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Edited Transcript of BAC earnings conference call or presentation 16-Oct-19 12:30pm GMT

Q3 2019 Bank of America Corp Earnings Call

CHARLOTTE Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of America Corp earnings conference call or presentation Wednesday, October 16, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Thomas Moynihan

Bank of America Corporation - Chairman & CEO

* Lee McEntire

Bank of America Corporation - SVP of IR

* Paul M. Donofrio

Bank of America Corporation - CFO

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Conference Call Participants

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* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* Brian Matthew Kleinhanzl

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* John Eamon McDonald

Autonomous Research LLP - Senior Analyst Large-cap Banks

* Keith Bennett Horowitz

Citigroup Inc, Research Division - MD

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Michael Lawrence Mayo

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Saul Martinez

UBS Investment Bank, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Hello, and thank you for joining the Bank of America third quarter earnings announcement. (Operator Instructions) Please note this call may be recorded. (Operator Instructions)

It is now my pleasure to turn today's conference over to Lee McEntire. Please go ahead.

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Lee McEntire, Bank of America Corporation - SVP of IR [2]

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Good morning. Thanks for joining the call to review our third quarter results. I trust everybody's had a chance to review the earnings release documents. They're available on the Investor Relations section of bankofamerica.com's website.

Before I turn the call over to our CEO, Brian Moynihan, let me remind you that we may make forward-looking statements during the call. After Brian's comments, our CFO, Paul Donofrio, will review more details of the third quarter results. We'll then open up for questions. (Operator Instructions) And for more information on the forward-looking comments we may make, please refer to either our earnings release documents, our website or the SEC filings

With that, take it away, Brian.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [3]

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Thank you, Lee. Good morning, everyone, and thank you for joining us to review our third quarter of 2019 results. These results reflect our success, and the U.S. economy continues to grow at around a 2% GDP level. In that kind of economy, our job is simple: drive solid customer activity, manage risk well, manage expenses well, all while investing heavily in our competitive advantage. That's what we've been telling you. It's been what we call responsible growth. The investments we have been making in the franchise for many years, and our disciplined, responsible growth approach are evident across every line of business results and respective customer basis you'll see in the materials.

Today, we reported $5.8 billion in after-tax net income and $0.56 per share for the third quarter. Those results include a previously announced $2.1 billion pretax impairment charge. This charge relates to the investment in our merchant -- Bank of America Merchant Services joint venture from 2009. That negatively impacted our EPS by $0.19. That charge, however, positioned us to meaningfully invest in our -- integrate our payments platforms in our commercial side businesses over the next several years.

Excluding that charge, third quarter net income was a record $7.5 billion after tax and EPS of $0.75 per share. On this adjusted basis, net income increased 4% from the third quarter of '18, while earnings per share increased 14%. This reflects an 8% reduction in average diluted shares from third quarter of '18. Returns after adjusting for the impairment charge were strong: return on assets, about 123 basis points; return on tangible common equity of 15.6%.

So before Paul dives into the quarter's results for the lines of business, I wanted to cover a little bit about client activity, costs and operating leverage at an enterprise level. These are the items that we focus on for you, that allows us to drive our competitive advantage. But first, some general context around the operating environment. Despite the repeated discussions that have -- continued discussions around a potential recession in the United States, I want to offer some data from our customer base, which presents the activity of a substantial portion of American consumers.

Our annual customer outgoing payments on the consumer side of our company are nearly $3 trillion, or about -- when compared to the U.S. economy, about 15%. Consumer payments year-to-date are up 6% compared to the same period in 2018 through the 9 months. For the third quarter, that pace was as solid or slightly increased from earlier in the year. This means the U.S. consumer continues the benefit by strong employment prospects.

Now interesting on the commercial side of clients, at roughly $325 billion in average U.S. commercial loans outstanding, we do see a lot of client flows as the market leader in the United States. Our total commercial loans grew 6% compared to the third quarter of '18 with good middle-market utilization rates. And importantly, our small business segment also grew 6%.

As such, we are the largest U.S. commercial lender and the largest small business lender in the United States according to FDIC data. This solid activity means the commercial customers continue to fare well. These are intangible examples that the U.S. economy is still in solid shape despite the worries and concerns about trade wars, capital investments slowdowns or other global macro conditions.

Now lets turn to Slide 3. Across nearly every line of business, we were seeing strong customer activity. You can see that on the slide. I won't take you through all the statistics here but let me highlight a few.

On the consumer business, on the left-hand side of the slide, our deposit growth has consistently been above the average -- industry average for many periods. It's axiomatic that we're gaining market share and not just in balances, but year-to-date, we've seen something that's interesting to us. We've had a 2% growth in a number of net checking households, a 700,000 increase. This is the fourth year of good growing net checking households after decade of consolidation of accounts, relationships and other changes to our business that began a decade ago to reposition.

It's also record levels of primary accounts and record levels of total balances and average balances in those checking accounts. 92% of our customers we have, it's primary checking account and household, and the average balances reaches $7,000.

Now through renewed focus on growth in our wealth management franchise, Andy Sieg and Katy Knox leading the charge, and we've seen net new Merrill Lynch and private banking relationships up over 30% plus in each case. And we're expanding the franchise by bringing our retail franchise, our Consumer Banking franchise, to markets where we had long established wealth management or commercial client coverage. Paul is going to cover the continued growth in digital uses across our client base, which provides an important dual benefit of strong customer service and lower cost structures.

Now on the commercial and corporate side, as you can see on the right hand of the slide as well as the institutional investor coverage we have, we're also growing the client bases. We have been investing in the client-facing teammates in our commercial banking for a few years, and we've increased our investment banking coverage especially in the middle market. And we've added new traders and sales staff in Europe as we opened our Paris brokerage office.

As you can see, these efforts are deepening relationships with 3% growth in solutions per household -- customer relationship in commercial. This investment has led to an improvement in our client coverage and investment banking market share.

Earlier this quarter, my teammate, Tom Montag, highlighted some of the gains we're making in middle-market investment banking coverage at a conference. We expect to see that -- see that continued success, and we expect for it to continue in the future as we continue to bring our capabilities to our great Commercial Banking franchise in the United States.

Let's turn to Slide 4. This increasing client activity can be seen in the growth in deposits and loans. On Slide 4, we look at the deposits. Average deposits grew $59 billion or 4.5% year-over-year growth. For 4 years now, we have grown deposits compared to the prior year for every one of those quarters by more than $40 billion when compared to the year before, all while we improve the mix of deposits. Deposits with our consumers grew $38 billion in total or 4%, reflecting the value clients place on the relationship benefits offered by the convenience of our network, the value of our leading digital capabilities and our unique Preferred Rewards program. Global Wealth Management was responsible for $16 billion of that $38 billion in consumer deposit growth, reflecting client expansion and preference to hold cash and move investments as well as inflows of about $8 billion from the conversion of some money market funds and deposits at year-end 2018.

Our Consumer Banking deposits grew by $22 billion or 3% year-over-year. More importantly, you can see in the right hand -- upper right-hand side of the slide, that these came from checking balance growth.

One additional point we'd focus on here is a long-term trend of deposit growth even in a moving rate environment. When the Fed started raising rates at the end of 2015, many of you had questions as whether our deposits continue to grow and what rates we'd have to pass through to customers. Since the end of 2015, our average Consumer Banking deposits are up $145 billion in balances, 3/4 of that coming from checking accounts. These balances are either no interest or very low interest on a core relationship with the households of America. Our rate paid remains low due to that superior mix of deposits. Now when you look at Global Banking in the lower right hand side of the slide, $23 billion in deposits growth reflects a rising rate environment and additional bankers we had deployed over the last few years to continue to sell our superior Global Transaction Services capabilities.

As we move to Slide 5, we see the loan side of the equation. Overall, average loans are up nearly 4% year-over-year despite selling about $9 billion of noncore consumer real estate loans out of the All Other category over the last year. Average loans on line of business grew $52 billion or 6% year-over-year as both consumer and commercial loans both grew at a 6% pace.

Middle-market borrowings, as I said earlier, continued to complement large corporate financings. As you can see in the bottom right-hand chart, we continue to demonstrate a fairly consistent range of responsible loan growth in our commercial businesses in all our business segments.

Within consumer, you'll note the strong residential mortgage growth but also the more stable credit card balances, which reflect our decision last year to continue to manage less profitable -- promotional balances down while driving core balances in our relationship, especially in Preferred Rewards capabilities. Within commercial, I want to highlight a couple of areas of activity important to understand as you think about commercial clients in the state of the U.S. economy.

First, as I said earlier, small business lending. Over the last year, we've grown small business loans 6%, regaining our market position as the #1 lender to small businesses in the United States. Supplying capital to small business is very important as they are the key driver of employment in the U.S.

As we continue to integrate around capabilities and offerings in this important client base, another portfolio with our commercial loans and leases book is our global equipment financing portfolio. Growth in this portfolio is a sign that commercial clients have invested -- are investing capital in the U.S. economy at a faster pace than the overall economic growth. This portfolio is $65 billion, and it grew $6.5 billion plus or 11% in the past 12 months. This reflects investments by clients and equipment to drive their business and invest in renewable energy products. These are just a couple of examples that mean our stable of lending portfolio is growing and supporting clients in a real economy and growing the size of smaller competitors' entire lending portfolios.

As we look to the expense side of the equation on Slide 6, we've been driving our responsive growth. Part of that is to have sustainable growth, which means we self-fund our investments and find ways to handle the inflationary cost to keep expenses relatively flat while we continue to invest heavily: $3 billion in technology, new branches, new teammates. Slide 6 shows the 2-year expense trend here. I'll talk about the expenses on Slide 6, excluding the impairment charge we took in our investment in Bank of America Merchant Services.

We've been operating in a tight range of $13 billion to $13.3 billion, with only one exception for the last few years. So we've been able to operate at a $53 billion annualized expense base despite increased investments in technology, in infrastructure, in buildings, in people and plant fee and other costs.

At $13.1 billion this quarter, we are basically flat compared to quarter 3 2018 despite elevated litigation costs of about $350 million compared to a 6 quarter run rate, about $100 million per quarter.

Regarding headcount, year-over-year headcount went up. It went up in the sales professional category by 1,700 people. We offset that cost through a reduction in other teammates.

As you look to the next slide, Slide 7, you see the familiar operating leverage trend, which has been a highlight to the firm's call of funding investments through operational earnings. Despite the immediate revenue impact of a lower interest rate environment and other revenue challenges with a slowing economy, we have a good track record of generating operational savings. We're able to keep operating leverage relatively flat.

Essentially, expenses and revenue grew about [$100 million -- less than $100 million each] (corrected by company after the call). On a more core operating basis, taking account the elevated litigation, you can see operating leverage even in this difficult NII environment.

As I've said before, generating operating leverage does get tougher. And we told you that over the last several quarters after 4 successful years of keeping expenses declining and holding relative flat. This will continue especially as we work through periods of interest rate cuts, but we remain focused on our mission to continue to grow revenue faster than expenses.

The question we ask ourselves is how much flexibility. And the question you ask us is how much flexibility we want to leverage from an issues spending on technology or infrastructure or hiring or we just keep -- or do we keep investing to build our market share momentum. As we talk to the investors around substantial portions of our stock, they continue to tell us to invest in our client and customer successes, to take advantage of our strong position and continue to invest sometimes. But even with that, you can see in this chart that we maintain our discipline around operating leverage.

With that, I'm going to turn it over to Paul for a few details on the quarter.

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Paul M. Donofrio, Bank of America Corporation - CFO [4]

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Thanks, Brian. I'm starting on Slide 8 with the balance sheet. Overall, compared to the end of Q2, the balance sheet grew $30 billion driven by loan growth, which ended the quarter more than $9 million higher.

We also grew the balance sheet in global markets to support additional client activity. Liquidity remained strong as average liquidity sources were unchanged linked quarter. Shareholders' equity declined $3 billion driven by a $2 billion decline in common equity as positive OCI from lower rates and net income totaling $7 billion was more than offset by $9 billion of capital returned to shareholders through common dividends and share repurchases. The remaining $1 billion decline in equity resulted from the redemption of preferred stock in Q3 after issuing lower-yielding preferred shares in Q2.

With respect to regulatory metrics, we remain comfortably above our minimum requirements. Regarding CET1 ratios, given the reduction in capital I just reviewed, our CET1 ratio, standardized, decreased to 11.4%, which is nearly 200 basis points above our minimum requirement. And as mentioned in our SEC filing, the impairment charge recorded this quarter reduced regulatory capital but had no impact on our capital plan announced in July.

Our risk-weighted assets increased modestly as a result of increased client activity and higher loan balances across the businesses. Lastly, our TLAC ratios also remain comfortably above our requirements.

Turning to Slide 9 and net interest income. On a GAAP, non-FTE basis, NII was $12.2 billion -- $12.3 billion on an FTE basis. Compared to Q3 '18, GAAP NII was up $126 million or 1%. The year-over-year improvement reflects solid loan and deposit growth as well as modestly higher average short-term rates year-over-year.

As you know, lower rates are a headwind. The Fed cut short-term rates in July and September, and average long-end rates are down over 100 basis points year-over-year. However, versus the linked quarter, GAAP NII was flat.

There were 2 primary negative impacts to NII in the quarter. First, lower short-term rates reduce yields on floating-rate assets. And second, because of lower long-term rates, we experienced faster prepayments on mortgage-backed securities, increasing the level of bond premium write-offs. Offsetting these negative impacts were 1 additional day of interest, loan and deposit growth, reduction in the cost of our long-term debt and a small decline in the interest rate paid on deposits.

In addition, Global Markets NII benefited from lower funding costs and a shift in mix of client activity. While NII improved in Global Markets, results are better assessed by studying together both NII and trade income profits as client activity from one quarter to the next can shift and mix between these 2 revenue lines. In fact, sales and trading revenue in the quarter, which include both NII and trade income profits, was down slightly versus Q2.

With regard to deposit pricing, we were disciplined. First, note that customers who have borrowed from us on a variable rate basis benefited from an approximate 30 basis point decline in LIBOR on a linked quarter basis. At the same time, we lowered the rates on interest-bearing deposits by 5 basis points to 76 basis points. Roughly half of our $1.37 trillion deposit book in our Consumer Banking businesses where our customer pricing remained relatively unchanged while the deposit rate we pay in Global Banking and wealth management declined 12 basis points versus Q2.

Now as you know, in our banking book, we have more variable-rate assets than variable-rate liabilities given the quality of our deposits, particularly in Consumer Banking. This makes us asset sensitive in our banking book. Or perhaps, it will be more descriptive to call us liability insensitive. In any case, this asset sensitivity increased compared to Q2, driven by the forward curve at the end of September, which was lower than the curve at the end of Q2.

Looking forward, on our Q2 earnings call, we reviewed our expectation that net interest income could grow roughly 1% for the full year of 2019 over 2018. That expectation has not changed despite the lower long-end rates and the expectation for another short-end rate cut in Q4. Nor have we changed our expectation that Q4 NII will be down relative to Q3. In Q4, we expect the decline in short-term rates will more fully affect yields on our variable-rate assets.

In addition, given the decline in long-end rates over the past couple of quarters, reinvestment rates on securities and mortgages is expected to dilute current portfolio yields. However, LIBOR rates have reduced the cost of our long-term debt and the funding of our Global Market business. This, plus loan-to-deposit growth, are expected to partially offset the headwinds.

Turning to asset quality on Slide 10. We saw no meaningful change in asset quality, which continues to be strong. We have maintained our responsible underwriting standards for years now, and we remain disciplined again this quarter in a relatively solid U.S. economy.

Similar to Q2, we sold some noncore consumer real estate loans where the sales price was above our current value due to prior charge-offs. This resulted in recoveries that reduced net charge-offs and provision expense in both Q3 and Q2 this year. Recoveries in Q3 and Q2 were $198 million and $118 million, respectively.

Including these recoveries, total net charge-offs in Q3 were $811 million compared to $887 million in Q2. Adjusting for the charge-offs -- excuse me, adjusting for the recoveries, excuse me, net charge-offs were just over $1 billion in both periods, and that the net charge-off ratio would be 42 basis points in Q3 and 43 basis points in Q2. On an adjusted basis and comparing to Q3 '18, net charge-offs were $77 million higher reflecting modestly higher commercial losses and seasoning of card losses.

Provision expense was $779 million and included a modest $32 million net reserve release.

The prior year period included a $216 million reserve release, driven in part by energy releases.

On Slide 11, we break out credit quality metrics for both our consumer and commercial portfolios and as you can see, asset quality remains strong.

Consumer nonperforming loans declined as a result of the loan sales. And in commercial, ratios tracking nonperforming loans and reservable criticized exposure remained near historic lows.

Turning to the business segment, and starting on -- with Consumer Banking on Slide 12. Consumer Banking produced another solid quarter of revenue and earnings growth. Earnings grew 5% year-over-year to $3.3 billion. Revenues grew 3%. We believe our efficiency ratio of 45%, which is one of the lowest among our peers, is driven by our digital delivery platform and simplified product offerings, which enables not only ease-of-use but also efficiency.

Our investments in this business continued at a steady pace, and client activity remains strong with respect to loan and deposit growth as well as consumer spending. Again this quarter, we added salespeople, expanded in new and existing markets, renovated financial centers and improved capabilities for consumers as well as small businesses. And even as we continue to invest, the cost of deposits year-over-year declined to 150 basis points, nearly offsetting the increase in rate paid, which is now 11 basis points.

Deposit growth was up $22 billion or 3% and centered in low rate checking. Loan growth was up 7% year-over-year. The low long-term rate environment continued to generate momentum in consumer real estate as new originations nearly doubled from last year to more than $20 billion.

Asset quality in the segment remained strong as the net charge-offs ratio was 118 basis points, down modestly from both last year and the previous quarter. In addition, we saw origination spreads improve in both mortgage and consumer vehicle lending during the quarter. Consumer investment assets grew $19 billion to $223 billion as strong client flows were partially offset by market declines.

Turning to Slide 13. Note that our 3% year-over-year improvement in revenue was driven by both NII as well as fees. NII benefited from deposit and loan growth. Card income was up 4% year-over-year as we experiences solid spending levels partially offset by rewards, which continued to be a headwind.

Each quarter, we show you the improvement in the consumer digital statistics, which are highlighted on Slide 14. Customers continue to transact and interact with us in person as well as through digital channels. So we continue to invest in both by adding financial centers and renovating existing ones as well as enhancing and adding capabilities to our #1-ranked digital banking platform. In fact, over the past year, we have opened 98 financial centers, renovated 562 and installed nearly 1,000 ATMs and remain on track to hit our buildout targets.

This includes opening financial centers in 3 new major U.S. markets in the past year, where we had previously no retail presence. And remember, while many are new markets, additions from a retail perspective, other lines of businesses, like Commercial Banking, Merrill and our private bank, have been serving customers for decades in these markets.

Turning to digital. In the third quarter, we saw nearly 2.5 billion consumer interactions across all channels with digital accounting for more than two billion of that total and digital sales now represent 26% of total sales. And by the way, our digital and physical worlds are increasingly connected and synergistic. Digital appointments are great example of that. 13% of our financial center platform traffic is now driven by appointments set in advance. This allows us to better prepare and staff for the specific needs of our customers and improve their experience.

Turning to Global Wealth and Investment Management on Slide 15. Strong results were aided by growth across AUM, loans and deposits and generally good market conditions in the quarter. Client balances are approaching $3 trillion as a result of flows and market valuations. Referrals across the company remained strong. Net income was $1.1 billion and grew 8% from Q3 '18. Pretax margin was a record 30%. The business created nearly 300 basis points of operating leverage year-over-year as revenue increased 2% while expenses declined 1%.

Within revenue, positive impacts from growth in deposits and loans drove NII higher. Asset management fees grew year-over-year as fees from AUM flows and market valuations more than offset general pricing pressures. Transactional revenue declined modestly versus Q3 '18.

With respect to expenses, investment in sales professionals, technology and our brand were more than offset by lower intangible amortization and deposit insurance costs. Mobile channel usage among wealth management households grew 45%.

Moving to Slide 16. GWIM results reflect continued solid client engagement in both Merrill and the private bank. Strong household growth contributed to higher client balances, which exceeded $2.9 trillion. AUM flows were nearly $6 billion in Q3 or $21 billion in the past 12 months, boosting AUM balances to a record $1.2 trillion.

On the banking side, average deposits of $254 billion were up $16 billion or 7% year-over-year driven by client growth and a 2018 year-end conversion of balances from money market funds. Average loans were 5% higher year-over-year, reflecting strong growth in mortgage and customer lending.

As you turn to Slide 17, before I review the slide and as I've done in the past, I want to provide summary information on Global Banking and Global Markets on a combined basis to allow comparison against competitors that may not break out these businesses separately. So on a combined basis, these 2 segments grew revenue to $9.1 billion and earned nearly $3 billion in Q3, generating a return of more than 15% on their combined allocated capital.

Looking at them separately, and beginning with Global Banking, the business earned $2.1 billion and generated return of more than 20% on allocated capital. Earnings were strong, up 3% from Q3 '18, driven by an increase in investment banking income and leasing-related gains. The year-over-year growth in earnings was mitigated by the absence of prior year reserve releases, primarily from energy exposures.

Growth in investment banking fees was the largest contributor to the 8% improvement in revenue year-over-year. Strong deposits and loan growth reflects the benefits of hundreds of bankers over the past few years as well as continued advancements in how we deliver our loan product and treasury services. Expenses were up 4% as we continue to invest in technology and client-facing associates.

Looking at trends on Slide 18 and comparing to Q3 last year. As you heard Brian mention earlier and Tom discussed at an investor conference last month, we have made steady progress in investment banking over the past year. Our standard progress with clients is reflected in both our improved fees as well as market share rankings in lead tables. IB fees in Q3 were more than $1.5 billion for the overall firm, up 27% year-over-year. Advisory was particular strong at approximately $450 million as we advised on 5 of the top 10 transaction completed in the quarter.

Pointing to our strength and leadership in credit underwriting activity in debt capital markets was strong with some record weeks of debt issuance. In Q3, we continued to add regional investment bankers with a focus on expanding our geographic coverage in the U.S. to match our coverage model and market leadership in Commercial Banking across the U.S.

One of the reasons for growth in deposits in Global Banking has been our consistent investment over multiple years in digital capabilities within our transaction services platform. Referring to Slide 19, note the growth in mobile and digital usage at the top of the page, and our focus on solutions for clients on the bottom of the page. Treasurers are looking for the same type of convenience as consumers, and our consumer and commercial teams work closely together to leverage technology advancements and drive usage and adoption of mobile and digital solutions. We now have over 500,000 CashPro users and mobile CashPro users doubled year-over-year. Mobile payment approvals by these users were $144 billion over the past 12 months, nearly doubling year-over-year.

Switching to Global Markets on Slide 20. As I usually do, I will talk about the results excluding DVA. Global Markets produced $858 million in earnings. When comparing results year-over-year and quarter-over-quarter, note that both prior periods included similar-sized equity investment gains that were noted in previous earnings calls. And in both cases, these gains were not included in sales and trading results. Year-over-year, revenue was down 2% as the segment share of improved investment banking fees and the modest improvement in sales and trading did not offset the prior year's gain on an equity investment.

Sales and trading improved 4% year-over-year. FICC was flat with Q3 '18, while equities improved 13%. Fixed revenue showed improved results in mortgage trading and municipal trading but was weaker in FX and credit products. The improvement in equities to $1.15 billion was driven by growth in client-facing activities as well continued -- as well as we continue to invest in our equity financing products.

In 2019, in equities, we added new clients, increased our market share with existing ones. Benefit derives from increased scale have improved the efficiency of our balance sheet as well as return metrics. Expenses were up 2% year-over-year as we continue to invest in technology. Plus Brexit preparedness continued to add expense.

On Slide 21, you can see that our mix of sales and trading revenue remains weighted to domestic activity where global fee pools are centered. Within FICC, revenue mix remain weighted towards revenue products.

Finally On Slide 22, we show All Other, which reported a loss of $1.6 billion. Results here included the joint venture impairment charge. Excluding this charge, the segment would have reported a profit of roughly $100 million.

A few other items impacted results here: first, provision benefit from the recoveries totaling $200 million related to the sale of our primary noncore consumer real estate loans, totaling up $1.8 billion. Second, the elevated litigation expense Brian mentioned is booked here. And third, the effective tax rate this quarter was 16% and included discrete benefits booked here and related to the resolution of several tax matters. We continued to expect the effective tax rate in Q4 of around 19%, excluding unusual items.

Okay, with that, let's just open it up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Jim Mitchell with Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [2]

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I guess, I'll ask the question and you can decide not to answer. But just if there's any help you can give us on sort of the NII outlook beyond 4Q. I know there's a lot of moving parts, but given the forward curve. And maybe you could also help us think about the premium amortization year-to-date, what that drag has been, and how that would play out in a stable rate environment from here.

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Paul M. Donofrio, Bank of America Corporation - CFO [3]

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Sure. So let me start with the premium amortization If -- I'm not giving you any precise number, but if you think about the extra day we had from Q2 to Q3, the increase in premium amortization in the quarter more than offset that. In terms of -- but going forward, unless long-end rates fall meaningfully from here, we wouldn't expect that level of increase in premium amortization in Q4, even next year without significant increase -- significant decrease among the rates.

In terms of the outlook for 2020, obviously, that's gonna be highly dependent on future Fed activity on deposit pricing across industry. We don't think it's really prudent right now to provide specific guidance at this point. You have our thoughts on -- well, I'm sure we're going to be talking about Q4 and you have our thoughts on that from our prepared remarks. You're also going to have our asset sensitivity disclosures. So the only thing that I'll remind you is when you think about Q1, we will have 1 less day of interest, which impacts NII by about $80 million, but we'll get that day back in the third quarter.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [4]

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Right. So maybe just a follow up on that just on the balance sheet growth, it seems like both loans and deposits have accelerated a little bit. You indicated some pretty strong trends and sort of new account growth in both consumer and wealth. Do you -- and coupled with sort of the lower rate environment, do you see deposit growth picking up across -- you had good in commercial across the consumer franchise broadly whether it's wealth or traditional banking.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [5]

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Yes, I think we have -- if you go back many quarters ago, we discussed -- our thought process is to tell our teammates to price to achieve sustainable deposit growth of 3% or more faster than the economy, which means you're in axiomatic point there as you're gaining share at all times if the economy is growing less. So they've been doing that. We are staying very careful and disciplined. There were some adjustments made on the wealth management business. If you look back last year, we had some growth there that we slowed down because it was a little too tied to bidding to much rate. They changed that process. They flattened out. Now they're growing again.

On the commercial side, the changes of interest-bearing and non-interest-bearing and the fees for services and all that stuff, calculations change. But I'd say you should expect us to continue to grow at the rate we're growing now or faster because, frankly, this -- we've been very disciplined about how we've been driving against core checking accounts on consumer side, core checking and savings accounts in the wealth management business and, obviously, GTS business. And so I'd expect it to continue to grow maybe faster, 3%, 4% or 5%. And -- but the thing about that is that is incredible amounts of new customers at very advantaged price and that we can put to work.

I think one thing, Jim, just to -- as I said in my prepared remarks, there's a lot of discussion when the Fed started raising rates, what would happen. And what I said back there was consumer increased their deposit balances by about $145 billion since the first Fed rate increase. And now there's been 2 decreases, right? So think about that machine just churning out growth and growth and growth. 75% of that was checking balances. That's the real encouraging part of the story in consumer. All-time customer satisfaction, high in those businesses; all-time employee satisfaction, high; all-time customer growth rates, high for 15 years or so. And you just take that and play it out, it's pretty important.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [6]

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Yes. It seems like it could be a good leading indicator.

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Operator [7]

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Our next question will come from Mike Mayo with Wells Fargo.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [8]

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I'm a little stuck on Slide 7 with the efficiency, and you mentioned all the investments that you're doing. So are you willing to go to negative operating leverage or -- with the investments? Like we have the new sales people in the branches and you have more deposit growth. You have new regional banking coverage. You have more investment banking. So the investments are paying off. So what's your confidence in growing revenues faster than expenses over the next year? You're not giving specific guidance. But more generally, what's the role of technology inside the firm that's enabling this operating leverage? For example, how many data centers do you have? And how many are you going to close? What percent of your applications you expect to migrate to the cloud? Just a little bit more color on what's happening behind the scenes that enables your operating leverage and your expectations for continuing that?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [9]

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Mike, those are good questions. I think we're going to invest for long-term value of this company and our clients. And so if this quarter, we were sort of flattish on operating leverage, if we happen to go negative, I'd argue that it was the right things to do based on everything we're assessing at the time, you do it. These quick changes in rates obviously, have an impact, that you then outgrow with the volumes coming in and producing the values. So -- but that takes compounding for the quarter. So our attitude in talking to our investors is, if we're gaining share and doing right things, keep going.

But the real key is back to your sort of your second question, which is the -- we are getting the benefits of sustained long-term investment and the changes the way this company operates that continue to push through. And so 3 years -- 2.5 years ago, we said we'd operate this year on $53 billion and change in expenses, and we hit that number and a lot of you had us in $57 billion or something like that.

Next year, we told you we'd be in the low $53 billion again, and we still are sticking to that. And so that's 3, 4 years out, you're saying how can you plan out with all the investments we're making? That is because we know we're making investments. At the same time, they're taking out costs.

The cloud journey for Bank of America is an interesting one. We started about, really, the New BAC framework, for those of you who remember that. It came out of that in just early days of Simplify and Improve. We had 200,000-plus servers, those server counts now down to 70,000. The first decision we made was to actually create an internal cloud. Those servers were operating about 30%, 67 data centers, very much dedicated by line of business, by operational unit, by risk or whatever. We took all that away and built common architecture. So the lion's share of applications run around 8,000 servers. We still have 70,000 servers. But those are more dedicated for very specific things, and we'll continue to work to take them down. We're down to 23 data centers, and those have been around the company for a while now. We took a $350 million charge a few years in the second quarter of '17 to pay for part of this changeover.

But in that time frame, we've reduced expenses by basically around 40% or $2 billion a year on our backbone. And so at the same time, if you looked on Pages 14 and 19, you can see just over the last couple of years the volume of transactions. So we're up 86% in mobile log-ins. We're up 39% in wired transactions and things like that.

So what you've had is this scale effect that we've been able to internalize in our provision these services from what we can get, and external clouds is still 25%, 30% cheaper, which we expect to change, honestly. And so we are working with potential providers to take the next step, which was discrete data centers and resources to internal cloud, save a ton of money, then use that power to actually negotiate with third parties to how they might help you and support you. And that's going on with Cathy Bessant and her team right now and Howard Boville runs this for us. But so far, we're still cheaper. And so far, we have to make sure that the external providers are a safe sound, leave the data just for us to use with our customers, don't mix it with other people's data, et cetera. And that discussion, negotiation goes on as we speak. But we will -- we're not -- we don't need to own the hardware. We just need to find out who can provide it the right way.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

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Well, thanks for providing data that others have not provided yet. So just one follow-up then. Again -- and the spirit behind this is you're getting the operating efficiency while you're making investments. You're doing stuff behind the scenes like this. So if you're coming from 60 data centers to 23 data centers, how much further do you have to go to fund from 200,000 servers to 70,000 servers? How much more do you have to go? And what percent of your applications do you expect to migrate to the cloud over time?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [11]

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The last question I'd leave to people with more expertise, but Mike, in the spirit of constant improvement, I never give people a number that I'm satisfied with because -- and you shouldn't either. In other words, if we think where you can -- we're at X for Howard and the team in this case or any of our businesses. You can improve it everyday. And so that is a cultural change we've made in this company. And frankly, the stability of having not had any acquisition activity in -- since 2009 and any other inorganic movement, you can plan these things out and execute them. And some of these things take 3 to 4 years to get done. So you have to be patient. You have to be consistent. You have to keep allocating investment to them to cause a change to happen and then be disciplined about the cost coming out the other side. But I'll never tell people we're done because then they'd stop working at it.

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Operator [12]

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Our next question will come from Glenn Schorr with Evercore.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [13]

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I'm curious. Now that you've taken a charge on the merchant servicing JV, I'm curious about the go forward. Like can you talk a little bit about what is built? What do you want to build? Is there going to be an impact on expenses that we'll see and how soon we'll see progress and what we'd see? Just -- I'm curious to learn more.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [14]

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Yes. Let me start -- Sure, Glenn. Let me start with a high-level comment, and then I'll let Paul, because remember, many of you don't know -- don't probably remember that Paul ran GTS for a while and had this part of his portfolio. So the -- but he can hit some of the details. But philosophically, we wanted to control our destiny to be able to provide this type of service to our clients in a much cleaner way. And we had a great partner in FDR, and at some point, that was good for what was going on, and the world then has changed. So we're making a change. So a lot of the discussions on -- in terms of where we take this. The team is working with FDR closely to unwind the venture as per the contract, et cetera, but it's been a good relationship. We expect to continue in various ways. But on the other hand, we had to get control of our destiny, the sales force, the implementation.

Paul, why don't you hit some of the pieces in terms of the numbers and the EBITDA and sort of impact on expenses and things like that, revenue.

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Paul M. Donofrio, Bank of America Corporation - CFO [15]

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Yes. I mean, I guess, in terms of expenses, I would remind you that the accounting for BAM's doesn't change until the JV actually ends in June. That's the first point. And so when you get out to Q3 '20, we'll begin reporting our share of the revenue and our share of the expenses versus today where we record that share as net earnings in the other income line under the equity accounting method.

Right as we sit here today, given all we have to do between now and then, we're not disclosing specifics. There's a lot of work to do, and the bottom-line impact is really not that impactful. As we get closer to the actual dissolution, we'll give up -- we'll give you some more guidance.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [16]

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Do you have a lot to build in terms of being able to service clients and deliver everything that you want to deliver to them? Everything that you're doing now, I'm assuming your current partner is doing. So I'm just curious how much of that you can do behind the scenes as you lead up to June 2020?

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Paul M. Donofrio, Bank of America Corporation - CFO [17]

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I mean, we're working on our plans. And we have a fair amount to do. But as you think about technology spend and then incremental build cost, I would -- that's going to be prioritized within our normal $3 billion or plus a year that we're investing.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [18]

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Okay. Brian, maybe 1 just high-level one on loan growth. I think growing loans -- core loans, 6% and a 2%, were like you described would be considered great by most metrics. Just curious if you think that's sustainable if we're going to sustain this 2% world?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [19]

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Yes. I think it'll ebb and flow, and you've seen it over the last -- if you looked at that 1 page on the lower hand corner, it shows you across 6% to 3% to 6% for commercial. So what have we been doing that's helping drive that? One of the major things we did is I think if you calculate, we have 4 segments, which go against commercial lending, the small business segment and our consumer business, the business banking segment, the commercial -- Global Commercial Banking segment, which is supposed to be called middle-market and then our GCIB for a large company. If you look across those segments, especially in small business but -- and importantly in business Banking, in Global Commercial Banking, Ather Williams who runs Business Banking and Alastair Borthwick, those guys have been investing in headcount and people and relationship manager in a precise number of region but think 25% more bankers today than it were 3 years ago, which gave us an opportunity to divide the portfolios of clients further. So people had less clients to give more depth to relationship, and that's why you've seen statistics about key products per relationship.

And then secondly, with the capacity we added to get new relationships, all consistent with our credit. So we often get asked, you're growing commercial loans. We're not -- we always ask ourselves, are we capably sticking to our credit standards, and we've been able to do that. So I think it's sustainable in mid-single digits. Maybe 6 is a little higher, maybe 5, maybe 4, maybe 6 if economy is a 2. But this [take-y] market share, because of the deployment of the capabilities into the middle-market and Business Banking franchises along with some of the work that's going on now with investment banking and others is a good place to be. And we -- and it's a 3- or 4-year investment. It takes about 3 years to get a commercial banker coming into our franchise up to speed, honestly.

And then on top of that, we've -- there's a fellow named Robert Schleusner who runs a group, the -- who does the underwriting process for the whole enterprise behind all these businesses, and we've invested tremendously in the technology in support of that group for their underwriting capabilities, turnaround time, all the things. And that is allowing us to frankly have -- we're told the fastest turnaround time of the bank's large -- large, smaller -- bigger or smaller. And so we feel that we're creating the kind of competitive advantage that this franchise has embedded in.

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Operator [20]

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Our next question will come from John McDonald with Autonomous Research.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [21]

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Wanted to follow up on Jim's questions around NII, Paul. You mentioned the full year outlook for the 1% hasn't changed. The prior outlook for the fourth quarter was to be around $12 billion. You came out a little bit higher this quarter. Just -- as we think about jumping off point into next year, are you still thinking about a fourth quarter NII around that $12 billion? Is that a fair reading of your disclosures and things like that?

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Paul M. Donofrio, Bank of America Corporation - CFO [22]

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Yes. That's a fair reading.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [23]

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Okay. And then just could you remind us how to read those disclosures and think about the impact of another Fed cut from here? There's some differences to the 10-Q disclosure you mentioned prior, like it's only the banking book. It's relative to the forward curve. How should we net all that and think about what 1 rate cut is if we're going to model that going forward?

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Paul M. Donofrio, Bank of America Corporation - CFO [24]

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Sure. So you'll have our sensitivity disclosures in our normal filings. But when you look at them, you're going to see that over the next -- that in a -- if the Fed were to cut rates by 25 basis points -- and remember, that disclosure is beyond the forward curve, which has 3 rate cuts in it, right? But if you look at that disclosure, you'll see that full 100 basis points would equate to around $3.3 billion on the short end. You just divide it by 16, and you're going to get the impact on a quarterly basis of about $200 million. But it's going to be a little bit less than that because again, that forward curve includes 3 rate cuts and then you're talking about 100 basis points on top of that. So you'd literally be -- that forward curve is literally -- I mean, that sensitivity disclosure literally means you'd be at zero interest rates. And obviously, the next rate cut, we're not going to be at zero interest rates. So it's not going to be full $200 million when you do the math on that disclosure.

In addition, as you point out or alluded to, that's just our banking book. And if you include Global Markets, which is modestly liability sensitive, that decline would be even further mitigated.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [25]

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Okay. So something, I think, you've said maybe before in the $125 million to $175 million or something less than $200 million?

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Paul M. Donofrio, Bank of America Corporation - CFO [26]

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Yes. It's going to be less than $200 million. And I'd even tell you it's going to be meaningfully less than $200 million.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [27]

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John, so these things -- I know you guys would like us to round it out to 6 digits each time and give it to you for the next couple of years. But the reality is we gave you an estimate for this quarter last quarter. I mean, in fourth quarter -- the current quarter, and we gave it to you last quarter. And in fact, there's been more rate cuts, and we're still holding the same guidance of 12 billion and change. And such shows you that we're managing the heck to try to avoid some of these impacts and how it ties deposits and better growth and deposits when you may have made estimated in that. So there's a lot of estimation. But we're trying to give it thematically, as Paul has talked about over time, but it's -- there is a -- it's not this imprecise. There's just a lot of moving parts that frankly, we've managed better than we'd hope -- we thought we could.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [28]

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I totally get it, and I totally appreciate it, Brian. Just with that, one more nitpick, Paul. Just from the third to the fourth quarter, 12, 3 this quarter, the pressures that you have in the fourth is kind of the combination of the LIBOR and then also the premium am. Is that why you could come down a little more than $200 million in the fourth quarter, and again, subject to all the caveats?

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Paul M. Donofrio, Bank of America Corporation - CFO [29]

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Look, as you're thinking about the second quarter to the third quarter, remember, we had 1 extra day. We had a second rate cut that came at the end of the quarter. So as we sit here today, we don't have that extra day. We've got 2 rate cuts fully baked in that are going to affect assets yields, plus you've got in that forward curve. So everything we're talking about here assumes the forward curve. You've got another rate cut. I already told you that, I thought that the premium am would not be as significant anywhere near as significant as it was second quarter to the third quarter. We're going to have loan and deposit growth. We're going to have -- we're going to, again, as Brian just said, work hard on all the other levers we have like deposit pricing. And so you get to -- I'm not giving you guidance. I gave you kind of how to think about it based upon those sensitivity of disclosures. But that's why it's a little bit different going from 3Q to 4Q versus Q2 to 3Q.

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Operator [30]

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Our next question will come from Betsy Graseck with Morgan Stanley.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [31]

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The question that we get with everybody we speak with is around how you're thinking about the competition in retail brokerage with some of the e-brokers, obviously, going to zero-commission cash and options and different players, different price points there on different products. But just wanted to understand how you think about that? I realize it's a small piece of the revenue line you've got but just want to see if you think that this is at all something that you need to address in the marketplace?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [32]

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The -- so Betsy, let me take that, because if you remember right, I had that business when we introduced $0 commissions in 2006. So it's not a new concept to Bank of America. And so about 87% of the current commission -- current trades are $0 dollars in the area that -- in the Merrill Edge and the self-directed platform that's been through forever. So this is not a change to our operating strategy, but we don't focus on trying to drive a pure trading type of thing. We think about the relationship and the Merrill Edge and things like that. So if you look at the consumer investment assets on Page 13, you can see they're up $20 billion year-over-year. We're driving a whole relationship into these managed portfolios that's based on financial advice to that. Yet, we still have a very confident, capable, against some redoubtable competition, we have a very strong platform that grows also. But the zero dollar change won't affect us much largely because we, frankly, (inaudible) this to 13 years ago.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [33]

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Right. That's with the preferred accounts.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [34]

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Yes.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [35]

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And so when people look at Page 16 and they see the brokerage rev line there, it's like $700 million this quarter. That is really commission on other things than stocks and options. Is that a fair way to read it?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [36]

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That's really not relevant here because that's in the wealth management business. Where this stuff shows up is actually back in the consumer side because Merrill Edge is in that area, and that's where the lion share of this is. So it's so -- it's not -- that $700 million is the financial advisory team under Andy selling things, the close end funds, mini-bonds, the stocks and a lot of other things. So it's -- that's how we -- that's been under pressure for years. And as you well know, that's a constant change of fighting the average yield for the total client assets in that business, but that's not affected by this decision. And you'll see us push a little bit on some of the qualifications to further open up this capability and other set of clients. But we're -- we only have 13% less to go, so...

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [37]

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Got it. Okay. And then just separately, one more question on NII, Paul, if you don't mind. But in the quarter, the market's NII helped out this quarter, I believe, and just let me know if I'm reading that right.

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Paul M. Donofrio, Bank of America Corporation - CFO [38]

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Yes. Yes, you're reading it right. Market's NII went up this quarter. As you -- and we've said that the markets business is liability sensitive. So it does help NII if rates decline. I just would point out that we really managed that business looking at total sales and trading revenue, not NII. And although the trading book is liability sensitive, it is really important to remember that client activity and product mix in global markets can vary quarter-over-quarter and will drive sort of income statement geography, which can produce and increase as you saw this quarter in NII or maybe reduce NII in another quarter, with the offset is going to be in trading account profits. So that's where the real key here is, to focus on the sales and trading disclosures as opposed to the mix between NII and trading account profits.

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Operator [39]

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Our next question will come from Saul Martinez with UBS.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [40]

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I'll also ask a question on NII. The one -- it seems like, obviously, third quarter is a little bit better than maybe expected, and you're retaining the 1% growth in -- it kind of implies $12 billion for the fourth quarter. You obviously have had rates come in, long-end to come in forward curves pricing and at least 2 more rate cuts. But it also feels like maybe you're a little bit more optimistic than -- about the NII trajectory than you were maybe earlier this quarter. Is that a fair reading, Paul?

And if so, I mean, what makes you a little bit more optimistic about your ability to sustain NII? Is it just that loan growth is coming in better? You've been able to reprice deposits a little bit faster? What gives you a little bit -- what makes you a little bit more confident that your NII trajectory could be a little bit better than what you thought maybe even a couple of months ago?

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Paul M. Donofrio, Bank of America Corporation - CFO [41]

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I think we do feel good, and I think we feel that way because we've seen how our teams are performing in a different interest rate environment. We've seen how our (inaudible) teams and our clients, by the way, have reacted to appropriate adjustments on deposit pricing given the change in LIBOR. And remember, all of our clients are getting a huge benefit in what they're paying on their loans. So it's appropriate to adjust deposit pricing. I think we're obviously growing loans and deposits well (inaudible). We've deepened relationships, and we've improved our capability to service them on both the loan and deposit side. So I think it's just another quarter under our belt where rates were different. And we've seen how the teams have performed, and we're feeling good.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [42]

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Okay. No, that's helpful. And on the deposit cost side, you did -- I mean, obviously, interest-bearing deposit costs were down 5 basis points, and it seems like that's going to be, given the limited scope in retail, wealth and commercial, you're being proactive there as you should. But you're coming from a lower starting point on deposit cost than most of your competitors to begin with. So I mean, just -- can you just talk to how much more room you feel like you have if -- as we get further along in the rate cycle? How difficult does it become? Or does it become more difficult to be more proactive in terms of lowering your deposit cost?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [43]

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I'd think back to the -- in the earlier discussion. That sort of general guidance we give our teams is you have to get us 3% -- in the current economic environment, we want to see the 3% in core growth and deposits, and you have to then price to achieve that both and then also, at the same time, achieve your goals on NII and things like that. So I think we try to be consistent. We value relationships. We focus on the core -- on the commercial side, the GTS relationships are -- drive the economics in the business as you well know. On the wealth management side, we're driving not only the investment cash but all the transactional cash, and you have to think of those as 2 separate executions and putting teammates -- investing by putting teammates into the Merrill Lynch offices who can help. There's client associates and others who have already done a good job, doing a better job in getting core checking relationships and mortgages and things like that, which also help. And then on the consumer side, obviously, it's the -- it's just the power of the brand and the franchise and digital competencies, so...

But we don't let people off the hook either way. And I -- that's -- we want them to grow. We want them to grow with the right kind -- with pricing that -- if somebody comes in and says I can grow by issuing a bunch of terms, CDs and premium price, that's kind of interesting, but that doesn't qualify for what we want. So the net then, if you look at it, by business, you're seeing, leave aside the movements as rates moved up and following, you're seeing, as you stabilize and even come down a little bit, you're seeing I'm able to continue to grow while managing rate paid carefully.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [44]

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And should we expect non-interest-bearing deposits to grow disproportionately in this environment? It seems that with lower rates, things like higher-yielding CDs become less attractive. And this is a -- for a bank like you, to National Bank and this great franchise and the national franchise, it seems -- we've seen like a pretty attractive environment or good environment for you guys to take share and suck up demand deposits that may be a faster rate than some of your peers.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [45]

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I think, yes, we expect to grow at a faster rate than our peers. That's kind of axiomatic when you're gaining the shares for this. But if you look at the slides on the deposits, you can see that growth in consumer drives the equation on non-interest-bearing and very low-interest cost deposits. And we're seeing there Dean and the team have a good job of -- they've gone from 6 basis points to 11. That's due to mix. It's -- and as Paul said earlier, we are liability insensitive to some degree because of this stuff and mixed deposits and, yes. But you got to remember on the $700 billion, 11 basis points of $700-something million dollars a year of cost. There's only so much priced leverage in there. So we say just keep growing and growing the right categories. They have CDs, and the CDs grew year-over-year.

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Paul M. Donofrio, Bank of America Corporation - CFO [46]

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The only thing I'll add there is, I think you all know this, but if interest rates are lower, then deposit rate paid is less important relative to all the other things people -- the reasons why people invest with us, or I should say, deposit with us. So theoretically, you might see more deposit growth in a lower interest rate environment because trust is more important. The deep relationship they have with us across preferred rewards and other things we do for them. We can be mobile. The online capability, the nationwide network of financial centers, our global GTS capabilities, those just all become more valuable to customers if rates are lower.

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Operator [47]

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Our next question will come from Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [48]

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Just a quick one. Brian, you mentioned that, obviously, delivering positive operating leverage gets harder with their -- and rate environment where it is. But as you look ahead, and you've done this good job of keeping this $53 billion or so, what are the incremental things that become more productive underneath that allows you to fund the incremental investments? Like, do we transition to other parts of the business becoming more productive or other pieces that you haven't -- maybe still haven't yet attacked that could still provide that underlying support?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [49]

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Sure. I mean, it's -- we have a -- the operational excellence platform, which -- that only Tom Scribner had. Now he's moved over to work on part of the operations group under Cathy. But Ann Walker has -- she had simplified and improved. This is an ongoing program, which has -- literally every manager in the company that are a couple levels down from my team, constantly working on coming up with the mapping of the process improvement process and asking for investment to help improve those processes. So there are areas where we're very digitized and very no paper and very electronic, and you can think of that in some of the consumer areas. There's areas where we're still just now getting the benefits of major investments we made. Think about the underwriting area in commercial that I talked about earlier that we're now bringing the people, the teammates on the platform to drive it.

And so all our platforms have major improvements available to them. Even though we're very efficient, and our efficiency ratio in each of the business units are industry leading, part from our scale and part from just the discipline of the teammates, so... And we look at deployment of the relationship management town. Are we getting the calls and the clients from our visits and the productivity out of that? We're looking at -- we continue to work on our real estate configurations that were down 50 million square feet in real estate from the start of 2010. And yet, we don't satisfy ourselves in the occupancy rates. Can we push it up? Can we densify the space? The new building we built in New York will be all, sort of this, modern style work environment that will allow us to make economic a higher rental cost.

And you look at every aspect of the company and continue to look at managers. We're down 10,000 managers over the last 3 or 4 years. That continues to drift down as we continue to look at what a manager does and how we test that. But we let attrition work for us and -- by not hiring and making sure when planning for on hiring, we can drive it out. And so everyone wants to say what's the silver bullet? The answer is everywhere, there's opportunities. And we don't know how far these goes with machine learning and artificial intelligence. These things you hear about are still in their infancy of being applied. And by the way, we spent $1.5 billion in data work over the last 5, 6 years, largely around all the CCAR stuff, but ultimately, across -- in this, in some of the work we're doing. But really, to get all the data rates, actually the bots and things that can operate are operating good data. And that investment then allows us to take advantage of it, and we're still on the early days [towards] that we invested in the markets business. So it's from one side of the company the other and going to -- the earlier comment, what target they have. The answer is that we don't have a target, except to improve every month, day -- the day, month, week and quarter. And we'll continue to do that.

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Operator [50]

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Our next question will come from Brian Kleinhanzl with KBW.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [51]

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Yes. I just -- two quick questions here. On the wealth and investment management, I heard that you were bringing down the noninterest expense. Can you go into a little bit more detail if there's still more that can be done on expenses in there, I mean, it's -- pricings due to positive operating leverage with expenses down?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [52]

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Yes. It's -- you have the pretax margin, if you think about it, once you pay the talent teammates we have and the financial advisory platform and the private banking platform, you're working on about half the revenue, and we're getting 30% of that to the pre-tax line. So the idea is, you've got to improve it in all directions. It's not just expenses and its efficiency expenses, simplification of product, especially for the clients with 500,000, 600,000, to continue to add straightforward products that are digitized on both the way they're delivered and the way they're statement and everything and then making the advisers able to handle more clients, and that allows us to get more efficiency.

Real estate configuration, we -- there's a lot of paper still in this business just because of the history of it. So they're probably in the first inning of really -- it's a very digital business in some ways when you think about trades and how they go through, but it's a very paper-intensive business in other ways, the way they do AML, KYC refreshes. So we're going to recognize the team. It took several hundred thousand hours out of a -- or several thousand hours out of the work to do that. It's just a thousand things. And so -- but importantly, also by driving the growth in loans and deposits and stuff, that is less -- it creates more pretax profit margin, frankly, off the strength of the bank's balance sheet and the size for our company, and that gives us unique positioning. So we're running the industry-leading margins, and we know we can continue to push them up. It is a very slow thing, and we don't change the way we pay people. We really focus it on working around and making all our teammates feel they have a great career, make more money and serve their clients better while we keep making the place more efficient.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [53]

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And then a separate one for the U.S. cards. I mean, I think we saw the gross interest yields still pick up in the quarter despite the rate cut and change in prime rates there? Was there something unique going on that allows you to kind of expand yields (inaudible) it?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [54]

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In the card portfolio, right?

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [55]

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Correct. The card portfolio.

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Paul M. Donofrio, Bank of America Corporation - CFO [56]

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Yes. Look, we've been focused on profitability. I -- we have been careful about growth as were growing. We're adding 1 million new cards a year, and again, with a focus on profitability. So we've reduced -- we've sort of scaled back on people we think are trying to game the system or just going after promotions. So that's improving the profitability overall. I think you saw that in the RAM that you're referencing, which is up year-over-year. And that's mostly being driven by NII. I mean, NIM growth in the card.

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Operator [57]

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Our next question will come from Matt O'Connor from Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [58]

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If we look at your expenses ex the impairment and the legal costs, it's about $12.7 billion. Obviously, if you annualize that, it's below the $53 billion you're talking about next year. And I know there's some seasonality in the first half of the year that drives cost higher. But I guess, first, is there anything in the $12.7 billion that's kind of not sustainable or unusual? And why isn't there maybe some downward flexibility to the $53 billion?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [59]

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You mean you're saying to our benefit? You're saying to our benefit?

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [60]

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Correct. Correct.

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Paul M. Donofrio, Bank of America Corporation - CFO [61]

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Yes. I mean, look, I think it's just -- the third quarter was just a little bit of timing. We're increasing our investment in people, in financial centers, in marketing, but it's not even throughout the whole year. So you got to think about the guidance we've given for the full year as opposed to just any given quarter.

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Keith Bennett Horowitz, Citigroup Inc, Research Division - MD [62]

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Okay. So just some ebbing and flowing there?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [63]

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Yes.

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Paul M. Donofrio, Bank of America Corporation - CFO [64]

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Yes. Just ebbing and flowing on marketing and other areas, which will rebound investments. We expect some of that rebound in the fourth quarter.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [65]

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And Matt, that's why if you go back to that earlier page in the deck why we should -- if you think about the last couple of years, there's always ebbing and flowing, but we're showing that we're kind of holding it here. And as you look over the next couple of years, we think we can hold it here and that at some point, we'll start growing or we're trying to grow -- the -- we're trying to spend 3% more a year but only grow the expense base. 1% is kind of the long-term picture. We're trying to take maybe 1% to 2% and with revenue growth of 3% to 4% in a normal environment that gives great operating leverage and EPS growth. That's the long-term view that we keep holding to. When interest rates move quickly -- those are the things that if you deal with it a bit over time, that's what you're trying to achieve. And so you could take that as for the general operating principle we push our teams towards.

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Keith Bennett Horowitz, Citigroup Inc, Research Division - MD [66]

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Okay. And then just separately. You talked about deposit growth potentially of 4%, 5%, accelerating a little bit from where we're at right here. And then you talked about loan growth potentially being in the, call it, 4% to 6% range. As we think about the overall balance sheet, should it grow in line with deposits? Or are there some opportunities to bring down debt and you'll see it little bit less earning asset growth?

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Paul M. Donofrio, Bank of America Corporation - CFO [67]

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Yes. Look, on the specific point, are there opportunities to bring down debt, there's a little bit of opportunity there. Our TLAC ratios are a little bit higher than we want them to be. But that was because we were adding a new bank in Dublin, adding a new broker/dealer in Paris, and by the way, putting up our a broker/dealer here in the U.S. for resolution planning.

So we have a little bit of opportunity there. I wouldn't make too much of a big deal about that. Basically, our balance sheet is going to grow as we grow deposits. With all that deposit growth going into loan growth, we still have a noncore portfolio running off a little bit. And whatever doesn't go to loans is going to go into the securities portfolio.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [68]

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And then you have the markets business, which also, because of financing activities and equities, not a lot of risk but notional growth of the balance sheet that you've seen.

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Operator [69]

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And we will take our last question from Gerard Cassidy with RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst [70]

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First, I would just want to thank you and Bank of America for the continued support of the bank analysts association meeting. You guys do that dinner every year like you're doing this year, so thank you very much. We really appreciate that.

The second point. Credit is very good for you folks in the industry. Can you share with us what -- when you look out over the next cycle, where are you guys spending extra time today just making sure that you don't take your eye off the ball because of some potential problems that could be on the horizon?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [71]

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Well, Gerard, you asked the question that Paul and I and Geoff Greener, our Chief Risk Officer, and importantly, our Enterprise Risk Committee led by Frank Bramble of our Board of Directors. We keep saying, "How do we make sure that we're sticking to our knitting ," so to speak. And you do that by that by -- you see all these go to the industry limits, country limits, leveraged underwriting limits. You pick -- just limit after limits, the house guidelines, exceptions. So I think -- one of the things, I think, my peers and I would say is, with stress testing and other things, you're required to think of the worst of times and hold capital for it. So I think in the industry generally, that has had a good -- a great impact in terms of us all thinking through the long-term impacts. But importantly, the data and the capabilities that we've built, starting 10, 12 years ago, are just tremendous. So when we ask the question, we can actually see, in very discrete areas, where is our exposure to this or that or the other thing, and that's important because then you can manage at that level. And the team under Jeff has done a great job of sort of bringing that data to the floor and making sure were always watching all the different pieces.

So Mick Ankrom, who is in charge of the credit risk of the company, I'll call him up. After the Houston hurricanes a couple of years ago, I said, Mick, what's our exposure? He said, what zip code do you want it for, and which product do you want it for? And do you want the card versus the mortgage or people that have both. And all that is just -- I think this is on like a Saturday night or something like that. Not to say he doesn't have more fun things to do, but it's -- so I think that allows us to keep track of it. But it's all -- it's just all of these limits and those granular limits and then the intrusion of a underwriting process that requires, really, for any reasonably sized loan, a risk manager to specifically sign off along with a banker on the commercial side and the consumer side, the parameters of that by box of so-called (inaudible) with risk and enjoy during that. It's kind of beating in the system. It's not something we people argue about or think about. So our real estate exposure is limited by a limit that James De Mare presents and as the Head of the Real Estate Exposure for the whole company and from the lion side and supported by a team on the risk side. So it's just in the 30 years I've been around this business, you just see the granular -- where we used to say, what do we have, and people would have to run out and look. Now you have it and then you can manage a lot more effectively on a go-forward basis.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst [72]

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Very good. And then pivoting a bit, you touched on it in your prepared remarks about the regional bankers that you guys have been hiring here in the States. Tom talked about it at a conference recently. You had good numbers in your investment banking area this quarter and are taking some wallet share. Is it because of hires that you're making across the globe? Or is it because some of your competitors are still struggling to really get back into the old groove of what they were, let's say, 10 or 12 years ago?

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [73]

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Yes. I think that Matthew Koder and the team have just and still -- realized we had the capabilities and the franchising tools. We just needed to really drive the call and effort, and he's done a great job of doing that. Alastair Borthwick and Matthew, together, have been working on building out this middle-market team, which is good. It's not only just pure investment banking and everything is M&A or maybe debt capital markets. And also, this exposure plays into -- a lot into the markets business, into -- hedging fuel costs or hedging interest rate risk or currency risk. The average mid-sized U.S. company is engaging all over the world, and that's a competitive advantage only a few of us have just to be able deliver in India for a mid-sized company in the United States and help them think through that or other places. So I think the team has done a good job there. We work very closely with the wealth management team in terms of referrals and coverage of the entrepreneur segment, thinking about a private banker, a financial adviser, Merrill Lynch and their clients working with the commercial. We measure that. We goal it. We -- it has to come sort of naturally by money, motion or transactional activity, but the awareness and that capabilities and coverage is -- they've done a good job. And so we will always be susceptible to the biggest deals if the activity slows down. All of us have that issue. But that underlying middle-market is just a lot more to companies, 10,000, 5,000 companies that you can get at that -- there's just a lot higher probability of one of them doing something at a given day than the top 1,000 companies.

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Operator [74]

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And there are no further questions at this time, so I'll turn it back to Brian.

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Brian Thomas Moynihan, Bank of America Corporation - Chairman & CEO [75]

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Thank you very much for your time and attention, and thank you for attending our earnings call. I think the themes for this call, and you've heard them in the Q&A and the earlier presentations, are the years of investments that the team has made and managed are paying off. We're using loans -- our loan and deposit growth, above industry averages and above the market on a conservatively responsive growth basis, continues to help offset the NII pressure due to rate changes, which is -- which all of your focus on it should be. We still continue to make sure we stay dedicated to responsible growth to make sure that credit risk and market risk we take on is consistent with how you expect us to manage it. And we continue to manage investments and expenses and run that sort of -- do a brain size of saying we can grow our investments, and we can also continue to manage our expenses carefully and relatively flat. And then on top of all that, over the last few years, our ability to have sustainable, predictable earnings and a excess capital is coming back to you along with the 100% of your earnings at levels which are unprecedented among our peers. So that's helping drive down the share count and helping produce EPS growth that we need. So consistent with responsible growth, and we look forward to seeing you next time.

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Operator [76]

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