Good day, everyone, and welcome to the Bank of America Second Quarter Earnings Announcement. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note today's call is being recorded. And it is now my pleasure to turn the conference over to Lee McIntyre.
Please go ahead.
Thank you, Catherine. Good morning. Thank you for joining the call to review our Q2 results. Hopefully, you've had a chance to review our earnings release documents. As usual, they're available, including the earnings presentation that we'll be referring to during the call on our Investor Relations section of the bankofamerica.
Before I turn the call over to Brian and Paul, let me just remind you, we may make some forward looking statements And refer to non GAAP financial measures during the call regarding various elements of the financial results. Forward looking statements are based on management's current expectations and assumptions, and they're subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials, our SEC filings on our website. Information about the non GAAP financial measures, including reconciliations to U. S.
GAAP can also be found in our earnings materials that are on our website. So With that, let me turn it over to you, Brian. It's all yours.
Good morning and thank all of you for joining us and thank you, Lee. Today, Bank of America reported $9,200,000,000 in after tax net income or $1.03 per diluted shares. These results included a few items worth highlighting and I'm on Page 2 ahead of Paul going through the details. 1st, As asset quality continue to improve and economy continue to recover, we released $2,200,000,000 of credit reserves established in the first half of last year. The idea that a company with our credit quality and other industry participants would be releasing reserves this quarter is not new news, But the reality is that BAC we're seeing credit quality levels that are very strong.
Net charge offs fell to 25 year low as a percentage of loans, Not just raw dollar amount. Let me mention a few items I don't believe were industry wide or expected at BAC. We recorded a $2,000,000,000 positive income tax adjustment Following last month's enactment of an increase in the UK corporate income tax rate to 25%. This required a remeasurement of our deferred tax asset, which just reverses the write downs from previous years when the tax rates were lower. In addition, our expense level included 2 things I would note.
These add up to about $800,000,000 With our strong results and the tax benefit, we took the opportunity To prefund $500,000,000 to our charitable foundation, this accelerates our planned funding for not only the rest of this year, but for next year as well. This is not new money, just utilizing some of the tax benefit to cover future expense. We also recorded roughly $300,000,000 of expense associated with processing transactional card claims related to state unemployment benefits. This represents to a large degree a catch up as we move through Away from these items, we produced another quarter of solid earnings and showed evidence of good client activity in an economy that Continue to recover from the pandemic. Now as we all know, the healthcare crisis has shown improvement and economies has recovered.
Progress on vaccinations along with the continued support of fiscal monetary policies has promoted a full and speedy recovery and a return to economic health. We like others are reopening our facilities and we're seeing more products being sold by our teammates in addition to the continued digital engagement at very high level. Our advisors and bankers and relationship managers are once again meeting with clients face to face building even the stronger relationships. We are seeing customer demand continue to grow I want to take a minute or 2 on the economy and then if you go to Slide 3. We have included a few slides highlighting our customer data.
Let me hit a few highlights. The GDP growth estimates by our BofA Securities Research team for the 2nd Quarter stand at 10% and stand at 7% for the full year 2021. The reopening is further driving projections of an economy has continued to grow at a rate Above the pre pandemic periods into 'twenty three. Also the unemployment rate dropped below 6% this quarter projected by economies You also note the stability to increase consumer spending from our own BAC customers, which is Not only much higher than same periods in 2020, which you would expect, but is notably 22% higher than the first half of twenty twenty one Compared to 2019, you can see that on the lower right of page. That growth rate 2019 was already growing strongly before the pandemic.
A few comments regarding the characteristics of spending, I think are interesting. We are halfway through the year and the total payments through this through all the different means of $1,800,000,000,000 That's 60% of last year's level. Last year indeed was a record even though suppressed in various periods when businesses were shut down. More specifically for the Q2, the total BAC Consumer Small Business Payments set a 4th quarterly consecutive record Reaching $976,000,000,000 up 41% year over year and 23% over 'nineteen. The trend has also continued into early July.
Spending accelerated as COVID vaccinations increase, business reopened and domestic travel increased. Combined spend at retailers and services comprises over 50% of debit and credit card spending a portion of the total spend. That increased 27% over 2019 Q2, But did slow a bit towards the end of the quarter as consumer moved their attention and started taking summer leisure trips and activities. You can see that by noting the return of travel and entertainment spending, which comprises about 10% of debit credit card spend. You can see we're recovering travel remains below 2,000 While recovering travel remains below 2019 spending levels.
Flipping the travel up a bit, as of mid June domestic airline purchases were up 8% over 2019, Well, international airline purchases on our cards are still down approximately 40%, showing the difference of the progress against the war on the virus in the United States versus other places. Now let's go to Slide 4. We just put this chart in to show you that the consumers are paying their bills. We've shown this each quarter, so you could see that the actual Card delinquency levels continue to edge down even as people are out and circulating the economy. Before we go to Paul, I want to comment specifically on 3 areas of interest to you, loan growth NII and expense.
We're going to do that on Pages 56. So first on loans, Paul and I are going to show you the average loans, Paul will show you that later, end period loans, I'll show you in a minute and long term trends, which are on Page 5. What all these figures point to is accelerating growth during the quarter as we've spoken about on occasion. This quarter, we saw loan levels across most every business move past stabilization and begin to make progress. Companies need to build inventory, hire workers To meet the growing customer demand, this virtuous circle of hiring workers and meeting customer spending will help drive the economy and hopefully will result more line usage on our loans.
You can see the path On Slide 5 of loans since the pandemic started in March 2020. As you can see, all of them are turning up in recent months. But moving to Slide 6, you see the more traditional detail for our company. Let's start on the lower right hand side of that slide and talking about the commercial portfolio. Commercial loan balances after adjusting for the reductions in PPP loans for Q2 forgiveness grew $15,000,000,000 This is led by Global Markets client borrowing activity, but beyond that and still excluding the PPP loan forgiveness middle market lending group And our business banking team finally had growth in the month of June 2021, a first since last March.
Fueling some of this improvement is calling effectiveness. Relationship managers have increased their calling efforts. We're now aggressively calling on targeted prospects. And with vaccination progress, face to face meetings have nearly doubled each month over the past 90 days. Commercial loans wealth management clients grew impressive 5% in the quarter as these customers borrowed through our custom lending products.
In Small Business, our Practice Solutions Group, which supports medical, dental and veterinary practices, has been building throughout the quarter and Small Business Production overall It's back to pre pandemic level. Turning to consumer loans, overall growth and end of period loans was 6,000,000,000 Card loans grew with increased spending and as customer payment percentages remained high. Auto originations have grown fairly consistently, although recently lower dealer supplies have affected them. Mortgage balance growth, which is a big part of our loan portfolio in consumer has been a challenge in the low rate environment with high refinancing volumes exceeding originations in past quarters. We are only modestly down this quarter as our origination volumes are finally overcoming the payoffs.
We are pleased with the trajectory through the period and that feeds into the second half of the year, While average loans drive that loan balances during the Q3 will drive NII, it's good to start with a trend that has reversed the past quarter's declines. On NAI, the good news is that we correctly called a bottom 3 quarters ago. We told you that in the 3 that we thought the Q3 of 20 20 would be the trough. Despite the volatility and lower rate moves and significant decline in loans, we've been able to hold NII At that level or more for 3 straight quarters. We expect it to move higher and Paul is going to discuss that later.
The other area I would comment on is expense. We saw on a reported basis, we saw a $500,000,000 in expense reduction from Q1 of 'twenty one to Q2 of 'twenty one. This quarter we also had around $800,000,000 in notable items for the aforementioned charitable contribution on employment claims process. Absent those notable items, expenses would have been down about $1,000,000,000 and in the low $14,000,000,000 range. This is a level we are targeting expense as we move through the rest of the year.
In the second half of the year, as we normalize our operations, we'll continue to return our business as usual working on process improvements that allow us to reduce our headcount And to continue to fund franchise investments, headcount in the 2nd quarter excluding the summer interns Declined by roughly 2,500 or over 1% from the Q1. So the messages for this quarter are straightforward. The organic growth machine that we had rolling before the pandemic hit is reemerging as the economy normalizes. We should be careful to ensure that the war on the virus stays 1, but we're seeing great deterrents. In retail preferred and small business, we saw a strong production of core transactional accounts Above pre pandemic low, this quarter was our best net sales growth in checking accounts since the Q2 2015.
We saw card production about 90% overall pre pandemic, but net cards net of runoff were positive The first time since the quarter Q1 of 2020 when we entered the pandemic. We saw growth in new Merrill Edge investment accounts. Paul will talk to you about that. We saw good mortgage production. We saw stronger digital activity.
In Wealth Management, we saw household growth And strong flows continue to grow even with the use of our banking platform to grow its credit side. In Global Banking, we saw loan growth and new production coming on, while While line usage still remains very low, we saw investment banking close this quarter with record pipelines. In markets, we saw a strong first half even compared to 2020 and a strong second quarter, albeit with more normal seasonal impact. So normalizing more like 'nineteen, but still higher. And we saw headcount come down as operational excellence kicks in by over 2,000 people.
We have work to do to keep driving down the core expenses and getting out the net COVID expenses over time. And above all, Due to responsible growth, we saw strong core credit metrics. So as the economy continues to recover, we are seeing organic growth engine kick back in. With that, I'll turn it over to Paul.
Thanks, Brian. Hello, everyone. I'm starting on Slide 7. As I have done in the past few quarters, the majority of my comments Excuse me, my comparisons will be relative to the prior quarter rather than year over year given the pandemic. Since Brian already covered a lot of the income statement, I will just add a couple of comments on revenue and returns.
Revenue was down 6 From Q1, the decline was driven by lower sales and trading results that more than offset solid consumer and wealth management revenue, which was a result of higher card income and AUM fees. It is also worth noting that while Investment Banking fees were down from a record Q1 level, they remained strong at more than $2,000,000,000 in Q2. Lastly, when comparing revenue against the prior year quarter, Remember, Q2 'twenty included a $704,000,000 gain on the sale of some mortgage loans. With respect to returns, our return on tangible common equity was 20% and ROA was 123 basis points, both benefiting from The positive tax adjustments and sizable reserve release. Moving to Slide 8, balance sheet expanded $60,000,000,000 versus Q1 To a little more than $3,000,000,000,000 in total assets, deposit growth of $24,000,000,000 supported $16,000,000,000 of loan growth, While the combination of market based funding and long term debt issuance supported expansion of the balance sheet and global markets, Other notable movements on the balance sheet included the continued deployment of excess cash into securities.
Securities increased $83,000,000,000 while cash declined $66,000,000,000 Driven by the additional deposit growth, Our liquidity portfolio remained above $1,000,000,000,000 or 1 third of the balance sheet. Shareholders' equity increased $3,000,000,000 As earnings outpaced capital distributions, capital distributions of $5,800,000,000 were limited to the average of earnings in the previous 4 quarters For regulatory guidelines and we're well below the $9,000,000,000 earned in the quarter. With respect to regulatory ratios, Consistent with Q1, standardized remained the binding approach for us and was down a little less than 30 basis points from Q1. While the CET1 ratio declined 30 basis points from Q1, it remained 200 basis points above our minimum requirement of 9.5%, which translates into a $31,000,000,000 capital cushion. While book value rose $3,000,000,000 regulatory capital was up 1,000,000,000 As the $2,000,000,000 tax adjustment did not benefit CET1 Capital, higher RWA from the liquidity deployed to securities, Growth in our market balance sheet and higher GWIM loan activity more than offset the benefit to the ratio from higher capital.
Our supplement excuse me, our supplementary leverage ratio at quarter end was 5.9%, Dropping from the prior quarter, primarily due to the removal of the regulatory relief, 5.9% versus a minimum requirement of 5% Equates to approximately $600,000,000,000 of balance sheet capacity, which leaves us plenty of room for growth. Our TLAC ratio remained comfortably above our requirements. Turning to Slide 9, Brian reviewed ending loan balances earlier, so I will focus on average balances, which are more closely linked to NII. As you look at The year over year trends note that these numbers include PPP loans, which have been moving lower now for 2 quarters, driven by forgiveness. You can see the change in those PPP levels on the slide.
Focusing on the linked quarter change, while loans on an ending basis were up nicely, On an average basis, even with a $3,000,000,000 decline in PPP balances, loans were flat. Wealth Management and Global Markets experienced the most notable improvements. GWIM continued to benefit from security based lending as well as custom lending, while continuing to have solid mortgage performance. In Global Markets, we looked for opportunities to lend to clients against a number of different Asset types creating mostly investment grade exposures as a good use of our liquidity. In consumer, We saw credit card loans stabilize for the first time in more than a year as credit spending ramped up and new accounts Continued to build across the quarters.
Quarterly new account levels are nearly back to 2019 levels. With respect to deposits on Slide 10, we continued to see significant growth across the client base, not only because of the growth in the money supply, but also because we added new accounts and attracted increased liquidity from existing customers. I would just note that the linked quarter growth On a spot basis included a headwind of about $34,000,000,000 from customer income tax outflows. Normally, We see deposits decline in the 2nd quarter given tax payments, but this year we saw strong growth even with these tax payments. Turning to Slide 11 and net interest income.
On a GAAP non FTE basis, NII for Q2 was $10,200,000,000 $10,300,000,000 on an FTE basis. Net interest income declined a little more than $600,000,000 from Q220, driven by the rate environment and lower loan balances, but showed modest improvement from Q1. Year over year comparisons beginning next quarter are expected to improve nicely as Q3 'twenty has proven to be the nadir for NII and we are expecting NII improvement in Q3 and Q4. Compared to Q1, the benefit of an additional day of interest And liquidity deployed was offset by a lower level of PPP loan forgiveness, the absence of proceeds Recorded in NII from the Q1 litigation settlement and modestly higher premium amortization expense. The net interest yield declined 7 basis points from Q1, driven by the continued addition of lower yielding debt securities in Q1 and Q2 and a larger global markets balance sheet.
Remember, as part of our liquidity that remains, I would include about $150,000,000,000 of debt securities hedged to floating, which earned a bit more than cash. As you will note, given all the deposit growth at low rates, our asset sensitivity to rising rates Remain significant and mostly unchanged from Q1, highlighting the value of our deposits and customer relationships. Let me give you a couple of thoughts around NII for the back half of the year. Last quarter, When the forward interest rate environment was 30 basis points to 40 basis points higher, we told you we were targeting NII at roughly $1,000,000,000 higher in Q4 of this year. This quarter's loan growth is encouraging and supportive of this target and the slowdown in mortgage Prepayments should also help improve NII.
So while we still think getting NII $1,000,000,000 higher by 4Q is Possible admittedly the recent significant decline in long end rates presents a challenge. This possibility of course assumes loans continue to grow in the second half and rates don't move lower from here. To improve our chances, we could decide to deploy additional liquidity at higher fixed rates in the coming weeks months as we evaluate The trade offs between liquidity, capital and earnings. Turning to Slide 12 and expenses. Q2 expenses were $15,000,000,000 $500,000,000 lower than Q1, while lower than Q1, the combination of the $500,000,000 contribution to the foundation and the nearly $300,000,000 increase in costs associated with unemployment claims processing Kept expenses above the low $14,000,000,000 target shared with the last quarter.
Outside of these two items, Expense was lower driven by the absence of a few Q1 items, seasonal payroll taxes, The real estate impairment charge and the acceleration expense due to incentive comp award changes. Additionally, lower incentive comp and severance costs also contributed Lastly, our COVID costs saw a modest decline as some pandemic related employee programs began to roll off, But this was mitigated to a certain degree by preparation costs for associates returning to the office. As we go to the segments, I would just note that the sizable foundation contribution was allocated to the lines of business and therefore negatively impact comparisons to prior quarters. As we look forward, we continue to invest at a high rate in people And in technology and in new financial centers, we are seeing the benefits of these investments. And now as we move forward, We expect that natural attrition will allow us to reduce headcount as we transition back to a more normal business environment.
As Brian mentioned, excluding some of our interns, our headcount this quarter moved down by about 2,500 people. Turning to asset quality on Slide 13, nothing but good news to report here. Net charge offs this quarter fell to 595,000,000 27 basis points of average loan. This is the lowest loss rate in more than 2 decades. That is 28% lower than Q1 and more than 30% below the Q2 of 2019.
Our credit card loss rate was 2.67 And several loan product categories were in recovery positions this quarter. Provision was 1,600,000,000 It was a $1,600,000,000 benefit, net benefit driven by the continued improvement And the macroeconomic outlook, which resulted in the $2,200,000,000 release of credit reserves, split fairly evenly between consumer and commercial loans. Our allowance as a percent of loans and leases ended the quarter at 1.55%, which is still well above The 1.27 percent, which was the level as we've begun 2020 following our day 1 adoption of CECL. And as a reminder, The mix of our loans has also changed since CECL Day 1. To the extent the economic outlook and remaining uncertainties continue to improve, We expect our reserve levels could move lower.
Okay. On Slide 14, we show the credit quality metrics For both the consumer and commercial portfolios, a couple of points I would make here. With respect to card losses, given the continued low level of late stage delinquencies In the 180 day pipeline, we would expect card losses to decline again in Q3. For at least the next couple of quarters, I would expect total net charge offs to moderate around the current level with lower card losses partially offset by lower net recoveries in other products. With respect to commercials, metrics, Turning to the business segments and starting with consumer on Slide 15.
Consumer Banking produced another good quarter With strong customer deposits and investment flows and the return of card loan growth. This reflects the strength of our brand, our digital innovations and the deployment of specialists in our centers, All of which enabled us to capture more than our fair share of the increase in customer liquidity. As Brian said earlier, This was a quarter of reopening where both our high-tech and high touch capabilities delivered growth in client activity. Given vaccination progress, we reopened certain financial centers. More of our associates were at their post in our financial centers and customer traffic was up.
All of the above drove higher sales in our centers. At the same time, We also saw increased sales through digital channels, which suggests increases in digital engagement are here to stay. The segment earned $3,000,000,000 in Q2, 13% higher than Q1 as revenue, expense and credit costs all showed improvement. Revenue improved 1%, reflecting higher card income on increased purchase volumes and modestly higher account service charges On ATM usage, expenses moved lower versus Q1, given the absence of the Q1 real estate impairment costs and seasonal higher payroll tax expense. We also saw some modest improvement in COVID costs As some of the elevated pandemic related associated costs began to wind down.
Our cost of deposits this quarter improved to an impressive 118 basis points. The team has done a great job servicing more and more deposits, while maintaining a strong cost discipline aided by digital engagement. Looking back at Q2 2019, we have added 38% more deposits, While expenses have only increased a little more than 3% annually in support of all that new activity even with COVID. On Slide 16, you can see the significant increase in consumer deposits and investments. Average deposits of 979,000,000,000 Are up $55,000,000,000 linked quarter and nearly $170,000,000,000 from Q2 'twenty, with more than 60% of that growth in checking.
Rate paid is down 22 basis points as 56% of the deposits are low interest checking. We covered loans earlier, but would just note that while average loans are down linked quarter, Carried end loans are up modestly excluding PPP as growth in card balances and vehicle lending Outpaced a small decline in mortgages. With respect to investment balances, we reached a new record Of $346,000,000,000 growing 40% year over year as customers continue to recognize the value of our online offering. Okay. On Slide 17, I'll highlight a couple of points Regarding the continued improvement in engagement, after crossing 40,000,000 digital users in Q1, we added another Quarter 1000000 users in Q2.
This quarter 70% of our consumer households use some part of our digital platform. We also reached 2,600,000,000 logins from customers in the last 90 days. And while you will note The tremendous Erika and Zelle usage, what I would draw your attention to is the digital sales growth, which is up 26% year over year. 85% of booked mortgages in the quarter were done digitally, while 77% of direct vehicle loans were digital. Turning to Wealth Management, the continued economic reopening and strong market conditions Led to records in average deposits, loans, investment balances and asset management fees in Q2.
Both Merrill and the Private Bank contributed to this improvement. Growth in gross new households at Merrill continued And the average size of the new households is larger this year than last year and at the same time net new households Grew, but at a slower pace given expensive competitive hiring practice across the industry. We remain committed to organic growth in our advisors and private client sales force as a stronger, more sustainable long term strategy. Net income of nearly $1,000,000,000 improved 12% from Q1 as we saw improvement in both revenue and expense. With respect to revenue, the record AUM fees, complemented higher NII on the back of solid loan Expenses dropped as the absence of seasonally elevated payroll tax in Q1 Was partially offset by higher revenue related costs.
Client balances rose to a record of 3,700,000,000,000 Up $725,000,000,000 year over year driven by higher market levels as well as strong client flows. Let's skip to Slide 20, which highlights our progress to digitally engage wealth management clients. In both Merrill Lynch and the Private Bank, we are focused on 3 pillars for digital engagement. 1, Digital adoption and deeper engagement 2, modernizing our platform for advisors and clients and 3, Secure and easy collaboration with clients. We provided stats on Slide 20 that show record levels of digital engagements Improved further in Q2, these are some of the highest levels of digital activity across our customers.
More and more clients are logging in to easily trade, check balances and originate loans All through one simplified sign on. 70% of checks deposited by the private bank clients and more than half Checks from Merrell clients are being deposited digitally now. And through leveraging Erica based AI capabilities and through use of WebEx meetings and secure text messaging, We are making it easy and more efficient for clients to do business with us wherever and however they choose. This creates additional capacity for our advisors to spend more time with existing and potential clients. All right, moving to Global Banking on Slide 21.
The business earned $2,400,000,000 in Q2, improving $251,000,000 for Q1, strong revenue growth and lower expenses were mitigated by a lower provision benefit than Q1. Deposit growth maintained or remained strong and increased $20,000,000,000 to a new record. Outside of PPP loan forgiveness, we saw modest growth across the platform as discussed earlier. Revenue growth reflected the absence of the prior quarter impairment on sub energy investments as well as increased ESG investments. Revenue also included strong firmware IB fees Up $2,100,000,000 down only modestly from the record Q1 level.
This performance resulted in an improvement To a number 3 ranking in overall fees with a pipeline that remains strong. Strong debt issuance Was it more than offset by lower equity underwriting fees. We had a provision benefit driven by a reserve release $834,000,000 in Q2, which was $328,000,000 lower than the Q1 release. Net charge offs were near 0, reflecting both low charge offs and a notable recovery in the quarter. Non interest expense declined 7% from Q1, reflecting lower compensation, partially offset by other costs.
We've already covered much of the balance sheet on Slide 22. So let's skip to digital trends on Slide 23. We continued our investments in digital solutions that deliver efficiencies for both clients and our employees. The solutions for clients have a compounded effect since they invariably mean less manual intervention by the bank, enhancing both efficiency and satisfaction. Enhanced Banking Solutions are helping us capture greater market share as wholesale clients Do more with their banking partners that are stable and secure and that have the capability to invest in new technologies that will provide better data and global integrated solutions.
Digitization and in particular, artificial intelligence is helping us streamline processes and respond to clients more quickly and efficiently. As an example, our bankers are using technology powered by Erica to not only better manage credit exposure, but also identify and win new business. We present some wholesale digital highlights on Slide 23. Pushing the global markets on Slide 24, results reflect solid but lower sales and trading activity as noted earlier, While down from the more elevated pandemic periods, trading revenue is still 10% or so higher From Q2 2019, as I usually do, I will talk about results excluding DVA. This quarter net DVA was negligible, The year ago quarter had a $261,000,000 loss.
Global Markets produced $934,000,000 of earnings in Q2, Down more than $1,100,000,000 compared to either Q1 or the year ago quarter. Focusing on the year over year, revenue was down 15% Driven by the reduction in sales and trading, the year over year expense increase was driven by higher costs associated with processing unemployment claims and Activity related sales and trading costs. Compared to Q1 expense, the higher unemployment processing costs were mostly offset By lower compensation, sales and trading contributed $3,600,000,000 to revenue declining 19% year over year. FICC declined 38%, while equities improved 33%, recording one of the strongest equity performances in our history. FICC results reflected The much more robust trading environment in the year ago period, particularly from macro products, Q2 'twenty one saw credit tightened Agency Mortgages endured a difficult trading environment given the volatility of rates.
The strength in equities was driven by a strong trading performance in derivatives and increased client activity notably in derivatives and in Asia. On Slide 25, we note half year revenue trends across the last few years. As you can see, While the pandemic elevated results in 2020, 2021 remains well above the prior years presented, Driven by continued client activity and volatility in the market. Finally, on Slide 26, we show all other which reported profit $1,900,000,000 The $2,000,000,000 tax adjustment benefited results. Absent this benefit, we would have reported $137,000,000 loss, which is a decline of $239,000,000 from Q1 'twenty one, driven by lower revenue.
Revenue declined $545,000,000 reflecting 2 impacts, 1st, higher partnership losses on ESG on increased ESG investments. As you know, we record grossed up revenue from these investments on an FTE basis in Global Banking, Pay the full tax there and then back out those entries in all other. You can also see the increase in ESG investment in Q2 in other income on our consolidated income statement where partnership losses are booked. While this loss impacts revenue, It is more than made up for on the tax line. We expect our tax credits and associated losses
In consolidated other income
to increase by at least $100,000,000 in Q3 and keep in mind Q4 is normally even higher reflecting seasonal activity. Revenue in all other was also impacted by some refinancing activity, recalled And we financed higher cost structured notes, which pushed some AOCI back through the income statement. Our effective tax rate this quarter excluding the $2,000,000,000 tax adjustments was 10.7% And further excluding tax credits driven by our portfolio of ESG Investments, our tax rate would have been 25%. For the second half of twenty twenty one, absent any changes in current tax laws or any other unusual items, We expect our effective tax rate to be in a range of 10% to 12%. Okay.
With that, we're ready to go to Q and A.
We'll take our first question from Glenn Schorr with Evercore ISI. Your line is open.
Hi, thanks very much. Wondered if we could contextualize your loan growth inflection conversation. I heard you on cards and auto contributing to the modest pickup on period end loans. So I'm wondering what confidence level you have That continuing in the second half will be card auto or will middle market M and A or anything else Start contributing. And then maybe most importantly, do you think 2022 could be a normal ish Loan growth year, say, low to mid single digits like you had been running?
Thanks.
Hi, Glenn. I think if you look across all the businesses On an inferior basis, loan growth, which bodes well. The usage on lines is still low. And so That is still running in the low 30s, which is about 1,000 basis points on average lower in the Banking segment. But what you see underneath that is that even business banking, which is either the segment from $5,000,000 to $50,000,000 is net Growing finally and it was the most affected by the PPP runoff.
And the run off PPP in the quarter was $6,000,000,000 $7,000,000,000 or something like that. So we impulse basically flat average balances that included, you overcame that. So We feel good as we look across the things. So what you really see is net car production back to pre pandemic. You see gross car production basically about 90% of pre pandemic.
You see Auto is which will pick back up as inventories become available. And the real driver on the consumer side is mortgages. We're basically holding our own right now. And that was different than frankly on the refi side, we lost some balances through the last several quarters. And on the commercial side, it's really Line usage honestly can't go any lower.
Maybe it can, but theoretically it can't because it's been stuck here for a good 4 or 5 quarters with the activity. But the auto dealer line usage, which is in that side of the house, for example, is very low than it traditionally is. So we expect those to pick back up. But the key is they're actually producing more Customers and more clients even at the low usage and the loans are starting to grow.
Sounds like we got a shot. Thanks. Maybe a very similar question on expenses and then I'll be done. You noted that there's some COVID expenses still in there. But excluding the 2 one time as you called out, we're still in the low 14s.
It sounds like $57,000,000 low $57,000,000,000 range for the year is okay. Should we've asked this question every year, any one of us have. Should 2022 be materially different than 2021 given how you're able to fund a lot of your investments internally?
So, Glenn, it's Paul. We're not providing specific 'twenty two expense outlook, but I will offer the following thoughts, which I think answer your question. So our rough estimate for the 4th quarter expense is a range of Low $14,000,000,000 I think if you add to that the seasonal higher payroll tax, approximately $350,000,000 in Q1, Plus add in 1% inflationary costs that we have talked about now for many quarters. Remember, if we do nothing, cost would grow by 3% or 4%, but we're driving that lower every Year and quarter through OpEx and other initiatives. But if you take the 4Q expense, you add the higher seasonal payroll tax, At 1%, that's a good base, I think.
And then from there, adjust based upon whatever assumption you want to make around Higher revenue expectations in areas that are closely linked to compensation exchange fees. I think if you do that math, you'll have a pretty good number.
Thank you, Paul. Appreciate it.
We'll take our next question from Matt O'Connor with Deutsche Bank. Your line is open.
Good morning. So I know in recent quarters, I've been asking about just the thought process on how you deploy liquidity and securities. And Look, it's been the right call because you were buying what felt like low rates, but rates have gone down again. But I just want to circle back on like what is the thought process you had alluded to potentially deploying more liquidity In the coming weeks and I just had to step back and it seems like your loans are starting to grow, deposit growth starting to slow And again, rates have ticked down again. So why lock in kind of 10 year duration at these levels with that as a backdrop?
Yes, Matt, I'll let Paul hit it more specifically, but one of the things that we just have to always keep Mining and you've touched on the deposits across $1,900,000,000,000 and the loans are $900,000,000,000 and change And that difference has got to be put to work. And the reality is we're generating $80,000,000,000 deposit growth And we've got to put it to work and that's what we do. And so we're not timing the market or betting or either way, we just sort of deploy it and we're sure it's really going to be there. And so that's been our strategy. And yes, we put some to work and it turns out to be in the aftermath Good thing.
I think Frank, I'd rather have a higher rate structure be better for long term earnings of the company, but I'll let Paul talk about redeploying. Yes, I
mean, I don't know what specifics you're looking for, but I would echo some of Brian's comments. I think we've been very balanced. If you look at the results Compared to other banks, we've maintained our NII for the last few quarters here. We called the bottom in the 3rd quarter. But at the same time, we were doing that.
We still are reserving significant liquidity. So we have a lot of dry powder as we sit here today and more deposits are coming.
So should we just think about it, loans plus securities will basically equal deposits? So if The loan growth is modest, but you keep growing deposits, you're just flat in the securities kind of regardless of rates?
Yes. And they've got to take out. We do have to keep straight cash, Obviously, we show you, but that's generally the way to think about it. And the debate is, do you remember we hedged a lot of the stuff that we bought Yes. Just to protect ourselves a little bit, but that's the simple way to think about it.
In the bank side balance sheet, that's the simple way to think about that. Obviously, the securities firm is different.
I'll just reiterate, like you said, we're going to get deposits, it's going to fund loan growth. Whatever leftover will probably go in securities, but then we still have a bunch of excess liquidity. So That can be deployed as well either in the near term or long term depending on how we balance liquidity against capital and earnings.
And actually going back to Glenn's question, Matt,
one of
the things we can't take advantage of is our extreme efficiency in the consumer business With the rate structure, and so I think they got down in the pushing towards 120 basis points of deposits because they're growing Your core checking customers are at more rapid pace than we've grown in a while. So Quarter after quarter after quarter, that's going to stick to our RIPS. You don't pay anything for it. And as rates rise, it'll drive the efficiency, but we just haven't had a chance to take advantage of Frankly, because of the rates.
Okay, got it. That's helpful. Thank you.
We'll take our next question from Mike Mayo with Wells Fargo. Please go ahead.
Hi. I'm stuck on Slide 17 with the digital usage. So I guess you have a record number of digital users, 70%. You highlighted digital sales of 26% year over year. Where aspirationally do you want that to go?
And what can be the impact on headcount and expenses? And it's the same question I asked before. Yes, best in class digital cost of deposits in the consumer is the lowest in the industry, But doesn't translate to the overall firm. So I'm just trying to connect the dots and your great digital usage to better efficiency and also get some sense of Your aspirations on the digital side?
So, Mike, just last question is sort of that Question which is the consumer side doesn't get the advantage until the you get the some rate structure on the short end especially. And so all that investment though, It'd be like we're having the same conversation we had in 2016 before rates rose or that When is this going to pay off and then it exploded and paid off and we expect it to happen again as the economy normalizes. And we are taking good advantage as you well know Prior to the pandemic. And so let me back up on digital products and usage. The key strategies we've been engaged on is beyond consumer and Paul Hit some of the wealth management pieces, you can see them.
And so when we're talking about the digital things, we're actually showing it by each segment. So the growth in the Wealth Management side, both for external usage, I. E. Customers and internal is extremely important in using Erica, internally as a method of artificial intelligence based natural language processing that helps make people more efficient in The commercial segment, the wealth management. So we don't have our aspiration is just to follow and push the clients at the same time And that always has a benefit and that's why over the last decade we're down 40,000 people in the retail network to give you a sense of where it goes.
We have some internal plans. We have an idea, but we are sort of we don't go out and say that because frankly it happens Piece by piece by piece and honestly, the $2,500 FTE reduction in the quarter Is in part due to the consumer efficiency kicking back in once they got through PPP processing things.
And that reduction in headcount, you have to also factor in The increase in headcount
in the front office. So we're getting
a reduction overall if you go back pre pandemicor if you look at this quarter, But at the same time, you're seeing a mix shift. We're adding more people out there talking to customers across the platform and we have less people
Okay. Just one follow-up on that aspirational question. Over the next several years, what would be the main technology driver for that?
There are basically 3 ways. One is it's all going to show up in headcount. And so we expect that The consumer cost of deposits has gone from 3.50 basis points probably 10, 12 years ago to 100 20. And so we'd expect to keep driving that down and that's going to be driven by everything we just talked about. When you get to Revenue related compensation of Wealth Management Business, that's up $500,000,000 from this quarter in 2019 probably or something like that.
And that's a good thing because we make money, but That will be more driven by its production capabilities and things like that. So there's basically buildings and how many do you need and how many people do that driven by how many people How much you pay our teammates who are talented and drive the business, that's driven by how many people and we just had a we had been Working our way down in headcount and it then froze because of all the work we had to do around the pandemic related programs. But now it's dropped by 1% in the quarter and
Our next question is from Betsy Graseck with Morgan Stanley. Your line is open.
Good morning, Betsy.
Hi. Good morning. Great slide on Slide 5, really love it. Thanks for all the detail. I just wanted to dig in on card a little bit.
There's been some Discussion around how spend is up a lot as you indicated as well and how much of that spend is Likely to be translating into revolving versus Transactor. You're giving us the daily clearly. We can see that here on the slide, but it would be helpful to understand what you're seeing in the guts of the machine. And Has revolver started to pick up? Or does this loan growth that you show on the slide reflect just the increased spend in
So the revolver piece It's starting to move forward, but it is down obviously significant pre pandemic. The transaction piece It's higher. You want people to use the card to get revenue and you saw that in the fee line to get revenue from the usage and also get revenue from the loans. The loans are obviously The better part of the equation, but Betsy, you have to realize we have about round numbers, same number of cards outstanding. There's $25,000,000,000 less balances, which the people didn't get any different.
They just have more cash and so they paid off the credit cards, which Completely responsible thing for them to do. And when they can get out and spend more money, which is starting to happen, I think you'll see the amuse these lines Short term purchases. So I don't think, yes, the pay rate is up, but I don't think it's a fundamental difference of behavior. It's just the opportunity to use the cards or Activity has been limited coming into this quarter when you finally saw things open. So we'll see where it goes, but it's the good news is it's going in different direction.
It had been Leading up and answer your point about Slide 5. And the good news is the people are high credit quality. So that means that the net interest the Risk adjusted margin I. E. That margin from cards minus the charge offs is actually closer than what people think because the card charge offs have dropped by $300,000,000 $400,000,000 a quarter.
Okay, Brian. Yes, no, that's great. That leads into the follow-up, which It's relating to your reserve ratio on card. I think the way we're calculating it is around 8.5% or 8.8% at this stage. And Give us a sense as to how you're thinking about that trajectory here, given that the environment has been improving.
What should we expect on
Well, I'll answer the question this way. If you go to CECL day 1, I think it was 6 point Right, 698. So that gives you a sense of a different environment with a different sort of Economic outlook at that moment. Obviously, as we grow loans, card loans, which we're talking about doing, They're going to eat into some of that excess reserve. But I think between whatever you want to model on loan growth and whatever you want to Think about in terms of getting back to CECL day 1, you could kind of come up with whatever with an answer.
Right.
And just Could you even be below CECL day 1 because the environment is so good right now?
You could easily be below CECL day 1. I mean, As you know, it just depends at the moment you're setting your reserve, what your mix is, what are your card balances and what is your View of the future and if our view of the future is a more benign environment than it was on CECL Day 1, then by definition you'd end up with lower reserves.
And that's the point of Page 6 Betsy really goes to your question on card specifics.
Okay. Thanks very much.
Our next question comes from Steven Chubak with Wolfe Research. Please go ahead.
Hi, good morning.
So
Paul, it was certainly encouraging to hear that there's still a path to the $1,000,000,000 improvement in that NII exit rate that you cited, just given some of the long end pressures since you gave that guidance. I was hoping you could just help us unpack some of the component pieces given it's a meaningful step versus what we saw in the most recent quarter. And maybe just thinking about it in 3 buckets, loan growth, Liquidity deployment and PremiumM being the 3rd, assuming no change in the forward, like how can we underwrite that path
So I would say that It's about half loan growth. Well, first back out, we have an extra day, okay? Back that out As we sit here today, it would be roughly half loan growth and half AML reduction, premium AML reduction. Having said that, it's a challenge given that the fact that rates have fallen, it's a challenge. It's hard to get there.
And so we've got we've always had the opportunity to deploy a little more liquidity as we think about this going forward.
Understood. At least the premium MAM ultimately will come. It's just a question of timing there. So but understand that that could at least impact where it shakes out by the end of the year. And the other thing I wanted to get a better sense of, Paul, just on the capital comments that you made earlier, you noted that you're at 11.5%, 200 bps above your minimum.
Just curious if you can give us some sense as to where you plan on operating on a steady state basis, how much cushion you want to retain? And just given the strength of your excess capital position, how should we be thinking about the pace or cadence of the buyback for the next 4 quarters?
Obviously, we're allowed to do it. So that's a change and at a level that allows us to move capital off the balance sheet that are Strained by the average of earnings, which was through this quarter. So it will move up. But I think we try to operate 50 basis points above the minimums as a Target because there's volatility. So our SLR of 5.9 has got 90 basis points of cushion in it and we want to operate 50 basis points there, 9.5% is 10% etcetera.
So you should expect us not immediately to be moving towards that over time. And then as this goes through the periods, the question will be Yes. What's the ultimate G SIP level that we have to maintain in the future and things like that. So but we can move at pace now And we couldn't before because it was constrained here. Your dividends plus your buybacks could only equal your earnings and we are a company that went into this crisis A lot more excess capital and we are company came out of this crisis with a lot more excess capital and there were 3 CCAR exams during this crisis and We had the lowest losses and stay below the 250 SEB, so off we go.
But that constraint, you got to go to the lowest constraint And at 50 basis points, you should expect us to stay above that, but right now that's a lot of excess cap.
If I could just squeeze in one more, sorry, I just got a bunch of questions on the global markets loan growth, which was a pretty eye popping number. And I was hoping you can just unpack the opportunity that you're seeing within that segment and whether there's further runway for continued growth just given How significant of an uptick we saw in the most recent quarter?
Yes, sure. So We did that activity, the loan growth was led by Global Markets, but we did see it across the platform, including middle market and other areas. In Global Markets, we just look for opportunities
to use some of
our liquidity in a more constructive way than Maybe buying more securities. And it was across a number of different types of opportunities and clients, but about I would say $6,000,000,000 ish of it went into our decision to hold some CLOs in loan form. Now we concentrated those holdings in AAA and AA tranches instead of distributing the securities to investors. And we think that activity is very consistent with our plans to allocate more balance sheet to customers and go to market. Having said all that, I know people concentrate on CLO exposure.
Our CLO exposure is still extremely low relative to our peers.
Fair enough. Thanks for commenting on the additional question.
Our next question is from Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. If I could just Further on the commercial loan topics, as you start to see a little bit better demand aside from PPP across whether it's corporate, which you just Because customers still have tons of excess liquidity to get through before they borrow.
Well, look, if you look at Global Banking This quarter, middle market was driven by food products, commercial services and suppliers and diversified wholesalers. Obviously, you've still got some industries that are affected by the pandemic and so they really haven't started to recover yet. If you look at our commercial committed exposures, by the way, they grew $30,000,000,000 quarter over quarter. We're now above the $1,000,000,000,000 prepayment level. So people are getting ready to borrow more.
As Brian noted, the revolver utilization is still at historic lows, but we're going to we would expect that to move up as the economy improves. And then in global markets, as I mentioned, there were lots of opportunities In mortgage warehouse lending, subscription facilities, asset backed securitization, there's lots of opportunities there to put more balance sheet to work.
And thanks Paul. And as a follow-up, on that point about the utility being low, but customers are readying themselves. I think as an We've been waiting for that for a couple of quarters now. What's that trigger point where you think that we'll start to see or it'll cause The line usage to actually start moving, it's been flat for now a good few quarters as we're ready for it.
I think it's going to be inventory builds across various interest rates.
And you're seeing trade finance kick up. Yes. The trade finance flows and the trade flows that we have have been kicking up and kicking up, which means at some point The people building inventories to meet the customer demand as we talked.
Some of that inventory building has been hampered by Trucking and ocean liner and just getting logistics. So I think working out some kinks there, you could start to see it.
And do you have any line of sight when you talk to your customers about any easing up of those supply chain constraints as we anticipate that?
Getting better, but still I've learned a lot more about ports than ever thought I'd learned from our customers. But it's Yes, it's getting better, but it's going to take a while. I mean, everybody talks about the chip that's well talked about, well known, but you're talking about basics. And so it's getting better, but it really comes down to the operation of the ports efficiently and the impact of Virus on employees in those ports and having people to work and unload the ships and things like that. So it's a pretty Drilled out sort of analysis they have, but the reality is it's still constraining, but it's getting incrementally better, but it'll take another 6 months to kind of And most are saying at the end of the year, that'll be better.
We'll see if that happens.
As you think about loan growth
and you
start modeling it, Just remember with revolver utilization is down close to 10%, that's $45,000,000,000 From
last year.
Yes, that's $45,000,000,000 Just for us.
Right. Yes, right. That's the opportunity set is just how quickly could that be a loaded spring, right? Okay. Thank you very much.
Our next question is from Gerard Cassidy with RBC. Please go ahead.
Good morning, guys. How are you?
Hey, Gerard. How are you?
Good. Paul,
can you share with us,
When I look at your average earning balance sheet in your supplement and you give us the yield of the average earning assets and I think it And what you're putting on each quarter of new earning assets, is there a 20 basis point difference, 10 basis points difference? And if we assume rates don't change, when does that gap disappear because What you're putting on is equal to what you're actually earning?
Yes. Well, again, I mean, I'll talk about when we Take our liquidity, which again, we've got a lot of excess liquidity and we deploy that into a security, right, we're picking up Well, in the Q2, we picked up on a blended basis between mortgages and treasuries, which were roughly fifty-fifty purchases. We picked up about 170 basis points relative to cash. But when you look at a security that's rolling off And being replaced, they're rolling off at sort of 250 and they're being replaced at 210. Now you could do the same math.
I did it with securities. You could do the same math with a loan, pick your loan category, whether it's a card or A commercial loan or it's going to just depend on the yield.
Very good. And coming back, I think you pointed out that the asset sensitivity of the balance sheet is still intact, 100 basis point parallel shift leads to about an $8,000,000,000 increase in net interest revenue. Can you share with us What weighs more heavily on that number? Is it the short end of the curve going up? Does it 70% Of that increase comes from the short end going up versus the long end?
Correct. It's approximately 70% for the short end. Very good. Okay. Appreciate it.
Thank you.
And we'll go to Charles Peabody with Portales. Your line is open.
Yes. I wanted to focus on your card operations For two reasons. One, it's the area where there seems to be some visibility to loan growth and 2, because it, I think, Generates about 20% of your bottom line, so it's a significant mover. If I'm using your line of business data correctly, Cards as a line of business are on pace to generate somewhere between $1,800,000,000 a quarter. So somewhere between Well, close to $8,000,000,000 a year.
Am I right in that assumption?
If you're talking about interest income, yes, if you look at this up on Page 8, the $1,876,000,000 is the card interest income for the Q2 of 'twenty one. Well,
I was using your the net income,
The net income, we don't have a card segment. We don't report a card segment because it goes there, it goes in the fee line, It goes in yes, and there's expenses
But if you look at your line of business reporting, you do have a consumer lending versus deposit And the consumer lending is primarily cards, if I understand it correctly.
No, it's got mortgage loans and auto loans and Yes, with all lending products. So let's if you got the 5th question, we get Leedah.
Okay. The question is, if I assume 2019 kind of data, in terms of margins, in terms of gross yield, and I assume high single digit growth in loans in 2020 2, because of the substantial reserve release this year versus what probably would be less next year, I see a fairly substantial decline in your card business as a line of business, as a profit business. And so I'm trying to get a sense, am I right that there's a delay even if the balances pick up, There's a delay to the improved profitability of that product line?
Because there's less reserve Last year, it was hurt by reserve build. This year, it's benefit by reserve releases. And next year, if that benefit comes out, That's the
company's being
And not only that, but you have to reserve as you're putting on loans. And so you get less benefit day 1 Versus Dave, 100.
Yes, but remember, we've got I think was somebody asked an earlier question, we're reserved on loans now 200 basis points higher than where we were CECL day 1. So as loans grow, you can eat into that reserve.
Right. And I estimated you probably have about $1,000,000,000 to $1,500,000,000 of excess reserves in your cards if you go back to day 1 CECL. And so you're going to bleed some of that back in over the second half of this year, which means you have maybe $500,000,000 to $1,000,000,000 next year.
Hey, Charlie. This is Lee. So why don't we take this offline and you and I can go through this afterwards. I see where you're headed. Okay.
Yes, I'll share my model with you, Lee, because I think it's an important hole that has to be filled next year.
Yes. What I'd also just add though, just while everybody is on the line is just remember our charge offs are running significantly lower. In addition, forget about all the reserving in and out.
Yes, absolutely. Absolutely. Yes, absolutely.
Yes. Okay. But I'll get with you after the call.
All right. Thanks.
And it appears we have no further questions. I'll return the floor to Brian Moynihan for closing remarks.
So thank you all for joining us. Once again, in the quarter, our customers are seeing good growth opportunities in the recovering economy. Deposits continue to grow $80,000,000,000 in the quarter loan balances stabilized and grew on a period end basis for the quarter. Even overcoming the PPP runoff, asset quality is at 25 year Percentage, loss, lows, not just dollar amount. The solid earnings continue this quarter.
The important thing is we're seeing Increased activity by our customer base, whether it's sales of all the different products, whether it's the reopening of branches and more appointments That lead to sales, whether it's our face to face meetings or commercial businesses. So that holds us in good stead and helps answer the question about how NII grows in the second half of the year. And so and then on top of all that, this quarter is the Q1 and many that we've been able to Forever that we've been able to go back and actually use excess capital based on our earnings power and our Board's Discretion, so you should expect us to get back in the share buyback game. So thank you and we will return that capital to you and we look forward to talking next quarter.
We'll conclude today's program. Thanks for your participation. You may now disconnect.