Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And I'll pick up on Slide 3, where we list some of the more detailed highlights of the quarter. And then on Slide 4, we present the summary income statement, so I'm going to refer to both of these together.
As Brian mentioned, for the quarter, we generated $8.2 billion of net income, and that resulted in $0.94 per diluted share. Our revenue grew 13% and that was led by a 25% improvement in net interest income, coupled with strong 9% growth in sales and trading results, excluding DVA.
Our non-interest revenue was strong despite three headwinds. First, we had lower service charges as commercial clients paid lower fees for treasury services since they now receive higher earned rates on balances. And obviously, that allows us to invest those funds to earn NII. On consumer, we had lower NSF -- insufficient funds and overdraft fees as a result of our policy changes announced in late 2021. Second, we had lower asset management fees and that just reflects the lower equity market levels and fixed-income market levels. And third, investment banking fees were lower, just reflecting the continuation of sluggish industry activity and reduced fee pools. Now all that said, despite these headwinds, each of the fee categories saw modest improvement from the fourth quarter levels.
Asset quality remained strong and provision expense for the quarter was $931 million. That consisted of $807 million of net charge-offs and a $124 million of reserve build. And that reserve build compares to a reserve release in the first quarter '22 of $362 million. Our charge-off rate was 32 basis points and still well below the fourth quarter of 2019, when our pre-pandemic rate was 39 basis points and, remember, 2019 was a multi-decade low. So credit obviously remains quite strong. I want to make one other point on Slide 4 and that is simply to note that pre-tax pre-provision income grew 27% year-over-year, compared to reported net income growth of 15%.
So let's turn to the balance sheet that starts on Slide 5 and you can see, during the quarter, our balance sheet increased $144 billion to $3.195 trillion. Brian noted our liquidity levels at the end of the period, those rose to more than $900 billion from December 31st. That's $23 billion higher and it remains $324 billion above our pre-pandemic level in the fourth quarter of '19.
Shareholders' equity increased $7 billion from the fourth quarter as earnings were only partially offset by capital distributed to shareholders. And we saw an improvement in AOCI of $3 billion due to lower long-term interest rates. The AOCI included more than $0.5 billion increase from improved valuations of AFS debt securities and that flows through CET1. And the remaining $2.5 billion due to changes in cash flow hedges doesn't impact regulatory capital. During the quarter, we paid $1.8 billion in common dividends and we bought back $2.2 billion in shares.
Turning to regulatory capital. Our CET1 level improved to $184 billion since December 31, and our CET1 ratio improved 14 basis points to 11.4%, once again, adding to our buffer over our 10.4% current minimum requirement as well as the 10.9% minimum requirement that we'll see on January 1st of '24. That means in the past 12 months, we've improved our CET1 ratio by 100 basis points and we've supported our clients and we've returned $12 billion in capital to shareholders. CET1 capital improved $4 billion and that reflects the benefit of earnings and the AOCI improvement, partially offset by the capital we returned to shareholders. Our risk-weighted assets increased modestly and that partially offset the benefit to the CET1 ratio of the higher capital we generated. And then our supplemental leverage ratio increase to 6%, that compares to a minimum requirement of 5% and leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements.
Now let's spend a minute on loan growth and we'll do that by turning to Slide 6, where you can see the average loans grew 7% year-over-year, driven by commercial loans and credit card growth. The credit card growth reflects increased marketing, it reflects enhanced offers and higher levels of card account openings. The commercial growth across the past year reflects the diversity of commercial activity across global banking and global markets and, to some degree, global wealth. And on a more near-term linked-quarter basis, loans grew at a much slower pace, partly driven by seasonal credit card paydowns after the fourth quarter holiday spending. And then commercial demand slowed in Q1 and we saw some paydowns by our wealth management clients as they lowered leverage as rates rose.
So let's turn to deposits and there's obviously been a lot of additional focus this quarter, so I want to spend extra time here and I'm going to start with Slide 7 and talk about average deposits. Just a few points we need to make before focusing on a more detailed discussion of the recent trends. Average total deposits for the first quarter were $1.89 trillion, that is down 2% linked-quarter, and down 7% year-over-year. Our deposits peaked in the fourth quarter of 2021 and even as the Fed has continued to withdraw money supply, our deposits have held around $1.9 trillion because there's a lot more industry deposits today and a much bigger economy today compared to pre-pandemic.
Our average deposits were up 34% compared to our pre-pandemic Q4 '19 balance and the industry's deposits are up 31% to $17.4 trillion. So we've obviously fared a little bit better than the industry. We put our pre-pandemic deposits for each line of business on this slide, so you can compare our balances then and now. I want to highlight consumer checking balances, which remained 53% higher than pre-pandemic. And as I think all of us would expect, GWIM combined client deposits are up a lesser 23% as those are the clients that generally move their excess cash into other off-balance sheet products. And in global banking, you can see the rotation to interest-bearing across time as rates rose.
So let's get a little more granular and a little more near-term and we'll use Slide 8 for that, where you can see the breakout of deposit trends on a weekly ending basis across the last two quarters. You can also see that we plotted the timeline of Fed target and rate hikes on the top left chart just for comparison through time. In the upper-left, you can see the trend of our total deposits. We ended Q1 '23 at $1.91 trillion, that's down 1% and, as Brian mentioned, over the course of the past six months, those balances have been relatively stable.
In consumer, looking at the top-right chart, we show the difference here in the movement through the quarter between the balances of low to no interest checking accounts and the higher-yielding non-checking accounts. And across the entire quarter, we saw a modest $4 billion decline in total. Checking balances, obviously, have some variability around paid days in particular, but note the relative stability of checking deposits because these are the operational accounts with money in motion to pay the bills and everyday living costs for families.
I'd also point out that our checking balances were modestly growing even ahead of March 9th upheaval and continued to move higher through the quarter on the back of disruption. Lower non-checking balances mostly reflect money moved out of deposits and into brokerage accounts where we earn a small fee. Rate paid increased 6 basis points from the fourth quarter to 12 basis points on this $1 [Phonetic] trillion of total consumer deposits and remains low because of the 52% mix, that is checking. Lastly, I'd just note that the rate movements in this business are concentrated in the small CDs and consumer investment deposits, which together represent about 5% of the deposits.
In wealth management, as you would expect, it shows the most relative decline and you can see the continued trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and off-balance sheet to other investment alternatives. Now, if we went back further, you'd see that roughly $90 billion has moved out of sweeps in the past year, which leaves $80 billion in these accounts. So you can see how with the pace and size of rate hikes slowing, we expect the declines in balances to lessen from here.
At the bottom-right, note the global banking deposit movement where we hold about $500 billion in customer deposits. These are generally operational deposits of our commercial customers and they use that to manage their cash flows through the course of the year. Those are down $3 billion from the fourth quarter and what's interesting to note is that our total deposits in this segment have been stable at around $500 billion for the past six months and this business just continues to see rotation into interest-bearing. The mix of interest-bearing deposits on an ending basis moved from 49% last quarter to 55% in Q1 and obviously, we pay increased rates on those interest-bearing deposits. And it's this rotation in global banking that's driving the rotational shift of the total company and it's pretty typical and to be expected in this environment.
So in summary, deposits continue to behave as we would expect, the cash transactional balances have shown some recent stabilization and for investment cash, we've seen deposits move to brokerage and other platforms for direct holdings of money market, mutual funds, treasuries and we're capturing many of those flows as you've seen in our numbers. It's just we expect that to slow going forward.
So now that we've examined trends for the different lines of business, I want to make some important points about the characteristics of our deposit franchise using Slide 9 and this will just help reinforce for shareholders who own Bank of America that they're investing in one of the world's great deposit franchises, all of it based off of relationships we have with our customers and the value they place on the award-winning capabilities and convenience they have access to.
So starting from the top, focus first on consumer, you can see that more than 80% of deposits have been with us for more than five years and more than two-thirds of our consumer deposits are balances with customers who've had relationships with the Bank for more than 10 years. Also, more than three-quarters of these customers are very highly engaged in their activities with us and also geographically dispersed across the United States, given our presence in 83 of the Top 100 markets. Lastly, whether you look at consumers or small business, the value proposition is what's driving the same result. We've got long-tenured customers with deep relationships that are highly engaged.
Turning to wealth management, you can see a similar story around long tenure and quite active relationships. The average relationship of our GWIM clients is around 14 years and again, these clients are very geographically diverse, they're also very digitally engaged and we continue to see deepening around banking solutions and products of all types. There's lots of options for these clients that extend from their operational checking accounts, all the way up through preferred deposit options and then we also benefit from having great alternatives for them within our investment platform.
On global banking, note that 80% of our U.S. deposit balances are held by clients who have had an account with us for at least 10 years. Furthermore, as we measure the number of solutions that clients have with us, we know that 73% of balances are held by clients that have at least five products on us and just like the other businesses, they're highly diversified by industry and geography. So those are some of the things that make our quality deposit base stable.
So now that we've walked through both loans and deposits, I want to transition a bit to make some points on balance sheet management and to focus on the liquidity we enjoy by having a surplus of customer deposits that far exceeds the loan demand of our clients today and far exceeded the loan demand of our clients pre-pandemic. Having the deposits alone doesn't pay the expenses to support these great customer basis and it doesn't mean much to our shareholders unless we put them to work to extract the value of those deposits. So that's what we're trying to illustrate and we want to show you how we do that.
You can see that on Slide 10, where you note, we had significant excess deposits over loans pre-pandemic. And during the pandemic, that increased -- that amount increased significantly. Before the pandemic we had $0.5 trillion more in deposits than loans and that peaked in late 2021 at more than $1.1 trillion and it remains high at roughly $900 billion still today. That's the context as we talk about how we manage excess cash.
So let's turn to Slide 11. And here we're going to focus on the banking book because our global markets balance sheet has remained largely market-funded and just follow the graph from left to right. At the top of the slide, you note trend of cash and cash equivalents and the two components of the debt securities balances: available-for-sale and held-to-maturity. And you can see the trend of the overall combined cash and securities balance movement and it closely mirrors the previous slide's excess deposit trend as you would expect.
In 2020, deposits grew while loans declined and that was pandemic borrowing from our commercial clients stopping and then quickly paying it off. Throughout 2020, as we put deposits to work, we took a number of actions to protect our capital and that included a buildup in hold-to-maturity, better aligning our capital treatment with our intent to hold those securities to maturity. We also hedged rate risk in the available-for-sale book using pay-fixed received variable swaps. So these securities acted like cash and they earned higher yields and guarded against capital volatility.
As we entered the middle of 2021, it became more clear that the stimulus payment would likely be the last one and therefore, we believed deposits would be peaking. As a result, we stopped adding to our hold-to-maturity securities book. That book peaked in the third quarter of 2021 at $683 billion, $562 billion were mortgage backs and the rest were treasuries. And all that's happened is that notional balances have declined in each of the past six quarters, ending the quarter at $625 billion. And within that, the mortgage-backed portfolio is down $67 billion to $495 billion.
As rates began to rise quickly throughout 2022, the value of our deposits rose. And at the same time, the disclosed market value of the hold-to-maturity securities declined, resulting in a negative market valuation on those bonds. That negative market valuation peaked in the third quarter, came down in the fourth quarter, and it's come down another $10 billion in the first quarter. In our 10-K disclosure, we include a chart which shows the maturity distribution of our securities portfolio. And I'd remind you, this is based on the maturity dates of those originations, i.e., the date of the last contractual payment. When we look at the actual cash flows of those bonds over time, it results in an average weighted life of the hold-to-maturity securities book of a little more than eight years. And as you can see, since the third quarter of '21, we've continued to see increases in the overall yield on the balances due to both the maturity and reinvestment of lower-yielding securities, as well as remix into higher-yielding cash. And as you can see, with deposits paying 92 basis points, that compares to our blend of cash and government-guaranteed securities which pays 290 basis points. So we continue to benefit NII and yield.
And finally, one very important last point I want to make, which is on the improved NII of our banking book, because remember, we manage the entirety of our balance sheet, that includes our deposits and that's where you see the net interest income has improved significantly. NII, excluding global markets, which we disclose each quarter, troughed in the third quarter of 2020 at $9.1 billion and it's now $5.4 billion higher on a quarterly basis at $14.5 billion in the first quarter of '23, and that's the acid test of managing the entire balance sheet.
So let's turn now to Slide 12 and focus on net interest income. On a GAAP non-FTE basis, NII in the first quarter was $14.4 billion and the FTE NII number was $14.6 billion. Focusing on FTE, net interest income increased $2.9 billion from the first quarter of '22 or 25% while our net interest yield improved 51 basis points to 2.2%. The improvement was driven by rates and that includes reductions in securities premium amortization. Average Fed fund rates are up 440 basis points year-over-year. Relative to that increase in Fed funds which has benefited all of our variable rate assets, the rate paid on our total deposits rose 89 basis points and the rate paid today on interest-bearing deposits is up 133 basis points. Average loan growth of $64 billion also aided the year-over-year NII improvement.
Turning to a linked-quarter discussion, NII of $14.6 billion is down $222 million from Q4. And that's primarily driven by the continued impact of lower deposit balances and the mix shift into interest-bearing. It's also influenced by lower global markets NII which, remember, still gets passed through to clients via higher non-interest income as part of the trading revenue.
Excluding the $262 million decline in global markets NII, the banking book NII of $14.5 billion, that was modestly higher as the benefit of increased short interest rates, some modest loan growth and some deposit favorability, was offset by two less days of interest in the quarter.
Turning to asset sensitivity on a forward basis, the plus-100 basis point parallel shift at March 31st stands at $3.3 billion of expected NII over the next 12 months from our banking book, 96% of that sensitivity is driven by short rates.
Summary, the first quarter NII was $14.6 billion this quarter on an FTE basis and that was a little better than our $14.4 billion expectation as we began the quarter, since deposits and rate pass-throughs were both modestly better. Looking forward, based on everything we know about interest rates and customer behavior, we expect second quarter NII on an FTE basis to be around 2% lower compared to Q1. So think about that NII as about $14.3 billion FTE, plus or minus, driven by expected deposit movements as well as lower global markets NII, which again is offset in the trading revenue.
So let me remind you of some of the caveats when it comes to that NII guidance. First, importantly, it assumes that interest rates in the forward curve materialize and that includes one more hike and then a couple of cuts in 2023. We also expect funding costs for global markets client activity to continue to increase based on those high rates. And as noted, the impact of that is still offset in noninterest income and that obviously assumes our current client positioning and the forward rate expectations.
We continue to expect modest loan growth, so that's in our NII expectation as well and it's driven by credit card and, to a lesser degree, commercial. And then finally, we just expect lower deposits in rotational shifts towards interest-bearing really for three reasons. First, we expect further Fed balance sheet reductions to continue to reduce deposits for the industry. Second, we anticipate lower wealth management deposits in the second quarter, that's pretty typical due to the seasonal impact of clients paying income taxes and, to a lesser degree now, a continuation of balance movement seeking better yields off balance sheet. And third, we just continue to expect some of the rotation of commercial deposits towards interest bearing.
Okay, let's go to Slide 13, we'll talk about expense. And here you can see us, in the first quarter, our expenses were $16.2 billion, that's up $700 million from the fourth quarter and it's driven by seasonal elevation from payroll taxes, mostly at $450 million, a little bit from higher FDIC insurance expense, that was another $100 million this quarter, and the cost of adding people, call that another $100 million.
We ended the first quarter with a little more than 217,000 people at the company, that was 260 people more than year-end. During the quarter, we welcomed 3,000 additional people into the company in January. That's due to outstanding offers that we extended in the fourth quarter. That meant that our headcount peaked in January at a little more than 218,000. And at the end of last week, we were down to 216,000. We continue to expect that to move lower over time and we expect by the end of the second quarter, our full time equivalent headcount will be roughly 213,000, excluding our summer interns. As we look forward to the next quarter then, we would expect Q2 expense to benefit from the reduction of the seasonal elevation of payroll tax in Q1. And we would also expect to see expense reductions coming from headcount reductions through attrition over time and our operational excellence work.
So we expect the expense in Q2 to be around $400 million or $500 million lower than Q1. So think of that as around $15.8 billion, plus or minus, in Q2. And then further, we just expect continued sequential expense declines in the third quarter and then again in the fourth quarter as we benefit from continued headcount discipline and attrition through time.
Now turn to asset quality on Slide 14 and I want to start the credit discussion by saying once again, asset quality of our customers remains healthy and net charge-offs continue to rise from their near-historic lows. Net charge-offs of $807 million increased $118 million from the fourth quarter. That increase was driven by credit card losses as higher late-stage delinquencies flowed through to charge-offs. For context, the credit card net charge-off rate was 2.21% in this first quarter and that compares to 3.03% in the fourth quarter of '19 pre-pandemic. Provision expense was $931 million in Q1 and that included $124 million reserve build. That's obviously less than the $403 million build we took in the fourth quarter and it reflects modest loan growth and an ever-so-slightly-improved macroeconomic outlook that on a weighted basis continues to include an unemployment rate still north of 5% as we end 2023.
We included a slide in the appendix this quarter that highlights the mix and credit metrics of our commercial real-estate exposure. And I just wanted to remind everyone here, we've been very intentional around our client selection, very intentional around portfolio concentration and deal structure over many years. And as a result, we've seen NPLs and realized losses that remain quite low for this portfolio. We had a total of $66 million of commercial real-estate losses in 2022, 70% of that was in office loans and that resulted in an annualized loss rate of 26 basis points.
In the first quarter, to give some perspective, our office loan losses were $15 million. We have roughly $73 billion in commercial real-estate loans outstanding, that's less than 7% of our loan book, it's highly diversified by geography and no part of the country represents more than 22% of the book, it's also very diversified across property-type. Within property-type, our office portfolio was $19 billion, it's about 2% of our total loans. The portfolio is roughly 75% Class A properties and when we originate, they're typically around 55% loan-to-value. Even though we've seen some property value declines, these exposures still remain well secured, $3.6 billion is classified as reservable criticized and even on the most recent refreshes on our toughest loans, we still have 75% LTVs. In our office book, $4 billion is scheduled to mature this year, another $6 billion in 2024 with the remainder spread over the following years. So we continue to feel that the portfolio is well-positioned and adequately reserved, given the current conditions.
On Slide 15, for completeness, we highlight the credit quality metrics for both our consumer and commercial portfolios.
And with that, I'm going to turn it back to Brian to talk about the lines of business.
