Bank of America Corporation

Good day, everyone, and welcome to the Bank of America second quarter earnings announcement. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You could register to ask a question at any time by pressing star and one on your touchtone phone. Please note today's call is being recorded, and it is now my pleasure to turn the conference over to Lee McIntyre. Please go ahead.

Thank you, Catherine. Good morning. Thank you for joining the call to review our second quarter results. Hopefully you've had a chance to review our earnings release documents. As usual, they're available, including the earnings presentation that we'll be referring to during the call on our investor relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then Paul D'Onofrio, our CFO, will cover the details of the quarter. Before I turn the call over to Brian and Paul, let me just remind you we may make some forward-looking statements and refer to non-GAAP financial measures during the call regarding various elements of the financial results. Forward-looking statements are based on management's current expectations and assumptions, and they're subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials, our SEC filings on our website. Information about the non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are on our website. So with that, let me turn it over to you, Brian. It's all yours.

Good morning, and thank all of you for joining us, and thank you, Lee. Today, Bank of America reported $9.2 billion in after-tax net income, or $1.03 per dilute shares. These results included a few items worth highlighting, and I'm on page two ahead of Paul going through the details. First, as asset quality continues to improve and the economy continues to recover, we released $2.2 billion of credit reserves established in the first half of last year. The idea that a company with our credit quality and other industry participants would be releasing reserves this quarter is not new news, but the reality is at BAC we're seeing credit quality levels that are very strong. Net charge-offs fell to 25-year low as a percentage of loans, not just raw dollar amounts. Let me mention a few items I don't believe were industry-wide or expected at BAC. We recorded a $2 billion positive income tax adjustment following last month's enactment of an increase in the UK corporate income tax rate to 25%. This required a remeasurement of our deferred tax asset, which just reverses the write-downs from previous years when the tax rates were lowered. In addition, our expense level included two things I would note. These add up to about $800 million. With our strong results in the tax benefit, we took the opportunity to pre-fund $500 million to our charitable foundation. This exhalates our planned funding for not only the rest of this year, but the next year as well. This is not new money, just utilizing some of the tax benefit to cover future expenses. We also recorded roughly $300 million of expense associated with processing transactional card claims related to state unemployment benefits. This represents, to a large degree, a catch-up as we move through claim backlogs. Away from these items, we produced another quarter of solid earnings and showed evidence of good client activity in an economy that continued to recover from the pandemic. Now, as we all know, the health care crisis has shown improvement and the economy has recovered. Progress on vaccinations, along with the continued support of fiscal and monetary policies, has promoted a full and speedy recovery and a return to economic health. We, like others, are reopening our facilities, and we're seeing more products being sold by our teammates, in addition to the continued digital engagement at very high levels. Our advisors and bankers and relationship managers are once again meeting with clients face-to-face, building even the stronger relationships. We are seeing customer demand continue to grow, given the opportunities our companies seek. I want to take a minute or two on the economy and that if you go to slide three. We have included a few slides highlighting our customer data. Let me hit a few highlights. The GDP growth estimates by our B of A securities research team for the second quarter stand at 10% and stand at 7% for the full year 2021. The reopening is further driving projections of an economy has continued to grow at a rate above the pre-pandemic periods into 23. Also, the unemployment rate dropped below 6% this quarter, projected by economists to continue to fall. You'll also note the stability increased consumer spending from our own BAC customers, which is not only much higher than the same periods in 2020, which you would expect, but is notably 22% higher than the first half of 21 compared to 2019. You can see that in the lower right of page. That growth rate in 19 was already growing strongly before the pandemic. A few comments regarding the characteristics of the spending I think are interesting. We are halfway through the year and the total payments through all the different means are $1.8 trillion. That's 60% of last year's level. Last year, indeed, was a record even though it was suppressed in various periods when businesses were shut down. More specifically, for the second quarter, The total BAC consumer and small business payments set a fourth quarterly consecutive record, reaching $976 billion, up 41% year-over-year and 23% over 19. The trend has also continued into early July. Spending accelerated as COVID vaccinations increased, business reopened, and domestic travel increased. Combined spend at retailers and services comprises over 50% of debit and credit card spending, a portion of the total spend. That increased 27% over 2019 second quarter, but did slow a bit towards the end of the quarter as consumers moved their attention and started taking summer leisure trips and activities. You can see that by noting the return of travel and entertainment spending, which comprises about 10% of debit credit card spend. You can see where recovering travel remains below 2000, while recovering travel remains below 2019 spending levels. Splitting the travel up a bit, As of mid-June, domestic airline purchases were up 8% over 2019, while international airline purchases on our cards are still down approximately 40%, showing the difference in the progress against the war on the virus in nine states versus other places. Now let's go to slide four. We just put this chart in to show you that the consumers are paying their bills. We've shown this each quarter, so you can see that the actual card delinquency levels continue to edge down. even as people are out and circulating the economy. Before we go to Paul, I want to comment specifically on three areas of interest to you, loan growth, NII, and expense. And we're going to do that on pages five and six. So first on loans. Paul and I are going to show you the average loans. Paul will show you that later. End-period loans, I'll show you in a minute. And long-term trends, which are on page five. What all these figures point to is accelerating growth during the quarter. as we have spoken about on occasion. This quarter we saw loan levels across most every business move past stabilization and begin to make progress. Companies need to build inventory, hire workers to meet the growing customer demand. This virtuous circle of hiring workers and meeting customer spending will help drive the economy and hopefully will result in more line usage on our loans. You can see the path on slide five of loans since the pandemic started in March 2020. As you can see, all of them are turning up in recent months. But moving to slide six, you see the more traditional detail for our company. Let's start on the lower right-hand side of that slide and talking about the commercial portfolio. Commercial loan balances, after adjusting for the reductions in PPP loans for quarter two forgiveness, grew $15 billion. This was led by global markets client borrowing activity. But beyond that, and still excluding the PPP loan forgiveness, middle market lending grew, and our business banking team finally had growth in the month of June 2021, a first since last March. Fueling some of this improvement is calling effectiveness. Relationship managers have increased their calling efforts. We're now aggressively calling on targeted prospects, and with vaccination progress, face-to-face meetings have nearly doubled each month over the past 90 days. Commercial loans of wealth management clients grew an impressive 5% in the quarter as these customers borrowed through our custom lending products. In small business, our practice solutions a group which supports medical, dental, and veterinary practices, has been building throughout the quarter, and small business production overall is back to pre-pandemic level. Turning to consumer loans, overall growth at end-of-period loans was $6 billion. Card loans grew with increased spending even as customer payment percentages remained high. Auto originations have grown fairly consistently, although recently lower dealer supplies have affected that. Mortgage balance growth, which is a big part of our loan portfolio and consumer, has been a challenge in the low-rate environment with high refinancing volumes exceeding originations in past quarters. We are only modestly down this quarter as our origination volumes are finally overcoming the payoffs. We are pleased with the trajectory through the period, and that feeds into the second half of the year. While average loan balances during the third quarter will drive down high, it's good to start with a trend that has reversed the past quarter's declines. On NAI, the good news is that we correctly called a bottom three quarters ago. We told you then that we thought the third quarter of 2020 would be the trough. Despite the volatility and lower rate moves and significant decline in loans, we've been able to hold NAI at that level or more for three straight quarters. We expect it to move higher, and Paul's going to discuss that later. The other area I would comment on is expense. We saw, on a reported basis, we saw a half billion dollars in expense reductions from first quarter of 21 to second quarter of 21. This quarter, we also had around $800 million in notable items for the aforementioned charitable contribution unemployment claims process. Absent those notable items, expenses would have been down about $1 billion and in a low $14 billion rate. This is a level we are targeting expense as we move through the rest of the year. In the second half of the year, as we normalize our operations, we'll continue to return our business as usual, working on process improvements that allow us to reduce our headcount and to continue to fund franchise investments. Headcount in the second quarter, excluding the summer interns, declined by roughly 2,500 or over 1% from the first quarter. So the messages for this quarter are straightforward. The organic growth machine that we had rolling before the pandemic hit is reemerging as the economy normalizes. We said be careful to ensure that the war on the virus stays one, but we're seeing great deterrence. In retail and preferred and small business, we saw a strong production of core transaction accounts above pre-pandemic lows. This quarter was our best net sales growth and checking count since the second quarter of 2015. We saw card production about 90% overall pre-pandemic, but net cards, net of runoff, were positive the first time since the first quarter of 2020 when we entered the pandemic. We saw growth in new Merrill Edge investment accounts, and Paul will talk to you about that. We saw good mortgage production. We saw stronger digital activity. In wealth management, we saw household growth and strong flows continue to grow, even with the use of our banking platform to grow its credit side. In global banking, we saw loan growth and new production coming on, while line usage still remains very low. We saw investment banking close this quarter with record pipelines. In markets, we saw a strong first half, even compared to 2020, and a strong second quarter, albeit with more normal seasonal impact, so normalizing more like 19, but still higher. And we saw a headcount come down as operational excellence kicked in by over 2,000 people. We have work to do to keep driving down the core expenses and getting out the net COVID expenses over time. And above all, due to responsible growth, we saw strong core credit metrics. So as the economy continues to recover, we are seeing our organic growth engine kick back in. With that, I'll turn it over to Paul.