Bank Of America Corp /De/ Q3 FY2021 Earnings Call

Stand by, your program is about to begin. Good day, everyone, and welcome to today's Bank of America 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. Please note this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Lee McIntyre. Please go ahead.

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

Thank you, Lee. And good morning to all, and thank you for joining us. This quarter, the economy continued to make solid progress and our clients continued to perform well, having adjusted to the operating environment. Many companies are making healthy profits and our research team expects another strong quarter of profits by American businesses. We reported $7.7 billion in net income, or $0.85 per diluted share, in the third quarter, up significantly from the year-ago period. We've now earned over $25 billion for the first nine months of the year. This quarter's strong results include some themes I want to highlight ahead of Paul going through the details on the quarter. Prior to the pandemic, Bank of America was growing and creating operating leverage quarter after quarter after quarter. As I said last quarter, the pre-pandemic organic growth machine has kicked back in. You see that this quarter, and it is evident across all our lines of businesses. In addition, this quarter, we saw the return of operating leverage. We also saw another quarter of solid loan growth. The good news is that the nature of this growth has broadened in the third quarter, even as commercial banking utilization rates have improved somewhat. NII has improved significantly, reflecting the many quarters of growth in deposits and now loans. That also reflects the steady management of interest rate risk and deployment of cash from our core deposit growth. At the same time, we still have a high level of asset sensitivity. We invest in our core deposits and that's supported stability in NII over the last year as rates and loans declined. What that did is bridge us to where we are now this quarter where growth in loans and other factors led to an improvement in NII and a modest improvement in NIM. Strong fee growth has complemented that NII improvement. And with expenses moving sharply lower, we saw a notable return of operating leverage. Year-over-year, our revenue is up 12% and expenses were flat. Our efficiency ratio improved to 63%. As I've done in the past, I want to spend a moment on what we see in our consumer data. Let me hit a few slides beginning first on slide 3. The improvement in vaccination and hospitalizations, all the things you know about, have seen the U.S. economy continue its reopening trajectory following a modest slowdown from the surge in cases caused by the Delta variant. There's been some discussion around the slowdown; I'll just note that the U.S. economy is now as large as it was in the pre-pandemic. Our own research team expects the U.S. economy to grow 5.5%+ this year and 5.2% next year. These growth rates are more than twice the growth rates that occurred in the pre-pandemic decade or longer. Unemployment rates continue to fall back to pre-pandemic levels. While the U.S. still has issues around labor supply and supply chains of materials, the economy is moving along. Looking at our own customer base and consumer spending, I'd offer you a few insights. In the third quarter, total Bank of America consumer spending — you can see it on the lower left-hand part of the slide — payments were robust. They reached $937 billion, up 23% over 2019 for the quarter and a similar percent of growth over 2020. September was the best month of the year, and we've seen those spending rates continue through the first part of October. Combined spend on total debit and credit cards, which is a subset of this total, and about 25% of it is in retail and services and remains strong. In third-quarter 2021, we continue to see spending shift toward travel and in-person entertainment as well as fuel, driven by both increased use and higher fuel prices. Year-to-date, as you can see in the chart, our total payments of $2.8 trillion by our consumers are 22% ahead of 2019 levels. In the chart on the right, you can see how fast the growth rates occurred this year. And that's another economic signpost to the steady recovery. Now as we turn to loan growth on slide 4, you can see this chart that we've been presenting to you for the last several quarters. Why do we show you this? We wanted to show you that as we hit the bottom, the inflection point, and what happened a couple of quarters ago. And this chart gives you a sense of the daily progression across those quarters. As you can see, every loan category is showing improvement. And if I showed you this by our lines of business, you would see similar progress across each one of them. Overall, ending loans, excluding PPP loans which are in a forgiveness process, as you well know, increased $16 billion linked-quarter. And if you look at the commercial portfolio, they grew $11 billion quarter-over-quarter. Compared to growth in Q2, growth this quarter was broad-based across Global Banking and Global Markets in the commercial space. C&I growth was driven in part by improved calling efforts from commercial relationship managers that we deployed across the world, in addition to a growing demand for credit. As you might note, we've invested in hundreds of relationship managers in our commercial lines of business, and those investments are now bearing fruit. Loans with our wealth management clients continued to grow this quarter as these customers borrow for the liquidity and asset purchases reasons they normally borrow. In our small business area, we're seeing the business stabilize and start to grow. One of the areas is our Practice Solutions Group. What that group does is lend to medical, dental, and veterinary practices. They've continued to see momentum and are on pace for the best years they've ever had. Now, turning to consumer loans, the American consumer continues to borrow from Bank of America. Card loans grew at a 7% annualized rate from quarter two levels with increased spending. And as you well know, repayment rates trends remain high. All products on the consumer side except home equity balances had higher balances for the quarter. The decline in home equity balances is understandable given prepayments in mortgage loans, etc. But still we saw $1.5 billion in originations this quarter, up more than 50% from last year's third quarter. Now, turn your attention to the slide in the appendix — not to cover it now, but you should take a look there — and you'll see the true loan lending business on the bottom left-hand side of that slide. And you'll see without the volatile PPP in and out that's occurred because of the program design, the loans this year in those lines of businesses are basically within 1% of where they were last year, and we can grow out from here. Moving to slide 5, we want to show the continued reemergence of the pre-pandemic growth machine of Bank of America. We give you a few highlights. On the deposit side, we grew net consumer checking accounts, which are the primary transaction accounts for our consumers, 93% being primary for the 11th consecutive quarter. This drove the continued growth in deposits and our leadership position in U.S. retail deposit market share reaching $1 trillion of deposits in our consumer segment alone. On credit cards, we crossed back over a million new card productions — that's the same levels we were pre-pandemic. New investment accounts have increased 9% during the pandemic. Digital progress has occurred across every business and you'll see that in Paul's slides later. And that's increased sales of products and high use of digital platforms. This bodes well for future sales levels and for future efficiency. Sales of banking products in Merrill Lynch and the private bank have remained strong and with the return to in-person meetings we should see them grow even stronger. We have seen year-to-date assets under management flows grow and nearly triple compared to year-to-date 2019. In Markets and Banking we had a near-record quarter in investment banking and equity trading revenue. So these are just a few examples of the customer growth we're seeing. A point or two on capital. This quarter's level of profits, coupled with our excess capital, allowed us not only to pay higher dividends to shareholders but also to buy back $10 billion in shares. In total, we returned $12 billion to you, our shareholders, through these actions, proving that we can support our customers in a growing economy, support our teammates with great pay and benefits, and support our communities — I'll describe in a minute — but above all return capital to you our shareholders and drive good returns for you. Going to slide 6. With regard to how the teams are delivering more broadly in our communities, we gave you in slide 6 an update on our $1.25 billion commitment. To date, we have directly funded nearly $400 million, about one-third of that commitment. This includes $36 million in completed equity investments in MDIs and CDFIs, $300 million in equity investment commitments to minority-focused funds to support minority and women entrepreneurs and businesses, and $70 million directed to philanthropic giving, focused on the priorities shown on the slide, in addition to the amount we usually give on a yearly basis. Now it's worth noting that in addition to the equity investments, we have $2.1 billion in deposits in CDFIs and MDIs, the largest in the U.S. If you go to the next slide, slide 7, this is what we're doing with our customers to help them with their financial lives even better. It highlights the products and services starting with financial well-being of our retail clients, particularly in the low-to-moderate income areas we serve. This includes our commitment to our Pathways program, where we hire teammates from our local communities to serve our communities and be successful in our company as a company of opportunity for them. We recently committed to hire another 10,000 teammates from those communities over the next five years because we completed the first 10,000 a year early. The unified ways in which our teammates and local markets do a spectacular job of approaching both banking from a global scale and banking from a local community level is unique and delivers every day for us. It's been a great job by our team this quarter, and I want to thank them. Now I'm going to turn it over to Paul. But as you know, Paul has been our CFO since 2015, has done a spectacular job with our company. He's going off to help us do some interesting things in the company, and I just want to congratulate and thank Paul for his support. I'll now turn it over to him to take you through his last earnings call. Paul?

Thanks, Brian. Hello, everyone. I will start on slide 8 by adding a couple of comments on revenue and returns. On a year-over-year basis, revenue rose 12%. The improvement was driven by a nearly $1 billion increase in net interest income and a nearly $1.5 billion increase in non-interest income. By the way, every business segment produced year-over-year improvement in non-interest income. Expenses declined from Q2 and were flat with Q3 2020 despite the year-over-year improvement in revenue and related costs. Solid revenue growth while holding expense flat created 1,200 basis points of operating leverage and resulted in $8.3 billion of pretax, pre-provision income, up 40% year-over-year. With respect to returns, our return on tangible common equity was 16% and return on equity was 9.9%, both of which improved nicely from the year-ago period. Moving to slide 9, the balance sheet expanded modestly versus Q2 to a little more than $3 trillion. After funding $9 billion of loan growth, deposit growth of $56 billion generated excess liquidity that was placed in a mixture of securities and cash. Our liquidity portfolio grew to $1.1 trillion, or one-third of the balance sheet. Shareholders' equity declined $4.7 billion from Q2 as capital distributions outpaced earnings this quarter. With respect to regulatory ratios, CET1 under the standardized approach was 11.14% — 140 basis points lower than Q2, driven primarily by a reduction in excess capital through share repurchases and to a lesser degree, higher RWA as a result of commercial lending growth. The ratio was 160 basis points above our minimum requirement of 9.5%, which translates into a $26 billion capital cushion. Given our deposit growth, our supplementary leverage ratio declined to 5.6% versus a minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth. Our TLAC ratio remained comfortably above our requirements. Turning to slide 10, I will focus on average loan balances because they are more closely linked to NII. Note that loan growth over the past two quarters has begun to show signs of improved demand, and I will refer to quarter-over-quarter improvements on an annualized basis. Also note that these charts include PPP loans, which have been moving lower, driven by forgiveness. The footnotes detail the change in PPP loans. From a peak of $25 billion last year, PPP loans have declined through forgiveness to a little more than $8 billion on an ending basis. Focusing on the linked-quarter change in loans and excluding PPP loans, total consumer and commercial loans grew on an annualized basis by 9% with commercial growing at 11% and consumer improving 6%. Global Banking continued to benefit from security-based lending as well as custom lending, while mortgage continued to perform solidly and Global Markets again looked for investment-grade opportunities with clients as a good use of liquidity. In Global Banking, we saw utilization move past stabilization this quarter, but utilization rates are still 700 basis points lower than 2019, representing a $30 billion gap from current loan levels. In consumer, we saw credit card growth as new accounts continued to build across the quarters and credit spending continued to rebound. And importantly in mortgage, as Brian noted, we saw growth as prepayment volumes slowed. With respect to deposits on slide 11, we continued to see significant growth across the client base, adding accounts across all our deposit-taking businesses. Combining both consumer and wealth management customer balances, I would highlight that retail deposits grew $28 billion from Q2. These clients now entrust us to manage more than $1.3 trillion in deposits, which is more retail deposits than any other U.S. bank. We also saw strong growth of $28 billion with our commercial clients. Remember, the deposits we are focused on and gathering are the operational deposits of our customers in both consumer and wholesale. Turning to slide 12 and net interest income. On a GAAP non-FTE basis, NII in Q3 was $11.1 billion, $11.2 billion on an FTE basis. Net interest income increased $965 million from Q3 2020, driven by deposit growth and related investing of liquidity, as well as PPP loan activity. These drivers were partially offset by lower loan levels. NII versus Q2 2021 was up $861 million. There were several positive contributors to the quarter-over-quarter growth. First, we had an additional day of interest. We also benefited from the continued deployment and growth of liquidity. Average loan growth also contributed to NII again this quarter. And we experienced an acceleration in the forgiveness of PPP loans, which improved NII quarter-over-quarter by a couple of hundred million. Last but not least, we had lower bond premium amortization expense, which declined from $1.6 billion to a little more than $1.4 billion. With respect to PPP loan forgiveness, I will emphasize that this was an acceleration or pull-forward of NII into Q3 from future periods. And as a side note, I would point out that the revenue from the PPP program has helped to defray some of the enormous cost of administering this assistance program on behalf of the government. Our net interest yield improved seven basis points from Q2 to 1.68%, driven by the improvement in NII. Importantly, given continued deposit growth and low interest rates, our asset sensitivity to rising rates remains significant, highlighting the value of our deposits and customer relationships. As we move to Q4 and assuming no significant interest rate changes, we expect benefits from expected loan growth, liquidity deployment, and lower premium amortization expense to more than offset the expected reduction in PPP revenue I mentioned. Assuming the forward curve materializes and given Q3 NII growth, as well as expectations for Q4 and assuming we see modest loan and deposit growth next year, we would expect NII in full-year 2022 to be well above full-year 2021. Turning to slide 13 on expenses. Q3 expenses were $14.4 billion, an improvement of more than $600 million versus Q2. Higher revenue-related costs were more than offset by the absence of the prior quarter's contribution to our charitable foundation, as well as lower costs of unemployment claims processing. Compared to the year-ago period, expenses were flat as improvements in net COVID costs, the absence of elevated litigation in Q3 2020, as well as digitalization benefits and other initiative savings were offset by higher revenue-related and other costs. As we look forward, we continue to see investment in technology and people at a high rate across the businesses. And we are adding new financial centers in certain growth markets. Turning to asset quality on slide 14. As I've reported for several quarters, the picture is very good here. Net charge-offs this quarter fell again to $463 million, or 20 basis points of average loans. This is the lowest loss rate in 50 years. Net charge-offs were 22% lower than Q2 and more than 42% below the same quarter in 2019. Our credit card loss rate was 1.7% and several loan product categories were still in recovery position this quarter. Provision was a $624 million net benefit, driven primarily by asset quality improvement as delinquencies and reservable criticized commercial loans continued to move lower. We had to reserve the lease of $1.1 billion split roughly 80% in commercial and 20% in consumer. Our allowance as a percentage of loans and leases ended the quarter at 1.43%, which is still well above the level following our day-one adoption of the CECL standard, especially considering the mix of loans today versus then. To the extent the macroeconomic environment and asset quality improves further and remaining uncertainties dissipate, we expect our reserve levels could move lower. On slide 15, we show the credit quality metrics for both our consumer and commercial portfolios. The only point I would make here is just to note the continued low level of late-stage loans, which drives the expectation that card losses could decline yet again in Q4 before leveling off. Turning to the business segments, and starting with Consumer on slide 16. Before I touch on the financials, I want to highlight what a great job this team has done in turning this business around since the pandemic. Of all our businesses, Consumer Banking was the most heavily impacted by the pandemic, which at its worst drove quarterly profits to a very narrow level before rebounding. We incurred heavy cost to protect the health of our associates and customers, and we added contractors and other resources to support the government in our own customer assistance programs. We added billions to credit reserves, depressing profits, as uncertainty mounted with respect to potential credit losses. Net interest income declined as interest rates fell quickly and significantly. Fast-forward to this quarter, and the segment's rebound has accelerated as earnings rebounded to more than $3 billion. Net charge-offs are at historic lows and NII has rebounded, reflecting not only deposit growth, but also the value of their deposits and customer relationships. The business alone has now crossed over $1 trillion in deposits, up 16% year-over-year. Our point here is that years of investing and operating under responsible growth positioned us to not only deliver for everyone during the pandemic, but also rebound quickly to organic growth and operating leverage. We were never down and we never stopped investing. And while this is true of every segment, the rebound in our Consumer Banking earnings is just a great illustration of the resilience of our business and our people. The segment earned $3 billion in Q3, 48% higher year-over-year as revenue, expense, and credit cost all showed improvement. Revenue improved 10%, reflecting higher card income on increased purchase volumes and higher service charges due to client activity. Net checking accounts grew more than 700,000 year-to-date, and 93% of our consumer checking accounts are primary accounts with an average checking account balance of more than $10,000. Expenses moved lower by 6% as a result of a continued reduction in COVID costs mitigated by higher costs for minimum wage increases and other operating costs. On credit, we had a $242 million reserve release this quarter. However, the more direct indicator of improved asset quality is the decline in net charge-offs. Net charge-offs of $489 million were down 26% year-over-year and 22% lower quarter-over-quarter. Our credit card net loss rate for the quarter was 1.7%; pre-pandemic it was over 3%. On slide 17, you can see the increase in consumer deposits, loans and investments. We covered loans and deposit growth earlier with respect to investment balances; we reached a new record of $353 billion, growing 32% year-over-year as customers continue to recognize the value of our online offering. Yes, balances grew as market values increased, but we also saw $21 billion of client flows. An important element of this growth has been the 9% growth in the number of accounts over the past year to more than 3 million. On slide 18, let me highlight a couple of points regarding the continued improvement in digital engagement. As all of you know, enrollment is important, but usage is key. We now have nearly 41 million customers actively using our industry-leading digital platform. This quarter, 70% of households used some part of our digital platform within the past 90 days, logging in more than 2.6 billion times. And while Erica and Zelle usage has been tremendous, what I would draw your attention to is the digital sales growth, which is up 27% year-over-year. Lastly, and not reflected on the slide, I would just add digital engagement has become foundational to maintaining our customer satisfaction at historic levels. Turning to Wealth Management, the continued economic reopening, client flows, and strong market conditions once again led to not only record investment balances and asset management fees, but also record levels of loans and deposits, all contributing to a record pretax margin in Q3. In fact, this is the 46th consecutive quarter of average loan growth in this business. Both Merrill Lynch and the private bank contributed to the improvement and are driving digital engagement to deliver products and services to clients. You can expect this to continue as we drive towards a modern Merrill, which is advisor-led, powered by digital. Growth in our new households at Merrill and at the private bank continued as we continue to build pipelines and move back towards our pre-pandemic pace. Net income of $1.2 billion improved 64% year-over-year driven by the strong revenue performance. With respect to revenue, AUM fees, which grew 19% year-over-year, complemented higher NII on the back of solid loan and deposit increases. Expenses increased in alignment with higher revenue. Client balances rose to $3.7 trillion, up 20% year-over-year, driven by higher market levels, as well as strong flows of $91 billion. Let's skip to slide 21 to highlight our progress in digitally engaging wealth management clients. The clients of this business continued to lead the franchise on digital adoption, utilizing not only digital tools to access their investments, but also other banking needs like mobile check deposit and lending. More and more clients logged in to easily trade, check balances, and originate loans all through one simplified sign-on. And by leveraging Erica-based AI capabilities, and through use of WebEx meetings and secured text messaging, we are making it easier and more efficient for clients to do business with us wherever and however they choose. This creates additional capacity for our teams to spend more time advising existing and potential clients. Moving to Global Banking on slide 22, the segment had very strong performance with near-record investment banking fees, another solid quarter of deposit growth, and an uptake in loan demand. Strong deposit growth helped to improve NII, which complemented the continued strength in investment banking. The business earned $2.5 billion, improving $1.6 billion year-over-year, driven by both higher revenue and lower provision costs. Provision expense reflected a reserve release compared to builds in the year-ago quarter. Revenue grew 16% and included an 8% improvement in NII while firm-wide investment banking fees were up 23% to $2.2 billion, down only modestly from the Q1 record level. This investment banking performance resulted in a strong ranking in overall fees with a pipeline that remains strong. We rank number one in leveraged finance and investment-grade with strong market share improvement compared to the year-ago period. We also had record M&A results. It is worth noting that we continued to see strong momentum in investment banking with our middle-market clients. As many of you know, we have been investing in our investment banking capabilities with middle-market clients for a few years now. Over that time, we have executed transactions for nearly 300 first-time IB clients, and we now have investment bankers in 23 cities across the U.S. Non-interest expense increased 7% year-over-year, primarily reflecting higher revenue-related costs and continued investment in the franchise. We've already covered much of the balance sheet on slide 23, so let's skip to digital trends on slide 24. Digital investments, strategies, and tactics are an enterprise effort, with earnings in one segment benefiting another. That has been particularly true in Global Banking. And as we continue to invest in our digital solutions, client adoption and usage continues to grow. Enhanced Banking Solutions have helped us capture greater market share as wholesale clients do more with banking partners that are the most stable and secure and have the capability to invest in new technology that will provide better data and global integrated solutions. Switching to Global Markets on slide 25, results reflect solid sales and trading activity led by our equities business. As I usually do, I will talk about the segment results excluding DVA. This quarter net DVA was a modest loss, but the year-ago quarter had a higher $160 million loss. Global Markets produced $941 million in earnings, on par with the year-ago quarter. Focusing on year-over-year, revenue was up 3% driven by sales and trading. Sales and trading contributed $3.6 billion to total revenue, improving 9% year-over-year. FICC declined 5%, while equities improved 33%, recording one of its strongest performances ever. FICC results reflected a flat yield curve and range-bound interest rates for much of the quarter with continued tight credit spreads. With interest rates moving late in the quarter, we saw an improvement in activity and revenue opportunities. The strength in equities was driven by growth in our client financing business, as well as a strong trading performance and increased client activity in both cash and derivatives. The increase in expense year-over-year was driven by increased activity-related sales and trading costs. On slide 26, we note year-to-date revenue trends across the last few years. As you can see, while our performance was elevated in 2020 during the pandemic, 2021 remains well above the pre-pandemic years presented, driven by continued elevation of client activity and volatility in the market, as well as investments made to extend more balance sheet to clients. Finally, on slide 27, we show All Other, which reported a small net loss. Revenue declined by $109 million year-over-year, reflecting higher partnership losses on ESG investments. Expense was lower year-over-year, driven by the absence of litigation accruals in the prior period. Our effective tax rate this quarter was 14%. Excluding the tax credits driven by our portfolio of ESG investments, our tax rate would have been roughly 25%. We would expect the tax rate in Q4 to be between 10% and 12%, absent any tax law changes or unusual items. With that, we can go to Q&A.

We'll take our first question today from Glenn Schorr with Evercore. Your line is open.

Hi, thanks very much. Lots of detail, I love the forward-leading commentary on NII and the size on the expense side. Obviously, expenses go up a little bit with all this market-related and activity-related revenue. So maybe if we could think about it, X, whatever mark is going to do over the next couple of years. You've produced great operating leverage, but as you still invest, maybe you can give us an idea of what to expect, even if it's just over the coming years as you invest yet eke out further efficiency gains? Thanks.

I think, Glenn, we might take you back a little bit in history to 2015 and 2016 when we started seeing the efforts in the BAC and the operating excellence kick in and what we said as we bring the expenses down and then we'd expect them to grow. You have a 3% inflationary between raises and, leave aside that the market's going up as you said and could drive a moment in time, but if you have 3% sort of embedded CPI-type increases in merit and rents and things like that, what we said is through our efficiency we could — when we got to the floor, which was the 2019 year — the idea was then to manage that to 1% net growth, and we've been able to keep working at that. With the PPP and with the COVID-related costs and stuff, it's kind of thrown it all around for the last 12 months, but you'll see that start to emerge coming out the other side. So the idea would be to grow revenues faster than the economy and grow expenses at a rate of net 1%, maybe 2% if the revenue growth is stronger. And that's the operating model. And you saw that come on quarter-after-quarter of operating leverage, I think for basically three years plus, then the pandemic pushed that around. And as we stabilize after the pandemic a couple of quarters ago, you are seeing a comeback to the system.

That's great. So it sounds like no change and still operating efficiency. Cool. Brian, what we have here, I think there was like a seven-page press release announcing all the leadership changes. It's a lot, and so I figure while we have you and talk about what's happening, how are you? Is this all natural succession, next level stepping-up type changes? Maybe just put the right perspective around it all.

Sure. We announced we have teammates who're retiring. I've been CEO; this is my 48th quarterly earnings conference call, so it's been a long time. People have a choice in life and when they retire, we have to adjust to it. But what we tried to accomplish — if you go back to last summer, we put a lot of senior executives onto the management team. What has happened now with Andrew's retirement and Tom's retirement is those executives now are reporting directly to me. That's really the effort. So we were a younger, more diverse team — three women running the eight lines of business — same philosophy about how we run the company. And now with this group of people, we have folks with five to ten years ahead of them and then we have two international colleagues on the management team for the first time, Bernie and Kathy. Kathy is needed to help us in the European context as Brexit came through; it's different and she is going to help us there and be a great help as Bernie has international expertise and does a great job for us. But the idea was to elevate people who are thinking 10 years out as opposed to one or two, and retirement timing drove a lot of this. The best thing they did for us, Tom and Andrew and others, is they developed a bench behind them that is extremely strong and can step into the jobs. Frankly, we've been running a lot of the businesses as they did over the last few years as they and I all spent more time on driving our brand in the market and other things at the company level.

Thank you, Brian. Thank you.

Our next question comes from Matthew O'Connor with Deutsche Bank. Your line is open.

Good morning. Was hoping to circle back on the NII commentary, which was clearly positive overall. But I think you've been talking about fourth-quarter net interest income to be up a billion versus the first quarter level on prior calls? And I think the guidance implies maybe similar to even better than that and was just hoping to get a little bit more of a point and update for fourth-quarter NII?

Sure. So relative to Q3, we'll have less PPP loan forgiveness. However, we think we should be able to overcome this decline and produce modest growth in NII in Q4 through a combination of loan growth, liquidity deployment, and modestly lower premium amortization expense.

Okay. Which I think does get you, I guess, to that up a billion versus the 103.

Yeah. Modestly would imply that we tend to tell you what we could do and we do it. So that's how we run the company, so yes.

Understood. Okay. And then separately on the expense question, you talked about kind of one to two percent growth long term, but as you think about next year, you obviously had some COVID and I think some one-time costs in the first quarter. How would you help frame 2022 costs versus 2021? Thank you.

The way I would think about 2022 — we're not going to provide specific guidance, but as a quarterly base for 2022, just start with our rough estimate of Q3 or Q4 here. Q4 should be flattish to potentially modestly lower than Q3. So just start with that as a base and add to that the seasonal higher payroll tax in the first quarter, which is roughly $250 million. And then as Brian said, add in inflationary costs, which we've been, as Brian said, targeting at around 1%. But given the war for talent right now, maybe you want to add a little bit more than 1% next year. And then lastly, adjust that base for any assumption you make around higher or lower revenue expectations in the areas that are closely linked to compensation and expenses. If you do that math, you're going to come up with I think a pretty good estimate for 2022.

Okay. And anything that we can back out in terms of COVID or the PPP costs going away as we think about next year?

Yes. Look, COVID — there's still a couple hundred million of net COVID in our costs, just down modestly from Q2. We're seeing some reduction in COVID costs, but we incurred some new costs as people return to the office. While there's not a lot left, it does create, I think, modest opportunity over the next year or so to get those costs out.

Okay. Thanks for all the clarity.

Our next question comes from Mike Mayo with Wells Fargo. Your line is open.

Hi, my question relates to tech, the front office and back office. On the front office, you have the slide number five, net new consumer checking accounts up by half over the last two years. How much of that is directly or indirectly related to digital banking? And then my backup question, which we don't really see: what are you doing as it relates to the cloud, your relationship with IBM? What sort of efficiencies do you think you can get? And I think you indicated you don't plan to go 100% to the public cloud like some of your peers have targeted. So if you could elaborate on your tech strategy, thanks.

So Mike, on the production of net new checking accounts — and remember, this is not just any accounts, these are core checking accounts — the primary keeps going up. It actually went from 92% to 93% over last year of primary accounts. The production hit this quarter was I think a 10-year high in terms of net accounts. And that's coming both from digital — roughly 30% of sales are digital, round numbers. Over the last three years, we've developed full digital execution in terms of account opening for core accounts, in terms of auto purchases, in terms of mortgage origination, etc., which now allow the fully digital practice to take place. Half the sales are digital. The good news honestly is that as branches reopened over the last period and people returned, the business went up and you saw account sales rise because it takes both high-tech and high-touch to be successful. So the percentage of sales that are digital came down, but that's because overall sales jumped up and there are more branches open. But you got it exactly right: we think that is a more efficient method of accumulating customers. We think we have about 17% market share in the Gen-Z area that is heavily digitally originated. A lot of college and other activity going on. But the key is to realize the net balances per account have gone from $7,000 to $10,000 over the last couple of years, so you're seeing a bigger and bigger core position. When you look at our 41 million digital customers, these customers are core customers with big balances. Merrill Lynch, for example, has a much higher average balance per account. On the cloud: the cloud is a complex question. Over the last eight to ten years, Kathy and the team led an effort to internalize our cloud, which made us a lot more efficient. We run a percentage of our business internally; certain executions and things run externally. We have hundreds of different software programs that run on a SaaS basis, and the term 'cloud' can be misleading because you have to look at product types and capabilities. You can get to innovation because of the new companies that develop on cloud-based systems. IBM's efforts to help build an internal cloud for the financial services industry is ongoing; these things have to be done carefully for purposes of security and trust and understanding our businesses. So far, we've come to the judgment that internalizing many functions has been beneficial and saved money, and we continue to add a modest amount to public cloud usage. Importantly, there's no restraint on our ability to tap innovation, whether it's running internally or externally.

Our next question comes from Gerard Cassidy with RBC. Your line is open.

Hi, Brian. How are you?

Good, Gerard. How are you?

Can you share with us: you've had incredible deposit growth, as you pointed out, the retail consumer is over a trillion dollars. When the economy normalizes sometime next year, can you share with us what you think will happen to deposit growth? And second, your loan-to-deposit ratio, similar to your peers, is very low. How do you see growing that over the next two or three years, and where can you get it to do you think?

Yes. So look, we expect deposit growth to continue, although it's likely at a slower rate than what was experienced so far this year. We expect our growth to continue in line with or slightly better than the industry. Remember that we're entering a phase of tapering. Tapering is still QE, so deposits are really not likely to decline until many quarters after QE ends, if they ever do. Because as the economy expands, the multiplier effect could mean growth in deposits even though money supply is coming down. So we'll just have to wait and see, but what we do know is as QE tapers, it's still going to be stimulative from a deposit standpoint and then, if deposits do decline, it will probably be many quarters, a couple of years maybe after QE ends.

Gerard, just a couple of things. When looking at the consumer deposit base, sometimes it's deja vu because back in 2015, 2016 it was all about the Fed normalizing rates and pricing, and we found we didn't have to raise prices as much because these are core transaction accounts, largely non-interest bearing. So you'll see some of that same dynamic apply again as rates normalize and monetary supply changes. In the consumer business, 56% of the balances are checking, so those are core transaction accounts, money moving in and out, very few CDs relative to the total. So the $1 trillion is mainly in checking and money market. Can it move around? Yes. But one thing that bodes well for the economy is that if you look at a checking customer that has $2,000 to $3,000 in balances, many customers are holding three to four times what they had before the crisis. That's good news. Those balances have been growing month over month for the last few months; they're not going down even though stimulus payments in many cases have ended. So consumers still have a lot of money in their accounts and are likely to spend it. In terms of deposit changes, those balances could decline a little, but it would be overcome by new accounts coming in at a million a year that carry a $10,000 average balance. We feel good about long-term deposit growth, and it's all driven by the checking core transaction behavior. On loan-to-deposit ratio, it's our customers driving that. When usage by auto dealer lines was down because inventories were down, demand for borrowing also changed. This is a customer-driven business. The good news is you can see in the loan growth charts that the other half of the smile is coming up, meaning customers are starting to draw on credit and use it, which bodes well for growing businesses. Also, when you combine consumer and wholesale retail deposits, it's $1.3 trillion, a big machine that is transactional and we don't think it moves as much on monetary supply questions as obviously the institutional side.

Very good. Thank you.

Our next question comes from Betsy Graseck with Morgan Stanley. Your line is open.

Good morning. Hey, Brian. I wanted to ask: we've got a setup into 2022 that looks pretty positive, especially when you think about the top-down GDP growth you're mentioning earlier. How are you leaning into that with regard to your footprint, and where do you see the biggest opportunity for share or gain across your business platform?

I'd say there's a couple areas. One, we've expanded the balance sheet in the markets business and we're seeing returns on that stronger in equities. Deploying balance sheet against client activity, recognizing activity levels, and sustaining those returns is an area of focus. In the lending business, it's customer selection. We added those extra relationship managers and are getting more customers the hard way — you're seeing net new customers in business banking, small business segments, and wealth. So balance sheet deployed to markets as capital and balance sheet questions, and elsewhere lending will follow the customer. Merrill Lynch is now a large engine and other areas are contributing. We feel good about it. Our research team expects solid GDP growth next year which sets up well.

So is there an opportunity that's even larger outside the U.S.? I'm thinking about your franchise outside U.S. borders — is that an engine of growth for you here relative to what you've been doing?

We'll continue to invest. We have more loans in the global core of the investment banking segment outside the U.S. than inside the U.S. and we continue to expand that. We will invest in Global Transaction Services; Ahmed and the team continue to develop capabilities and we're getting high single-digit revenue growth from it. But if the question is whether we will change and go into consumer or wealth management outside the U.S., the opportunities in consumer and wealth here in the U.S. are huge. Think about markets like Indianapolis where we just opened our 15th branch and are moving up in market share. In many local markets we are moving into the top five or seven from lower positions. There's a lot of opportunity domestically and it's not the time to distract ourselves. We're in a competitive environment and we're winning.

Okay. And then just lastly, Paul, you're mentioning how NII has grown and the drivers for next year. Embedded in that is a forward curve. What about the opportunity here for the forward curve to shift higher when you're thinking about the increase in NII? If we had inflation come through stronger and rates rise sooner, would that be an opportunity for you to take even more duration than you've got in the book or would you keep security duration where it is?

We'd look. We have a lot of excess liquidity right now, so there's always an opportunity to deploy some of that in the future. We're always balancing liquidity, capital, and earnings. If rates rise, we'd study whether to deploy some of that liquidity at higher rates. Our interest rate sensitivity disclosure is the best way to talk about the opportunity if rates rise. It sits today, because of our liability insensitivity and the value of deposits and customer relationships, at about $7.2 billion for a parallel shift — and about 70% of that's on the short end. That gives you a sense of the opportunity as rates rise.

Our next question comes from Jim Mitchell with Seaport Research. Your line is open.

Hey, good morning. Maybe just a question: one of your peers this morning talked about the impact of SLR adoption; I think he disclosed that standardized RWAs could grow 7% to 10%. Is that a similar impact for you? Just trying to get a sense of how you think about the adoption of that.

We already adopted the standardized approach quite some time ago; I think we were among the first to adopt. Lee can come back to you with the details if you need specifics, but that adoption is already reflected in our metrics.

Okay, that's great. Then — so when we think about the buybacks, the $10 billion acceleration of buybacks this quarter — should we just expect that acceleration to continue until you get towards your target of around 10 to 10.5% CET1?

Yes. It's simply put: we manage it dynamically and the board manages it on a quarterly basis. What's happening is we have more capital because we're earning more money, and then we clean up a little bit here and there, but we're working towards over a multi-quarter period back toward our target and we'll continue to focus on that.

Okay, that's great. Thanks.

Our next question comes from Charles Peabody with Portales. Your line is open.

Actually, my question was asked, but on the NII, if you just extrapolate third to fourth-quarter commentary, you're looking at a mid-single-digit rate of growth year-over-year in 2022, and I think you used the word modest NII growth is expected for 2022. In that, what sort of yield curve or nominal rate environment are you assuming to get above or towards that level?

Let me just correct, because I think either you didn't hear us right or we said something wrong. We're expecting modest NII growth from the third quarter to the fourth quarter. We're not providing specific guidance for 2022, but a couple of reminders: NII will depend on loan and deposit growth, which we expect to continue with a growing economy. We also expect lower premium amortization expense over time consistent with the path of rates. All guidance we give is dependent on the forward curve at that moment and we use the curve. Assuming the current forward curve and given our expectations around improving NII in the second half of this year — we've booked the third quarter and given guidance on the fourth quarter — one could expect a robust improvement in NII comparing full-year 2021 versus full-year 2022, but we won't give a specific number now. By the way, I want to correct one thing I said earlier; I mentioned that our asset sensitivity for a 100 basis point parallel shift was $7.7 billion — it's actually $7.2 billion, so sorry for that.

But on the interest rate structures, what I'm thinking about — there's a significant amount of liquidity on bank balance sheets waiting to be put to work, and I'm wondering if that doesn't put somewhat of a cap on how much rates can rise. Then you have some decline in Treasury issuance because of a declining budget deficit, and then you're still going to have QE tapering through the first half of next year, so you have a lot of demand for a shrinking supply on the Treasury side. That's why I'm curious what sort of rate structure, either nominal or curve-wise, you're anticipating going forward.

All the factors you're talking about go into our thinking. We use the forward curve and market participants debate those topics; we don't use internal stable assumptions. We've always used the curve to build our estimate of asset sensitivity based on the forward curve at the end of each quarter, and that's how we think about it.

Our next question comes from Steven Chuback with Wolfe Research. Your line is open.

Hi, good morning. Thanks for taking my questions. I wanted to start with the tax rate guidance. Paul, you've always provided color on how to think about some of the potential fee income drag associated with those ESG-related investments, recognizing that the impacts are intended to be P&L neutral. I was hoping you could help size how we should be thinking about the other income drag related to the guidance for Q4 and whether you guys would consider a potential change to the accounting, given all the noise and volatility that that creates in the income statement.

Yeah. Look, we expect our ESG activities to increase over time, so as we go into 2022 and 2023, and as we've long talked about, the fourth quarter is generally the highest for that pretax loss that we book in other income for entering into these partnerships. I do think it's important to remind everybody that these partnership losses are booked in other income but are more than offset in the tax line. So as we grow these activities in the future, there will be a small headwind to revenue growth, but not to net income growth given the tax benefits of these investments. As you think about modeling, we expect the fourth-quarter loss to be roughly $800 million on the other income line from these tax investments, or perhaps a little higher, reflecting both the typical seasonal increase in the fourth quarter and partnership investments, as well as a few deals in the third quarter that got delayed and will likely pop into the fourth quarter. Beyond that, putting Q4 aside, a good modeling assumption for the normal three quarters of 2022, absent unusual items, would be a quarterly loss of $400 to $500 million for those ESG investments, again in other income and more than made up for in the tax line.

Thanks for that color, Paul. And just for a quick follow-up, I know you guys are reluctant to give explicit expense guidance for next year, but I wanted to run some numbers by you. It sounds like the $14.4 billion this quarter annualized is the jumping-off point that gets us to around $57.6 billion. You have the $250 million of additional seasonal expense you spoke to that gets us to $57.9 billion and then that's the starting point for thinking about how much incremental growth somewhere in that range of 1% to 2%. Is that the right way to think about it?

You've got some but not all the components because you have to account for COVID-related expenses and what happens next year. The leading thing for everybody to focus on is headcount because if you think about the expense base it's dominated by people, buildings and equipment used to operate, and positioning them for success. Headcount has been drifting down as special programs have run off — PPP servicing, deferrals, unemployment claims processing — and that decline provides some offset. Managers are down about a thousand in the company, round numbers, and we continue to manage that down. So you have the component parts that are coming clear. We brought the run rate back down to flat year-over-year and we'll continue to work on it.

That's great. And just one quick follow-up, if I may, on the securities yield. You guys saw some nice expansion there; I know that's in part due to the premium amortization benefit. I was hoping you could help frame how large that benefit could be from premium amortization if prepayment speeds start to normalize closer to pre-COVID levels. And separately, where are you reinvesting along the curve and how are you thinking about duration and risk appetite given the size of your MBS portfolio?

If you think about premium amortization expense over time, it's going to depend on the path of rates. Prepayment speeds lag movements in mortgage rates; people tend to focus on the 10-year which is correlated to mortgage rates but mortgage rates lag the 10-year by a little more than two months. Also remember the size of the securities portfolio has increased a lot year-over-year, so all those things go into your modeling.

Understood. Thanks for taking my questions.

Our next question comes from Ken Usdin with Jefferies. Your line is open.

Thanks. Good morning. Just a question or two on the card. Interesting to see purchase credit card volumes continued to grow nicely and debit did come down a little bit, so overall interchange fees — just wondering if you can talk through what you're seeing in terms of the underlying trends there. Was that stimulus starting to change as far as debit? Was it the Delta variant? What do you see in terms of the forward outlook for spend trends and card balances?

In card income, a couple of points to clarify so no one is confused: Consumer Banking card income was up nicely year-over-year — about 8% — driven by purchase volume increases despite payment rates remaining relatively high. When you look at consolidated lines, you won't see quite the same step-up because of a decline in card income associated with processing unemployment claims, which sits in Global Markets. In terms of balances, we expect card balances to continue to improve. Balances grew at a 7% annualized rate quarter-over-quarter, including some small growth in revolving balances. We opened over a million new accounts, matching pre-pandemic levels. Balance growth reflected higher spend and reinitiated marketing efforts including promotional offers, while payment rates remained elevated. We expect higher Q4 seasonal purchase volume which will drive additional balances in cards.

You always have to look at the spending side of this. Debit and credit cards represent only about 20% of how consumers spend money from their accounts; there are cash withdrawals, ATMs, checks, and P2P payments like Zelle which are taking off. Tap payments penetration is growing as well. But the good news is no matter how you cut it, card balances are growing and there is still capacity for consumers to borrow if they choose.

Great. Thanks a lot, guys.

Our final question comes from Chris Kotowski with Oppenheimer. Your line is open.

Good morning, and thank you. I'm trying to disaggregate the strength in net interest income. If I understand, PPP revenues were up $166 million, amortization was down $200 million, and there's an extra day. It still implies roughly a $500 million or roughly 5% linked-quarter growth in NII up against, say, 1.5% average loan growth. Is there an explanation for that strength? Is it the securities you put on, or how did it become that strong?

You have to add an extra day, which helps. Then you're left with loan growth for two quarters now, and we took in a lot of deposits quarter-over-quarter. We put some of those toward loan growth, some into cash, and some into the securities portfolio. So it's a combination of additional day, loan growth, deposit inflows and deployment, PPP timing, and lower premium amortization expense.

Okay. And if you had to guess, with the size of the securities portfolio that you have now, if you were in a 2017-type rate environment, what would the premium amortization currently at $1.4 billion move to?

You can estimate that by tracking CPRs and making assumptions. But stepping back, the main driver is loan growth and funding those loans with low-cost deposits. We funded loan growth this year, and the funding with core deposits — which are largely non-interest bearing — is what's going to build NII over time. Short term it's the premium amortization and security dynamics, but long term it comes back to the banking spread between loans and deposits as loan growth continues.

That was an awesome quarter, thank you. That's it for me. Thanks.

We agree with that. To close the quarter out, we returned to organic growth trends pre-pandemic, saw solid loan demand, good revenue growth — 12% year-over-year — expenses flat year-over-year delivering strong operating leverage. We returned $12 billion to shareholders this quarter through dividends and buybacks. We continue to invest in customers and teammates and return capital to shareholders. I also want to thank Paul for his service as CFO and we look forward to Allison and the team taking over next quarter. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.