Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And I'll start by adding a little more detail on the income statement and refer you to Slide 6 highlights. You can see here revenue of $24.5 billion grew 8% with NII improving 24% year-over-year, while our fees declined 8%. And I'll cover the NII improvement in just a moment.
On noninterest income, the volatility and the levels of market activity drove a year-over-year decline in investment banking and asset management fees, while still some trading benefited from investments made in the business and the volatile market conditions.
Additionally, service charges moved lower for two reasons. First, in Consumer, we completed the sweeping changes around insufficient funds and overdraft in June, marking a 90% reduction from June of 2021. Second, our corporate service charges declined as earned credit rates increased for clients and that overwhelmed organic growth in the gross fees associated with treasury management services performed for our clients.
Expenses this quarter were $15.3 billion and they included the settlement of our last large remaining legacy monoline insurance litigation. As you likely saw on October 7, we filed the 8-K announcing a settlement that resolved all of the outstanding litigation with Ambac and that dates all the way back to the 2008 financial crisis. We recorded $354 million in litigation expense this quarter above previous accruals for payment of the settlement. And without that litigation cost, our expense would have been just below the $15 billion mark.
Okay. Let's move to the balance sheet and we'll look at Slide 7, where you can see during the quarter, the balance sheet declined $38 billion to $3.07 trillion. That was driven by a $46 billion decline in deposits and coupled with a $53 billion decline in securities.
Our average liquidity portfolio declined in the quarter reflecting the decrease in deposits and security levels. At $941 billion, our liquidity still remains $365 billion above pre-pandemic levels, just to give you an idea of just how much our liquidity has increased. Shareholders' equity was stable with the second quarter at $270 billion as earnings were offset by capital distributed to shareholders and the change in AOCI from rate moves.
We paid out $1.8 billion in common dividends. We bought back $450 million in gross share repurchases, and that covered our employee issuances in the quarter, leaving no dilutive impact for shareholders.
AOCI declined $4.4 billion as a result of the increase in loan rates, and we saw the impact primarily in two ways. First, we had a reduction from a change in the value of our AFS debt securities. That was 1.1 billion and that impacted CET1. Second, rates also drove a $3.7 billion decline in AOCI from derivatives and that does not impact CET1. That reflects cash flow hedges mostly put in place last year against some of our variable rate loans and that protected us against CET1.
With regard to regulatory capital, our supplemental leverage ratio increased to 5.8% versus our minimum requirement of 5%, which still leaves plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements.
Okay. Let's go to CET1 waterfall on Slide 8, and we can talk about that. As you'll recall back in -- last quarter, we talked about our June CCAR results, where our stress capital buffer increased from 2.5% to 3.4%. And that increased our overall CET1 ratio minimum requirement from 9.5% to 10.4% as of the beginning of the fourth quarter.
Our capital levels today remain strong with $176 billion of CET1. And through the good work of our teams, we improved our CET1 ratio by 49 basis points compared to June 30, taking us to 11%. That leaves us well above our new 10.4% minimum requirement. So we'll walk through the drivers this quarter. First, it's $6.6 billion of earnings, net of preferred dividends and that generated 40 basis points of capital. And then also importantly, through optimization of the balance sheet, we managed our RWA balances down and that added 26 basis points more of capital ratio improvement. Dividends used 11 basis points of capital. And this quarter, the movement in treasury and mortgage-backed securities rates caused the fair value of our AFS debt securities to decrease and that lowered our CET1 ratio by 7 basis points.
We remain well positioned for the rate movement because of the hedge of a large portion of this portfolio continuing to protect us from AOCI movements while benefiting NII since swap to floating. So we feel like our teams rose to the challenge well this quarter in terms of increased capital requirements.
On Slide 9, we've laid out average loans. And looking at those loans and providing a bit more detail on a year-over-year basis, you can see 12% average growth as commercial loans grew 17% and consumer loans grew 7%. Within Consumer, credit card grew 12%. Focusing on more near-term growth versus the second quarter of '22, our average total loans grew 8% on an annualized basis, led by 12% annualized commercial loan growth and 21% annualized credit card growth, while other consumer loans were relatively flat linked quarter. This slower loan quarter growth included two notable impacts that Brian mentioned. We saw good commercial loan demand, and we also saw FX valuations adjustments as a result of the strong dollar and then some loan sales and syndications that lowered our RWAs. Partially offsetting some of the strong card growth in consumer loans, we sold about $1 billion of residential mortgage loans. Adjusting for the FX impact and loan sales, loan growth from Q2 was closer to the industry's growth rate.
Let's focus now on deposits use on Slide 10. And you can see there that our average deposits year-over-year are up 1% at $1.96 trillion. The noninterest-bearing deposits are down 3%, while the interest-bearing are up 4%. So overall, we grew our deposits. And as you would expect in a rising rate environment, we've seen some shifts from noninterest-bearing into interest-bearing, and it's important to understand the makeup of these moves.
In Consumer, our total deposits are up 7% year-over-year. These are core and foundational elements of the customers' financial activities. And we've seen growth in both noninterest-bearing and interest-bearing balances and we remain very disciplined on $1.1 trillion of total consumer deposits while Fed funds is now at 3.25. So customers see the value in their total relationship with us through their personalized client engagement and our industry-leading digital capabilities and rewards. We expect that to continue.
Do we expect deposit rates to increase? Yes, of course, and we will remain both disciplined and competitive, and that is built into our asset sensitivity. On a linked quarter basis, our consumer deposits moved lower by less than 1%.
In Wealth Management, total deposits are flat year-over-year. And again, it's important to understand that as expected, these are the clients who generally have more excess liquidity and have historically saw higher rates, both in deposit accounts as well as movements outside of deposits where we offer alternatives for those clients. While flat year-over-year, within that, we saw a $12 billion decline in year-over-year average deposits on our brokerage platform with some shifts from sweeps to preferred deposits within the platform. Meanwhile, Merrill Bank deposits and deposits with Private Bank have grown $12 billion. The higher-tiered preferred deposit products represent a little more than 20% of the mix of deposits and they're moving largely in line with short-term rates, while the other 80% or so deposit products are paying much lower rates. On a linked quarter basis, we saw total GWIM deposits decline by 7%, further highlighting these trends.
In Global Banking, we hold about $500 billion in customer deposits, and we saw a 7% year-over-year decline. In a rising rate environment, where excess balances can be more expensive, we typically see some runoff, particularly in high liquidity environments as clients both use cash for inventory build and begin to manage their cash for yield. And we've seen the mix of interest-bearing deposits move from 30% a year ago to nearly 35%, and we're paying an increased rate on those interest-bearing deposits. Pricing is largely customer-by-customer based on the depth of relationship and many other factors. And again, we're not really seeing anything unexpected here.
Betas at this point are still favorable to the last cycle. And as we would just note, relative to the last cycle, the Fed increases have been pretty rapid, and we'd expect to pay higher rates as we continue to move through this rate cycle. It's probably too early to say right now if at the end of that cycle, the percentage of those rate pass-throughs will be similar to the last cycle.
Turning to Slide 11 and net interest income. On a GAAP non-FTE basis, NII in Q3 was $13.8 billion, and the FTE NII number is $13.9 million. Focusing on FTE, net interest income increased $2.7 billion from Q3 '21 or 24%, and that's driven by benefits from higher interest rates, including lower premium amortization and from loan growth. Versus the second quarter, NII is up $1.3 billion, driven largely by the same factors, plus an additional day of interest in the quarter.
Year-over-year now, average short-term interest rates have increased 200-plus basis points, driving up the interest earned on our variable rate assets while we've maintained discipline on our deposit pricing, and that has driven nearly $1 billion of improvement. Long-term interest rates on mortgages have increased even more than short-term rates, and that's improving fixed rate asset replacement and driving down refinancing of mortgage assets, therefore, slowing the recognition of premium amortization recognized in our securities portfolio. Year-over-year, that premium amortization has improved $1 billion. And additionally, lower securities balances over the past six months modestly offset the benefits of year-over-year loan growth.
The net interest yield was 2.06% and that improved 38 basis points from the third quarter of '21. 20 basis points of that improvement occurred in the most recent quarter. And as you will note, excluding Global Markets activities, our net interest yield was 2.51% this quarter.
Looking forward, as it relates to NII guidance, I'd like to make a couple of comments. And first, I need to make a couple of caveats. Our guidance is going to assume interest rates in the most recent forward curve and that they materialize, that we see modest loan growth and modest deposit balance changes with market-based deposit pricing increasing baked in.
With that said, we expect NII in Q4 to be at least $1.25 billion higher than Q3. So last quarter when we were together, we told you we expected to see consecutive NII increases of about $1 billion in Q3 and another $1 billion in Q4. And that would make a total of $2 billion in Q3 and Q4, given we just put up $1.3 billion in Q3 and that outperformance, and refreshing our expectation for Q4 at $1.25 billion. We're now saying that aggregate quarterly improvement won't be the $2 billion we initially thought, it's increased to around $2.6 billion or more.
Turning to asset sensitivity and focusing on a forward yield basis. At September 30, declined $0.7 billion to $4.2 billion of expected NII over the next 12 months, with now roughly 95% of the sensitivity driven by short rates. And on a spot basis, our sensitivity to 100 basis point instantaneous rate hike would be $5.3 billion.
Okay. Let's turn to expense, and we'll use Slide 12 for the discussion. Third quarter expenses were $15.3 billion and were flat with the second quarter as litigation costs for our settlement in Q3 nearly offset the fines agreed to last quarter on a comparative basis. And it's nice to bring resolution to these matters. Without the costs associated with the resolutions in both periods, expenses would have been just less than $15 billion.
We continue to make steady investments in our people, technology, marketing and financial centers. And what allows us to help pay for these investments are the operational process improvements we've talked about and the increased digital adoption rates by our customers and by our bankers. Our headcount this quarter increased by 3,500. And if we adjust for the release of our summer interns, our headcount is actually up by closer to 5,500. We welcomed 1,800 new full-time associates from college campuses around the world into our company this quarter and we hired another 3,800 net new people on top of that. That included just less than 3,000 across our various lines of business and another 1,000 in staff and support and technology positions to support those lines of business. And with all the great benefits and talented people already at this company and with our great brand, it highlights that Bank of America is a great place to work.
As we look forward, we'd expect our fourth quarter expenses will land our full year reported expense at approximately $61 billion. That obviously includes the cost noted for resolving the second quarter and third quarter regulatory and litigation matters. So without that, our expenses are expected to be a little more than the $60 billion level we talked about earlier in the year. And we're proud of our team's discipline around expense particularly in this inflationary environment, while at the same time, we're modestly increasing our level of investment in the company's future and our growth.
Turning to asset quality on Slide 13, and I want to start by saying just as Brian did that asset quality of our customers remains very healthy. The net charge-offs of $520 million declined $51 million from the second quarter. That decline was driven by prior period charge-offs associated with the sale of some noncore mortgage loans we discussed last quarter. Absent those losses, net charge-offs were relatively stable with the prior period.
Provision expense was $898 million in the third quarter, and that was $375 million higher than the second quarter. And we built $378 million of reserve in the period compared to a modest release in Q2. The reserve build in the quarter primarily reflects good credit card loan growth and a dampened macroeconomic outlook.
Even as we build our reserves for the future, this quarter, we saw many of our asset quality metrics continue to show modest improvement as NPLs and reservable criticized both declined from Q2, and you can see that in the supplement.
On Slide 14, we highlight the credit quality metrics for both our Consumer and Commercial portfolios. And there's only one point I want to make, looking at this slide and that is delinquencies because our consumer delinquencies remain well below pre-pandemic levels. And as Brian noted earlier, we're watching closely the early-stage card delinquencies as they begin to increase modestly.
Lastly, the recent Hurricane Ian impacted some areas where we have strong market shares for many of our businesses, and our teams have spent the past days assessing the damages and insurance coverage down to the loan level. And we've already incorporated that analysis into our reserves for the quarter. We compared our analysis to other large storms in recent years like Sandy, Harvey and Irma where we incurred just a small amount of financial losses.
Turning to the business segments, let's start with Consumer Banking on Slide 15. And Brian shared earlier, we've got organic growth across the checking accounts, the card accounts and investments picking up this quarter, not necessarily because of anything we're doing differently in the past 90 days, but as a result of many years of retooling and continuously investing in the business.
We have the leading retail deposit market share. We have leadership positions among all of the important products. We're the leading digital bank with tremendous convenience capabilities for consumer and small business clients. We've got a leading online consumer investment platform and the best small business platform offering for our clients. So as a result, customer satisfaction is now at all-time highs, and that is helping us to drive strong financial results.
The Consumer Bank earned $3.1 billion on good organic growth and delivered its sixth consecutive quarter of operating leverage while we continued heavy investments for the future. The impact of strong year-over-year revenue growth of 12% was partially offset by an increase in provision expense. And the provision increase reflected reserve builds this period, mostly for card growth versus a reserve release in the third quarter of '21. Our net charge-offs remain low and stable. While our reported earnings were only modestly up year-over-year, pretax pre-provision income grew 12% year-over-year which highlights the earnings improvement coming through without the impact of the reserve actions.
Card revenue was solid and increased modestly year-over-year as spending benefits were mostly offset by higher rewards costs. Service charges were down $338 million year-over-year as our insufficient funds and overdraft policy changes were in full effect now by the end of Q2. And because of the scale of the business and the diverse revenue, we fully absorbed that revenue impact and are now benefiting from the benefits of overall customer satisfaction, lower attrition in our client base and lower cost associated with fewer customer complaint calls associated with less nuisance fees.
Expense increased 11% from business investments for growth, including people, digital and marketing along with costs related to opening the business to fuller capacity. Much of the company's increased salary and wage moves in the quarter impact Consumer Banking the most. We also continued our investment in financial centers, opening another 16 in the quarter while we renovated nearly 200 more. Both digital banking and operational process improvements are helping to pay for those investments. And as revenue grew, we've improved the efficiency ratio to 51%.
Moving to Slide 16. Wealth Management produced strong results, earning $1.2 billion, and that's a particularly strong result given both equity and bond market levels. If they remain unchanged for the rest of the year, this would be only the first time since 1976 that both equity and bond markets were down for the year.
Now the volatility and generally lower market levels have put pressure on revenue in this business. And what's helping to differentiate Merrill and Private Bank right now is a strong banking business; in this case, to the tune of $339 billion of deposits and $224 billion of loans. So while many of our brokerage peers faced declines in revenue and margin, we've seen year-over-year revenue growth of 2% and a margin of 29%, driving the sixth straight quarter of operating leverage. And we saw enough revenue growth from banking products in Q3 that more than offset declines in assets under management and brokerage fees.
Our talented group of financial advisors, coupled with our powerful digital capabilities, allowed modern Merrill to gain 5,200 net new households and the Private Bank gained 550 more in the quarter, both up nicely from net household generation in 2021.
We added $24 billion of loans since Q3 of '21, growing 12% and this marked our 50th consecutive quarter of average loans growth in the business, consistent and sustained performance. Assets under management flows were $4 billion in the quarter and $42 billion since this time last year. Expenses increased 2%, driven by continued client facing hiring and higher other employee-related costs as our advisors are increasing their in-person engagement with clients, and that's partially offset by lower revenue-related incentives.
On Slide 17, you'll see our Global Banking results, where we earned $2 billion in Q3 on strong revenue growth as higher NII more than offset lower noninterest income. Earnings were down year-over-year, driven in large part by the absence of a prior period reserve release. Our 7% revenue growth is quite healthy given the more than 40% decline in investment banking fees, coupled with lower leasing revenue.
While the company's overall investment banking fees declined $1 billion year-over-year in a continued tough market, investment banking fees did improve modestly from Q2 and the teams did a nice job of holding on to our number three ranking in overall fees in a tough environment. Otherwise, in fees, we saw a decline in corporate service charges as enterprise credit rates rose with increased rates, and that outpaced the growth in gross treasury service fees generated from new and existing clients. I'd also remind you that GTS benefits greatly from the NII off of deposits that more than offsets this. So our year-over-year total GTS revenue was up 44%. We also had lower leasing related revenue comparatively. The provision expense increase reflected a reserve build of $144 million in Q3 '22 compared to a $789 million release in the year ago period.
And with regard to expenses, they increased 5% year-over-year, driven by continued investments in the business. For example, in Commercial Banking, our strategic hiring over the years has just continued to increase our client and prospect calling efforts.
Switching to Global Markets on Slide 18. And as we usually do, we'll talk about segment results, excluding DVA. Inflation, continued geopolitical tensions and the changing monetary policies of central banks around the world continue to drive volatility in both the bond and equity markets. As a result, it's another quarter that favored macro trading while credit trading businesses faced the continued challenging market environment with wider spreads and recession concerns.
So the third quarter net income of $1.1 billion reflects a good quarter of sales and trading revenue. Focusing on year-over-year, sales and trading contributed $4.1 billion to revenue, improving 13%. FICC improved 27% while equities declined 4%. The FICC improvement was primarily driven by growth in our macro products, while our credit traded products were down. And we've been investing heavily over the past year in several macro businesses that we identified as opportunities for us, and we were rewarded this quarter.
The decline in equities was driven by lower client activity in Asia and a weaker performance in cash, partially offset by good performance in derivatives where we saw increased client activity. Year-over-year expense declined, reflecting the absence of costs associated with the realignment of liquidating business activity that we took in the fourth quarter of '21, and the business generated a 10% return in the third quarter.
Finally, on Slide 19, we show All Other, which reported a loss of $281 million, declining from the year ago period, driven by the litigation settlement that I noted earlier and higher tax expense. On income tax expense, I just want to mention one thing that made our tax rate a little higher this quarter, and that is with the recent passage of the Inflation Reduction Act of 2022. Among other things it incorporated, there is a change that allowed solar energy investments to elect production tax credits versus upfront investment tax credits. And those production tax credits have the potential to earn more credits over the expected life of the production facility.
So as a result, our third quarter tax expense is approximately $150 million higher due to the net reversal of tax credits accrued for 2022 solar deals taken in the first half of 2022 that were recognized under initial investment tax credits at the time and we were placed with production tax credits. So a little impact this quarter but net benefit to the shareholder over time. This drove the effective tax rate a little higher this quarter to more than 14%, still obviously benefiting from our ESG investment tax credits. And excluding the impact of ESG tax credits, tax rate would have been approximately 24%. Given the change noted for solar investments, we expect the fourth quarter tax rate to be similar to the third quarter tax rate and we'll examine the further effects of these changes and how they impact full year 2023 and report on that next quarter.
And with that, I'm going to stop there and open it for Q&A.
