Bank of America Corporation

Hello and thank you for joining the Bank of America third quarter earnings announcement. At this time all participants are in a listen only mode. Later you will have an opportunity to ask questions during the question and answer session. Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn today's conference over to Lee McIntyre. Please go ahead.

Good morning. Thanks for joining the call to review our third quarter results. I trust everybody's had a chance to review the earnings release documents. They're available on the investor relations section of bankofamerica.com's website. Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during the call. After Brian's comments, our CFO, Paul D'Onofrio, will review more details of the third quarter results. We'll then open up for questions. Please try to limit your questions so that we can get to all the callers. And for more information on the forward-looking comments we may make, please refer to either our earnings release documents, our website, or the SEC filings. With that, take it away, Brian.

Thank you, Lee. Good morning, everyone, and thank you for joining us to review our third quarter of 2019 results. These results reflect our success in a U.S. economy that continues to grow at around a 2% GDP level. In that kind of economy, our job is simple, drive solid customer activity, manage risk well, manage expenses well, all while investing heavily in our competitive advantage. That's what we've been telling you and what we call responsible growth. The investments we have been making in the franchise for many years and our disciplined responsible growth approach are evident across every line of business results in respect to the customer basis you'll see in the materials. Today we reported $5.8 billion in after-tax net income and $0.56 per share for the third quarter. Those results include a previously announced $2.1 billion pretax impairment charge. This charge relates to the investment in our Bank of America Merchant Services joint venture from 2009. That negatively impacted our EPS by 19 cents. That charge, however, positioned us to meaningfully invest and integrate our payments platforms in our commercial side businesses over the next several years. Excluding that charge, third quarter net income was a record $7.5 billion after tax and EPS of 75 cents per share. On this adjusted basis, net income increased 4% from the third quarter of 2018, while earnings per share increased 14%. This reflects an 8% reduction in average diluted shares from third quarter of 2018. Returns after adjusting for the impairment charge were strong. Return on assets of 123 basis points, return on tangible common equity of 15.6%. So before Paul dives into the quarter's results for the lines of business, I wanted to cover a little bit about client activity, costs, and operating leverage at an enterprise level. These are the items that we focus on for you that allow us to drive our competitive advantage. But first, some general context around the operating environment. Despite the repeated discussions or the continuing discussions around a potential recession in the United States, I want to offer some data from our customer base, which represents the activity of a substantial portion of American consumers. Our annual customer outgoing payments on the consumer side of our company are nearly $3 trillion, when compared to the U.S. economy, about 15%. Consumer payments year-to-date are up 6% compared to the same period in 2018 through nine months. For the third quarter, that pace was a solid or slightly increased from earlier in the year. This means the U.S. consumer continues to benefit by strong employment prospects. Now, interesting on the commercial side, clients, at roughly $325 billion in average U.S. commercial loans outstanding, we do see a lot of client flows as the market leader in nine states. Our total commercial loans grew 6% compared to the third quarter of 2018 with good middle market utilization rates. And importantly, our small business segment also grew 6%. As such, we are the largest U.S. commercial lender and the largest small business lender in the United States, according to the FDIC data. This solid activity means that commercial customers continue to fare well. These are tangible examples that the U.S. economy is still in solid shape, despite the worries and concerns about trade wars, capital investment slowdowns, or other global macro conditions. Now, let's turn to slide three. Across nearly every line of business, we are seeing strong customer activity. You can see that on the slide. I won't take you through all the statistics here, but let me highlight a few. On a consumer business, on the left-hand side of the slide, our deposit growth has consistently been above the industry average for many periods. It's axiomatic that we're gaining market share, and not just in balances, but year-to-date we've seen something that's interesting to us. We've had a 2% growth in a number of net checking households, a 700,000 increase. This is the fourth year of growing net checking households after a decade of consolidation of accounts, relationships, and other changes to our business that began a decade ago to reposition it. It is also at record levels of primary accounts and record levels of total balances and average balances in those checking accounts. 92% of our customers, we have the primary checking account in the household, and the average balance reaches $7,000. Now, through a renewed focus on growth in our wealth management franchise, Andy Seed and Katie Knox are leading the charge, and we've seen net new Merrill Lynch and private banking relationships up over 30% plus in each case. And we're expanding the franchise by bringing our retail franchise, our consumer banking franchise, to markets where we have long established wealth management or commercial client coverage. Paul is going to cover the continued growth in digital uses across our client base, which provides an important dual benefit of strong customer service and lower cost structures. Now, on the commercial and corporate side, as you can see on the right-hand side of the slide, as well as the institutional investor coverage we have, we're also growing the client basis. We have been investing in the client-facing teammates in our commercial banking for a few years, and we've increased our investment banking coverage, especially in the middle market, and we've added new traders and sales staff in Europe as we opened our Paris brokerage office. As you can see, these efforts are in deep relations with 3% growth in solutions for households. customer relationship and commercial. This investment has led to an improvement in our client coverage and investment banking market share. Earlier this quarter, my teammate Tom Montag highlighted some of the gains we're making in middle market investment banking coverage at a conference. We expect to see that – we've seen that continued success, and we expect for it to continue in the future as we continue to bring our capabilities to our great commercial banking franchise in nine states. Let's turn to slide four. This increase in client activity can be seen in the growth in deposits and loans. On slide four, we look at the deposits. Average deposits grew $59 billion, or 4.5% year over year. For four years now, we have grown deposits compared to the prior year for every one of those quarters by more than $40 billion when compared to the year before, all while we've improved the mix of deposits. Deposits with our consumers grew $38 billion in total, or 4%. reflecting the value clients place on the relationship benefits offered by the Convenience Star Network, the value of our leading digital capabilities, and our unique Preferred Rewards Program. Global Wealth Manager was responsible for $16 billion of that $38 billion in consumer deposit growth, reflecting client expansion and preference to hold cash and move investments, as well as inflows of about $8 billion from the conversion of some money market funds and deposits at year-end 2018. Our consumer banking deposits grew by $22 billion, or 3% year-over-year. More importantly, you can see in the upper right-hand side of the slide that these came from checking balance growth. One additional point we'd focus on here is long-term trend of deposit growth, even in a moving rate environment. When the Fed started raising rates at the end of 2015, many of you had questions was whether our deposits could continue to grow and what rates we'd have to pass through the customers. Since the end of 2015, our average consumer banking deposits are up $145 billion in balances, three-quarters of that coming from checking accounts. These balances are either no interest or very low interest in our core relationship in the households of America. Our rate paid remains low due to that superior mix of deposits. Now, when you look at global banking on the lower right-hand side of the slide, $23 billion in deposit growth reflects the rising rate environment and additional bankers we have deployed over the last few years to continue to sell our superior global transaction services capabilities. As we move to slide five, we see the loan side of the equation. Overall, average loans are up nearly 4% year-over-year, despite selling about $9 billion of non-core consumer real estate loans out of the all-other category over the last year. Average loans in our line of business grew $52 billion, or 6% year-over-year, as both consumer and commercial loans both grew at a 6% pace. Middle market borrowing, as I said earlier, continued to complement large corporate financing. As you can see in the bottom right-hand chart, we continue to demonstrate a fairly consistent range of responsible loan growth in all our business segments. Within consumer, you'll note the strong residential mortgage growth, but also the more stable credit card balances, which reflect our decision last year to continue to manage less profitable promotional balances down while driving core balances and our relationship, especially in rewards capabilities. Within commercial, I want to highlight a couple of areas of activity important to understand as you think about commercial clients in the state of the U.S. economy. First, as I said earlier, small business lending. Over the last year, we've grown small business loans 6%, regaining our market position as the number one lender to small businesses in the United States. Supplying capital to small businesses is very important, as they are the key driver of employment in the U.S. As we continue to innovate around capabilities and offerings in the important client base, another portfolio with our commercial loans and leases book is our global equipment financing portfolio. Growth in this portfolio is a sign that commercial clients are investing capital in the U.S. economy, that faster-paced new overall economic growth. This portfolio is $65 billion, and it grew $6.5 billion plus, or 11%, in the past 12 months. This reflects investments by clients and equipment to drive their business invest in renewable energy products. These are just a couple examples of when our stable lending portfolio is growing and supporting clients in a real economy and growing the size of smaller competitors' entire lending portfolios. As we look to the expense side of the equation on slide six, We've been driving a responsible growth. Part of that is to have sustainable growth, which means we self-fund our investments and find ways to handle the inflationary costs to keep expenses relatively flat while we continue to invest heavily, $3 billion in technology, new branches, new teammates. Slide 6 shows a two-year expense trend here. I'll talk about the expense in slide 6, excluding the impairment charge we took in our investment in Bank of America Merchant Services. We've been operating in a tight range of $13 to $13.3 billion, with only one exception for the last few years. So we've been able to operate at a $53 billion annualized expense base, despite increased investments in technology and infrastructure and buildings and people and philanthropy and other costs. At $13.1 billion this quarter, we were basically flat compared to quarter three of 2018, despite elevated litigation costs of about $350 million compared to a six-quarter run rate of about $100 million per quarter. Regarding headcount, year-over-year headcount went up. It went up in the sales professional category by 1,700 people. We offset that cost through the reduction in other teammates. As you look to the next slide, slide 7, you see the familiar operating leverage trend, which has been a highlight for the firm's culture of funding investments to operational earnings. Despite the immediate revenue impact of a lower interest rate environment and other revenue challenges with a slowing economy, We have a good track record of generating operational savings. We're able to keep operating leverage relatively flat. Essentially, expenses and revenue grew about $500 million, less than $500 million each. On a more core operating basis, taking account the elevated litigation, you could see operating leverage even in this difficult NII environment. As I've said before, generating operating leverage does get tougher, and we told you that over the last several quarters. After four successful years of keeping expenses declining and holding relatively flat. This will continue, especially as we work through periods of interest rate cuts, but we remain focused on our mission to continue to grow revenue faster than expenses. The question we ask ourselves is how much flexibility, and the question you ask us is how much flexibility we want to leverage from initiative spending on technology or infrastructure or hiring, or do we keep investing to build our market share momentum? As we talk to the investors who own substantial portions of our stock, They continue to tell us to invest in our client and customer successes, to take advantage of our strong position and continue to invest in times. But even with that, you can see in this chart that we maintain our discipline around operating leverage. With that, I'm going to turn it over to Paul for a few details on the quarter.