Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q2 2024
Operator, Operator
Good day, everyone, and welcome to the 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. It is now my pleasure to turn the conference over to Lee McEntire of Bank of America.
Lee McEntire, Executive Vice President
Good morning. Welcome. Thank you for joining the call to review our second-quarter results. Our earnings release documents are available on the Investor Relations section of bankofamerica.com. They include the earnings presentation we will reference during the call. I hope everyone has had a chance to review those documents. Our CEO, Brian Moynihan, will make some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Let me just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials available on our website. So with that, let me turn the call over to Brian. Thank you.
Brian Moynihan, CEO
Thank you, Lee, and good morning, and thank all of you for joining us today. Before I begin today, I just want to reflect for a moment on the horrible events this weekend. We at Bank of America are clear that there's no place for political violence in our great country, and we continue to wish the former President Trump a speedy recovery. Our thoughts, of course, go out to the victims, their families, and others impacted by this terrible event. With that, let's turn our attention to the results for the second quarter of 2024 at Bank of America Corporation. This quarter, we achieved success in a number of areas, underscoring the benefits of our diversity and the dedication of our team to deliver responsible growth. Our organic growth engine continues to add customers and activity to all our businesses, even as we see a drop in net interest income this quarter. Starting on slide two, our net income for the quarter was $6.9 billion after tax or $0.83 in diluted EPS. Attesting to the balance in our franchise, the earnings were split evenly, half in our consumer and GWIM businesses, which serve people, and the other half in our institutional-focused business global banking and markets. We grew revenue from the second quarter of 2023 as improvement in non-interest income overcame the decline in net interest income. Fees grew 6% year-over-year and represented 46% of total revenue in the quarter. Our strong fee performance was led by a 14% improvement in asset management fees in our wealth management businesses. We grew investment banking fees 29% year-over-year and saw sales and trading revenue increase 7%. Global Markets had its ninth consecutive quarter of year-over-year growth in sales and trading revenue; a good job by Jimmy DeMare and his team. Card and service charge revenue also grew by 6% year-over-year in our Consumer business. Much of this fee growth is a result of our intensity around organic growth, and is a testament to the diversity of our operating model. Now on to slide three. Organic growth has been driven by several key factors. First, we focus on our customers. We continue to place them at the center of everything we do. Consumer led the way in delivering solid organic growth with high-quality accounts and engaged clients. For the 22nd consecutive quarter, we had significant net new consumer checking accounts. We expanded our customer base and our market share. Specifically, we added 278,000 net new checking accounts this quarter, which brings our first six months of 2024 to more than 500,000. In wealth management, we added another 6,100 new relationships this quarter. In our commercial businesses, we added thousands of small businesses and hundreds of commercial banking relationships. This has led to now managing $5.7 trillion in client balances, loans, deposits, and investments across the consumer and wealth management client segments. In those areas, we saw flows of $58 billion in the past four quarters. Our emphasis on personalized financial solutions and superior customer service has strengthened customer loyalty, attracting new clients across all our businesses. Our focus on providing liquidity and risk management solutions to our institutional clients positions us to continue to gain more share of the wallet as well. Second, we continue to deliver innovative digital solutions. One of the primary contributors to attracting and retaining customers to our platforms is our digital banking capabilities for our clients across all businesses. Our fully integrated consumer banking investment app drives utility for our customers across their investment and consumer accounts. Our usage stats are strong proof points. Our consumer mobile banking app now serves more than 47 million active users. They logged in 3.5 billion times this quarter. We also continue to see more sales through the use of our digital properties. Digital sales represented 53% of our total sales in the past quarter in our consumer businesses. 23 million consumers are now using Zelle, sending money on Zelle at nearly 2.5 times the rate they write checks. In fact, more Zelle send transactions occur than a combination of customer ATM transactions, cash withdrawals, and tellers. Simply put, Zelle has become a dominant way to move money. In our wealth management business, we are seeing more banking accounts being opened to complement the investment business those clients conduct with us. Importantly, these clients are recognizing the ease of our digital banking capability. 75% of our new accounts and our Merrill teammates were opened digitally. 87% of our global banking clients are also digitally active. We have innovated and significantly streamlined service requests by enabling clients to directly initiate and track transaction inquiries within our awarded CashPro platform, using AI to accomplish that. Third, we continue to make core strategic investments in our businesses. We're not complacent with the success you see on this page. We continue to strategically invest in our core businesses. A few examples: while we have the leading retail deposit share in America, we continue to invest and have opened 11 new financial centers this quarter in this first half of the year and renovated another 243. This is an investment in both our expansion markets and our growth markets. In wealth management, we continue to invest in our advisor development program. It's grown to 2,300 teammates, allowing us to continuously add more than teammates to our 18,000 strong best-in-class financial advisory force across all our wealth management businesses. We're also adding teams of experienced advisors strategically in areas across the country. In our banking teams, we continue to add to our regional investment banking team. We now have more than 200 regional bankers across the country to better serve our commercial clients, and they complement our industry coverage for corporate clients. In our global markets business, we continue to extend balance sheet to our clients while adding expertise and talent to continue to lead our market share improvements seen over the last several years. We also have increased our technology initiatives and expect to spend nearly $4 billion on technology initiatives this year. We have focused projects around artificial intelligence enhancements with both clients and our teammates. A recent example of our use of AI is our advisor and client insights tool. We've delivered more than 6 million insights here today to our financial advisors, providing them proactive reasons to engage our clients. AI has moved from cost-saving ideas to enhancing the quality of our customer interactions. Fourth, organic growth is driving integrated flows across our business. We invest heavily in each line of business that compete in the markets based on their particular customer segment. But importantly, we also invest across our lines of business to knit them together and gain market share in local markets. It's a differentiated advantage for us; our banking leadership position across our businesses and our nationwide franchise. For example, we leverage our franchise by connecting business customers with wealth management teams. Our teams across all our businesses have made 4 million referrals to other businesses in the first six months of this year. Next, we drive efficiency and effectiveness through our operational excellence platform. We continue to invest heavily in the future of our franchise and growth, while we also have to manage expenses day-to-day. Our focus on operational excellence has enabled us to hold our expense growth to 2% year-over-year, well below inflation rates. We continue to work to achieve operating leverage as NII stabilizes and begins to grow again. As you look at it now, Alistair will explain later, a fair portion of the year-over-year increase in expense is due to the formulaic incentives of wealth management due to the peak growth of that business. And last, our capital strength allows us to deliver for all our stakeholders. Our capital remains strong as we held our CET1 ratio at 11.9% this quarter. We grew loans, increased our share repurchases to $3.5 billion, and paid $1.9 billion in dividends. Average diluted shares dropped below 8 billion shares outstanding. In addition, we also announced our intent to increase our quarterly dividend by 8% upon board approval. Note that with an 11.9% CET1 ratio, we remain in a solid excess capital position, both above the current regulatory requirements and the increased requirement to 10.7% beginning in October as a result of the recent CCAR exam.
Alastair Borthwick, CFO
Thank you, Brian, and I'm going to start on slide six of the earnings presentation. I'll touch on more highlights noted on slide six as we work through the material. I just want to say upfront that we delivered strong returns, with a return on average assets of 85 basis points and a return on tangible common equity of nearly 14%. So let's move to the balance sheet on slide seven, where you can see we ended the quarter at $3.26 trillion of total assets, relatively unchanged from the first quarter. There's not much to note here apart from a mixed shift of lower securities balances, mostly offset by an increase in reverse repo and modest loan growth, as well as global markets client activity. On the funding side, deposits declined $36 billion on an ending basis, reflecting typical seasonal customer payments of income taxes. As Brian noted, average deposits were still modestly higher. Liquidity remained strong with $909 billion of global liquidity sources that were flat compared to the first quarter. Shareholders' equity was also flat compared to Q1, as earnings were offset by $5.4 billion in capital distributed to shareholders and a $1.9 billion redemption of preferred stock in the quarter. The $5.4 billion of capital contributions included $1.9 billion in common dividends and the repurchase of $3.5 billion in shares. AOCI improved modestly in the quarter, and tangible book value per share of $25.37 rose 9% from the second quarter of last year. In terms of regulatory capital, our CET1 level improved to $198 billion, and the CET1 ratio was stable at 11.9%. This 11.9% ratio remained well above our current 10% requirement, as well as our new 10.7% requirement as of October 1, 2024, Risk-weighted assets increased modestly, driven by lending activity. Our supplemental leverage ratio was 6% versus our minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth. Our $468 billion of TLAC means our total loss-absorbing capital ratio remains comfortably above our requirements. Brian already covered deposit trends, so let's turn the balance sheet focus to loans, and we'll look at average balances on slide eight. You can see average loans in Q2 of $1.051 trillion. They improved 1% year-over-year, driven by 5% credit card growth and modest commercial growth. The modest improvement in overall commercial loans included a 2% increase in our domestic commercial loans and leases, partially offset by a 4% decline in commercial real estate. Middle market lending saw an uptick in the quarter, and we saw good demand in our wealth businesses from custom lending. These areas of growth were largely offset by continued paydowns from our larger corporate clients on interest rate sentiment. Consumer growth was driven by credit card borrowing, and while home lending balances were flattish, originations picked up a bit this quarter. Lastly, and on a positive note, loan spreads continued to widen. As we turn our focus then to NII performance on slide nine, note that we moved the slide we typically use to talk about excess deposits to the appendix on slide 22, so you can see that there. Our excess deposit levels above loans remained high at $850 billion and continue to be a good source of value for shareholders. 52% of our excess liquidity is now in short-dated cash and available-for-sale securities. The longer-dated, lower-yielding hold-to-maturity book continues to roll off, and we reinvested again this quarter in higher-yielding assets. The blended yield of cash and securities continued to improve in the quarter and is now 160 basis points above our deposit rate paid.
Operator, Operator
To all locations on hold. Please remain on line, we are experiencing a technical difficulty. You will hear music for just a moment.
Alastair Borthwick, CFO
Regarding NII, we expect that three interest rate cuts will materialize, starting in September, another in November, and one more in December. The waterfall shows an estimated impact of those rate cuts to our quarterly NII. The next couple of categories are a result of natural management of interest rate risk in a balance sheet mixed with fixed-rate assets and variable-rate assets. Our balance sheet is split roughly half and half. So, we take in liquidity from customers that we use to fund our assets, and then we store excess liquidity in cash and securities.
Lee McEntire, Executive Vice President
All right, Alistair, Brian. I received some feedback that the audio from the call may have been interrupted for a moment. At the point where it was interrupted, I want to emphasize a couple of points that Alistair was making. Referring to slide nine, where we lost audio, we started discussing the performance from Q1 to Q2 of net interest income. This was influenced by increased funding costs and the shift of deposits looking for higher yield alternatives. In Q2, while the rates were still high, the rotation and the rate increases began to slow down. On slide 10, I would reiterate the key points that Alistair began to discuss, confirming our expectation that Q2 will be the lowest point for NII in the current rate cycle. Our outlook remains unchanged, with the belief that NII will start to increase in Q3 compared to Q2 and then continue to rise in Q4. We have provided a range of expectations that Alistair mentioned, and we anticipate Q4 NII to be around the $14.5 billion mark, plus or minus, which would represent approximately a 4% to 5% increase from this quarter's NII.
Glenn Schorr, Analyst
Hi, thanks very much.
Brian Moynihan, CEO
Good morning, Glenn.
Glenn Schorr, Analyst
Thanks very much. I definitely appreciate slide 10 a lot. I know you would have given us the 2025 NII guide if you wanted to give us one, so feel free to give that if you want, but that's not my question. My question is, given all the pieces of the puzzle that you gave us expectations for modest loan and deposit growth and slowing deposit-seeking behavior, if you get that 4% pickup from 2Q to 4Q this year that you're expecting, right now, or at least recently, consensus had NII looking flattish with that fourth-quarter number, and that doesn't make a lot of sense given all the pieces. So maybe if you can just comment directionally if you don't want to give the number of, does it make sense to you that we'd collectively be expecting flat NII with your higher fourth-quarter number?
Alastair Borthwick, CFO
So, Glenn, you're right. We're probably not going to give guidance around 2025 for all the reasons that you would expect. What we're trying to do here is reinforce for everyone what we've been saying from the beginning of the year, and that is we think Q2 is the trough, and we believe from this point we're in a good position to grow. Now, when you look at some of the elements of this bridge, you'll draw your own conclusions with respect to fixed-rate asset pricing is going to persist for some period of time, and you'll be able to draw your own conclusions, but I just want to point out we've been pretty clear on our guidance for Q1 and Q2. We've always felt like this would be the trough. We feel like Q3 and Q4 are likely to be better. You can see our work here. We've laid it all out. Nothing's really changed in terms of that. The most important thing I think for everybody here is we feel like 2024 is a really foundational year. It's this twist period where we just got to get through the last of the deposit rotation, and we're establishing a foundation for growth from here, so that's what we're trying to convey.
Glenn Schorr, Analyst
Maybe I could just ask a follow-up on deposits within the wealth business. You have $4 trillion of client assets. I'm curious if you break out the split between brokerage and advisory accounts. Do you hear me okay? I'm hearing tons of feedback. Sorry, okay so $4 trillion in client asset in wealth. I'm curious if you can give us the split between brokerage and advisory. And the reason I'm asking is, I'm curious how you've been handling rate paid on cash and advisory accounts and whether we should expect any behavioral changes following the recent wealth news. Thanks a lot. Sorry for the feedback.
Alastair Borthwick, CFO
I'm not sure that distinction is the one I would focus on. We've experienced a significant change in cash entering and exiting the economy due to monetary policy. As we stabilize, our guidance to our team is to increase our deposit base a bit quicker than the overall economy, which requires strategic pricing across the board. If you look at the slides I shared, you'll notice that the wealth management segment takes a bit longer to adjust because those clients hold more investment cash with us. It's not just about the funds in their investment accounts; it's how they manage their cash needs, which aren't for daily expenses, and they tend to move that around. That trend has mostly stabilized. Over the past four to six weeks, we've seen deposits in that segment hover around the $280 billion mark, showing limited fluctuation. These deposits will continue to vary based on customers paying their income taxes, taking on more market risks, and other factors. The adjustments we made to deposit pricing to create a growth-friendly platform were implemented during the quarter and reflected across the profit and loss statement.
Jim Mitchell, Analyst
Hey, good morning. Maybe just a quick follow-up, and I don't need to beat a dead horse on NII, but can you just help us think through the puts and takes on, you have rate cuts at the end of the year. Forward curve implies more next year. As that cumulative impact starts to hit next year. I guess, what gives you confidence that this is sort of a trough? What are all the puts and takes that we should think about in how we model the NII for next year when we think about the forward curve and that impact?
Alastair Borthwick, CFO
Jim, I think this bridge probably has all the right inputs for any given year. I mean, we've chosen to do it for 2024. We've always resisted going out too far for the very simple reason that there are so many variables and they start to multiply with one another. If you think about even the rate cut one here, we're using the three cuts, September, November, December. If I did this as of Wednesday of last week, there would have been two. Earlier in the year, there were six. So, since we don't know what that path looks like, it's very challenging to provide guidance for '25 at this stage. What we're laying out here is, these are the component parts. We're going to get some benefit from fixed-rate asset pricing over time. We're going to get some benefit in the immediate term from the BSBY cessation and that leading back into the P&L. As that rolls off, we'll get benefit from cash flow hedges repricing. And then we use the forward curve same as you do for the rate cuts. We benefit a little bit from global markets liability sensitivity. And then that final piece is the piece that we're trying to drive in terms of organic growth. We're trying to drive this loan growth, we're trying to drive the deposit growth. And as Brian pointed out, it's been a pretty unusual period in history where we've had an enormous change in the rate structure and in the fiscal stimulus and the effects now fading away to something more normal. But that last box will come down to your assumptions versus our assumptions. And we will update you as we go through the next couple quarters, and we'll give you a better sense toward the end of the year.
Jim Mitchell, Analyst
Okay, that's all fair. And maybe just on the growth piece, maybe deposits seem to have bottomed for you guys in the second quarter of last year. You've had good growth, I think Brian pointed out, even with the tax headwind this quarter. So, good performance, but still pretty modest. How are you thinking about the growth trajectory from here, I guess, as we think about, does it accelerate with rate cuts in your view? What are the dynamics you're thinking about returning to the historical kind of mid-single-digit deposit growth within BofA and the industry?
Alastair Borthwick, CFO
Well, I think Brian covered slide four; that top left chart gives a sense of what's going on with the growth; that's average growth over time there. We've had four quarters in a row, so we feel good about that part. Q2 does tend to be a slower quarter just with all the tax payments. So we think deposits will do better over time, particularly as we get past peak Fed funds. We feel like the pricing and rotation, you can sort of see it in our numbers, they're slowing. So, we're getting towards the end there. We're getting towards the end of QT. So we're not quite finished on all of those things yet. I'd be careful about getting too excited about deposit growth, but we feel like we're doing okay so far; we just got to keep driving that.
Mike Mayo, Analyst
Hi, I'll start with a simple question. You mentioned loan spreads have improved. Why is that? Where is that? Do you expect that to continue?
Alastair Borthwick, CFO
Loan spreads have improved for us, Mike, over the course of the past I think it’s now eight or nine quarters. It's primarily in the commercial businesses. It's largely because we have to price the balance sheet for the returns that our shareholders expect. It’s true for the industry, and we've been quite purposeful in that regard. We've tried to balance price spread and growth over the course of time, but it's primarily a commercial phenomenon at this point. I would expect that to continue for the foreseeable future, but it’s a competitive environment, we’ve got to see.
Mike Mayo, Analyst
Okay. You gave us slide 10, a lot of details there. You talked about September rate cuts, the fixed asset repricing, securities repricing, loans repricing, mortgage and auto, swaps maturing, November, we see fixed cash swaps, and a whole litany of stuff. But I think when you put it all together, what it's led to is a net interest margin of only 1.93%. In fact, I think your yield on your assets is below Fed funds right now. So would you agree that you're under-earning with that NIM of 1.93%? And I know I've asked this question before, but you always have to mark-to-market. What is a normal NIM? I mean, you were 2.5% in 2017, you were 3% in 2004. And I know the composition has changed and everything, but what's a normal NIM? And what do you think is a normal return on tangible common equity through the cycle? Thanks.
Alastair Borthwick, CFO
I'd say right now, in terms of the 1.93%, we feel like we are under-earning. We feel like that number is going to go up over time. It'll go up as net interest income goes up. But additionally, I think the balance sheet is likely to stay kind of flattish here. So the numerator is going to grow, the denominator is going to stay pretty tight here. So we think we're under-earning there. We think through a cycle, we've got to get back to a more normal number like 2.30-ish over time. That takes a while; it's a grind, Mike, quarter-after-quarter, so that's where we're headed. In terms of return on allocated capital, right now, we're right around that 14%. We want to be at 15% or higher for our shareholders. A lot of it is because we've accrued an awful lot of capital over the course of time in advance of any potential capital changes. And the other final thing I'll just remind you is we're a little different than some of the regional banks in that we've got an enormous global markets business. And that obviously makes an impact on the headline NIM number.
Mike Mayo, Analyst
Okay. And then just, I wasn't clear, you said net charge off in the second half should be less than the first half. And I wasn't sure if that related to cards or what you meant by charge off.
Brian Moynihan, CEO
Mike, that was me. Basically, what I'm saying is that you've reached a stable point with delinquencies, which indicates that the second half is largely predictable, as it's just a progression from 30 to 90 to 180 days. The charge-off rate will remain relatively flat. We're returning to a normal rate of around 3.80%. We typically underwrite with the expectation of a higher charge-off rate, to be honest, but we anticipate the rate will settle around 3.80%.
Mike Mayo, Analyst
Okay, so credit card charge off should flatten or decline in the second half relative to the first half?
Brian Moynihan, CEO
Exactly. Remember, when considering all the charge-offs, that's the main factor on the consumer side by a significant margin. Regarding the commercial side, we addressed the situation with CRE office, which has seen a decline from quarter to quarter. We expect improvements in the second half as well.
Steven Chubak, Analyst
Hi, good morning.
Alastair Borthwick, CFO
Good morning, Steve.
Steven Chubak, Analyst
Good morning, everyone. I wanted to follow up on some of the earlier questions regarding net interest margin. A lot of the focus has been on the repricing of both loans and securities. I would like to hear your thoughts on the possibility of optimizing some of your higher-cost funding. Considering the various avenues for improving net interest margin and looking beyond 2024, how should we anticipate the pace of net interest margin growth? I understand it may take longer to reach the range of 2.30 to 2.40, but how can we set expectations for the trajectory of net interest margin beyond 2024?
Alastair Borthwick, CFO
Your first point is whether we can reduce some of the higher-cost securities. The answer is yes, and we expect to do so. We have some shorter-term CDs that can mature, and we can either renew them or not. We also have shorter-term debt. We have reduced our long-term debt as we strengthen the company. There are various ways to manage this; it doesn’t solely rely on securities reinvestment but also includes paying down higher-cost liabilities. We have multiple options for utilizing the reinvestment strategy around fixed rates. The second question pertains to the time frame in which we expect to see growth.
Steven Chubak, Analyst
It's really about the NIM trajectory beyond '24.
Alastair Borthwick, CFO
Yes. So, look, we're obviously on it right now. We feel like this is the trough. We're trying to build it from here. We'll make meaningful strides on that through 2025. That's where we're going.
Betsy Graseck, Analyst
Hi. Good morning.
Alastair Borthwick, CFO
Good morning, Betsy.
Brian Moynihan, CEO
Good morning, Betsy.
Betsy Graseck, Analyst
So, is it correct that as we move into the second half of 2025, there will be additional benefits from swap roll-offs?
Alastair Borthwick, CFO
Yes, that's correct. In the second half of 2025, we'll be able to provide a clearer picture of what to expect as we approach that time. However, it's still a year away.
Betsy Graseck, Analyst
Yes, for sure. I'm just wondering if you could explain how the swap book is affecting slide 10. Is the impact gradual into the second half of '25 or does it switch on in Q3? I’d like to understand how the swap book is influencing this situation.
Alastair Borthwick, CFO
Yes, the part that's important for slide 10 around the second half of this year is just the BSBY piece. It's not from cash flow swaps. Any cash flow swaps we have that roll off in the course of the next 12 months really, they're all kind of current coupon-ish, because anything that we did there was to do with LIBOR cessation or whatever. And so, they all got re-coupons. So I wouldn't worry about that. In the second half and onward, some of the older, longer-dated things, they've got the lower coupons. So that's when you know the BSBY number over time will disappear, but in the second half of '25, the cash flow number will begin to appear. And then I think probably Lee can give you more of the details following.
Erika Najarian, Analyst
Hi, good morning. Just my first question is trying to square, what you're telling us on the net interest income trajectory in the setup versus your disclosure. So, Alistair, you told us about, as a response to Glenn's question, the benefit from fixed asset repricing, cash flow hedges repricing in the second half of '25. And when I look at table 40 from your queue, in both a parallel shift and a steepener scenario, down 100 is negative to net interest income? Is it because this is a 12-month look and like you pointed out, in the second half of '25, you have underwater cash flow hedges that are rolling off? In other words, as we go through 2025, do you get less asset-sensitive? And additionally, what is the notional on those cash flow hedges that you're talking about?
Alastair Borthwick, CFO
Yes. So the asset sensitivity that we disclose is meant to give a sense for what happens if nothing changes; it's totally static. So, that's one difference. Number two, it's off of the future curve. So, it's a 100 above whatever or below whatever the future curve is. So, I think it's a really helpful thing for short-term moves and rates. Like take, for example, that orange box on page 10, it's helpful for something like that, but it's less helpful in terms of a predictor of where 2025 NII would be, because there are so many other inputs, Erika, over time.
Erika Najarian, Analyst
And just what's the notional of the cash flow hedges that you're referring to?
Alastair Borthwick, CFO
Over time, let's say about $150 billion, approximately $150 million.
Erika Najarian, Analyst
And how much of that starts rolling off in the second half of 2025?
Alastair Borthwick, CFO
I think you can view it as roughly $10 billion each quarter. The amounts rolling off in the next year will have minimal impact as they are all current coupons. The benefits will start to show in the second half of 2025 when the ratings are slightly lower. Lee will likely provide more detailed information on this.
Ken Usdin, Analyst
Hey, thanks. Good morning. Alastair, I wanted to ask for more information about the securities portfolio, particularly regarding the $180 billion of pay-fixed swaps on the AFS book. While we are aware of the HTM maturity schedule, I'm curious about the AFS book. How many of those pay-fixed swaps are currently in the money, and what is your perspective on that aspect of the portfolio?
Alastair Borthwick, CFO
Yes. Just remember that those are received fixed. When we include the AFS in our portfolio, it represents a group of securities, typically treasuries. We convert them to floating rates, so they appear as cash for our purposes, and we don't need to be concerned about regulatory capital impacts. To us, they simply look like cash equivalents. That's our perspective on it, Ken.
Ken Usdin, Analyst
Okay. And then just how do you manage that going forward with regards to, like, the rate forecasts? Do those come off as the securities book matures or?
Alastair Borthwick, CFO
It's not really about the interest rates for us. We have $1.9 trillion in deposits and $1.05 trillion in loans, which gives us $850 billion in excess. When we have this excess, we can take various actions. Our primary focus is on lending, but if that's not feasible, we'll invest it in cash or securities available for sale, likely swapping to floating rates. We can also choose to hold some investments to maturity if we think it's best. At the moment, we prefer to continue paying down our holdings to maturity, a strategy we've maintained over the last 11 quarters. Our philosophy regarding available-for-sale securities remains unchanged.
Ken Usdin, Analyst
Okay. And a quick one on expenses. I believe you said that costs are kind of hanging in here at around the $16.3 billion that was reported. And so, just kind of any color on puts and takes here, just is that better kind of revenue-related comp against your ongoing efficiencies? And just how do you think about longer-term expense growth again? Thank you.
Brian Moynihan, CEO
Sure, Ken. Honestly, the second quarter reflects last year's second quarter. This year, we saw an increase of $300 million. As Alastair mentioned, $200 million of that was due to wealth management incentive compensation, and the remaining growth came from other incentive compensation. The challenges we face are mainly related to fee growth in our businesses, which usually have a closer link between fees, expenses, and incentive compensation tied to those fees. As Alastair pointed out, this is positive expense growth, which is what we aim for. It does increase and at a healthy rate. Our headcount has remained relatively stable, sitting at 212 million this quarter. Even with the addition of summer teammates, we were at 215 last year, including the same summer teammates this quarter. We are effectively managing headcount and redeploying staff. We are also addressing various initiatives and streamlining work. We feel confident in our expense management, particularly with current wage inflation rates of 3% to 5% affecting all the services we purchase in external markets. The key takeaway is that, as all revenue elements come into play and with Alastair discussing NII and related factors, if lifts in revenue can be achieved while expenses remain relatively flat, we can work toward positive operating leverage. This quarter, we were hovering around a 1% decrease, which is manageable, and we expect to return to the five-year trajectory we maintained before the pandemic disrupted things.
Gerard Cassidy, Analyst
Hi, Brian. Hi, Alastair.
Brian Moynihan, CEO
Hi, Gerard.
Alastair Borthwick, CFO
Hi, there.
Gerard Cassidy, Analyst
Brian and Alastair, you mentioned the excess deposits, which I believe was referenced on Slide 22. As we look ahead, assuming the Federal Reserve decides to lower interest rates, I noticed you included three anticipated Fed fund rate cuts in Slide 10. However, as we approach the end of 2025, the forward curve suggests more rate cuts. Can you explain how you plan to adjust your deposit pricing in light of these expected rate changes and the current high level of excess deposits? Will you be able to be more aggressive in reducing your deposit costs?
Brian Moynihan, CEO
Yes. I think that's very business and more importantly, customer-specific views, Gerard. So we think of our deposit strategies in the context of how our customers utilize our services. And so, if you think about the parts that priced up in Global Banking or the investment-related cash in the Consumer business and Wealth Management, that will come back down as rates come, because the short-term equivalents come down, some is absolutely mechanical because it's actually priced to meet a money market fund equivalent that will happen. And so, yes, I think if you think about us being all in, if you look on that slide at 203 basis points, there'll be some pickup as rates come down in those higher things. The zero interest balance accounts are low-interest checking. You know, they don't really move because there's zero interest or low interest, so they'll be kind of static, but they're still extremely valuable in the current context. So when you think of all the consumer, I think 60 odd basis points or something, that's driven by the fact that we have $40-odd million transactional primary checking accounts that is growing at $1 million a year, meant, multiple years in a row, $900,000 a million a year that are maturing from $3,000 up to $7,000 or $8,000 in balances as people mature the relationship with us, that's where the tremendous value in the deposit base of this company goes. And so if you think about $1.91 trillion having grown $100 billion almost from the trough; you think about it growing linked-quarter, multiple quarters in a row, you think about even as we look now to buy the balances above that amount. Yes, those are good dynamics. So we think about it, but it will move. But if you remember, part of our deposit pricing is never going to move to zero.
Gerard Cassidy, Analyst
Right, right. No, no doubt. And those are the golden deposits. One other question on slide 10 and also I think if I recall your first quarter queue, you guys indicated you were asset sensitive. I would assume that this slide 10 also shows that with the three rate cuts, Alastair, what would it take to move to a more neutral position on the balance sheet or even a liability-sensitive position should the Fed really get into a rate-cutting environment?
Alastair Borthwick, CFO
Yes. So this shows that we're asset sensitive. That's why the red box obviously is bigger than the green box. It's the market specifically that's liability sensitive. So we're still asset-sensitive, Gerard. What it would take for us is either we can have a lot more rotation into interest-bearing or we could buy some short-dated duration, fixed-rate. So those are the two alternatives. And if you look at the course of time, if you were to go back to our queues over time, you'd see that we've become less and less rate-sensitive over time. We’ve really narrowed the corridor of whether rates go up by 100 or down by 100, what could that outcome look like? Narrowed that pretty substantially over time because we're trying to lock in rates here, recognizing that NII is up $4 billion or $5 billion over the course of the past several years per quarter.
Brian Moynihan, CEO
Yes. I would like to point out, Gerard, that for someone with your extensive experience in this industry, the rate environment has been quite unusual for the last 15 years. If we reach a Fed funds rate of 3.5, as predicted by our experts, it would limit the capacity to further tighten asset sensitivity since there would still be some room to lower rates without hitting zero floors. This indicates the importance of stability during periods when the rate environment remains consistent. Furthermore, a higher nominal rate environment will facilitate better management of our outcomes, as the current low rate structure triggers zero floors, which adds sensitivity that will diminish if rates increase over time. Does that make sense to you?
Gerard Cassidy, Analyst
Yes, it does. Thank you. Brian or Alastair, I have one last quick question. I noticed in slide 25 that your home equity loan balance has actually increased. I believe that's the first time in maybe over two or three years. Was there a new program or what are you seeing that drives that? Will this trend continue as we move into '25? Thank you.
Brian Moynihan, CEO
I believe this reflects that people have secured low-rate loans and now wish to borrow. This is a costly choice because they have a fixed-rate mortgage and home equity available, so it makes sense for them to utilize it. It’s encouraging to see that, after four or five years of decline from $30 billion, balances are stabilizing. If you examine the year-over-year mortgage production, it’s $5.7 billion and $5.9 billion, with home equity line production showing solid new originations. It's pleasing to see that balances are no longer decreasing; while they aren't growing significantly, at least they are not continuously falling. We hope that consumers will start to tap into their home equity over time at a reasonable rate without needing to refinance the entire first mortgage.
Vivek Juneja, Analyst
Thank you for the questions. I want to provide some insight on non-interest-bearing deposits. On an average basis, the decline has noticeably slowed. However, at the end of the period, we saw a faster rate of decline. Is this just a temporary fluctuation around the end of Q1? What are you observing on a month-to-month basis? Is the slowdown genuine? Also, could you discuss this in relation to customer segments, if possible?
Alastair Borthwick, CFO
Yes, Vivek, you're noticing two aspects. Firstly, the rotation is indeed slowing down, which is expected since this mainly involves cash transactions in non-interest-bearing accounts. The difference this quarter can be attributed to the seasonality of tax payments. When individuals face significant tax liabilities, they often withdraw from their brokerage accounts, transfer it to their non-interest-bearing accounts, and then wire the funds from there. This illustrates the movement of money we are seeing this quarter.
Vivek Juneja, Analyst
Did you have any revenue from your equity derivatives trading this quarter?
Alastair Borthwick, CFO
Nothing to highlight, nothing to note. That's a position we sold years ago and anything that's happened with Visa would just unwind on the balance sheet. We've recycled it, so it shouldn't have any impact on revenue.
Matt O'Connor, Analyst
Good morning. How are you guys thinking about targeted capital levels going forward? Obviously, we're still waiting for final rules. Maybe there's a little more volatility in your SCB than you would have thought, but you still got a nice buffer? And then I guess one last piece I was thinking is the remixing of the balance sheet that's been commented on throughout this call over time probably causes a little creep in RWAs, right, like loans higher than, say, securities. So lots of excess capital, but some puts and takes, and how are you thinking about it between now and when we get final guidelines?
Brian Moynihan, CEO
We always want to utilize our capital to grow the business. If we need to allocate it to support RWA growth for loans, that's a positive outcome, and our priority is to do that. We've maintained an 11.9% quarter-to-quarter with a slight increase in RWA, which I think reflects our strategy well. We executed $3.5 billion in buybacks and distributed $1.9 billion in dividends. This trend should continue, as we don't require substantial capital for growth since the RWA needs are met with a straightforward process. We're generating solid earnings, which we will reinvest in dividends and buybacks. Our goal is to keep a management buffer of 50 basis points above the necessary requirements. While the volatility in the market is a separate topic, it's manageable because we can plan accordingly. Regardless of our opinions on the volatility, we've effectively absorbed it, and as new regulations emerge, we'll adapt as needed. Under the new SCB, we're looking at a requirement of 10.7 plus 50, giving us a guideline of 11.2. There may be some adjustments if we gain insights about next year's outlook. Once all three components are finalized, we will see how they influence various aspects of our operations. Overall, we're confident about our position and believe that our current earnings are adequate to support the growth we anticipate in the current economic environment, which requires only modest needs while directing the remainder back to our shareholders.
Operator, Operator
That concludes our question-and-answer session for today. I'd be happy to return the call to Brian Moynihan for closing comments.
Brian Moynihan, CEO
Thank you, operator. Thank all of you for joining us today. Obviously, a lot of focus on NII, and we gave you slide 10 to give you the bridge. Alistair answered a lot of the questions, and Lee's here to answer it. The key is to understand what's driving that, which is deposit performance, which is stabilized and starting to grow for like six quarters in a row now, loan growth very low but just staying positive. Those are going to drive the value of this franchise, and that's going to grow with our customers. That's coupled with strong fee performance this quarter in terms of wealth management fees, investment banking fees, consumer fees, even growing global payment services fees, and of course, great work done by our markets team. So that leveled with flattish expenses gives us a chance to start driving operating leverage again in the company. That generates a lot of earnings, a lot of excess capital, and we put that back in your hands. Thank you for your time and attention. We look forward to talking next quarter.
Operator, Operator
This does conclude today's Bank of America earnings announcement. You may now disconnect your lines. Everyone, have a great day.