Bank of America Q3 2021 Earnings Report

Bank of America EPS Results

• Actual EPS: $0.85
• Consensus EPS: $0.71
• Beat/Miss: Beat by +$0.14
• One Year Ago EPS: $0.51

Bank of America Revenue Results

• Actual Revenue: $22.77 billion
• Expected Revenue: $21.60 billion
• Beat/Miss: Beat by +$1.16 billion
• YoY Revenue Growth: +11.90%

Bank of America Announcement Details

• Quarter: Q3 2021
• Date: 10/14/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, October 13, 2021
• Conference Call Time: 8:00PM ET

Bank of America (NYSE:BAC) is a multinational financial services company headquartered in Charlotte, North Carolina. It provides a broad array of banking, investment, asset management and related financial and risk management products and services to individual consumers, small- and middle-market businesses, large corporations, governments and institutional investors. The firm operates through consumer banking, global wealth and investment management, global banking and markets businesses, offering capabilities across lending, deposits, payments, advisory and capital markets.

Its consumer-facing offerings include checking and savings accounts, mortgages, home equity lending, auto loans, credit cards and small business banking, supported by a nationwide branch network and digital channels. Wealth and investment management services are delivered through well-known platforms, combining advisory and brokerage services, trust and private banking, investment advisory and retirement solutions. On the corporate side, Bank of America provides commercial lending, treasury and payment services, corporate and investment banking, underwriting, trading and risk management solutions for institutional clients.

The company traces its roots to the founding of the Bank of Italy in 1904 by Amadeo Giannini and expanded over the 20th and early 21st centuries through a series of mergers and acquisitions. The modern Bank of America emerged from major consolidations in the banking industry and broadened its capabilities with notable acquisitions, including the addition of Merrill Lynch’s wealth and investment businesses. While its core franchise is concentrated in the United States, Bank of America maintains operations and client relationships across international markets to support multinational clients and global capital markets activity.

Bank of America is led by an executive management team focused on integrating retail, wealth and corporate services while investing in digital platforms and risk management infrastructure. Its client base spans individual consumers and small businesses to large corporations and institutional investors, and the company emphasizes technology-enabled delivery, compliance and capital markets expertise as central elements of its strategy.

Bank of America Q3 2021 Earnings Call Transcript

Key Takeaways

• Return of pre-pandemic organic growth and operating leverage: revenues rose 12% y/y while expenses were flat, driving efficiency to 63% amid strong deposit and loan growth and improved NII/NIM.
• Q3 net income of $7.7 billion ($0.85 per share), lifting YTD earnings above $25 billion; $12 billion returned to shareholders via dividends and buybacks, with CET1 at 11.1% (160 bp buffer).
• Loans (ex-PPP) increased $16 billion q/q, broad-based across commercial and consumer lines, with corporate utilization recovering and momentum in wealth management and small-business lending.
• Asset quality remains strong: net charge-offs at a 50-year low of 20 bps, a $624 million net reserve release, and allowance at 1.43% of loans, as delinquencies and criticized credits continue to decline.
• Digital engagement accelerates with 41 million active users and digital sales up 27% y/y; Q3 consumer payments hit $937 billion (+23% vs 2019), supporting rising card balances and consumer deposits above $1 trillion.

Presentation

[Operator]

Good day, everyone, and welcome to today's Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Lee McEntire. Please go ahead.

[Lee McEntire, VP of Investor Relations at Bank of America]

Thank you, Catherine. Good morning. Thank you for joining the call to review our third quarter results. Hopefully, you've all had a chance to review the earnings release documents. As usual, they're available, including the earnings presentation that Brian and Paul will be referring to during the call. They're available on the investor relations website of bankofamerica.com. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments. Then Paul Donofrio, our CFO, will cover the details of the quarter.

[Lee McEntire, VP of Investor Relations at Bank of America]

Before I turn the call over to Brian and Paul, let me just remind you that we may make forward-looking statements, and I would ask you to refer to non-GAAP financial measures during the call regarding various elements of the financial results. Forward-looking statements that we make are based on management's current expectations and assumptions, and they're subject to risks and uncertainties.

[Lee McEntire, VP of Investor Relations at Bank of America]

Factors that may cause the actual results to materially differ from expectations are detailed in our earnings materials and the SEC filings available also on our website. Information about the non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials, and those are available on our website. With that, let me turn it over to Brian. It's all yours.

[Brian Moynihan, CEO at Bank of America]

Thank you, Lee. Good morning to all, and thank you for joining us. This quarter, the economy continued to make solid progress. Our clients continued to perform well, having adjusted to the operating environment. Many companies are making healthy profits. Our research team expects another strong quarter of profits by American businesses.

[Brian Moynihan, CEO at Bank of America]

We reported $7.7 billion in net income or $0.85 per diluted share in the third quarter, up significantly from the year-ago period. We've now earned over $25 billion through the first nine months of the year. This quarter's strong results include some themes I want to highlight ahead of Paul going through the details on the quarter. Prior to the pandemic, Bank of America was growing and creating operating leverage quarter after quarter after quarter. As I said last quarter, the pre-pandemic organic growth machine has kicked back in.

[Brian Moynihan, CEO at Bank of America]

You see that this quarter, and it is evident across all our lines of businesses. In addition, this quarter, we saw the return of operating leverage. We also saw another quarter of solid loan growth. The good news is that the nature of this growth has broadened in the third quarter, even as commercial banking utilization rates have improved somewhat.

[Brian Moynihan, CEO at Bank of America]

NII has improved significantly, reflecting the many quarters of growth in deposits and now loans. It also reflects the steady management of the interest rate risk and deployment of cash from our core deposit growth. At the same time, we still have a high level of asset sensitivity. We invest our core deposits, and that supported stability in NII over the last year as rates and loans decline. What that did is bridge us to where we are now.

[Brian Moynihan, CEO at Bank of America]

This quarter, where growth in loans and other factors have led to an improvement in NII and in NIM. Strong fee growth has complemented that NII improvement. With expenses moving sharply lower, we saw a notable return of operating leverage. Year-over-year, our revenues are up 12% and the expenses were flat. Our efficiency ratios improved to 63%. As I've done in the past, I wanted to spend a moment on what we see in our consumer data.

[Brian Moynihan, CEO at Bank of America]

Let me hit a few slides, beginning first on slide 3. The improvement in the vaccination, the hospitalizations, all the things you know about, have seen the U.S. economy continue its reopening trajectory following a modest slowdown from the surge in cases caused by the Delta variant.

[Brian Moynihan, CEO at Bank of America]

Where there's been some discussion around the slowdown, I would just note that the U.S. economy is now as large as it was in pre-pandemic. Our own research team, not being in transit at all, expects the U.S. economy to grow at 5.5%+ this year and 5.2% next year. These growth rates are more than twice the growth rates that occurred in the pre-pandemic decade or longer. Unemployment rates continue to fall back to pre-pandemic levels. The U.S. still has issues around labor supply and supply chains of materials, the economy is moving along. Looking at our own customer base and consumer spending, I'd offer you a few insights. Third quarter total Bank of America consumer spending, you can see it on the lower left-hand part of the slide. Payments were robust.

[Brian Moynihan, CEO at Bank of America]

They reached $937 billion, up 23% over 2019 for the quarter, and a similar percentage of growth over 2020. September was the best month of the year, and we've seen that spending rates continue through the first part of October. Combined spend on debit and credit cards, which is a subset of this total, about 20-odd % of it, in that retailers and services remain strong. In third quarter 2021, we continue to see spending shift toward travel and in-person entertainment, as well as fuel driven by both increased use and higher fuel prices. Year-to-date, as you can see in the chart, our total payments of $2.8 trillion by our consumers are 22% ahead of the 2019 levels. In the chart on the right, you can see how fast the growth rates occurred this year, and that's another economic signpost of this steady recovery.

[Brian Moynihan, CEO at Bank of America]

As we turn to loan growth on slide 4, you can see this chart that we've been presenting to you for the last several quarters. Why do we show you this? We wanted to show you that as we hit the bottom, the inflection point, and what happened a couple of quarters ago. This chart gives you a sense of the daily progression across those quarters. As you can see, every loan category has seen improvement. If I showed you this by our lines of business, you would see similar progress across each one of them. Overall, ending loans, excluding PPP loans, which are in the forgiveness process, as you well know. Overall, those loans increased $16 billion linked quarter. If you look at the commercial portfolio, they grew $11 billion quarter-over-quarter.

[Brian Moynihan, CEO at Bank of America]

Compared to growth in Q2, growth this quarter was broad-based across global banking and global markets in the commercial space. C&I growth was driven in part by improved calling efforts from commercial relationship managers that we deployed across the world, including in addition to a growing demand for credit. As you might note, we've invested in hundreds of relationship managers in our commercial lines of business, and those investments are now bearing fruit. Loans with our wealth management clients continue to grow this quarter, as these customers borrow for the reasons they borrow for liquidity and asset purchases and other things. Interesting in our small business area, we're seeing the business stabilize and start to grow. One of the areas is our Practice Solutions group. What that group does is lends to medical, dental, and veterinary practices.

[Brian Moynihan, CEO at Bank of America]

They've continued to see momentum and are on the pace of the best year they've ever had. Turning to consumer loans, the American consumer continues to borrow from Bank of America. Card loans grew 7% annualized from Q2 levels with increased spending. As you well know, repayment rates trends remain high. All products in the consumer side, except the home equity balances, had higher balances for the quarter. The decline in home equity balance is understandable given the prepayments in mortgage loans, et cetera. Still, we saw $1.5 billion in originations this quarter, up more than 50% from last year's Q3. I'll turn your attention to slide and appendix, not to cover it now, but you should take a look there, and you'll see the true loan lending business on the bottom left-hand side of that slide.

[Brian Moynihan, CEO at Bank of America]

You'll see without the volatile PPP in and out that's occurred because of the program design. The loans this year in those lines of business are basically within 1% of where they were last year, and we can grow out from here. Moving to slide 5, we want to show the continued re-emerge of the pre-pandemic growth machine at Bank of America. We give you a few highlights. On the deposit side, we grew net consumer checking accounts, which the primary transaction account for our consumers, 93% being primary, for the 11th consecutive quarter. This drove the continued growth in deposits in our leadership position in U.S. retail deposit market share, reaching $1 trillion of deposits in our consumer segment alone. On credit cards, we crossed back over 1 million new card production. That's the same levels we were pre-pandemic. New investment accounts have increased 9% during the pandemic.

[Brian Moynihan, CEO at Bank of America]

Digital progress has occurred across every business, and you'll see that in Paul's slides later. That's increased sales of products and high use of digital platforms. This bodes well for future sales levels and for future efficiency. Sales of banking products in Merrill Lynch and the private bank have remained strong. With a return to in-person meetings, we should even see them grow stronger. We have seen year-to-date assets under management flows grow and are nearly triple compared to year-to-date 2019. In markets and banking, we had record or near record quarters of both investment banking and equity trading revenue. These are just a few examples of the customer growth we are seeing. A point or two on capital.

[Brian Moynihan, CEO at Bank of America]

This quarter's level of profits, coupled with our excess capital, allowed us not only to pay higher dividends to shareholders, but also to buy back $10 billion in shares. In total, we returned $12 billion to our shareholders through these actions, proving that we can support our customers in a growing economy, support our teammates with great pay and benefits, and support our communities, as I'll describe in a minute. Above all, and return capital to you, our shareholders, and drive good returns for you. Going to slide 6. With regard to how our teams are delivering more broadly in our communities, we gave you in slide 6 an update on our $1.25 billion commitment. To date, we have directly funded nearly $400 million, about one-third of that commitment. This includes $36 million completed in equity investments in MDIs and CDFIs.

[Brian Moynihan, CEO at Bank of America]

$300 million in equity investment commitments to minority-focused funds to support minority and women entrepreneurs and businesses. $70 million of philanthropic giving directed at the priorities shown on the slide, in addition to the amount we usually give on a yearly basis. Now, it's worth noting that in addition to the equity investments, we have $2.1 billion in deposits in CDFIs and MDIs, the largest in the U.S. doing that. If you go to the next slide 7, this is what we're doing with our customers to help them live their financial lives even better. It highlights the products and services charting the financial well-being of our retail clients, particularly in the low to moderate income areas we serve.

[Brian Moynihan, CEO at Bank of America]

This includes our commitment to our Pathways program, where we hire teammates from our local communities to serve our communities and be successful in our company as a company of opportunity for them. We recently re-upped to hire another 10,000 teammates from our communities over the next five years. That's because we completed the first 10,000 a year early.

[Brian Moynihan, CEO at Bank of America]

The unified ways in which our teammates in local markets do a spectacular job of approaching both banking from a global scale and banking from a local community is unique and delivers every day for us. It's been a great job by our team this quarter, and I want to thank them. I'm going to turn it over to Paul. As you know, Paul has been our CFO since 2015, has done a spectacular job with our company. He's going off to help us do some interesting things in the company, and I just want to congratulate and thank Paul for his support, and now I'll turn it over to him to take you through his last earnings call. Paul?

[Paul Donofrio, CFO at Bank of America]

Thanks, Brian. Hello, everyone. I will start on slide 8 by adding a couple of comments on revenue and returns. On a year-over-year basis, revenue rose 12%. The improvement was driven by a nearly $1 billion increase in NII. A nearly $1.5 billion increase in non-interest income. By the way, every business segment produced year-over-year improvement in non-interest income. Expenses declined from Q2 and were flat with Q3 2020, despite the year-over-year improvement in revenue and related cost. Solid revenue growth while holding expenses flat created 1,200 basis points of operating leverage and resulted in $8.3 billion of pre-tax, pre-provision income, up 40% year-over-year. With respect to returns, our return on tangible common equity was 16%, and ROA was 99 basis points, both of which improved nicely from the year-ago period. Moving to slide 9, the balance sheet expanded modestly versus Q2 to a little more than $3 trillion.

[Paul Donofrio, CFO at Bank of America]

After funding $9 billion of loan growth, deposit growth of $56 billion generated excess liquidity that was placed in a mixture of securities and cash. Our liquidity portfolio grew to $1.1 trillion, or one-third of the balance sheet. Shareholders' equity declined $4.7 billion from Q2 as capital distributions outpaced earnings this quarter. With respect to regulatory ratios, CET1 under standardized approach was 11.1%, 40 basis points lower than Q2, driven primarily by a reduction in excess capital through share repurchases and, to a lesser degree, higher RWA as a result of commercial lending growth. The ratio is 160 basis points above our minimum requirement of 9.5%, which translates into a $26 billion capital cushion. Given our deposit growth, our supplementary leverage ratio declined to 5.6% versus a minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth. Our TLAC ratio remained comfortably above our requirements.

[Paul Donofrio, CFO at Bank of America]

Turning to slide 10, I will focus on average loan balances because they are more closely linked to NII. Note that loan growth over the past two quarters has begun to show signs of improved demand. I will refer to quarter-over-quarter improvements on an annualized basis. Also note that these charts include PPP loans, which have been moving lower, driven by forgiveness. The footnotes detail the change in PPP loans. From a peak of $25 billion last year, PPP loans have declined through forgiveness to a little more than $8 billion on an ending basis. Focusing on the linked quarter change in loans, excluding PPP loans, total consumer and commercial loans grew on an annualized basis by 9%, with commercial growing 11% and consumer improving 6%. GWIM continued to benefit from security-based lending as well as custom lending while mortgage continued to perform solidly.

[Paul Donofrio, CFO at Bank of America]

In global markets, we again look for investment-grade opportunities with our clients as a good use of liquidity. In global banking, we saw utilization move past stabilization this quarter, utilization rates are still 700 basis points lower than 2019, representing a $30 billion gap from current loan levels. In consumer, we saw credit card grow as new accounts continued to build across the quarters and credit spending continued to rebound. Importantly, in mortgage, as Brian noted, we saw growth as prepayment volumes slowed. With respect to deposits on slide 11, we continued to see significant growth across the client base, adding accounts across all the deposit-taking businesses. Combining both consumer and wealth management customer balances, I would highlight that retail deposits grew $28 billion from Q2.

[Paul Donofrio, CFO at Bank of America]

These clients now entrust us to manage more than $1.3 trillion in deposits, which is more retail deposits than any other U.S. bank. We also saw strong growth of $28 billion with our commercial clients. Remember, the deposits we are focused on and gathering are the operational deposits of our customers in both consumer and wholesale. Turning to slide 12 and net interest income. On a GAAP non-FTE basis, NII in Q3 was $11.1 billion, $11.2 billion on an FTE basis. Net interest income increased $965 million from Q3 2020, driven by deposit growth and related investing of liquidity, as well as PPP loan activity. These drivers were partially offset by lower loan levels. NII versus Q2 2021 was up $861 million. There were several positive contributors to the quarter-over-quarter growth. First, we had an additional day of interest.

[Paul Donofrio, CFO at Bank of America]

We also benefited from the continued deployment and growth of liquidity. Average loan growth also contributed to NII again this quarter. We experienced an acceleration in the forgiveness of PPP loans, which improved NII quarter-over-quarter by $200 million. Last but not least, we had lower bond premium amortization expense, which declined from $1.6 billion to a little more than $1.4 billion. With respect to PPP loan forgiveness, I would emphasize that this was an acceleration or pull forward of NII into Q3 from future periods. As a side note, I would point out that the revenue from the PPP program has helped to defray some of the enormous costs of administering this assistance program on behalf of the government. Our net interest yield improved 7 basis points from Q2 to 1.68%, driven by the improvement in NII.

[Paul Donofrio, CFO at Bank of America]

Importantly, given continued deposit growth and low interest rates, our asset sensitivity to rising rates remains significant, highlighting the value of our deposits and customer relationships. As we move to Q4, and assuming no significant interest rate changes, we expect benefits from expected loan growth, liquidity deployment, and lower premium amortization expense to more than offset the expected reduction in PPP revenue I mentioned. Assuming the forward curve materializes and given Q3 NII growth as well as expectations for Q4, and assuming we see any loan and deposit growth next year, we would expect NII in full year 2022 to be well above full year 2021. Turning to slide 13 on expenses. Q3 expenses were $14.4 billion, an improvement of more than $600 million versus Q2.

[Paul Donofrio, CFO at Bank of America]

Higher revenue-related costs were more than offset by the absence of the prior quarter's contribution to our charitable foundation, as well as lower costs of unemployment claims processing. Compared to the year-ago period, expenses were flat as improvements in net COVID costs, the absence of elevated litigation in Q3 2020, as well as digitalization benefits and other initiative savings were offset by higher revenue-related and other costs.

[Paul Donofrio, CFO at Bank of America]

As we look forward, we continue to see investment in technology and people at a high rate across the businesses, and we are adding new financial centers in certain growth markets. Turning to asset quality on slide 14. As I've reported for several quarters, the picture is very good here. Net charge-offs this quarter fell again to $463 million or 20 basis points of average loans. This is the lowest loss rate in 50 years.

[Paul Donofrio, CFO at Bank of America]

Net charge-offs were 22% lower than Q2 and more than 42% below the same quarter in 2019. Our credit card loss rate was 1.7%, and several loan product categories were still in recovery position this quarter. Provision was a $624 million net benefit, driven primarily by asset quality improvement as delinquencies and reservable criticized commercial loans continued to move lower.

[Paul Donofrio, CFO at Bank of America]

We had a reserve release of $1.1 billion, split roughly 80% in commercial and 20% in consumer. Our allowance as a percentage of loans and leases ended the quarter at 1.43%, which is still well above the level following our day one adoption of CECL, especially considering the mix of loans today versus then. To the extent the macroeconomic environment and asset quality improves further and remaining uncertainties dissipate, we expect our reserve levels could move lower.

[Paul Donofrio, CFO at Bank of America]

On slide 15, we show the credit quality metrics for both our consumer and commercial portfolios. The only point I would make here is just to note the continued low level of late-stage delinquency loans, which drives expectations that card losses could decline yet again in Q4 before leveling off. Turning to the business segments and starting with consumer on slide 16.

[Paul Donofrio, CFO at Bank of America]

Before I touch on the financials, I want to highlight what a great job this team has done in turning this business around since the pandemic. Of all our businesses, consumer banking was the most heavily impacted by the pandemic, which at its worst drove quarterly profits to a very narrow level before rebounding. We incurred heavy costs to protect the health of our associates and customers, and we added contractors and other resources to support the government and our own customer assistance programs.

[Paul Donofrio, CFO at Bank of America]

We added billions to credit reserves, depressing profits as worries mounted with respect to potential credit losses. Net Interest Income declined as interest rates fell quickly and significantly. Fast-forward to this quarter, and the segment's rebound has accelerated as earnings rebounded to more than $3 billion.

[Paul Donofrio, CFO at Bank of America]

Net charge-offs are at historic lows, and NII has rebounded, reflecting not only deposit growth, but also the value of their deposits and customer relationships. The business alone has now crossed over $1 trillion in deposits, up 16% year-over-year. Our point here is that years of investing and operating under responsible growth positioned us to not only deliver for everyone during the pandemic, but also rebound quickly to organic growth and operating leverage. We were never down, and we never stopped investing.

[Paul Donofrio, CFO at Bank of America]

While this is true of every segment, the rebound in our consumer banking earnings is just a great illustration of the resiliency of our business and our people. The segment earned $3 billion in Q3, 48% higher year-over-year, as revenue, expense, and credit costs all showed improvement. Revenue improved 10%, reflecting higher card income on increased purchase volumes and higher service charges due to client activity.

[Paul Donofrio, CFO at Bank of America]

Net checking accounts grew more than 700,000 year-to-date, and 93% of our consumer checking accounts are primary accounts with an average checking account balance of more than $10,000. Expenses moved lower by 6% as a result of a continued reduction in COVID costs, mitigated by higher costs from minimum wage increases and other operating costs. On credit, we had a $242 million reserve release this quarter.

[Paul Donofrio, CFO at Bank of America]

The more direct indicator of improved asset quality is the decline in net charge-offs. Net charge-offs of $489 million were down 26% year-over-year and 22% lower quarter-over-quarter. Our credit card net loss rate for the quarter was 1.7%. Pre-pandemic, it was over 3%. On slide 17, you can see the increase in consumer deposits, loans, and investments.

[Paul Donofrio, CFO at Bank of America]

We covered loans and deposit growth earlier. With respect to investment balances, we reached a new record of $353 billion, growing 32% year-over-year as customers continued to recognize the value of our online offering. Balance grew as market values increased, but we also saw $21 billion of client flows. An important element of this growth has been the 9% growth in the number of accounts over the past year to more than 3 million.

[Paul Donofrio, CFO at Bank of America]

On slide 18, let me highlight a couple of points regarding the continued improvement in digital engagement. As all of you know, enrollment is important, but usage is key. We now have nearly 41 million customers actively using our industry-leading digital platform. This quarter, 70% of households used some part of our digital platform within the past 90 days, logging in more than 2.6 billion times. While Erica and Zelle usage has been tremendous, what I would draw your attention to is the digital sales growth, which is up 27% year-over-year. Lastly, while not reflected on the slide, I would just add, digital engagement has become foundational to maintaining our customer satisfaction at historic levels.

[Paul Donofrio, CFO at Bank of America]

Turning to wealth management, the continued economic reopening, client flows, and strong market conditions once again led to not only record investment balances and asset management fees, but also record levels of loan and deposits, all contributing to a record pre-tax margin in Q3. In fact, this is the 46th consecutive quarter of average loan growth in this business.

[Paul Donofrio, CFO at Bank of America]

Both Merrill Lynch and the private bank contributed to the improvement and are driving digital engagement to deliver products and services to clients. You can expect this to continue as we drive towards a modern Merrill, which is advisor-led, powered by digital. Growth in our new households at Merrill and at the private bank continued as we continued to build pipelines and move back towards our pre-pandemic pace. Net income of $1.2 billion improved 64% year-over-year, driven by the strong revenue performance.

[Paul Donofrio, CFO at Bank of America]

With respect to revenue, record AUM fees, which grew 19% year-over-year, complemented higher NII on the back of solid loan and deposit increases. Expenses increased in alignment with higher revenue. Client balances rose to $3.7 trillion, up 20% year-over-year, driven by higher market levels as well as strong flows of $91 billion. Let's skip to slide 21 to highlight our progress in digitally engaging wealth management clients. The clients of this business continued to lead the franchise on digital adoption, utilizing not only digital tools to access their investments, but also other banking needs like mobile check deposit and lending. More and more clients logged in to easily trade, check balances, and originate loans, all through one simplified sign-on.

[Paul Donofrio, CFO at Bank of America]

Through leveraging Erica-based AI capabilities and through use of Webex meetings and secure text messaging, we are making it easier and more efficient for clients to do business with us wherever and however they choose. This creates additional capacity for our teams to spend more time advising existing and potential clients.

[Paul Donofrio, CFO at Bank of America]

Moving to global banking on slide 22. The segment had very strong performance with near record investment banking fees, another solid quarter of deposit growth, and an uptick in loan demand. Strong deposit growth helped to improve NII, which complemented the continued strength in investment banking. The business earned $2.5 billion, improving $1.6 billion year-over-year, driven by both higher revenue and lower provision costs. Provision expense reflected a reserve release compared to builds in the year-ago quarter.

[Paul Donofrio, CFO at Bank of America]

Revenue grew 16% and included an 8% improvement in NII, while firm-wide investment banking fees were up 23% to $2.2 billion, down only modestly from the Q1 record level. This IB performance resulted in a number four ranking in overall fees with a pipeline that remains strong. We ranked number one in leveraged finance and investment grade with strong market share improvement compared to the year-ago period.

[Paul Donofrio, CFO at Bank of America]

We also had record M&A results. It is worth noting that we continued to see strong momentum in investment banking with our middle-market clients. As many of you know, we have been investing in our investment banking capabilities with middle-market clients for a few years now. Over that time, we have executed transactions for nearly 300 first-time IB clients, and we now have investment bankers in 23 cities across the U.S.

[Paul Donofrio, CFO at Bank of America]

Non-interest expense increased 7% year-over-year, primarily reflecting higher revenue-related costs and continued investment in the franchise. We've already covered much of the balance sheet on slide 23. Let's skip to digital trends on 24. Digital investments, strategies, and tactics are an enterprise effort with learnings in one segment benefiting another. That has been particularly true in global banking.

[Paul Donofrio, CFO at Bank of America]

As we continue our investments in digital solutions, our client adoption and usage continues to grow. Enhanced banking solutions have helped us capture greater market share as wholesale clients do more with banking partners that are the most stable and secure and have the capabilities to invest in new technologies that will provide better data and global integrated solutions. Switching to global markets on slide 25. Results reflect solid sales and trading activity led by our equities business.

[Paul Donofrio, CFO at Bank of America]

As I usually do, I will talk about the segment results excluding DVA. This quarter, net DVA was a modest loss, but the year-ago quarter had a higher $160 million loss. Global markets produced $941 million in earnings, on par with the year-ago quarter. Focusing on year-over-year, revenue was up 3%, driven by sales and trading. Sales and trading contributed $3.6 billion to total revenue, improving 9% year-over-year.

[Paul Donofrio, CFO at Bank of America]

FICC declined 5%, while equities improved 33%, recording one of its strongest performances ever. FICC results reflected a flat yield curve and range-bound interest rates for much of the quarter, with continued tight credit spreads. With interest rates moving late in the quarter, we saw an improvement in activity and revenue opportunities. The strength in equities was driven by growth in our client financing business, as well as a strong trading performance and increased client activity in both cash and derivatives.

[Paul Donofrio, CFO at Bank of America]

The increase in expense year-over-year was driven by increased activity-related sales and trading costs. On slide 26, we note year-to-date revenue trends across the last few years. As you can see, while our performance was elevated in 2020 during the pandemic, 2021 remains well above the pre-pandemic years presented, driven by continued elevation of client activity and volatility in the markets, as well as investments made to extend more balance sheet to clients.

[Paul Donofrio, CFO at Bank of America]

Finally, on slide 27, we show all other which reported a small net loss. Revenue declined by $109 million year-over-year, reflecting higher partnership losses on ESG investments. Expense was lower year-over-year, driven by the absence of litigation accruals in the prior period. Our effective tax rate this quarter was 14%. Excluding the tax credits driven by our portfolio of ESG investments, our tax rate would have been roughly 25%. We would expect the tax rate in Q4 to be between 10% and 12%, absent any tax law changes or unusual items. With that, we can go to Q&A.

[Operator]

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

[Glenn Schorr, Senior Managing Director at Evercore ISI]

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

[Brian Moynihan, CEO at Bank of America]

I think, Glenn, it might take you back a little bit in history to 2015 and 2016 when we started seeing the efforts from New BAC and the operating excellence kick in. What we said is we'd bring the expenses down, then we'd expect them to grow at, you sort of have a 3% inflationary between raises, and leave aside that the market's going up, as you said, and could drive a moment in time and et cetera. If you had 3% embedded CPI type of increases, then merit and rents and things like that. What we said is through our efficiency, when we got to the floor, which was the 2019 year, the idea was then to manage that to 1% net growth. We've been able to keep working at that.

[Brian Moynihan, CEO at Bank of America]

With the PPP and with the COVID-related costs and stuff, it's kind of threw it all around for the last 12 months. You'll see that start to emerge, come out the other side. The idea would be to grow revenues faster than the economy and grow expenses at a rate of net 1%, maybe 2% if the revenue growth is stronger. That's the operating model. You saw that come on quarter after quarter of operating leverage, I think for basically three years plus 14 quarters, something like that. The pandemic pushed that around. As we stabilize after the pandemic a couple of quarters ago, you're seeing it come back to the system.

[Glenn Schorr, Senior Managing Director at Evercore ISI]

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

[Brian Moynihan, CEO at Bank of America]

Oh, sure. We announced we have some teammates who are retiring. I've been CEO. This is 48th quarterly earnings conference call. It's been a long time. I would rather never have to have senior leaders move because they have a choice in life, and when they retire, we have to adjust to it. What we tried to accomplish, if you go back to last summer, we put a lot of senior executives onto the management team. What has happened now with Anne's retirement, Tom's retirement, and Andrew's retirement is those executives now are reporting directly to me. That's really the effort. We're a younger, more diverse. Three women running the eight lines of business. Same philosophy how we run the company. Now with a group of people who have five to ten years ahead of them.

[Brian Moynihan, CEO at Bank of America]

Then we have two international colleagues on the management team for the first time, in Bernie and Kathy. Kathy is needed to help us in the European context as Brexit came through. It's different. She's going to go help us in that and be a great help to us. Bernie has international, does a great job for us.

[Brian Moynihan, CEO at Bank of America]

The idea was to elevate people who, and also focus on people who are thinking 10 years out as opposed to one or two and retirement. That's really the genesis of it. People retire, and we make reactions. Tom and Anne and Andrew have been tremendous teammates. The best thing they did for us is develop a bench behind them that is extremely strong, that can step into the jobs. Frankly, we're running a lot of the businesses over the last few years, as we all spent more time on driving our brand in the market and other things at a more company level.

[Glenn Schorr, Senior Managing Director at Evercore ISI]

Thank you, Brian. Thank you.

[Operator]

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

[Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank]

Good morning. Was hoping to circle back on the net interest income commentary, which was clearly positive overall. I think you've been talking about 4Q net interest income to be up $1 billion versus the first quarter level on prior calls. I think the guidance implies maybe similar to even better than that, and was just hoping to get a little bit more of a pointed kind of update for 4Q net II.

[Paul Donofrio, CFO at Bank of America]

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

[Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank]

Okay. Which I think does get you, I guess, to that up $1 billion versus the $10.3.

[Paul Donofrio, CFO at Bank of America]

Yeah. Modestly would imply that.

[Brian Moynihan, CEO at Bank of America]

Matt, we tend to tell you what we could do when we do it. That's how we run the company. Yes.

[Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank]

Understood. Okay. Separately on the expense question, you talked about kind of 1%-2% growth long term, as we think about next year, you obviously had some kind of COVID and I think some one-time costs in the first quarter. How would you help frame 2022 costs versus 2021? Thank you.

[Paul Donofrio, CFO at Bank of America]

Sure. The way I would think about 2022, we're not going to provide specific guidance, but as a quarterly base for 2022, just start with our rough estimate of Q3 or Q4 here. Q4 should be flattish to potentially modestly lower than Q3. Just start with that as a base, and add to that the seasonal higher payroll tax in the first quarter, which is roughly $350 million. As Brian said, add in inflationary costs, As Brian said, targeting at around 1%, but given the war for talent right now, maybe you want to add a little bit more than 1% next year. Lastly, adjust that base for any assumption you make around higher or lower revenue expectations in the areas that are closely linked to compensation and exchange fees. If you do that math, you're going to come up with, I think, a pretty good estimate for 2022.

[Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank]

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

[Paul Donofrio, CFO at Bank of America]

Yeah. Look, COVID, there's still $200 million of net COVID in our costs. It's down modestly from Q2. We're seeing some reduction in COVID's costs. We incurred some new costs as people return to the office. While there's not a lot left, it does create, I think, modest opportunity over the next year or so to get those costs out.

[Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank]

Okay. Thanks for all the clarity.

[Operator]

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

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Hi. My question relates to tech. I'll do the front office and the back office. The front office, you have the slide number 5. Net new consumer checking accounts up by half over the last two years. How much of that is directly or indirectly related to digital banking? My back office question, which we don't really see is, what are you doing as it relates to the cloud, your relationship with IBM? What sort of efficiencies do you think you can get? I think you indicated you don't plan to go 100% to the public cloud like some of your other peers have targeted. If you could elaborate on your tech strategy. Thanks.

[Brian Moynihan, CEO at Bank of America]

Mike, on the first, the production of net new checking accounts, remember, Mike, you've been around us a long time, these are core checking accounts. The primary, it keeps going up. It actually went from 92% to 93% over the last year of primary accounts. The production hit this quarter was, I think, a 10-year high in terms of net accounts. That's coming both from the digital's 50% of sales round numbers. We now have, to your point, over the last three years, developed full digital execution in terms of account opening for core accounts, in terms of auto purchases, in terms of mortgage origination, et cetera, which now allows a fully digital practice to take place. Half the sales are digital. The good news, honestly, is that as the branches reopened over the last, and the visits went up.

[Brian Moynihan, CEO at Bank of America]

You saw the accounts sold rise because it takes both high touch and high tech to be successful. The percentage in sales of digital came down, that's because overall sales jumped up, and obviously they're more branch-dominated. You got it exactly right. We think that is a more efficient method of accumulating customers. We think we have about 17% market share in the Gen Z area that is heavily digitally originated. A lot of college, a lot of other things going on. The key is to realize that net balances per account have gone from $7,000-$10,000 over the last couple of years. You're seeing a bigger and bigger core position. That's 1 thing to keep in mind is when we give you our 40 million digital customers, these customers are core customers with big balances.

[Brian Moynihan, CEO at Bank of America]

Merrill Edge, for example, I think we're up to $70,000 or something average balance per account, not $3,000 or $4,000. Anyway, just on the cloud. The cloud is a complex question. As you're well aware, over the last eight, ten years, Kathy and the team led an effort to internalize our cloud, which made us a lot more efficient. We run a percentage of our business outside due to certain executions and things like that. We have 500 different software programs that run in a SaaS basis. The question of cloud can be misleading is can you get to all the product types or capability types you can get out there because of the new companies that develop them on cloud-based systems, and we can get to them all.

[Brian Moynihan, CEO at Bank of America]

The IBM is an effort to internalize a cloud that we can use as a financial service industry, and IBM's working on that. These things have to be done carefully for purposes of security and trust and understanding our businesses. So far, we've come to the judgment that we're continuing to internalize and saving a lot of money, and we continue to add modest amounts to the cloud. Importantly, there's no restraint on our ability to tap innovation or ingenuity based on whether it's running internally or externally.

[Paul Donofrio, CFO at Bank of America]

Next question, please.

[Operator]

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

[Gerard Cassidy, Managing Director at RBC]

Hi, Brian. How are you?

[Brian Moynihan, CEO at Bank of America]

Good, Gerard. How are you?

[Gerard Cassidy, Managing Director at RBC]

Good. Can you guys share with us, you've had incredible deposit growth. As you pointed out, the retail consumer area is over $1 trillion. When the Fed ends QE sometime next year, can you share with us what you think will happen to deposit growth? Second, your loan-to-deposit ratio, similar to your peers, is very low. How do you see growing that over the next two or three years, and where can you get it to, do you think?

[Brian Moynihan, CEO at Bank of America]

Paul, why don't you add a few comments on the change in monetary policy, and then I'll talk a little bit about some of the other things.

[Paul Donofrio, CFO at Bank of America]

Yeah. Look, we expect deposit growth to continue, although it's going to be likely at a slower rate than what was experienced so far this year. We expect our growth to continue in line with or slightly better than the industry. You got to remember that we're entering a phase of tapering. Tapering is still QE. Deposits are really not likely to decline until many quarters, if you look back at historical data after QE ends, if they ever do, because as the economy expands, the multiplier effect, we could see growth in deposits even though money supply is coming down. We'll just have to wait and see. What we do know is as QE starts, it's still going to be stimulative from a deposit standpoint. As I said, if deposits do decline, it'll probably be many quarters, a couple of years maybe, after QE ends.

[Brian Moynihan, CEO at Bank of America]

Gerard, just a couple of things. When looking at the consumer deposit base sometimes I think it's deja vu all over again is the classic statement because in 2015, 2016, 2017, it was all about the Fed's going to normalize rates and you're going to have to raise prices. We didn't have to because the reason why we don't have to is these are core transactional accounts in a large part, not interest-bearing. You'll see some of that same dynamic apply again as the rate normalizes and the monetary supply has changed. In the consumer business, 56% of the balances are checking. That would say those are core transaction accounts, money moving in and out. Very little CDs, I think $50 billion-$60 billion or something like that. The $1 trillion is all basically in checking and money markets. Can it move around? Yeah.

[Brian Moynihan, CEO at Bank of America]

If you look, one of the things that bodes well for the economy is that if you look at a checking customer that has maybe $2,000 or $3,000 in balances with us, they're sitting with three times what they had before the crisis. That's good news. They will spend some of that, I assume. Interestingly enough, that's been growing month-over-month for the last few months. It's not going down even though the stimulus payments to customers in large part other than the childcare stopped. One of the things that bodes well for the economy, and this isn't trying to cozen you to some viewpoint about it, is the consumer still has a lot of money in their accounts, and they're going to spend it. Going back to your deposit question, could that mean those balances come down a little bit?

[Brian Moynihan, CEO at Bank of America]

It'd be overcome by the new accounts coming on at $1 million a year that carry $10,000 average balance, et cetera. We feel good about long-term deposit growth, and it's driven by the checking core transactions. Loan-to-deposit ratio, it's our customers driving it. When the usage by the auto dealer lines was down to 25% of what it was because the inventory is being down. Of course, they want to borrow. We want to lend to them because that means they have the inventory to sell to the consumer. This is a customer-driven business. $900 billion odd of loans against $2 trillion of deposits is largely driven by the customer activity.

[Brian Moynihan, CEO at Bank of America]

The good news is you can see in those charts that I call the smile charts on the loan growth page there that the other half of the smile is coming up, meaning that the customers are starting to draw on credit and use it, and that'll bode well for the customer growing their businesses and stuff. Importantly thinking about just the economy generally. One of the things I'll remind you of, Gerard, is we break out consumer and GWIM, and a lot of people talk about retail deposits. That is $1.3 trillion when you combine them together. It is a big machine, and it's all transactional. We just don't think that moves as much on monetary supply questions as obviously the institutional side.

[Gerard Cassidy, Managing Director at RBC]

Very good. Thank you.

[Operator]

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

[Brian Moynihan, CEO at Bank of America]

Morning, Betsy.

[Betsy Graseck, Managing Director at Morgan Stanley]

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

[Brian Moynihan, CEO at Bank of America]

I'd say there's a couple areas. One as you're well aware of, we've expanded the balance sheet in the markets business, and they're seeing the returns on that stronger in the equities business and good. James DeMare and the team under Tom's leadership continue to do it, but stronger in the equities business. Deploying balance sheet against that, recognizing the activity level, sustaining, et cetera. If you go in the lending business it's customer selection. We were out with those 100 extra relationship managers banging away at the world, getting more customers the hard way.

[Brian Moynihan, CEO at Bank of America]

You're seeing net new customers in the business banking, small business segments and stuff growing. You see that in the wealth management business. What you'll see is that the balance sheet deployed to markets is a capital and balance sheet question. Everywhere else, it's going to follow the customer, but it's the core customer growth, and that's why you put those statistics in that you see. Meanwhile, Merrill Edge is over $300 billion and becoming a fairly significant enterprise on its own. You see some of these other aspects. We feel good about it. Like you said, Candace and the team run a great research platform, and they basically are 5% plus this year and 5% next year, which sets up well.

[Betsy Graseck, Managing Director at Morgan Stanley]

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

[Brian Moynihan, CEO at Bank of America]

Yeah. We have more loans in the Global Corporate and Investment Banking segment outside the U.S. than we do inside the U.S. We continue to expand that. Matthew Koder and team have done a good job. Lisa Clyde and the team in the corporate banking area are doing a great job. Yes, we're going to invest in that. The GTS, Faiz, I'm adding the team and continue to develop our capabilities there. We're getting high single-digit revenue growth off the deposits and fees combined together. We continue to invest at real-time payments. It's just one thing after another. We're doing that. Outside-- If the question is, are we going to change and go into the consumer business or wealth management business outside the U.S.?

[Brian Moynihan, CEO at Bank of America]

The opportunities in the consumer business or just in the wealth management business in the U.S. are staggering to us. Think about it. We just opened our fifteenth branch in Indianapolis. You and I would've been talking four years ago, I don't think we had any, maybe it's five. We're now seventh market share, moving up strong. You look at it in Columbus and Cleveland, Cincinnati, Salt Lake City, Minneapolis, and you're seeing us move in the top five, seven from zero. That growth in the new households is running multiples of 2019 in Merrill, the private bank. There's just so much opportunity to distract ourselves would be not the time to do it. We're in a war with the competition, we're winning.

[Betsy Graseck, Managing Director at Morgan Stanley]

Okay. Just lastly, Paul, you were mentioning how you've got bigger than a breadbox on growth in NII as you look into next year and you outline the drivers. I'm just wondering, embedded in that is a forward curve. What about opportunity here for the forward curve to shift higher? When you're thinking about the increase in NII, if we had inflation come through stronger, rates rise sooner, would that be an opportunity for you to take even more duration than you've got in the book? Would you keep the securities duration where it is today?

[Paul Donofrio, CFO at Bank of America]

Look, we have a lot of excess liquidity right now, so there's always an opportunity to deploy some of that in the future. We're always balancing liquidity, capital, and earnings. If rates rise, I think we probably would have to study whether we want to deploy some of that liquidity at higher rates. We've got our interest rate sensitivity disclosure, which is probably the best way to talk about the opportunity if rates were to rise. It sits today because of our liability insensitivity, the value of those deposits and customer relationships that Brian just talked about. That's sitting at $7.7 billion for a parallel shift. 70% of that's on the short end. That gives you a sense of maybe the opportunity here as rates rise.

[Betsy Graseck, Managing Director at Morgan Stanley]

Thanks.

[Operator]

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

[Jim Mitchell, Senior Equity Analyst at Seaport Research]

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

[Paul Donofrio, CFO at Bank of America]

We already adopted SA-CCR, I think, and that was a benefit for us in markets.

[Jim Mitchell, Senior Equity Analyst at Seaport Research]

Oh, really?

[Paul Donofrio, CFO at Bank of America]

Yeah. Lee can come back to you with the details. We were the first to adopt.

[Jim Mitchell, Senior Equity Analyst at Seaport Research]

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

[Brian Moynihan, CEO at Bank of America]

Yes. I mean, simply put, we manage it dynamically. The board manages it dynamically on a quarterly basis. What's happening is if you look at where we thought we'd be, we're ending up with more capital because we're earning more money. Then we clean up a little bit here and there. We're working towards over multi-quarter period back towards our target. We'll continue to focus on that.

[Jim Mitchell, Senior Equity Analyst at Seaport Research]

Okay. That's great. Thanks.

[Operator]

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

[Charles Peabody, Analyst at Portales]

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

[Paul Donofrio, CFO at Bank of America]

Yeah. Let me just correct because I think maybe you didn't hear us right or we said something wrong, but we're expecting modest NII growth from the third quarter to the fourth quarter.

[Charles Peabody, Analyst at Portales]

Oh, okay.

[Paul Donofrio, CFO at Bank of America]

Yeah. We gave some perspective in the initial comments that I made about 2021 versus 2022. We're not really providing specific guidance on 2022, but let me just give you a couple of reminders and qualifiers that it's going to depend, NII is going to depend on loan and deposit growth, and we expect both of those to continue to grow consistent with a growing economy. We also are expecting lower premium amortization expense over time consistent with the path of higher rates.

[Paul Donofrio, CFO at Bank of America]

When all the guidance we ever give you is always dependent on the forward curve at that moment. Assuming the current forward curve and given our expectations around improvement in NII in the second half of this year, we've already booked the third quarter. I've given you guidance on the fourth quarter. That one could expect, I think, robust improvement in NII comparing the full year 2021 versus the full year 2022. By the way, I want to correct one thing I said earlier. I mentioned that our asset sensitivity, 100 basis points rise parallel shift to the curve was 7.7. It's actually 7.2. Sorry for that.

[Charles Peabody, Analyst at Portales]

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

[Brian Moynihan, CEO at Bank of America]

All the factors you're talking about go into it. We use the curve. All you market participants and all the debate, we don't use some internal estimate. We've always used the curve, and we've been telling you that for a long, long time, going back couple decades. That's how we build that estimate of the asset sensitivity based on the forward curve at the time, be it at the end of the quarter or whenever we calculate.

[Charles Peabody, Analyst at Portales]

All right. Thank you.

[Operator]

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

[Steven Chubak, Managing Director at Wolfe Research]

Hi, good morning. Thanks for taking my questions. Wanted to start off with one just on the tax rate guidance. Paul, you've always provided at least helpful color on how to think about some of the potential fee income drag, as well associated with those ESG-related investments, recognizing that the impacts are intended to be P&L neutral. I was hoping you could help size just how we should be thinking about the other income drag related to the guidance for 4Q, and whether you guys would consider a potential change to the accounting just given all the noise and volatility that that creates in the income statement.

[Paul Donofrio, CFO at Bank of America]

Look, we expect our ESG activities to increase over time, as we go into 2022 and 2023. As we've long talked about, the fourth quarter is generally the highest for that pre-tax, for that loss that we book in other income for entering into these partnerships. I do think it's important to remind everybody, I know you know it, but I'll remind everybody that these partnership losses are booked in other income, but they're more than offset in the tax line. As we grow these activities in the future, there will be a small headwind to revenue growth, but not to net income growth, given the tax benefits of these investments.

[Paul Donofrio, CFO at Bank of America]

As you think about modeling everybody out there, we expect the fourth quarter loss to be $800 million on the other income line from these tax investments, or even perhaps a little higher, reflecting both the sort of typical seasonal increase in the fourth quarter in partnership investments. There were a few deals in the third quarter that got delayed because of all the logistical stuff, and we think they're going to pop into the fourth quarter. Beyond that, putting the fourth quarter aside, a good modeling assumption for the normal three quarters of 2022, I would say, absent unusual items, it'll be a quarterly loss of kind of $400-$500 for those ESG investments. Again, in the other income line, more than made up for in the tax line.

[Steven Chubak, Managing Director at Wolfe Research]

Thanks for that color, Paul. Just for my follow-up, I know you guys are reluctant to give some explicit expense guidance for next year. Just given the sheer amount of inbound that we've gotten after you made your remarks, I just wanted to at least provide some ranges and just see if we're thinking about things appropriately. It does sound like the $14.4 billion we saw this quarter, annualizing that is the jumping-off point. That gets us to $576. You have the $250 million of additional incentive expense or seasonal expense, sorry, that you spoke to. That gets us to $579. That's the starting point for thinking about how much incremental growth, somewhere in that range of 1%-2%. Is that the right way to think about it?

[Brian Moynihan, CEO at Bank of America]

You've got some, but not all the components because you got the COVID-related expenses and what happens next year. I think the leading thing for everybody to focus on is watch the headcount because at the end of the day, if you think about the expense base, it's dominated by people and the buildings and equipment they operate on and positioning them for success. That headcount now is drifting down as it has because the impact of the runoff of some of the special programs that we had, the half a million PPP loans, 2 million customer deferral applications, the unemployment payments, all this stuff, it's going down, and that's coming down. In client-facing investments and technology stuff, that goes up, but we continue to engineer the back office. Watch that number. I think it was 209,400 this quarter, 411 if I got it right.

[Brian Moynihan, CEO at Bank of America]

For the quarter, down for the year. Managers are down about 1,000 in the company round numbers at this point, and we just continue to manage that down. You've got the component parts that have become clear. We sort of brought the run rate back down to flat year-over-year, and we'll continue to work on it.

[Paul Donofrio, CFO at Bank of America]

The only other thing that I would add, Brian, if I may. We're clearly focused on managing expense as well, but what we're really focused on is creating operating leverage. You saw that this quarter, and that's how we really think about the business model. We've got to grow revenue. In terms of expense growth, we've got to grow expenses slower than we're growing revenue, and we've given you the sort of 1 percentage framework.

[Steven Chubak, Managing Director at Wolfe Research]

That's great. Just one quick follow-up, if I may. Just on the securities yield. You guys actually saw some nice expansion there. I know that's going to be reflective, at least in part, of some of the premium amortization benefit that was cited. I was hoping you can maybe help frame how large could that benefit be from premium amortization if prepaid speeds really start to normalize in earnest somewhere closer to pre-COVID levels. Separately, just where are you reinvesting along the curve? How are you thinking about duration risk appetite given the size of your MBS portfolio?

[Paul Donofrio, CFO at Bank of America]

Yeah. If you think about premium amortization expense over time, it's going to depend on the path of rates. I just would remind you that prepayment lags movements in mortgage rates. People kind of focus on the 10-year. It's about mortgage rates. They lag that by a little more than two months. I would also just remind everybody that as you think about premium amortization expense, it's also important to really remember that the size of the securities portfolio has increased a lot year-over-year. All those things sort of have to go into your modeling.

[Steven Chubak, Managing Director at Wolfe Research]

Understood. Thanks for taking my questions.

[Operator]

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

[Ken Usdin, Managing Director of Equity Research at Jefferies]

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

[Paul Donofrio, CFO at Bank of America]

Sure. Well, look, in card income, just a couple of points to make just so no one's confused. When you look at our sort of consumer banking card income fees, they were up very nicely year-over-year at about 8%, driven, as you said, by the purchase volume increases despite the fact that payment rates are still relatively high. When you look at the consolidated line, you're not going to see that. It's up only slightly versus Q3 2020 because of the decline in card income associated with processing unemployment claims which sits in Global Markets.

[Paul Donofrio, CFO at Bank of America]

Just some clarification there. In terms of balances, look, we're expecting card balances to continue to improve. The balances grew 7% quarter-over-quarter on an annualized basis including some small growth in revolving balances. We opened over 1 million new accounts which now matches pre-pandemic levels. I think balance growth reflected higher spend and the reinitiated marketing efforts that we've talked about including promo offers, while again, payment rates remained elevated. We expect higher Q4 seasonal purchase volume, and that's going to drive additional balances in cards.

[Brian Moynihan, CEO at Bank of America]

Yeah. I think just a couple of things. You've got the balance question on cards, but you do always have to look at the spending side of it. We say debit and credit cards are only about 20-odd% of the way consumers spend money out of their accounts. Cash out of the ATMs, checks written, Zelle is taking off and becoming a meaningful amount of the payment. Cards are an easy form of payment. We're already seeing tap cards are things that 12% of the penetration already. The good news is, no matter how you cut it and how you look at it, there are two good messages. Card balances are growing, but there's still tremendous capacity for the consumers to borrow if they want to do things.

[Brian Moynihan, CEO at Bank of America]

The second thing is that the spending levels are growing at 10% growth rates in an economy in the U.S. which is led by the American consumer. That is a tremendous amount of spending that's going on, and it's accelerating even as the stimulus is in the rear-view mirror by quite many months. As people get back to work and higher wages and things, there's just more money to spend. I think the focus on card as a spending vehicle versus a borrowing vehicle will be something we look at. We like the business. We continue to generate 1 million new cards, as Paul talked about, it will break down about who needs to borrow and what. The asset quality is unbelievable. The NIM is as high as it's ever been, that's a good business.

[Ken Usdin, Managing Director of Equity Research at Jefferies]

Great. Thanks a lot, guys.

[Operator]

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

[Paul Donofrio, CFO at Bank of America]

Morning, Chris.

[Chris Kotowski, Managing Director at Oppenheimer]

Good morning. Thank you. I'm trying to kind of disaggregate the strength in net interest income. I just wanted to make sure I have all the moving parts right. The PPP revenues were up $166 million. Amortization was down $200 million. It still kind of implies like a $500 million or roughly 5% kind of linked quarter growth in NII up against, say, 1.5% average loan growth, if I have that right. Is there an explanation for that strength? Is it the securities you put on, or how did it become quite that strong?

[Brian Moynihan, CEO at Bank of America]

You got to add an extra day.

[Chris Kotowski, Managing Director at Oppenheimer]

Extra day? Okay. That's 1% more.

[Brian Moynihan, CEO at Bank of America]

What you're left with, I think, is the loan growth for two quarters now. We took in a lot of deposits quarter over quarter. We put some of those towards the loan growth. We put some of those in cash, and we put some of those in the securities portfolio.

[Chris Kotowski, Managing Director at Oppenheimer]

Okay. If you had to guess, with the size of the securities portfolio that you have now, if you were in a, say, 2017 kind of rate environment, the $1.4 billion in amortization currently, what would that go to, if you can say?

[Brian Moynihan, CEO at Bank of America]

You can look at that by just tracking the CPRs and make your estimates. You know the size of the portfolio in the basis. Just backing up a little bit, this loan growth, in the first quarter, we said we thought we were seeing the stabilization, and there was a lot of people fulminated against that saying, "Wait, how can that be true?" Second quarter, we said in the second half of the quarter especially, we saw growth. All that loans stayed on the books, plus we grew it on top of that. As we said earlier, I think $60 billion excluding the PPP. That's what's going to build into the NII projections going forward because that's 250, 300 basis point spread stuff. Remember, we're funding with zero cost deposits to the tune of $200 billion or $300 billion up year-over-year.

[Brian Moynihan, CEO at Bank of America]

That's what will drive it long term. Short term, it'll be all the things you talked about, but that's going to stabilize at some point and then it's really going to come back down to what we do on the banking side of the balance sheet, make loans, take deposits, and make the spread between them. The best news is the NIM percentage actually started moving up. That shows you that the stabilization leads to that coming true as we grow the loans.

[Chris Kotowski, Managing Director at Oppenheimer]

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

[Brian Moynihan, CEO at Bank of America]

We agree with that. That's all? All right. Thank you all for your attention. Just to close the quarter out, I could just take Chris's comment and say we returned to organic growth trends seen pre-pandemic. We saw solid loan demand, good revenue growth, 12% year-over-year, expense flat year-over-year for great operating leverage of 12%.

[Brian Moynihan, CEO at Bank of America]

Returning to that effort to try to drive that quarter-by-quarter to make the great investments to drive the franchise at the same time having expense discipline. $12 billion of capital went back to you this quarter. We continue to return the excess capital and all the current earnings because frankly, we can grow without retaining capital because of the core way we run the business on a risk basis. We continue to do what we need to do in our communities outside at the same time. Just in closing, I want to thank Paul for his service as CFO. We look forward to Alastair and the team taking over next quarter. Thank you.

[Operator]

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

Participants

Executives

• Brian Moynihan, CEO
• Lee McEntire, VP of Investor Relations
• Paul Donofrio, CFO

Analysts

• Betsy Graseck, Managing Director at Morgan Stanley
• Charles Peabody, Analyst at Portales
• Chris Kotowski, Managing Director at Oppenheimer
• Gerard Cassidy, Managing Director at RBC
• Glenn Schorr, Senior Managing Director at Evercore ISI
• Jim Mitchell, Senior Equity Analyst at Seaport Research
• Ken Usdin, Managing Director of Equity Research at Jefferies
• Matthew O'Connor, Managing Director of U.S. Banks Equity Research at Deutsche Bank
• Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo
• Steven Chubak, Managing Director at Wolfe Research