Good day, everyone, and welcome to today's Bank of America earnings announcement. At this time, all participants are in a listen-only mode. Please note this call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn today's program over to Lee McEntire. Please go ahead.
Thank you, Catherine. Good morning. Welcome. Hope everyone has had a good weekend. Thank you for joining the call to review our third quarter results. I hope everyone's also had a chance to review our earnings documents released earlier this morning. As always, they're available, including the earnings presentation that Brian and Alastair will refer to during the call on the Investor Relations section of the bankofamerica.com website. I'm gonna first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then I'll ask Alastair Borthwick, our CFO, to cover the details of the quarter. Before I turn the call over to Brian, I'll just remind you that we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions, 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 and the SEC filings that are available on the website. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website and in the docs. With that, I will turn it over to you, Brian. Thank you.
Good morning, and thank you for joining us. I wanna start by sending our thoughts to the impacted areas from the devastation of recent storms, especially our impacted teammates and their families. Our teams remain busy assisting those clients and associates in the impacted areas. We're gonna start on slide 2 of the earnings materials. This quarter, Bank of America reported $7.1 billion in net income or $0.81 per diluted share. We grew revenue 8% year-over-year. We delivered our fifth straight quarter of operating leverage. Every business segment delivered operating leverage. This takes us back to our five-year run before the pandemic. The highlights this quarter were also once again marked by good organic customer activity. This was coupled with a significant increase in net interest income.
In addition, the teams adapted well to our new capital requirements, and as a result, our common equity tier one ratio, our CET1 ratio, improved by nearly 50 basis points to 11%, moving 60 basis points above its current minimums. The decline from prior- year reported net income and EPS comparisons reflect a reserve build versus reserve release last year. At the same time, however, our asset quality remained strong as net charge-offs and several other metrics in fact improved from the second quarter of 2022. Pre-tax, pre-provisioned income grew 10% year- over- year. From a return perspective, we produced a 15% ROTCE and a 90 basis point ROA. Our efficiency ratio this quarter dropped to 62%. Taking out the litigation, it would have been 61%.
Even while investing in marketing and people and technology and physical plant, the team continues to drive operational excellence. An easy way to think about this is we currently operate Bank of America with less people than we had in 2015, seven years ago. Let's go to slide 3. Those continued investments over the past several years in our people, tools, and resources for our customers and teammates, as well as our new and renovated financial centers, has allowed us to continually enhance the customer experience and fuel organic growth as we drive responsible growth. In the third quarter alone, we added more than 400,000+ net new consumer checking accounts. We added 1.3 million new credit card accounts. We added 100,000 new funded investment accounts in our consumer business. Customers are finding it increasingly convenient to access us.
Digital users grew to 56 million. Logins by those U.S. users cleared 3 billion in the past quarter, 1 billion per month. Erica surpassed 1 billion interactions since it was introduced four years ago this quarter. It has become a primary interaction method for our clients, with more than 130 million interactions this quarter alone. When you look at our sales, 48% of third quarter sales were digital, a 36% year-over-year increase. This occurred even as we fully reopened our financial centers and had our teammates also selling. Now, once again, you can find all these digital statistics and more in the appendix of our earnings material as usual. I encourage you look at those statistics for every one of the lines of business, not just consumer.
They compare favorably to any competitive measures we see, because when we see people actually publish their numbers. At the same time, 27 million customers visit our financial center in the quarter. This highlights the importance of having both high touch and high tech approach. In the Wealth Management business, we added 400 advisors this quarter. Our advisors added nearly 6,000 new households in the Merrill and Private Bank areas. We saw solid net flows despite the turbulence in markets. 80% of our GWIM customers are digitally active. 30% of the new Merrill accounts are opened digitally. That, combined with the consumer investments business, has seen more than $100 billion of net client flows year to date. We continue to see increased activity both in investments as well as the banking products in this area.
This quarter, GWIM opened a record number of bank accounts. GWIM also saw its 50th consecutive quarter of average loan growth. The banking capabilities and success differentiates our platform. The business grew revenue, delivered operating leverage, and saw record pre-tax pre-provision growth even in choppy markets. As we turn to global banking. Ending loan balances were down linked quarter. However, we did see solid production in this area, and that was offset by client pay downs, decrease in the value of foreign denominated loans, and loans sold to manage our risk-weighted assets, which helped us build the capital levels I talked about earlier. As we look at global markets, the team had a strong third quarter in sales and trading performance. In fact, in the third quarter of 2022 was the strongest since the third quarter of 2010.
It grew 13% from last year. It was led by strong performance on our macro FICC business, which has benefited by investments made over the past year. We had no trading loss days this quarter. Let me also make a few points using the customer activity highlighted on the continued resilience of Bank of America's broad customer base. If you look at slide 4, you can see some points about the overall health that demonstrate what's going on in the customer base. Let me make a couple key points. First, consumers continue to spend at strong levels. Second, consumer average deposit levels for September 2022 remain at multiples of their pre-pandemic levels. You can see that in the lower right. Third, there's plenty capacity for borrowing as credit card balances of the BAC are still 12% below pre-pandemic levels.
The payment rates on those credit cards are 1,000 basis points over pre-pandemic levels. On spending, a couple thoughts. A perspicacious analyst might wonder whether the talk of inflation, recession, and other factors would fructify in a slower spending growth. We just don't see it here at Bank of America. Year-to-date spending of $3.1 trillion through September is up 12% compared to last year. Second, as you look across the periods, you can see in the trend of year-over-year spending. As we entered the pandemic, we saw spending decline and quickly recover, then grow across the quarters. While still strong in September at 10%, spending growth has slowed just a bit from the 12% year-to-date pace, which shows you that early in the year it was a faster year-over-year growth rate. It's still strong.
In the first two weeks of October show that strength that's still growing at 10%. It's notable that it isn't just inflation that is driving spending as transactions are up at single digits year-over-year pretty consistently. You also note on the bottom left, the continued growth in goods and services, particularly retail toward experiences of travel and entertainment. While fuel price volatility continues, it is not currently impacting the spend levels in this quarter as prices stabilize. The level of customer liquidity remains strong. Average deposit balances of our consumer customers remained at high levels relative to a year ago. These balances are still multiples of the pre-pandemic periods, and they were largely unchanged at these elevated amounts for the month of September. These deposit levels suggest continued capacity for spending at healthy levels.
On slide 5, we show you, as we did last quarter, some other impact, some other stats about resiliency. As you can see, whether you look at early or late stage card delinquencies, they all remain well below our pre-pandemic levels. These are decades old lows, and we're just now seeing a gradual move off these lows in early stage delinquencies. Late stage delinquencies are still 40% below pre-pandemic levels. Keep in mind, asset quality metrics were strong even before the pandemic. On this page, what you see is 30- and 90-day card delinquencies. If you compare them against the average for the past five years leading up to the pandemic, a period of growth and unemployment falling, those averages were 183 basis points and 91 basis points respectively.
The current ratio of delinquencies would have to worsen 30% or more to even approach that five-year pre-pandemic average at a time of economic growth and falling unemployment. Consumers remain resilient. Let me take a couple minutes to talk to you quickly about the balance sheet, and I'll turn it over to Alastair. As you think about loan and deposits base balances in general, we're seeing what we expected as monetary policy tightens. On deposits, we see clients with excess liquidity looking for yield, whether that being the global banking movements you can see from moving from non-interest bearing to interest-bearing accounts. Or in our Wealth Management business, where we saw clients shift out of brokerage sweeps into preferred deposits or other investment products like treasuries that we offer.
If you look at our core customer base, where the transactional balances drive the outcome, we are seeing steady balances driven by new account activity and a good value proposition we have for our customers. When you think about loans, consumer loan balance growth was led by card and reflects increased marketing, continued reopening of financial centers building high levels of new customer relationships. On commercial, while average loans rose $16 billion linked quarter or 12% annualized, you did see a modest ending balance decline as good loan production was offset by the sale or syndication of $3 billion of loans and also by $4 billion in negative foreign currency impacts. We obviously took activity on balance sheet optimization, which helped our RWA discussion, helped reduce our RWAs and led to the capital levels I talked about earlier.
We have provided an update in the appendix as to the credit transformation of our loan portfolio and a few other consumer credit slides that help illustrate the quality of our portfolio under years of responsible growth. We updated the slides again this quarter to show you them, and you can find them in the appendix, and I recommend them to you. In summary, client activity remains good. NII has improved quickly, and the customer's resilience and health remains strong. We've also managed our expenses very well. We drove operating leverage. The team managed the balance sheet well and improved capital, even as it increased our dividend and bought back a modest amount of shares. We call that responsible growth. With that, I'll turn it over to Alastair.
Thank you, Brian. 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%. I'll cover the NII improvement in just a moment. On non-interest income, the volatility and the levels of market activity drove a year-over-year decline in investment banking and asset management fees, while sales and 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 7th, 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. Without that litigation cost, our expense would have been just below the $15 billion mark.
L et'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 long 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 the 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%. 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 30th, taking us to 11%. That leaves us well above our new 10.4% minimum requirement. 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. 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. 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. 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 2022, 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 linked quarter growth included two notable impacts that Brian mentioned. We saw good commercial loan demand and we also saw FX valuation 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 using slide ten, and you can see there that our average deposits year-over-year are up 1% at $1.96 trillion. The non-interest bearing deposits are down 3% while the interest bearing are up 4%. Overall, we grew our deposits. As you would expect in a rising rate environment, we've seen some shifts from non-interest 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 customer's financial activities, and we've seen growth in both non-interest bearing and interest bearing balances. We remain very disciplined on $1.1 trillion of total consumer deposits while Fed funds is now at 3.25%.
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. 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. It's important to understand that as expected, these are the clients who generally have more excess liquidity and have historically sought 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. 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. 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 was $13.9 billion. Focusing on FTE, net interest income increased $2.7 billion from Q3 2021 or 24%. 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+ basis points, driving up the interest earned on our variable rate assets while we've maintained discipline on our deposit pricing. 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. 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 2021. 20 basis points of that improvement occurred in the most recent quarter.
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. 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 then in Q3 and Q4.
Given we've 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 30th declined to $4.7 billion to $4.2 billion of expected NII over the next 12 months, with now roughly 95% of the sensitivity driven by short rates. On a spot basis, our sensitivity to 100 basis points 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. 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. 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 headcounts 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. 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.
Without that, our expenses are expected to be a little more than the $60 billion level we talked about earlier in the year. 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, I want to start by saying, just as Brian did, the 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 non-core 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. 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. 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.
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.
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 convenient 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. 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 third quarter of 2021. Our net charge-offs remain low and stable. While reported earnings were only modestly up year-over-year, pre-tax, 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.
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. As revenue grew, we've improved the efficiency ratio to 51%. Moving to slide 16.
Wealth Management produced strong results, earning $1.2 billion. 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 markets levels have put pressure on revenue in this business. What's helping to differentiate Merrill and the Private Bank right now is a strong banking business, in this case to the tune of $339 billion of deposits and $224 billion in loans. While many of our brokerage peers face 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.
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 2021, 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 non-interest 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, the GTS benefits greatly from the NII off of deposits that more than offsets this. Our year-over-year total GTS revenue is up 44%. We also had lower leasing related revenue comparatively. The provision expense increase reflected a reserve build of $144 million in Q3 2022 compared to a $789 million release in the year-ago period. 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. The third quarter of 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%. FIC improved 27%, while equities declined 4%. The FIC improvement was primarily driven by growth in our macro products while our credit- traded products were down.
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 2021. 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 was a change that allowed solar energy investments to elect production tax credits versus upfront investment tax credits. Those production tax credits have the potential to earn more credits over the expected life of the production facility. 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 replaced with production tax credits.
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. Excluding the impact of ESG tax credits, the 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. With that, I'm going to stop there and open it for Q&A.
If you would like to ask a question, please press star and one on your touchtone phone. You may withdraw yourself from the queue at any time by pressing the pound key. We'll take our first question today from Jim Mitchell with Seaport Global. Your line is open.
Hey, good morning, guys. Maybe just on NII, I think there's a lot of uncertainty around deposit behavior, betas, what the catch-up rate could be with deposit pricing, but you guys indicated that you do. You're still pretty asset sensitive. How do you think about the trajectory of NII next year? Can it kind of keep growing from sort of the Q4 level, through next year?
Thanks, Jim.
Assuming forward curve is realized. Sorry.
Yeah. Yeah. The short answer is yes, we believe so. We believe that really for three reasons. The first one is, you know, we're still expecting future rate hikes and, you know, there's gonna be some lag to their impact. You'll start to feel some of that in Q1, for example, of the late hikes in this quarter. Second, you know, we're anticipating loans growth is still pretty good at this stage. We're anticipating that we'll keep growing on the loan side. Third, we've got an opportunity to restrike our balance sheet at higher rates with every opportunity now as things come off of our existing securities portfolio. Look, we've got our assumptions in there to be competitive on deposit pricing in each of the various segments. Yes, we believe we'll grow NII next year.
From 4Q run rates.
Yes. Correct.
Maybe as a follow-up, you guys have done a pretty great job on hedging AOCI risk in the AFS book. My understanding is that the benefit, those are sort of delayed start swaps. Is there a material benefit coming from those swaps in the fourth quarter and beyond? What w e think about that?
Just the way our own ALM projected over the course of the next couple years, we had some forward-starting swaps. Those are gonna pay us floating in the fourth quarter, and that's a contributor to the NII growth in the fourth quarter. I think you should assume a little bit third quarter, most all in fourth quarter, and that's probably it.
Okay, great. Thank you.
We'll go next to Erika Najarian with UBS. Your line is open.
Hi, good morning.
Good morning, Erika.
I just wanted to ask a question about expenses. You know, I think part of a bearish thesis on the stock is that, you know, bearish investors expect some sort of expense catch-up relative to how your closest peer, one of your closest peers is budgeting expenses for not just this year, but next year. Heard you loud and clear on the $61 billion plus the litigation settlement for full year 2022. As we think about coming years and think about the investments that you've made, you've highlighted the headcount additions in the third quarter, will the expectation of, you know, 1%-2% expense growth still hold as we look forward, or does inflation and investments change that range upward?
Erika, you know, we continue to invest heavily along multiple dimensions, people, technology, restructuring all the physical plant, marketing. You know, but yet through the core operational excellence discipline this company has and has shown, as I said earlier, seven years later, we have the same number of people. The company's a lot bigger than it was in 2015, you know. We continue to reposition money from things we can eliminate the work by the engineering and work in the technology investments we make enabling the customer use of that technology and plow it back into the production side of the company.
You know, I think if you think about just this year's third quarter 2022 versus third quarter 2021, if you've taken out the litigation, there's about $600 million increase in expenses year over year. $100 million of that's marketing. Another chunk is another couple $200 million technology. This is quarterly, not annual, the quarterly numbers. Then on top of that, you know, the amount of physical plant change in that time is huge, not only in our branches, but all over our company. You know, we feel strong. We continue to increase investments. Technology will go up 15%, you know, this year versus, I mean, 2023 versus 2020 in those expense numbers we're giving you. We pay for it by not investing and hoping something happens.
Y ou know, we expect the things to fructify in near term and bring forth the fruit and drive expense efficiencies and effectiveness. That's how we can trim the managers in that time period I gave you. The headcount of managers came down 10,000 people in that period of time. We invested all in frontline people to help serve our clients.
Got it. My second question is, on more significant buyback activity, Brian. You know, I think that the CET1 build is certainly coming, you know, faster than I think the street expected. I'm wondering, you know, do we need to see, you know, Bank of America get to that 11.4%, before heavier buyback activity? Or do you think you could manage, you know, the heavier buyback activity, as you build to that 11.4% CET1 by January 1st, 2024?
Y ou know, we bought back shares this quarter and still grew the capital. You know, our job is to drive our company to serve our customers. That first order of business for our capital is always to help the growth in the balance sheet, especially on the lending and market side. You should expect that buybacks will continue to increase. Remember, we are now sitting above what we are supposed to be sitting at on 01/01/ 2024. Next year's is already here.
Obviously the trade between building the buffer up a little bit more, as you said, from where we are now to 50 basis points over the requirement, is a little bit different when you already exceed the requirement. We'll put a little bit towards the buffer. We'll support the organic growth, put a little bit towards the buffer and then use the rest to send back to you guys.
Thank you.
We'll go next to Glenn Schorr with Evercore ISI. Your line is open.
Thanks very much. I'm curious, you half your capital builds was thanks to RWA mitigation. You mentioned no loss days in the quarter despite all this market volatility. You also, I think, mentioned some loan sales. I don't know if that has to do with some of the leveraged loans working off book. I wonder if you could talk about RWA mitigation going forward and include in that what's left in the leveraged loan book to distribute. Thanks.
There's a couple things that are going on there. I don't want to confuse them. Let me first talk about the leverage finance thing. That we just marked through our numbers. It's in the numbers. We pushed it through. We do it every week. That's included. When you look at those global markets or investment banking results, they include anything we're doing in investment banking. I don't think that's what Brian was referring to. What Brian was referring to is the RWA optimization that we're doing as a company to make sure that we're in a great place to serve our customers.
To be in a position to have the flexibility for buybacks in the future. So a couple of things that we did there. We did sell some loans. You saw that in prior quarters in all other. You can see some of the legacy loans we were able to sell in prior quarters. This quarter we sold $1 billion of loans in consumer and wealth and maybe $1 billion in global banking. So it's not big, but it's important for us just to make progress in different areas. Then most of the RWA optimization plan that we've been doing is pretty quiet. It's taking the securities that are 20% risk-weighted asset, and as they roll off, and remember there's like $15 billion of them roll off every quarter, we can replace those with treasuries at a higher yield.
We're getting more yield, and we're reducing the RWAs with that. The only other thing I'll just say on RWA optimization is, you know, we probably tapped the brakes a little bit on loan production this quarter in a couple places. We did a little bit of CDS hedging here and there. You'll see if you look at our numbers, you'll also see the global markets, just the way that customers are demanding balance sheet. The balance sheet's still growing, but the RWAs are a little bit lower. There's a lot that goes into RWAs, but it's a billion here, a billion there. You add it all up and it makes a difference.
That was awesome. I appreciate that. And I guess very much related, you just touched on it a little bit, but I'm curious, you're a prime and super prime bank in consumer land. You gave us enough details. I know how you're thinking about growth there. On the commercial side, given what we're all facing in this potential real buzzsaw of an economy, how do you approach risk and what business to take on? I don't know if you can include in that thought what kind of maturity wall you're looking at on the commercial side of the book. Thank you for all that. Appreciate it.
Glenn, look, we always say to ourselves and what our teammates is that the response of growth across the last decade plus leads us to where we are. You're not gonna do anything like this afternoon to change the impact. Candace and her team have negative growth, not this quarter, but the fourth quarter, the first couple of quarters next year, modestly negative growth. You know, that you're not going to change your portfolio overnight. The question is how do you manage it, right? We have limits across all the different categories. You can see the spread of risk in the supplemental book. You can see that nobody is a big part of it.
We look customer by customer, anticipate who's gonna be needing money in terms of refinancing, but also in terms of just, you know, operating like we did during the pandemic. Went through every single loan of a company with $5 million or more in revenue in our company on a quarterly basis for a while to ensure we had it. We, you know, worked the construct of the book, who we underwrite, client selection, the structures of the deals, et cetera, in a spread of diversity among industries and U.S. versus non-U.S., et cetera. On top of that, we always work in the book hard and our ratings integrity is very high. We can see it as measured in the SNCs and other things against the third parties.
Very rare that we have much to do in anything we have rated. We make sure that we test that continuously with our credit review team under Christine Katziff's and Geoff Greener's team, because that in the end of the day makes sure we're not fooling ourselves and we continue to look at that. Frankly, I think this quarter we still had upgrades exceeded downgrades. If you look at NPLs and criticized reserves, they both went down this quarter again. You know, we're seeing improvement in the credit book, even though all the parade of horribles that you sort of alluded to, and it wouldn't take a perspicacious person to see that because it's in the paper every day.
Right now the credit continues to improve, but it's what we did over the last 12 years, 13 years of proof. Hold us in good stead as we head into this thing.
Thanks, Brian. I appreciate it.
Our next question comes from John McDonald with Autonomous Research. Your line is open.
Morning. Thanks. I wanted to ask about the NII assumptions and maybe just your outlook around loan growth and what you're seeing in the economy. What do you expect from loan growth? You mentioned modest. Alastair, just the pace of deposit mix shift and betas that you're kind of building into your outlook would be helpful. Thanks.
Well, on the loan side, I'd say, you know, we talked about at the beginning of the year that we thought loans would be high- single digits, and we've slightly outperformed that obviously. This quarter was a little bit of a 90-day reset for us in some ways. I didn't see that so much in consumer because the card quotes just came through. In commercial, certainly we probably held that back just a touch. We think we'll resume that sort of high- single digit, maybe mid if things begin to slow a little bit. We've got that in our forecast. We sort of resume the path that we've been on. With respect to deposits, I'd say on betas, obviously we're just increasing those because we've got to be competitive in this environment.
Around balances, you know, I think there's a sense that the industry will be flattish, maybe down. We think we're going to outperform the industry ever so slightly. That's what's largely baked into our assumptions at this stage.
In terms of funding that, the gap between the loan growth and flattish deposits, securities came down a fair amount this quarter. Can you continue to run down the securities portfolio? What kind of volume do you get from cash flows off the book there?
Yeah. The securities portfolio runs off at about $15 billion a quarter. It was a little more this quarter because we actually had an opportunity to sell some securities that offset some gains, some losses, and freed up some RWAs. We took advantage of that this quarter. The securities number this particular quarter was a little larger. I think on an ongoing basis, John, you should assume that we've got $15 billion that just comes in. Then broadly, we've got, you know, $175 billion of cash at the central bank, and we got another couple hundred billion of stuff that's mostly Treasury swap to floating. We've got lots of ways to pay for loan growth in the future.
Okay, thanks. If I could just clarify the discussion with Erica on expenses. The $61 billion this year includes the litigation. Did you say next year you're kind of targeting low single-digit expense growth, would you say? Positive operating leverage?
Yeah. I think we said that, yeah, it includes the litigation, and then next year we said, yep, basically. Yep, this year includes the litigation, and next year we said at some point we'll get back to the 1%-2% rise. We'll just have to see how some of the ins and outs play in terms of some of the stuff running off this year still left over from the pandemic. Yeah, look at the 15.3% for three quarters in a row. You know, honestly, each quarter has had a little bit of something in it. John, if you think about the first quarter when we had the, you know, FICA and that type of stuff in it, the second quarter had the regulatory summons, third quarter had the litigation. We're bouncing around low 15s, and we expect that run rate to kind of hold.
Great. Thanks.
We'll go next to Mike Mayo with Wells Fargo. Your line is open.
Morning, Mike.
Hi. I'd like a little bit more details on how you add employees and resources for the additional revenues from the second quarter to the third quarter. Your profit margin on the new revenues was 100%. I mean, revenue is up $2 billion, expense is up zero. That's clearly, that's not sustainable. But I would like you to, if you can, tie that into slide 22, more digital users and sales, Zelle, Erica, 1 billion interactions. Your headcount's not growing a whole lot. How long can you keep that going? You know, theoretically, all this digitization over the past few years equates to, like, how many employees or how much in expenses or what's a terminal efficiency level relative to the past?
I think, Mike, that's a lot of questions, but I'll try to sort it out a little bit. Starting with the last. There is no terminal efficiency ratio. Our idea is when you work on expenses, you're not working on a ratio. It ends up in a ratio, but you're working on the actual dollar spent. And so we can keep working on investing heavily to drive that. And the digitization of all the operational process in the company is what you see on slide 22 on the consumer side. And you see it in the other slides on some of the wealth management and commercial operations. Still a lot of paper in the GTS business that we continue to take out. That's what we're trying to do.
Interestingly enough, what's driving the near-term growth in employees, you know, there's obviously financial advisor growth. You saw the 400 this quarter that's investing in the training programs and hiring some people into the office, especially outside our footprint, to get them growing again. There's investment in consumer and commercial bankers. Those are not huge numbers. A big investment in the GCIB platform over the last year. I think 1,000 teammates the last couple of years. Those investments come in. But also, you know, we're investing to drive the operational excellence platform and actually ensuring that we've got great customer service, dealing with all the things that go on.
A major part of it, frankly, is getting. Even though we have less branches year over year, less numbers of units, we have more people in them because we continue to build out the relationship management capabilities of branches. As you said on page 22, the work goes out of the branches from the day-to-day, you know, sort of, service things. We're putting more and more in the relationship management. That's why you see 400,000+ net new checking households this quarter, which is a record for us going back to pre-financial crisis. We don't know how far back it is. If you look at, you know, small business originations, they're going up. If you look at merchant services sales, which, you know, that was an investment in Salesforce there and an investment. So it's just a combination of driving that.
The continued digitization allows us to continue to be efficient, effective, and frankly, plow the money saved back into marketing, back into more technology to make us even more effective and then into people where we need them. But, you know, Tom Scrivener that runs our operations group sees a lot of stuff ahead of him he can take out. Bruce Thompson over the credit operations platform across all the businesses, a lot they can take out over time, and we just go working it.
Mike, I think we don't necessarily translate it into that sort of idea of how many more people this digital thing, you know, replace or productivity metrics. But if you look at it by different lines of business, just take consumer for a moment. If 50% of our consumer sales now are taking place digitally, you can almost think about that being the equivalent of 4,000 more financial centers. It turns out, if you give 35 million people banking in their pocket with a mobile phone, makes a big difference.
Just a quick follow-up then. Brian, you said before the NII benefits would come barreling through to the benefit of investors. That was the case this quarter. Do you expect that to continue to be the case over the next year?
Yes. We said it last quarter, and I hope I proved it true there to what you asked about last quarter.
All right. Thank you. Yeah.
One of the things, Mike, you know, to think about is if you go back and look at the consumer page in the deck, you'll see that. You know, the cost of deposits, which is the overall cost of all the stuff the against deposit basis continues to, you know, basically be 110 or 120 basis points, which is down from 300 basis points, you know, 15 years ago. That is extremely leverageable. By the way, the profit margins, you want us back up to 30% and driving through. Yeah, we're letting that NII pour through, which then drives those numbers up.
One quick follow-up. Just, I asked this for someone else. They said they didn't really know. The consumer deposit betas are outperforming for you and for some others. Why is that outperforming now? Do you think that's going to last?
The consumer, if you go to the page on deposits, there's a distinguishing fact that goes on in consumer that's at our company and generally, which really drives out the tremendous value proposition we have to be the core transaction, core relationship, a bank for our customers. If you look at page 10, you can see that the interest checking, non-interest-bearing accounts, you know, the dollar volume of deposit as a total percentage of deposits are a very high percentage, and that's what we focus on. That allows you. Those are zero or very low rates because the amount of services that come around them, the access to 3,900 branches, to the call centers, to the digital platform, to the ability to give Zelle payments, et cetera. That's what drives it.
The beta is a product of the mix more than it is a product of any pricing strategy. Because non-interest-bearing checking are zero in any rate environment.
All right. Thank you.
Our next question comes from Matt O'Connor with Deutsche Bank. Your line is open.
Good morning. The capital build was obviously faster than expected, or at least what most of us had expected. It doesn't really seem like there was much revenue drag from that. Can you kind of flip the script here and lean into certain businesses? I guess I'm thinking, you know, as we look globally, there's some peers that are needing to build capital. So maybe there's some opportunity for further share gains in areas like Markets and Global Banking.
Yeah. Yeah, look, we're in a good position on capital even after, you know, the increased Stress Capital Buffer results, which, you know, surprised our industry and our company. And we appealed that, as you well know, and didn't get relief, but we hope it's looked at in the future. But the capital improvement, you know, really didn't take much of a revenue hit. Honestly, the only place we had to hold, you know, was to be careful on loan production in the high-end businesses, i.e., GCIB. Other than that, the markets business has an allocation of size of balance sheet and capital and RWA, which, you know, basically, you know, they were able to achieve all the results without even using it up.
You know, Jim DeMare and the team do a great job there. The rest of it, everything else was no real change. Frankly, where we are now, those changes are, you know, that tapping is gone for this quarter already, and we're out and doing what we should do.
Separately, just a little nerdy modeling question. As we think about the timing of the tax credits being pushed out, driving the tax rate slightly higher, is there an offset in that all other fee line that I think is viewed in tandem with the tax rate and the ESG credits?
Yeah. I would think about it this way. The effective tax rate for Q3 and Q4 likely a little bit higher than our original guide of 10%-12%, but for the full year, it should end up right around that 12% mark. Then, you know, I'd say this year, you're right, in the fourth quarter and all other, we have to take into account the fact that the ESG deals and their timing. I think for your model, Matt, I would use $700 million of an after-tax loss for the fourth quarter as the most likely. I'm talking all other now. If you're asking me with respect to the consolidated other income, then I'd use something very similar to the fourth quarter of 2021, where we had an $800 million pre-tax loss. I would just use that there. Okay?
Okay. That's the high watermark of the year, right?
Yeah. It's just the seasonal nature of these ESG deals and their installation generally.
Thank you.
Our next question comes from Ken Usdin with Jefferies. Your line is open.
Thanks. Good morning. Just another question or two on fees. Can you just walk us through some of the deltas and like the service charges line? Just talk about. I know you had mentioned both, you know, the overdraft run rates, deposit changes and ECR. Just, you know, how much of that, you know, is embedded by now, and what should we look for going forward from that those areas? Thanks.
Yep. Ken, I think with respect to card, you know, kind of flattish as I would think about it right now, a little bit of fourth quarter seasonal maybe, that should benefit there. Service charges, most importantly on the consumer side, all the NSF/OD, we're now at the steady-state run rate, so that won't be hurting us again until you've, you know, from this point forward. The commercial part, you're right to highlight. Look, the commercial business, the GTS business is adding clients. We're doing more with clients, so that's adding gross fees. But many of the clients prefer that earnings credit adjustment as the way that they essentially, you know.
Pay interest, receive interest, and then pay fees. That came down probably $150 million this quarter. I think you should expect that to come down again next quarter, just with the way rates are going. And then the other fees are probably pretty straightforward. Wealth will be all about market levels with a one-month lag based on where the markets are. Investment banking, kind of flattish, I would think. Maybe hoping for a little bit of positive at some point, but not necessarily this quarter. Then sales and trading, your guess is as good as ours, but we generally point to the sort of 15% seasonality in Q4 compared to Q3. You know, we're coming off of obviously a pretty good period.
Yeah. Let me, Ken, just one of the things I think, and it goes a little bit to Mike's point, a little bit to some of the other points, is that about 80-odd%, if I've got it exact. I think it's 84%, if I got it right, of the interchange goes back to the customer base in terms of rewards products, either directly through our own rewards programs or through some affinity group programs. You know, obviously, as charges go up, you know, a fair amount of that goes back. Now, what does that produce in value? It produces incredible value. A lot of that in our Preferred Rewards fee structure, a reward structure which goes across all products in our company.
You know, if you even just look at the preferred segment and why deposit pricing and the stability of our accounts is different than peers through the last re-pricing cycle, and we'll see what happens this time, is that, you know, that reward structure cements the customer relationship. That then has a 99% retention rate plus of those preferred customers who have about 80% of all deposits in our consumer segment. You know, they are very stable, important customer base, as all our customer bases are.
You have to think through on those fees, you know, we're effectively investing those fees in the duration of the customer base, the length of customer base, the profitability of customer base, the stability of customer base, and the fact that then we can net produce a lot more customers because we're not having to replace a runoff. As you see some of these fee lines, same with NSF/OD. By doing what we've done, the attrition rate has obviously dropped to the floor, and you're seeing more production of net accounts there. These are all related to total pre-revenue per customer, profit per customer, as opposed to any individual decision.
Great. Thanks for all that color. I got just one separate question on, you know, you mentioned that this credit continues to improve and you're seeing some underlying. Can you just work us through just to remind us just where you are in terms of your scenarios from a CECL perspective? You know, if the economy does in fact change, you know, how weighted are you already to an already worsening scenario?
Yeah. This quarter, very similar to last quarter, we use Blue Chip consensus as our baseline. We're talking 50 different economists, some of whom are in the middle, some of whom are pessimistic themselves, some of whom are more optimistic. That's 60%, that's the baseline. The other 40% is downside scenarios that we built. There, that's the weighting then that we're applying. In this particular quarter, just to give you an idea, Ken, once again, we increased our forecast for inflation in that scenario. We increased unemployment in that scenario, and we decreased GDP through the course of the next couple of years. All of that, you know, that's a few quarters now in a row where that pattern is continuing, and we did it again this quarter. We'll just keep adjusting that over time based on the macroeconomic situation as it develops over time.
Yes. Just, Al, just to give them a sense, though, you know, it's 5% unemployment like now and then continues all the way through next year. There's an inherent conservatism built into that reserving level. That's a reserve scenario, 60/40, and has those kinds of statistics around. It has inflation, but more importantly, it's based on that kind of unemployment level, which is 150 basis points over where we are. We are in October, so it would be pretty quick to move to the 5% at the end of the year.
Great. Thank you very much.
It moves even higher than that next year, just to give you an idea. It's sort of in the mid fives, just to give you a general sense.
Understood. Thank you.
We'll go next to Vivek Juneja with JPMorgan. Your line is open.
Hi. Thanks. Just a couple of questions, Brian and Alastair. Hung loan marks, a quick one, how much were those in the third quarter?
We didn't call that out, Vivek, just for the simple reason it was smaller this quarter. We run those through the P&L every week, as you know. The results that you see in global markets and investment banking did include them last quarter. We called it out last quarter because it was just bigger. This quarter, we didn't feel that we needed to.
Okay. Brian, you talked about tech spend being up, if I caught it correctly, 15% in 2023. Is that right? If so, what's the dollar amount of tech spend that you're expecting in either this year or next year?
This year we're around $3.3 billion. Next year we move up 15% off of $3.4 billion or something like that.
Okay. This is for the new product development type of s ort of.
Yeah. When other people talk about the overall number is like $10 billion. This is for the platform and all the other stuff. This is purely new code is the way to think.
Yeah. Got it. For both of you, what are you expecting as the impact of QT on deposits? What are you modeling in?
Well, we're obviously modeling in probably the same thing you are. We're going to have to price competitively for deposits in an environment where obviously market-based e xpectations are changing every day. We're anticipating it's gonna be a little bit tougher from this point forward, but that's already baked into our NII.
I guess to get more precise, I'll say since you have better resources and better data than we do, where do you expect betas to get to?
Well, that's gonna differ by customer base. I don't want to get into this on this call just because it's competitively important for us, obviously. You can assume that at the higher end of wealth, for example, I shared that we're passing through most of that at this stage. That's gonna be very different versus our non-interest-bearing accounts. It will be different for operational versus non-operational and commercial. The betas will be in quite different places, but I'm anticipating that they'll just continue to drift up over time.
Thanks.
We'll go next to Betsy Graseck with Morgan Stanley. Your line is open.
Hi. Just a couple of questions. One is on how we think about comp going into next year. We've got this inflation rate that's obviously hot, seems higher for longer. While we expect it comes down over the next 12 months, you're going into the year with it at a pretty high level, and Social Security is even going up like 8%, as we all know. Wondering how you think about that. You, you've done a great job at, you know, being on the front foot with regard to minimum wage increases in your shop. Should we expect more of that to come into next year's expense guide as well?
Betsy, we are. You know, over the last several months, we've just done the fifth Sharing Success program. We did our usual merit. We did a 3%, 5%, and 7% merit increase for everybody under $100,000 in compensation based on years of service. We accelerated a $22 starting wage, which is $40,000-odd a year now. And, you know, we'll continue those patterns. But the good news is we're seeing the attrition rate start to move back. It was, you know, 12% drop to 6%, move back up to 15-ish%, and has now dropped down to low 14s%, and each month it starts to drop even more. So we feel that we've got the right mix, and, you know, we all look at benefits continuously.
We continue to, you know, didn't vary any benefits during it, but we increased our childcare benefit to $275 per month per child, increased our tuition reimbursement and did it in advance. It's a complex package, but, you know, we've been able to absorb all that and keep expenses bouncing along at 15.3% a quarter for the last three or four quarters, and we'll continue to do that. That's where it comes down to also using the technology investments and operational excellence investments to continue to reduce the aggregate number of people we have working and pay those talented teammates we have even more while they work.
Expectation for that to persist, meaning flat expenses year-over-year as we go into 2023.
We've said that we'd start growing in the 1%-2% category, and that's, you know, part of these types of inflationary things that you're mentioning, which are higher now, and then working it down over time. So right now we're running at a low- $15 per quarter, yeah, $15.3, and we expect it to, you know, maintain and grow. But most of that growth does come, as you're saying, into the compensation. And it ebbs and flows where it goes on a given, you know, when the markets are driving more investment banking markets and wealth management. And, you know, those come down a little bit, and the other compensation comes up as we've changed base pay and things I've talked about. With 214,000 people, it's a very complex discussion all over the world. You, there's no one answer for the whole team.
Yeah, I get that. Okay, thanks. That's helpful color. Just one other one, Alastair. You mentioned the securities roll-off that you've been able to, you know, mix shift towards a higher yield over time. Can you give us a sense as to what kind of pull to par we should be thinking about for the model on the AOCI hits that you've had to take? You know, how many quarters or years should we be thinking that gets erased over?
I'd say on the Treasuries, generally speaking, you just think about the duration there being somewhere between four and five years. On the mortgages, it's probably seven to eight. It takes a while to pull to par. Then there'll be some derivatives as well. I think the team can probably help you model that at some point. Those are broadly speaking about the numbers I would use.
Okay. Thank you.
Obviously, it'll be faster for any securities that repay in the meantime.
Right.
Yep. Got it. Thanks.
We'll take our next question from Gerard Cassidy with RBC. Your line is open.
Go on, Gerard.
Hi, Brian. Hi, Alastair.
Hi.
Alastair, you touched on there is, you know, some early-stage delinquencies in the consumer book and not so much with the hurricane. Can you give us any color? Your numbers are obviously very strong. Can you give us some color of what you're seeing there? Is it a lower FICO score customer? Anything you can read into it?
You know, this is one of the things, Gerard, you have to be careful of because obviously when a person doesn't pay you, their FICO is going down, de facto. So the reality is the origination statistics we put in the back of the deck there are very strong, remain strong. And what we're seeing is, you know, I gave you the five-year averages, which are still far exceed where we are today, and we're still lower pre-pandemic. So even though we're ticking back up the word quote normalization, we have, you know, I ask people to be careful because we're moving back to what was all-time lows, and we're not even there yet. So I think if you look in the auto business, you know, the number of repossessions and stuff is down at half on a monthly basis.
We built under responsive growth. We built a book in the consumer side that we knew would be durable through different modeled outcomes, which is what we do in the stress testing and what we do in the reserve setting process and stuff, but also through actual outcomes. What you're seeing is it's weathering, you know, any notion of issues in the economy well now. In our commercial book, as we said, you know, we still see, you know, upgrades exceeding downgrades. The simple way to think about it, I think we're through the P&L provision cost with flat reserve build pre-pandemic was basically, you know, $1 billion a quarter. We're running around that number now, and that, but that's building $400 million of reserves. It's a little different constitution.
That means unless charge-offs pick up, you're gonna see the reserve build start to mitigate because sort of we're sitting there in a pretty conservative scenario now, and it'll all depend on that as we look forward. Remember, the baseline is now baking in effectively a recession based on the Blue Chip.
Gerard, I think too, if you went back through our supplement over the course of the past 10 years, you're gonna find these numbers are so low, like we're squinting to see a change here. It's coming off of really historically extraordinary numbers. Is there a little bit of movement? Yes. But is it the second best of all time? Yes.
Very good. Very good color. Can I follow up on the provision, Brian, you just mentioned about, you know, the $1 billion in the past. If you took that worst, you know, you guys, I think, said 60/40 in terms of your reserve build in terms of the base case on the economy versus a really difficult economy. If that really difficult economy went to 100%, what type of provision on a quarterly basis would that push up to?
Yeah, I mean I think we have that. Remember that I'd be careful about that because basically the baseline now has built into it, you know, a fairly weak forward path in the near term. I wouldn't speculate exactly the numbers. If you saw, you know, we built a bunch of reserves with 15% unemployment and a projection that that was gonna go on or 14%, whatever, like it was in the pandemic, and you saw us move up. We're sitting closer to what we called CECL day one and pre-pandemic, you know, implementation. You can see some of that in the stress test. You know, we don't really speculate on that, you know, but we have our own stress test to test it to make sure.
You can see the Fed stress test. In the adverse case, you can see the numbers, frankly, which I don't think would ever materialize given, you know, what you do in the period of time between then and there. That gives you some sense if you look at those outcomes.
Very good. Appreciate the color. Thank you.
We'll take our final question today from Charles Peabody with Portales. Your line is open.
Yeah, most of my questions were asked already, but I'm just curious if you had any thoughts about how the Basel III endgame might play out and the timing of implementation of that, or any general thoughts on the color.
No, no particular updates at this point. Obviously we're waiting along with everybody else. Once we get the rules, Charles, we'll sit down and we'll start working through our own capital base. Obviously, as Brian pointed out earlier, just the fact that we've now put ourselves in a position where already we're ahead of where we need to be in January of 2024. We've got a lot of flexibility at this point for whatever the end game does come out with.
Thank you.
Okay. Well, thank you for all your questions and your attention. Let me just summarize for the third quarter of 2022. You saw responsible growth in action once again. We had organic growth in all businesses. We had top line revenue growth driven by the NII increases. We had strong expense control, flat expenses for the third straight quarter, operating leverage for the fifth straight quarter, and good work on that. We had good risk management. You can see that we're still running strong risk parameters. We built the capital to the end state 01/01/2024 levels that we need. That's what we call responsible growth, and now you're seeing it in action. Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.