Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q2 2022
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 an opportunity to ask questions during the question-and-answer session. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Lee McEntire.
Lee McEntire, Director of Investor Relations
Good morning, and welcome. Happy Monday, and thank you for joining the call to review Bank of America's second quarter results. I hope everyone's had a chance to review our earnings release documents. As always, they're available, including the earnings presentation that we'll be referring to during this call, on the Investor Relations section of the bankofamerica.com website. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then I'll ask Alastair Borthwick, our CFO, to cover the details of the quarter. Before I turn the call over to Brian, just let me remind you, we may make some forward-looking statements, and please refer to our 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 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 on our earnings materials that are available on the website. So with that, Brian, I'll turn it over to you. Thanks.
Brian Moynihan, CEO
Thank you, Lee, and thank you, everyone, for joining us today this quarter. I appreciate the great team here at Bank of America. We reported $6.2 billion in net income, or $0.73 per diluted share. This represents our fourth consecutive quarter of operating leverage. We grew revenue by 6%, while expenses increased only 1.5%, resulting in 4.5% of operating leverage compared to the second quarter of 2021. Additionally, we observed a 21% year-over-year improvement in net interest income. These earnings resulted in a return on tangible common equity of 14% and a return on assets of 79 basis points. When comparing our earnings to the second quarter of 2021, it's important to note that there were two significant items in that quarter. First, net income was positively impacted by $2 billion due to a tax adjustment relating to a UK tax law change, which contributed $0.23 to EPS. Second, we released $2.2 billion in credit reserves during that period, which boosted earnings by $1.7 billion or $0.19 in EPS. This would adjust the reported EPS for that quarter to $1.03, down in the low 60s, contrasting with this quarter's $0.73 per share. The strength of our earnings is highlighted by a 15% increase in pretax pre-provision income, which reached $7.4 billion this quarter when excluding the two aforementioned impacts, an improvement from the second quarter of 2021. Now, let's discuss some of the factors driving these results. The organic growth engine at Bank of America, which was active before the pandemic, is now fully operational. This is evident in net new checking account openings, new consumer investment accounts, household growth in Wealth Management, strong loan growth across all products, and notable performance by our Global Markets and investment banking teams, even amid a volatile capital market environment. Our continued success in expense management, bolstered by the best digital banking platform globally, has also contributed to these results. We recorded an increase in user activity, including log-ins and usage, which led to a 20% rise in sales from our platform compared to last year. Our asset quality remains robust, with net charge-offs in the second quarter of 2021 still significantly lower, by 50%, compared to pre-pandemic levels in late 2019. In observing the results by segment, our Consumer Banking segment has shown strong momentum, achieving the fastest loan growth rate in nearly three years, alongside the addition of more than 240,000 net new checking accounts in this quarter alone. We expanded our physical presence through new financial center openings and renovations, while also enhancing digital engagement with our consumer and small business clients. Despite elevated consumer income tax outflows, we experienced strong deposit activity. In Wealth Management, revenues grew 7% year-over-year, despite a period of falling market values. Our banking business adapted well, with the addition of over 5,100 net new households across Merrill and Private Bank. Our total client balances across Merrill, the Private Bank, and our consumer investments team amounted to $3.8 trillion as of June 30, 2022, bolstered by nearly $150 billion in client inflows over the past year. Our Global Banking team reported a 5% quarter-over-quarter loan growth, which translates to a 20% annualized growth rate. Additionally, Global Treasury Services revenue has been strong as customers utilized our services to effectively manage liquidity. Although overall revenue in Global Banking was pressured by weaker investment banking fees in a volatile market, our net interest income improvement nearly offset these challenges, resulting in only a modest year-over-year revenue decline. We maintained our third position in the investment banking market share. In the Markets segment, we achieved an 11% sales and trading growth compared to last year, excluding DVA. Our macro FICC business, which we have invested in over recent years, performed well alongside equity derivatives, while the FICC side faced challenges due to spread widening and a more risk-averse customer base. Overall, our expenses for the second quarter were slightly lower than in the first quarter, as we expected. It is important to note that this quarter included approximately $425 million for regulatory matters. Our progress in digital engagement has played a significant role in maintaining favorable expense results. Digital sales have grown by 20%, and customer interactions with our digital platforms have surged, with Erica nearing 1 billion interactions since its launch. Clients have completed 8 million life plans, driving asset growth and account retention. While charge-offs increased slightly in the second quarter, this was mainly due to loan sale accounting and certain credit decisions stemming from past pandemic issues. Now, as we switch to customer activity, our core checking households surpass 35 million, and we serve 60 million consumers in the U.S. U.S. consumers have shown remarkable resilience, with spending remaining healthy despite the absence of stimulus payments. Average deposit balances across most cohorts have exceeded both last quarter and pre-pandemic levels. Furthermore, we have not observed any decline in our customers' asset quality, and they are well positioned to borrow. In fact, Bank of America customers had their highest quarterly spending on record in the second quarter, amounting to $1.1 trillion, an increase of 12% year-over-year. Spending in June 2022 was also up 11.3% compared to June 2021, with a rise in transactions of over 6%. Consumer spending habits have shifted towards experiences and travel, while fuel spending has increased due to rising prices. We also noted a continued decline in cash and check volumes, which are being replaced by digital alternatives, helping improve our cost structure. Average deposit balances for our customers remain high compared to last year and pre-pandemic periods, with a minor decline observed among the most affluent customers. Regarding credit quality, we have provided additional information this quarter due to ongoing discussions surrounding a potential recession. We remain committed to responsible growth and are well-prepared. Our loan portfolio is now well-balanced between consumer and commercial loans, with a more collateralized consumer portfolio. The diversification of our commercial mix has also improved. Furthermore, most of our commercial loans are either investment-grade or secured, reflecting the cautious approach we have taken over the past decade. Overall, despite concerns about a slower economy and global challenges, client activity remained strong this quarter, with rapid improvements in net interest income and robust customer resilience. We managed to keep expenses flat when compared to the first quarter, even with the regulatory matters we faced. We continue to achieve strong operating leverage in a challenging capital markets environment, generating substantial returns and delivering capital back to shareholders. As we think about capital, we prioritize supporting customers and related loans while also returning capital to shareholders. We announced plans to increase our dividend in the third quarter and have retired shares this quarter. Our strong capital position, bolstered by the stress test results, will further strengthen our balance sheet. With that, I'll turn it over to Alastair.
Alastair Borthwick, CFO
Thank you, Brian. And since Brian hit the highlights of the income statement, I just want to reiterate, we saw good returns in the quarter with a return on tangible common equity of 14% and return on assets of 79 basis points. So I'm going to begin my comments on Slide 7 and the balance sheet. As you can see, during the quarter, the balance sheet declined $127 billion to a little more than $3.1 trillion, and that reflected an $88 billion decline in deposits and a decrease in our Global Markets balance sheet. We utilized a combination of cash and some rotation from securities this quarter to fund our loans growth given the decline in deposits. Our average liquidity portfolio declined in the quarter, reflecting a drop in deposits and lower securities valuation, and it remains very elevated at nearly $1 trillion. For reference, that was $576 billion pre-pandemic, just to give you an idea of how much liquidity has increased over the period. Shareholders' equity increased to $2.5 billion from Q1 with a few different components we should note. Shareholders' equity benefited from net income after preferred dividends of $5.9 billion and the issuance of $2 billion in preferred stock. That's $7.9 billion flowing into equity. We paid out $2.2 billion in common dividends and net share repurchases. Accumulated other comprehensive income declined as a result of the increase in loan rates. We saw that impact in two ways. First, we had a reduction from a change in the value of our available-for-sale debt securities of $1.8 billion, which impacts CET1. Second, rates also drove a $2 billion decline in AOCI from derivatives that does not impact CET1, and that reflects cash flow hedges mostly put in place last year against some of our variable rate loans, which provided some net interest income growth and also protected CET1 at the same time. With that equity growth, we saw book value increase in the quarter. In terms of regulatory capital, our supplemental leverage ratio increased 10 basis points to 5.5% versus our minimum requirement of 5%, leaving plenty of capacity for balance sheet growth. Our TLAC ratio remains comfortably above our requirements. Okay, let's turn to Slide 8, and we'll talk about CET1, where our capital levels remain very strong. We have $172 billion of CET1 and a 10.5% CET1 ratio, which increased from the first quarter and remains well above our second quarter 9.5% minimum requirement. The 10.5% CET1 ratio is also expected to be just above our new 10.4% requirement from CCAR when it's confirmed by regulators at the end of August. That new level will be effective for us on October 1. I'll walk through the drivers of the CET1 ratio this quarter. First, $5.9 billion of earnings, net of preferred dividends, generated 36 basis points of capital. Looking at the chart, you can see how we used that. We grew loans by $38 billion. With a decline in our Global Markets balance sheet and some loan sales and other balance sheet initiatives, we were able to hold risk-weighted assets flat this quarter. Second, we returned $2.7 billion of capital to shareholders, representing 16 basis points. Third, this quarter, the movement in treasury and mortgage-backed securities rates caused a decline in the fair value of our available-for-sale debt securities, lowering our CET1 ratio by 11 basis points. We remained well positioned for that rate movement as our hedge of a large portion of this portfolio continues to protect it from AOCI movements. We ended the quarter above our expected minimum of 10.4% required October 1, and we expect to build some additional buffer on top of that in Q3. Moving beyond the third quarter, we should remind you our balance sheet growth last year means our G-SIB surcharge and CET1 requirement will move higher by 50 basis points beginning in 2024. I just want to make sure we repeat that for clarity, it's 2024 because I know others have different timelines for their requirements. Given our additional higher G-SIB minimum over the next six quarters, we'll work to move above that expected CET1 minimum of 10.9% by January 1, 2024, and we'll look to exceed that with another 50 basis points of internal management buffer on top of that requirement. Okay, so now let's talk about the biggest use of CET1 this quarter, and I'm referring to loans on Slide 9. As you review the average loan data, we just want to remind you that our discipline around responsible growth has remained tight. Average loans have climbed back over $1 trillion. They're up 12% compared to Q2 2021, led by commercial growth of 15% and complemented by consumer growth of 8%. Each line of business and product segment reflected good growth, and geographic and industry participation within that growth has also broadened over the past several quarters. As we turn to linked quarter comparisons, I'll use ending balances. The $25 billion linked quarter commercial improvement came mostly from new loans and also included some improved utilization from existing clients. From an asset quality standpoint, 98% of the commercial loan growth was either investment-grade or secured. Consumer loans grew $10 billion linked quarter, led by both credit card and mortgage and also increases in auto and securities-based lending. For the first time in years, home equity balances increased modestly. Card loans grew $5 billion from Q1, reflecting healthy spend levels even as payment rates remained elevated. Within our growth, our average FICO was 771, as you can see on Slide 23 in the appendix. We've provided a daily ending loan chart that shows trends through the quarter, and you can see both commercial and consumer loan balances have returned to pre-pandemic periods, with really only credit cards remaining 15% to 20% below that period. Moving to deposits on Slide 10. Across our past 12 months, we've seen solid growth across the client base as we've deepened relationships and added new accounts. Some of the year-over-year growth was impacted by a higher level of tax payments across consumer and GWIM clients and businesses in Q2 of this year. Those elevated tax payments drove the decline in deposits from Q1. Year-over-year average deposits are up $123 billion or 7%. Retail deposits with our Consumer and Wealth Management clients grew $129 billion, and we believe our retail deposits of $1.4 trillion continue to lead all competitors. Within the consumer balances, I’d just like to point out that small business deposits of $177 billion grew 14% year-over-year, reflecting the continued reopening of small businesses across America and the consumer spending supporting their growth. The average balance of these accounts is more than $40,000. On Wealth Management, we saw clients paying higher tax bills this year, and we saw some move deposits to market-based funds, much of which remained in our own complex. With our commercial clients, deposits were up modestly year-over-year, even as customer tax payments are higher this year. Some have recently begun to seek higher yields and use cash strategically for acquisitions and other operational activities. Turning to Slide 9 and net interest income. On a GAAP non-FTE basis, NII in Q2 was $12.4 billion, and the FTE net interest income number was $12.5 billion. Focusing on FTE, NII increased $2.2 billion from the second quarter of last year or 21%, driven by benefits from higher interest rates, including lower premium amortization and loan growth. NII compared to the first quarter rose $870 million, and that came in a good bit higher than the $650 million plus that we signaled on our last earnings call. The benefits of higher rates, lower premium amortization, loan growth, and the additional day of interest more than offset the impact of lower securities balances. Our net interest yield was 1.86%, improving 17 basis points from Q1 and benefited from the rise in rates, loan growth funded with cash and a 4 basis point improvement from lower premium amortization on securities. Looking forward, we want to provide the following NII guidance, and we just have to provide a few caveats. First, we base the guidance on interest rates and the forward curve materializing, and I'm referring to the curve on July 15th. Second, we assume modest growth in loans and deposits. Third, we assume deposit betas reflecting disciplined pricing to achieve our growth. If those assumptions hold true, we can see NII in Q3 increase by at least $900 million, possibly $1 billion, versus Q2. We expect it to grow again at a faster pace on a sequential basis in the fourth quarter. The way we think about those NII increases, given the expense discipline that we have, is we expect the majority of that to fall to the bottom line for shareholders. Focusing on asset sensitivity for a moment. As you know, we typically disclose our asset sensitivity based on a 100 basis point instantaneous parallel shock in rates above the forward curve. On that forward basis, asset sensitivity at June 30 was $5 billion of expected NII over the next 12 months. More than 90% of that is driven by short rates. That number is down from $5.4 billion at March 31, largely because the benefit of higher rates is now already factored into our baseline of actual NII after we grew that $870 million. Given that the yield curve is projecting 125 basis points of rate hikes over the next couple of meetings, we thought it was also appropriate to provide the disclosure again regarding asset sensitivity on a spot basis. On a spot basis, our sensitivity to a 100 basis point instantaneous rate hike would be $5.8 billion or $800 million higher than the forward basis at June 30. Okay, let's turn to expense, and we'll use Slide 12. Our expenses were $15.3 billion, up a couple of hundred million or 1.5% from the year-ago period and down modestly compared to the first quarter. I want to focus on the more recent comparison versus the first quarter. We had higher expenses for regulatory matters related to certain issues, and those offset the seasonal decline from the first quarter elevated payroll taxes and revenue-related incentive costs. Let me pause for a moment on the $425 million expense we've recognized for regulatory matters in the second quarter. A little more than half of that amount relates to fines to resolve regulatory investigations relating to our administration of prepaid unemployment benefit card programs in certain states that we announced last week. The balance of the expense relates to an industry-wide issue and it concerns the use of unapproved personal devices, which has not yet been fully resolved. As we look forward, more broadly on expenses, we continue to invest heavily in technology, in people, and in marketing across the businesses. We continue to add new financial centers and renovate old ones in expansion and new growth markets. To help pay for those investments, we continued to look for opportunities to simplify our processes and reduce work, driving our costs lower to self-fund our new investments. Our headcount this quarter includes roughly 2,300 summer interns, and we hope they will consider us to be a great place to work and join us full-time next year. This is the most diverse group of talent we've seen yet. Absent the addition of those interns, our headcount was down a little more than 700 associates. Like many other companies, we are doing many things to tackle challenging labor market conditions, and we're meeting that challenge pretty well so far. Turning to asset quality on Slide 13. I want to repeat what we've said now for many quarters. The asset quality of our customers remains very healthy, and that's true in both consumer and commercial. So net charge-offs of $571 million increased $179 million from Q1, driven by loan sales and some other credit decisions we made as opposed to core credit deterioration. Absent those losses, net charge-offs were down modestly compared to the year-ago period and up slightly from Q1. Provision expense was $523 million in Q2, driven by the charge-offs as we had a small reserve release of $48 million. That release includes builds for loan growth and builds for a dampened macroeconomic outlook in the future. The builds were offset by continued asset quality improvement and the effect of reduced pandemic uncertainty. On Slide 14, we're highlighting the credit quality metrics for both our consumer and commercial portfolios, and a couple of things are worth repeating again this quarter. Consumer delinquencies remain well below pre-pandemic levels, and you can see the decline in reservable criticized. Non-performing loans saw a modest decrease, driven both by the loan sales mentioned earlier and other improvements across commercial. Turning to the business segments. Let's start with Consumer Banking on Slide 15. The Consumer Bank earned $2.9 billion on good organic growth, delivering its fifth consecutive quarter of operating leverage. Strong top-line growth of 12%, driven by net interest income improvement, was more than offset by increase in provision expense resulting from the prior year's much larger reserve release. While reported earnings were down, pretax pre-provision earnings for Consumer grew 26% year-over-year, which highlights the earnings improvement without the impact of that reserve action. Card revenue was solid and increased modestly year-over-year as spending benefits were mostly offset by higher rewards costs. Service charges were down nearly $200 million year-over-year, as our previously announced insufficient funds and overdraft policy changes were in full effect by June. The third quarter will reflect the full run rate going forward, and we believe these changes are helping to improve overall customer satisfaction and further lower customer attrition. Expense increased 2%, as much of our increased salary and wage expenses in the quarter impacted Consumer Banking the most. As revenue grew, we improved the efficiency ratio to 54%. Reduced costs associated with continued shifts in client behavior to digital engagement allow us to invest in higher marketing, more technology and higher wages for our people. We also continued our investment in financial centers, opening another 19 in the quarter while we renovated 157 more. Notable customer activity highlights included 240,000 net new checking accounts opened in the second quarter and marking the 14th consecutive quarter of net new consumer checking account growth. This led to a record 35 million consumer checking accounts with 92% of them considered to be their primary account. Additionally, small business accounts are enjoying the features of their business Advantage Rewards and showed growth of 5% from last year. We also grew investment accounts by 6% year-over-year. Not surprisingly, the market impacted customer balances negatively on the investment side. At the same time, over the past 12 months, we've seen $21 billion of positive client inflows. Lastly, once again, we opened over 1 million credit cards in the quarter, and we grew average active card accounts and saw combined credit and debit card spend up 10%. As you saw earlier, we had solid lending activity with continued low loss rates. Our 43 million active digital users signed on this quarter a record 2.8 billion times, with our Erica users up 30% year-over-year, and we captured over 123 million total client interactions in the second quarter alone. You can see all the other digital metrics and trends on Slide 26. Turning to Wealth Management on Slide 16. You can see we produced strong results, earning $1.2 billion and producing 16% year-over-year growth. Revenue growth was 7% as net interest income generated through our banking assistance for these clients more than offset modest declines in assets under management fees from market impacts during a challenging quarter. Clients and advisors recognize this value of a holistic financial relationship across investments and banking. Doing that at Bank of America differentiates both Merrill and the Private Bank, helping to diversify and differentiate our earnings in this business compared to other brokers. Our talented group of financial advisers, coupled with powerful digital capabilities, allowed modern Merrill to gain nearly 4,500 net new households. We also gained 650 more in the Private Bank this quarter. That’s a very solid showing by both, given the complexities of serving our clients in challenging market conditions over the past 90 days. We added $25 billion of loans over the last year, growing 13% and marking 49 consecutive quarters of loans growth in the business, which reflects consistent and sustained performance. Assets under management flows and deposit growth were a little more muted this quarter as clients paid taxes impacting the quarter-to-quarter comparison. Year-over-year, our deposits were up $17 billion, and overall investment flows were $78 billion over the past four quarters with total flows of $110 billion. Expenses increased by 2%, driven by higher employee-related costs and resulted in operating leverage of 6%. Turning to Slide 17 and Global Banking. You'll see the business earned $1.5 billion in the second quarter, down $918 million year-over-year, driven by the absence of a large prior period reserve release and lower investment banking revenue. As you know, it was a tough comparative quarter for the business as the industry investment banking fee pool declined 50%. While we acknowledge that's a big drop, we want to remind you that before the pandemic, our quarterly average for investment banking fees was in the range of $1.3 billion to $1.5 billion compared to the $1.1 billion we posted in the second quarter. We view this level as temporary and believe it can rise back to more normal levels in the next few quarters when economic uncertainty becomes more muted. While the company's overall investment banking fees declined, we held on to our #3 ranking in overall fees and maintained our market share through the first half of the year compared to 2021. At the same time, we saw very strong loan growth. Ending loans grew $18 billion linked quarter and are up $62 billion or 19% year-over-year. That loan growth and higher rates drove net interest income growth, which was able to offset the drop in investment banking fees, leaving revenues in the business fairly flat year-over-year. Also impacting revenue was half of the firm's $300 million leveraged finance valuation marks. The market turmoil and abrupt slowdown in the second quarter sparked a downturn in the leveraged finance markets, causing several deals across various market participants to get marked down. Some of those deals have been funded, and we're working through any remaining exposure to get them through the market. The provision expense increase reflects a reserve build of $143 million in Q2 compared to an $834 million release in the year-ago period. Finally, we saw expenses increase by 8%, driven by higher personnel costs and a share of the noted expenses for regulatory matters. Switching to Global Markets on Slide 18. As we usually do, we'll talk about the segment results, excluding DVA. Second quarter net income of $900 million reflects a solid quarter of sales and trading revenue. It was another quarter that favored macro trading, while the credit trading business has faced a more challenging market environment with widening spreads in the face of increased inflation fears and recession beliefs. Focusing on year-over-year, Sales and trading contributed $4 billion to revenue, improving 11%. FICC was up 19%, while equities was up 2%. The FICC improvement was primarily driven by growth in our macro products, while credit-traded products were down. We've invested heavily over the past year in several macro businesses identified as opportunities for us, and we were rewarded for that this quarter. Our strength in equities was driven by good performance in derivatives, offset by weaker trading performance in cash. Lastly, also impacting revenue was the other half of the firm's $300 million in leveraged finance markdowns. Year-over-year expense declined, reflecting the absence of costs associated with the realignment of a liquidating business activity, partially offset by that share of the regulatory costs. Absent these impacts, expenses were relatively unchanged. The business generated an 8% return in Q2, impacted by elevated leveraged finance marks and regulatory matter expenses. Finally, on Slide 19, we show All Other which reported a loss of $318 million, declining from the year-ago period, driven by the prior period $2 billion tax benefit from that UK tax law change. Revenue is roughly a couple of hundred million higher than Q2 2021 due to the absence of some prior period structured note losses. Expenses increased as a result of the regulatory matters and the realignment of liquidating activity last year to All Other. As a reminder, for the financial statement presentation in this release, all segments are taxed on the standard fully taxable equivalent basis. In All Other, we incorporate the impact of our ESG tax credits and any other unusual items. For the quarter, our effective tax rate was 9%. That benefited from two things: first, ESG investment tax credits; and second, roughly $300 million of discrete tax benefits that applied to this quarter. Excluding those tax credits and discrete items, our tax rate would have been 26%. And with that, we'll jump into Q&A, please. Thank you.
Operator, Operator
We'll take our first question today from Glenn Schorr with Evercore.
Glenn Schorr, Analyst
So I'm looking at all your credit metrics improving on a modest reserve release in the quarter and everything you said about responsible growth, it's all great. But my question is, how do you balance making sure that you're not looking too much in the rearview mirror and see where we came from versus what we're going towards and people's obvious concerns about the go forward and the economy? And maybe within that, let's just talk about what leading indicators you'd look at that drive, say, if you thought about putting up a CECL reserve on the go forward? You don't sound that concerned, but like a lot of people are looking at a recession here.
Brian Moynihan, CEO
Glenn, thanks for the question. Remember, the reserve methodology is a forward-looking methodology. Our core scenario is weighted part of the baseline, part of the adverse and ends up, just to give you a sense, with the unemployment rate this year in the actual reserve setting scenario, not an adverse case. It was set with 5% employment within the next five months, so 3.6% to 5%. So there's a conservative aspect of how the reserves are set. The high quality of the loan book is not only what we talk about and show you all the stats that you can assess and look at, but you can also look at the stress test results on a relative 10% unemployment overnight, yada, yada, yada. You see all the different statistics there. You see that page on Page 5 or 6 or whatever is in a slide; you can see us lower than everybody else's, that's because of many years of responsible growth and while we showed you those pages comparing the different points in time. Our reserve is not set looking backwards, it's set looking forward based on the books, based on the CECL methodology. We even do a comparison to where CECL day 1, as we call it, what happened then, and it's consistent. It's consistent. It's just that the credit quality book continues to improve, honestly.
Glenn Schorr, Analyst
I love the signs of reference. Maybe just one follow-up on RWA; you didn't seem to need to do much. I appreciate the comments you made on the prepared remarks. So the question I have is there seems to be a much higher intent across the Street to mitigate RWA. For obvious reasons, everybody's capital requirements are going up. So the question I have for you is have you balanced doing more of belt tightening versus using your okay relative capital position to continue to grow while others are tightening the belt?
Alastair Borthwick, CFO
Thanks, Glenn. So, obviously, we're in a little different place in that we have the capital already. We feel like over the course of the past several years, we've been quite disciplined around our RWAs. It just remains important for us to stay at it. You saw us do a couple of things this quarter. We sold a portfolio of loans that were non-core. We've changed a little bit in terms of how the sum of the 20% risk-weighted assets in our securities portfolio are rolling off. We can replace them with 0% risk-weighted like treasuries with essentially the same yield at this point. You saw what we did this quarter. We grew loans. We built capital. We created some RWA flexibility in the background, and we think we can do the same going forward.
Operator, Operator
We'll go next to Jim Mitchell with Seaport Global.
James Mitchell, Analyst
You're still expecting relatively healthy asset sensitivity even with the forward curve at a high level. When I compare it to the current spot, it suggests there won't be a significant degradation in betas in the forward compared to the spot. Can you talk about how you view deposit betas as Fed funds rise above 300 basis points?
Alastair Borthwick, CFO
Yes. Last time we spoke, we discussed our historical deposit beta from 2015 to 2019, which was in the low 20s percentage. We expressed our intention to perform better, and we have exceeded that expectation so far. Typically, we focus on pricing strategies to drive deposit growth. Last year, our growth was 7%, and this year we're anticipating low single-digit growth, but that will depend on how the rate structure changes. We are aware that we will be competing with other institutions, and we'll monitor that closely over time. We continue to see growth in core operating balances in consumer accounts. If there's any decline, it's primarily in the high-end Wealth Management segment and in non-operating commercial balances. We're closely monitoring these factors, and our net interest income is based on what we believe are reasonable assumptions regarding deposit pricing.
James Mitchell, Analyst
So just to clarify, you can go ahead.
Brian Moynihan, CEO
And Jim, just look at Page 10, and you can see if you look at the upper right-hand corner and see the size of the noninterest-bearing and interest checking, which is different than money that moves. Think about that even in the Wealth Management deposits on the lower left and then the operating deposits in the commercial book. We just have a lot of these deposits that are money and movement in the household. We've gone through this discussion a lot a few years ago. So they're very intensive rates only because the money is always moving, and it's just the average collective balances in these households as opposed to money that's for investment purposes, which will move. You saw it move a little bit in the Wealth Management business this quarter, and some of the corporates will continue to position them for more investment-oriented cash for lack of a better term. We'd expect that to occur. But I think history is some guide here, but also at the end of the day, we've grown 1 million new checking accounts year-over-year. That brings them more and more stable core checking balances, which don't move around much. So think about all that; we've been through it before. As rates go up, the stuff that moves due to rate is relatively modest. We have a huge bucket of noninterest-bearing that sits with us.
James Mitchell, Analyst
Right. So, I mean, clearly, you guys have a high-quality deposit base. So I think the implication is even over 300 basis points, you think betas can stay sort of in that well under 50% range, if not putting words in your mouth.
Brian Moynihan, CEO
Yes. We instruct our team to maintain consistent pricing to achieve slightly faster growth than the market. They have been outpacing the market considerably due to stimulus and similar factors, but even compared to the market, they are projected to grow much quicker. That's the guidance we provide. We aim to protect the franchise.
James Mitchell, Analyst
On the capital side, I'm trying to understand how quickly you plan to establish a buffer and how to approach that buffer for both 2024 and 2023. Are there still opportunities for buybacks before then?
Alastair Borthwick, CFO
We already have a modest buffer relative to what we expect at the end of October. We’ve obviously got future capital generation and we've got some balance sheet optimization we can do. We feel like we've got a lot of flexibility. We think we've got some ability to do a little bit of everything.
Operator, Operator
We'll go now to Mike Mayo with Wells Fargo.
Michael Mayo, Analyst
Thank you for the NII guidance. I believe we will reconvene on January 18, 2023, for the earnings call, and we'll see if your guidance holds true. I understand you aim to provide achievable guidance, but you've mentioned nearly $2 billion in increased NII over the next two quarters, suggesting an $8 billion rise in the annualized run rate for NII. I want to confirm that I've understood this correctly. Regarding your definition of the majority that should contribute to the bottom line, how do you define "majority"? Is it at least 50.1% or something higher?
Alastair Borthwick, CFO
So I'll answer the question. Yes, I think you're right. We said $900 million to $1 billion this quarter coming up and then at least that, the following quarter. So yes, you're right to think about that as a couple of billion. We'll get a little more precise with the fourth quarter as we get to, obviously, a quarter from now. In respect to falling to the bottom line, I'd say that's going to be the vast majority, but I'll leave that to Brian.
Brian Moynihan, CEO
I think, Mike, we're bouncing around $15 billion to $15.5 billion of quarterly operating costs. You can look backwards and see that that's been fairly constant. You’d expect that to continue. The vast, vast majority falls to the bottom line. It's out of the business model. You know, Mike, as well as anybody that revenue comes through the businesses that don't need to add people or activity to get the value of it, i.e., the consumer business in the Wealth Management business and Commercial Banking business. You saw that year-over-year. As much as it's a strong projection going forward, we captured like $2 billion last year second quarter, this year second quarter. A lot of it fell to the bottom line on an apples-to-apples basis.
Michael Mayo, Analyst
I mean just as one follow-up. I mean, look, you've changed the firm since the global financial crisis when the company overpromised and under-delivered. You've really gone out of your way to under-promise and over-deliver. So when you say phrases like vast, vast majority, don't you want to hedge a little bit? I mean you have a lot of inflationary pressures. You're hearing talk about it's harder to hire people, harder to retain people. You have rents. You have all sorts of things happening here. You're saying vast, vast majority of these additional revenues should fall to the bottom line. Any hedging at all you'd like to give here?
Brian Moynihan, CEO
I believe that when looking at the quarterly expenses of $15.3 billion and net interest income, we mentioned it was up 650 last quarter and now it's at 850. We have exceeded our estimates, which is why we are optimistic about the next couple of quarters; we have a clear understanding of what's ahead. Overall, we feel positive about it.
Alastair Borthwick, CFO
The question you asked me last quarter was how we continue to invest in the franchise. We increased our marketing efforts, hired staff in areas where we wanted to grow, and reduced staff in areas where it was less necessary. We continue to open new branches in many cities and towns where we lacked brand presence. This quarter, we invested $800 million in technology co-development that has been successfully implemented. In terms of confidence for the next quarter, we’re almost three weeks in, and everything is well organized. Overall, we feel quite optimistic.
Operator, Operator
Our next question comes from Betsy Graseck with Morgan Stanley.
Betsy Graseck, Analyst
Two questions. First is just on the investments that you're making in expanding your market share and capital markets activities. You've obviously made a decision to do that, and it's panned out. I wanted to understand at this stage, given the higher ratios that you have, will you still be leaning into investing and looking to take more share in the capital markets-related businesses?
Brian Moynihan, CEO
Yes, as Jimmy DeMare mentioned, the growth plan we initiated almost 2.5 years ago has been implemented, which has led to an increase in the size of the balance sheet. You can see some of this reflected on Page 18 regarding trading-related assets, but to really understand the growth, you'd need to look back to the previous quarters and see the increase over time. He has developed the balance sheet to a size that he believes is appropriate. We have also expanded our product capabilities and he continues to hire in key areas, giving us confidence that we are well-prepared. The market conditions have presented challenges, but if you examine our trading revenue for the first half of the year over the past three years, it has remained relatively stable at around $8 billion. He has done an excellent job in that regard. Therefore, we do not require another significant increase in the balance sheet; the current state is quite solid, and the relative size of the platform is well established.
Betsy Graseck, Analyst
Okay. And then as we think about the capital ratio and the buffer, I think you had been running with a 100 basis points buffer. Should we now expect that you're going to be running with 50 basis points over?
Brian Moynihan, CEO
Yes, you should. As it gets larger, you don't need quite the buffer. That 50 basis points is for when we reach January 1, 2024, and that's what we're aiming for.
Operator, Operator
We'll take our next question from Matt O'Connor with Deutsche Bank.
Matt O'Connor, Analyst
Just a follow-up on the expenses. How are you thinking about costs in the back half of the year? I think you had full-year guidance of around $60 billion. Obviously, you had some higher regulatory costs this quarter. How are you thinking about that?
Alastair Borthwick, CFO
We haven't changed much, Matt, in terms of the way we think about running the company. Brian mentioned already, if you look at the last six quarters, we're sort of running the place right around $15 billion, out-of-sight. We still feel like that's the right place, that $60 billion flattish year-over-year. Just make sure you back out and add that reg matter. That's all. The core remains the same.
Matt O'Connor, Analyst
Okay. Just want to clarify that. That's helpful. And then within credit, I guess, what types of mortgages did you sell that generated those losses? In All Other consumer, you had higher losses and you did mention there were some other actions that you took, and I was just wondering what those were.
Alastair Borthwick, CFO
On the residential mortgage side, we sold an old portfolio of residential mortgages that we had categorized as All Other several years ago. This provided us the chance to exit that portfolio, which we do periodically. In this instance, the amount was around $3.3 billion. We did incur a loss, which you can see reflected in our reports. However, that loss was largely offset by a gain from another area. I wouldn't classify it as a significant economic loss, but it did temporarily increase the charge-offs, which is why we highlighted it. Additionally, there were a few other factors involved, such as write-downs associated with the pandemic, stimulus impacts, and adjustments with overdraft. Nonetheless, I wouldn't consider this to be related to the core consumer credit portfolio that we manage.
Matt O'Connor, Analyst
Okay. Overdraft shows up in the All Other consumer charge-offs, right?
Alastair Borthwick, CFO
In this case, yes.
Operator, Operator
We'll go now to Erika Najarian with UBS.
Erika Najarian, Analyst
I wanted to keep on Mike's theme of under-promising and over-delivering. I’m going to try to ask the NII question another way. Alastair, one of your peers has started to frame NII with regards to an exit rate in the fourth quarter. As I'm just thinking about the rate sensitivity and the forward curve in your comments about loans and deposits and deposit repricing, obviously, you're alluding to $13.5 billion by third quarter. Is it possible by the fourth quarter, relative to everything going on in the company right now, that the exit rate for NII could approach $15 billion?
Alastair Borthwick, CFO
It's too early for us to provide that information right now. We feel comfortable giving you guidance for the next quarter because we have a solid understanding of where loans and deposits stand and how we anticipate growth. As we look further ahead, we have less certainty. We aim to share that spot sensitivity along with forward sensitivity to give you a general idea. Currently, we expect it to be in the range of $900 million to $1 billion for Q3. It's too soon to say with accuracy for Q4, but we believe it will pick up again in Q4. We can provide more clarity based on the rate structure and our observations of deposits and loans as this quarter progresses when we reconvene in three months.
Brian Moynihan, CEO
Erika, this isn't going to give you specific NII guidance. We're just trying to ensure you can see the leverage in the platform for a quarter or two. You all can take that and extrapolate based on your own economic projections, but it's meant to give you a sense of what we see in terms of loans, deposits and the pricing dynamics, et cetera. In the near term, we're more sure. Just like last quarter, we said it’d be 600-odd billion, and it turned out to be 800-ish because we're careful what we think and what we give you.
Erika Najarian, Analyst
I have a follow-up question regarding capital. First, are you actively working to reduce the stress capital buffer? Can you remind us of the challenges from this year's test that you believe you can address for next year? Additionally, what is the expected pace of buybacks moving forward as you prepare for the new hire minimum on January 1, 2024?
Alastair Borthwick, CFO
On the second question, that will depend on how our lines of business utilize the balance sheet. Our primary goal is to keep them competitive in the market daily and ensure capital supports that. This approach is effective as they are delivering strong returns. In the near term, loan growth will be the main driving factor since the markets business will fluctuate but not significantly change. Regarding the stress test, overall losses are manageable, but operating expenses are highlighting the differences in our company's operation. As we prepare for next year's test, there is limited we can adjust within the loan portfolio, which is performing at the highest level based on their outcomes. The focus will be more on managing operating expenses and operational losses moving forward.
Operator, Operator
We can go now to Gerard Cassidy with RBC Capital Markets. Brian.
Gerard Cassidy, Analyst
Can you share with me the average deposits in your fourth quarter of 2019, which totaled about $1.4 trillion? Today, you have $2 trillion. Consumer deposits have grown significantly, as you pointed out, Brian, increasing by $358 billion during that time. Can you provide your perspective on how the acceleration of quantitative tightening at about $95 billion a month might impact your balance sheet over the next 12 to 18 months?
Alastair Borthwick, CFO
We're obviously interested in that trajectory too. We haven't noticed any significant changes in deposits yet. The second quarter largely reflected a return to the typical seasonal patterns we observe. The last two years were unusual due to pandemic-related cash inflows and fiscal monetary stimulus. This quarter may have seen a slight increase. You may have seen reports indicating that tax receipts this year exceeded expectations, and we certainly felt that. So far, the impact of quantitative tightening hasn’t been very pronounced. It seems our customers still prefer to maintain a solid deposit balance. It’s reasonable to consider that in comparing to Q4 2019; the economy and the monetary base have both grown, suggesting there might be a floor, but we will continue to monitor developments as we move forward.
Brian Moynihan, CEO
Gerard, we can't really go ahead against the market here because at the end of the day, that growth affects the monetary accommodation, the fiscal stimulus, et cetera. But remember, as you're thinking about that 1.4, 1.5 and today 1.9 to 2, you also have to remember that it's been three years, and with inflation, the economy is larger; it was a smaller economy back then, it's now about $25 trillion. That means there may be an increase in deposits when adjusting for that. You kind of need to not only put your normal growth rates but also add to that sort of the size of the economy and our market share because deposits reflect the economy moving in and out of the system. It will be higher. We know that, but there will be some impact from monetary tightening or else it wouldn't occur; it wouldn't be the way the Fed controls the economy.
Alastair Borthwick, CFO
If you look at the last couple of quarters, as loans have continued to return, as securities have matured and prepaid, we've just taken some of that liquidity and put it against loans. That has always been our first choice, even in a pandemic.
Operator, Operator
We'll take our final question today from Ken Usdin with Jefferies.
Ken Usdin, Analyst
Just a couple of follow-ups on the balance sheet. So just following up on the deposit side, Alastair, in your prepared remarks, you talked about modest growth in loans and deposits from here. Should we be thinking about modest growth in deposits that off period end balance when you think about that after we get past this tax seasonality?
Brian Moynihan, CEO
Yes, think about period end because that's where we are. We've seen the deposits in the first few weeks of July, will be relatively stable. Yes, you got to go off period end because that's what you got. There are some fluctuations as you get the month end and all that stuff, but that's where we start from.
Alastair Borthwick, CFO
Q3 and Q4 seasonally tend to be the place where we build deposits.
Ken Usdin, Analyst
Okay. And then on the loan growth side, again, obviously, you're putting up very strong results with a big industry, especially in commercial and in card. Can you just talk about you're thinking in terms of how loan growth looks in the second half relative to the last couple of quarters? Any changes you're just sensing, good or bad, within the customer base and across the various loan buckets?
Alastair Borthwick, CFO
Not a tremendous amount of change. We've had good loan growth. We anticipate we'll see good loans growth. That said, obviously, for the full year, we're kind of at 12%. We thought we'd have mid- to high single digits. That's still our expectation: mid- to high single digits. There are a couple of places where, for example, our mortgage pipeline has declined just with higher rates. It seems natural to think that in some other areas like securities-based lending, as rates rise, that might soften some loan demand. Business leaders may talk themselves into less confidence, which may dampen loan growth. As of right now, we expect it to remain in that mid- to high single digits.
Ken Usdin, Analyst
Got it. One cleanup here. Premium amortization was about a $300 million helper to $0.6 billion. How much more improvement could you see? Is that built into your expectation for the third and fourth quarter?
Alastair Borthwick, CFO
Yes. It’s built in. It'll keep going down, obviously, as rates go up, but it's not a linear relationship; it's more curved. Our expectations are built into our net interest income guidance.
Brian Moynihan, CEO
By seeing no more questions, let me just close by thanking you for your time and attention. As you think about Bank of America for the second quarter of 2022, as we said earlier, the pre-pandemic growth engine has kicked back in. We're mindful of the debate about a future recession, and we have prepared the company across the last decade-plus through responsible growth to be prepared for that. But as we see our current customer base, we are not seeing them slow down in terms of their activities. So the story is one of organic growth with operating leverage driven by and using our capital wisely. Thank you.
Operator, Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time.