Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q2 2020
Operator, 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 today's call is being recorded. It is my pleasure now to turn the conference over to Lee McEntire. Please go ahead.
Lee McEntire, Director of Investor Relations
Good morning. Thanks for joining the call to review our second quarter results. I trust everybody has had a chance to review our earnings release documents. They're available on the Investor Relations section of the bankofamerica.com website.
Brian Moynihan, CEO
Thank you, Lee, and thank all of you for joining us for our results. As I reflect on our discussion from last quarter's results, I recall how we sat in the depths of the COVID-19 crisis. We saw a rise in virus cases. We completed a significant transition within our company and across many companies worldwide to work from home. We had to close branches for safety and other facilities. By mid-April, we had already spoken to 1 million customers asking for assistance with paying their loans. We witnessed a significant amount of commercial line draws from mid-March to mid-April, driven by panic and the immediate need for liquidity. At the same time, we observed a flood of deposits looking for safety. However, the core economic projections were still adjusting to the worsening predictions and the realities tied to health officials' assessments about the virus’ trajectory and the actual situation regarding shutdowns and state-at-home orders. Now, a quarter later, while cases continue to rise in some areas, others see a decrease. However, economic projections have been revised, and the outlook has deteriorated since last quarter, extending the recessionary environment deep into 2022. As such, we have set aside substantial reserves for anticipated future credit losses this quarter, which has impacted our earnings negatively. On the brighter side, there have been encouraging trends as consumer spending has vastly improved since April. In 2019, total spending by Bank of America consumers was $3 trillion, making it a considerable sample of U.S. economic activity. For April, consumer spending was down 26% compared to April 2019, but for June it was close to flat versus 2019 levels. So far in July, we are observing total spending actually exceeding what it was last year.
Paul Donofrio, CFO
Thank you, Brian. I'll begin on slide 11 with our balance sheet, which ended the quarter at $2.7 trillion in total assets, representing an increase of $122 billion since the end of Q1, largely driven by a surge in deposits. During Q2, deposits grew by $135 billion, while loans declined by $52 billion as commercial borrowers repaid many of their lines. Excess liquidity has been predominantly invested in cash and cash equivalents. Shareholders' equity increased modestly as earnings exceeded distributions to shareholders. Regarding regulatory ratios for the past two years, our CET1 ratio under the standardized approach has been binding. However, this quarter, the ratio under the advanced approach is lower, making it binding. Our CET1 ratio under the standardized approach improved by 80 basis points compared to the linked quarter to 11.6%, primarily driven by an $86 billion decline in RWA, stemming mainly from commercial loan paydowns as well as lower credit card balances. We also adopted the Standardized Approach for Counterparty Credit Risk, aka SA-CCR for derivatives, and our CET1 ratio under the advanced approach improved to 11.4% as RWA declines modestly. Moreover, we received our preliminary Stress Capital Buffer from the Federal Reserve based on our CCAR results. Our stress depletion was approximately 150 basis points, and including the dividend add-on, our SCB was slightly below 2%. However, SCBs are floored at 2.5%, so our minimum standardized and advanced CET1 requirement remains at 9.5%, with a capital cushion above the minimum of $28 billion at quarter end. The CET1 ratio under the advanced approach became binding primarily due to the impact of RWA resulting from the migration of corporate credit risk ratings under the advanced approach. Our TLAC ratios increased and remained comfortably above our minimum requirements. Moving to slide 12, net interest income on a GAAP non-FTE basis for Q2 was $10.8 billion, which is $11 billion on an FTE basis. Net interest income declined by $1.3 billion relative to both Q1 2020 and Q2 2019. As we noted during our Q1 call and observed this quarter, NII has dropped to about $11 billion as variable rate assets repriced lower following a more than 100 basis points decline in average one-month LIBOR from Q1. Other notable headwinds for NII this quarter included roughly $300 million in higher premium amortization on our asset-backed securities due to the lower rate environment and a drop in higher-yielding credit card balances. While these negative impacts were somewhat offset by deposit growth along with lower deposit pricing, the introduction of PPP loans this quarter marginally aided NII, as did lower global market funding costs. Given the sharp decline in NII, the increase in the balance sheet driven by deposit growth caused net interest yields to drop significantly quarter-over-quarter by 46 basis points. Looking at the bottom-right chart, the main driver of that decline was lower interest rates quarter-over-quarter. Furthermore, the increase in deposits moderately helped NII but diluted the net interest yield as most of the excess funding in Q2 was invested in cash or cash equivalents, yielding only 10 to 15 basis points. We are continuously assessing the uncertainty regarding the duration of these deposits. Additionally, two other factors diluted net interest yield: the higher level of premium amortization and the lower balances of high-yielding credit cards. Regarding forward NII guidance, we believe the largest impact from the interest rate declines occurred in Q2, as expected. As we proceed to Q3, we face headwinds from the paydowns of commercial loans, which could decrease NII by a couple hundred million dollars. As a reminder, NII will likewise be impacted by the long end of the curve as our securities portfolio continues to reprice lower. Moving beyond Q3, NII stability, absent significant changes in economic conditions, will depend on asset growth and/or the redeployment of deposits into higher-yielding securities rather than cash. Beyond NII, as Brian mentioned, the balance and diversity of our revenue streams, together with strong expense management, have supported pre-tax pre-provision income despite the unprecedented decline in interest rates. I also want to remind everyone that short-term rates were near zero in 2014 and 2015 before rates rose, but during those years, we generated solid profits. Today, we are managing higher loan balances by $150 billion and higher deposit balances by $500 billion, which will benefit NII compared to those past periods. Turning to slide 13 and expenses, this quarter our expenses stood at $13.4 billion, mildly lower than Q1 2020. For three years now, despite investments in technology, sales professionals, marketing, philanthropy, new or renovated financial centers, expanded benefits, and increased minimum wage, we have managed expenses effectively, maintaining a range between $13 billion and $13.5 billion per quarter, aside from the impairment charge taken in Q3 2019. This quarter was no exception, even with the additional costs related to COVID-19. In Q2, we estimate that COVID-related spending versus savings netted to an increase in expenses totaling $400 million. We will diligently work to reduce these costs as we navigate through this crisis, all while assuring the safety of our customers and employees. The higher cost from COVID was primarily offset by the lack of elevated payroll tax when comparing total non-interest expense to Q1. I’d like to note that on July 1, we began accounting for merchant services provided directly to our customers versus through a joint venture. Thus, as with Q3, we will record revenue and expense for these operations separately instead of netting them under the equity method of accounting. Consequently, we project that the expenses for this business will add roughly $200 million per quarter to our expense run rate. Additional revenue for merchant services in the short term should be about $100 million a quarter, which should improve as the economy recovers and our operations become more integrated, thereby driving increased value for clients. We are excited to integrate merchant services into our lines of business. Merchant services represent a core product for many of our clients, from small businesses to large multinationals that rely on accepting credit and debit cards for significant portions of their revenue. This service is essential for transactional banking and working capital management. Given that our lines of business enjoy a leading market share among both consumers and businesses, we can innovate, connect, and provide services that add value across the spectrum of payment users through innovations like expedited settlement, enhanced authorization, least-cost routing, liquidity management, credit, FX, data analytics, and many other products. Our new proprietary platform is flexible, resilient, and positions us to grow and facilitate the evolution of the payment ecosystem as the marketplace evolves. Now turning to asset quality on slide 14. Our underwriting standards have remained responsible and strong for many years, and we expect this to benefit us as we progress through this health crisis. One independent indicator of the relative quality of our balance sheet is the Federal Reserve’s annual CCAR stress test. Our net charge-off ratio under this year's stress test was again the lowest of our peers, which has been the case in seven of the last eight years. Total net charge-offs for this quarter were $1.1 billion, or 45 basis points of average loans. Net charge-offs rose $24 million from Q1, with an uptick in commercial losses mostly offset by lower consumer losses. Provision expense was $5.1 billion. Our reserve build of $4 billion reflects a weaker economic outlook since the end of Q1, impacting expected future losses. While we observed increases in commercial reservable criticized exposures due to the virus, overall credit thus far has outperformed expectations as NPLs only rose modestly versus our forecasts. As the economy reopened, we experienced fewer deferral requests, improved payment trends from stressed borrowers, a slower pace of commercial downgrades towards the end of the quarter, and swifter repayment of line draws than we had anticipated. On slide 15, we break out our credit quality metrics for both our consumer and commercial portfolios. On the consumer front, COVID effects on asset quality were mild. This is primarily due to deferrals extended to consumer borrowers, coupled with government stimulus for individuals and small businesses. Consumer net charge-offs decreased by $138 million, partially due to deferral arrangements that provided better recovery chances thanks to stimulus and other assistance. Meanwhile, in the commercial segment, we observed a $162 million increase in net charge-offs, particularly concentrated in commercial real estate and energy. Our commercial loan book, excluding small business, ended the quarter at 88% investment-grade or collateralized. The COVID-19 impact has been clearer in reservable criticized exposures, which surged by $9 billion since Q1, primarily driven by sectors like cruise lines, restaurants, real estate, and retail. Turning to Slide 16, this table provides a comprehensive overview of our allowance build since year-end 2019. Our allowance, including reserves for unfunded commitments, was $10 billion at year-end and has doubled to over $21 billion, while our overall loan balances have remained fairly stable. We ended Q2 with an allowance-to-loans-and-leases ratio of 2%. Notably, the coverage ratio for credit cards increased to 11%, total commercial loans increased to 1.6%, and commercial real estate rose to 3.5%. These ratios reflect our loan mix, with consumer loans concentrated in secured loans supported by high underwriting standards focused on high-FICO borrowers, with whom we have strong relationships. Additionally, it reflects the investment-grade quality of our commercial portfolio, characterized by strong payment and debt service capabilities. Our reserve increase from Q1 reflects an outlook based on the most recent economic consensus estimates, while also considering downside scenarios. A mixture of these new scenarios produced a recessionary outlook indicating a deeper decline and a longer recovery time to regain positive GDP. It’s crucial to note that if we consider the Fed's stress credit losses from the latest CCAR and assume we have set aside all those potential losses now, our CET1 ratio would still stand above 10.25%, comfortably above our minimum of 9.5%. Naturally, uncertainties remain, including how government fiscal and monetary actions will influence outcomes and how our deferral programs will affect losses. Perhaps the greatest uncertainty lies in how long economic activity and conditions will be significantly impacted by the virus. Now, moving to the business segments and starting with Consumer Banking on Slide 17. Despite the monumental financial challenges brought on by COVID-related impacts, including significantly lower rates, fee reductions, higher provisions, and increased expenses, this segment remained profitable in the quarter. As Brian previously discussed, this health crisis has highlighted the value of our high-tech and high-touch strategy. Significant investments and innovations in our digital capabilities have equipped us to support our customers, complementing investments in our financial centers and setting us apart from our peers. The provision expenses reflected higher anticipated future losses resulting from worsened economic conditions. Notably, net charge-offs during the period actually declined. Much of the financial burden associated with expected future losses was incurred during the first half of this year, and due to the widespread deferrals in place, significant charge-offs in this segment are not anticipated until later this year or possibly beyond. Revenue in this segment faced considerable pressure due to the drop in NII, as the segment holds the majority of our deposits. This segment bore the brunt of fee waivers that negatively impacted revenue. Card fees were down due to reduced spending activity along with the fee waivers. Service charges were also down due to fee waivers and fewer overdrafts stemming from increased customer account balances. Despite these challenges, banking is deemed an essential service, and across the country, we managed to maintain operations in 60% of our financial centers. The team navigated immense challenges during the first half of the year to ensure continued service while striking a daily balance between serving our customers’ needs and ensuring the safety of our associates and clients. Our costs reflect this balancing act, having added personnel to support customer calls and managed digital interactions not just for existing products but also for applications related to the Paycheck Protection Program (PPP). Many of these new staff members worked from home. We continue to invest in the franchise, adding new sales professionals alongside associates to handle customer interactions. Financial centers were renovated, and we increased minimum wages, with expenses from these investments partially offset by improvements in processes, digitalization, and technological advancements. Client momentum persisted, with average deposits rising by $104 billion or 15% from Q2 2019. Even more impressive is that 70% of this growth occurred in checking accounts as clients received stimulus payments, postponed tax payments, and gradually ramped up their spending. Average loans increased by 8%, driven by mortgage demand, even in a low-rate environment, although mortgage growth was tempered by declines in credit card and other consumer balances. Furthermore, we are continually adding consumer investment accounts and witnessing strong inflows into our Merrill Edge platform. In Q2, we added 9% more customer investment accounts compared to last year, with over 30% of these added digitally. Assets under management rose by 17%, driven by both inflows and market valuations. Let’s skip slide 18 and move to Wealth Management, as I believe we've addressed most trends already. Referring to Wealth Management and Global Wealth Investment Management on slides 19 and 20, we maintained strong client growth at Merrill Lynch and the private bank, even as our sales teams worked remotely. In Q2, we welcomed nearly 6,000 net new households to Merrill Lynch and around 500 net new relationships in the private bank. Total client balances surged to $2.9 trillion from Q1, mainly driven by an equity markets rebound. Compared to last year, client balances are up 1%, with excellent growth in deposits, AUM inflows, and loans. Net income for this segment totaled $624 million, down 42% due to a 10% decline in revenue alongside higher provision expenses. This revenue decline was attributable to both reduced NII and fees. Non-interest income dropped 7%, driven by lower transactional revenues and fees attributable to market valuations, partially offset by the positive AUM inflows. Expenses remained stable year-over-year, as the previous year’s investments in sales professionals and technology were somewhat counterbalanced by lower revenue-related incentives and net savings related to COVID-19. Provision expenses rose due to reserves established for anticipated future COVID-related net charge-offs, while current net charge-offs remained minimal. Transitioning to Global Banking on slides 21 and 22, we observed strong average loan growth from Q1 line draws, record deposit levels, and record investment banking fees. However, these benefits couldn’t offset the twinned impact of lower rates and rising provision expenses due to COVID. The Global Banking business generated $726 million, down $1.2 billion from Q2 2019, with this figure factoring in an additional $1.5 billion added to the allowance for credit losses this quarter. On a pre-tax pre-provision basis, results improved by 4% year-over-year, driven by record investment banking outcomes. In Q2, we notably improved our investment banking revenues and market share for the second consecutive quarter. Investment banking fees of $2.2 billion represented a 57% year-over-year increase, including highs in both investment-grade issuance and equity capital markets. Average loans rose by 14% from Q2 2019; however, I must note that the significant repayment of Q1 draws grew as the quarter proceeded, posing a headwind to NII in Q3. Additionally, new loan origination spreads have increased both quarter-over-quarter and year-over-year. Likewise, we continued to experience strong growth in deposits, which surged by $131 billion or 36%, even as rates paid have diminished in light of declining LIBOR rates. The rates paid have reverted to levels reminiscent of 2015, just prior to the beginning of rate increases. This growth in investment banking fees, loans, and deposits reflects not only our belief in the quality of our portfolio but also the addition of hundreds of bankers over the years who enhance and improve our client coverage. Turning to digital on slide 23, we've largely addressed key points around loan and deposit activity on slide 22. As seen in consumer and GWIM, our digital capabilities have proven invaluable during this health crisis, enabling clients to work from home and seamlessly manage their treasury needs. Not surprisingly, we continue to witness increased usage of these capabilities. Switching to Global Markets on slide 24, our teams performed remarkably well in an unusual environment, achieving the best quarterly revenue since the first quarter of 2012. The fixed-income market strengthened throughout the quarter, with prices rebounding from Q1, particularly in credit products. As usual, I will discuss results excluding DVA. This quarter, net DVA reported a loss of $261 million. Global Markets generated $2.1 billion in earnings during Q2, nearly doubling the previous year's period and a 42% increase from solid results in Q1. Year-over-year revenues rose 34% due to heightened sales and trading performance along with enhanced investment banking fees, partly offset by the absence of a gain on an equity investment that took place in Q2 2019. Expenses were well managed and remained flat compared to Q2 2019. In terms of sales and trading revenue, it improved by 35% year-over-year, driven by a 50% growth in FICC and a 7% improvement in equities. When compared to Q1, sales and trading revenue also improved, as FICC growth linked quarter overcame a decline in equities coming off a record in Q1. Furthermore, trading comparisons to Q2 2019 for FICC reflected better trading performance across all products, both macro and credit. FICC results were bolstered by improved client flows, credit spread tightening, lower funding costs, and asset prices rallying throughout the quarter, while equity revenue surged due to stronger performance in cash and client financing, albeit partially offset by weaker performance in derivatives. On Slide 25, the half-year comparisons show sales and trading up 28% year-over-year, exhibiting notable stability over the past several years at around $7 billion. Finally, on Slide 26, we reveal All Other, which reported a profit of $216 million. Revenue benefited from a gain of $704 million stemming from the sale of $9 billion in mortgage loans, which significantly improved revenue compared to Q1. This quarter’s effective tax rate was 7%, reflecting the anticipated 11% tax rate for the remainder of 2020, related to the greater impact of tax credits associated with tax-advantaged investments on lower pre-tax income alongside the relevant adjustment to the year-to-date tax rate. With that, we can now open the floor for questions.
Operator, Operator
We'll go first to Glenn Schorr with Evercore. Please go ahead. Your line is open.
Glenn Schorr, Analyst
Hi, thanks very much. I have two quick clarifications. When you mentioned that net interest income will be down a couple of hundred million, are you referring to the current base? Will we stabilize from that point? I noted your comments about assessing the duration and stickiness of the deposits. Could you explain how you evaluate the duration? It sounds promising, but I'm unclear on whether clients can assist you in that evaluation. How do you determine the duration and stickiness of the deposits? Additionally, what would you consider redeploying into if you believe they are somewhat sticky?
Paul Donofrio, CFO
Yes. To clarify, we're discussing a decrease of a couple of hundred million from Q2 to Q3. I won't go over all the factors contributing to that. Looking beyond Q3, the growth of net interest income will depend on asset growth and the redeployment of deposits into higher-yielding assets. We've increased our deposits by $284 billion since the end of the year, but all of that is currently earning only 10 basis points in cash. As we consider the future impact of this pandemic, we will evaluate how much of these deposits will remain while also gaining confidence in the elements that allow for deployment into securities. There's a significant difference in potential earnings between mortgage-backed securities or treasury bonds compared to 10 basis points. There are opportunities, but we need to approach this carefully. It's something you know when you see it.
Glenn Schorr, Analyst
Got it. Maybe a similar question on expenses. The $400 million in COVID-related expense includes a combination of PPP and work-from-home related costs. Does that start to decrease now or will it continue? I want to clarify the base number we're adding the $200 million of merchant servicing expenses on top of. Thanks.
Paul Donofrio, CFO
Yes, sure. As we said, we're sort of estimating that if you take all the increases from COVID-related spending and all the decreases, you had a net $400 million. If you think about all those increases, it's not just PPP-related. There are supplemental pay, childcare, masks, food, and added financial guards in our centers. You've got all the PPP-related expenses and all the tech costs associated with moving virtually all our employees to work-from-home. Some offsets came in the way of travel and other employee expenses in terms of meetings that all kind of nets down this quarter to $400 million. We're going to work on that, but I don't think you can say it's all going to go away in Q3. We will work to manage those expenses as we progress, but we have to ensure we do it in a way that does not jeopardize the safety of our customers and employees, so we think there's some opportunities there.
Glenn Schorr, Analyst
Okay. Last one. The Wealth Management reserve build, I wonder if you could talk about the profile of those loans. How much of that is to things like a building for a Wealth Management loan would require that build?
Paul Donofrio, CFO
I think most of it is mortgages.
Brian Moynihan, CEO
And there are some commercial lending in there, but it's all very high-quality loans made to wealthy individuals, and there were 30% of our mortgage originations this quarter were aimed at wealth management clients. It represents a significant mortgage book, and although we are making estimates on the future performance, whether they happen or not, is a separate question. However, we feel confident about the portfolio, given the strong fundamentals.
Glenn Schorr, Analyst
Okay. Appreciate it.
Brian Moynihan, CEO
We look at exposures like real estate as part of our Wealth Management segment. As we've said, Glenn, for years, there's no hidden sort of real estate exposure within our Wealth Management business. It's managed as such.
Glenn Schorr, Analyst
Understood. Thanks, Brian.
Operator, Operator
Next question is from Mike Mayo with Wells Fargo. Please go ahead.
Mike Mayo, Analyst
Hey, Brian.
Brian Moynihan, CEO
Hi, Mike.
Mike Mayo, Analyst
You mentioned July activity is above last year. Is that right? So, just a little bit more color on the green shoots. It seems like the trends are all in your favor. But I'm just wondering, if that's backward looking. In many of your markets like Florida, or Texas, or California, I mean, that's where you're big and you're seeing an increase in COVID cases. And I guess that leads to death, and that leads to shutdown. So from an on-the-ground perspective, do you expect these green shoots to continue? What advice do you give to the governors in those states? How does it all shake out?
Brian Moynihan, CEO
The first advice we give is to everyone to prioritize safety. The more quickly you can transition to a more favorable environment, as we witnessed in some hotspots previously, the sooner you can see activity levels pick up. To be precise, the data we have through July 14 suggests that levels are up year-over-year. Looking at the first two weeks of July, activity dipped in Texas and similar areas, but remains around 25% higher than during the shutdown phase. So, while we may see some leveling off, we still observe a larger trend of improvement amidst ongoing activity. There's an uptick in home spending where data from retail sales supports that. We also observe drops in credit card transactions, particularly in restaurants and travel, leading to more noticeable ebb and flows. However, based on recent weeks, it appears there's been a mid-single digit percentage decrease in certain regions like Texas and Florida, but the overall trend remains positive at a 25% increase compared to pre-opening weeks. We'll see how it plays out as it can be somewhat unpredictable, but that's the current assessment.
Mike Mayo, Analyst
And then a separate question. I guess you've added more to your reserve, what $8 billion added to your reserves the last two quarters and another $4 billion this quarter is pretty remarkable. And your net charge-off ratio was flat quarter-to-quarter. Talk about a disconnect, however, maybe it's not a disconnect. So I guess it's a tough question. But what would your charge-offs be? What would your NPAs be if you didn't have the forbearance in place? Like, if it were to end tomorrow and you had to recognize the full extent of the problems, just in a sense of order of magnitude, would it be 5% higher? Or 10% higher? 50% higher? What?
Brian Moynihan, CEO
To give you a straightforward answer, if you consider all the factors and just for the second quarter, I believe net charge-offs would have been around $40 million higher if we accounted for all payments under normal conditions. The total amount of charge-offs is around $600 million to $700 million, so it wouldn't have shifted significantly. Interestingly, for the non-deferred customers, delinquency actually decreased by 15 to 20 basis points quarter-over-quarter. So for the non-deferred customers, many of whom have maintained their payments, the impact remains manages. The complexity, however, lies in distinguishing between CECL versus prior methods that revolved around lifetime provisions, and you will see actual losses emerge later than anticipated. We're currently not observing trends consistent with an 11% employment rate, which would typically signal higher distress in customer payment behavior, largely due to stimulus impacts that have sustained many margins.
Mike Mayo, Analyst
All right, thank you.
Paul Donofrio, CFO
Hey, Mike. It's difficult to see the data at this point, but there are some indicators that can be examined across the industry. You mentioned one of them; let's consider losses. We can look at non-performing loan growth and reserve growth. As Brian just mentioned, this isn't a one-off situation; our loss ratios in the Fed stress tests have been the lowest compared to our peers. Although their evaluations are conducted differently, we consistently report the lowest loss rates among most of them. Therefore, there is objective third-party evidence supporting our position.
Mike Mayo, Analyst
All right. Thanks again.
Operator, Operator
Next question is from Jim Mitchell with Seaport Global. Please go ahead.
Jim Mitchell, Analyst
Hey, good morning. Hey, Brian, just a follow-up on your corporate credit comment. If you look at your NPLs, you absolutely had the least amount of increase quarter-over-quarter versus your peers. I appreciate your comments about doing a micro versus macro look at every individual loan. So when we think about that, do you think your performance is primarily due to the micro focus rather than some peers maybe doing a macro assessment? Or is it really just your higher exposure to investment grade and your industry mix? Furthermore, how do you think about the extensive capital raising in the second quarter and the liquidity it provides to corporate borrowers and how do you factor that into your outlook?
Brian Moynihan, CEO
I’m not certain where we should position the responsibility, but it reflects the quality of the portfolio. Our commercial real estate exposure is much lower than in previous crises; for instance, we held approximately $400 million rather than the $14 billion from prior crises in housing construction. We've been proactive with our portfolio management while assessing customer credit quality thoroughly, ensuring we’re not exposed to any undue risk. I think the differences in rates within stress tests stem from how we've cultivated responsible growth alongside maintaining a fortress balance sheet, and thus our performance reflects that foundation.
Jim Mitchell, Analyst
Absolutely. And then maybe on deposit growth, it continues to be surprisingly strong. I appreciate your comment about uncertainty and holding those in cash for now. But when you think about trends throughout the quarter as stimulus money was distributed, did you see deposit growth slowing down or turning negative lately? What could you say about your deposits over the last month?
Brian Moynihan, CEO
The uncertainty essentially lies in large cash inflows from corporate customers, as we’re not sure when they'll start utilizing the funds. We wish for them to deploy that cash to stimulate the economy rather than letting it sit idly on their balance sheets. Hence, that’s the variable impacting deposits. The environment is noticeably different on the consumer side. As of now, linked-quarter growth in consumer checking accounts has increased by $50 billion. We've netted approximately 180,000 new checking accounts year-over-year, up nearly 900,000. Those numbers represent what we’d consider an average quarter's performance. Moreover, the average amounts in these accounts have also increased by 12% or possibly even more. While a portion of these new deposits may be decreasing after the impact of stimulus payments, we believe many remain. The majority of our financial centers have naturally remained open, which is conducive to deposit growth and customer interactions. Overall, our aim continues to be stable deposits diligently worked towards across various market conditions.
Paul Donofrio, CFO
To build on Brian's comments and give a macro perspective, clearly, if the money supply increases, bank deposit levels will also rise. Furthermore, when you look at the treasury’s bank account at the Fed, it's at an unusually high balance. It's likely that some of this capital will eventually flow into the private sector as well. There are a couple of factors worth noting for Q3: tax payments have been postponed and will occur during this quarter. Additionally, we're hopeful that spending will continue to rise so that some excess cash on accounts may be utilized for both consumer and corporate purposes.
Jim Mitchell, Analyst
That's all really helpful. Thanks.
Operator, Operator
Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy Graseck, Analyst
Hi, good morning. A couple of follow-ups there. One on the points that you were making about the deposits. It's interesting that you had all those drawdowns and paybacks, but the deposits didn't leave yet, that's basically what you're referring to, right?
Brian Moynihan, CEO
Yes, Betsy, that's the point. You would expect a decline in deposits if corporates repay, but we have witnessed other cash inflows that have not followed the expected trends. I believe we have secured a greater share than anticipated.
Betsy Graseck, Analyst
So, my two questions. One is on just the forbearance and the waivers. Can you give us an update as to how you're dealing with those? Do they roll off automatically? Are you going person-by-person? How should I be modeling this fee waiver fading? Is it going to come back? Do you kick it back in? And I mean do you stop the fee waivers in Q3, or will it be more of a phase-in through 2021? Just help us understand how you're dealing with that.
Brian Moynihan, CEO
The handling of waivers varies by loan type, especially in mortgages, which may have specific legislative requirements. For most lending, we are adopting a personalized approach, assisting individuals by assessing their situations regarding their income and work conditions. We have noted that the number of requests for waivers has decreased by 98%, hence we're feeling positive about the metrics in our portfolio.
Betsy Graseck, Analyst
And then as we go through this pandemic, obviously, we've got flashpoints building again in certain locations like you were asked earlier on the call, you've got a big footprint of branches in these locations. So, I would think that your programs are open obviously for folks who are coming back into that second wave. Just want to confirm that. And then how are you thinking about the branch footprint just generally? I mean you mentioned earlier about opportunities to improve efficiencies to call back the $400 million net COVID cost increase that you experienced this quarter. But a little bit longer term, given the increase in digital, the fast ramp that we've seen in the most recent couple of months—does that make you think, hey, we can pull back on our branches even more than we had been thinking before? Give us an update there. Thanks.
Brian Moynihan, CEO
Yes, I believe it would be prudent to reassess our branch footprint based on consumer behavior and market needs in the future. We've already reduced branch counts by 30 or 40 locations compared to last year, but the current environment will push us to be adaptive. We're recognizing standard operating protocols that bring customers into our centers are just as important as maintaining our full digital capabilities. Presently, we’re receiving around half a million business visits a day, so branches remain a crucial aspect of our operations. This combination of digital strength and physical presence differentiates us and enhances our customer reach.
Betsy Graseck, Analyst
Thanks.
Operator, Operator
We'll go next to Matt O'Connor with Deutsche Bank. Please go ahead.
Matt O'Connor, Analyst
Can you just talk about the small business PPP in terms of the timing of when you think it will be repaid or forgiven and remind us of the accounting there? And is that included in your net interest income outlook? Thanks.
Paul Donofrio, CFO
I'll begin with the accounting. In this quarter, we have just under $100 million, and it will be slightly more next quarter in net interest income from the Paycheck Protection Program. This is due to a 1% interest rate, and under FAS 91, the fees will be amortized into net interest income over the loan's duration. Regarding the overall program, we processed approximately 335,000 loans in just a few weeks, which was a significant effort to execute successfully. Therefore, I don't expect to see much, if any, profitability from the Paycheck Protection Program.
Matt O'Connor, Analyst
Okay. And does that include the fees that you get if it's accelerated from a forbearance? I think there were some articles out there that you're going to donate any profit. But obviously, there's just the focus on the revenue, and to your point, there is the cost as well so.
Paul Donofrio, CFO
Yes. When forbearance occurs and we begin amortizing those fees into net interest income, any forgiven loans will require us to accelerate the remaining fees that haven't been amortized. This could lead to a spike in a quarter or two if we see a significant amount of forbearance. However, as we've mentioned, we will donate any net profits that come from this program, so I don't expect to see much profit from it.
Matt O'Connor, Analyst
Okay. And then just separately on the criticized commercial loans, it's helpful that you do disclose this. I'm not sure everybody does. So I appreciate that. But how would you think about the loss content on that? Obviously, it's a much bigger bucket than say non-performers and — are loans that you're watching. But how should we kind of think about the risk of loans that are kind of criticized versus say non-performing? Or how much might flow into non-performing?
Brian Moynihan, CEO
Yes. Well, I'd say that depends on the loan. They're largely secured. They're collateralized, which play into the recovery prospects. Remember that the criticized rating is derived from loss probabilities based on sectors and collateral structures. This perspective aligns with our reserving methodology, resulting in a solid reserve build. Therefore, it’s essential to view it as a structured framework rather than something to be isolated from NPLs. Their different stages reflect the dynamic nature of our adequacies against loss projections based on our risk assessments.
Matt O'Connor, Analyst
Okay. Thank you.
Operator, Operator
Next question is from Ken Usdin with Jefferies. Please go ahead.
Ken Usdin, Analyst
Thanks. Good morning. I had a couple of questions on the JV dissolution. So I'm just wondering, Paul, relative to your $100 million fees; first of all, where is that revenue going to materialize? And second of all, can you help us put that in perspective of what it was maybe at its peak? You’ve mentioned that it could improve as the economy picks up, what's the best metric we can watch in your disclosures to track that progression?
Paul Donofrio, CFO
A portion of that revenue will be recorded in consumer, and part of it will be reflected in Global Banking. I’ll have to think about how we can better help you see it, as it has never been a significantly large number in terms of net profits through the JV. We expect that now we’re integrating the services directly, we can leverage our customer relationships and fully mobilize our sales force, leading to growth. In the near-term, we anticipate revenues will approximate $100 million, but we would expect to see that grow as our investments start to yield results. I don't have a specific measurement to provide at this time, but I can contemplate this to see if we can include it in the supplementary materials.
Ken Usdin, Analyst
Okay. And just in terms of fees, other categories, we saw a decline in asset management fees. Was that impacted by the averaging effect? And should that improve given the period-end market levels we saw?
Paul Donofrio, CFO
Yes, you have to remember that AUM fees are on a one-month lag, so you're capturing what happened at the end of the first quarter.
Ken Usdin, Analyst
Yes. And lastly, just any comments on the Investment Banking pipeline given the relative strength we saw in the second quarter?
Paul Donofrio, CFO
Sure. Investment Banking had a fantastic, strong quarter with significant market share gains, which we've been seeing rise across several quarters. Our market share is currently above 8%, which is quite positive. Additionally, we've made inroads into middle-market investment banking, where we’re capturing above 9% market share there. We have seen a lot of activity as we help clients raise the capital they need. However, I’m afraid we’re witnessing a slight slowdown in activity over the first few weeks of the new quarter, so I don't anticipate Q3 to be as robust as Q2 has been, but we still are very, very positive about the progress we are making with our clients and our market share.
Operator, Operator
We'll go next to Saul Martinez. Please go ahead. Your line is open.
Saul Martinez, Analyst
Hi, good morning, everyone. I wanted to clarify something regarding NII. You mentioned that NII is expected to decline by a couple of hundred million quarter-over-quarter due to commercial paydowns, and that long-end rates will also have an impact on NII. Can you give us an idea of how much additional pressure on NII we might see in the third quarter from long-end rates? I assume the redeployment of cash into securities has had a positive effect, but that may take longer to materialize. Paul, we've discussed reinvestment risk in the past and assessed the impact of long-end rates on securities cash flow. Could you help us understand the potential effects for the third quarter and how we might think about this moving forward?
Paul Donofrio, CFO
Yes, look I will say in terms of our $200 million of current perspective downward guidance between Q2 and Q3 is already including all these variables, right?
Saul Martinez, Analyst
Yeah.
Paul Donofrio, CFO
You've got loans possibly declining, LIBOR coming down, securities portfolios adjusting—it's all in there. The securities portfolio matures about $20 billion to $25 billion each quarter and the reinvestment yields are considerably lower than they were prior. This dilution will happen gradually, but we can offset some of that if we reallocate deposits currently held in cash to invest in higher-yielding assets.
Saul Martinez, Analyst
Okay, I might have misunderstood your point. I thought you meant that the $200 million is not just from the impact of commercial paydowns, but originates from various factors. I wanted to follow up on Matt's question regarding PPP to gain a clearer understanding of the potential impact. You have $25 billion in PPP loans, and it's reasonable to assume that a significant portion will be forgiven. Given the fee rates associated with those loans, we're discussing substantial figures in relation to your net interest income, likely exceeding $1 billion. My initial question is, why should we anticipate a notable increase in net interest income in the fourth quarter and first quarter as those loans begin to be forgiven? Additionally, regarding expenses, I'm trying to clarify what you mean by not making a lot of money on that. Does it mean that the costs are already accounted for in your expense base and you’ve had to increase expenses? Or will you be donating some of the accounting revenues as a competitor has done? I'm looking to understand the timing, scale, and location of the impact, as they don't appear minimal to me.
Brian Moynihan, CEO
We did communicate back in April that we would donate any net profits from this activity. The costs associated with this undertaking were substantial, considering the number of personnel working on processing applications and forgiveness. To date, we have 3,000 staff members dedicated to managing the forgiveness process, and we've also engaged third parties to supplement those efforts for the review. As for the impact on revenue, while you’re correct in noting the potential to generate significant NII through forgiven loans, the reality is the corresponding costs to manage that process will outweigh any immediate net profits we might generate.
Saul Martinez, Analyst
Yeah. Okay. All right. Thanks, guys. I appreciate it.
Operator, Operator
The next question is from Vivek Juneja with JPMorgan. Please go ahead.
Vivek Juneja, Analyst
Hey, Brian, hey, Paul, I wanted to clarify something. Regarding the consumer loans that had been deferred, I assume that starting in late June or early July, you began to see some of those loans pass the deferral period. What are you observing with those whose deferrals are now complete? What percentage are requesting new deferrals versus those that are fully paid off? And for those that are paid off, what trends are you noticing?
Brian Moynihan, CEO
We're currently seeing a decline in requests for deferrals as we are now entering a range where a good proportion of the original deferrals held are set to conclude. Regarding credit cards, a sizable number have been shifted off deferral, yielding a good chance of positive outcomes as the current underwriting stands at approximately 85% of our customer base in credit card lending. This positive outcome is based on observed behavior of those borrowers thus far, and we’re maintaining reserves to cover potential credit issues that could flare up as the deferrals play out.
Vivek Juneja, Analyst
Okay. Thanks.
Operator, Operator
Our next question is from Brian Kleinhanzl with KBW. Please go ahead.
Brian Kleinhanzl, Analyst
Yeah. Thanks. Just two quick questions. I mean, first on the expenses. Just how are we should be thinking about the expense trajectory as we look out to the third quarter, fourth quarter? I get the extra $200 million from merchant services, but then how much of these COVID-type expenses are expected to roll off into the third quarter, and then that still, if we get the typical seasonality as well in the back half of the year?
Brian Moynihan, CEO
Yes. So all of those elements should be factored in; Paul briefly laid this out earlier. However, we want to reiterate that last year, we disclosed that unwinding the joint venture and our transition to a direct approach on those costs would yield changes in the expense landscape for this year, which is where the $200 million notice comes in. Without that, we remain committed to closely monitoring our expenses and will manage them down over time. Generally speaking, expense management will be a standard undertaking, but we absolutely want to ensure no one forgets what we disclosed last year.
Brian Kleinhanzl, Analyst
Okay. And then a separate one just simple is the tax rate guide that you gave in the second half, does that roll forward into 2021? Thanks.
Paul Donofrio, CFO
I don't think we have a good answer for the 2021 tax rate yet. I’ll follow up on that if you need further detail.
Brian Kleinhanzl, Analyst
Yeah. Okay.
Operator, Operator
And we'll take our final question today from Charles Peabody with Portales. Please go ahead.
Charles Peabody, Analyst
Yeah. I wanted to get some more color on your consumer and community bank and particularly the profitability of the various product lines like cards, mortgages, autos, and branching. I ask that because on a relative basis your consumer and community bank has done much better than the other big three: Wells, JPMorgan, and Citi. I know a big part of it is probably cards where the other businesses are losing money. The other companies are losing money in cards. So, can you talk a little bit about the profitability of your different product lines and the relative value that they produced for you guys versus other major banks?
Brian Moynihan, CEO
I would challenge the premise that profitability across our consumer bank is driven simply by the deposit business. The context of the lending aspects, combined with the rate environment, which has been compressing margins across the board, has made the lending side more challenging, yes. However, the profits in our consumer business received support from our deposit business, even as rates declined. Our previous year's earnings levels have shown strong profitability metrics, largely resilient to economic pressures. But this year has forced us to adapt to changing conditions across all segments, including consumer lending.
Paul Donofrio, CFO
I would add that our starting point to profitability prior to this quarter has been unsurpassed compared to many of our competitors, especially given the strength of our deposit franchise coupled with cautious management in the face of unsecured consumer credit. While decline in profitability from intensified competition feels pressing, the fundamentals of our consumer business remain solid.
Brian Moynihan, CEO
Just to clarify, we’re not viewing it strictly as a lending business. We see every product holistically within the overall consumer interaction with the bank, focusing on deposits. Having established strong positions with customer accounts enables us to pivot through times of rate decline while maintaining a focus on operational efficiency across branches and reducing overall costs. The strategy here aligns to better serve our customers and maintain profitability even in fluctuating markets.
Charles Peabody, Analyst
All right. Thank you.
Operator, Operator
It appears we have no further questions. I'll return the floor to Brian for closing remarks.
Brian Moynihan, CEO
Thank you, and thank you for spending your time with us this morning. It's another quarter where we've driven responsible growth. We continue to manage this company diligently in the face of our current environment, while fostering progress across core ventures. This quarter, we are particularly pleased with the performance from our Global Markets and Investment Banking divisions, which significantly contributed to our earnings capacity even amid the challenging economic backdrop reflected in our results. Thank you, and we'll talk to you again next time.
Operator, Operator
This will conclude today's program. Thanks for your participation. You may now disconnect.