Earnings Call
Bank Of America Corp /De/ (BAC)
Earnings Call Transcript - BAC Q4 2023
Operator, Operator
Good day, everyone, and welcome to Bank of America's Earnings Announcement. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. Operator instructions were provided. Please note this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Lee McEntire.
Lee McEntire, Investor Relations
Good morning. Welcome, and thank you for joining the call to review our fourth quarter and full year results. We know it's a busy day for all of you. As usual, our earnings release documents are available on the Investor Relations section of bankofamerica.com website, and they include the earnings presentation that we will be referring to during this call. I trust everybody's had a chance to review the documents. I'll first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Let me just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from those expectations are detailed in our earnings materials and the SEC filings that are available on our website. Information about our non-GAAP financial measures, including reconciliations to US GAAP can also be found in our earnings materials and our website. So with that, I'll turn the call over to you, Brian. Thank you very much.
Brian Moynihan, Chairman and CEO
Thank you, and Happy New Year to everyone. Good morning. Thank you for joining us. I'm starting on Slide 2 of the earnings presentation. Here at Bank of America, our teammates finished 2023 with a solid fourth quarter. Reported EPS was $0.35, but that included two notable items that Alastair will describe in more detail. Adjusted for those two items, net income was $5.9 billion after tax or $0.70 per share. Before Alastair covers quarter four results, I want to take a moment and briefly review the 2023 full year results. Our team at Bank of America delivered strong profits for shareholders across a challenging year, navigating a slowing economy, geopolitical tensions, bank failures, and the impact of a rate hike of historic speed. We began the year with a pessimistic aura as economists predicted a mild recession within the year. Instead, 2023 showcased economic resilience led by US consumers despite higher interest rates. We ended 2023 with economists projecting the Fed has successfully steered the US economy to a soft landing. In regards to the economy, during 2023, we consistently made a few points regarding what we were seeing in our customer data here at Bank of America. First, the year-over-year growth rate in spending from the beginning of '23 started declining. And it went from, in the early part of '23 over the early part of '22 from a 9% to 10% growth rate to this quarter's 4% to 5% growth rate and that's where it stands here early in 2024. You can see that on Slide 29 in the appendix. That growth rate, 4% to 5%, is more consistent with a 2% GDP environment and a lower inflation environment. Second, the point we've made is that our consumer deposit balances at Bank of America remained 30% higher than pre-pandemic. We saw the deposit balance of consumer accounts move lower this quarter, but are now seeing more differentiation in behavior. In the lower average balance size accounts, the balances in there still remain at multiples of pre-pandemic levels, nearly three years past last stimulus. They are modestly declining. The deposit outflows you've seen in consumer have largely been driven by the higher-balance accounts who've moved their excess balances into the markets to seek higher yields. We capture those with our leading wealth platform. Third, the consumers of Bank of America have had access to credit and are borrowing responsibly. The balance sheets are generally in good shape. And while impacted by higher rates, remember, many of them have fixed-rate mortgages and remain employed. So they've shown great resilience. Let's move to discussion of full year 2023 earnings. We reported net income of $26.5 billion after tax, which includes $2.8 billion after tax for notable quarter four items. Adjusted for those items, adjusted net income was $29.3 billion after tax. Earnings per share were $3.42 and that grew 7% over 2022. On that adjusted basis, we generated a 90 basis point return on assets and a 15% return on tangible common equity. The year 2023 was characterized by a record organic customer activity, record digital customer engagement levels and satisfaction scores, strong but slowing NII during the course of the year, strong sales and trading up 7% year-over-year, operating leverage reflected good expense discipline, solid asset quality and a strong capital and liquidity position. All this was helped by the years of Bank of America's assiduous dedication to responsible growth. This helped us bring our headcount and expense down every quarter during 2023, in line with what we told you to expect early last year. Adjusted full year revenue grew 5% on the back of 9% NII improvement and strong asset management fees and sales and trading results. We achieved 170 basis points of operating leverage in 2023 as heightened quarterly expense levels were driven lower throughout the year even as the investments in growth continued. Net charge-offs moved higher through the year off the historic lows, but they still compare very favorably against historic averages. One last point worth noting is the level of deposits. If you think back as we ended 2022 and entered 2023, the great debate was how much the pandemic surge in deposits would dissipate. But looking today, we ended 2023 with $1.924 trillion of deposits, only $7 billion less than we had at year-end '22 and 4% higher than the trough in May of this year. The total average deposits in the fourth quarter remained 35% higher than they did in the fourth quarter of 2019. This has been tremendous work by our teams to drive our industry-leading market share, actually outperforming the industry across the four-year period, and again this year. While the economy appears to continue to normalize and rates continue to have some volatility, one thing that remains important is driving that organic growth. This client activity sticks to the ribs is what we want to spend a moment as I wrap up. On Slide 3, we highlight some of the successes in organic activity in our results for the year. Bank of America team is a powerful engine that's fueling results across all our businesses. I would note a couple of examples to try and connect the importance to our financials. It's easy to use the consumer business as an example. In consumer, we added 600,000 net new checking accounts during the year 2023. The fourth quarter of 2023 represents the 20th straight quarter of net addition of checking accounts. The quality is what drives the checking account balances. On average, 67% of the deposit balances have been with us for customers who have been with us for more than 10 years. 92% of the consumer checking accounts are primary, meaning they're the core client household account. 60% of our checking accounts use their debit card. They average 400 transactions per account each year, showing how engaged they are. They have traditionally opened savings accounts 20% to 25% of the time within a few months of opening their checking accounts. Thinking about those new accounts, at opening those new checking accounts opened last year, bring in about $4,000 of balances. Then they deepen over the next subsequent months to two times that amount. New saving accounts come with those accounts, starting with about $8,000 and doubling over time. From the total new checking accounts we opened just in 2023, those customers have opened nearly 0.5 million credit card accounts with us so far in 2023. Historically, we've seen on average these customers more than doubled those card balances within a year. Those card accounts on average have spent about $7,000 per year, of which a portion will carry a balance. Now, there's always additional opportunity to further serve our clients and to continue to meet them where they are. In addition to the industry-leading digital platforms that we have, we have opened 50 new financial centers in 2023. More than half of those were in our expansion markets. We've expanded our presence during 2023 to 10 markets, including our latest opening in Omaha. In our global wealth management team, we added more than 40,000 net new relationships across Merrill and the Private Bank. Our advisors opened 150,000 new banking accounts for wealth management clients, showing the completeness of the relationship approach. The average Merrill account is over $1 million at opening. The average private bank account is multiples of that. As you can see on the slide, we now manage $5.4 trillion of client balances across loans, deposits, investments of our consumer clients, both consumer and GWIM. We saw $84 billion of flows into those accounts last year. As we switch to Global Banking on the lower-left-hand side of the slide, we added clients to increase the number of products per relationship. Just like in consumer, we have seen good growth in customers seeking the benefits of our physical and digital capabilities, but most importantly, our talented relationship managers who provide financing solutions, treasury services, strategic advice for clients with local and global needs. We added roughly 2,500 new commercial and business banking clients this year. That is more than twice what we added in 2022. We look forward to continue to grow with those clients in '24 and add even more. This capitalized on a multi-year build of our relationship management team in the Global Banking businesses, especially in product expansion also, especially in the global transaction services area and mid-market investment bank. As we think about global markets, we continue to see strong performance from our team with 7% year-over-year revenue growth, the strongest we've had in many years. We see digital tools our customers have access to across the board, helping us enable this activity at lower costs. Our normal digital banking slides are once again included for your reference on Pages 21, 24 and 26. In summary, this was a good quarter. We delivered our third quarter of expense declines. We saw NII outperform what we expected when we talked to you on the last earnings call. We continue to manage well through the transition and the rate structure. We saw deposits grow this quarter. And we look forward with a strong capital base, strong liquidity and growing loans and deposits to a great 2024. I want to thank my teammates for what they did for us in 2023, and we all know we're off to a nice start for '24. With that, I'll turn it over to Alastair.
Alastair Borthwick, Chief Financial Officer
Thank you, Brian. And I'm going to start on Slide 4 of the earnings presentation to provide just a little more context on the summary income statement and the highlights. For the fourth quarter, as Brian noted, we reported $3.1 billion in net income or $0.35 per diluted share. That GAAP net income number included two notable items. First, we recorded $2.1 billion of pretax expense, that's $0.20 after-tax earnings per share for the special assessment by the FDIC to recover losses from the failures of Silicon Valley and Signature Bank. Second, on November 15th 2023, Bloomberg announced that they would discontinue publishing the Bloomberg Short-Term Bank Yield Index rate after November 15th 2024 and many commercial loans in the industry had BSBY as a reference rate prior to SOFR becoming industry-standard. As noted in an 8-K we filed earlier this week, we came to a conclusion in early January that BSBY cessation would not get the same accounting treatment allowed under LIBOR cessation. And therefore cash-flow hedges of BSBY indexed products related to BSBY cash flows, forecast to occur after November 15th 2024, we need to be moved out of OCI into earnings in the fourth quarter of '23 financials. So as a result of the accounting interpretation, we recorded a negative pretax impact to our market making revenue of approximately $1.6 billion. I just want to reinforce that's an accounting impact. It's not an economic change to the contracts and we'll see an offset to this over time through higher NII mostly occurring in 2025 and 2026 after BSBY ceases in November 2024. The accounting lowered CET1 by 8 basis points during the quarter and we will recapture that in the next two or three years. Adjusted for the FDIC assessment and the BSBY cessation related impact, Q4 net income was $5.9 billion, or $0.70 per share. On Slide 5, we show the highlights of the quarter and we reported revenue of $22.1 billion on an FTE basis. And excluding the BSBY cessation impact, adjusted revenue was $23.7 billion and declined 4%, driven by net interest income. Fourth quarter revenue is a tough year-over-year comparison as NII peaked in the fourth quarter of '22 at $14.8 billion, before slowly moving lower over 2023. Outside of NII, we saw good growth in treasury service fees and wealth management fees and those were offset by higher tax-advantaged investment deal activity, creating higher operating losses and the more tax credits associated with them and recognized across periods. Expense for the quarter of $17.7 billion included the $2.1 billion FDIC charge. So excluding that charge, adjusted expense was $15.6 billion and consistent with our prior guidance. That allowed us to invest for growth, as well as use good expense discipline to eliminate work and reduce headcount. And on an adjusted basis, this then is the third quarter of sequential expense decline this year. Provision expense for the quarter was $1.1 billion, that consisted of $1.2 billion in net charge-offs and a modest reserve release, reflecting the improved macroeconomic outlook. Net charge-offs reflect the continued trend in consumer and commercial charge-offs towards more normalized levels as well as higher commercial real-estate office losses. Lastly, our income tax expense this quarter was a modest benefit as credits from tax-advantaged investment deals offset the tax expense on the lower earnings in Q4 driven by the notable charges. So let's review the balance sheet on Slide 6, and you'll see we ended the quarter at $3.2 trillion of total assets, up $27 billion from the third quarter. I'd highlight here, both the $39 billion growth in deposits and a decline in cash on balance sheet of $19 billion. Overall, you'll note the debt securities increased $92 billion. And that included a $9 billion decline in hold-to-maturity securities, and $100 billion increase in available-for-sale securities reflecting short term investment of liquidity from all of these activities. We continue to put money into very short-term T-bills and hedged treasury notes this quarter and those are essentially earning the same rate as cash. And you can see our absolute cash levels remain quite high. As Brian noted, liquidity remained strong with $897 billion of global excess liquidity sources. That was up $38 billion from the third quarter of '23 and it remained $321 billion above our pre-pandemic level in the fourth quarter of '19. Shareholders' equity increased $5 billion from the third quarter as earnings and AOCI improvement were only partially offset by capital distributed to shareholders. The AOCI improved $4 billion, reflecting both the previously mentioned BSBY-related reclassification into fourth quarter earnings and other AOCI improvements. This included some improvements in other cash-flow hedges, which don't impact regulatory capital, driven by a decline in long-end rates. During the quarter, we paid out $1.9 billion in common dividends and we bought back $800 million in shares, which more than offset our employee awards. Tangible book value per share is up 3% linked-quarter and 12% year-over-year. Turning to the regulatory capital, our CET1 level improved to $195 billion from September 30th, while the CET1 ratio declined 9 basis points to 11.8% and remains well above our current 10% requirement as of January 1st '24. We also remained well-positioned against the proposed capital rules, as our current CET1 level matches our 10% minimum against anticipated RWA inflation from the proposed rules. Risk-weighted assets increased $19 billion on loan growth and growth in global markets, RWA, and our supplemental leverage ratio was 6.1% versus the minimum requirement of 5%, which leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above requirements. So let's focus on loans by looking at the average balances on Slide 7. And you can see loan growth improved this quarter as we saw improvement in both credit card and commercial borrowing, offset by declines in commercial real estate and securities-based lending. The commercial growth reflects good demand overall and was muted only at quarter-end by companies paying down commercial balances as they finalized their year-end financial positions. Lastly, on a positive note, we've seen loan spreads continue to widen, given some of the capital pressures from proposed rules on the banking industry, and this combined with investments in relationship managers we've added over the past few years, has positioned us to take market-share and improved spreads. Moving to deposits, I'll stay focused on averages on Slide 8, and the trends of ending balances saw growth in Global Banking and wealth management and declines in consumer. Relative to the pre-pandemic fourth quarter '19 period, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels. Consumer is up 33%, with checking up 40% driven by the net-new checking accounts added that Brian noted earlier. On a more recent performance basis, deposits grew $29 billion or 6% from Q3 on an annualized basis. The only business that saw a decline in deposits linked-quarter was consumer. And here we saw a decline of $21 billion. This linked-quarter decline slowed from the third quarter change. And in total, we have $959 billion in high-quality consumer deposits, which remains $239 billion above pre-pandemic levels. The total rate paid on consumer deposits in the quarter was 47 basis points and this remains very low, driven by the high mix of quality transactional accounts. Most of this quarter's rate increase remains concentrated in CDs and consumer investment deposits, which together only represent 15% of the consumer deposits. Turning to wealth management, balances on an end-of-period basis improved modestly, and we continued to experience a slowing in the trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off-balance sheet. Our sweep balances were down $4 billion and were replaced by new account generation and deepening. Global Banking deposits grew $23 billion, moving nicely above the $500 billion level that we've experienced over the course of the past six quarters. These deposits are generally transactional deposits of our commercial customers. They are the ones that used to manage their cash flows. And noninterest-bearing deposits were about 33% of deposits at the end of that quarter. So when we turn to excess deposit levels on Slide 9, you can see deposit growth exceeded loan growth this quarter. And that expanded our excess of deposits above loans, from Q3 to about $0.9 trillion, which is well above the $0.5 trillion we had pre-pandemic. You can see that in the upper-left of Slide 9, which is where we've used and shown you how we think about managing excess liquidity. We continue to have a balanced mix of cash available-for-sale securities and held-to-maturity securities. And this quarter, the combination of the cash and the AFS securities now represent 51% of the total $1.2 trillion noted on this page. You'll also notice the change in mix of the shorter-term portfolio as we began to lower cash and increase available-for-sale securities buying mostly short-dated T-Bills with similar yields. You can note also the hold-to-maturity book continued to decline from paydowns and maturities pulling to PAR. In total, the hold-to-maturity book moved below $600 billion this quarter. It's now down $89 billion from its peak and it consists of about $122 billion in treasuries and about $465 billion in mortgage-backed securities along with a few billion others. Also note that the blended cash and securities yield continued to rise and remained about 170 basis points above the rate we pay for deposits. The replacement of these lower earning assets into higher yielding assets continues to provide an ongoing benefit and support to NII. From a valuation perspective, given the reduced balance and the longer-term interest-rate reductions we've seen in the fourth quarter, we experienced an improvement of more than $30 billion in the valuation of the hold-to-maturity securities. So, let's turn our focus to NII performance using Slide 10. And a strong finish to the year helped us report $57.5 billion in NII on a fully tax-equivalent basis for the full year of 2023. That's up 9% compared to 2022. On an FTE basis, we reported $14.1 billion in NII, which was modestly better than we told you to expect last quarter driven by modestly better deposit growth. The $14.1 billion was a decline of $400 million from the third quarter, driven by the unfavorable impacts of deposits and related pricing and lower global markets NII, partially offset by higher rates benefiting asset yields. And as we look forward, given that we've got one less day of interest in the first quarter and that's worth about $125 million to $150 million, and given the rate curve shift, we believe the first quarter will be somewhere between $100 million and $200 million lower than the fourth quarter. It could move a touch lower in Q2 and then we believe it should begin to grow sequentially in the second half of 2024. So very consistent with our prior guidance. With regard to the forward view I just provided, let me note a few other caveats. It would include an assumption that interest rates in the forward curve materialize. And the forward curve today has six cuts compared to last quarter when we had three cuts in the 2024 curve. So it's bouncing around a little and shifted in the past quarter. Forward view also includes our expectation of low to mid-single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. Given our recent deposit and loan performance, we continue to feel good about these assumptions. Before moving away, it's worth noting our net interest yield declined 14 basis points to 197 basis points. And that's driven by the decline in NII, as well as higher average earning assets, reflecting prior period builds of cash and cash-like securities. Turning to asset sensitivity and focusing on a forward yield curve basis, the plus 100 basis point parallel shift at December 31st was $3.5 billion of expected NII over the next 12 months, coming from our banking book. And that assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 93% of that sensitivity is driven by short rates. The 100 basis point down scenario is $3.1 billion. Let's turn to expense and we'll use Slide 11 for the discussion. And we reported $15.6 billion in adjusted expense this quarter, which excludes the FDIC assessment. This was in line with our projection from last quarter and down $199 million from the third quarter, driven by reductions in headcount earlier in the year and seasonally lower revenue-related expense. These reductions outpace the continued investments that we're making to drive growth. Our average headcount was down from the third quarter to 213,000 people, and that's good work after peaking at 218,000 last January. We lowered our headcount through the year by 5,000 and did so without taking an outsized severance charge as we used attrition to lower our headcount along the way. One more point to acknowledge the good work of our teams on expense, Q4 '23 adjusted expense of $15.6 billion is only $94 million higher than the fourth quarter of '22. And just remember, we began 2023 with a $125 million lift in quarterly FDIC expense. So through some good operational excellence work and otherwise, we've managed through all of the additional costs of investments in new tech initiatives and merit and financial center openings, as well as some stronger revenue and higher marketing costs. As we look forward to next quarter, we expect to see the more typical Q1 seasonal elevation in expense of $700 million to $800 million compared to Q4. So we believe expense will be around $16.4 billion in the first quarter. That includes elevated payroll tax expense and the expected costs of higher revenue in both sales and trading and wealth management, as well as merit cost increases. And as we move through 2024, we expect the quarterly expense to decline from Q1, reflecting a drop in the elevated payroll tax expense and revenue changes, as well as some additional operational excellence initiative work. Continued digital transformation and adoption is also going to help us as we go through the year. Now turn to credit, and I'll use Slide 12 for that. Provision expense was $1.1 billion in the fourth quarter and it included an $88 million reserve release due to a modestly improved macroeconomic environment. On a weighted basis, we're reserved for an unemployment rate of nearly 5% by the end of 2024 compared to the most recent 3.7% rate reported. Net charge-offs of $1.2 billion increased $261 million from the third quarter, and the net charge-off ratio was 45 basis points, a 10 basis point increase from the third quarter. On Slide 13, we highlight the credit quality metrics for both our consumer and commercial portfolios, and the overall increase in net charge-offs was driven by three things. First, $104 million of the increase was driven by credit card losses, which continued to normalize as higher late-stage delinquencies flowed through to charge-offs. Second, $65 million of the increase was driven by a broad range of smaller commercial and industrial losses, which were mostly previously reserved and monitored for the past couple of quarters. And lastly, $76 million of the increase was driven by commercial real estate losses, primarily due to office, also mostly reserved. In the appendix, we've included a current view of our commercial real estate and office portfolio stats provided last quarter, and we've also included the historical perspective of our loan book de-risking and long term trend of our consumer and commercial net charge-offs, and you can see those on slides 30 to 33. Let's move on to the various lines of business and their results and I'll start on Slide 14 with Consumer Banking. For the quarter, consumer earned $2.8 billion on continued good organic growth and despite their good client activity, it's difficult to outrun the earnings impact of higher rates on deposit costs while the credit is also normalizing. The reported earnings declined 23% year-over-year as top line revenue declined 4% while expense rose 3% and the credit costs rose. Customer activity showed another strong quarter of net new checking growth, another strong period of card opening and investment balances for consumer clients which climbed $105 billion over the past year to a record $424 billion. Our full year flows were $49 billion as accounts grew 10% in the past 12 months. Loan growth was led by credit card and that broke above $100 billion this quarter. Deposit decline slowed in the quarter with continued strong discipline around pricing. And our expense reflects continued business investments for growth. And as you can also see on the appendix page 21, digital engagement continued to improve and showed good year-over-year improvement as customers enjoy the continuation of enhanced capabilities. Moving to Wealth Management on Slide 15. We produced good results, earning a little more than $1 billion after adding 40,000 net new relationships in Merrill and the private bank this year. These results were down from last year as a decline in NII from higher deposit costs still catching up from the interest rate hikes, more than offset higher fees from asset management, driven by higher market levels and assets under management flows. As Brian noted earlier, both Merrill and the private bank continued to see strong organic growth and produced solid assets under management flows of $52 billion since the fourth quarter of '22, which reflects a good mix of new client money as well as existing clients putting their money to the work. Expenses reflect continued investments in the business and revenue related costs. On Slide 16, you see the global banking results. The business produced strong results with earnings of $2.5 billion as a decline from peak levels of NII was offset by lower provision expense, leaving earnings down 3% year-over-year. Revenue declined 8%, driven by the NII. Our global treasury services business remained robust with strong business from existing clients as well as good new client generation. In addition, we continued to see a steady volume of solar and wind investment projects this quarter and our investment banking business continued to perform well in a sluggish environment. Year-over-year revenue growth also benefited from lower marks on leveraged loan positions. The company's overall investment banking fees were $1.1 billion in Q4. That grew 7% over the prior year despite a fee pool that was down 8%. And for the year we held on to the number three position overall, given that performance. In the component parts, we ended the year number one in investment grade, number two in leverage finance, number four in equity capital markets, and number four in mergers and acquisition. The diversification of the revenue across products and regions reflects the growing strength of our platform, and a good example of that is our focus on the equity capital markets blocks business, where we finished number one in the United States for the first time since 1998. And in EMEA, we were also number one for blocks. Provision expense reflected a reserve release of $399 million and that comes from an improved macroeconomic outlook as well as realized charge-offs better, as noted before. Expense decreased 2% year-over-year as continued investments in the business were more than offset by reductions in other operating costs. Switching to Global Markets on Slide 17, the team had another strong quarter, with earnings growing 13% year-over-year to $736 million, driven by revenue growth of 4% and we refer to results excluding DVA as we normally do. Good results in sales and trading and comparatively low marks on leverage loan positions drove the year-over-year performance and focusing on the sales and trading ex-DVA, revenue improved 1% year-over-year to $3.8 billion, which is a new fourth quarter record for the firm. FICC was down 6% from a record quarter, while equities increased 12% compared to the fourth quarter of '22. And the FICC revenues were down versus that record fourth quarter level with higher revenues in mortgages and municipal trading. Equities was driven by improved trading performance in derivatives. And our expense was up 3% on continued investment in the business. Finally, on Slide 18, all other shows a loss of $3.8 billion, as the two notable items highlighted earlier negatively impacted net income by $2.8 billion in that segment. Revenue adjusted for the $1.6 billion BSBY cessation was flat year-over-year, and expense adjusted for the $2.1 billion FDIC assessment was down a couple hundred million, driven by lower litigation and lower unemployment processing costs. I noted earlier we reported a modest tax benefit this quarter. The tax credits from tax advantaged investment deals throughout the year, including their benefits in the fourth quarter, exceeded taxes on reported earnings because we had the two notable items that lowered results this quarter. For the full year, our tax rate was a little more than 6%. And excluding the impacts of BSBY cessation and FDIC and the other discrete tax benefits, that rate was 10%. And further excluding our investment tax credits, our tax rate would have been 25%. So thank you. And with that, we'll launch into the Q&A, please.
Operator, Operator
We'll take our first question from Jim Mitchell of Seaport Global.
Jim Mitchell, Analyst
Hey, good morning, guys. Alastair, maybe on the NII trajectory that you're talking about, sort of down a little bit in the first half and then start to stabilize in the second half, and you're building in six cuts, but a lot of those cuts are coming starting in sort of 2Q and beyond. And given your asset sensitivity, why would we expect NII to stabilize? Is that just sort of expected growth of deposits and loans? Just kind of help us think through your assumptions on the NII for '24.
Alastair Borthwick, Chief Financial Officer
Yeah. Well, I think, Jim, going back to last quarter, I don't think our views have changed a great deal. So our guidance isn't changing much either in that regard. If anything, Q4 deposits were a little better than we expected. We sort of thought this quarter might be around $14 billion; it was a little better than that, so that's obviously a good starting point. Now, when we look forward off of that slightly higher number, if you think about Q1, I'm thinking about it in terms of a date count, that might be $150 million, let's say. So from where we are, that's going to get us to somewhere between $13.9 billion and $14 billion. It's going to be in that kind of a range. Q2, we see going down just a little bit more. That's a little bit of deposit seasonality in Q1 and a little bit of just catch up on rate paid and some rotation. But at that point, we see growth in the back half of the year, and that's largely deposits growing, loans growing a little bit, restriking some of the securities that come off the balance sheet, and restriking some of the loans that come off the balance sheet. It's all of those things. You're right. When we got together last quarter, we thought there might be three rate cuts. Now it's up to six, so that's a little harder, but the deposit picture has been a little better. So no particular change at this point.
Jim Mitchell, Analyst
Okay, that's fair. Maybe as a follow-up on loan growth: what do you think? We all see the card growth, but outside of that it's been pretty muted. With rate cuts likely, maybe that will be a bit better for demand. What are you seeing on the commercial side in terms of demand, and what would change the dynamic?
Alastair Borthwick, Chief Financial Officer
Well, I mean, you look back, if you look at our loan growth in the materials, it's been a pretty slow loan growth environment. And I think what's going on underneath it is, obviously, you've got the economic activity. Offsetting that a little bit is lower revolver utilization. And you can start to see why with rates being much higher, it's a little more expensive to borrow a revolver. So as corporate cash balances have come up and deposits have come up, that's just a natural headwind. That's beginning to fade. So we kind of feel like the loan growth ought to be low single digits. Normally, we think about it is kind of GDP plus just a little bit of market share. So in a low GDP environment, that's sort of what we're expecting for loans this year. And then we'll just need to see how the rate structure develops.
Jim Mitchell, Analyst
Okay. All fair. Thanks.
Operator, Operator
We'll take our next question from Erika Najarian of UBS. Please, Najarian, please check your mute switch. Your line is open.
Erika Najarian, Analyst
Hi, sorry. Rookie move. Apologize for that. Alastair, if you could, thank you for giving us more detail about how your NII trajectory is going to be for the rest of the year. I'm wondering if you could just give us a little bit more color on what you're expecting for deposit rate repricing and, for BofA specifically, the liability mix in the second half of the year. If you expect deposit growth to come back, I think a big question the market has is what repricing power to the downside these banks have as the Fed cuts rates. I think that would be really good color for the market to have.
Alastair Borthwick, Chief Financial Officer
Yeah, okay. So, first of all, if I go back over the trajectory of deposits through the course of 2023, we troughed at $1.845 trillion and we ended at $1.925 trillion. So underneath there, there's $80 billion of growth in deposits since May. So that obviously informs our perspective around how we think about deposit gathering at this stage. That feels to us like it's a supportive environment of our NII forecast. Second, obviously, over the course of this year, there's been a move towards more interest bearing. And that actually helps us in the event that we start seeing Fed cuts, because that's obviously going to allow us to take those rates down. So, look, we're going to see a little bit of rotation, I think, here in Q1 and Q2. I think we'll likely see a little bit of deposit pricing lag. But the last Fed hike at this point was July. So there's been an awful lot of time at this point for deposit pricing to shake out. We won't be immune from anything. We have to compete for deposits along with everyone else. But combine all of those things and that's where we get our confidence.
Erika Najarian, Analyst
Got it. And just to clarify how we should think about the full year, the $16.4 billion in 1Q '24 expenses and a quarterly decline from there, does that pretty much square with what you've said in the past for expenses of up 1% to 2% year-over-year? And would that number include an assumption that investment banking activity returns in force in 2024?
Brian Moynihan, Chairman and CEO
Yeah, so if you think about it, pre-pandemic we reached a point where we'd taken expenses down to a level where we said we'd kind of grow at about half the rate of inflation. So you're right. What we're thinking now is we're up $100 million in the fourth quarter versus last year's fourth quarter. If you look at the personnel side, it's up a little higher and non-personnel is down a little lower. We see a rise in first-quarter expenses, then we start going down each quarter again. So if you think about $100 million to $200 million of inflationary growth over the quarters this year, you get into the mid-60s. Most of the firms we look at are in that range and we feel comfortable with that. That allows us the room to use our operational excellence, take out expenses and replace them with revenue-related expenses. We see that pattern reemerging now that we've gotten stability after the pandemic, the great resignation, and the inflation that occurred in 2021 and 2022. We now stabilize back to the ability to produce sequential declines in quarters during the year and year-over-year inflationary growth of 1% to 2%, and that gets you into the low 60s.
Erika Najarian, Analyst
Thank you, Brian.
Operator, Operator
We'll take our next question from John McDonald of Autonomous Research.
John McDonald, Analyst
Hi Alastair, Brian. Alastair, I wanted to revisit NII and see if you could help. It's hard to reconcile the NII outlook with the rate sensitivity disclosure on the slide that shows a 100 basis point parallel downward shift is a $3.1 billion hit. Are there caveats, for example that real-world outcomes don't play out like the disclosures? Long-term rates have already fallen by almost 100 basis points, so where is that $3.1 billion headwind in your forecast? It's impressive that you can keep NII essentially flat despite that using the forward curve. Thanks.
Alastair Borthwick, Chief Financial Officer
Yeah, well, I mean, I think that the main thing is, number one, it obviously assumes a parallel shift instantly. So the rate cuts that are in the forward projections, the earliest one comes March, for example. So you're not going to see a full year's worth of rate cuts all in the space of the first day or so. It doesn't work out that way. So, John, I think the way to start would be just use what we've disclosed, which is that $3.1 billion. You can see what we say in terms of how much of that is the short end. And then I just take that number and use that as the beginning point. And just keep in mind, we still see some deposit growth, some loan growth, and some securities and loan repricing that offsets all that.
John McDonald, Analyst
Okay. Okay. That's helpful. And then maybe just on top of that, trading NII or the global markets NII, is that likely to be a headwind or a tailwind in '24 versus '23? Do you have any visibility on that?
Alastair Borthwick, Chief Financial Officer
If you look at global markets, in any given quarter they move around based on customer behavior. Over the long arc, looking at the past two or three years, they have been liability sensitive. So I would expect rate cuts to benefit global markets NII somewhat. If you think about retracing the steps of what has been conceded in NII, you would expect to recover that over time.
John McDonald, Analyst
Okay. So maybe that could grow a bit.
Brian Moynihan, Chairman and CEO
John, this quarter was a drop from the third to the fourth quarter by a pretty good amount. And that's partly due to the fourth quarter having lower activity, just lower inventory carry and things like that. That reversed itself and we're off to a good start so far in the first quarter here and the balance sheet moves back up. So there's a little bit of quarter-to-quarter linkage from the third to the fourth quarter typically.
John McDonald, Analyst
Okay, got it. Thanks, guys.
Operator, Operator
We'll take our next question from Mike Mayo of Wells Fargo.
Mike Mayo, Analyst
Hi. Just another follow-up on NII. I guess if you take the Fed dot plot, maybe there are only three rate cuts. If you assume that instead of six, how would you be thinking about the change in NII?
Alastair Borthwick, Chief Financial Officer
I think if we got the three rather than the six, Mike, we'd do modestly better, I think. Let me put it this way. If we hadn't seen the three more since last quarter, we might have a higher guide, but because we've come off of a base with better deposit gathering in Q4, so we're starting in a better place. So those two things have sort of evened themselves out. But obviously, if it pushes out later, that's a good thing for us.
Mike Mayo, Analyst
Brian, Alastair, you always talk about the information advantage you have by being in the flow of so much of the U.S. economy. What do you think? I know you rely on your research group, Brian, and their economic forecast, but do you think we're going into a recession in the second half of this year? Does the Fed need to cut six times? Are you seeing that? Where are you seeing the most softness?
Brian Moynihan, Chairman and CEO
I think our research team expects rate cuts next year and a soft landing, as you referenced, Mike. As you can see, year-over-year spending growth in the fourth quarter versus last year's fourth quarter, and in the first quarter so far versus the same period last year, is running about 4% to 5%. That reflects more than $4 trillion moving out of consumer accounts at Bank of America into the economy. That 4% to 5% is similar to what it was in 2017–2019 when the Fed raised rates, inflation was under control, and the economy was growing at 1.5% to 2.5%. So that level of spending should sustain the economy, although our core prediction is that growth will slow from a higher rate in the third quarter to around 1% or so in the first couple of quarters next year. Consumer activity indicates people are still in the game and still spending. Where they spend is a bit different: more on services, restaurants, and experiences, and less on goods at retail. They remain employed. Economists' estimates project only a modest rise in the unemployment rate in the core case; our reserves are actually set assuming almost a 5% unemployment rate by the end of this year, which is reassuring. Consumers are using credit responsibly. While higher credit card balances get attention, the economy is much larger than in 2019 because of inflation, so as a percentage we do not see stress; this looks like a normalization of credit. They are working and getting paid, have balances in their accounts, access to credit, and many have locked in favorable mortgage rates. We feel this is a positive picture. So we view a soft landing as the core thesis. Our internal data supports our research team's outlook, which is also informed by our institute.
Mike Mayo, Analyst
And then just as far as controlling what you can control in terms of expenses and headcount, tech investments, and maybe throw in AI as part of that, what sort of extra efficiencies can you achieve through AI, tech, and other initiatives? You squeezed a lot out over the last decade plus. What's left to go?
Brian Moynihan, Chairman and CEO
There’s always more to do. If you look at what we’re doing this year and next year, meaning 2024, 2025 and into 2026, it’s a couple of billion dollars plus, which helps us with the dynamic Erika mentioned of avoiding growth in expenses outpacing inflation, because we’re reinvesting that spend into productive things. This year we expect about $3.8 billion in technology initiatives, which is up by $500 million or more from 2021 to 2022 and then roughly flat from 2022 to 2023. Those investments are being applied in different ways: we added relationship managers across the board, continue opening branches, and are largely through the branch rehab program we’re keeping. All of this is growth-oriented spending. We added 600,000 net new checking accounts for the year, our 20th straight quarter of net checking account growth, and those are strong core accounts that flow into our asset management business, which is $80 billion or more. In our Merrill Edge program, advertising has driven the business and we have 10% more customers, adding 300,000 to 400,000 customers in the last 12 months. Those customers bring average opening balances of $80,000 to $100,000, so they are not small accounts. We’re investing across many levers, none of them simple. After the great resignation in 2022, we needed to get headcount growth back in line. We reduced headcount from 218,000 in January to 212,900 at year end, redeploying teammates between businesses, retraining and reskilling people. As we deploy AI wisely, it will allow further redeployment. Our turnover is very low at 7% for 2023, down from 12% in 2022 and about 6% in the fourth quarter, and we can still manage headcount down simply by hiring less, which gives us flexibility. We hired 15,000 people this year, so we can always moderate hiring if we see efficiencies and redeploy the people we have.
Mike Mayo, Analyst
All right. Thank you.
Operator, Operator
Our next question is from Matt O'Connor of Deutsche Bank.
Matt O'Connor, Analyst
Hi. I have a question about capital allocation going forward. Brian, sorry if I missed this earlier, but I think there was some media coverage suggesting you might be putting capital to work ahead of the markets. Is there any way to size that? And more broadly, how will you allocate capital from here, including buyback levels and related items? Thanks.
Brian Moynihan, Chairman and CEO
Yeah. I'm not sure of the media report, but in the end of the day, Jim DeMare and team have done a great job to deploying capital and growing market share in the sales and trading business. So they're up 7% year-over-year in revenue. FICC was up 11% for the year. Equity was down a little bit, down 1% or so. And they've done a great job. $17.6 billion of revenue, highest by a lot over the last few years. And think about it, in the '19 time frame, we were $13 billion in revenues. They fundamentally moved up. That was deploying more balance sheet, you got a little bit more capital but inherently, but not a lot. They're not taking a lot of risk. They made money every trading day in '23, again, I think. And so they do a great job of serving the clients. So don't think there's a big capital, a massive amount of capital. They get the capital they need. They have the balance sheet and the risk appetite they need. But we're continuing to put money towards that business because they've proven to be successful. We gave them the balance sheet a few years ago and they were able to deploy. More broadly, we pay out the dividend. We then have a bunch of capital. Today we meet the standards as best. As Alastair said, we could divine from the rule, and we'll see what the final rule looks like when it comes out. But right now, the $194 billion of CET1 is the level of notional CET1. We have to meet the RWA inflation. I'm not saying it's a good rule. I'm just saying we make the math work. And so from now on, we can basically deploy capital to the dividend payment, a couple of billion dollars a quarter, and then everything above that will go to support business growth if we have it, build a little bit of cushion, we need to build over some period of time to meet these new rules if they come through, and then share buybacks, which we bought $800 million or so last quarter, and you'd expect that to keep ticking up.
Matt O'Connor, Analyst
Okay, that's helpful. And then you did mention that trading or markets is off to a good start so far this year. Obviously, just a handful of days, but any color around that? And then kind of more broadly speaking, as we think about the overall wallet, like, obviously banking is the press, but how would you frame the market trading wallet? Do we use 2020 as a jumping off point and grow it by some kind of long term trend or any way to kind of frame that in terms of a base case? Thank you.
Alastair Borthwick, Chief Financial Officer
It's too early for us to predict what the quarter will look like. We'll get a much better feel for that four, five, six weeks from now. But I think you can use the '23 numbers as a baseline starting point. And then the first quarter, I just applied sort of a typical kind of seasonality. Q1 tends to be a very good quarter for us, Q4 less so just with the client activity. And then just recognize that we're starting from a Q4 record. So that's the only thing I would consider.
Matt O'Connor, Analyst
Okay, thank you very much.
Brian Moynihan, Chairman and CEO
And then actually you mentioned investment banking. Matthew and the team exceeded what we thought in the quarter and seemed to perform better than industry. And actually we're up a little bit year-over-year, but there's a full pipeline. The question is sort of when is the clarity? And you're seeing some stuff get done. And with stability in rates, you'd expect that to kick back up. We typically are running about $1.5 billion before the added activity because of the rate falling and pandemic a quarter. We're now $1 billion to $1.2 billion. You expect it to move back in those levels. And we have actually been gaining share over the last few quarters as the markets gone down around as we held our relative position and grew it. So I think Matthew and the team is in good shape and this middle market execution has added a lot of throughput to the team and is building up over time.
Operator, Operator
We'll take our next question from Glenn Schorr of Evercore.
Glenn Schorr, Analyst
Hello, there. Good morning. First question is on the deposits. And I like the path that we've seen in terms of all the stimulus comes, all the deposits come in, you get some spending, you get some migration, you get some rich people buying treasuries. It's great. To see the stability in the fourth quarter and hear your comments about 2024 for deposits is a little encouraging. We'd always want more, but it's a little encouraging. But my question is, to be 35% higher in 4Q '19 is what I would call a lot more growth than a normal period of time would be with the up and down. So is that a good thing or is that a risk? And maybe the answer lies within how much of those excess deposits are sitting in all these new accounts that you've opened versus just cash from sitting around in existing clients that's maybe waiting to be deployed. I hope that question is clear.
Brian Moynihan, Chairman and CEO
So, Glenn, you're making me have deja vu, because I think you would have asked this question in the first quarter of '23 too on the theory that this was all going to run off. When we looked at it, we always said we had grown during the pandemic at roughly 4% or 5% a year in deposit growth. If you strung that line out, we're still above it. And now we're turning and growing. As Alastair said, we troughed in the middle of the year, so we've outgrown what our implied growth rate would have been given our size. We feel good about that. It's all core. Now, look at the dynamics by client. For wealth management clients in GWIM, those balances came down and are bouncing around $290 billion to $300 billion on a given day, and they've been relatively stable for maybe five or six months. In wholesale banking, balances came up, came down after the pandemic, and then have been growing back; they're actually stronger because activity has picked up and line usage has stabilized, which shows the environment around their borrowing and cash is more consistent. That's been good. For consumer, as we said earlier, if you compare balances in deposit accounts pre-pandemic to now for consumers excluding wealth management, those with $50,000, $100,000, $250,000 or $1 million in collected balances are down about 20%. People moved money to get rates, and most who were going to move money have done so. Is consumer still bouncing around a little? Yes, balances are roughly $950 billion on a given day, but that's stabilized and been relatively consistent over the last four to eight weeks. That needs to settle, and then you grow from there. The point is they moved the money they were going to move; you don't get that money twice. A chunk of higher-end consumer balances shifted, about 20% moved into money market funds, which we captured in other places, and they no longer have that to move because those were accumulated balances from a zero interest rate environment pre-pandemic plus other factors. If you look at Slide 8, you can see deposit slides laid out by non-interest bearing and interest bearing. The key is consumers have about $959 billion in high-quality deposits on a given day. Checking balances are still up about $140 billion and have bounced around a bit; they have moved down a little, but that's mainly high-end checking balances that have flowed into the market.
Glenn Schorr, Analyst
That's all good and more than I was looking for. I appreciate it. The quickie follow-up on reserves is, with a pretty solid economy, resilient US consumer, your NPLs are down. You have a lot of reserves. The question is, what are the signposts that you or we should be looking for to know when you've added enough, when we're stable enough, point in time and you actually start funding charge-offs from reserves and not adding? Thanks.
Alastair Borthwick, Chief Financial Officer
I think we're getting pretty close now because things are beginning to stabilize. They're beginning to normalize. The whole thing is a period of transition for the economy and it's a period of transition for our clients, too. A lot of them are dealing with higher interest rates and they're just beginning to moderate and change their spending behaviors. So we've seen a trend over the course of the past few quarters. It's pretty predictable around the consumer side. You can see that in our disclosures. I think it's going to bounce around over the course of the next couple of quarters. Now that we're back towards 2018-2019 levels, it's going to settle in, we think, in the first half of this year. And then on the commercial side, the asset quality remains really in a very good position. We happen to have a couple of names that popped up this quarter, but to your point, we were pretty fully reserved against them. That wasn't a surprise to us. We had seen those over the past six months. So we think we're getting close there, Glenn. And obviously, the closer we get to a soft landing, the better we're going to feel about that.
Brian Moynihan, Chairman and CEO
Glenn, as you think about it, when you said reserves, remember that under CECL we've always used a lifetime reserve methodology, which we're still getting clear on. We've operated under it for a few years, but this quarter we actually had commercial reserves come down to pay for the charge-off on a specific prior-period reserved property or loan, and you saw some of that. Be careful on the consumer side because the pay-as-you-go consumer reserves are still building up to a nominal amount of charge-offs consistent with 2018 and 2019. If you look at card in 2018/2019, the charge-off rate across the eight quarters ranged from a low of 2.90% to a high of 3.26%. We're at 3.07% today, but balances are $6 billion to $8 billion higher, so you have to be careful about the nominal amount to get that right. If you look more broadly across the company, we had 45 basis points this quarter, and the range in those eight quarters is in the mid-30s to low-40s. What’s different is the CRE piece of that and a charge-off. The reserve-to-loans and all the classic factors looked at are very strong. The reserve is set with basically half driven by the adverse-case scenario versus the base case, and then some judgmental adjustments on top of that. As it becomes clearer that we're in a soft landing, to Alastair's point, there's less allocation to those adverse scenarios. We always will make some allocation, but when you put it all together, the scenarios have unemployment rising into the high 4s, and you look at unemployment today — it's nowhere near that and there is no prediction to get there in our base case. That's what will start to ease up general reserving. But remember, on card it's a bit of pay-as-you-go. We were running around 6% reserves and we're up to 7% against card now. So there might be a little bit coming back, but I'd rather have growth soak that up back down to 6% in cards than give it back to reserves.
Glenn Schorr, Analyst
That's great color. Thank you for all that.
Operator, Operator
We'll take our next question from Ken Usdin of Jefferies.
Ken Usdin, Analyst
Hey, thanks. Good afternoon. I have a technical clarification on that BSBY $1.6 billion. I presume you start to get that back mid-quarter in Q4 next year, given the November 15, 2024 termination, and then does it run out ratably? I'm just wondering over what exact period of time you receive that $1.6 billion.
Brian Moynihan, Chairman and CEO
Okay. Hey, Ken, happy New Year. It's this year, 2024, so.
Alastair Borthwick, Chief Financial Officer
Ken. Yes, you got it right. We'll get some of it back at the back end of 2024. So we'll get a little bit in the fourth quarter, and then I'd say we get most of it back in '25, most of the remainder back in '26. That's the easiest way to think about it.
Ken Usdin, Analyst
So is it straight-line or a bit front-loaded? I just want to know whether it's simply divided evenly or if there's a tail.
Alastair Borthwick, Chief Financial Officer
No, it's got a little more in 2025 than 2026.
Ken Usdin, Analyst
Okay, I got it. Thank you. And just one question. Can you just remind us of brokerage fees this quarter felt the impact, I think you said it of the soft averages from this quarter. And so I think should we expect to see just from the markets bounce that we saw in the fourth quarter, that to play well into the first quarter starting points from the management fees perspective?
Alastair Borthwick, Chief Financial Officer
I think you should expect our global markets performance to continue for now. There's a pretty constructive environment for the markets business at the moment, and I don't think anything has changed. There's a lot of client repositioning going on. So I think the fourth quarter is the right number to start with, and you should adjust for a step up in activity in Q1. If I misinterpreted and you were talking about wealth management, those fees will follow the usual monthly lag based on where the markets go. Markets are elevated right now, which should be favorable going forward.
Ken Usdin, Analyst
That's what I was getting at. Thank you. Right. Just confirming that we didn't see the benefit yet. That comes further based on the averages and how that'll play forward, presuming the market hangs in there.
Alastair Borthwick, Chief Financial Officer
Correct. That tends to be a lag by a month or so. So you'll see that in Q1.
Operator, Operator
We'll take our next question from Ryan Kenny of Morgan Stanley.
Ryan Kenny, Analyst
Hi. Thanks for taking my question. Just following up on a few questions ago on the commercial credit side. So the commercial net charge-offs did roughly double sequentially. And you mentioned that there were a few customers that popped up. Should we interpret that to mean that the pace of deterioration decelerates and it was just a one-off, or is there anything else going on under the hood there?
Alastair Borthwick, Chief Financial Officer
I don't think it's anything more than a momentary spike. Looking at the chart, two things are happening. First, we have a small office exposure that will bounce around as we work through that portfolio; it's relatively small for us, we're taking the right actions, but it was a bit elevated this quarter compared with the prior three. Second, in commercial more broadly there were a couple of other items this quarter, but we were pretty fully reserved against them and had seen them coming. Asset quality in commercial remains very strong outside of the office sector, as you can see from our reserve balances. The underlying issue is that commercial starts from such small numbers that any uptick can appear like a spike.
Ryan Kenny, Analyst
Thanks. And then just one more clarifying question on NII. So in this scenario with the six rate cuts, can you help us understand how you expect the deposit mix to migrate? And specifically, would the migration from NIB to IB deposits grind to a halt? Or is there any scenario where NIB deposits actually start growing again?
Alastair Borthwick, Chief Financial Officer
I think what we're trying to describe is a sense that we're getting towards the tail end of this now, partly because we're now six months away from the last time that the Fed raised rates, and then partly because if we do have rate cuts, it's going to start to disincent people moving out of non-interest bearing. So that's what we're describing over the course of time. We've got to see how that develops through the course of the year.
Ryan Kenny, Analyst
Thanks.
Operator, Operator
We'll take our final question from Gerard Cassidy of RBC.
Gerard Cassidy, Analyst
Hi, Brian. Hi, Alastair. You guys have obviously done a very good job in the consumer banking area with digital banking, and I frame that for you guys in this question. We hear a lot about AI and what it could do for the banking industry. And when you look out over the next three to five years and you invest in AI to improve efficiencies, could it have a similar impact what digital banking did for consumer banking pre-iPhone to where we are today in your business? Or is it going to be more like blockchain, where it was a lot of discussion about the future of blockchain, but we don't hear much about that anymore? Do you guys have a view on what AI could be for your business over the next three to five years?
Brian Moynihan, Chairman and CEO
I'm not sure there's a relevant comparison to blockchain, so let's focus on AI. If you look at 2021, you can see the digital movement. One example is Erica: in the fourth quarter there were 170 million interactions with Erica, with about 16 to 18 million unique users. That's AI in an early stage. We started building it ten years ago. It operates on our data and uses natural language processing, and we have to keep updating it for the way people use words. Think about 170 million phone calls, branch visits, emails, and so on where inquiries previously had to go elsewhere; Erica helps clients get things done and find answers. We think there's vast promise for AI and we're deploying it in many places, especially internally to help employees work better and faster. We have it in our coding shop where developers use it to improve effectiveness and learn. But there is still significant care required around data, usage, models, and accountability, so for now we're applying it to somewhat easier use cases even though we believe it has great potential. Its adoption will be similar to the digital transition; the pace depends on how far it can go before you run into difficulties applying it effectively. This builds on what we've done with digital and Erica. We brought Erica to the commercial side, so CashPro uses Erica to answer questions and we're seeing that usage grow and customers are comfortable interacting with it. As it's applied more broadly it will provide substantial help, but we're still assessing how much benefit it will generate and whether model outputs can be adequately controlled. We have used algorithmic machine learning models across the company for years, and over the last ten years we've spent billions on data cleanliness, getting data in the right place, and ensuring it's dependable. The models that operate on that data are machine learning models, not open autonomous natural language models, and we've seen great promise. That's partly why we operate the company on roughly the same expense base we had in 2015 or 2016. So yes, it's been digitization and more. We have high hopes for AI, but we must make sure it does a great job for the customer.
Gerard Cassidy, Analyst
Very good. And as a follow-up, we've been reading and seeing a lot of information about the private credit markets making inroads, and we know the shadow banking industry has been around for a long time, our entire careers. What are you seeing today? Is it more competitive against Apollo and Blackstone in lending? And then second, they're also, I assume, customers of yours, so how do you balance servicing them while at the same time they could be a direct competitor in the lending markets?
Brian Moynihan, Chairman and CEO
Well, that's all the issues that we got to balance on a given day. And we can originate loans into their platforms and there are lots of things we can do. So we continue to work through that. I think to take it more broadly, my colleagues and I have made clear that the strictures around our industry, the methodology operating and the openness and ability to operate outside has led to the mortgage business largely being done outside the industry and most other asset classes being outside the industry. Being outside the industry and the private lending is just another case of that. And I think we're very competitive. We do a great job. We have a $0.5 trillion of commercial loans outstanding. We have hundreds of billions of dollars of mid-sized companies, et cetera. So we think there's a way that we can do this with our clients and help them and help us. A lot of them are asking can you help us originate loans? I think there's still a question ahead of whether the policy of having more things going on outside the bank industry is a good policy. Of course, we in the banking industry don't think it's a good policy because the reality, I think, one inherent part of your question was when these companies bounce around because of economic stress or for them as an operator, the banking system has a workout methodology, not a liquidation methodology or trading methodology. And that served American enterprise very well. And so I think we have to be clear and see how it affects the economy that way. And those are issues that were true pre-pandemic and have become more acute. So we feel we'll be competitive no matter what. Nothing scares us. We've got a great team and they do a great job. But it's endemic of the issue that if you keep pushing too much capital regulation, stuff will find its way outside the system. And that doesn't mean the risk has changed, it just means it's moved from purview of the regulators and that's one of the points we make. But on the other hand, we are working with those enterprises to help us be a combined effective competitor.
Gerard Cassidy, Analyst
Very good, Brian. I appreciate it.
Operator, Operator
This does conclude our question-and-answer session. I'd be happy to return the call to Mr. Brian Moynihan for closing comments.
Brian Moynihan, Chairman and CEO
Happy New Year to everyone. Thank you for all the time today and on a very busy day with lots of us reporting. As we summarized, fourth quarter was a good quarter and another strong year for our company driven by organic growth from all our customer segments. Our digital capabilities continue to grow, our deposits and loans grew, and that's good news. Our NII continues to exceed what we tell you each quarter in terms of what we think is going to happen, which is good news. We gave you new guidance which we plan to hit. Our capital markets activity remains good on both the investment banking side and the sales trading side. And importantly, to get the value of that revenue, we have to have good expense management. You saw us, during the course of year take headcount down from 218,000 to 212,900. You saw us take the expense down sequentially, sets us up good for next year. And with all that, our capital and asset quality remains strong, as does our liquidity. So thank you and we look forward to talking to you next quarter.
Operator, Operator
This does conclude today's Bank of America earnings announcement. You may now disconnect your lines, and everyone have a great day.