Earnings Call Transcript
BANK OF AMERICA CORP /DE/ (BAC)
Earnings Call Transcript - BAC Q4 2020
Operator, Operator
Good day, everyone, and welcome to today's Bank of America Fourth Quarter Earnings Announcement's Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note, today's call is being recorded. And it's now my pleasure to turn the conference over to Lee McEntire. Please go ahead.
Lee McEntire, Executive
Good morning. Welcome and thank you for joining the call to review our fourth quarter results. I hope by now you've all had a chance to review the earnings release documents. As usual, they're available including the earnings presentation that we'll be referring to during the call on the Investor Relations section of bankofamerica.com’s website.
Brian Moynihan, CEO
Thank you, Lee, and good morning to all of you, and thank you for joining us today. Before I pass the call to Paul to review the fourth quarter, I want to hit a few points. First, I want to provide some brief commentary on 2020 for the full year then talk about what we see in the economy as we enter 2021, and then highlight some areas where I believe we made strong strategic progress that will drive momentum into 2021 and beyond. So starting on slide two. 2020 was a tough operating environment, as you all know. In that period, we generated net income of nearly $18 billion or $1.87 in EPS and earned a return above our cost of capital. Our EPS was down 32% compared to 2019, driven by the impacts of the coronavirus pandemic on the company and the economy. As you know, the Fed dropped rates to nearly zero. Longer rates also fell to historic lows. Loan demand surged and then waned as the panic subsided. That reduced net interest income. But as we told you last quarter that we believed that NII had likely bottomed in the third quarter of 2019. In fact, we saw a modest improvement this quarter which Paul will cover later despite the challenges from lower loans. Non-interest revenue declined slightly, but included some interesting dynamics highlighting the diversity of Bank of America's model. Consumer fees declined driven by the activity levels of clients, but also by higher account balances and customer accounts. That's a good thing for the economy going forward. Our business mix allowed us to benefit from more market-related activities in sales and trading, investment banking, and investment brokerage in the wealth management businesses. Our full-year revenue of $15 billion from sales and trading rose 17%, and we generated more than $7 billion of Investment Banking revenues this year, an increase of 27% over last year.
Paul Donofrio, CFO
Thanks, Brian. Hello everyone. I'm starting on slides 6 and 7 together. As I did last quarter, I will mostly compare our results relative to Q3, as most investors we speak with are more interested in our progress as we traverse the pandemic rather than in comparison to pre-pandemic periods. In Q4, we earned $5.5 billion or $0.59 per share, which compares to $4.9 billion or $0.51 a share in Q3. Compared to Q3, the earnings improvement was driven by lower provision expense, as we released $828 million in reserves, nearly offsetting net charge-offs, which also declined. Also benefiting earnings, expenses declined $474 million from Q3 on lower litigation costs, and NII moved from the Q3 trough. Non-interest income declined from Q3, but results across individual line items were mixed. First, the decline in other income was driven by seasonal client activity with respect to ESG investments, which created higher partnership losses, but benefited our annual tax rate, as I have described in previous discussions. Our tax rate for the year was 6%. If we adjust for the tax benefit of our portfolio of ESG investments, our tax rate would have been roughly 21%. I point this out to emphasize that the full-year tax benefits of the socially responsible investments more than offset the portion of losses recorded in other income throughout the year. Relative to Q3, non-interest income was also impacted by lower sales and trading, which typically slows from Q3 to Q4. But, while sales and trading revenue was down linked-quarter, year-over-year it was up 7%. On the positive side, non-interest income benefited from higher asset management fees as the market improved. And we grew net new households again this year. And finally, we had another good quarter of Investment Banking revenue, which increased from both the strong Q3 levels and year-over-year. Also when comparing net income to Q3, remember, the Q3 tax expense benefited by $700 million from the revaluation of our UK deferred tax asset. Finally with respect to returns, note that our ROTCE was 11.7%, and our ROA approached 80 basis points. Moving to slide 8, the balance sheet expanded $81 billion versus Q3 to $2.8 trillion in assets, total assets. The main point is that deposits are driving and funding substantially all of this growth. Deposits grew $93 billion in the quarter and are up $361 billion from Q4 2019. On the other hand, loans declined from Q3. With deposits up, loans down, excess liquidity is piling up in our cash and securities portfolios. Global liquidity sources are up $367 billion year-over-year and $84 billion just from Q3. In fact, Global Liquidity is up so much that it now exceeds total loans. With respect to regulatory ratios, the standardized approach remains binding at 11.9%, consistent with Q3. Shareholders' equity increased $4 billion, as earnings were more than three times the amount of common dividends paid plus we issued preferred stock totaling $1.1 billion. But, this was offset by higher RWA, as we invested more cash in securities. At 11.9%, our CET1 ratio is 240 basis points above our minimum requirement, which equates to a $36 billion capital cushion. Our TLAC ratio also increased and remains comfortably above our requirements. Before leaving the balance sheet, as usual, we provide the charts on slides 9 and 10 to show the historical trends with respect to average loans and deposits. For reference, we included these same charts on an end-of-period basis in the appendix. Overall, year-over-year, total loans are down 4%. And in the lines of business, they are down 2%. The decline year-over-year was driven by lower revolver utilization and other paydowns in commercial and by pullback in credit card activity. On slide 10 we provide the same trends by line of business for deposits. Brian already made a number of points on deposits and you can see the tremendous year-over-year growth in every line of business that led to 23% growth in deposits for the company. At $1.7 trillion in deposits far surpasses any previous record for deposits. We believe our strong deposit growth reflects our customers' overall experience with us, as we continue to innovate around digital capabilities, as well as enhance our nationwide physical footprint of financial centers and ATMs, which have continued to prove important to customers and clients. I will just add that, given historically low interest rates, our rate paid on deposits declined modestly linked-quarter and we are now lower than the rate paid to customers in 2015 before the Fed began raising rates. And I will point out that our interest cost on $1.7 trillion of deposits this quarter was only $159 million. Turning to slide 11 and net interest income. On a GAAP non-FTE basis NII in Q4 was $10.25 billion, $10.37 billion on an FTE basis, while net interest income declined million from Q3. The improvement from Q3 was driven by the increased deployment of excess deposits into securities. Lower loan balances, lower reinvestment rates and modestly higher mortgage-backed securities premium write-offs mitigated the improvement in NII. The net interest yield was relatively stable, declining only one basis point from the Q3 level. Note that given all the deposit growth, plus the low starting point with respect to interest rates, our asset sensitivity to rising rates remains quite large and is a good reminder of the value of these deposit relationships. Now with respect to NII. As we move into 2021, we offer the following perspectives. Our perspective on NIIs assume that net interest rates follow the forward curve and do not move lower than current levels and that the economy does not take a meaningful step backwards as a result of recent negative COVID developments. With that said, first I would remind everyone that Q1 will be impacted by two less days of interest, which is a headwind of nearly $200 million. Also, seasonally, we would expect to see payments related to holiday spending result in lower card balances. We also have the continuing impact of higher-yielding assets maturing or paying off and being replaced with lower-yielding ones. Offsetting these headwinds we currently intend to again invest a portion of our excess deposits which continued to grow in Q4 into securities. Having listed those specific Q1 impacts, NII improvement, more generally, will depend on all the factors we are all focused on such as loan growth, PPP loan forgiveness and PPP new originations and mortgage refinancings, as well as mortgage-backed security payment speeds, which impact the write-off of bond premiums. Should those trends develop in a positive way, our NII and earnings will benefit. One final note on NII. We added a slide in the appendix that shows the difference between 2015 when short-term rates were last this low and today. The important difference between then and now is the growth in our balance sheet which improved NII and the decline in expenses since then. Speaking of expenses and turning to slide 12. Q4 expenses were $13.9 billion; $474 million lower than Q3. The decline was driven by a reduction in litigation expense. We also saw a reduction in COVID-related expenses, primarily those associated with processing claims for unemployment insurance. Higher planned marketing costs across the firm and revenue-related processing and incentives mitigated the reductions. As we move into 2021, remember, Q1 will include seasonally higher payroll tax expense, which we estimate at roughly $350 million. Given the resurgence of COVID cases across the U.S. and in Europe, we estimate that $300 million to $400 million of net COVID-related expenses remained in our Q4 expenses. We continue to work hard to lower these types of expenses, but not at the expense of the safety of our employees and customers. And outside of these COVID costs, we continue to manage expenses tightly, using gains in productivity and digital activity to mitigate other increases. Turning to asset quality on slide 13. Our total net charge-offs this quarter were $881 million, or 38 basis points of average loans. Net charge-offs continued to benefit from years of responsible growth, as well as government stimulus and loan deferral programs. A $91 million decline in net charge-offs was driven by lower credit card losses. The loss rate on credit cards declined to a 20-year low of 206 basis points of average loans. Provision expense was $53 million, which not only reflected an improvement in macroeconomic projections but also incorporated uncertainties that remain in the economy due to the health crisis. These considerations resulted in an $838 million reserve release this quarter, reducing consumer loan reserves by $621 million and commercial by $207 million. Our allowance as a percentage of loans and leases ended the year at 2.04%, which is well above the 1.27% where we began the year, following our day one adoption of the CECL accounting standards. With respect to key variables used in setting our reserve, as done in previous quarters, we continued to include a number of downside scenarios. Based on our Q4 2020 weighting of those scenarios, GDP is forecasted to return to its Q4 2019 level in the early part of 2022. This improved by a couple of quarters relative to Q3. The weighting scenario also resulted in an unemployment rate at the end of 2021, consistent with where it is today, just north of 6.5%. On slide 14 we break out credit quality metrics for both our consumer and commercial portfolios. On the consumer front, COVID's effects on net charge-offs continued to remain benign. Overall, consumer net charge-offs declined $82 million, driven by card losses and remained near historic lows. We experienced modest increases in delinquency and NPL levels, but they remained low and were expected, given the deferral activity of customers. While expired deferrals drove consumer 30-day delinquency modestly higher compared to Q3, importantly, they remain 22% below the year-ago level. And, consumer deferral balances continued to decline in Q4, ending the year at $8 billion. Moreover, balances are now mostly consumer real estate-related with strong underlying collateral values. We added a slide in our appendix which further highlights delinquency trends for credit cards. It shows a modest bulge of the expected deferral-related delinquencies moving their way through time and into the 90-plus bucket at year-end. As the bulge of deferral-related delinquencies passed through time periods, delinquencies receded. As an example, in Q4, five-day delinquencies were down more than 30% year-over-year which shows that after deferrals passed through this time period, delinquencies fell and stayed lower. So, assuming net losses follow their historical relationship to delinquencies in the 90-plus day bucket and no other changes in card payment trends, we would expect card losses to be higher in Q1 but then decline in Q2. Moving to commercial, net charge-offs were relatively flat to Q3 even as we sold some loans in affected industries, crystallizing losses but reducing risk. Overall, given the environment, the asset quality of our commercial loan book remained solid, and 89% of exposures were either investment-grade or collateralized. Our reservable criticized exposure metric continued to be the most heavily impacted by COVID and increased this quarter by $3 billion from Q3, led by downgraded exposures in commercial real estate primarily hotels. Importantly, commercial NPLs while up modestly remained low at only 45 basis points of loans. Turning to the business segments and starting with Consumer Banking on slide 15. Consumer Banking throughout 2020 has been the segment most impacted by COVID. It bore the brunt of revenue disruption from interest rates, customer activity, and fee waivers. Reserve-building impacted provision expense. And expenses increased for PPP programs and protection of associates and customers. In Q4, compared to Q3, revenue, expenses, and provision all improved. We earned $2.6 billion in Consumer Banking in Q4 versus $2.1 billion in Q3. But with earnings still below prior year pre-pandemic levels, we know we still have plenty of room for improvement. Client momentum in this business continued to show strength around deposits and investment flows, while near-term loan growth has been impacted by the decline in mortgage balances from heightened refinance activity. Looking at the components of the P&L linked-quarter, revenue growth included both higher NII and fees. Consumer fees reflected an increased level of holiday spending as well as higher investment account activity. Even as revenue moved higher, expenses moved modestly lower, as we had a reduction in pandemic costs and continued to realize the benefits of a more digitally engaged customer base. As Brian noted, and as you can see on slide 17, we saw an improvement in digital enrollment. Most importantly, customer use of our digital capabilities increased with not only more sign-ons and higher digital sales, but also more service fulfillment through digital channels as reflected by volume growth in both Erica and Zelle. Note also that, both our rate paid and cost of deposit declined. Cost of deposits is now 135 basis points. In the past year, we added over 500,000 net new checking accounts and grew deposits 23% while dropping our cost of deposits 17 basis points, even with the increase in costs associated with the pandemic. Let's skip to Wealth Management on slide 18 and 19. And I will refer to both slides as I speak. Okay. Here again, the impact of lower rates on a large deposit book pressured NII, impacting an otherwise solid quarter with positive AUM flows, market appreciation, and solid deposit and loan growth. Net income of $836 million improved 12% from Q3, as revenue growth and improvement in provision exceeded a modest increase in expense. With respect to revenue, NII grew driven by solid growth of both loans and deposits. Asset management fees grew to a new record on higher market valuations and solid flows. Expenses increased driven by revenue-related expense and investments in our sales force. Merrill Lynch and the Private Bank both continue to grow households, as we remain a provider of choice for affluent clients. Client balances rose to a record of more than $3.3 trillion, up $302 billion year-over-year driven by higher market levels as well as positive client flows. Let's move to our Global Banking results on slide 20. COVID has also heavily impacted Global Banking due to lower interest rates, softer loan demand, and higher credit costs. But here, again we saw improvement. The business earned nearly $1.7 billion in Q4 improving $751 million from Q3 driven by lower provision expense and improved revenue. On a year-over-year basis, earnings were $341 million lower, driven by NII. Looking at revenue and comparing to Q3, revenue improvement was driven by higher Investment Banking fees as well as more leasing activity associated with our clients' ESG investments. Investments Banking fees for the company of nearly $1.9 billion grew 5% from Q3 and were up 26% year-over-year. As Brian noted, this performance led to improved market share overall and in several key products. Provision expense reflected a reserve release of $266 million in Q4, compared to a build in reserves of $555 million in Q3. Non-interest expense was higher compared to the linked quarter and year-over-year, primarily reflecting investments in the platform as well as support for the PPP program and also reflecting the recording of merchant services expense, given the change in accounting versus the year-ago quarter. As Brian noted earlier, customers continued to appreciate the ease, safety, and convenience of our digital banking capabilities. And usage continued to grow, helping defray other costs. We present some digital highlights on slide 22. As noted earlier, loans declined but saw stabilization late in the quarter. And continuing to trend since Q2, the spread of the loan portfolio continued to tick higher as spreads on new originations on average exceeded the average spread of the portfolio. Average deposits increased 26% relative to Q3 as businesses remained highly liquid. Okay. Switching to Global Markets on slide 23. Results reflect solid year-over-year improvement in revenue from sales and trading, but declined from the robust levels of Q3. As I usually do, I will talk about segment results, excluding DVA. This quarter, net DVA was a small loss of $56 million. On that basis, Global Markets produced $834 million of earnings in Q4, a decline from the more robust trading in Q3 but up markedly from Q4 2019. Focusing on year-over-year revenue was up 13% on higher sales and trading. The year-over-year expense increase was driven by higher activity-based costs for both trading and unemployment claims processing. Sales and trading contributed $3.1 billion to revenue increasing 7% year-over-year, driven by a 30% improvement in equities and a 5% decline in FICC. The strength in equities was driven by market volatility and investment repositioning, which drove client activity higher. The decline in FICC reflected strong credit trading performance, which was more than offset by declines across most macro products and mortgage trading. As Brian noted, the year-over-year performance of this business has been strong in every quarter of 2020. You can see that on slide 24 and that produced strong segment returns of 15% on allocated capital for the year. Okay. Finally, on slide 25, we show All Other which reported a loss of $425 million. Compared to Q3, the decline in net income was driven primarily by the prior quarter's tax benefit of $700 million associated with our U.K. deferred tax asset. Revenue declined from Q3 driven by the accounting for wind and solar and other ESG investments. We also experienced some modest equity investment losses. Expenses declined from Q3 on lower litigation expense but were partially offset by higher marketing costs. For 2021, absent any changes in the current tax laws or unusual items, we would expect the effective tax rate to be in the low double digits driven by the level of ESG client activity relative to pre-tax earnings. And with that, I'll turn it back to Lee and Brian for Q&A.
Operator, Operator
We'll take our first question today from John McDonald with Autonomous Research. Please go ahead.
John McDonald, Analyst
Hi. Good morning. I wanted to ask a question about expenses. Brian mentioned that he expects the cost numbers to remain relatively flat in 2021 compared to 2020. I'm curious if that refers to all expenses or just a specific core metric. Could you provide an outlook on the expenses you anticipate and the trend for COVID-related expenses this year? Thanks.
Brian Moynihan, CEO
Yes, John, that's the total amount for both years at around $55 billion because we are optimistic about continuing to reduce COVID-related costs. The slowdown this quarter was primarily due to the situation in October with case counts and the need to ensure support for our employees, including childcare at home to maintain effectiveness. This is reflected in our customer scores, and despite having half to 40% of our branches closed, growth in checking sales reached 70% to 80% of a typical year. So, yes, the overall figure is flat year-over-year. We are also addressing the underlying dynamics. Importantly, we are planning to invest $3.5 billion next year in technology, new financial centers, and additional staff to enhance sales. We expect to see a decrease in COVID-related costs as the year progresses, but we still have work ahead, while overall remains flat year-over-year.
John McDonald, Analyst
Okay. And then longer term Brian, you've talked about getting back to a low $54 billion as kind of a run rate ex-COVID. Is that still how you're thinking about things?
Brian Moynihan, CEO
Yes. We should start to work down. Again either, as we said many years ago, as we get in the out years and get more and more efficient the day-to-day costs of rent increases and payroll pay increases work at you. But the idea is to have the net expense grow sort of at 1% a year. So, 3% up from just day-to-day cost to manage a couple of percents out and so we'll continue to work that down in the future. We've got work to do on getting these COVID expenses out of here.
Operator, Operator
Our next question comes from Mike Mayo with Wells Fargo. Please go ahead.
Mike Mayo, Analyst
Hi. I wanted to follow up on efficiency. You're making significant progress with digital banking, engaging 39 million digital households. When looking at the metrics, the efficiency ratio for the quarter stands at 69%. If we exclude the $400 million in COVID-related costs, it might drop to 67%, but that’s still quite a bit higher than the 57% to 59% range you previously maintained. I understand low rates have an impact, but it seems like you might be investing more than you've communicated, or perhaps there are additional COVID costs involved. It raises the question of whether you are becoming as efficient as indicated in your initial remarks, Brian. Can you help clarify the current efficiency ratio or my adjusted efficiency ratio in comparison to a more typical level?
Brian Moynihan, CEO
So, Mike, looking at page 11 regarding net interest yield and net interest income, we observed a loss of $2 billion in revenue each quarter last year, which is significant. As we gradually improve this and as rates increase, that $2 billion per quarter, totaling $8 billion annually, should rise without any additional costs. We're also becoming more efficient in the branches, with operating costs over the deposit base now at 1.35%, and we've opened 700,000 new checking accounts. You're correct that it's impacted more by the revenue effects on net interest income than by expenses. We previously mentioned COVID-related costs of $300 million to $400 million, which are offset by savings in areas like travel. Although gross costs are higher, we just launched the PPP program today and have 5,000 employees ready to manage the next phase of PPP and the forgiveness process. Once that wraps up, those aspects will be cleared from our system. So we've got you covered.
Mike Mayo, Analyst
And then the follow-up to that is going to NII. I'm not sure, if you gave a specific outlook or not Paul, when you went through that. I mean, as you said liquidity is now greater than loans. Your loan-to-deposit ratio is at close to 50%, I think it's the lowest in history like ever right now. So there's a lot of dry powder there. But did you give guidance for NII for this year assuming the forward yield curve stays where it is? And do you think you can somehow pull out positive operating leverage this year? Or is that too tough given the rate environment?
Paul Donofrio, CFO
We didn't provide specific guidance, but I can share some insights on our outlook for 2021. It's important to reflect on our progress in 2020 to better estimate and model net interest income (NII) for this year. In Q1 of 2020, interest rates dropped to historically low levels, with short rates falling by 150 basis points and long rates by over 100 basis points. Loans significantly declined starting in Q2 as demand weakened, and larger companies turned to the capital markets to reduce debt and enhance liquidity. Historically, when interest rates or loan volumes decrease, it takes several quarters to see substantial balance sheet growth again. We believe we reached the bottom for NII in Q3, and it increased in Q4. Under normal circumstances, it should be easier to grow NII from here. The influx of deposits and our decision to invest excess cash into securities rather than keeping it idle contributed to our ability to recover quickly during this crisis. Our ongoing investment of cash in Q4 indicates we can mitigate the impacts of low loan demand in the short term due to recent reinvestment yields and fewer days of NII in Q1, resulting in NII remaining largely unchanged in Q1 compared to Q4 before increasing throughout the year. Additionally, we regained the interest days lost in Q1 during Q2 and Q3. As for commercial loans, we saw them stabilize at the end of Q4, which gives us hope for a rise in loan demand. We anticipate some loan demand this year, and with the rate curve steepening over the last 90 days, we expect NII in Q4 2021 to be significantly higher than in Q1 2021. Furthermore, year-over-year comparisons for the second half of 2021 to both 2020 and the first half of 2021 should look quite positive.
Mike Mayo, Analyst
Okay. That's helpful. And then when you say a lot higher in Q4 than Q1, bigger than a bread box? Or, I mean any sizing to that?
Paul Donofrio, CFO
I would expect NII in Q4 2021 to be much higher than Q1 2021.
Brian Moynihan, CEO
Once we start to understand the levels, we begin to see growth in loan activity. We expect to outpace the economy in loan growth during normal conditions and in terms of net interest income. However, we need to work our way back up from this point. It will take four to five quarters to properly adjust this significant balance sheet and reposition it, which involves managing it down before we can expand again. We will see how it unfolds.
Mike Mayo, Analyst
Okay. Thank you.
Operator, Operator
And our next question is from Glenn Schorr with Evercore. Please go ahead.
Glenn Schorr, Analyst
Hi. Thank you very much. You all are quite consistent in this area. However, I am interested in your views on capital. I'm not sure if your CET1 has ever reached such a high point, and your requirements are not increasing. As your capital continues to grow and considering your G-SIB target is relatively low compared to your major competitors, what are your thoughts on how aggressive you might be with capital returns? We don't discuss bolt-on acquisitions often, but I'm curious about your perspective on that. Additionally, could you address asset management in particular, given your strong distribution capabilities? Thank you.
Brian Moynihan, CEO
Glenn, let me address that. The primary opportunity for growth would come from acquiring more deposits in markets where we currently don't operate. However, that's not possible due to legal restrictions that have been in place since the GLBA and even earlier. Regarding asset management, we decided to sell that part of our business because we prioritize being a large distributor. While we do evaluate opportunities occasionally, our focus has been on organic growth and returning capital to our shareholders. The recent regulatory changes, such as the SLR adjustments, haven't impacted us significantly because we have ample SLR. We plan to be proactive in returning capital, especially with the $3 billion we need to return in the next couple of months. We'll see how the Federal Reserve's guidelines evolve, and then we'll proceed accordingly. At the moment, there aren’t many acquisition opportunities in the United States, so our best strategy continues to be developing our franchise organically, which has proven successful. In recent years, our brand system has also expanded significantly, averaging over $100 million in deposits per branch for those that have been operational for a few years, consistently increasing our market share year after year. Hence, we believe it’s crucial to keep this momentum going.
Glenn Schorr, Analyst
I appreciate all that. Is there a specific either buffer above the CET1 and/or you want to put it in the $36 billion excess? Where is a natural resting ground? Not tomorrow, but just whenever you get there.
Brian Moynihan, CEO
Yes. We always said sort of 50 basis points above the relevant binding criteria is where you'd start to slow down. But remember, we're basically only getting back to earnings. And so we got a lot of room between us and whatever the requirement is plus 50 basis points. And from time-to-time those move around advance to standardize SLR whatever is binding. But think about that's where the Board targets are.
Operator, Operator
Our next question is from Matt O'Connor with Deutsche Bank. Please go ahead.
Matt O'Connor, Analyst
Good morning.
Brian Moynihan, CEO
Good morning.
Matt O'Connor, Analyst
Can you talk a bit about the timing of the liquidity deployment in the fourth quarter? I think mortgage rates actually came down. And one can argue if you look out six to 12 months longer-term rates will be higher as kind of vaccines get rolled out and the economy picks up. So obviously, you have tons of deposits, but it's also pretty long-duration assets I would think that you're buying. So if you could talk about that?
Paul Donofrio, CFO
Yes, you're correct. The 10-year rate increased during the quarter, but mortgage rates for customers went down, and the rates on mortgage-backed securities also slightly decreased. We always aim to balance liquidity, capital, returns, and profits, and we did allocate about $100 million of our cash into securities this quarter, including both mortgage-backed securities and some treasuries. We believe that was the right decision. We understand the rate structure and likely improved our yield on that $100 billion by around 125 basis points. Additionally, we still have significant excess cash. Our balance sheet shows an increase in cash by $70 billion to $80 billion this quarter after net deployment. This gives us ample opportunity for future investments, and we plan to make more investments in the second quarter while keeping an eye on the rate environment.
Matt O'Connor, Analyst
And then I guess somewhat related, is there a point where you just say, we don't want some of these deposits? It's better to kind of free up even more capital. Or just have a little bit more of an efficient balance sheet and not have to kind of make some of these tough decisions? Or charge for the deposits?
Brian Moynihan, CEO
If a customer approaches us to open a checking account and start a long-term relationship, we would never refuse that opportunity, whether they're a commercial or consumer customer seeking core deposits. When we examine our growth, we aren't aggressively bidding for CDs or money markets on the consumer side. You can note that $108 billion of the $160 billion increase came from checking account growth. Despite previous rate increases, we maintained our checking account growth and expect it to continue because these are essential customer relationships. Historically, when rates rose in 2016, 2017, and 2018, our checking accounts grew at double-digit rates quarter after quarter, indicating that we were taking market share. The same applies on the commercial side in our GTS business; we haven't been actively seeking short-term deposits. Our growth is based on solid core relationships that we are compensated to maintain. Even though commercial services may feel the impact of zero floors, the services provided justify our continued engagement. We don't accept deposits just for the sake of adding a few billion to our balance sheet without yielding returns; that's not our approach, and we have already turned down such offers.
Matt O'Connor, Analyst
Okay. Thank you.
Operator, Operator
Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy Graseck, Analyst
Hey thanks. Paul, just first off a follow-on question to the last one around the reinvestment into securities. Like you mentioned, you did $92 billion or so this past quarter. So, as we're thinking about the NII guidance you just gave, should we be anticipating an increase into the securities book that's above and beyond that roughly $100 million run rate that you did in 4Q?
Paul Donofrio, CFO
We are continuing to evaluate excess deposits and anticipate deploying more cash into securities. While we won't disclose the exact amount, there is a significant figure within the guidance we provided. The volume and speed of our purchases will be influenced by various factors, including expected loan demand and customer deposit behavior. While I won't provide a specific number, we do expect a meaningful increase this quarter.
Betsy Graseck, Analyst
Yes. Okay. Got it. And then just separately, in talking about credit, you indicated that the delinquencies are suggesting that your NCOs are going to be coming down Q-on-Q in 2Q. And that's a pretty stunning statement, given that we still have this unemployment rate where it is. Can you just talk a little bit about why you expect that's happening in your book of business? Do you just have a population that's really not being impacted by the unemployment rate? Maybe you could give us some color there.
Paul Donofrio, CFO
Sure. I want to clarify something I think I heard you say, or maybe you didn't say it, but I want to ensure everyone understands. We expect net charge-offs for card to increase in Q1; they will not decrease in Q1. And that’s the reason for that.
Brian Moynihan, CEO
Hey Paul. We lost you there for a second just, if you could say what you were saying.
Paul Donofrio, CFO
Okay. I want to clarify something because I think I heard you mention something different. We expect net charge-offs for card, which is the main component of consumer loans, to increase in Q1 and then decrease in Q2.
Betsy Graseck, Analyst
Yes. That's what I thought I said so sorry about that.
Paul Donofrio, CFO
The expectation is influenced by the delinquencies in the 90-day bucket, which are higher than in other buckets. These delinquencies have moved from the five-day to 30-day, then to 60-day, and now they are in the 90-day bucket. Historically, a certain percentage of delinquencies in the 90-day bucket translates into losses in the following quarter as they reach 180 days. However, when examining the 90-day bucket, we do not see the same high levels in the earlier buckets. In fact, the 30-day bucket shows a significant year-over-year decrease. This is why we believe Q2 results will likely decrease, although "likely" may be too strong a term. The real question is whether individuals impacted by the health crisis, who have received stimulus support and are unemployed, will the new stimulus help them until they are vaccinated and regain employment? And will we eventually see those losses, or will they simply be deferred to later periods?
Brian Moynihan, CEO
Betsy, to provide you with additional details, if you refer to page 27 of the deck in the appendix, you'll find four charts at the bottom that were intentionally included because we anticipated this question. If you analyze the categories from mid-2019 to the end of 2020, you'll notice that all the delinquency buckets have decreased, including the 90-plus days, which is down in gross dollar amounts year-over-year. However, the trend resembles more of a mouse moving through a snake rather than a pig, indicating that while there was an increase, it remains at a lower dollar amount. Subsequently, it is expected to decline again as you move from the left to the right side of the page. On page 14, you will see that total charge-offs in consumer this quarter were $482 million. The red bars representing credit cards show a significant decrease year-over-year in gross dollar amounts, which is promising for the future. When we mention an increase, it's from levels significantly lower than historical dollar amounts. Lastly, it's important to note that the unemployment rate among our customers is lower than that of the broader American population, largely because of our client selection and focus on the prime market.
Paul Donofrio, CFO
Hey, Betsy, to add to the discussion about commercial, we've noticed an increase in reservable criticized assets, but there has not been a significant rise in non-performing loans. They currently stand at 45 basis points of loans. We believe that commercial losses in the upcoming quarters will primarily stem from specific events within companies as they unfold, likely affecting industries that were more severely impacted by COVID. This quarter, we recorded some losses as we decided to reduce our exposure to those impacted industries. This resulted in some realized losses, which appeared in our net charge-offs this quarter. If we hadn't made those adjustments, our net charge-offs in commercial would have been even lower.
Betsy Graseck, Analyst
Yes. Yes. No, I got it. I mean, we're forecasting NCOs peaking sometime in the end of 2021. But given your comments maybe the question is have they already peaked, or will they have peaked for you in like Q1?
Brian Moynihan, CEO
The care there is to think the consumer is really at this point, sort of, run the course. And the commercial, the reserves have built and the activity may occur in the out quarters. But the consumer runs the course by just straight throughput five to 30, 30 to 60, 60 to 90. So we're showing you the charts that really tell you what's going to happen in the first half and because it's a pretty mathematical calculation.
Betsy Graseck, Analyst
Yes. No, I got it. Impressive. Thank you.
Operator, Operator
Next question from Vivek Juneja with JPMorgan. Please go ahead.
Vivek Juneja, Analyst
Hi, Brian. Hi, Paul. Brian, a question for you. Can you talk a little bit about your FICC trading? You've lost share in 2020 including in Q4. What are you thinking about this business? What are your plans for it?
Brian Moynihan, CEO
Our plans are to continue operating as we do. Looking at it year-over-year, it's an integrated business market. Jimmy does a great job, and as shown on that chart, it's one of the best years it has ever had, with a year-over-year increase of 15% or so. They perform well, and there are areas where we do not engage, which tend to fluctuate quarterly. Interestingly, when those areas don't perform, people tend to overlook that aspect, allowing us to maintain a more stable revenue level. As seen on page 24, we recorded $13.2 billion, $13.3 billion, $12.9 billion, and $15.2 billion, indicating a strong year. The FICC revenue rose from $8.4 billion to $9.7 billion, which is significant, particularly in areas we don't trade. We are more credit-driven, and that distinguishes us from some competitors. We are pleased with the business and believe it effectively supports the connectivity between our issuing clients and our investing clients. We will continue to drive this effort.
Paul Donofrio, CFO
Can I just add one, happy to see what data you're looking at but I don't think we're losing market share in FICC. I think we're actually gaining market share. And perhaps not as much as we're gaining in equities, but we're gaining market share certainly in the segments where we're investing within FICC.
Vivek Juneja, Analyst
Okay. We'll go back and compare with the Europeans. Paul, I have a different question for you. What was the MBS premium amortization expense this quarter?
Paul Donofrio, CFO
I don't think we're providing the exact number, but it was an increase. I would say it had a meaningful impact on net interest income. Going forward, we will need to see customer mortgage rates stabilize and rise for that number to stabilize and decrease.
Vivek Juneja, Analyst
I understood what you meant. Yes.
Paul Donofrio, CFO
Yes. However, to give you a sense of its impact, one-third of the decline in net interest yield for the company was due to premium amortization in the quarter.
Vivek Juneja, Analyst
By the time you provided the fourth quarter guidance for net interest income improvements, how much of a reversal are you expecting in the mortgage-backed securities premium amortization?
Paul Donofrio, CFO
I would consider the forward rates for your estimation. We are not expecting them to increase in that guidance. The forward curve indicates that rates are projected to rise by the end of the year compared to their current levels.
Vivek Juneja, Analyst
Yes, my question was how much are you expecting it to decline, Paul? I know you do not expect them to grow.
Paul Donofrio, CFO
I understand you were asking for the dollar amount and I'm not going to give you the dollar amount.
Vivek Juneja, Analyst
Not the dollar amount, but do you have any sense of the percentage, since you mentioned that one-third of the decline was due to that? I'm not looking for an exact figure, just any general idea would be helpful.
Paul Donofrio, CFO
Maybe we can follow up on that. I don’t have the information readily available. I can provide an estimate of how much of the improvement comes from that later. However, I just don’t have it right now. Additionally, I want to point out that the write-off of premium is not solely due to the decline in rates; it’s important to remember that the portfolio has also increased in size.
Vivek Juneja, Analyst
Right. But you've been hurt more than others by it. So, obviously, that should turn around for you later in the year if refinance…
Paul Donofrio, CFO
Yes. That's a significant advantage if mortgage rates increase.
Vivek Juneja, Analyst
All right. Thanks.
Operator, Operator
Next question is from Ken Usdin with Jefferies. Please go ahead.
Ken Usdin, Analyst
Thanks. Good morning. Just one accounting follow-up for you Paul. Just you mentioned the low double-digit tax rate. And that other fee line for where the ESG investments go through has been pretty volatile, but a pretty big negative number. And I just wanted to see if there's any way you can help us understand just what that looks like when you're helping us understand the tax rate as the other side of it.
Paul Donofrio, CFO
Yes, I can help with that. There are two ways to approach this. First, consider the other income line for the company. This line will fluctuate significantly from quarter to quarter. For modeling purposes, a reasonable estimate going forward, excluding unusual items, would be a loss of about $200 million in that line, with the fourth quarter typically being higher due to the seasonal increase in partnership investments we've seen this quarter. While I could provide more details, the volatility is primarily driven by partnership losses in the fourth quarter. Other factors in that line include equity investment gains, gains and losses from the sale of debt securities, and some mark-to-market income from our fair value loans and related hedges. Expect volatility in this area, but I would estimate a loss of around $200 million each quarter, with a larger loss in the fourth quarter.
Ken Usdin, Analyst
Yes, understood. Great. I want to follow up on the progress you're seeing in the franchise as we approach reopening. Many of the fee items related to cards and consumers are still fluctuating. What do you believe needs to occur for those fees to move in a positive direction? There's a significant amount of excess liquidity impacting fees and overdrafts. Is this the new normal, or do you anticipate that as the economy improves, we will also see an improvement in those fees?
Brian Moynihan, CEO
I believe the main factor is the interchange dynamics in both debit and credit, which are growing but recovering from a previous deficit as I mentioned earlier. This should be beneficial. Additionally, the number of transaction accounts is increasing. However, it's important to note that we have a strategy aimed at reducing clients' overdraft charges through our safe balance account, which has about three million accounts. We're encouraging our customers to utilize our services in a way that maximizes their benefits. This effort impacts the overdraft line as the overall dollar volume increases. We'll have to wait and see how it plays out. Ultimately, the growth in account numbers will drive our results, albeit slowly, as we've consistently been reducing our overdraft fees relative to total fees among large competitors, and we plan to keep this trend going since it indicates our customers are doing well.
Ken Usdin, Analyst
Got it. Okay. Last thing any quick update on the merchant and how that's progressing along as well? And now that we've seen another kind of full quarter of that broken out?
Brian Moynihan, CEO
Yes, I believe it's still developing. We've implemented the new system and are beginning to market it, which we see as a fundamental aspect of our business. However, one challenge has been the sales process, which is closely tied to the types of customers utilizing merchant services, and this has been impacted by COVID. Overall, it's progressing, but there's room for improvement.
Ken Usdin, Analyst
All right. Got it. Thank you, Brian.
Operator, Operator
Next question is from Jim Mitchell with Seaport Global. Please go ahead.
Jim Mitchell, Analyst
Hey, good morning. Maybe just a little bit on consumer loan growth. It seems like you deliberately shrunk residential mortgage. Auto looked pretty good. But credit card was a little sluggish, I think, given typical seasonality. So, customers are flush with cash. How do we think about the demand for lending going forward? You gave some nice color on the commercial side on a monthly basis. How do we think about the consumer side?
Brian Moynihan, CEO
The issue at hand is regarding our large consumer lending operations, particularly in the unsecured sector, where we saw a pullback in March, April, and May. The good news is that we are returning to normal levels. For instance, in December, we had 198,000 credit card accounts booked, which is an increase from 191,000, marking the highest level since pre-COVID days, though we were previously operating at 300,000 accounts. There’s work to be done to get back to those full numbers on the credit card side. Regarding mortgages, we are being cautious and conservative with interest rates, and we have booked about $7 billion in secured lending, including mortgages, within our core consumer business, which gives us some optimism. Auto lending has picked up again, but home equity lending has dropped to about $0.5 billion per quarter from around $3 billion. We still have room for improvement. On a positive note, credit card balances have stabilized at around 85 million, although there’s some seasonality. Meanwhile, mortgage activity seems to be improving slightly as we've reverted to more normalized underwriting practices, and the auto sector has remained strong. However, we did have to scale back, resulting in a loss of about half of our monthly credit card volume. We've since increased from a low point of 150 million to 200 million, but we still have work ahead of us.
Jim Mitchell, Analyst
So, is the uptick in marketing spend sort of reflective of that push to reengage with consumer and we should expect some nice sort of improvement going forward?
Brian Moynihan, CEO
All our marketing really is around consumer product capabilities. So, yes.
Operator, Operator
Our next question is from Gerard Cassidy with RBC Capital Markets. Please go ahead.
Gerard Cassidy, Analyst
Good morning Brian, good morning Paul. Brian, following up on the consumer commentary you provided, I recall you mentioned in your prepared remarks that you are returning your underwriting standards to pre-COVID levels. I have two questions regarding this. Can you explain how those standards have changed? When you tightened them, how have they shifted back to normal? Did this involve FICO scores on the consumer side, and did you implement the same changes on the commercial side? I would appreciate some details on what has changed in that area.
Brian Moynihan, CEO
Let me begin by discussing the commercial aspect of our business, which includes Business Banking, Global Commercial Banking, and Global Corporate Investment Banking. In March and April, we halted our prospecting efforts because it was quite challenging, and it was important to assess our portfolios thoroughly. We conducted quarterly portfolio reviews on every loan to ensure accurate ratings and to communicate with our customers about any potential needs for covenant waivers. Over time, we identified a group of customers in industries that are struggling, while the remainder of our customers are in solid condition, with improving credit quality seen on a quarterly basis. About four months ago, we resumed prospecting with a focused list for Business Banking and Global Commercial Banking, targeting middle market and upper small businesses across all our markets. Recently, we've expanded our prospecting efforts back to full capacity, with some exceptions for limited industries. On the small business front, the situation was more pronounced, and we've already seen a resurgence. In the fourth quarter, our originations increased quarter-over-quarter by 50%, and although this is a significant improvement, we are still down 50% year-over-year yet up over 100% linked-quarter. New commitments rose by 135%, but year-over-year figures still show a decline of 47%. This indicates a shift in the small business sector, which has been the slowest due to its high-risk nature. Turning to the consumer side, we maintained our loan-to-value ratios on consumer mortgages and adjusted our FICO requirements, slowing down due to market conditions. Home equity lending has also decelerated, while auto loans resumed more quickly due to their secured and short-term nature. We have consistently targeted the super prime segment. Recently, we have returned to about 80% to 90% of our previous ability to generate loans, having adjusted from a 20% decrease, and anticipate this trend will continue as we gain clarity on market direction. This is promising for future economic activity and loan growth.
Gerard Cassidy, Analyst
Very good. Thank you. And then Paul in your comments you were talking about having greater confidence with the deposits to go further out on the yield curve. You talked a little bit about that already. I guess the question is what changed on the confidence side that now you're comfortable to take those deposits and move them further out versus maybe six months ago?
Paul Donofrio, CFO
Sure. So, what's changed is A, the level of deposits, right? We continue to get more and more deposits in. B, reviewing as Brian noted earlier where the deposits are coming from predominantly high-quality deposits checking, et cetera new accounts. Three, when you look at just the sheer growth of the money supply coupled with the expectation as we come out of this recession that the velocity of money will likely increase, it's hard to build a case that we're going to see a significant decline in deposits in the U.S. And we're going to get our fair share if not more of those deposits. So, because of how we run our business on both commercial and the retail side in terms of focusing on high-quality deposits, we just feel good about the deposits we have.
Brian Moynihan, CEO
Yes, and Gerard just to make it sort of straightforward. Once you got by the feeling this was an ephemeral move; and especially, on the corporate side that this was going to be what a state whether you could be a little more interested. On the consumer side, you always know those are going to hang but the reality is the big inflow on the commercial side you had to make sure it wasn't ephemeral.
Gerard Cassidy, Analyst
Very good. And Brian and Paul, hopefully, we'll see you guys at Bank this year in person.
Brian Moynihan, CEO
Good, we'll try.
Paul Donofrio, CFO
Hope so.
Gerard Cassidy, Analyst
Okay. Thank you, gentlemen.
Operator, Operator
We'll take today's last question from Brian Kleinhanzl with KBW. Please go ahead.
Brian Kleinhanzl, Analyst
Thanks. I just have one question. It's regarding the reserve levels overall. I guess when you think about it, I know there was some changes with this quarter driven I think by qualitative factors. But I guess when you look at relative to the base case, how much of the reserve is still related to qualitative factors? Meaning that if the base case comes true that could be released over time.
Brian Moynihan, CEO
Yes, I'm not sure we provide the exact methodology, but let me give you an overview. We set our reserve at the end of 2020 based on an unemployment rate of 7.8% and adjusted it to 6.6% for 2021. The actual rate was more than a full percentage point lower than that. As we gain more confidence in the economic outlook, we expect the forward path to stabilize. Two key factors will contribute to this: the volume of site activity has increased, leading to fewer charge-offs, which instills confidence in our projections, and the economic conditions have become clearer, especially with the end of the COVID era now more certain due to the vaccine. As these changes occur, the uncertainty surrounding our assumptions will decrease. Currently, we have approximately 50% of our weight focused on downside risks, but this will lessen over time. As the duration of the crisis becomes clearer, particularly with more vaccinations, our lifetime calculations will start to incorporate these positive developments more significantly. Both factors will influence our reserves. Moreover, our economic team anticipates the economy will surpass its pre-crisis state by the end of this year, and our reserve strategy will be adjusted accordingly moving into next year. We are adopting a more conservative approach, which requires careful judgment.
Brian Kleinhanzl, Analyst
All right. Great. Thanks.
Operator, Operator
And this will conclude today's program. Thanks for your participation. You may now disconnect.