Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And on Slide 8, we list the more detailed highlights of the quarter, and then Slide 9 presents a summary income statement, so I'm going to refer to both of those. For the quarter, we generated $7.4 billion in net income, and that resulted in $0.88 per diluted share. A year-over-year revenue growth of 11% was led by a 14% improvement in net interest income, coupled with a strong 10% increase in sales and trading results ex-DVA.
Revenue was strong, and it included a few headwinds, and I thought I'd go through those headwinds first. We had lower service charges from both higher earnings credit rates on deposits for commercial clients, and the policy changes we announced in late 2021 to lower our insufficient funds and overdraft fees for our consumer customers. The good news on the consumer piece is year-over-year comparisons get a bit easier starting next quarter, as the third quarter of '22 reflects the full first quarter of these changes.
Second, we had lower asset management and brokerage fees as a result of the lower equity and fixed income market levels, and market uncertainty that impacted transactional volumes compared to a year ago quarter.
Third, we have a net DVA loss of $102 million this quarter compared to a gain in DVA of $158 million in the second quarter a year ago. We also recorded roughly $200 million in securities losses as we closed out some available for sale security positions and their related hedges, and we put the proceeds and cash.
Lastly, and just as a reminder, our tax-rate benefits from ESG investments, and those are somewhat offset by operating losses on the ESG investments which show up in other income. So, this quarter, our tax-rate is a little bit lower and the operating losses are a little bit higher from volume of these deals. So you have to be careful in analyzing the lower tax-rate without considering the operating losses, and that in-turn often offsets what would have been higher revenue elsewhere. Our tax-rate for the full year is expected to benefit by 15% as a result of the ESG investment tax credit deals, and absent of these credits, our effective tax-rate would still be roughly 25%, and we continue to expect a tax-rate of 10% to 11% for the rest of 2023.
Expense for the quarter of $16 billion included roughly $276 million in litigation expense which was pushed higher this quarter by the agreements announced last week with the OCC and the CFPB on consumer matters. Asset quality remains solid and provision expense for the quarter was $1.1 billion, consistent with $869 million in net charge-offs and $256 million in reserve built. The provision expense reflects the continued trend in charge-offs towards pre-pandemic levels, and it is still below historical levels.
The charge-off rate was 33 basis points, and that's only 1 basis point higher than the first quarter and still remains well below the 39 basis points we last saw in Q4 of 2019, when remember, 2019 was a multi-decade low. I'd also Slide 9 just to highlight returns, and you can see we generated 15.5% return on tangible common equity and 94 basis points return on assets.
Let's turn to the balance sheet starting with slide 10, and you can see our balance sheet ended the quarter at $3.1 trillion, declining $72 billion from the first quarter. A $33 billion or 1.7% reduction in deposits closely matched a $41 billion decline in securities balances through paydowns from the hold to maturity and sales of available for sale securities. Securities are now down $177 billion from a quarter to '22. Cash levels remained high at $374 billion and loans grew $5 billion.
As Brian noted, our liquidity remains strong with $867 billion of liquidity, up modestly from the first quarter of '23, and still remains nearly $300 billion above our pre-pandemic fourth quarter '19 level. Shareholders' equity increased $3 billion from the first quarter as earnings were only partially offset by capital distributed to shareholders. AOCI decreased by $2 billion, driven by derivatives valuation and AFS securities values were little changed. So, there is little change in the AOCI component that impacts regulatory capital. Tangible book-value is up 10% per share year-over-year.
During the quarter, we also paid out $1.8 billion in common dividends, and we bought back $550 million in shares to offset our employee awards. And last week, we announced the intent to increase our dividend by 9%, beginning in the third quarter.
Turning to regulatory capital, our CET1 level improved to $190 billion from March 31st, and the ratio of CET1 improved more than 20 basis points to 11.6%, once again, adding to the buffer over our 10.4% current requirement. While our risk-weighted assets increased modestly in the quarter.
Also noteworthy, on July 3rd, we initiated dialog with the Fed to better understand our CCAR exam results, and we remain in discussions today with no news to update as of now. In the past 12 months, we've improved our CET1 ratio by more than 110 basis points, and we've done that while supporting claims for loan demand and returned $11.3 billion in dividends and share repurchases to shareholders. A supplemental leverage ratio was 6% versus our minimum requirement of 5%, and that leaves us plenty of capacity for balance sheet growth. Finally, the TLAC ratio remains comfortably above our requirements.
So, let's now focus on loans by looking at average balances, you can see those on Slide 11, and there you can see, average loans grew 3% year-over-year. The drivers of loan growth are much the same. Consumer credit card growth is strong, and then commercial loans grew 4%. The credit card growth reflects increased marketing, enhanced offers and higher levels of account openings over time. And in commercial, we saw a little bit of a slowdown this quarter, driven by higher paydowns from borrowers and weaker customer demand as opposed to any credit availability from us. We are still open for business for loans. While loan growth has slowed, it's generally remained still ahead of GDP, and commercial client conversations remain solid as our clients seem to be waiting for some of the economic uncertainty to lift before borrowing further.
Slide 12 shows the breakout of deposit trends, that's on a weekly-ending basis across the last two quarters, and it's the same chart that we provided last quarter. In the upper left, you see the trend of total deposits. We ended the second quarter at $1.88 trillion, down 1.7% with several elements of our deposits seeming to find stability. Given the normal tax seasonality impacts on deposit balances in Q2 and the monetary policy actions, we believe this is a good result.
I want to use the other three charts on the page to illustrate the different trends across the last quarter, and more specifically in each line of business. In consumer, looking at the top right chart, you see the difference in the movement through the quarter between the balances of low to no-interest checking accounts and the higher-yielding non-checking accounts. Here you can also see the low levels of our more rate-sensitive balances in consumer investments and CD balances, and they're both broken out here. In total, we've got still more than $1 trillion in high-quality consumer deposits which remains $274 billion above pre-pandemic levels.
In the second quarter, that decline in consumer deposits was driven by higher debt payments, higher spend, and seasonal tax activity, and some non-checking balances that rotated from deposits into brokerage accounts. We did see some competitive pressure this quarter within about roughly $40 billion of CDs, as some of the financial institutions pushed prices higher, and at this point with deposits far exceeding our loans, we've not yet felt the need to chase deposits with rates. Broadly speaking, average deposit balances of our consumers remain at multiples of their pre-pandemic level, especially in the lower end of our customer base.
Total rate paid on consumer deposits in the quarter rose to 22 basis points and remains low relative to Fed funds, driven by the high mix of quality transactional accounts. Most of this quarter's 10 basis point rate increase remains concentrated in those CDs and consumer investment deposits, and together those represent only 11% of our consumer deposits.
Turning to wealth management, this business is also impacted by tax payments, and normally shows the most relative rate movement because these clients tend to have the most excess cash. The previous quarter's trend of clients moving money from lower-yielding sweep accounts into higher-yielding preferred deposits and moving off balance sheet onto other parts of the platform seemed to stabilize this quarter, and our suite balances were more modestly down at $72 billion.
At the bottom right, note the global banking deposit stability. We ended the second quarter at $493 billion, down $3 billion from the first quarter. We've now been in this $490 billion to $500 billion range for the past several quarters, and these are generally the transactional deposits of our commercial customers that they use to manage their cash flows. And while the overall balances have been stable, we've continued to see shift towards interest bearing as the Fed raised rates one more time during the quarter before pausing in June. Non-interest-bearing deposits were 40% of their deposits at the end of the quarter.
Focusing for a moment on average deposits using slide 13, I really only have one additional point to make. While you've seen the modest downtick in deposits for the past several quarters as the Fed has removed some accommodation, we just want to note that deposits remain 33% above the fourth quarter 2019 pre-pandemic period. And as you look at the page, every segment relative to pre-pandemic is up at least 15%. Consumer is up 40%. Consumer checking is up more than 50%, and as noted, global banking has been right around $500 billion for the past five quarters, and it remains 31% above pre-pandemic.
So, let's move to slide 14, and we'll continue the conversation that we began last quarter around management of excess deposits above loans. In the top left, note the balances in the second quarter of each year since the pandemic began. The excess of deposits needed to fund loans increased from $500 billion pre-pandemic to a peak of $1.1 trillion in the fall of 2021. And as you can see, it remains high at the end of June at $826 billion. In the top right, note that the amount of cash and securities held has increased across time, in line with the excess deposit trend, and you'll also note the mix shift over time. This excess of deposits over loans has been held in a balanced manner across the period shown, with roughly 50% fixed longer-dated,held-to-maturity securities, and the rest has been held in shorter-dated available for-sale securities in cash.
Cash and the shorter-dated AFS securities combined was $516 billion at the end of the quarter, and cash at $375 billion is more than twice what we held pre-pandemic, and you should expect to see that come down over time. We made these investments given the mix in transactional nature of our customers' deposits, particularly given the excess deposits built. Note, also in the bottom left chart, the combined cash and securities yields continued to expand this quarter, and remained meaningfully wider than the overall deposit rate paid. That's a result of two things.
Securities book has seen a steady decline since the fall of 2021 when we stopped adding to it. With less loan funding needs, proceeds from security paydowns have been deployed into higher-yielding cash, and through this action and the increased cash rates, the combined cash in security yield has risen further and faster than deposit rates. Deposits at the end of the quarter were paying 124 basis points while our blend of cash and securities has increased to 319 basis points. So, over the past year the deposit cost has risen by 118 basis points, and the cash and securities yield has improved by 164 basis points. And as a reminder, this slide focuses on the banking book because our global markets balance sheet has remained largely market funded.
Finally, one very last -- one last very important point that I want to make is on the improved NII of our banking book. The NII excluding global markets which we disclose each quarter troughed in the third quarter of 2020 at $9.1 billion, and that compares to $14 billion in the second quarter of 2023, so almost $5 billion higher on a quarter basis, $20 billion per year. That's led to a stronger capital position even as we returned capital to shareholders and supplied capital to our customers in the form of loans and other financing capital.
And then more specifically on the hold-to-maturity book, the balance of that portfolio declined again $10 billion from the first quarter, it's down $69 billion since we stopped adding to the book in the third quarter of '21. The market valuation on our hold-to-maturity book, which is in a negative position, worsened $7 billion since March 31, 2023, driven by a 54-basis point increase in mortgage rates. the OCI impact from the valuation of our hedged AFS book modestly improved this quarter.
Let's turn to slide 15, and we can focus on net interest income. on a GAAP or non-FTE basis, NII in the second quarter was $14.2 billion, and the fully tax equivalent NII number was $14.3 billion. So, I'm going to focus on that fully tax equivalent. Here NII increased $1.7 billion from the second quarter of '22 or 14%, while our net interest yield improved 20 basis points to 2.06%. This improvement has been driven by rates which includes securities premium amortization, partially offset by global markets activity, and $137 billion of lower average deposit balances. Average loan growth during the period of $32 billion also aided the year-over-year NII improvement.
Turning to a linked quarter discussion, NII of $14.3 billion is down $289 million or 2% from the first quarter, and that's driven primarily by the continued impact of lower deposit balances and mix shift into interest bearing, partially offset by one additional day of interest in the period. Global markets NII increased during the quarter. The net interest yield fell 14 basis points in the quarter, driven by a larger average balance sheet due to the cash positioning we chose and some higher funding costs. This quarter's compression, we believe, was just a little anomalous, driven by our decision late first quarter to position the balance sheet around higher cash levels.
Turning to asset sensitivity and focusing on a forward yield curve basis, the plus 100 basis point parallel shift at June 30 was unchanged from March 31, '23, at $3.3 billion of expected NII over the next 12 months in our banking book, and that assumes no expected change in balance sheet levels or mix relative to our baseline forecast, and 95% of the sensitivity remains driven by short rates. A 100-basis point down-rate scenario was unchanged at negative $3.6 billion.
Let me give you a few thoughts on NII as we look forward. We still believe NII for the full year will be a little above $57 billion, which would be up more than 8% from full-year 2022, and this could include third quarter at approximately the same level as second quarter, so think $14.2 billion, $14.3 billion. And then fourth quarter, somewhere around $14 billion. That's a slightly better viewpoint than we had last quarter for the third and 4th-quarter, with a little more stability closer to the second quarter level, and therefore provides a better start point for 2024.
So, let's talk through the caveats around our NII comments. First, it assumes that interest rates in the forward curve materialized, and an expectation of modest loan growth driven by credit card. On deposits, we are expecting modestly lower balances led by consumer, and we expect continued modest deposit mix shifts from global banking deposits into interest bearing. The past few months have provided us a little more positive outlook around NII, given the apparent stabilization of some elements of deposits as well as better pricing, and now we'll see how the rest of the year plays out.
Okay, let's turn to expense, and we'll use slide 16 for that discussion. Second quarter expenses were $16 billion, that was down $200 million from the first quarter. And as I mentioned, the second quarter included $276 million of litigation expense. In addition, we also saw a little higher revenue-related expense driven by our sales and trading results. Those higher costs were more than offset by the absence of the first quarter seasonal elevation of payroll taxes and savings from a reduction in overall full-time headcount. Now, excluding the 2,500 or so summer interns that we welcomed into our offices over the summer months, our full-time head count was down roughly 4,000 from the first quarter start point, to 213,000. That's some good work after peaking at 218,000 in January.
Our summer interns will leave us in the third quarter, and hopefully many will return as full-time associates next summer. And at the same time in Q3, we welcomed back about 2,600 new full-time hires as college grads, many of whom interned with us last summer. And that's a very diverse class of associates who are excited to join the company.
As we look forward to next quarter, we would expect the third quarter expense to more fully benefit from the second quarter head count reduction, even as we remain in a mode of modest hiring for client-facing positions. Additionally, the proposed notice of special assessment from the FDIC to recover losses from the failures of Silicon Valley and signature banks could add $1.9 billion expense for us, $1.5 billion after tax, and we just remain unsure at this point of timing to record that expense.
Let's now move to credit, and we'll turn to slide 17. Net charge-offs of $869 million increased $62 million from the first quarter, and the 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 2.6% in Q2, and remains well below the 3.03% pre-pandemic rate in the fourth quarter of '19. Provision expense was $1.1 billion in Q2, and that included a $256 million further reserve build, that's driven by loan growth, particularly in credit card, and it reflects a macroeconomic outlook that on a weighted basis continues to include an unemployment rate that rises to north of 5% in 2024.
On slide 18, we highlight the credit quality metrics for both our consumer and commercial portfolios. On consumer, we note we continue to see asset quality metrics come off the bottom, and they remain below historical averages. Overall commercial net charge-offs were flat from first quarter. And within commercial we saw a decrease in C&I losses that was offset by an increase in charge-offs related to commercial real estate office exposures.
As a reminder, commercial real estate office credit exposure represents less than 2% of our total loans, and this is an area where we've been quite intentional around our client selection, portfolio concentration, and deal structure over many years, and as a result, we've seen NPLs and realized losses that are quite low for this portfolio. In the second quarter we experienced $70 million in charge-offs on office exposure, to write down a handful of properties where the LTV has deteriorated. Our charge-offs on office exposures were $15 million in the first quarter. We pulled forward some of the office portfolio stats provided last quarter in a slide in our appendix for you. Now, we continue to believe that the portfolio is well positioned and adequately reserved against the current conditions.
Moving to the various lines of business and their results, starting on slide 19 with consumer banking, for the quarter, consumer earned $2.9 billion on good organic revenue growth and delivered its ninth consecutive quarter of strong operating leverage, while we continue to invest in our future. Note that top-line revenue grew 15% while expense rose 10%. These segment results include the bulk of the impact of the costs of the regulator agreements from last week. While reported earnings were strong in both periods at $2.9 billion, it understates the success of the business because the prior year included reserve leases while we built reserves this quarter for card growth.
EPNR grew 21% year-over-year even with the added cost of the agreements. And the revenue growth overcame a decline in service charges that I noted earlier. Much of this success is driven by the pace of organic growth of checking and card accounts [Phonetic] as well as investment accounts and balances, as Brian noted earlier. In addition to the litigation noted, expense reflects the continued business investments for growth, and as you think about this business, remember much of the company's minimum wage hikes and the mid-year increased salary in wage moves in 2022 impact consumer banking the most, and that, therefore, impacts the year-over-year comparisons.
Moving to wealth management on slide 20, we produced good results earning a little less than $1 billion. These results were down from last year as asset management and brokerage fees felt the negative impact of lower equity, lower fixed income markets, and some market uncertainty, impacting transactional volume. Those fees were complemented by the revenue from a sizeable banking business, and that remains an advantage for us. As Brian noted earlier, both Merrill and the private bank continued to see strong organic growth and produce solid client flows of $83 billion since the third -- since the second quarter '22.
Our assets under management flows of $14 billion reflect a good mix of new client money as well as existing clients putting money to work. Expenses reflect lower revenue-related incentives and also reflect continued investments in the business as we add financial advisers.
On slide 21, you see the global banking results, and this business produced very strong results with earnings of $2.7 billion, driven by 29% growth in revenue to $6.5 billion. Coupled with good expense management, this business produced strong operating leverage. Our global transaction services business has been robust. We've also seen a higher volume of solar and wind investment projects this quarter, and our investment banking business is performing well in a sluggish environment. Year-over-year revenue growth also benefited from the absence of marks taken on leveraged loans in the prior-year period.
We saw modest loan growth on average year over year and link quarter, the utilization rates declined, and more generally, we saw lower levels of demand. As we noted earlier, the deposit flows have stabilized in the $490 billion to $500 billion range over the past several quarters, reflecting the benefits of our strong client relationships. The company's overall investment banking fees were $1.2 billion in the second quarter, growing 7% over the prior year and 4% link quarter, a good performance in a sluggish environment that saw fee pools down 20% year-over-year.
Provision expense declined year-over-year as we built more reserve in the prior year. Expense was held relatively flat year-over-year even as we drove strategic investments in the business, including a relationship management hiring and technology costs, and additionally comparisons benefit from the absence of elevated expense for some regulatory matters in the second quarter of '22.
Switching to global markets on slide 22, we had another strong quarter with earnings growing to $1.2 billion, driven by revenue growth of 14%, and I'm referring to results excluding DVAs we normally do. The continued themes of inflation, geopolitical tensions, and central banks changing monetary policies around the globe, along with this quarter's debt ceiling concerns continued to impact both the bond and equity markets. And as a result, it was a quarter where we saw strong performance in both our macro and micro trading businesses. The investments made in the business over the past two years continued to produce favorable results. Year-over-year revenue growth benefited from strong sales and trading results and the absence of marks on leveraged finance positions last year.
Focusing on Sales and Trading, ex-DVA, revenue improved 10% year-over-year to $4.4 billion. FICC improved 18% while equities was down 2% compared to the second quarter of '22. Year-over-year expense increased 8%, primarily driven by investments in the business and revenue-related costs partially offset by the absence of regulatory matters in the second quarter of '22.
Finally, on slide 23, all other shows a loss of $182 million. Revenue included $197 million of losses on securities sales and increased volume of solar and wind investment operating losses that create the tax credits for the company. As a result of the increased solar and wind tax deal volume and their associated related operating losses, our effective tax rate in the quarter was lower at 8%, but excluding ESG and any other discrete tax benefits, our tax rate would have been 26%.
So, with that, let's stop there, and we'll open it up for Q&A.
