Good day, and welcome to the Bank of America Third Quarter Earnings Announcement. Currently, all phone lines are in a listen only mode. Later, there will be an opportunity to ask questions during the question and answer session. Please be advised today's program may be recorded. It is now my pleasure to turn the program over to your host, Lee McIntyre.
Good morning. Welcome and thank you for joining the call to review the Q3 results. I trust everybody has had a chance to review our earnings release documents. As usual, they're available, including the earnings presentation that we'll be referring to during the call on the Investor Relations section of the bankofamerica.com website. I'm going to first turn the call over to the CEO, Brian Moynihan, for some opening comments and then ask Paul D'Onofrio, our CFO, to cover some other elements.
Before I turn the call over to Brian and Paul, let me just remind you we may make forward looking statements and refer to non GAAP financial measures during the call just regarding various elements of our financials. The forward looking statements are based on management's current expectations and assumptions, and they're subject to risk and uncertainties, particularly as we continue to operate in this pandemic period. Factors that may cause those results to materially differ from expectations are detailed our earnings materials and the SEC filings that are available on the website. Information about our non GAAP financial measures, including reconciliations to U. S.
GAAP, can also be found in our earnings materials available on the website. So with that, take it away, Brian.
Thank you, Lee, and thank all of you for joining, and I hope all of you are staying safe. We're going to begin on Slide 2. And today, before Paul takes you through the detail on the financials, I thought I'd give you some thoughts on the 1st 3 quarters of 2020 and how we're driving for you here at Bank of America. As an opening comment, economy and the markets this year have been defined more by than anything else by the impact of the global health care crisis. This has created a sinuous path for the recovery.
As we have said early on here at Bank of America and what our data continues to suggest is that we are seeing a return to the fundamentals of a generally sound underlying economy, but we won't get there until we fully address the health care crisis and its associated effects. These effects have been lessened by the monetary and fiscal policies and by the core health of the U. S. Consumer given those policies. There are 3 key themes that I'd like to comment on.
1 is the economy generally, what we see in our data and the impact of the projected path on the economy's earnings and the company's earnings and prospects going forward. The second is how do we continue to think about and manage the risk resulting from the economic downturn and the subsequent, beginnings of the recovery. And the third is how we are making progress given all that backdrop on our core strategies. Before I touch on these items, just a brief summary of the quarter. Overall, solid performance given the operating backdrop we face.
We earned around $5,000,000,000 after tax of $0.51 per share. We ended the quarter with capital a capital ratio of 11 0.9% versus 9.5% minimum. For the 3rd period of this pandemic, we've earned more than twice our dividends, attesting to the strong balance sheet and security of this company. The operating environment continues to require more operational excellence than ever before. It requires delivery of immediate technology capabilities across our franchise from our group of talented teammates.
It also has to deliver a customer experience that can be redefined on a daily basis. It also has to meet customer demands, which ebb and flow given the daily events. It requires it has required extra costs to do the right thing to protect our teammates, our clients and our franchise, all while processing higher transaction levels and dealing with volatility and the high volumes that come from it. It requires Oparos work on delivery on a day to day basis. This results in expense that remains elevated this quarter as expenses from COVID.
However, our disciplined expense management remains well intact. We've turned the corner on these COVID costs. As we see in the 4th quarter, we see the cost coming back down the company. That is evidenced by the drop this quarter of 3,000 in our headcount on a quarter to quarter basis. And Paul will talk more about the path going forward in a minute.
So let's start with the economy and its impact on our company. We saw another partial restoration in the U. S. Economy. We saw that in our outside data, and we saw it in the large base of spending on our customers.
As you think through the quarters, in the Q1, our customer spending was impacted as we hit March as it after a strong start to the year. However, for the quarter, our customers still spent more than they did in the Q1 of 'nineteen. The Q2 saw the worst of the crisis in terms of spending. There was a 30% drop in GDP, and the spending fell deeply in April that started to recover as stimulus, PPP and other monetary policy kicked in, into May June. And also, the REO openings began.
In the Q3, we've seen a full restoration of spending by Bank of America customers when compared to last year. Overall, the customer payment levels in September 2020 were larger than September 2019. Year to date, across $2,300,000,000,000 in spending at Bank of America, customers have spent more than they did last year. You can see that on Slide 26 in the appendix. This has occurred even as some of the summer 2020 stimulus programs have run their course.
Our own Bank of America economic experts created a sharp rebound in 3rd quarter GDP of around 30%. So simply put, we're back to 90% -plus where we were in terms of GDP size. So what are we seeing as we turn in October? The spending by our consumers is still solid, about 10% ahead of last year. Deposits remain elevated and continue to grow in Consumer Banking and Global Wealth Management.
And Global Banking deposits are flattish and as customers continue to make choices about the liquidity. We are seeing loan demand stabilize, and it may we may have seen a trough in September. And commercial utilization rates have come down below pre pandemic levels last year. As the economy continues to grind forward, we believe we'll see some demand recover over the next few quarters. In consumer lending, card balances appear to be stabilized and credit spending continues to grow.
And we are growing at new accounts in our consumer card businesses. New accounts are growing in our auto lending business and our mortgage business is stable. So this view of loan demand and more stability of balances, the ability to redeploy some of the cash balances given the now lengthier stability of customer deposits, leads us to believe that the 3rd quarter was a trough quarter for NII, and Paul will cover more of that later. The second topic I want to touch about is going to Slide 3 on the risks. We continue to remain focused on all the risks, whether market and trading risk, credit operational reputational risk, given the incredible volumes and unusual working conditions that we're all in.
Going back to the Q1 volatility, the concern was obviously market risk. We've handled this market risk well. And again, for this quarter, the team made trading profits on every single day. Our capital levels and liquidity are historically high levels, as I stated before, and liquidity stands at over $860,000,000,000 Credit risk is the current focus in this quarter, and you can see the highlights of that on Slide 3. Charge offs declined for the quarter.
Reserve build this quarter was on the commercial side. Mostly, that's due to the specified industries that are facing still not being fully open and the length of time it may be till they reopen. Consumer card release reserves, for example. We believe we are staying ahead of the commercial risk by aggressively renewing our portfolios. Over the last two quarters, in each quarter, we've done a 100% review of all the middle market and business banking portfolios to ensure we have strong internal ratings integrity and focus on the ability to pay as well as just having liquidity.
You can see an increase in the criticized exposure that comes through those views and re ratings, but is more focused on the certain industries and Paul will touch on that. In the 1st couple of weeks, we've seen the criticized assets come back down on some of those clients to refinance. Meanwhile, overall, nonperforming loans remain around 4 point $5,000,000,000 with commercial basically flat to last quarter and consumer growing around $200,000,000 Overall, the balance of non performing loans remains at a modest forty eight basis points to loans. This is a testimony to the decade of responsible growth this company is engaged in. Importantly, the deferral story, which we talked about the last couple of quarters, is largely over.
We only have 100,000 customers remaining on deferral at the end of September. Of the $9,000,000,000 in total consumer balances that remain on deferral, dollars 7,500,000,000 are mortgage loans. Those are well secured and low loan to value and, among other, many other positive attributes, including 25% to 30% of them are in the Wealth Management business. All are accounted for in our reserves based on the expected losses that might come. Interesting, both car delinquencies and mortgage delinquencies are down in terms of dollar amount and percent year over year.
Having said all this around credit, we don't expect to see a meaningful increase in net charge offs till mid next year. And we expect that the reserve builds are behind us, which means the P and L impact of those losses should be in our financials already. So then the question becomes, after managing the risk, is have we been investing in the company at the same time? And that you can see as you move to Slide 4. Through our continued investments in technology, we continue to improve our platforms across the board, drive operational excellence, invest in the future all while growing core customer and client households throughout the quarter.
In our commercial businesses, we're now actively prospect again, having done the reviews I spoke about early, fully assessing the credit quality of existing clients and then focusing our production work on the prospects we know we can get around the country. In our consumer business, we continue to grow net core checking households by about 900,000 year over year and $100,000,000,000 plus in checking balances. We saw strong growth in Middle Edge in our consumer customer investment platform by $40,000,000,000 in assets year over year. We've seen depth and penetration in digital engagement across the whole consumer business. In our wealth management business, even as we our advisors work from home, our private bankers and wealth and financial advisors grew households again this quarter.
In fact, we reached a record new client balances of 3,000,000,000,000 dollars We also continued our investments in our market expansion during the 3rd market expansion during the crisis. We added 13 new financial centers in the quarter and continued to offset that number with closures that were preplanned before the pandemic. But the key area we continue to change the company is in the digital capabilities, not only in consumer but across the board in every business. This digital enablement is a trifecta of better customer engagement and client delight, deeper penetration of products and services and operating efficiency. And with the rollout of a new industry feature like this week's Life Plan announcement, where we now have 500,000 customers have already filled out a Life Plan financial plan over the last couple of weeks.
You can see these digital engagement highlights on Slide 4. This quarter, we had 2,300,000,000 in total digital logins in our consumer business. Erica is up to 16,000,000 users. Zelle is at 12,000,000 users. Importantly, you see at the bottom of the list the digital engagement of our wealth management customers.
Through that digital platform, Merrill Lynch and a private bank are again proving that we're high touch and high-tech. This ranges from how we provide advice and personal research to how these our clients have interacted with us to do things like just deposit checks, and that was up dramatically over the quarter as our advisory clients embraced our new digital capabilities. In the middle of the page, you see the statistics for our commercial business, for our products called CashPro and CashPro Mobile. This makes our clients' lives easier and saves them operating costs. And here we in CashPro area, we've rolled out a bunch of new features and user interfaces and capabilities last week to allow companies and company treasures to better manage their money around the world in all kinds of currencies and all kinds of environments.
So in summary, dollars 5,000,000,000 in after tax earnings and a solid quarter. Progress on the economic recovery, progress on the risk, but most importantly, underlying that business, strong growth in the business side in the customer side of the business, which is what we do, and we'll continue to do it in perpetuity. With that, let me turn it over to Paul.
Thanks, Brian. I'm starting on Slide 56 together. In most periods, my earnings remarks are focused on year over year comparisons, but this quarter, many of my comments will be directed towards comparisons against Q220 as most investors we speak with are more interested in our progress quarter over quarter as we work sequentially through the health crisis and given COVID has made year over year comparisons less relevant. Q3 net income excuse me, of $4,900,000,000 or $0.51 per share compares to $3,500,000,000 or $0.37 in Q2. The earnings improvement was driven by lower provision expense as we modestly added to the reserves for credit losses in Q3 compared to the more significant increase in reserves in Q2.
Versus Q2, the lower provision expense was mostly offset by lower NII and higher cost of litigation and cost of the COVID environment. Lower rates and loan balances caused NAI compression, which I will discuss in a moment. The linked quarter decline in non interest income was driven by the more robust trading and IB environment in Q2 as well as a 7 $100,000,000 gain on the sale of mortgages recorded in Q2. While down linked quarter, fees from Capital Markets in both Market Making and Investment Banking were solidly up year over year. At $1,800,000,000 Investment Banking fees were the 2nd best quarter in the company's history.
Brian noted progress in activities levels across many of our businesses, and that showed up in increased levels of fees, which helped to mitigate the linked quarter decline in capital markets revenue. Q3 saw card income and service charges move higher from the more heavily impacted Q2 levels. We also experienced higher asset management fees as the market improved, and we grew net new households again this quarter. Turning to expenses. They were higher in Q3 than Q2, driven by 3 things.
First, we built litigation reserves for litigation with respect to some older matters. 2nd, we had an increase in COBRA related costs. And third, this is the 1st quarter in which we recorded merchant servicing expense. It is important to point out that the increase from recording merchant servicing expense and even some of the increase in COVID related costs were associated with increases in reported revenue, which obviously helps defray their impact on profits. And with respect to the linked quarter change in pretax pre provision income, I would also point out that the $1,300,000,000 of the decline was driven by 2 more abnormal items, the prior period loan sale gain of 700,000,000 dollars and this quarter's elevated litigation expense of about $600,000,000 In addition, given a reversal in U.
K. Tax policy, our results included a $700,000,000 positive adjustment to our tax expense as we revalued our U. K. Deferred tax assets that had been previously written down. Our ROTCE was 10% and ROA was 71 basis points.
Moving to the balance sheet on Slide 7. We ended the quarter little change from Q2 at $2,700,000,000,000 in total assets. The main point I want to make about the balance sheet is the redeployment of some of our excess liquidity out of cash and reverse repo and into securities. Cash and reverse repo declined by about $112,000,000,000 from Q2, while security levels rose by a similar amount. This will help offset NII compression from lower reinvestment rates in coming quarters.
The only other notable point on the balance sheet was the decline in loans, driven by customer paydowns. Shareholders' equities increased $3,200,000,000 as earnings were more than twice the amount of dividends paid. With respect to regulatory ratios, importantly, this quarter we received approval of our updated model to calculate operational risk RWA, which resulted in a $128,000,000,000 reduction in our advanced RWA. A decline in loans drove RWA even lower under the advanced approach. The improvement in RWA and capital improved our CET1 ratio under advanced from 11.4 to 12.7.
The decline in loans improved RWA under standardized as well, but given the larger decline in our CET ratio under the advanced approach, standardized became our governing approach again this quarter. Our CET1 ratio under the standardized approach improved to 11.9%, which is 240 basis points above our minimum requirement and translates into a $35,000,000,000 capital cushion above that requirement. Our TLAC ratios also increased and remained comfortably above our requirements. Before leaving the balance sheet, I want to point out a couple of things with respect to loan and deposit trends. The charts on Slide 89 show a 5 year trend as we wanted to give you a longer perspective on the growth of loans and deposits that incorporated more normal environments given the near term disruption caused by the pandemic.
Overall, year over year, total loans grew 1% and in the lines of business grew 3%. Commercial loans rose 67,000,000,000 in Q1 and then declined in each of the next two quarters, year over year, average global banking loans are only down 1%. In consumer banking, loans grew 5% year over year as the decline in higher yielding card loans was more than offset by the addition of PPP loans and residential mortgages. In terms of the past forward, a few perspectives. First, our middle market utilization rate a year ago was 41% and has now declined to 37%.
Business Banking has gone from 39% to 33%. We believe these rates are bottoming and should begin to move higher over the next few quarters if the economy continues to grind forward. With respect to credit cards, spending and cash volumes declined materially during the first half of the year, driving balances lower. The good news is that credit card spending continued to gradually improve in Q3, but remains heavily below pre pandemic levels in certain categories such as travel and entertainment. Outside of PPP loans, where government forgiveness will drive declines, we remain optimistic that the larger loan declines of the past couple of quarters are behind us, absent a resurgence in COVID cases further impacting the economy.
On Slide 9, we provide the same trends by line of business for deposits. Brian already made a number of points on deposits, and you can see the tremendous year over year growth in every line of business. I will just add that in each line of business, rate paid on deposits is at or below the rate paid to customers in 2015 before the Fed began raising rates. So we think our strong deposit growth reflects our customers' overall experience with us. Turning to Slide 10 and net interest income.
On a GAAP non FTE basis, NII in Q3 was $10,100,000,000 $10,240,000,000 on an FTE basis. Net interest income declined $719,000,000 from Q2 'twenty and $2,100,000,000 from Q3 'nineteen. The drop from Q2 was driven by lower loan balances and decline in interest rates across the yield curve, which was more pronounced on an average basis than on a spot basis. Given the decline in mortgage rates during the quarter, we saw an extraordinary level of mortgage prepayments. This resulted in higher bond premium write offs and drove a little more than half of the decline in NII for Q2.
Compared to Q2, the increase in prepayments was negatively impacted negatively impacted the yield on our securities by 30 basis points and the overall net yield on the company by 6 basis points. The lower long term rates also continued to impact the reinvestment of maturing securities, lowering our NII and yield. The other primary driver of the linked quarter decline in NII was the lower commercial and credit card balances previously noted. While lower short end rates did reduce the cost of both deposits and long term debt, this funding off decline was mitigated by yields on variable rate loans also repricing lower. We also want to point out that we saw a modest benefit in Q3 from the redeployment of some of our excess liquidity into securities.
This should aid NII more in subsequent quarters. Given the sharp decline in NII, the net interest yield declined by 15 basis points from Q2. On the bottom right, we show the drivers of this net interest yield decline. I already noted the bond premium impact, and you can see the other drivers on the chart. In terms of forward NII guidance, there are a couple of caveats worth emphasizing, such as rates not moving lower than Q3 levels and the economy not taking a big step backwards from negative COVID developments, which could drive low demand lower again.
Having said that, we believe Q3 will likely be the bottom for NII, and we are optimistic it will move higher in 2021. Let me provide a few thoughts on why we feel good about NII moving forward. First, commercial loan utilization rates are at historically low levels, and with the economy expected to slowly grind forward, we are optimistic that over the next quarter or 2, you could see C and I loan demand start picking up. As Brian noted, we are also seeing spending on credit cards slowly picking up. So with stable customer repayment rates, we could see a seasonal lift in card balances as well.
At the very least, we are not expecting the continued large declines seen over the past two quarters in outstanding commercial or card loans. In addition, some combination of refinancing Fategui and stabilization of long end rates should result in less bond premium write offs than currently impacting NII. And lastly, as I mentioned, the deployment of cash to higher yielding securities will aid NII in the future. We believe these factors taken together in the near term will mitigate the ongoing negative effects of NII on higher yielding assets maturing or paying off and being replaced with lower yielding ones. Turning to Slide 11 and expenses.
Expenses this quarter were $14,400,000,000 which are $1,000,000,000 higher than Q2. First, about $600,000,000 of the increase is from elevated litigation expense. The remaining increase is split between higher COVID costs and merchant processing expenses, which are not higher but just accounted for differently this quarter following the JV dissolution. The elevation in our net COVID expense was driven by costs associated with processing unprecedented levels of claims for unemployment insurance through our commercial card product and continued costs of supporting PPP loans. Both of these activities have revenue benefits, which helped offset some of the costs.
With respect to expense in Q4, we don't expect to have a similar amount of litigation expense, and we don't expect a repeat of the Q3 activity with respect to processing unemployment insurance claims. Therefore, we believe, absent other unexpected changes, our Q4 expense number should be in the neighborhood of around 13 point $7,000,000,000 Turning to asset quality on Slide 12. Our total net charge offs this quarter were $972,000,000 or 40 basis points of average loans. While net charge offs benefit from government stimulus and loan deferral programs, it also reflected years of adherence to our responsible growth model. The $174,000,000 decline in net charge offs was driven by lower credit card losses.
The loss rate on credit card declined to 2 49 basis points of average loans. Provision expense of $1,400,000,000 driven by a $417,000,000 net reserve build this quarter. While total reserves grew modestly from Q2, total loan balances declined $44,000,000,000 increasing our allowance as a percentage of loans to leases to 2.1%. I would also note the coverage ratio for every loan category increased from Q2 with credit card now just north of 11%, total commercial loans at 1.8% and CRE at 3.7%. In terms of the process and key variables with respect to setting our reserve, which is something everyone seems to have in, we continue to include a multiple of downside scenarios.
The weighting of these scenarios produced an outlook that GDP could return to its 4Q 2019 level sometime in late 2022. The weighting also produced an unemployment assumption of nearly 9% as we exit Q4 'twenty and 7% a year later. So our unemployment assumptions for the end of 2020 is higher than the current unemployment and the time to return to positive GDP improved compared to last quarter. At the end of the day, we build commercial reserves for exposures to industries more heavily impacted by COVID and left reserve coverage in other areas nearly unchanged as we felt despite the macro improvement, there is still too much uncertainty around unemployment, expiration of stimulus, the duration of the pandemic to reduce total reserves. On Slide 13, we bake out credit quality metrics for both our consumer and commercial portfolios.
On the consumer front, COVID effects on asset quality continued to remain benign. Consumer net charge offs declined $170,000,000 driven by a decline in credit excuse me, in card losses. 30 day delinquencies and NPLs rose from very low levels as deferrals ended and began to enter those metrics. As Brian noted, consumer deferrals have materially declined with only $9,000,000,000 remaining, which are mostly consumer real estate related and have strong collateral values. Credit card deferrals have declined from more than $7,000,000,000 at the end of Q2 to around $400,000,000 now, and more than 80% of the accounts with deferrals that have expired have made their first payment.
Commercial net charge offs were flat with Q2, but included higher commercial real estate losses, primarily related to mall exposures, which were offset by lower C and I related losses. Overall, given the environment, the asset quality of our commercial book remains solid with 88% of exposures excluding small business either investment grade or collateralized. Our reservable criticized exposure metric continues to be the most heavily impacted by COVID and increased this quarter
by $10,000,000,000 from Q2.
It should be no surprise to you that exposures in the hotel and airline industries led that increase. However, it's also worth noting that our commercial NPLs, which are lower rated than criticized, are still only $2,200,000,000 flat compared to Q2 and remained low at only 40 two basis points of loans. With respect to commercial real estate, which is an area of focus given COVID's potential impact on the sector, we feel very good about our exposure and reserve coverage. Today, outstanding loans for commercial real estate are $63,000,000,000 which represents 7 percent of total loans for Bank of America and less than 25 percent of total equity. These percentages are very low compared to the broader industry.
90% of these loans are either investment grade or secured by collateral. We have a diverse mix of exposure led by office space at about a quarter of CRE, the CRE portfolio, multifamily, retail, hotels, each just north of 10% of our CRE exposure. And our exposure is also regionally diverse with only one area of the country representing more than 20% of the CRE loan book. Currently, we have a little more than $400,000,000 in this book on NPL status, and year to date, we have seen less than $200,000,000 in net charge offs, and we hold nearly 3.7% of allowance against these loans. I'll just take just a moment to go a little deeper on our exposure to hotels as an example of our measured approach over the years.
Within CRE, we have about $7,000,000,000 outstanding loans related to hotel properties. That is less than 1% of overall loans. With respect to asset quality of these loans, 85% of them are collateralized, with many having pre COVID LTVs around 50% to 55% that can weather a meaningful price decline. While 60% of these loans are classified as reservable criticized, only $120,000,000 are NPLs. Okay.
Turning to the business segments and starting with Consumer Banking on Slide 14. In the interest of time, I will keep my comments brief on the lines of business and just hit the highlights on the slides we normally provide. In the first half of the year, compared to our other segments, consumer banking was the most heavily impacted by COVID as it bore the brunt of revenue disruption from lower rates and lower consumer spending as well as the need for customer assistance. It also bore a large dislocation in credit costs, not because of realized losses, but instead from establishing reserves for losses, which are projected to materialize over the coming quarters. In Q3, we did not add reserves and you can see the improvement in profits versus Q2.
I would also note that expected credit losses have yet to materialize. In fact, we saw reserves in net charge offs decline from Q2. We also saw improvement in consumer fees as activity and account growth improved, and we saw less demand for customer assistance through fee waivers. We also believe this quarter may be the turning point with respect to COVID expense. As COVID costs decline, we expect to see the benefit of a more digitally engaged customer base.
We earned $2,100,000,000 in consumer banking in Q3 versus roughly $100,000,000 in Q2, but remained well below last year's results as NII fees and expenses have all been pressured by the pandemic. It is worth pointing out that both our rates paid and cost of deposits declined as deposits grew and we handled more transactions, but were more productive as a result of digital processing. Client momentum in this business continued to show strength around deposits and investment flows, while loan growth continued to be impacted by declines in credit cards. Let's skip the Wealth Management on Slide 1718, and I will refer to both of those pages as I speak. Here again, the impact of lower rates on a larger deposit book resulted in lower NII, impacting the otherwise solid quarter with positive AUM flows, market appreciation and solid deposit and loan growth.
Net income of $749,000,000 was down 32% from Q3 'nineteen, driven by a decline in revenue as well as higher non interest expense. Net income improved from Q2 on lower provision expense as reserve building subsided. With respect to revenue, lower NII more than offset improvement in asset management fees. Expenses increased in comparisons against both periods, driven by revenue related expense and investments in our sales force. Merrill Lynch and the private bank both continued to grow clients as we remained a provider of choice for affluent clients.
As a result of the great work of our advisors to provide advice and guidance in these challenging times, year to date, we've added nearly 17,000 net new households in Merrill Lynch and more than 1400 net new relationships in the private bank. Client balances rose to a record $3,100,000,000,000 up 6% year over year, driven by the rebound in markets as well as positive client flows. Let's move to our Global Banking results on Slide 19. Global Banking results continued to reflect COBRA related impacts of both lower interest rates and higher credit costs in the quarter. Mitigating these impacts, the business continued to produce strong investment banking results.
The business earned $926,000,000 in Q3, which split relatively evenly between lower revenue and higher credit costs. The decline in revenue was driven by lower NII as a result of lower rates. Within non interest income, taxed advantaged leasing revenue was lower, while IB fees rose. As I mentioned, investment banking fees for the company were $1,800,000,000 and they were up 15% year over year. An increase in non interest expense year over year primarily reflected investments in the platform, including our merchant services business.
While average deposits are up nicely year over year, average deposit levels declined from Q2 as we continued to lower rates and some customers chose other uses for their liquidity. Rate paid on deposits are now lower than the level seen at the end of 2015 just before rates began to rise. Average loans year over year were modestly lower, reflecting the pay down noted earlier. But it's worth noting that we've seen positive trends on spreads, albeit at lower origination levels. Switching to global markets on Slide 22.
Results reflect solid year over year improvement in revenue from sales and trading, but also the expected decline from the robust levels of Q2. In addition, this quarter, we saw an increase in both revenue and expense associated with processing and unprecedented level of claims for unemployment insurance. This is another important activity during this pandemic period, whereby we get money in the hands of those who need it on behalf of the states. Unfortunately, the costs, as in many other COVID driven activities, were quite a bit higher than the fees received. We expect both to reduce substantially next quarter.
As I usually do, I will speak about the segment's results excluding DBA. This quarter, net DVA was a loss of $116,000,000 So Global Markets produced $945,000,000 of earnings in Q3, modestly higher than Q3 2019. Year over year, revenue was up 13% on improved investment banking fees, higher sales and trading and the fees for processing unemployment claims. The expense increase was driven by higher claims process costs as well as higher brokerage clearing and execution costs associated with higher activity in Asia. Sales and trading contributed $3,300,000,000 to revenue, increasing 4% year over year, driven by a 6% improvement in equities and a 3% improvement in FICC.
The improvement in FICC results was driven by performance in mortgage and FX, while the strength in equities was driven by client activity in Asia. Finally, on Slide 24, we show all other, which reported a profit of $296,000,000 Compared to Q3 2019, the improvement in net income is driven primarily by the prior year 2,100,000,000 pretax impairment charge associated with our merchant servicing JV. Compared to Q2 'twenty, the earnings reflects the $700,000,000 tax adjustment associated with our UK deferred tax asset. The tax expense improvement versus linked quarter was mostly offset by 2Q's $700,000,000 gain from the sale of mortgages and the higher litigation expense in Q3. In Q3, the tax rate reflected the benefit of the tax adjustments as well as the ongoing benefit of tax advantaged investments.
In Q4, absent unusual items, we expect the effective tax rate to be around 10%, reflecting the impact of tax credits relative to pretax income. And just a reminder, these tax advantage investments, which are driven by our commitment to ESG, also result in pretax partnership losses booked in consolidated other income and these partnership losses are normally seasonally high in Q4. Okay. With that, let's jump to Q and
And we can take our first question from Glenn Schorr with Evercore. Your line is open.
Hi, thanks very much. So you've historically been incredibly stable in trading and again you are this quarter. But I guess I have a question to rehash on. During times like this, you have some peers that will have bigger spikes and then they'll come back down to earth at other times. And I'm just curious if you could talk about you're steady, but you're not seeing the same spikes.
Is that your risk tolerance? Is it a CCAR stress testing thing? Is it a mix of business? And is it conscious? Meaning, are you investing to close some gaps, just curious if you could talk about that from the market's perspective?
Thanks.
Sure. Well, look, again, our sales and trading results were solid with total revenue up 4% year over year, equities up 6% to up 2%. We had no days with trading losses again this quarter. If you kind of look at I don't really like to talk about competitors, but every competitor is going to have a different business mix, And many of our competitors, I will say, take more risk in one quarter or another, clearly that can create some differences in relative performance. We don't really focus that much on individual quarters, but instead, we look at results over longer time periods.
And as noted, sales and trading is up 22% year to date. I would also note that we're gaining share, we think, in equities in other parts of our market business, and we certainly have gained share in investment banking. There's been quarters where we've done better than some of our peers. Go back to Q1 and when you'll see in equities where we basically did better than all our peers. So we're staying focused on the medium and long term, we're investing in the business and we're taking share.
Fair enough. Maybe just one follow-up on you noted obviously loan demand stabilized, trough quarter for NII, don't expect to add to reserves, deferrals mostly over and you have a $35,000,000,000 capital cushion. I'm curious what you feel is a more natural number. At some point, we'll get off buyback suspension. So what's a more natural number for your capital cushion?
And what might be your intentions on what to do with that excess because it feels like organic growth, you're going to make more money than you can file into organic growth for a while.
That's a good list to work with in terms of citing the things. And yes, we are generating twice our dividend or more, have been for every quarter even when we put up the reserves, even while the rate structure hits. Trough quarter for NII last quarter, expenses coming down, built the reserves. We'd expect that we'll get through the stress test and then we'll start to go into capital redeployment as we did before. And our general goal is to run about 100 basis points over the minimum.
So for us, that's 10.5, which is another reason why the mix of business is so important to us that you referenced earlier is, remember, we had a stress capital buffer that was 2.5%, and we didn't use all of it. But so we got plenty of cushion here from an operational basis in terms of the ability to use capital management once we're free and clear.
And we can move next to Jim Mitchell with Seaport Global. Your line is open.
Hey, good morning. Maybe one for Brian, given the pressure in the industry and your scale advantages, do you see is there an opportunity here to kind of pressure advantage a little bit and try to accelerate market share and sort of what that might mean for expenses if you did?
Yes. Well, I think we've been able to push market share. So if you look at the FDIC data, I think we're up 60 or 70 basis points in aggregate deposit market share, June 30 to June 30, and everybody had the benefit for the monetary policy. But what we watch is where the market share is going to stick to the bridge. So think about it in terms of adding commercial bankers, which we've added.
Think about it in terms of entering new markets and branches. This year, we've entered several new markets. If you look at the deposits in these markets that we've been open a while, they're 50,000,000 dollars per branch, moving to $100,000,000 per branch. And think about the Wealth Management business, adding financial advisors. So we just keep driving that total.
And if you think about we have $1,700,000,000 deposits, dollars 800,000,000,000 plus in consumer, but a lot of other people forget that we also have a personal business in GWIM with $250,000,000,000 $250,000,000,000 plus in deposits. So we have pressed our advantage. And in consumer, those who have been around the company, we repositioned the consumer business from 60% primary checking to 90% -plus. And that's 1,000,000 new checking accounts year to year. There are 800,000, 900,000, something like that in a year where we've been shut down for a couple of quarters from some of the activity at the branches.
And that's strong performance. We're pressing that all the time. The magic has been we've been able to manage expenses between 13%, 13.5% a quarter. Now you've got to add the merchant to it, to the 13.7% Paul did, and still invest at that rate. And that's look at that Page 4 on the digital growth, it's just it's very strong.
Our Zelle is I think we're 30% of all the Zelle transactions. Erica moves. And then Life Plan this quarter, we put out a new product that you can do your own financial plan and 500,000 customers in a couple of weeks. So across the board and each element of the franchise investing $3,000,000,000 in technology. So we're pressing advantage organically every day and you're seeing that come out.
Our deposit market share across the board has grown. And our loan share where we compete has continued to grow and our GTS business has continued to grow. And as Paul said, our investment banking has grown to grow. And as Paul said, our investment banking is growing and we're keeping driving it.
So that's helpful. And so you feel comfortable that, you can still, I mean, add the $200,000,000 to the $13,000,000 to $13,500,000 to $13,200,000 you still feel comfortable doing all that and keeping expenses in that range?
Yes. And it just that's the operational excellence platform. If you look at whatever page that was, look at all those quarters and you go back even before that, it's been think of all the investment we've made making, I think that's 3 years that we show you maybe. So think a $10,000,000,000 $9,000,000,000 to $10,000,000,000 in technology development, code development, new initiatives in that period of time, and expenses stayed relatively flat. Think about, redeploying probably 300 to 400 or 500 new branches across that decade across that 3 to 4 years in markets we've never been.
Think about refurbishing. We've done 300 or 400 branches this year so far. We've opened into new markets, etcetera. So just this quarter, just this little quarter, we opened 13 branches in new markets. So we're pressing our advantage.
And the Board asked me and I if we'd have the discussions with our major shareholders, Could you press it harder? And there's a and the answer is, if I talk to the marketing people, sure, they'd want to spend more money on marketing. But I think we spend enough to do the trick and drive it in a way that's stick to the rigs.
Okay, great. Thanks.
And we can move next to Betsy Graseck with Morgan Stanley. Your line is open.
Hey, good morning.
Hey, Betsy.
Thanks for the time. I wanted to dig in a little bit on the points you're making, Paul, earlier about the cash and the redeployment into securities. And I just wanted to get a sense as to for 4Q, how much of a NIM uplift do you think you're going to get from that? And then what percentage of cash have you used already? What is going to be guiding you on how much more to use here and is there a limit for how much cash you're willing to redeploy into securities?
Yes, sure. So in the Q3, we deployed about $100,000,000,000 of our cash into mortgage backed securities and treasuries over the Q3. And on a weighted average basis between the treasuries and mortgage backed securities that probably produced a lift relative to cash of about close to a percentage point on what we deployed. You didn't see a lot of that come through in Q3 because of the timing of those purchases throughout the quarter, you'll see more of that impact in Q4. With respect to future deployment, we have some firepower left.
I hesitate to give you a number, but call it maybe another $100,000,000,000 ish. I'm not telling you we're going to deploy all of that in the 4th quarter. We're continuing to assess deposits and we'll likely continue to deploy more cash, very likely to deploy more cash into securities moving forward, but no answer right yet exactly how much. The size and the pace of that will be influenced by a number of judgments, including things like loan demand and customer deposit behavior. And we'll also balance the mix of purchases as we assess the trade offs between capital, liquidity and earnings.
And the 1 percentage point you're talking about is a yield lift on the portfolio versus cash?
That is if you compare what we're buying, mortgage backed securities, treasuries to what we were earning in cash or repo, the pickup in yield on that investment is a little less than 1%.
Yes. Okay. Yes, I got it. All right. And then maybe if you could speak a little bit to both yourself and Brian to the discussion around the C and I loan utilization.
And I get that we're at a historic low or close to the lows in utilization. But what is it that you're seeing in your customer discussions that gives you an expectation that you could see that start to lift in 4Q and into 'twenty one?
So what we see is it just hasn't been going down. It kind of ran down throughout Q2 and Q1 every panic bar, people draw on the lines and then it ran down. And so some of these companies are making more cash flow than they've ever made. And so what you're starting to see is a couple of things. One is in areas like auto retail dealers and stuff, the inventories are going to have to build.
They're also going to have nothing to sell, so they'll build those back up. You're seeing it in suppliers of parts and things. They're building their inventories because they're seeing more final demand on the products that sustain, and that's, I think, the key. So it's more just talking to people and seeing that, frankly, that they brought it down about as far as they can from sort of the day to day operational basis. When you start to think of $50,000,000 under revenue companies running in the numbers that Paul gave you, which is what we call business banking, they can't get it much loan out because they're paying their payrolls and doing their things.
And so they're going to start to build back up as they start to expand to meet their client demands. And so that's what we give this conference. It's just a conversation we had that we've had with them. And talking to them in these deep reviews we've done, it's been clear that they're feeling better that the core demand from May to June to July to August to September picks up. The only big question when you're when we're wrong on all this in terms of loan balance is really in the high end and who has access to markets and how deep that goes in the middle markets, which we make fees on the investment banking side, but that can move the loan balances around as you well know.
And we can move next to Mike Mayo with Wells Fargo. Your line is open.
Hi, this is a follow-up to you guys pressing your advantage. I mean, I guess the good news, bad news. Good news is you're growing household, your deposits the corporation are up 1.40 year over year, your digital banking is growing. So that's great. And your award is your NII has gotten crushed, right?
So it's a short term versus long term trade off. So as you look at an environment with lower rates for longer, as you acquire these customers, have you changed your assumptions for lifetime value? Because I assume you eventually want to monetize the benefits of these relationships, but it's just not happening yet.
So I think, Mike, you have to think about it 2 ways. One is for the new customers coming on, bringing us $100,000,000,000 in incremental checking deposits year over year, That is money coming on at basically 0 that you can redeploy, as Paul said. So there's a value to that incrementally to the company. The question is when you have the quick fall down in rates that we had, you have to kind of get underneath it and come out the other side, as you well know. But look, the value of the deposit franchise is representative of having the core household relationships, and that's where you see the things move forward.
So what are we seeing? We're seeing a rebound in our auto lending. We're seeing a rebound in our card lending. Those are coming because we have the core relationships that are digitally inactive. 50% of the sales are coming digitally, and that helps us grow.
And then you think about just on the consumer, look at if you look at Page 15 on the investment side, you're seeing that build up by $40,000,000,000 year over year, dollars 20,000,000,000 linked quarter. So that materialized the balance. And the good news is, as you look at the fee structure across the platforms and the different things, you're seeing the fees start to come back up, which is just core activity. So Brad, you only have 200,000,000 dollars in total quarterly deposit interest cost. So it can only go from $225,000,000 to 0.
There's not much left in it. It was 1,000,000,000 dollars I think last year this quarter. So we brought that down, and now we just got to grow the volume back out, and you're seeing that start to happen. And that's what gives Paul comfort in some of the core projections. And it's the debt to relationship.
It's not any single product, as you well know. And we're pressing the advantage because, frankly, even in a low rate environment, more core deposit customers, more core checking accounts and deposit in addition to our wealth management business and GWIM, more GTS business, we'll make more money. You might get a twist of rates in a given quarter. But just think back, we had this discussion in the mid-twenty 13, 'fourteen, 'fifteen and saw the earnings come up even before the rates move.
Are there ways to yes, we know this is a little nichmann to a customer relationship. It's just getting value today for that relationship. You are mentioning the different products. Is there a way to think about charging more fees or something if you have a low rate environment like this? Again, that's getting your money's worth for all the effort you put in to gather these new households.
Yes. Well, I think not penalty fees, clearly, Mike, because that just is a bad customer experience because the other thing is the attrition rate in the book has dropped to very low because the high quality customer experience our team delivers. Then it gives you the permission to do more with them. So penalty fees, I think are not the way to go. But core account fees for the structures are there.
But the reality is that most of the our preferred book, which is 80% of the consumer deposits by definition is way above any minimum requirement for fees. And so you've got the volume. You're getting 80% of consumer deposits in a book with only about 20% of the customers. So you make it up in your expenses and your operating capacity there. And that's what that's how you ultimately make it up even in the low rate environment is just this year.
We have 4,300 branches in this franchise, Mike. In 1999, we had 4,800, just to give you a sense.
Right.
And I think, Mike, you deepen with them. You've deepened with them in loans, you've deepened with them in wealth management and we're making progress in all those areas.
All right. Thank you.
And we can move next to Matthew O'Connor with Deutsche Bank. Your line is
open.
Good morning. I wanted to follow-up on expenses. You talked about $13,700,000,000 in the 4th quarter. And I just wanted to just trying to figure out, is that still an elevated number from COVID? And because if you annualize it and you had the 1Q seasonal bump, you're kind of call it mid-fifty 5,000,000,000 range for next year, which feels high, but I want to you guys a chance to address that.
Yes. I think the $13,700,000,000 roughly $13,700,000,000 for 4Q, that probably includes net COVID expenses of $300,000,000 to 400,000,000
Okay. And as you think about the timing of that $300,000,000,000 to $400,000,000,000 coming off, I guess it can be tricky, but what are you assuming at the point?
$300,000,000 to $400,000,000 right. I mean, dollars 3,000,000 to $400,000,000 per quarter. I mean, in the Q4,
it was higher this quarter.
But in the Q4,
you kind of
baked into that number is $300,000,000 to $400,000,000 of net COBRA expenses. So that'll come off over 2021 And we'll get more of it at the end of the year than we will in the beginning of the year, but it'll, I don't know, ratably come down. I can't I would expect maybe half of that to be in per quarter to be in that on a full year basis.
Okay. And then separately, following up on net interest income, you talked about a move higher in 2021. The outlook for net interest income for next year based on the assumptions that you have.
Sure. Look, without providing any specific guidance, I'll give you a few thoughts for next year. Obviously, the lower reinvestment yields are expected to continue and that's going to impact NII. But that headwind early in the year should be offset by the deployment of the cash into securities. And then by the middle of the year, we're hopeful that loan growth will be a tailwind as the economy recovers.
So we think NII should move forward and up from here.
So if I work at that math and think about, again, to adjust for the day count and some of those nuances, would your expectation be that net interest income dollars in 3Q of next year be higher than this year?
Yes. 3Q to 3Q?
Yes.
I'd have to think about I'd have to look at that. I mean, certainly higher than yes, I would say I would expect that 3Q next year to be higher than 3Q this year, yes.
Right. Okay, makes sense. All right, thank you.
And we can move next to John McDonald with Autonomous Research. Your line is now open.
Hi. Paul, 2 NII questions. Just near term, so it sounds like you might be expecting a little bit of lift net of all the factors you talked about in NII in the Q4 or kind of flattish up a little? Just kind of what's the near term outlook on NII?
Yes. So the near term outlook is, as I said, it's going to be, we think at least flat and we're optimistic it's going to be up. So we think we're at the low point 3% for NII. We've got the ones of reinvestment on securities. We've got the lower average loan balances given where we're ending this quarter on loan balances.
But we think those headwinds are going to be offset by the deployment of the excess cash that we've done and we'll probably continue to do in the Q4. So at least flat and optimistic up.
Okay. And how when you think about redeploying cash, rates are still very low today. What how do you balance the risk of locking in low yields and duration risk against looking to protect NII and thinking loan growth might come back, you expressed some optimism there.
Yes, it's a very good question. We are always balancing liquidity, capital and earnings. I don't want to go into a lot of detail, but we are maintaining the asset sensitivity of the company with these purchases.
Okay. And then one nitpick here. In the other income category, it was a net loss in non interest income minus $250,000,000 So you mentioned tax advantage investments and tax rate, but this other income kind of runs at a little bit of a losses or there's some other issues there?
Yes. No, I think that I would expect that. I think other income is going to bounce around quarter to quarter, but it should on average be down a couple of 100,000,000 dollars given, as you said, the investment in our renewable energy products and other ESG efforts, which create partnership losses.
Okay. Okay. So that's kind of a new run
rate for
that. And remember, in the Q4, those partnership losses are always higher. So think maybe a couple of 100,000,000 higher.
Okay, more than the 250 this quarter?
Yes. But we get the benefit in the tax line throughout the year.
Yes. 10% for the Q4. And do you have an idea of like tax rate for an annual basis going forward with this new arrangement?
I don't have an expectation for next year to share with you, but the Q4, absolute unusual items, 10%.
Okay. Thank you.
And I would just remind everybody that these tax advantaged investments are things we're doing to help society. We're talking about low income housing. We're talking about wind and solar. These are things that are part of our ESG effort.
Yes, we're an amelioristic company, but on the other hand, we're also doing it because it's a good business for us and helps us generate the benefits net of the cost, the losses are positive to the company's earnings.
Got it. Thanks.
And we can move next to Ken Usdin with Jefferies. Your line is open.
Thanks. Good morning, guys. I was wondering if you elaborate a little bit more on just your expectations for just how the loss cycle is going to evolve. Paul, I believe you mentioned that you wouldn't expect losses to really start moving up until mid year next year? And as we start to evaluate whether or not and how much stimulus we get versus what we've already gotten baked in the cake, just how are you expecting to see both the consumer and the commercial side traject us as we move forward?
Thanks.
Yes, sure. So look, regarding the charge offs, I think we've covered it, but in consumer, given the lack of significant delinquencies we've seen so far, even on those customers who will come off deferral, And given the fact that net charge offs don't occur without bankruptcy until 180 is past due, just not likely we're going to see consumer net charge offs will show up until kind of mid-twenty 20 mid-twenty 21.
If you go back and think about it, what we thought was going to happen, Q3 this year pushed out. Going back to the first we looked at. Then the second quarter we looked at, we pushed out further. The 3rd quarter we pushed out further. So it just keeps pushing out based on, on, frankly, the characteristics of our consumers are stronger than the characteristics generally in the United States.
And the characteristics in the United States are their consumers are doing better because of all the things you mentioned than the unemployment statistic would indicate in models. And so it just pushed it out, but it's now into the second half of next year.
Yes. And I guess I'm just trying to wonder sorry, go ahead.
Remember, the near term path of charge offs is going to be driven by delinquency roll and things like that, what's delinquent at the end of this quarter. And as Paul said, the 30 day delinquencies are down year over year in mortgages and cards and things like that. It's down as a percent and down as a dollar amount down as a percent on a smaller balance. So, the credit quality has been strong.
And you made the point about not being quite clear yet on if you should release reserves just given the uncertainties. I guess how much is future stimulus a part of that equation? What do you for to kind of get that comfort zone that you can say? I know you said the builds are done, but just in terms of starting to utilize and feel comfortable that you can let even more of those reserves kind of flow back into capital?
If there were a so a stimulus plan would help the unemployed. The businesses are still struggling to get their business utilization up, those obvious businesses you all know, and then states and towns so they don't have further reduction in budgets and or schools and other things, the hospitals, all these people have been heavily affected. Stimulus affecting those would help all these speed up the pace of the estimates coming down, quite frankly. Right now, there hasn't been right now, there's it's not baked in, as Paul said earlier. But if stimulus coming, it would move us further and you'd see the reserves come out further because the lifetime expectation of loss would be lower.
It's kind of the way it works for us.
All right. Thanks very much.
We will move next to Charles Peabody with Portales. Your line is open.
Yes. Two quick questions. In your guidance on no more reserve build, I'm trying to make sure I understand that because you've also talked about the possibility of loan growth. So at the very least, you'll cover charge offs, but we also provide for loan growth?
We would, but just think about a couple of percentage of loan growth given the level of reserving wouldn't change it dramatically. So if we had fast loan growth, which I don't think economy is going to support in the near term, We'd have to grow faster. But that'd be a high quality problem to have to build reserves for loan growth.
Sure, sure. And then the second question is, can you give us some color on the pipeline for investment banking, what that looks like versus the Q2 or the year ago, Q4? Yes, the pipeline looks solid for Investment Banking. Again, the second quarter was a record quarter for us, and the Q3 was the 2nd best quarter for us. So investment banking is normally down sequentially, 3rd quarter to 4th quarter.
I don't think you can expect to see the same type of volume in the 4th quarter that we saw in the Q2 or perhaps the Q3, but the pipeline looks solid. We're even seeing some M and A pick up, at least from a discussion standpoint.
Tom Montag and I have been very pleased with the work that Matthew Coater has done with that team over the last year and a half or so SNC took over and just driving great coverage, driving great connectivity to our middle market business and the fees there continue to grow. And so they've done a he's done a very good job with the management team in that business and we'd expect him to keep making progress.
Yes, we've gone from just in middle market alone, we've gone from 4th 2nd in a year with 9.5% market share. We talked about market share gains earlier.
And this does conclude the question and answer session. I'd like to turn the program over to Brian Moynihan for any closing remarks.
So number 1, thank you all for joining us and your interest in our company. 2nd, a solid quarter of $5,000,000,000 plus in earnings nearly $5,000,000,000 in earnings, dollars 0.51 a share. Good business progress across the board in terms of client activity and client household growth. And also, we saw the economy continue to progress in terms of our customer spending, and it continued to see that continue into October. So nearly $5,000,000,000 in earnings, solid very strong capital, very strong liquidity, continuing our responsible growth mantra.
Thank you.
Thank you for your participation. This does conclude today's program. You may disconnect at any time.