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spk01: 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 can register to ask a question at any time by pressing star and one on your touch tone 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.
spk09: 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
spk10: 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 diluted 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 continue to improve and the economy continue 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 that 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 that 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 U.K. 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 lower. 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 accelerates 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 expense. 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 that showed evidence of good client activity in an economy that continued to recover from the pandemic. Now as we all know the healthcare crisis has shown improvement and the economy has recovered. Progress on vaccinations along with the continued support of fiscal 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 see. I want to take a minute or two on the economy and then 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 also note the stability of 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 the page. That growth rate in 2019 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 the business was shut down. More specifically for the second quarter the total BAC consumer's fall business payments quarterly consecutive record reaching $976 billion of 41% year over year and 23% over 2019. 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 activity. You can see that by noting the return of travel and entertainment spending which comprises about 10% of debit and credit card spending. You can see where recovering travel remains below 2019 spending levels. We're going to 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 of 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 be on the 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, NIA and expense. We're going to do that on pages five and six. 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've 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. 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
spk00: and
spk10: talk about the commercial portfolio. Commercial loan balances after adjusting for the reductions of PPP loans for a quarter to 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, the first since last March. Feeling some of this improvement is calling effectiveness. Relation of managers that have increased their calling efforts were now aggressively calling on targeted prospects and with vaccination progress, -to-face meetings have nearly doubled each month over the past 90 days. Commercial loans above manager clients grew impressive 5% in the quarter as these customers borrowed through our custom lending products. In small business our practice solutions 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 in end of period loans was $6 billion. Card loans grew with increased spending as customer payment percentages remained high. Audit 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 loans drive, that loan balance is during the third quarter will drive to NAI, it's good to start with a trend that has reversed the past quarter's decline. On NAI the good news is that we correctly caught 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 is 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 reduction 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 a billion dollars and in low 14 billion dollar rates. This is the level we are targeting expenses 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 including excluding the summer interns declined by roughly 2,500 to 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 start to be careful to ensure that the war on the virus stays one overseeing great deterrents. In retail preferred and small business we saw a strong production of core transaction accounts above pre-pandemic levels. This quarter was our best net sales growth and checking counts since the second quarter 2015. We saw car 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 head count 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 the economy continues to recover. We are seeing our organic growth engine kick back in. With that I'll turn it over to Paul.
spk07: Thanks Brian. Hello everyone. I'm starting on slide seven. As I have done in the past few quarters the majority of my comments or excuse me my comparisons will be relative to the prior quarter rather than year over year given the pandemic. Since Brian already covered a lot of the income statements I will just add a couple of comments on revenue and returns. Revenue was down 6% from Q1. The decline was driven by lower sales and trading results that more than offset solid consumer and wealth management revenue which was a result of higher card income and AUMPs. It is also worth noting that while investment banking fees were down from a record Q1 level they remained strong at more than $2 billion in Q2. Lastly when comparing revenue against the prior year quarter remember Q2.20 included a $704 million gain on the sale of some mortgage loans. With respect to returns our return on tangible common equity was 20% and ROA was 123 basis points both benefiting from the positive tax adjustment and sizeable reserve release. Moving to slide eight. Balance sheet expanded $60 billion versus Q1 to a little more than $3 trillion in total assets. Deposit growth of $24 billion supported $16 billion of loan growth while the combination of market-based funding and long-term debt issuance supported expansion of the balance sheet and global markets. Other notable movements on the balance sheet included the continued deployment of excess cash into securities. Securities increased $83 billion while cash declined $66 billion. Driven by the additional deposit growth our liquidity portfolio remained above $1 trillion or one-third of the balance sheet. Shareholders equity increased $3 billion as earnings outpaced capital distribution. Capital distributions of $5.8 billion were limited to the average of earnings in the previous four quarters per regulatory guidelines and were well below the $9 billion earned in the quarter. With respect to regulatory ratios consistent with Q1 standardized remained the binding approach for us and was down a little less than 30 basis points from Q1. While the CET1 ratio declined 30 basis points from Q1 it remained 200 basis points above our minimum requirement of .5% which translates into a $31 billion capital cushion. While book value rose $3 billion regulatory capital was up $1 billion as the $2 billion tax adjustment did not benefit CET1 capital. Higher RWA from the liquidity deployed to securities, growth in our market's balance sheet and higher GWIM loan activity more than offset the benefit to the ratio from higher capital. Our supplementary leverage ratio at quarter end was .9% dropping from the prior quarter primarily due to the removal of the regulatory relief. .9% versus a minimum requirement of 5% equates to approximately $600 billion of balance sheet capacity which leaves us plenty of room for growth. Our TLAC ratio remained comfortably above our requirements. Turning to slide 9, Brian reviewed ending loan balances earlier so I will focus on average balances which are more closely linked to NII. As you look at the year over year trends note that these numbers include PPP loans which have been moving lower now for two quarters driven by forgiveness. You can see the change in those PPP levels on the slide focusing on the link quarter change while loans on an ending basis were up nicely on an average basis even with a $3 billion decline in PPP balances loans were flat. Wealth management and global markets experienced the most notable improvements. GWIM continued to benefit from security based lending as well as custom lending while continuing to have solid mortgage performance. In global markets we looked for opportunities to lend to clients against a number of different asset types creating mostly investment grade exposures as a good use of our liquidity. In consumer we saw credit card loans stabilize for the first time in more than a year as credit spending ramped up and new accounts continued to build across the quarters. Quarterly new account levels are nearly back to 2019 levels. With respect to deposits in slide 10 we continued to see significant growth across the client base not only because of the growth in the money supply but also because we added new accounts and attracted increased liquidity from existing customers. I would just note that the link quarter growth on a spot basis included a headwind of about $34 billion from customer income tax outflows. Normally we see deposits decline in the second quarter given tax payments but this year we saw strong growth even with these tax payments. Turning to slide 11 and net interest income on a gap non-FTE basis, NII for Q2 was $10.3 billion on FTE basis. Net interest income declined a little more than $600 million from Q220 driven by the rate environment and lower loan balances but showed modest improvement from Q1. Year over year comparisons beginning next quarter are expected to improve nicely as Q320 has proven to be the nadir for NII and we are expecting NII improvement in Q3 and Q4. Compared to Q1 the benefit of an additional day of interest and liquidity deployed was offset by a lower level of PPP loan forgiveness, the absence of proceeds recorded in NII from the Q1 litigation settlement and modestly higher premium amortization expense. The net interest yield declined seven basis points from Q1 driven by the continued addition of lower yielding debt securities in Q1 and Q2 and a larger global markets balance sheet. Remember as part of our liquidity that remains I would include about $150 billion of debt securities hedged to floating which earned a bit more than cash. As you will note given all the deposit growth and low rates our asset sensitivity to rising rates remain significant and mostly unchanged from Q1 highlighting the value of our deposit and customer relationships. Let me give you a couple of thoughts around NII for the back half of the year. Last quarter when the forward interest rate environment was 30 to 40 basis points higher we told you we were targeting NII at roughly $1 billion higher in Q4 of this year. This quarter's loan growth is encouraging and supported with this target and the slowdown and mortgage prepayments should also help improve NII. So while we still think getting NII $1 billion higher by Q4 is possible admittedly the recent significant decline in long end rates presents a challenge. This possibility of course assumes loans continue to grow in the second half and rates don't move lower from here. To improve our chances we could decide to deploy additional liquidity at higher fixed rates in the coming weeks and months as we evaluate the tradeoffs between liquidity, capital and earnings. Turning to slide 12 and expenses, Q2 expenses were $15 billion a half a billion lower than Q1 while lower than Q1 the combination of the $500 million contribution to the foundation and the nearly $300 million increase in costs associated with unemployment claims processing kept expenses above the low $14 billion target shared with the last quarter. Outside of these two items expense was lower driven by the absence of a few Q1 items, seasonal payroll taxes, the real estate impairment charge and the acceleration of expense due to incentive comp award changes. Additionally lower incentive comp and severance costs also contributed to the decline. Lastly our COVID costs saw a modest decline as some pandemic related employee programs began to roll off but this was mitigated to a certain degree by preparation costs for associates returning to the office. As we go to the segments I would just note that the sizable foundation contribution was allocated to the lines of business and therefore negatively impacts comparisons to prior quarters. As we look forward we continue to invest at a high rate in people and in technology and in new financial centers. We are seeing the benefits of these investments and now as we move forward we expect that natural attrition will allow us to reduce head count as we transition back to a more normal business environment. As Brian mentioned, excluding some of our interns, our head count this quarter moved down by about 2500 people. Turning to asset quality on slide 13, nothing but good news to report here. Net charge off this quarter fell to $595 million or 27 basis points of average loan. This is the lowest loss rate in more than two decades. That is 28% lower than Q1 and more than 30% below the second quarter of 2019. Our credit card loss rate was 2.67 and several loan product categories were in recovery positions this quarter. Provision was a $1.6 billion net benefit driven by the continued improvement in the macro economic outlook which resulted in the $2.2 billion release of credit reserves split fairly evenly between consumer and commercial loans. Our allowance as a percent of loans and leases end of the quarter at .55% which is still well above the .27% which was the level as we begun 2020 following our day one adoption of CISO. And as a reminder, the mix of our loans has also changed since CISO day one. To the extent the economic outlook and remaining uncertainties continue to improve, we expect our reserve levels could move lower. Okay, on slide 14, we show the credit quality metrics for both the consumer and commercial portfolios. A couple of points I would make here with respect to card losses. Given the continued low level of late stage delinquencies in the 180-day pipeline, we expect card losses to decline again in Q3. For at least the next couple of quarters, I would expect total net charge-offs to moderate around the current level with lower card losses partially offset by lower net recoveries and other products. With respect to commercials, metrics, reservable criticized exposure and MPLs both decline in the quarter. Turning to the business segments and starting with consumer on slide 15, consumer banking produced another good quarter with strong customer deposits and investment flows and the return of card loan growth. This reflects the strength of our brand, our digital innovations, and the deployment of specialists in our centers, all of which enabled us to capture more than our fair share of the increase in customer liquidity. As Brian said earlier, this was a quarter of reopening where both our high tech and high touch capabilities delivered growth in client activity. Given vaccination progress, we reopened certain financial centers. More of our associates were at their posts in our financial centers and customer traffic was up. All of the above drove higher sales in our centers. At the same time, we also saw increased sales through digital channels, which suggests increases in digital engagement are here to stay. The segment earned $3 billion in Q2, 13% higher than Q1 as revenue, expense, and credit costs all showed improvement. Revenue improved 1% reflecting higher card income on increased purchase volumes and modestly higher account service charges on ATM usage. Expenses moved lower versus Q1, given the absence of the Q1 real estate impairment cost and seasonal higher payroll tax expense. We also saw some modest improvement in COVID costs as some of the elevated pandemic related associated costs began to wind down. Our cost of deposits this quarter improved to an impressive 118 basis points. The team has done a great job servicing more and more deposits while maintaining a strong cost discipline aided by digital engagement. Looking back at Q2, 19, we have added 38% more deposits while expenses have only increased a little more than 3% annually in support of all that new activity, even with COVID. On slide 16, you can see the significant increase in consumer deposits and investments. Average deposits of $979 billion are up $55 billion link quarter and nearly $170 billion from Q2, 20, with more than 60% of that growth in checking. Rate paid is down to two basis points, as 56% of the deposits are low interest checking. We covered loans earlier, but would just note that while average loans are downed link quarter, period end loans are up modestly excluding PVP as growth in card balances and vehicle lending outpaced a small decline in mortgages. With respect to investment balances, we reached a new record of $346 billion, growing 40% year over year as customers continue to recognize the value of our online offering. On slide 17, I'll highlight a couple of points regarding the continued improvement in engagement. After crossing 40 million digital users in Q1, we added another quarter million users in Q2. This quarter, 70% of our consumer households used some part of our digital platform. We also reached 2.6 billion logins from customers in the last 90 days. And while you will note the tremendous Erika and Zelle usage, what I would draw your attention to is the digital sales growth, which is up 26% year over year. 85% of booked mortgages in the quarter were done digitally, while 77% of direct vehicle loans were digital. Turning to wealth management, the continued economic reopening and strong marketing conditions led to records in average deposits, loans, investment balances, and asset management fees in Q2. Both Merrill and the private bank contributed to this improvement. In growth, new households at Merrill continued, and the average size of the new households is larger this year than last year. And at the same time, net new households grew, but at a slower pace given expensive competitive hiring practice across the industry. We remain committed to organic growth in our advisors and private client sales force as a stronger, more sustainable long-term strategy. Net income of nearly 1 billion improved 12% from Q1, as we saw improvement in both revenue and expense. With respect to revenue, the record AUM fees complemented higher NNI on the back of solid loan and deposit increases. Expenses dropped as the absence of seasonally elevated payroll tax in Q1 was partially offset by higher revenue-related costs. Client balances rose to a record of 3.7 trillion, up 725 billion year over year, driven by higher market levels as well as strong client flows. Let's skip to slide 20, which highlights our progress to digitally engage wealth-bound clients. In both Merrill Lynch and the private bank, we are focused on three pillars for digital engagement. One, digital adoption and deeper engagement. Two, modernizing our platform for advisors and clients. And three, secure and easy collaboration with clients. We provided stats on slide 20 that show record levels of digital engagement improved further in Q2. These are some of the highest levels of digital activity across our customers. More and more clients are logging in to easily trade, check balances, and originate loans all through one simplified sign-on. Seventy percent of checks deposited by the private bank clients and more than half of checks from Merrill clients are being deposited digitally now. And through leveraging Erica-based AI capabilities and through use of WebEx meetings and secure text messaging, we are making it easy and more efficient for clients to do business with us wherever and however they choose. This creates additional capacity for our advisors to spend more time with existing and potential clients. All right, moving to global banking on slide 21. The business earned $2.4 billion in Q2, improving $251 million from Q1. Strong revenue growth and lower expenses were mitigated by a lower provision benefit than Q1. Deposit growth maintained or remained strong and increased $20 billion to a new record. Outside of PPP loan forgiveness, we saw modest growth across the platform as discussed earlier. Revenue growth reflected the absence of the prior quarter impairment on some energy investments as well as increased ESG investments. Revenue also included strong firm-wide IB fees of $2.1 billion down only modestly from the record Q1 level. This performance resulted in an improvement to a number three ranking in overall fees with a pipeline that remains strong. Strong debt issuance was more than offset by lower equity underwriting fees. We had a provision benefit driven by a reserve release of $834 million in Q2, which was $328 million lower than the Q1 release. Net charge-offs were near zero, reflecting both low charge-offs and a notable recovery in the quarter. Non-interest expense declined 7% from Q1, reflecting lower compensation, partially offset by other costs. We've already covered much of the balance sheet on slide 22, so let's skip to digital trends on slide 23. We continued our investments in digital solutions that deliver efficiencies for both clients and our employees. The solutions for clients have a compounded effect since they invariably mean less manual intervention by the bank, enhancing both efficiency and satisfaction. Enhanced banking solutions are helping us capture greater market share as wholesale clients do more with their banking partners that are stable and secure and that have the capability to invest in new technologies that will provide better data and global integrated solutions. Digitization and, in particular, artificial intelligence is helping us streamline processes and respond to clients more quickly and efficiently. As an example, our bankers are using technology powered by Erika to not only better manage credit exposure, but also identify and win new business. We present some wholesale digital highlights on slide 23. Pushing the global markets on slide 24, results reflect solid but lower sales and trading activity, as noted earlier. While down from the more elevated pandemic periods, trading revenue is still 10% or so higher from Q219. As I usually do, I will talk about results excluding DVA. This quarter net DVA was negligible, but the year-ago quarter had a $261 million loss. Global markets produced $934 million of earnings in Q2, down more than $1.1 billion compared to either Q1 or the year-ago quarter. Focusing on the -over-year, revenue was down 15% driven by the reduction in sales and trading. The -over-year expense increase was driven by higher costs associated with processing unemployment claims and the activity-related sales and trading costs. Compared to Q1 expense, the higher unemployment processing costs were mostly offset by lower compensation. Sales and trading contributed $3.6 billion to revenue, declining 19% -over-year. FIC declined 38%, while equities improved 33%, recording one of the strongest equity performances in our history. FIC results reflected the much more robust trading environment in the year-ago period, particularly for macro products. Q221 saw credit tightened and agency mortgages endured a difficult trading environment given the volatility break. The strength in equities was driven by a strong trading performance in derivatives and increased client activity, notably in derivatives and in Asia. On slide 25, we note half-year revenue trends across the last few years. As you can see, while the pandemic elevated results in 2020, 2021 remained well above the prior years presented, driven by continued client activity and volatility in the market. Finally, on slide 26, we show all other, which reported profit of $1.9 billion. The $2 billion tax adjustment benefited results. Absent this benefit, we would have reported $137 million loss, which is a decline of 239 from Q121, driven by lower revenue. Revenue declined $545 million, reflecting two impacts. First, higher partnership losses on increased ESG investments. As you know, we record grossed-up revenue from these investments on an FTE basis in global banking, pay the full tax there, and then back out those entries in all other. You can also see the increase in ESG investment in Q2 in other income on our consolidated income statement where partnership losses are booked. While this loss impacts revenue, it is more than made up for on the tax line. We expect our tax credits and associated losses in consolidated other income to increase by at least $100 million in Q3. And keep in mind, Q4 is normally even higher, reflecting seasonal activity. Revenue in all other was also impacted by some refinancing activity. We called and refinanced higher cost structured notes, which pushed some AOCI back through the income statement. Our effective tax rate this quarter, excluding the $2 billion tax adjustment, was 10.7 percent and further excluding tax credits driven by our portfolio of ESG investments, our tax rate would have been 25 percent. For the second half of 21, absent any changes in current tax laws or any other unusual items, we expect our effective tax rate to be in a range of 10 to 12 percent. Okay, with that, we're ready to go to Q&A.
spk01: We'll take our first question from Glenn Shore with Evercore ISI. Your line is open.
spk06: Hi, thanks very much. I wondered if we could contextualize your loan growth inflection conversation. I heard you on cards and auto contributing to the modest pickup on period end loans. So I'm wondering what confidence level you have of that continuing the second half of the year, whether it be card auto or will middle market, M&A or anything else start contributing? And then maybe most importantly, do you think 2022 could be a normal-ish loan growth year, say, you know, low to mid single digits like you had been running? Thanks.
spk10: Thanks, Glenn. I think if you look across all the businesses on an individual basis at loan growth, which votes well, the usage on lines is still low. And so that, you know, that is still running in the low 30s, which is about a thousand basis points on average lower in the banking segment. But what you see underneath that is that even business banking, which is the segment from five to 50 million, is net growing finally. And it was the most affected by the PPP runoff. And, you know, the runoff PPP in the quarter was $6 billion, $7 billion or something like that. So we, in Paul's, you know, basically flat average balances that included, you overcame that. So we feel good as we look across the thing. So what you really see is net card production back to pre-pandemic. You see gross card production basically about 90% of pre-pandemic. You see autos, which will pick back up as inventories become available. And the real driver on the consumer side is mortgages. You know, we're basically holding our own right now. And that was different than, you know, frankly on the refi side, we lost some balances through the last several quarters. And on the commercial side, it's really line usage, you know, honestly can't go any lower. Maybe it can, but theoretically it can't because it's been stuck here for a good, you know, four or five quarters with the activity. But the auto dealer line usage, which is net by the house, for example, is very low than it traditionally is. So we expect those to pick back up. But the key is we're actually producing more customers and more clients, even at the low usage and the loans are starting to grow.
spk06: Sounds like we got a shot at that. Thanks. Maybe a very similar question on expenses and then I'll be done. You noted that there's some COVID expenses still in there. But excluding the two one-time, as you called out, we're still in the low 40s. Sounds like 57, low 57 billion range for the year is okay. Should, you know, we've asked this question every year, any one of us have. Should 22 be materially different than 21, given how you're able to fund a lot of your investments internally?
spk07: So, Glen, it's Paul. You know, we're not providing specific 22 expense outlook, but I will offer the following thoughts, which I think answer your question. So our rough estimate for the fourth quarter expense is a range of low 14 billion. I think if you add to that the seasonal higher payroll tax, approximately 350 million in Q1, plus add in 1% inflationary costs that we have talked about now for many quarters, remember, you know, if we do nothing, costs would grow by 3 or 4%, but we're driving that lower every year and quarter through OPEC, SIM, and other initiatives. But if you take the 4Q expense, you add the higher seasonal payroll tax, add 1%, that's a good base, I think. And then from there, you know, adjust based upon whatever assumption you want to make around, you know, higher revenue expectations in areas that are closely linked to compensation exchange fees. I think if you do that math, you'll have a pretty good number.
spk06: Thank you, Paul. Appreciate it.
spk01: We'll take our next question from Matt O'Connor with Deutsche Bank. Your line is open.
spk03: Good morning. So I know in recent quarters I've been asking about just the thought process on how you deploy liquidity and securities, and look, it's been the right call because you were buying what felt like low rates, but rates have gone down again. But I just want to circle back on, like, what is the thought process you had alluded to, you know, potentially deploying more liquidity in the coming weeks? And I guess I step back, and it seems like your loans are starting to grow, deposit growth is starting to slow, and again, you know, rates have kicked down again. So, you know, why lock in kind of 10-year duration at these levels with that as a backdrop? Yeah,
spk10: Matt, I'll let Paul hit it more specifically. But one of the things that we just have to always keep mining, and you've touched on it, is that the deposits are across 1.9 trillion, and the loans are 900 and change, and that difference has got to be put to work. And, you know, the reality is we're getting a rate of $80 billion deposit growth, and, you know, we've got to put it to work, and that's what we do. And so we're not timing the market or betting or a way. We just sort of deploy it when we're sure it's really going to be there. And so that's been our strategy. And, yes, we put some to work, and it turns out to be, in the aftermath, a good thing. I think, Frank, I'd rather have a higher rate structure. We'd be better for long-term earnings of the company. But I'll let Paul talk about redeploying.
spk07: Yeah, I mean, I don't know what specifics you're looking for, but I would echo some of Brian's comments. I think we've been very balanced. We, you know, if you look at the results compared to other banks, we've maintained our NII for the last, you know, few quarters here. We called the bottom in the third quarter. But at the same time we were doing that, we still, you know, are reserving significant liquidity. So we have a lot of, you know, dry powder as we sit here today, and more deposits are coming.
spk03: So should we just think about it, you know, loans plus securities will basically equal deposits. So, you know, if the loan growth is modest, but you keep growing deposits, you'll just plow it into securities kind of regardless of rates?
spk10: Yeah, and they've got to take out – we do have to keep straight cash, obviously, that we show you. But that's generally the way to think about it. And the debate is, you remember we hedged a lot of the stuff that we bought, you know, just to protect ourselves a little bit. But that's the simple way to think about it. In the bank side balance sheet, that's the simple way to think about it. Obviously, there's securities firms different.
spk07: We – I'll just reiterate, like you said, we're going to get deposits. It's going to fund loan growth. Whatever's left over will probably go in securities. But then we still have a bunch of excess liquidity. So that can be deployed as well, either in the near term or long term, depending on how we balance, you know, liquidity against capital and earnings.
spk10: And actually going back to Glenn's question, Matt, you know, one of the things we can't take advantage of is our extreme efficiency in the consumer business with the, you know, the rate structure. And so I think they got down in a – you know, they're pushing towards 100 or 120 basis points of deposits because they're growing, you know, core checking customers at a more rapid pace than we've grown in a while. So consistently quarter after quarter after quarter, that's going to stick to our ribs. You don't pay anything for it. And as rates rise, it'll drive the efficiency. But we just haven't had a chance to take advantage of it, frankly, because of the rate structure.
spk03: Okay, I got it. That's helpful. Thank you.
spk01: We'll take our next question from Mike Mayo with Wells Fargo. Please go ahead.
spk02: Hi. I'm stuck on slide 17 with the digital usage. So I guess you have a record number of digital users, 70%. You highlighted – you highlighted digital sales of 26% year over year. You know, where aspirationally do you want that to go? And what can be the impact on headcount and expenses? And it's the same question I asked before. You have -in-class digital cost of deposits in the consumer. It's the lowest in the industry, but doesn't translate to the overall firm. So I'm just trying to connect the dots from your great digital usage to better efficiency and also get some sense of your aspirations on the digital side.
spk10: So Mike, the last question is sort of that question, which is the consumer side doesn't get the advantage until you get the some rate structure on the short end especially. And so all that investment, though, it'd be like we're having the same conversation we had in 16 before rates rose. Or that, you know, one's just going to pay off and then it exploded and paid off and we expect it to happen again as the economy normalizes. And we are taking good advantage, as you well know, prior to the pandemic. And so let me back up on digital products and usage. The key strategies we've been engaged on is beyond consumer. And Paul hit some of the wealth management pieces. You can see him. And so when we're talking about the digital things, we're actually showing it by each segment. So the growth in the wealth management side, both for external usage, i.e. customers and internal is extremely important. Using Erica internally as a method of artificial intelligence based natural language processing stuff helps make people more efficient in the commercial segment wealth management. So we don't have our aspiration is just to follow and push, follow and push the client at the same time. And that always has a benefit. And that's why the last decade, we're down 40,000 people in the retail network to give you a sense of where it goes. You know, we we have some internal plans. We have an idea, but we we are sort of we don't go out and say that because frankly, it happens piece by piece by piece. And and honestly, a twenty five hundred dollars, twenty five hundred FTE reduction in the quarter is in part due to the consumer efficiency. Kick them back in once they got through PPP processing things.
spk07: And that that reduction in headcount, you have to also factor in the increase in headcount in the front office. So we're getting a reduction overall. If you go back to the record, you look at this quarter. But at the same time, you're seeing a mixed ship. We're adding more people out there talking to customers across the platform and we have less people in support in the back office.
spk02: OK, just one follow up on that aspirational question. When you strip out and you don't normalize everything, you know, rates and everything else you want to do, how much more do you think you can lower unit costs over the next several years? And what would be the main technology driver for that?
spk10: There are basically three ways. One is that it's all going to show up in headcount. And so we expect that the consumer cost of deposits has gone from three hundred fifty basis points, probably ten, twelve years ago to one hundred and twenty. And so we'd expect to keep driving that down. And that's going to be driven by everything we just talked about. When you get to revenue related compensation of all management business, that's up a half billion dollars from this quarter, nineteen probably or something like that. And that's a good thing because we make money, but that that will be more driven by its production capabilities and things like that. So so there's basically buildings and how many do you need and how many people that's driven by how many people, how much you pay our teammates, our talent and drive the business. That's driven by how many people. And we just had a we had been working our way down and headcount. And it then froze because of all the work we had to do around the pandemic related programs. But now it's dropped by one percent of the quarter. And that's where that's where it pays back.
spk02: Great. All right. Thank you.
spk01: Our next question is from Betsy Gray with Morgan Stanley. Your line is open.
spk05: Hi.
spk01: Hi.
spk05: Good morning. Great slide on slide five. Really love it. Thanks for all the detail. I just wanted to dig in on card a little bit. There's been some discussion around how spend is up a lot, as you indicated as well, and how much of that spend is likely to be translating into revolving versus, you know, You know, Transactor, you're giving us the daily, clearly, we can see that here on the slide, but it would be helpful to understand what you're seeing in the in the guts of the machine. And is has revolvers started to pick up or does this long growth that you show on the slide reflect just the increased spend in Transactor pay down rates or similar to what they've been over the past few months?
spk10: So the revolver piece did start to is starting to move forward, but it is down obviously significantly pre pandemic. The Transactor piece is higher. You want people to use the card to get revenue. And you saw that the feline to get revenue from the usage and also get revenue from the loans. The loans are obviously the better part of the equation. But, you know, that's it. We have about round numbers, you know, the same number of cards outstanding. There's twenty five billion dollars less balances, which
spk08: the
spk10: people didn't get any different. They just have more cash. And so they paid off the credit card. It was a completely responsible thing for them to do. And when they can get out and spend more money, which is starting to happen, I think you'll see them use these lines short term purchases. So I don't think you have the pay rates up, but I don't think it's a fundamental difference of behavior. It's just the opportunity to use the cards for activity has been limited coming into this quarter when you finally saw things open. So we'll see where it goes. But the good news is it's going in different direction. It had been leading up and that's your point about slide five. And the good news is, you know, the people are high credit quality. So, you know, that that means that the net interest, the risk adjusted margin, I that margin from cards minus the charge is actually closer than what people think because the card charge also dropped by three or four hundred million a quarter.
spk05: OK, Brian, that's yeah, no, that's great. That leads into the follow up, which is relating to your reserve ratio on card. I think the way we're calculating is around eight and a half or eight point eight percent at this stage. And give us a sense as to how you're thinking about that trajectory here, you know, given that the environment has been improving. What should we expect on reserves going forward?
spk07: Well, I'll answer the question this way. If you go to Cecil Day one, I think it was six point six ninety eight. So, you know, that gives you a sense of a different environment with a different sort of economic outlook at that moment. Obviously, as we grow loans, card loans, which we're talking about doing, they're going to eat into some of that excess reserve. But I think, you know, between whatever you want to model on growth and whatever you want to think about in terms of getting back to Cecil Day one, you could kind of come up with whatever, you know, with an answer.
spk05: Right. And just could you even be below Cecil Day one because the environment is so good right now?
spk07: You could easily be below Cecil Day one. I mean, as you know, it just depends at the moment you're setting your reserve, what your mix is, what are your card balances and what is your view of the future? And if our view of the future is a more benign environment than it was on Cecil Day one, then by definition, you'd end up with lower reserves.
spk10: And that's the point of page six that really goes to your question, not card specific.
spk05: Okay. Thanks very much.
spk01: Our next question comes from Stephen Chuback with Wolf Research. Please go ahead.
spk12: Hi. Good morning. Morning, Stephen. So, Paul, it was certainly encouraging to hear that there's still a path to the billion-dollar improvement in that NII exit rate that you cited, just given some of the long-end pressure since you gave that guidance. I was hoping you could just help us unpack some of the component pieces, given it's a meaningful step up versus what we saw in the most recent quarter. And maybe just thinking about it in three buckets, loan growth, liquidity deployment, and premium M being the third. You know, assuming no change in the forward, like, how can we underwrite that path to the billion-dollar increase off the current base?
spk07: So I would say that it's about half loan growth. Well, first, back out. We have an extra day. Okay. Back that out. And as we sit here today, it would be roughly half loan growth and half of amort reduction, premium amort reduction. Having said that, you know, it's a challenge, given that the fact that rates have fallen, it's a challenge. It's hard to get there. And so, you know, we've got, we've always had the opportunity to deploy a little more liquidity as we think about this going forward.
spk12: Understood. At least the premium amort, ultimately, will come. It's just a question of timing there. So, but understand that that could at least impact where it shakes out by the end of the year. The other thing I wanted to get a better sense of, Paul, is just on the capital comments that you made earlier. You noted that you're at 11.5 percent, 200 bips above your minimum. I'm just curious if you can give us some sense as to where you plan on operating on a steady-state basis, how much cushion you want to retain. And just given the strength of your excess capital position, how should we be thinking about the pace or cadence of the buyback for the next four quarters?
spk10: Well, obviously, we're allowed to do it. That's a change. And at a level that allows us to move capital off the balance sheets that are constrained by the average of earnings, which was through this quarter. So it'll move up. But, you know, I think we try to operate 50 basis points above the minimums, you know, as a target because there's volatility. So RSR 59 has got 90 basis points of cushion in it, and we want to operate 50 basis points there. The nine and a half is 10, et cetera. So you should expect us not immediately to be moving towards that over time. And then, you know, as this goes through the periods, the question will be, you know, what's the ultimate decent level that we have to maintain in the future and things like that. So we can move at pace now. And we couldn't before because it was constrained here. Your dividends plus your buybacks could only equal your earnings. And we are a company that went into this crisis with a lot more excess capital. And we're a company that came out of this crisis with a lot more excess capital. And there were three CCAR exams during this crisis. We had the lowest losses and stayed below the 250 SCV. So off we go. But, you know, that constraint, you got to go to the lowest constraint, you know, and add 50 basis points. And you should expect us to stay above that. But right now, that's a lot of excess capital.
spk12: If I could just squeeze in one more, sorry, just get a bunch of questions on the global markets, long growth, which is a pretty eye popping number. Now, I was hoping you can just unpack the opportunity that you're seeing within that segment and whether there's further runway for continued growth, just given how significant of an uptick we saw in the most recent quarter.
spk07: Yeah, sure. So we did that activity. The long growth was led by global markets, but we did see it across the platform, including the market and other areas. In global markets, we just look for opportunities to use some of our liquidity in a more constructive way than maybe buying more securities. And it was across a number of different types of opportunities and clients. But about, I would say, six billion-ish of it went into, you know, our decision to hold some CLOs in loan form. Now, we concentrated those holdings in AAA and AA tranches instead of distributing the securities to investors. And we think that activity is very consistent with our plan to allocate more balance sheet to customers in global markets. Having said all that, since I know people concentrate on CLO exposure, our CLO exposure is still extremely low relative to our PRC.
spk12: Fair enough. Thanks for accommodating the additional question.
spk01: Our next question is from Ken Ustin with Jeffreys. Please go ahead.
spk04: Thanks. Good morning. If I could just go further on the commercial loan topics. You know, as you start to see a little bit better demand aside from PPP across, you know, whether it's corporate, which you just talked about, commercial, small business, what's your dissent from the customer base of where it's potentially coming back the most and where the most holdbacks are because customers still have tons of excess liquidity to get through before they borrow?
spk07: Well, look, if you look at global banking this quarter, middle market was driven by food products, commercial services and suppliers and diversified wholesalers. Obviously, you've still got, you know, some industries that are affected by the pandemic. And so they really haven't started to recover yet. If you look at our commercial committed exposures, by the way, they grew 30 billion quarter over quarter. We're now above the one trillion dollar prepayment level. So people are people are, you know, getting ready to borrow more. As Brian noted, the revolver utilization is still at historic lows, but, you know, we're going to expect that to move up as the economy approves. And then, you know, in global markets, as I mentioned, there were there were lots of opportunities in mortgage warehouse lending, subscription facilities, asset-backed securitization. There was lots of opportunities there to put more balance sheet to work.
spk04: And thanks Paul. And as a follow up, you know, on that point about the utility being low, but customers are readying themselves. I think as an industry, we've been waiting for that for a couple quarters now. What's that trigger point where you think that we'll start to see or that'll cause the line usage to actually start moving? You know, it's been flat for now, you know, a good few quarters as we ready for it.
spk07: I think it's going to be inventory bills across, you know, various industries.
spk10: And you're seeing trade finance kick up. Yeah. The trade finance flows and the trade flows that we have, you know, have been kicking up and kicking up, which means at some point, you know, people building inventories to meet the customer demand as we talk.
spk07: Some of that inventory building has been hampered by, you know, trucking and ocean liner and, you know, just getting logistics. So I think working out some kinks there, you could start to see it.
spk04: And do you have any line of sight when you talk to your customers about any easing up of those supply chain constraints as we anticipate that?
spk10: Getting better, but still I've learned a lot more about ports than I ever thought I'd learn from our customers. It's getting better, but it's going to take a while. I mean, you have talked about the chip that's, you know, well talked about, well known, but you're talking about basics. And so it's getting better, but it really comes down to the operations of ports efficiently and the impact of virus on employees in those ports and having people to work and unload the chips. Things like that. So it's a pretty drilled out sort of analysis they have, but the reality is it's still constraining, but it's getting incrementally better. But it'll take another six months to kind of, and most are saying they're sad the end of the year, it'll be better. We'll see that as
spk07: you think about growth, start modeling. Just remember with, you know, Walbert utilization down close to 10 percent, that's 45 billion from
spk10: last year.
spk07: Yeah, that's 45 billion a lot. Just
spk08: for us.
spk04: Right. Yeah, right. That's the opportunity set is just how quickly could that be a loaded spring. Right. Okay. Thank you very much.
spk01: Our next question is from Gerard Cassidy with RBC. Please go ahead.
spk11: Good morning, guys. How are you?
spk10: Hey, Gerard. How are you?
spk11: Good. Paul, can you share with us, when I look at your average earning balance sheet in your supplement, and you give us the yield of the average earning assets, and I think it declined to 179 basis points, can you share with us what's the difference between what you're reporting and what you're putting on each quarter of new earning assets? Is there a 20 basis point difference, 10 basis points difference? And if we assume rates don't change, when does that gap disappear because what you're putting on is equal to what you're actually earning?
spk07: Yeah. Well, again, I mean, I'll talk about when we take our liquidity, which again, we've got a lot of excess liquidity, and we deploy that into a security, right? So we're picking up, well, in the second quarter, we picked up on a blended basis between mortgages and treasuries, which were roughly 50-50 purchases. We picked up about 170 basis points relative to cash. But when you look at a security that's rolling off and being replaced, they're rolling off at sort of 250 and they're being replaced at 210. Now, you could do the same math. I did it with securities. You could do the same math with a loan, pick your loan category, whether it's a card or a commercial loan or, you know, it's going to just depend on the yield.
spk11: Very good. And coming back, I think you pointed out that the asset sensitivity of the balance sheet is still intact. A hundred basis point parallel shift leads to about an $8 billion increase in net interest revenue. Can you share with us what weighs more heavily on that number? Is it the short end of the curve going up? You know, 70% of that increase comes from the short end going up versus the long end?
spk07: Correct. It's approximately 70% of the short end.
spk11: Very good. Okay. Appreciate it. Thank you.
spk01: And we'll go to Charles Peabody with Portales. Your line is open.
spk08: Yeah. I wanted to focus on your card operations for two reasons. One, it's the area where there seems to be some visibility to loan growth and two, because it, I think, generates about 20% of your bottom line, so it's a significant mover. If I'm using your line of business data correctly, cards as a line of business, you know, are on pace to generate somewhere between, you know, $1.8 billion a quarter. So somewhere between, you know, well, close to $8 billion a year. Am I right in that assumption?
spk10: If you're talking about interest income, yeah, if you look at this up on page 8, the $1.876 billion is the card interest income for the second quarter of 21. But that's...
spk08: Well, I was using your, the net income, you know.
spk10: The net income, we don't have a card segment. Yeah, we don't report a card segment because it goes there, it goes in the fee line, it goes in, you know, the net interest expenses.
spk08: But if you look at your line of business reporting, you do have a consumer lending versus deposit, and the consumer lending is primarily cards, if I understand it correctly.
spk10: No, it's got mortgage loans and auto loans. And, you know, it's all lending products. So if you've got a bit of a question, we can lead it.
spk08: Okay. The question is, if I assume, you know, 2019 kind of data, you know, in terms of margins, in terms of gross yield, and I assume high single digit growth in loans in 2022, because of the substantial reserve release this year versus what probably will be less next year, I see a fairly substantial decline in your card business as a line of business, as a profit business. And so I'm trying to get a sense in my right that there's a delay, even if balances pick up, there's a delay to the improved profitability of that product line.
spk10: Because there's less reserve. Last year it was hurt by a reserve bill. This year it's benefit by reserve releases. And next year, that benefit comes out. That's the company's PMI. And
spk08: not only that, but you have to reserve as you're putting on loans. And so you get less benefit day one versus day 100. Yeah,
spk07: but remember, we've got, I think somebody asked an earlier question, we're reserved on loans now, you know, 200 base points higher than where we were Cecil day one. So as loans grow, you can eat into that reserve.
spk08: Right. And I estimated you probably have about a billion to a billion and a half of excess reserves in your cards if you go back to day one Cecil. And so you're going to bleed some of that back in over the second half of this year, which means you have maybe a half a billion to a billion next year.
spk09: Hey, Charlie. So why don't we take this offline and you and I can go through this afterwards. I see where you're headed. Yeah, I'll
spk08: share my model with you, Lee, because I think it's an important hole that has to be filled next year.
spk09: Yeah, what I'd also just add though, just while everybody's on the line is just remember our charge also running significantly lower, you know, in addition to forget about all the reserving. Yeah,
spk08: absolutely.
spk09: Yeah. Okay. I'll get with you after the call.
spk08: All right. Thanks.
spk01: And it appears we have no further questions. I'll return the floor to Brian Moynihan for closing remarks.
spk10: So thank you all for joining us. Once again, in the quarter our customers are seeing good growth opportunities in the recovery economy. Deposits continue to grow 80 billion in the quarter. Loan balance is stabilized and grew on a period and basis for the quarter. Even overcoming a PPP runoff asset quality is at 25 year percentage loss, lows, not just dollar amount. The solid earnings continues this quarter. The important thing is we're seeing increased activity by our customer base, whether it's sales of all the different products, whether it's the reopening of the branches and more appointments that lead to sales, whether it's our face to face meetings or commercial businesses. So that holds us in good stead and helps answer the question about how NI grows in the second half of the year. And so and then on top of all that, you know, this quarter is the first quarter and many that we've been able to forever that we've been able to go back and actually use the excess capital based on our earnings power and our board's discretion. So you should expect us to get back and share buy back game. So thank you. And we will return that capital to you. And we look forward to talking next.
spk01: We'll conclude today's program. Thanks for your participation. You may now disconnect.
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