美國銀行 (BAC) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Bank of America's First Quarter Earnings Announcement 2018.

(Operator Instructions) Please note this call may be recorded.

(Operator Instructions) It is now my pleasure to turn the conference over to Lee McEntire.

Good morning.

Thanks to everyone for joining this morning's call to review our 1Q '18 results.

Hopefully, everyone's had a chance to review the earnings release documents on the Investor Relations section of the bankofamerica.com website.

I'll just remind you, we may make some forward-looking statements in the discussion today.

For further information on those, please refer to either our earnings release documents, our website or our SEC filings.

Brian Moynihan, our Chairman and CEO, will make some opening comments.

Paul Donofrio, our CFO, will review the 1Q results in more details.

With that -- then after that, we'll open up for questions.

With that, I'll pass it over to Brian.

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

The momentum our team has built over the last several years again showed up with strong earnings in the first quarter 2018.

So let me start on Slide 2. We reported record earnings for our company of $6.9 billion after tax, up 30%.

On a pretax basis, our earnings grew 15%.

This growth drove improvement in our returns.

Return on tangible common equity improved nearly 400 basis points to 15.3% while our return on assets improved to 120 basis points.

Our efficiency ratio fell below 60% on an FTE basis, reflecting our disciplined focus on expenses.

We achieved all this by driving responsible growth.

As you've heard us say many times, responsible growth has 4 parts: we have to grow no excuses; we have to grow on our customer-focused framework; we have to grow within our risk appetite; and we have to do it in a sustainable manner.

So how did we do this quarter?

Well, first of all, we did grow no excuses.

During the first quarter, we continued to play the role that our company plays and help economies grow here and around the world by supplying capital and through debt and equity growth underwriting for growth of those companies.

In our company, we grew loans by more than 5% year-over-year in aggregate across the businesses.

We grew deposit by more than 3% while maintaining discipline in our deposit pricing.

Consumer led our deposit growth with an increase of 6% or $38 billion in deposits year-over-year, a strong showing.

All this led to revenue growth of 4%.

And we also increased the amount of capital we returned to shareholders this quarter.

We grew within our defined customer framework, the second tenet of responsible growth.

As Paul will show later in the presentation, we delivered more cards and more checking accounts through our consumer customers, more accounts in our Merrill Edge online brokerage to our investors, more households were formed in Merrill Lynch and U.S. Trust and more small business clients, more business banking clients, more commercial banking customers came into the franchise.

But most importantly, with those customers who are already here, we continue to increase our depth of relationship.

The third tenet of responsible growth is to grow within our disciplined risk framework.

We reported credit charge-offs of $911 million, 40 basis points of average loans, lower than both the prior quarter and the prior year-ago quarter.

In fact, we reported a net charge-off ratio below 50 basis points now for 13 of the last 16 quarters.

That's 4 years of relative consistency.

And just like last year, for the whole of 2017, we made money every day in the first quarter in the Global Markets business despite the pickup in volatility.

And while our market balance sheet grew to support our clients, our VaR, our value at risk, remained stable year-over-year.

The fourth tenet of responsible growth is grow on a sustainable basis.

And we did that by investing in our people and our communities and by driving operational excellence.

You can see that come through once again with the predictable earnings for our shareholders.

This quarter's results are the 13th quarter in a row reporting positive operating leverage on a year-over-year basis.

As you look at Slide 3, you can see this chart.

We've got there different ways in different quarters, but it's 13 quarters in a row of positive operating leverage.

That's because through fundamental operational excellence and expense discipline throughout our franchise.

We've been able to again reduce quarterly operating expenses this quarter on a year-over-year basis.

We've done that now for 13 of the past 14 quarters, even as we continue to invest heavily in the franchise.

These investments in our franchise range from investments in communities we serve, the products we deliver and the people who serve our clients.

As we said before, we continue to invest nearly $3 billion annually in technology initiatives.

Investments in the business this quarter have come through new capabilities for our clients.

We included the rollout of Erica across the board, our artificial intelligence assistance in mobile banking.

We had a more extensive rollout of our digital auto shopping across the country.

And we initiated our digital mortgage capabilities.

In addition, we continued to drive our P2P payment product, Zelle, throughout our franchise.

Paul will take you through the slides and focus on these items and the statistics around this growth.

But it's important to realize the emerging growth that these items represent.

In addition to that, we continue to build on years of our retail transformation investments.

This quarter, we highlighted that over the next 4 years, we'll open 500 new centers and redesign more than 1,500 centers, completing the task that we've been after for many years.

This will require us to add 5,000 new client-facing professionals, opening 600 Merrill Edge offices and expanding the financial center footprint.

We're expanding those to markets where we traditionally have had commercial and wealth management businesses, and now we'll have a full franchise.

As you think about people and our investment in our teammates, year-over-year we've added 1,500 primary relationship teammates.

At the same time, we reduced our overall headcount by 2,600 or about a little over 1% of headcount.

We also shared the success of our company from tax reform with all our teammates through bonuses and share grants.

And all 90%-plus of our teammates have received benefits.

We've continued to invest in our industry-leading aspects of our teammates, including our minimum starting wage, our extended bereavement and parental leave policies and many other items.

In summary, this is a record quarter.

And we did it by driving responsible growth.

With that, let me turn it over to Paul to take you through more details.

Paul?

Thanks, Brian.

Good morning, everyone.

I'm going to start on Slide 4. Bank of America reported net income of $6.9 billion or $0.62 per diluted share.

Net income was up 30% year-over-year.

EPS was up 38%.

Growth in earnings was driven by not only tax reform but also operating leverage and continued strong asset quality, which is easily seen in our $8.4 billion pretax income, which was up 15% year-over-year.

Revenue was $23.1 billion, improving 4% year-over-year, driven by NII improvement.

Expenses fell 1%, creating operating leverage of 5%.

Provision expense was $834 million, virtually the same number as last year.

With respect to returns, return on (inaudible) climbed to 10.8%.

Return on tangible common equity, which tends to be more widely followed by BAC investors, grew to 15.3%.

Return on assets was 1.2%.

And on an FTE basis, the efficiency ratio improved to just below 60%.

All of these metrics showed strong improvement from 2017.

The effective tax rate for the quarter was 18%, reflecting the roughly 900 basis points of ongoing benefit resulting from tax reform.

Note that Q1 included a tax benefit of approximately $200 million from deductions for share-based awards delivered during the quarter.

If one adjusts for this, the effective tax rate would have been a little more than 20%, in line with expectations on a full year basis.

Before moving on, I would also note that the quarter included a few accounting rule changes as well as reporting changes.

None of these were material, and they are described more fully in our appendix of our press release and earnings deck.

Turning to the balance sheet on Slide 5. Overall, compared to the end of Q4, end-of-period assets of $2.3 trillion increased $47 billion, driven by growth to support Global Markets clients as well as higher cash balances from strong deposit growth.

We expect a portion of the cash build to reverse as customers pay taxes in Q2.

Loans on a period-end basis declined $2.7 billion as consumers began paying down credit card balances following a period of strong holiday spend in Q4.

We also moved roughly $2 billion of consumer loans to held for sale.

On the funding side, we grew deposits $19 billion from Q4 and we added market-based funding in support of asset growth in Global Markets.

Long-term debt increased $4.9 billion from year-end as we took advantage of attractive spreads ahead of 2Q maturities.

Liquidity remains strong with average global liquidity sources of $522 billion and a liquidity coverage ratio of 124%.

Equity decreased a little more than $900 million from Q4.

Common equity declined $3.3 billion while preferred equity increased $2.3 billion from a late period issuance.

The preferred issuance replaces redemptions that will be completed in Q2.

The decline in common equity from Q4 was driven by negative OCI, common dividends and share buybacks, which in total exceeded the $6.9 billion of earnings.

The OCI decrease was driven by a $4 billion after-tax decline in the recorded value of our AFS securities, given the increase in long-end rates in Q1.

Share repurchases and common dividends in the quarter were $6.1 billion.

In Q1, we repurchased 152 million shares and issued 41 million shares under our employee incentive programs.

From a book value per share perspective, the decline in common equity was mostly offset by our declining share count, resulting in a tangible book value per share of $16.84, down modestly from Q4.

As we turn to regulatory metrics, let me remind you we are now through the transition period on CET1 and reporting on a fully phased-in basis.

Our CET1 ratios remained well above our 9.5% requirement but did decline in the quarter, given the reduction in common equity I just reviewed.

In essence, we returned most of our net income through capital distributions, so the equity reduction roughly equaled the OCI loss on AFS securities.

Focusing on risk-weighted assets and compared to Q4.

RWA under advanced was stable.

Under standardized, it increased $9 billion.

Global market activity drove the increase under both approaches.

But the increase was offset under advanced by declines in consumer credit and continued roll-off of legacy mortgages.

Looking at CET1 ratios, under advanced, it declined 24 basis points to 11.3%.

Under standardized, the ratio declined 32 basis points to 11.4%.

The ratios are within 4 basis points of each other as there is now only $6 billion in RWA separating the 2 approaches.

The supplemental leverage ratio declined modestly from balance sheet growth but continued to well exceed regulatory minimums.

Turning to Slide 6. On an average basis, total loans increased to $932 billion.

Note that the Q2 '17 sale of U.K. card and the Q4 '17 sale of remaining small positions of student loans and manufactured housing loans impacted the year-over-year comparisons by a little more than $10 billion.

Adjusting for these sales, which were recorded in All Other, average loans were up $28 billion or 3% year-over-year.

Loan growth continued to be dampened by the runoff of non-core loans.

On the other hand, loans in our business segments were up $45 billion or 5.5% year-over-year.

Consumer Banking grew 8%, led by mortgages and credit card.

Wealth management's strong growth of 7% was driven by mortgages and structured lending.

Originations of new home equity loans continued to be outpaced by paydowns.

Global Banking loans and leases were up 3%.

Loan growth remained solid but with admittedly slower year-over-year growth than previous quarters.

Switching to average deposits and looking at the bottom right.

Growth was $41 billion or 3% year-over-year.

Consumer Banking once again led with growth of $39 billion or 6%.

Year-over-year, average deposits declined in wealth management.

This year-over-year decline mostly occurred from Q1 '17 to Q2 '17.

Since then deposit levels in wealth management have been stable.

Global Banking deposits increased $19 billion or 6% as we grew client balances domestically across all sectors of commercial clients and internationally with corporate clients.

Turning to asset quality on Slide 7. Total net charge-offs were $911 million or 40 basis points of average loans.

As Brian mentioned, aside from the Q4 single main commercial loss, our net charge-offs and resulting loss ratio have been quite consistent.

Provision expense of $834 million in Q1 included a $77 million net reserve release.

This reflects our focus on responsible growth as well as an improving economy.

The net reserve release reflects continued improvement in our legacy consumer real estate and energy portfolios with a modest build for continued credit card seasoning.

Our reserve coverage remained strong with an allowance for loan ratio of 1.1% and a coverage level 2.8x our annual net charge-offs for the quarter.

On Slide 8, we break out credit quality metrics for both our consumer and commercial portfolios.

With respect to consumer, net charge-offs of $830 million were up $61 million from Q4.

The primary driver of the increase is the seasoning of the consumer credit card portfolio as net charge-off ratio increased to 3%.

Consumer NPLs of $4.9 billion declined from Q4.

And 45% of our consumer NPLs remain current on their payments.

Commercial losses continued to bounce along the bottom, declining from Q4 and on a year-over-year basis.

Finally, reservable criticized exposure was down nearly $200 million from Q4.

Turning to Slide 9. Net interest income on a GAAP non-FTE basis was $11.61 billion, [$11.76 billion] (corrected by company after the call) on an FTE basis.

Year-over-year, GAAP NII is up $550 million or 5%, reflecting the benefits of both higher interest rates as well as loan and deposit growth.

Partially offsetting this growth was the absence of NII resulting from 2Q '17 sale of the U.K. consumer credit card business and higher funding costs for Global Markets.

Focusing on net interest yield.

It is flat year-over-year as the benefits of broad improvement in asset yields versus funding cost was offset by 2 notable factors: first, the Q2 '17 sale of higher-yielding U.K. card portfolio; and second, the impact from the lower-yielding Global Markets assets.

Together, these 2 factors lowered net interest yield by 12 basis points year-over-year.

Compared to Q4 '17, NII on a GAAP basis improved $146 million as the net benefits of higher interest rates across the curve offset 2 less interest accrual days.

NII on an FTE basis and in comparison to prior periods was further impacted by tax reform, which lowered NII on an FTE basis by roughly $100 million.

With respect to deposit pricing, overall interest-bearing deposit rate paid in Q1 rose 4 basis points from Q4 '17 and 21 basis points year-over-year.

That compares to Fed funds, which is up 75 basis points over the past 12 months.

In the most recent quarter, we increased rates on certain wealth management deposits to keep pace with market-based alternatives.

With respect to commercial clients, we continue to selectively raise pricing.

Pricing on retail interest-bearing deposits was unchanged.

Turning to asset sensitivity.

As of 3/31, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $3 billion over the subsequent 12 months.

This is modestly lower than 12/31 sensitivity, driven by the increase in long-end rates, which decreased prepayments and increased NII.

The short-end sensitivity was largely unchanged from year-end and now represents about 75% of the sensitivity.

Turning to Slide 10.

We had another solid quarter of expense management, extending our record of year-over-year quality declines in expense to 13 out of the last 14 quarters.

Noninterest expense of $13.9 billion this quarter was down $196 million or 1.4% year-over-year.

Improvement in non-personnel costs drove the year-over-year decline.

Personnel costs were relatively flat year-over-year despite increasing salaries for merit and increased health care costs.

We continue to reduce non-client-facing roles while increasing client-facing roles, such as relationship bankers in consumer, business banking and commercial as well as financial advisers in wealth management.

As we signaled on our 4Q call, expenses increased compared to Q4 '17.

The increase of $622 million was driven by seasonal elevation of payroll tax expense and higher incentives associated with revenue, mostly in Global Markets but also in wealth management.

Modestly offsetting these increases were operational cost reductions.

This quarter marks the first quarter we have reported an efficiency ratio below 60% on an FTE basis.

Turning to the business segments and starting with consumer on Slide 11.

Another very strong quarter for this business as the value of deposits, growth of both loans and deposits as well as the investments we have made in people and our ability to better connect with customers continued to improve financial results.

Consumer Banking's earnings increased to $2.7 billion in Q1, returning 30% unallocated capital.

Given tax reform, a review of pretax growth is more relevant.

And on this basis, profits grew 19% year-over-year.

By the way, this is the 11th straight quarter where Consumer Banking's earnings rose on a year-over-year basis.

Consumer Banking created over 700 basis points of operating leverage in Q1 as revenue growth of 9% outpaced expense growth of 2%.

The efficiency ratio fell below 50%.

The value of our deposits as rates rose, along with growth in client balances, drove the 9% year-over-year improvement in revenue.

Year-over-year, average loans grew 8%, average deposits grew 6% and Merrill Edge brokerage assets grew 18%.

Cost of deposits, which reflects noninterest expense as a percent of average deposits, remained steady at 161 basis points.

Rates paid remained very low at just less than 5 basis points.

Year-over-year, net charge-offs increased $105 million as we continued to experience modest and expected seasoning of our credit card portfolio, along with loan growth.

The net charge-off ratio remained low at 1.27% and is up only 6 basis points year-over-year.

Provision expense increased $97 million year-over-year.

Okay, turning to Slide 12 and key trends.

Looking first at revenue.

Driven by NII growth, revenue grew 9% year-over-year, reflecting the value of our deposits and our relationships with customers, which continue to deepen as we expand capabilities.

Spending on debit and credit cards was up 9% year-over-year.

That's up from 5% growth in Q1 '17, indicating relationship deepening and consumer confidence have continued to improve.

This increased spending was enough to drive a small increase in card income despite the headwinds from increased customer rewards.

Service charges were down modestly as a result of the full quarter impact of the elimination of certain overdraft fees late in Q4.

Focusing on client balances.

On the bottom of the page, you can see the success we continued to have growing deposit, loans and brokerage assets.

It's worth noting Merrill Edge assets have grown to $182 billion, up 18% year-over-year.

Client flows here marked a new record this quarter, up 36% from the previous record.

Merrill Edge offers customers a lot of value and it's a great way for us to deepen relationships.

Whether it is access to one of our 4,000 licensed advisers and to world-leading research platform or how we integrate Merrill Edge into other banking needs, we think customers are noticing and giving us more of their investment dollars.

Also noteworthy is card balances, which grew 5% year-over-year.

Our focus remains on prime and super prime borrowers with average book FICO Scores of 770.

Expenses are up 2% year-over-year as investment in renovating branches and technology initiatives modestly outpaced continued optimization and savings from digitalization.

And we continue to make progress on our announced investments in new and renovating financial centers, including entry into new markets.

Slide 13 shows the progress in digital banking.

We had some significant investments this quarter.

First, we introduced Erica, our digital banking assistant, to customers.

While it's too early to judge the usage, this is an exciting deployment which offers customers the use of cognitive AI learning to help them better live their financial lives.

We also rolled out digital auto shopping more fully across the U.S. In Q1, 67,000 customers utilized our auto shopping app, which was twice as many as Q4.

Overall, auto loan sourced digitally accounted for 50% of all auto loans originated directly with our customers.

We also rolled out our digital mortgage experience, accelerating and simplifying mortgage applications through benefits like pre-filling customer data, digital loading of supporting documents and utilizing DocuSign.

Turning to some of the digital trends on the slide.

As you can see, year-over-year, growth in all these metrics continued to be impressive as we remain a leader in digital banking.

We now have more than 35 million digital users, including 25 million accessing their accounts through mobile devices.

This quarter, customers logged into Bank of America mobile banking app 1.4 billion times to either transact or shop with us.

Digital payments grew to $365 billion this quarter, well surpassing 50% of total payments of $682 billion, which were up 10% year-over-year.

P2P payments, while a small percentage of overall payments, continued to increase with $9 billion of payments processed in Q1.

Also noteworthy is the volume of mobile deposit transactions, which now represents 24% of all deposit transactions.

This is equal to volume of more than 1,200 financial centers.

Appointments made through digital devices to meet with a professional in one of our financial centers also continues to grow, reaching nearly 35,000 a week.

This allows us to not only better understand and prepare for customer needs but also to better manage our professional staffing within our busy financial centers.

Sales on digital devices now account for 26% of all sales.

Turning to record results in our Global Wealth and Investment Management business on Slide 14.

Strong client activity, a market which was up year-over-year, higher rates and solid expense management pushed GWIM's earnings this quarter to over $1 billion for the first time ever.

Pretax earnings grew 12% and pretax margin increased to 29%.

Strong AUM flows over the past 12 months and a tailwind with respect to market appreciation once again drove strong asset management fees, offsetting modest pricing pressure.

At the same time, brokerage revenue continued to face headwinds as volume declined and mix shifted.

All-in, revenue grew 6% year-over-year with 17% growth in asset management fees and modest NII improvement, partially offset by lower brokerage revenue.

Revenue growth, coupled with careful expense management, drove 3% operating leverage.

Year-over-year, expenses were up 3%, driven by revenue-related incentives as well as investments in primary sales professionals.

While we were pleased with revenue this quarter, I would note that the market levels at fee pricing points were quite healthy this quarter and have since retreated.

Moving to Slide 15.

We continued to see strong overall client engagement in Merrill Lynch and U.S. Trust.

Our local market strategy, led by 93 market presidents, is helping to better integrate our lines of business and deepen relationships, especially in wealth management.

We're also seeing Merrill Lynch advisers react positively to growth initiatives in this business, including the 2018 compensation program, which incentivizes household and other types of responsible organic growth.

Total organic household acquisition for the quarter was the highest we've experienced in quite some time, 5 years at least.

Q1 was also our strongest start of the year since the merger with Merrill in terms of total net new money.

In fact, we saw positive brokerage flows for the first time in a couple of years, all while experiencing record-low competitive adviser attrition.

Year-over-year, client balances rose $140 billion or 5% to $2.7 trillion, driven by higher market values, solid AUM flows and continued loan growth.

Average loans of $159 billion grew 7% year-over-year.

And the growth remained concentrated in consumer real estate as well as structured lending.

Turning to Slide 16.

Global Banking earned just over $2 billion, generating a 20% return on allocated capital.

With solid expense controls, this business remains the efficiency leader of the company at 44%.

On a pretax basis, earnings declined 2% year-over-year, driven by lower investment banking fees and revenue impacts on an FTE basis of tax reform with respect to tax-advantaged assets.

Absent the impact of tax reform, the business would have created modest operating leverage.

With respect to revenue, IB fees were down, in line with a reduction in the industry's IB fee pool, reflecting the tough comparison against a strong Q1 '17.

IB fees of $1.35 billion for the overall company declined 15% year-over-year.

Expenses reflect operational savings, mostly offset in our investment in additional client-facing professionals to enhance local market coverage.

Global Banking grew loans 3% year-over-year to a record $352 billion.

As I said last quarter, optimism amongst clients remains high, so we continue to expect loan demand to pick up.

Looking at trends on Slide 17 and comparing to Q1 last year.

With respect to average loans, the 3% growth was led by international regions and domestic middle-market C&I.

Within total commercial lending, average C&I rose 3% while commercial real estate increased 2%.

Loan spreads were flat in Q1, continuing the trend we have seen in the past 6 months after early 2017 compression.

Average deposits rose 19% or 6% year-over-year as we maintained a targeted pricing approach to acquire or retain high-quality deposits.

Switching to Global Markets on Slide 18 and 19.

I will talk about results excluding DVA.

Global Markets revenue was $4.7 billion and earnings increased to $1.4 billion, returning 16% unallocated capital.

On a pretax basis, earnings were down modestly year-over-year, driven by lower revenue and increased expenses from continued technology investments.

Up 1% year-over-year, sales and trading totaled $4.1 billion of the $4.7 billion in revenue.

Performance in equities was strong as volatility increased.

Equity sales and trading revenue at $1.5 billion reached a record, up 38% year-over-year.

Results were driven by increased client activity and a strong trading performance in derivatives.

The equity business also benefited from an increase in client financing activities.

Revenue in FICC sales and trading at $2.5 billion (inaudible) increased 13%, driven by lower client activity and less favorable credit markets compared to a very robust prior year quarter.

This overshadowed improvement in macro products, such as rates and currency.

With respect to expenses, Q1 was 2% higher year-over-year, driven by continued investments in technology.

Okay.

On Slide 20, we show All Other, which reported a net loss of $286 million, which was an improvement year-over-year.

Revenue declined $240 million year-over-year, primarily due to the absence of the non-U.

S. consumer credit card business sold in 2Q '17.

Noninterest expense improved approximately $500 million year-over-year due to lower mortgage servicing costs, reduced operational cost from the sale of the non-U.

S. consumer credit card business and lower litigation expenses.

Compared to Q4 '17, remember that changes related to tax reform were booked in this reporting unit, impacting significantly quarter-over-quarter comparisons of revenue and tax expense.

Okay, let me turn it back over to Brian for a couple of closing comments before we open it up for Q&A.

Thanks, Paul, and we're on Slide 21.

Just a couple of thoughts to close and take your questions.

We're operating in an environment with global economic expansion continues, and it continued in the first quarter.

Corporate profits have remained healthy.

Consumer business confidence continues to be strong.

And we see that in the accelerated consumer spending in our customer base, as Paul talked about.

The financing balances grew in our markets business, as our investors invested heavily in the markets in the first quarter.

So that's a good business environment, a solid business environment with good economic metrics.

And we continue to get our fair share in that environment.

We get it by driving responsible growth and the operating leverage that we talked about through all the businesses.

And we also provided more capital back to you, our shareholders.

With that, let's open it up for questions and answers.

(Operator Instructions) We'll take our first question from John McDonald of Bernstein.

In terms of expenses, Paul and Brian, you've -- you're on track clearly to get to your target of the ballpark $53 billion for this year.

I think you've said that you can also kind of stay in that ballpark in 2019 and 2020, even with the investments and the build-outs that you're doing.

Is that still the view?

And how is that possible?

Are you self-funding that with some saves elsewhere?

If you could talk about that, it would be helpful.

Yes, John, it's our view, what we said, I think, last quarter, the investments we'll make are -- will be funded with the hard work in operating leverage and Simplify and Improve and organizational health and operational excellence.

And we announced the investments we're making in the retail business.

It's all contemplated with -- in the low $53 billion level, which we ought to be able to maintain in '19 and '20.

And if we're going to make any further investments, it'll be modest, as we said.

But right now, it looks like it's shaking out to be okay.

Okay, great.

And then also on the credit cards, it looks like you're getting solid card growth now with balances up 5% year-over-year.

Is that some acceleration in new products that you've rolled out within the last year or so?

And do you think that growth can continue on the credit card front?

And then just as an add-on, in terms of the seasoning, Paul, do you have any kind of view of what the pace of that 3% charge-off would look like as it seasons?

Sure, let me just start with the latter.

So we did have a charge-off rate of 2% this quarter.

That was expected and well within tolerance.

We would expect it to be around 3%.

Kind of if you look at the remainder of the year, remember Q2 is usually seasonally the highest quarter in terms of credit card net charge-off.

Plus I would remind you that we have the hurricanes, which -- it's been 180 days since the suspension of those charge-offs, probably a little bit.

And that will show up in the second quarter, but we're fully reserved for that.

So then you get the rest of the year, which is seasonally down normally.

So I would expect it to stay around 3% on average for the full remainder of the year.

In terms of growth, it's just good blocking and tackling.

We remain focused on prime and super prime, where our customers are adding cards, using our cards more because of the rewards structure.

We make it simple for them, we make it easy.

And I don't think there's anything different we're doing, it's just a continuation of what we've been doing in the past.

I'd add one thing, John.

People forget that we also got out of and sold a lot of business pieces in card over the years, including another one that will go out over the next quarter or so.

And that always was hard to go through.

That's kind of over now, by and large.

And so the growth we're seeing in the underlying 1 million-plus cards -- new cards we do every quarter and the usage by customers and the primary usage has been pretty consistent and ought to bode well for continued growth.

But it's really getting rid of the drag of -- getting rid of portfolios over the last couple of years.

We'll move next to Betsy Graseck -- I'm sorry, Jim Mitchell of Buckingham Research.

Maybe just a quick question on deposit pricing.

You guys have, in the retail side, have kept deposit pricing quite low.

Obviously, you've done a great job in focusing on small balances, transaction and relationship-type accounts.

When do you think that pressure starts to build in your business?

Or is it because they're transaction, you just don't think there's a lot of pressure for repricing retail deposits right now?

Look, Bank of America and the industry, I think, have not increased deposit pricing appreciably on traditional accounts.

I think the reason for that is, certainly in Bank of America's case, we deliver a lot of value to depositors, transparency, convenience, safety, mobile banking, online banking.

We're rolling out new capabilities every day with Erica, nationwide network, rewards, advice and counsel.

That has real value to people beyond just deposit rate paid.

And I think this value plus the lack of market pressure so far has allowed us to keep deposit rates relatively flat on traditional accounts.

You've seen us been raising it in GWIM.

You've seen us been raising it selectively in Global Banking.

We're just going to have to balance -- we're going to continue to balance the needs of customers in a competitive market environment with that of our shareholders' interest.

And we'll do the right thing at the right moment.

Jim, just adding that people get focused on the rates.

So as a clear statement, the all-in rate paid for all our deposits is about 24 basis points, obviously extremely beneficial versus any other way to raise money in the markets which are multiples of that.

In fact, I think we paid 3x as much for our term debt cost on a quarterly basis than all other deposits.

But people forget that, that comes from the value of the customer franchise.

And so if you think about the consumer business, half their deposits are checking.

And so -- and the CDs have been running off and sort of bouncing around with a $2 billion or $3 billion of runoff on a year-over-year basis.

So it is driven by the fact that the core transaction account, the balances have grown over $7,000 per balance of checking account in our consumer franchise.

And as we add more accounts and grow in these new markets, we're getting the primary relationship in the household, which means you're getting the transaction money which is moving at all times.

And so it's a different format.

It's not a pricing strategy.

It actually comes out of the fact that, that's the nature of the business.

Right.

And you're still getting your growth, so it's a good thing.

Has the -- if you look at the short end of the curve here, your rate sensitivity numbers at the short end really don't seem to have changed over the past year despite multiple rate hikes.

Is that sort of reflective of that experience that the types of deposits that you're attracting are lower rates than maybe you initially thought and you have a little bit more sensitivity at the short end even after the number of rate hikes we've seen?

Yes, that's right.

Yes, that's generally right, yes.

We'll move next to Betsy Graseck of Morgan Stanley.

Couple of questions.

One on capital.

You indicated very strong capital ratios across the board.

Could you just give us a sense of post the Fed discussion and proposals on the SLR and the SCB, how you might be able to at least go through as proposed, how you might be able to utilize them?

Utilize the capital?

Yes.

Does it free up any incremental opportunity set for you?

Yes, okay.

Well, a couple of thoughts.

Obviously, it's still early.

I think it's going to be out in a couple of days.

I guess, the first thing I would say, I think we think it's constructive, right?

Growing the balance sheet and increasing buybacks or continuing buybacks and [stress] didn't make a lot of sense.

So that kind of change is going to model reality -- or better model reality, I should say.

Replacing a fixed capital conservation buffer with a buffer that's more tailored to a company's individual situation, that seems sensible.

The issue is that you've got a CCAR stress in there that can fluctuate year-over-year.

So the question is, maybe hopefully -- this year's scenario, it's a lot more severe.

So the question is, is that going to introduce some uncertainty?

Is that going to force all these banks to have to have more of a buffer?

On the specifics for us, if you use the last 3 years scenario, our stress capital buffer would be 2.5% because we'd be below the floor.

And on an ongoing forward-looking basis, we feel good about the stress depletion and the stress capital buffer because of the way we run the company.

And we're focused on responsible growth, loan-to-consumer prime and super-prime.

We're prudent about our trading risk.

We have low VaR.

We have a legacy portfolio that's running off.

Having said that though, this scenario severity will create volatility, so we don't have -- and we don't have transparency into event models.

So we're just going to have to wait and see this year's results and future results, and we're going to have to have a comment period.

We're going to have -- we're going to give our comments, and we're going to come to -- we're going to find out what the final rule looks like.

Sure.

Just thinking in particular about the SLR ratio, which is quite high.

And is there an opportunity for you to deploy some of that under the new rule set, maybe a little more than peers?

Yes, I think it's -- I think that's helpful given the recalibration that's proposed.

The SLR certainly makes more sense now.

It was a binding [strength] to lots of banks, not for us.

It was a binding constraint and it really is meant to be more of a backstop, so this feels like it makes more sense.

In terms of the impact on us, it's going to be most helpful at our bank entities, reducing the well-capitalized levels by about 175 basis points from 6% to 4.25%.

And that's going to allow us to have more flexibility in terms of taking some of that capital that's in our banking entities and moving it up the chain so that we can support other businesses or potentially doing more business (inaudible) otherwise would have been able to do.

And if we move it up obviously, it becomes free for all the users, including returning to shareholders.

So again, it's an NPR.

We'll have to see how it pans out, but it -- I think that's constructive.

Okay.

And then Brian, a follow-up on the expense question.

I know you said $53 billion in expenses for 2018 and I believe flat in '19.

So one of the questions we've been getting is around the branch build-out, the 500 branches that you're looking to do in new markets.

Does the branch build-out, is that a net neutral to these numbers of $53 billion?

Or have you factored that into that expense expectation?

Those investments are all sort of factored in the flattish from -- here.

It's over 4 years, obviously, the build amount.

And remember that the -- you build them and you staff them up, and so it's a sort of [ratable] build.

So we'll -- we're comfortable with the flattishness and we'll pay for those.

The question we've all asked ourselves over and over again is if it's proving very successful, can you accelerate it faster?

That comes down to (inaudible) question of getting leases and things and up and running.

But if provided a lot more pop, we might move it up, and that might cause a little bit more, if I'd be modest.

And I know, a while ago, you mentioned processing costs associated with cash and checks, where (inaudible) if I recall correctly, somewhere around $5 billion.

With all the digital activity that you're doing now, has that materially gone down yet?

It's going down, the 20-odd percent of deposits on mobile versus the branch that Paul spoke about earlier.

The P2P and Zelle, getting more meaningful, the digital movement of money is half the money moved by consumers today.

It's all adding positive pressure.

It's not going to be immediately changed.

It's not going to immediately change.

It's allowed us, over the last 10 years, to go from 6,100 branches to 4,400 and change or whatever is that now.

It's allowed us to increase ATMs and effectiveness, at the same time, bringing the overall cost down for them.

So the volume -- we're absorbing massive volume increases too.

And so in terms of checks and money movement, this year, the cash in the first quarter, they're all means of payment, the first quarter up 9% over the last year, yet the cost in the consumers, you can see, are modestly up and the efficiency ratio has dropped a little bit, it's right around 50% now.

So it's all good, but it -- don't expect there will be a massive step function in a day.

It really takes the change in customer behavior over time.

Our next question is from Mike Mayo of Wells Fargo.

I guess, I have a good news/bad news question, got the bad news for you, Brian.

Tax cut was supposed to lead to a lot of loan growth.

The higher rates were supposed to lead to much higher margins.

Volatility was expected to lead to much higher trading, not from your guidance, but just generally in the market.

And as we've said, it seems like -- it's been a good meal, but where's the dessert?

So I guess, the question there is, should we see -- expect more of a benefit from that into future?

And if not, why?

Or how long does it take?

And the good news is even without the dessert, so to speak, you guys still had some very nice efficiency.

So if you could elaborate more on the record consumer efficiency and tie that more to the 1.4 billion quarterly hits you had in digital banking, like how much of the consumer efficiency is due to digital versus, say, branch closures or other actions and where do you think that could go?

Yes.

I mean, Mike, you're sort of saying the debate that's going on.

We have seen loan growth of 5% year-over-year in the core businesses, 3% overall.

We're still running off some portfolios, believe it or not, 10 years after the crisis that we showed you on that slide.

So in our view, that's solid loan growth.

And if you look at it, like what's in the commercial business, the C&I product, I think up mid-single, 5%, the consumer lending up.

And so it's solid loan growth.

We have been growing at a decent clip.

We expect that to continue.

It's a 2% to 2.5% type of growth of economy we're experiencing currently as we speak.

The projections are higher going forward, but we've got to get there.

So I think that's there.

I think on margin expansion, if you think about it from an operating profit basis, the efficiency ratio dipped to below 60%, which means we're expanding our pretax operating profits and revenue over expense.

In terms of NII, there's some sales that went on that Paul explained earlier.

In the trading and equities, it was up 38% year-over-year.

Again, solid, but it -- again, that nominal was about $400 million compared with $500 million of NII expense.

And so you got to keep all these things, I think, in balance, which, I think, is kind of what you're saying.

As we look out, we expect constructive economy and the rest of the year, our experts have it, continuing to grow with an all-in growth rate with the U.S. economy of 2.9% in GDP for the '18, which would be a nice pick up over the last year.

And you've got to expect the elements that we talked about to grow within that.

I think you -- then, a consumer, I think the story is the same.

It's -- every -- going to Betsy's earlier question, people look for this overnight change.

It's going to be a change that's going to occur every single quarter.

So 1.4 billion mobile log-ins this quarter -- this first quarter versus 1 billion last year allow us to have 20-odd percent sales in that business, allow us to have 20-odd percent checks deposited in that business.

All that saves us efficiency.

At the same time, we still have 850,000 people coming to branches every day that need to have highly qualified, capable people servicing, so we're investing in those sales professionals.

So I think it's just going to keep going in the right direction and all -- it bodes well to helping us make that change with expenses basically down in the company year-over-year and consumer basically flattish.

And just one follow-up then.

So the 1.4 billion digital banking that's per quarter, how does that help other metrics, say, call center or personnel or how many branches can you close or how many people?

Just anything else concrete you could give us.

Sure.

The calls were down about 14% year-over-year.

I think it's round numbers, to give you sense.

(inaudible) I think that's a number.

It's 14%.

So it all helps.

Sales were up -- deposits are up.

And so that all helps.

But remember -- don't forget, this is a high-tech, high-touch system.

And so you have to be able to do both and do both well.

It's just that the -- what these techniques, whether it's ATM capabilities, whether it's the digital devices, mobile device capabilities allow you to do more value-added tasks, for lack of a better term, in the branches and their stores than we used to do, which was just deposit checks and things like that.

So deposits at the branches continue to trend down and go up in mobile.

But it's a trend that will continue over many years.

And Brian, quarter-over-quarter and year-over-year, again -- and again, well, we're still adding new branches and investing in new cities at the same time.

So you still expect branches to decline with all those branch additions?

It's always going to be a question of modest changes because remember, we're adding the branches and taking them out and redoing branches and making them bigger.

So the count, I think, could -- can bounce around.

If you look across the last several quarters, it's been slightly down as we build our branches that have put upside to it, but you also see us consolidating branches in cities.

So it's really a configuration.

We are, like any other person looking at what the optimal configuration is in any given time, so we might take 2 or 3 branches and fold them together in a city because the nature of businesses change.

So I don't ever make long-term projections to that number because -- if I told you many years ago, it will go from 6,100 to 4,400, you just said I was -- you just said Bank of America was crazy and in fact, it did that.

We'll take our next question from Glenn Schorr of Evercore ISI.

First question on trading.

FIC, down 13%.

Got all your comments, appreciate it.

But trading assets were up 17% year-on-year.

So we can't see trading assets split between FIC and equity.

So just looking for a little more color.

Was the decline in FIC mostly a reduction activity in credit?

Where is the increase in trading assets flowing?

Sure.

On a year-over-year basis, a lot of the increase in Global Markets was a result of client activity in equities.

Quarter-over-quarter, it was probably more FIC.

It's being driven by client demand, and it's also being driven by the opportunity we see in equities to do more with our customers and to build some scale.

Is that prime brokerage, is that the risk, is it all of the above?

Yes, it's prime brokerage and derivatives, exactly.

But I would -- the -- I would put prime brokerage first.

Okay, that's good.

And then just one other question.

I think in the past, a flatter yield curve was a predictor of a slowdown in -- or a credit issue is -- a slowdown in maybe the economy or maybe even a recession.

But the curve is pretty darn flat right now, but the economy is great.

So curious, from your vantage point, what it means for your balance sheet, how you're positioned business-wise and balance sheet-wise and how much we should be concerned about the flatter curve?

Look, we are positioning our balance sheet to service our customers.

Obviously, we look carefully at balancing capital liquidity and earnings when we do that, but the primary motivation is serving our customers.

The flatter yield curve, (inaudible) but a little bit steeper, proven that NII comes on the short end.

We are in a situation today where securities rolling off the balance sheet are being replaced by securities at higher yields.

So that's good.

You saw some impact on OCI this quarter because rates rose, so we got to be watchful of that.

But again, it's not like we're out there doing derivatives or doing other things to manufacture a certain type of balance sheet.

We are basically -- have a balance sheet that services our customers' needs.

It grows when there's more activity from them.

We have to make sure we have enough liquidity and enough capital to run the company in good times and in bad, and I think we're doing all those things.

We'll move next to Ken Usdin of Jefferies.

I was wondering where -- if you could you talk a little bit about the structure of the balance sheet.

I noticed that you did have a lot of this cash come in, a lot of balances in lower-yielding parts of the balance sheet and you also had a smaller securities portfolio both at period end and average.

Can you talk about how much of that was just episodic?

Or if it was a purposeful change given the movement to the yield curve?

And how you might think about that kind of mix of the lower-yielding assets and mix going forward?

Sure.

So a couple of things in there.

Remind me if I don't get all of them.

But first of all, the securities portfolio, there's no change in how we're managing the securities portfolio.

The reduction you're seeing is just a function of long-term rates going up and the effect on the available sale securities in terms of declining their value that flows through OCI and its equity.

In terms of -- we discussed part of the impact on the company's net interest margin or net interest yield, whatever you prefer, that is being affected by: one, the fact that -- U.K. card we sold in the second quarter; but two, we're growing global market assets.

We just talked about the fact that we've been growing them on a multi-quarter basis now in equities.

When you grow the balance sheet in equities, you create interest expense.

You don't create interest income.

That benefit shows up in the trading line.

This quarter, with any volatility, we had a 38% increase in our fees in equities.

In terms of the cash you're seeing on the balance sheet, yes, deposit -- we had deposit growth.

We saw some cash build up.

But that cash buildup, a lot of it, I think, is for people who want to pay their taxes.

So a portion of that cash buildup is going to run out in the second quarter.

Did I hit all your questions or was there something else?

Yes.

No, that's exactly it because it just -- obviously, you had a huge balance sheet growth, but the NIM was flat and it was largely just because of this mix.

So I'm just wondering how much of that mix might naturally revert back out.

You don't see as much balance sheet growth, but you see the NIM start to move through.

Well, the U.K. card thing will roll off, obviously.

We're still going to grow our balance sheet and markets will grow, if the client demand is there.

We're always looking at it to make sure we're getting the right returns.

We feel good about the investment we're making there.

And you can see that when some volatility happens, we got the return we were expecting.

Also, that balance sheet growth in markets, a lot of it is very low RWA.

You saw the RWA down under the advanced approach this quarter even though we've been growing the balance sheet and markets.

So it's an investment.

We're watching it.

We think we're getting the right returns.

And the bottom line is NII is up $550 million year-over-year.

Yes, that's exactly the point, great.

And then if I can follow up just on the commercial lending front.

You guys would also seem to me among the best positioned to see the small business, middle market commercial uptick.

Can you just talk about end demand and the tone you're hearing and how you -- when are we going to -- when and if we're going to see that translation into balance?

Because I heard your intro comments that things are good underneath, but just -- if you can flavor it by the product segment, that would be great.

Sure.

Look, we are optimistic about loan growth.

We -- we've been seeing mid-single-digit loan growth in our business segments.

We've been seeing C&I growth 4%, 5% every quarter.

As you know, we haven't -- we're more cautious in CRE.

So the fact that we're able to grow loans in Global Banking by as much as we have, even though we've been more cautious in CRE, is another indication of the strength of our platform.

It's another indication of the value of these new bankers we're adding in local markets.

We have repatriation.

I think some of the dollars did go to pay down some loans.

I think we saw that in large corporates.

You may have seen a little bit of it in middle market.

I hate to say it, but anecdotally, if you look at average balances in middle market, you compare them to quarter-end balances.

We clearly saw a little bit of an increase at the end of the quarter.

So look, we feel very good.

We're optimistic.

We'll move next to Gerard Cassidy of RBC.

Brian, can you give us some color?

Your Consumer Banking digital trends are obviously very strong.

Can you tell us what advantage of that is giving you over the smaller banks?

And then second, the -- a lot of talk about nonbanks may be coming into this area, the classic Amazon effect.

Could you give us some of your thoughts about that as well?

Right.

I think, just on the broader question, our job is management and the team, was to be the best there is at digital banking, mobile banking, et cetera, across all the platforms.

And so we have been investing heavily for many, many years.

This mobile platform just didn't arrive in the online platform.

This is $1 billion of investments across probably the last 6 years or something like that to get there in terms of building it out.

So no matter who comes in, our job is to be more confident and more capable than anybody, whether there are competitors in the traditional industry or new competitors.

And that's why we continue to upgrade the capabilities and driving it.

And so think about what we've done.

Erica is a voice-activated artificial intelligence agent.

And you could go in and say, "Send Brian $5," and it will come to Brian, so all -- we can all do that if you want.

It's pretty simple.

It allows people to find balances and do things by talking to the computer.

It will improve across time and we're starting to -- we had 40,000 teammates working on it.

But it's an exciting thing.

It's payback will be over the next decade, but its competitive advantage is high.

If you take the Zelle, we've processed almost 29 million transactions over the first quarter.

It adds up over 100%.

But importantly, I think it's up dramatically even from last quarter, so you're seeing that go on.

Digital sales are 26%.

These numbers are hard to get comparisons on, but we think the bank industry generally is up 10%.

We think that all retailers, even including Amazon and the nonbanking space, it's maybe in the mid-teens as a percentage of sales, maybe high teens, but we're 26% today.

And things like our auto program, I think it's multiple -- we've gotten multiples of applications with us, new applications.

It's rolled out to 2,000 dealers, where you can see 2,000 dealers, car inventory on our site and go buy and qualify for loans at the same time.

So all these things, we're getting tens of thousands of appointments per week where people set an appointment on digital to come in, which allows us to staff more appropriately.

So I think the point is, is that these are tremendous capabilities with major investments that will pay off not only to date but over time.

And I think it's a good against all commerce, large, small, traditional competitors and anybody outside the industry, and our job is to continue to invest to do it.

When we put that altogether, we've grown the customer base.

We've grown what they do with this, the customer satisfaction scores are at an all-time highs at the same time in both in the branch and the nonbranch.

And as a follow-up.

Paul, you talked a little bit about the commercial real estate loan portfolio growing.

You're more cautious.

Some of the banks that have reported results have indicated that some of the underwriting in commercial real estate is getting too aggressive.

Can you give us more color?

Are you seeing that as well?

And how are you being more cautious in your underwriting?

We have been more cautious for many, many, many quarters now.

So we've been talking about this for over a year.

We've just made -- we've stuck to our client selection, which are the higher-quality players in the industry and we've stuck to structures that we thought made sense.

It's been in multifamily and other places, structures.

And we're getting a little bit to a place where we were not comfortable.

So we -- we've been growing, but it's just been a different level of growth relative to many of our competitors.

But it's something again -- it's not something we've done this quarter, something we had been focused on and cautious about for many quarters now.

So we feel pretty good about where we are in commercial real estate.

And by the way, we're kind of seeing -- again, this is more anecdotal, but we're kind of seeing now that as others are getting nervous, we're seeing business come our way at prices and structures that we like.

We'll move next to Matt O'Connor of Deutsche Bank.

Just a follow-up on the NIM.

You had mentioned the drags on a year-over-year basis from the card sale and the market's impact was 12 basis points.

I don't know if I missed what the Q-Q swing was from the markets.

I mean, the quarter-to-quarter for Q1?

Exactly.

It's impacted by the growth in Global Markets, but it's also impacted quarter-over-quarter by the change in corporate tax rate on an FTE basis.

You got to factor that in as well.

So it's a couple of basis points.

Combine the $100 million lower TEA and the market's impact is couple of basis points combined?

I think that's right.

I'll back to you by...

Okay.

And then just separately, deposits overall continued to grow, but we saw some decline in the non-interest-bearing bucket.

And I think versus 4Q, there's some seasonality.

But obviously, it was also down year-over-year.

I'm just wondering what your thoughts are in terms of how much further pressure there might be in that category and which business segment, I think, is probably in the -- it's not in the consumer side, it sounds like, but which segment that's coming from?

Yes.

It's coming from the Global Banking side.

We expected to see rotation between non-IB and IB and Global Banking.

We're still growing deposits there well up 6% year-over-year.

The growth is across large corporates and middle market, international is also growing well.

But we are seeing a mix shift there over the last couple of quarters.

Okay.

And I guess, that -- is that factored in, the rate sensitivity that you disclosed for the erosion there?

Yes, it is.

Our next question is from Marty Mosby of Vining Sparks.

Two questions.

First, Paul, since you're getting the mark-to-market in your equity already, is there some thought that periodically you'll go in and refresh the yields to get the benefit in the income statement while you're already taking the hit on the equity side?

No.

I mean, we're just going to follow normal GAAP accounting.

To when they will (inaudible) by the way, just -- it's interesting if you look at our balance sheet, right, over $2 trillion.

You've got a portion of it, the AFS securities portfolio, which is $230 billion, which is mark-to-market and close to OCI, but basically, nothing else does.

So the value of our deposits, the value of our -- the debt that we -- the money we raise, when we borrow, that doesn't change in value.

So it's just an accounting construct that all banks have to deal with.

No.

I understand, I kind of get -- maybe I didn't ask -- do the question right.

I'm thinking you can take actions because you're forced already -- recognize the loss on the AFS portfolio, you might as well go ahead and restructure to be able to buy new bonds and you're buying in the same duration because you can generally add -- I just did the math, somewhere between $0.15 to $0.20 just by going in and rounding up the yields when you're already taking the hit on the equity side.

Look, we are -- the way our securities portfolio works is we grow deposits and we try to put all that deposit growth to work in customer assets within our client and risk framework.

And if we don't have enough demand there, it goes in the securities portfolio.

We're buying securities that we think makes sense to balance liquidity, earnings and capital of the company in all sorts of market environments.

So Marty, just to be simple.

We're not going to take losses to -- in the current period to hit equity and just to reposition the portfolio.

It will just -- it will run off over time, and it's all in the interest rate sensitivity numbers Paul gave you and it reaped -- about tens of billions of dollars come through each quarter that we have to put back to work and it ratchets up in a higher rate environment.

So don't expect us to do anything.

Okay.

And then Brian, the second quarter I really wanted to focus on was you've kind of eliminated the tracking and mortgage banking as -- even a line item on the income statement for fees.

It's -- my background and being interested just on that particular business.

You've gone from buying countrywide, which was supposed to be a major strategic move for the company.

We all know what happened there, not -- by any of you -- all is falling -- you've done a job working through that.

But just thinking strategically, from where come from and not being a business segment and now it's actually limited in the sense of what you're looking at from a line item on the fee income statement.

So just strategically, kind of think about that shift and what that means going forward?

What it doesn't mean is that we're not delivering mortgage loans for our customers and home equity loans.

I think we did $9-plus billion this quarter of mortgage loans, $3 billion plus in home equity loans, and we'll continue to do that.

The issue is when you're putting them on your balance sheet, there's no sale, gain on sale.

When the mortgage servicing portfolio is running down to be your core business, the amount of fees there is not as high.

The MSR is down to a few billion dollars and running off.

And so it's just immaterial, Marty.

That's the problem, and -- but it's not -- it's immaterial from a [fancy] reporting in the context of $20 billion -- $23 billion in revenue a quarter.

But it's not immaterial in our minds, of our consumer customers and our wealth management customers.

And there, you can see that we continue to drive our mortgage capabilities through -- including this quarter, introducing a digital mortgage product that I think is going to be the best in the industry.

And remember, Marty, we are focused on revenue, we're not focused on the fee line or the NIM lines.

Exclusively, we're focused on revenue.

So these were -- these are -- we're making loans to our customers, and we're making them prime and super-prime.

And so why shouldn't we keep them on our balance sheet as opposed to selling them to an agency and having to pay insurance that really doesn't -- it's overpriced for the amount of risk we're taking?

So we feel really good about the strategy because it increases revenue over time.

I feel like you're making the right transitions here.

Just interesting to see how far the industry has come from a transaction business to a balance sheet-driven business.

So it's -- there has been dramatic shifts and you all participated and led that as we've gone through it.

Remember, here, it's a customer business.

It's not transaction business.

It's not a balance sheet business, it's a customer business, and that's how we've been driving it.

Our next question is from Brian Kleinhanzl of KBW.

Just had a quick question on the commercial.

You said you were able to grow C&I around 4% and 5%.

Is there any way to break that down between just overall growth among existing customers versus what you're getting from entrants into new markets?

Trying to get a sense of how much further you could go just by entering new markets and you can continue to push C&I growth more.

So we can follow up with you on that.

I'm not sure I have those numbers with me.

But it's our customers, obviously.

And we are -- have been -- we've added hundreds of anchors in business banking and commercial banking.

We've added them in local markets all around the U.S. and we still like these opportunities, and that's clearly contributing to the growth.

Some of that C&I growth is in wealth management where we've seen nice growth as well, and we have a lot of FAs out there talking to clients.

And again, we're concentrating our bankers, our new branches in those markets where we have those bankers and where we have those wealth advisers so that we can deliver in those local markets.

And I think you're seeing the benefit of that in loan growth generally with -- certainly in C&I.

Brian, one thing I'd say is as we have done a good job in the small business segment and the Business Banking, which, I think, $50 million under revenue companies for Business Banking and $5 million under for small business, I think it's small business.

This quarter, year-over-year, we had about a 9% growth in loan balances and Business Banking probably had mid-single digits, and that shows you sort of the breadth of the franchise, albeit the total of those 2 portfolios is probably $50 billion, $60 billion in total, so you got to be careful when you put it against the $400 billion in total commercial balances.

But if you think about it from an economic indicator, the growth in our company a success and that shows that those mainstream SME-type companies are out there are borrowing more and doing more, and we expect that to continue because of the economy going forward.

And then just a separate question, you did mention that you saw the brokerage balances tick up this quarter.

Was that something that you had done internally to try to manage those balances higher?

Or was it just customer engagement that hadn't been there for a while?

Is this a trend?

Can you just elaborate further on that?

You're talking about brokerage assets in wealth management?

Right.

Institutional wealth management, Brian?

Correct.

Is it institutional brokerage assets or wealth management brokerage assets?

The wealth management brokerage assets.

Yes.

We've -- the balances have been declining for many quarters as people shifted to AUM.

And this was the first time in 2 years, I think, that balances were actually up.

Remember, balances go up because the market goes up.

Balances go up because of flows and the combination of those 2 things.

For the first time in many quarters, it saw an increase.

And again, just similar to the small business, business banking relative to commercial, underneath that -- the Merrill Lynch piece, which is geared to the mass affluent market segment, is -- had record flows and it's growing 18%, 20% year-over-year.

That again is $135 billion, $200 billion in total balances, but it's growing nicely.

And as it gets bigger, it started actually having a contribution to the total, whereas in the past, the Merrill Lynch U.S. Trust dwarfed it.

So you're seeing that kick in and help us out on what you could call brokerage balances.

We'll move next to Richard Bove of Hilton Capital.

Just want to go back to the balance sheet issue.

The company hasn't grown its common equity for roughly 2 years now and then had [$7 billion] in the current quarter and nothing fell down to common equity.

And I'm just wondering, when does the inability or the unwillingness to grow common equity have an impact on the secular growth rate of the business?

Right -- look, common equity didn't grow, Dick, sort of linked quarter.

A lot of that had to do with the OCI, came and took a fair chunk of it away, then we returned capital.

But let's split the other side, if the balance sheet grew, loans grew, deposits grew.

And so we're overcapitalized, so we don't need to grow the notional amount to support the businesses.

And that's the -- that's what we we're driving at.

So we -- and then inside our loan balances, we have still [$68 billion] (corrected by company after the call) of runoff loans, which give us tremendous capacity.

They're going to run off over the next several years, and we'll fill that back up with loans we want.

So there's no inability to serve our customers and our clients implied by the equity being flat.

With 11.3% CET1 ratio, Dick, relative to 9.5% minimum, we have plenty of cushion, plenty of equity to be able to grow with our customers.

Yes.

And I think you've done an unbelievably good job, a phenomenal job, I would argue, in terms of turning this company around.

But I'm just wondering -- because I'm going back 2 years, I'm not just looking at 1 quarter, and I'm seeing that common equity just doesn't grow.

And at some point, given the fact that assets do grow, the market capitalization does grow, that common equity is going to have to grow, and I don't know when that is.

But second question is, we've seen, again, looking longer term, going back to the fourth quarter of 2015, something like 150, 165 basis point increase in the overnight rate and the net interest margin of the bank is up 25 basis points.

The Fed funds rate is up, what, something like, I don't know, 80 basis points in the last year and the net interest margin is unchanged.

I know there's a lot of dynamics mix of business, the whole shape of the yield curve, shape of the balance sheet, et cetera.

But what -- when does the net interest margin of this bank start to reflect the changes in overall interest rates in the economy?

Look, you've talked about just the 2.39%, when does it go up?

Yes.

Yes.

It would -- look, we told you that versus last year first quarter, it had been up 12 basis points, but we sold a portfolio of higher-yielding cards.

That's pretty much out of the system.

So all during that time, you got to think about the dynamic of the loans that ran off that were more risky and the charge-offs.

And so take credit cards just across that time, you'll see that the risk-adjusted margin on a percent basis has been strong.

And obviously, charge-offs have continued to work their way down.

But the NIM, the company doesn't change a lot because we ran off a lot of cards we didn't want there in -- over the years that were causing a lot of charge-offs.

So I think you got it right.

It's mix -- it's all that stuff.

But the key is, on the deposit side, can we keep the pricing through a mix of deposits?

And we've done that.

And on the yield side, because we don't have -- yes, because we have that capacity that we just talked about, a lot of stuff is mortgage loans and securities, which doesn't help on the yield side, but will help as rates rise.

And our final question comes from Nancy Bush of NAB Research.

Paul, back to this question on tangible book value.

You guys, as I recall, after the crisis -- Brian, I recall vividly you're saying you're going to focus on tangible book value as an indication of the growth of the company.

And we've been used to, not just for you, but everybody else in the industry, saying TBV go up quarter after quarter after quarter.

And now that's beginning to change, mostly due to the OCI issue.

Do you have to be more careful at this point on share repurchase and other capital actions just to keep the hit to TBV from not being extreme on a quarter-to-quarter basis?

I think if stock price -- we're going to deploy the capital back to shareholders and just through the structure, Nancy, that you're more than familiar with that's going to go a substantial amount and stock buybacks.

But the OCI, you pointed out, is the near-term risk and that will pull the par over time, as you well know.

And that's an accounting convention that will go again.

That's -- it's $12 billion in gross number now, I think.

And so think about that as -- that's an after-tax number that's $1.20 a share right there will pull the par over time.

Okay.

Secondly, on the growth, the underlying growth issue.

I think you said the underlying loan growth was 5%, but the reported growth was 3% due to the runoff of these noncore portfolios.

Has there been any thought about sort of accelerating the disposition of these portfolios so that the underlying growth becomes more apparent?

I mean, would it take a capital hit at this point?

Or are there not buyers?

Or do you just think it's better to work these things out over time?

Well, we've taken all approaches.

So we've sold some, and we let some run off.

We've restructured it at the customer level.

And the stuff we have now, frankly is -- the credit quality is -- there's still [bumps] that we're working through.

But generally, the credit quality has been improving.

And so we're just letting it go on its ordinary course.

The -- I think you see on Slide 6, you can see that, that number is now down to about $68 billion year-over-year, down $30 billion.

And a lot of that year-over-year was sales and things we moved some stuff out.

But I don't expect -- there are buyers, but frankly, the economics, if we always look at -- as opposed to the growth rate.

And I think we're trying to maximize the value for all of you and us as shareholders.

And it's just -- we look at every trade, and we try to figure out what the -- every possible piece and what the trade is and whether it makes sense.

And so the good news is it's down to $68 billion from what it was, probably $250 billion a few years ago.

And it's sort of running off at a slower amount.

And so we'll work through it, Nancy.

It's not -- if there's an opportunity to move some of that, we do.

If you take that portfolio in total, Nancy, you should not be thinking that they're all -- there's a loss there.

We've gotten through most of that problem.

Well, thank you, everyone, and thank you for your questions.

We had a strong quarter, record earnings for our company, and we did that by driving responsible growth.

The key to that is driving operating leverage, and you can see that in our efficiency ratio going below 60% for the first time in a long time.

We look forward to next quarter, and we'll see you then.

Thank you.

This does conclude today's Bank of America's First Quarter Earnings Announcement 2018.

You may now disconnect your lines.

And everyone, have a great day.