Bank of America Corporation (BAC) Earnings Call Transcript & Summary

Perfect. Moving right along, wrapping up this morning -- today's presentations in this room, I'm very pleased to have Bank of America.

As everyone finds their seats, we'll put up the first ARS question, just get everyone situated. As we've asked the other companies, what's your current position in the shares of BAC?

Just to make me feel good? Well, let's see what the answer is. It may not. At least, if overweight...

So 56%. So Brian, this should make you feel good because I -- off the top of my head, I do think that's #1 or 2 from the banks that we've seen so far today, although for the other part of the people that didn't put that, maybe we'll go to the next question. Despite the fact, I would say, that people seem to own it, your multiple is rather low, at least relative to over the last few years. So to the audience, what do you think is weighing on the most, on Bank of America's valuation? And let's see, credit quality is one, and we're going to certainly get into that, followed by capital. So we're going to make sure we at least touch on those 2. But before we get there, we've had a full day of bank presentations. And maybe we could just start big picture and talk about the bank's competitive positioning. And for those that are maybe not in the overweight camp, if you were pitching Bank of America's stock, what would you -- be the story?

I think if you think about who we serve, we serve global enterprises, meaning investors like everyone out here and corporations around the world. And then all the rest is in the U.S. for mass-market consumers, to the wealthiest people and the small businesses, for large-cap companies. But when you think about it, we have the only sort of 3 arcs, which is a person born today could be a client of our company. No matter whether they become the richest person in the world or anything else for the rest of life, a small business for me today could be a client of our company through its entire life for all of the core services and then likewise, an investor. And so our view is those positions are not something we need to figure out how to be successful. In their top-tier positions, they grow, they take share, they are well suited, their margins in each of the business is among the best, and that's what we drive. But that's been a lot of years, 230 years, to put together a franchise. So it's not like something you accumulate quickly. So what happens then? We hear about companies, that you'll hear today, are going to have digital in-phase. We had in $1 billion -- 1 billion digital interactions last month. This isn't something that you aspire to get to do. We had 1 billion last month. We talk about the Merrill Edge platform reaching the $300 billion and adding customers, 250,000, 300,000 a year, 1 million new checking accounts. These are all attributes of having this great position. The brands and the best condition has been in terms of brand ratings, the satisfaction. The attrition to the customer base is low, and all that then allows you to compound that growth. And by the way, we do it at scale. And so what we have as NII comes through the system, as rates normalize and get to positive rate structure, [ Ted ] and I come barreling through to you guys as a shareholder because of the operating platform we have and the scale and the capabilities it has. We don't -- we invest a lot of money every year, about $3.5 billion in technology. 200, 300 new business bankers cover the medium-sized businesses over the last few years, et cetera, et cetera. But in the grand scheme of things, we can do that by the efficiency and effective -- and the leverage on the platform, and that's what we do.

And I guess, in your mind, what do you think makes Bank of America attractive to customers?

It's the focus on the customer and focus on services are relevant to them. We don't -- depending on which segment in the Wealth Management segment, the largest business in the United States by a lot and more than -- maybe the largest business in the world and with all the capabilities that come with Merrill and our Private Bank and lending and investing and -- but also the attention to detail. And the digitization there is 86%, the Private Bank, of digital interface with the customer. So it's amazing. So it's really the capabilities of all those services coming to them, the corporation setting. It's everything from credit to the transaction services, but also corporate employee banking, where we bank the employees of the company. Millions of people signed up for that service over the last 5, 6 years at the corporate level, as an HR benefit and stuff. So we just -- it's the range of services, the customer attitude, the fairness of the products and services and the consistency. We don't go in and out. They will do this today and tomorrow. We won't do it. We've basically been consistent with the products and services we'd offer for 15 years almost now.

Almost exactly a year ago today. I think it was a call a day or 2 before this conference last year, you announced a pretty meaningful, I'll say, management shake up, but a lot of different roles, a lot of different people. Just maybe talk to kind of what you've seen since then? Are you kind of pleased with progress over the past year since those announcements were made?

Yes. The team has done a great job. So these are the -- so Matthew Koder is running GCIB at the time, reporting to Tom. Jimmy is running markets. Wendy Stewart had just come in to run the Commercial Bank. So these are all people who have been, 30-year careers, 20-year careers, at our company, and what we did is we just lifted them to the management team. And so it's wonderful to have that new enthusiasm. Do we miss Tom or Anne or Andrea? Yes, we do. But the reality is, is that this was a stable full of talented executives ready to come to the floor and with natural retirements as to what happens. And so as we do talent planning, we've got our Board of Directors meeting this week. We do town planning every time we're with them on different facets of it. And the idea is to always have people ready to go, and the team has done a good job and -- managing through the rest of the pandemic end point and also doing the core growth and market share, dealing with the change in the investment bank and revenues. Matthew's done a good job to keep the team focused on growing a relative share even though the market is down. They're doing a great job.

Great. Now Lee told me I couldn't ask about the quarter until we got -- unless I ask about ESG. So let's come up with the next ARS question. How do you view Bank of America as it relates to ESG, give and take? So middle of the pack, which is maybe a little bit surprising, Brian, because I know you've been one of the more prominent leaders around ESG. You've talked a lot about the standardization of statistics and sustainable financing on a global basis. So maybe talk about in terms of what you're doing there. I know part of that management changes you talked about. You had a CFO, Paul Donofrio, move over to kind of run more of a sustainable financing-type role. Maybe talk to what you're doing there as well?

Well, I think this comes -- what we do here is based on driving capitalism, to do what society needs from it, so that therefore it can continue to perpetuate. So we believe in profits and purpose. So we deliver return on tangible common equity that delivers for our shareholders, and we deliver across the platform. So that's basically -- you read the shareholder letter. That's how we define responsible growth. That's how we define how we run the company. And how that [ edits ] itself is you're able to accomplish opportunity for people inside our company and outside our company. And outside our company could be people that we bring in. So an example of what we've done is 10,000 people we've hired from LMI communities come in and work in our company a little bit. We made announcement we'd do 10,000. We did that in 3 years. We said we'd do it in 5. We made that announcement for 10,000. That gives us an opportunity to come work with a great employer like our company. At the same time, it gives us obviously a very loyal employee base. And that then provides a capability across time, which is very important. So each of these is tied to delivering both ways, meaning profits and purpose. And we don't -- where we call it the Genius of the AND, not the Tyranny of the OR, for those of you who know Jim Collins, said -- those are the 2 phrases to use. So what do we do? We do $1 trillion -- we did $250 billion of investment last year, the [ $3.5 ] commitment over the next 10 years in the environmental space to help companies make the transition. And what do we do? We have the wages and salary growth in the company. We did that to get the turnover down from 15% and as low as to 12%. Before the pandemic, it came back up a little bit. It's already started back down. What do we do? We invest in the charity work we do among all the communities, the housing development work because we need strong communities for our company to be successful. And these are all packages of what we do to help drive the success. And for that, you get -- if you look from the top 10 places for Gen Z kids to choose to work, according to Glassdoor, where we open above average in the amount of accounts we open for all different segments of the cohorts of the population, meaning Millennials, Gen Z, et cetera. And that [ resounds ] to the benefit of our employees who want -- and customers who want to be with the company that does good things, including corporate customers. And then on the other hand, yes, we produce the profit. That leverage is tremendous. So we it's how we run the company.

Got it. Now with the good stuff, 35 million core checking accounts, 60 million consumer customers. Obviously, the best probably real-time data of almost anyone. Maybe just talk to in terms of kind of what you see in terms of spend, deposit balances, loan repayments, et cetera?

Yes. Let me just start with Candace and the team. We put together the institute to take our real-time data and put it out at a simple way so people could see what was going on with real facts. And so when we talk about our spending data, I'll give you what we're seeing so far in August, but also in the first week of September. Or our account balance data, we're trying to give that information, so the facts are on the table. Because too much we read about based on a small survey, this is what's happening. And so what are we seeing right now? In the month of August 2022, consumers spent 10% more than they spent in August 2021. And you'll hear a lot about credit and debit card spending. That's only about 25% of the way a consumer would lose money. And so the whole thing for us is well over $4 trillion now in an annual basis. That grew -- August grew [ 10% -- over the last -- August ] transactions grew 5.5% to 6%. So the challenge, people say, well, prices are up, therefore it's growing. You say no, people don't go out to dinner twice on the same night. So the transaction volume is going up, too. They don't pay rent twice. They don't pay -- they don't buy clothes twice, et cetera. So that's good news. So the 3 things to think about. The customers are spending more. They have -- the amount of money in accounts is not going down. It's been relatively flat. In the month of August, it basically was a little bit down and lower cohorts from July, 12%, 13%, 15% year-over-year growth, all the way up through cohorts, would be like $75,000-, $100,000-earning households. So they have the money in accounts. They're spending it at a good clip. They have capacity to borrow. Our credit cards are still not up to where they were in a pandemic. Our home equity loans are still down. And you look across the industry, capacity to borrow, so the consumer is in very good shape. And you sort of say why, is that true. In the discussions with various people, it's pretty simple. They're getting employed. They're getting paid more. And on a multiple year, wage growth had actually exceeded the inflation rate. So what's interesting is Labor Day was bigger than last Labor Day by about 17% Labor Day weekend, travel and things. So consumers are spending, and that bodes well for the economy. It's also the toughest thing the Fed has to deal with. Because what consumers are spending money on now, services, travel, things like that, take a lot of labor content, which means the employment situation is going to be tight. And that's the struggle they're doing is they can't get easing in employment markets because everybody started traveling, demands in hotels, restaurants, the airlines, et cetera, was high, unemployment kept coming up. And so the unemployment rate is not moving much in their favor. So that's going to be the interesting by-play. But right now, you'll see that data pretty strong at the consumer level, very consistent. So to give you a sense, back -- if you look back, what I have told you in '18 and '19, when the economy has grown 2%, you'd see like a 5% to 6% growth rate. So it's growing much stronger.

Interesting. Maybe shift to loan growth. In the second quarter, I think every line of business, every product segment, saw as good loan growth, kind of broadening participation, whether it's geography, industry within that, even home equity had started to grow. But if we look at the H8 data more broadly, it's starting to look like it slowed a little bit quarter-to-date. C&I was down 3 out of the last 4 weeks. Can you maybe just talk to kind of what you've seen around lending so far this quarter? And just maybe talk to what have you seen around spreads?

If you look at loans overall, we are growing through the first 2 quarters of -- last quarter last year, in the first couple of quarters, had a pretty good clip. Everybody -- we were outgrowing everybody with a capital, which we can talk about later. We basically had to be careful of the RWA, to make sure we are above our limits -- levels last year, 10 40. We were 10 -- last quarter at 10 50. We want to make sure we kind of grew through that pretty quickly. So we were judicious. But when you look at it, you get teared apart. And that loan growth rate will slow down, but that has less to do with, I think, as really core stuff versus semi-core stuff, right? So we'll let stuff run out. Some of the mortgage lending stuff slowed down just because of the dynamics of the market. But once we get through this transition period, you expect us to grow loans at faster than the growth rate in the economy. And we've been able to do that. So if you look at '17, '18, '19, we started growing loans pretty well, and we'll continue to do that. So this quarter, I'd expect you'll see us look like the market for the first time. We've actually outgrown the market in other cohorts. So we'll kind of look like the market.

Got it. And then if you stick with the H8 data, deposits have kind of continued to contract in the third quarter so far. Maybe just talk to in terms of what you're seeing around deposits and maybe differentiate by your core customer space.

Yes. So when you think about deposits and deposit pricing, if you go back and pulled out the tape of this conference in '16, '17, '18, '19, we've had the same discussion, which is what happens? And what you caution people is $2 trillion, $1.9 trillion of deposits is a broad category. And then there's a lot of different things. There's companies that have big balances because rates were 0, they didn't have anything else to do with the money. They're paying for services, so they had to put a higher volume and a lower credit rate. Therefore, what -- that credit rate goes up, like it does now in higher rates. They will move that to the market with us, and we'll put it into money markets and other things. You have high-end investing customers who will do the same. But when you go to the other side in consumer, you have checking customers, and 56% of our balances are checking, that doesn't change because people have money in those accounts and they're spending it every day and runs through the system. So you'll see -- you saw in the second quarter, we ran out a lot of tax payments, honestly, so we had -- in the Wealth Management business. And so you'll see deposits sort of bumping around a little, sort of follow the market. But the difference will be the consumer business is holding a lot more deposits than, say, the high end of the Wealth Management business and the really pricey stuff that will go in the markets and to treasuries and stuff like that. So it's a very complex question across it. But we'll do as well as the market. But again, after you get through a transition here, you can go back and look at it in '16, '17, '18, and you were outgrowing the market and buy a little bit and outgrowing the economy, and that's [ what where we're ] back to be. But you've got this -- you got just a transition period to go through. That happens when the rate structure moves around.

I guess do you think you can grow core deposits throughout the cycle? And then maybe also talk to kind of the mix shift that someone talked to from noninterest-bearing into interest-bearing and just talk to just how that impacts the income statement.

Well, it depends on the customer base, but in the higher-end consumer, meaning Wealth Management consumer, those deposits will go in the direct treasuries and/or money markets, and corporate is the same. So you'll see some rotation. In the broad consumer business, which is more than half the deposits, that's kind of a -- we have $30 billion of CDs. They may grow a little faster, but it's not going to make a lot of difference. And so it's really in the parts of the Wealth Management business in the corporate business. And the mix of noninterest-bearing will come down, and the interest bearing will go up but -- in the corporate business, but again, it's tied to fees we get paid and a lot of other things. So I think people have to be careful about assuming that's a change in overall deposits. If you look at the pricing cycle, rates went up and stayed basically at the level for 12 months. And in that 12-month period, we grew deposits 5%. The highest we ever paid, I think all in is like 45 basis points for all the deposits put together against the Fed funds rate that was 2.5 for a year, 2.25, whatever it was. So that's a dynamic you get to, ultimately.

Got it.

And that's 1 million new checking accounts. That's this core organic growth engine that's pretty powerful.

Got it. I guess one of the things working from BofA today that was maybe different from several years ago was just the organic growth opportunities kind of across all the businesses seem to be clicking. I just -- maybe we can kind of quickly just go through the 4 main businesses, starting with consumer. But 14 consecutive straight quarters of net new checking account growth, where is that coming? Can it continue? And just maybe one of the business lines that come up at the conference is just credit card in terms of what you're seeing there as well. And obviously, you can't talk about consumer without talking about digital.

Let's -- why don't we start at the other end only because we'll never get to it. So start with markets, right? So we made a decision 2 or 3 years ago to change the position of our markets business, let the balance sheet grow. And Jimmy DeMare and the team have done a great job of taking advantage of that. So you'll see them continue to invest in customers, and that's going on. On the corporate side, the loan growth, as I said, in sort of normal environment, which basically outgrows the economy, we deployed -- had 10% or 15% more lenders in the middle market business, had more like 20%, 30% or 40% more lenders in the Business Banking, which is a 5 to 50. And you're seeing that engine take place, and new customer acquisition is as high as it's ever been. When you go to Wealth Management, they've been putting on 5,000 new customers a quarter. They're on a course to do that. That's been kind of clicking through. So then you go to the consumer business. And if you go back 15 years ago or so, when we used to run the consumer business one way, we flipped that switch really in the middle of the financial crisis that people didn't see that we basically slowed down the sales and really focused on core accounts. So in that period of time, we've gone from 60% core checking accounts to 90%, 92%, 93%. And that then has driven the average account balance around $2,000 in checking account to $11,000 a day. And so that 1 million that you referenced earlier a year is basically stuck with us and continues to grow. And if you think about that on our base, 3% customer growth plus the deposits plus attach plus the other services and capabilities, it's a heck of a growth engine. So that's what we look at. Cards, we're doing about $1 million -- 1 million new cards a quarter. I think we just had the biggest net growth quarter. They just told me that growth month in August. So we feel good about that. The balance is still low because people are flushed with cash. So until that changes -- and they've been coming up a little bit, but that dynamic is still in the system.

I guess on Wealth Management, you mentioned kind of net new household growth. I know a few years ago, you planted a growth module into the grid. Just maybe talk to how that's tracking more recently. And just obviously, the equity market volatility plays into that? How does that impact near-term results?

Well, there are substantial asset management fees when equity valuations come down. In a balanced portfolio, for lack of a better term, you're going to have an impact. But as long as it's stabilized, you start to produce new households, you get that. Now meanwhile, that business has a big bank at it, too, one of the biggest bank in the country with $200 billion-plus deposits and loans and stuff. So you'll see that NII come up. And I think last quarter, if I remember right, they had record revenue, I think, because of the balance of the business. So yes, the sheer asset management fees are affected by market levels in this quarter because of the pricing down early in the quarter. There's been stability since. But if you think about it in terms of revenue, there are opportunities. So they're pushing back up to the highest margins they've ever had in the business right now.

And then maybe on -- just in investment banking or Global Banking, obviously, IBCs across the industry have been near pressure. Maybe talk to what you're hearing from clients about pipelines. Maybe more near term, I think Dealogic is showing IBCs down 50%, 60% year-over-year for the quarter. That would put you [ about ] $1 billion, give or take. How should we think about the near-term environment?

Yes. If you separate the 2 pieces, investment banking fees and the markets, in the near term, investment banking, we won't look a lot in the market because the financing side of it's what to hit, and that's our strongest suit. Now meanwhile, the last couple of years, we've moved from #4 to #3 by Deologic, and we'll see where this all shakes out. And so the team has done a good job to hold the relative share, but the fees are down. So it was $2 billion a quarter at the high point. Now last quarter was $1.1 billion or something like that. So we're -- and before the pandemic, had run $1 billion, $2 billion, $3 billion, $4 billion. So it's sort of back to that level. Now when you talk to Matt and the team, the pipelines are very full. And there's a lot of activity that's been held in the bay and waiting for some stability in the market to push it through. And so they continue to be optimistic about the strength of that pipeline and the quality of that pipeline and what could happen with that. It's not theoretical deals that could happen. It's actually stuff that's ready to go. And so we'll see how that plays out, but it will require the market to stabilize to have that happen. So you should expect them to be not a lot different than the market. On the trading side, typically, you had, from second quarter to third quarter, down high single digits or so, 10%, 9%, something like that. That was a typical downdraft. We'll do better than that this quarter. And we'll be low single digits type of reduction in the second quarter of '22 to third quarter '22, which the team has been doing a good job.

Down low single digits sequentially?

Yes. And go see how it plays out. It's still second week of September, but we got to finish. But right now, I think it looks like we'll come in better than we typically would.

Got you. Maybe shift gears to the P&L and talk about interest income. We did touch on loan and deposits before. But we've seen some pretty strong sequential improvements over the last 3 quarters. I think NII was about $900 million last quarter. You talked about 2Q being up that much. Maybe -- I think you mentioned the $1 billion and then another more increase in 3Q to 4Q. Just maybe talk to just any update there, what was -- based on kind of what you're seeing today, how swaps maybe figure into that. And then one thing we kind of struggle with is annualizing the fourth quarter number that you'd imply gets to something approaching $60 billion. How should we think about that as we kind of begin to think about 2023? No good deed goes unpunished.

You can do the math if you can add.

Don't get it more complicated than that. Then it gets difficult. I'm still trying to figure out much trading can be up from the year-over-year based on your linked quarter guidance.

Yes. So I'm trying to remember. I think it was a few hundred million up the first quarter -- fourth to first, and then there's like 400, then 800 or so, and we said 1 billion this quarter. That's what we believe, and it's coming true. And so 900, I guess, this quarter. And we said the next quarter ought to be a higher number than that. And we still expect that -- we expect that to be true. And so that's a build. And if you start to do the math, like you just did, you get to that kind of number in the fourth quarter. So we're not going to deny if that's math. What we got to do is watch the turn and how the rate structure and everything happens. But based on the curve we told you last quarter, we'd see 900 -- around 900 this quarter and more than that in the fourth quarter, and we fully expect to see that. And so -- but how is that coming about? Loans, deposits and disciplined pricing and core deposits. So if you take that year-over-year in the second quarter, I think we're up $2.2 billion or something in the -- see it linked quarter 2 to quarter 2. There's substantial increases. And the difference, we run the company, that's all going to come to you. Now we got to get -- charge-offs are still running pretty low and whether they go back to '19 and stuff like that. But reserve releases are out now, and you saw us build the last quarter, and we'll continue to build. But absent that, which it just -- it goes to you. And so it's all going to the bottom line. And that's how we've run the company, and that leverage coming back in, think about the consumer business and even the Wealth Management business and the profit margin is just expanding because the cost structure stays relatively flat.

Got it. I guess on the cost structure comment, you've been talking to that $60 billion to $60.5 billion expense number, which is basically flat if you kind of adjust for some litigation expense. Maybe talk to how you've been able to kind of keep expenses flat. I know you've been investing in technology and branches and marketing and all that fun stuff. And obviously, there is an inflationary environment. We've heard it from every company speak. So how do you kind of come up against that?

Well, it's -- so you have to go back, and we had $70-odd billion of cost. And we're running it down, got to about $58 billion, $59 billion, if I remember right, and we told you we'd get to $53 billion. And that's a bridge from 2011 or something like that to 2019. And we got it down there. And then we said at that point, you kind of get it down to level and grow sort of inflationary growth thereafter. What happened there was higher inflation and all the different stuff that you just mentioned. So it pushed up to 60, and we're staying relatively flat. How do you do it? At the end of the day, if you look at our cost structure, it's people. These talented people we have serve the customers well. It's computers that run all this data, and it's buildings to keep them dry. And it's a fairly straightforward thing. That's what you got to manage. Marketing expense, you can move around a little bit. But other than that, it's basically those 3 components. So what you do is you use the techniques we have for engineering processes continuously to continue to reduce headcount. So when I became CEO, there's 285,000 people who worked in the company. At the peak, we were at 305,000 people. We're now about 210,000 people. The company is a lot bigger. Our consumer business back then had 120,000 people. And today, it has [ 60 ]. And there were $300 billion in checking account balance back then, and now there's multiple -- $300 billion total balance back then. Now there's $1 trillion. So just think about that. There were 6,000 -- 5,000-plus branches, almost 6,000, and now there's 3,900. So it's digitization of the customer interface. It's supplying all that. It's also reengineering all the products. It's simplification. It's all that stuff. And so you just keep applying that -- employing that. So the spending numbers I gave you, check dollar volume written is actually up year-over-year and up since 2019. Checks numbers written is down 25%. How do you do that? You push them to the Zelle and other P2P and you can take out expenses. It's tedious, and people sort of look at you like, "Really?" And you say, "Yes, really." So you count every hit. You make sure you understand what they do. You continue to work. You took -- we took players of management out. We had 13 layers in 2015. We have 7 today. Those are all work you do, but you're just [ going to see us ] investing to reengineer the company. But it comes from the customers using the digital deployment you give them to get better service and better capabilities out of the company, and then you have to take the cost out on the back end. So even what we've done at overdrafts, it would sound like an odd trade to give up the revenue, except if you know how much expense we can take out on the other side. But you have to have that discipline. And that's the thing that it just -- the company has done a good job. The management teams have done a good job. You can see it. So how can you run the company on 200,000 -- 10,000 people when you're bigger and -- what you've done is engineered all these jobs and just after and after and after in different periods of time that had different things. And so we're pretty confident looking across the quarterly run rate for many years now. You can sort of see the ebbs and flows first quarter with a higher FICO and stuff. But you basically can watch the thing play out, and you can plan on it. Now in that, if somebody were working in our company in 2010 and they made under $100,000, they have received double digit per year increase in the comp every single year. So this isn't like -- what you've been able to do is engine out so many people you can pay for. And so that's the way you have to run these big-scale enterprises.

In that vein, maybe put up the next ARS question. What do you think of Bank of America's expenses for 2023? And I guess, Brian, as more audience [ friendly ] answer, just even on this dollar expense number, but as revenues get bigger and bigger, at some point, do you shift to managing the company more on an operating leverage basis? Or how should we...

So coming into the pandemic, we had 20 quarters in a row of operating leverage, and we went through the obvious when rates came crashing down, and you had to scramble to do all the stuff our industry did and our company did. We came out of -- now we've had 4 quarters of operating leverage. Now we're back to operating leverage. And so the idea of holding the nominal dollar amount is trickier, but you want to get a couple of hundred basis point spread between revenue growth and expense growth. And when you go across with our profit margin and scale, that drives a lot of value. That we got to go through. We're going to get a big bump in NII. You just laid it out. Expense could be flat. But as this thing settles back into more of a normalized environment, you should see that kind of dynamic take place. We'll grow revenue faster than expenses with about a couple of hundred basis points of operating leverage. We did 20 quarters in a row, and then we did it every quarter where we had enough normalization, and you could actually get to it again. And so we expect that to continue.

All right. Five questions left, 8 minutes, we could do this. Credit quality.

That's good. That's good. Next. It's very good.

Is it going to stay good? And when it normalizes, how should we think about the normalization process?

So let me do this a couple of things. If you looked in our last report, and the numbers wouldn't be different now, we showed you like even in the stuff that wasn't booked at 660s, whatever, [ we had them below ], but migrated there, the delinquencies haven't moved. They're still way below they were in '19. So if you look at the core portfolio, it's gone down and stayed there. And so if you look at the credit card charge-offs, they've dropped in half, I think, and just stayed there. And so does it have to go -- so we had 15, 17, 20 basis points or whatever in the last few quarters. Then we had 40 in '19, -ish. You have 40-ish type thing. That was an all-time low. So you're sitting and saying, wait a second, you're not even normalized an all-time low. So that's the reality. Our reserve setting methodology that we set the reserve assumes 5% unemployment. This is in 3.5 months and 5% all the way through next year. That's the base case. Do we believe that's going to happen? No, but that's what -- that's a conservative build in. So you're taking that count that things could go wrong, but you kind of put -- the company has done it. So whatever else will we show? We showed you what the company looked like and the financial crisis impact and what it looks like now. And you have things like even though commercial real estate balances aren't that much different, the for-sale housing, developer housing is in the several hundred basis -- a few hundred million versus billions, $10 billion, $15 billion, whatever it was before. And those charts that are in there. So the quality of the portfolios, I think you've seen in the stress test results year after year, are strong. And so even on the stress results, the charge-off rates for credit card over 9 quarters are not a heck of a lot different than the industry we all used to underwrite to in the mid-2000s, to give you a sense. So should it be different? Yes, it should be. But is it lower than it was in '19 we thought it should be different? Yes. But then -- so we'll normalize for that, but that's not -- people got to be careful. That's not a -- that's a pretty good environment. And so we've made record earnings in '18 and '19, whatever it was anyway. So you got to be careful about saying that's normalization. That is basically back to good times. And yet, you got literally $500 million of charge-offs a quarter to get even back there. So think about the oil and gas. When was that, in the '15, '16 when we had the oil and gas and the price fell, and we put up $700 million. I think we took it all back through the P&L in the next 24 months. Russia comes in. You take it step balance, that responsible growth, that -- doing across time. You've got all the portfolios. You've got the data. You got the information. Hurricane hits. You know exactly the cardholders you have. You know exactly the mortgage balances, and you can understand it. When prices went up in the market, we changed home price underwriting market by market based on the dynamics in the market, what LTVs will allow to happen. And all that stuff, we think we are definitely a leader in. But it's permeating the industry, which helps the credit quality of the whole industry, I think, too.

Got it. 5 minutes, 4 questions. Capital.

We have a lot of it. Next.

What are you going to do with it, right? You do have 90 basis point pressure from SCB coming. Potentially 50 basis points SCB increase coming next in '24. Can you grow loans and buy back stock at the same time?

Well, of course, for this quarter, we had to be a little more careful because we -- there was more than we thought based on this new methodology. And we peeled it, and you saw the result. But then we'll see what happens over time with that, but it was a little -- that was a given. So we end up at 10.50. Our requirement's 10.40. We built 20-odd basis points last quarter. You should expect us to keep building capital. Our goal would be to push ourselves through year end up to a level and then increase the ability to do share repurchases. This quarter only in the very large -- we had to do some unfundamental stuff. We've sold some loans and stuff that you saw last quarter and continued some of that. And we had to be careful in these big deals and stuff like that. That ends this quarter, and we're back in the game. So you see our loan growth, and some of the areas will be pushed a little bit out just because, frankly, those deals you can manage the timing of, and then we'll bring them in. But we just -- we didn't want to have any questions. So we'll see where we close out, but we should be in good shape. And then we can -- we'll start to step up the stock buyback as we get back in the line.

Got it. One of the things you did is you did contest the SCB with the Fed unsuccessfully. But do you think you can get the Fed to change their thinking? Or is there stuff that you could do so next year's stress test, you'll look better than the 90 basis point increase you saw this year?

Well, I think that comes from operating costs and deposit size and stuff. So if you read the response letter and stuff, that will -- my guess is that will start to take care of itself by some of the dynamics in the underlying market. But there's not a lot we can do because the portfolios are pretty clean and stuff like that. So basically, it's how you can do is not have operating hits, and we haven't had them. That's kind of the -- and so this is an industry-wide change they're making in the model. It's not a company-specific change. So it just got allocated in a way that was kind of by size, which when you're a very successful, large company, and our peers are very successful large companies and get a lot of deposits, suddenly you took a lot more of your share. That should reverse out as the size relativity changes through, right, but we'll see.

Got it. And then I don't -- I asked you about tax rate, but it's come up a lot. You printed 9% in the second quarter. The so-called Inflationary Reduction Act has a 15% minimum corporate tax rate. I realized that a lot of ESG investments a little bit earlier kind of drive the tax rate lower. But can you kind of -- is there a concern there? Or kind of flush that out for us.

So leave aside the discrete credits could happen in a quarter based on, I think, a few quarters ago. It was something they did in the U.K. and then something -- but leave that aside. The basics of our tax are pretty easy. We pay the full rate, and then we -- all the Low-Income Housing Tax Credits and environmental credits come through and bring that rate down by about 1,000 basis points, and we disclose that. So there would be 21% federal, but for that, that brings it around 11%. The difference of 11 and 9 just bounce around based on some of those things and the things in the IRA, and so you [indiscernible]. They preserve those credits. And so we don't -- they preserve those credits. We've got to see it all come out in the wash because it's an act and they get to go through this. But those credits are preserved because it would be kind of perverse to say in the act to which we're enabling infrastructure for environmental change in the United States, we're going to take away the credit that actually has enabled a lot of infrastructure change. So it was obvious that they should have left them in. By the way, they got it in there. And so it's there, but it's -- so that tax rate difference is those 2 things. I mean it's not mysterious. And that's why we started telling because people were saying, well, you guys have a low tax rate. It's because we're doing those things. If we didn't do those things, we wouldn't have low tax rate. If you take away the tax benefits, we'd have to rethink doing those things or the pricing form would have to go up a lot. And so it's preserved in the statute. So it shouldn't change a lot.

And then just lastly, there's been some headlines of late around Bank of America and Ambac tied to kind of countrywide litigation. The trial started this week. There's potentially another trial next year. Maybe just provide some context around some potential outcomes, how you reserve for losses and just how we should be thinking about this.

We don't disclose publicly our reserves, litigation reserves, but this has been going on a long time. And you should assume that we adjust for it and make sure we are current on it. It's finally come to trial. It's the last case. We've dealt with everything else. So we're just going to finish this one up, too.

Great. Showing 0 on the clock. Please join me in thanking Brian for his time today.

Okay. Thank you.