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. You may register to ask a question anytime by pressing a star then one on your touch-tone phone. Please be advised today's program may be recorded. It is now my pleasure to turn the program over to your host, Lee McEntire.
Good morning. Welcome, and thank you for joining the call to review the third quarter results. I trust everybody's 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 gonna first turn the call over to the CEO, Brian Moynihan, for some opening comments, and then ask Paul Donofrio, 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 in our earnings materials in 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, thank all of you for joining, I hope all of you are staying safe. We're gonna begin on slide two. Today, before Paul takes you through the detail on the financials, I thought I'd give you some thoughts on the first three quarters of 2020 and how we're driving for you here at Bank of America. As an opening comment, the economy and the markets this year have been defined more by, than anything else, by the impact of the global healthcare crisis. This has created a strenuous 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 healthcare 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 three key themes that I'd like to comment on. One is the economy generally, what we see in our data, and the impact of the projected path on the economy's earnings and on 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.
The third is how we are making progress, given all that backdrop, on our corporate strategies. Before I touch on these items, just a brief summary of the quarter. Overall, a solid performance given the operating backdrop we face. We earned around $5 billion after tax of $0.51 per share. We ended the quarter with capital, a capital ratio of 11.9% versus 9.5% minimum. For the third 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 has required extra cost to do the right thing to protect our teammates, our clients, and our franchise, all while processing higher transaction levels and dealing with the volatility and the high volumes that come from it. It requires arduous work on delivery on a day-to-day basis. This results in expense that remains elevated this quarter. That's expenses from COVID. However, our disciplined expense management remains well intact. We have turned the corner on these COVID costs. As we see forward in the fourth quarter, we see the cost coming back down the company. That is evidenced by the drop this quarter of 3,000 in our head count on a quarter-to-quarter basis. Paul will talk more about the path going forward in a minute.
Let's start with the economy and its impact on our company. We saw another partial restoration of the U.S. economy. We saw that in our outside data, we saw it in the large base of spending on our customers. As you think through the quarters, in the first quarter, our customer spending was impacted as we hit March, after a strong start to the year. However, for the quarter, our customers still spent more than they did in the first quarter of 2019. The second quarter saw the worst of the crisis in terms of spending. It was a 30% drop in GDP, the spending fell deeply in April. That started to recover as stimulus, PPP, and other monetary policy kicked in, in the May and June. And also, the REO openings began.
In the third quarter, 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 $2.3 trillion in spending at Bank of America, customers have spent more than they did last year. You can see that in 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 predict a sharp rebound in third quarter GDP of around 30%. Simply put, we're back to 90%+ where we were in terms of GDP size. 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. In Global Banking, deposits are flattish as customers continue to make choices about the liquidity. We are seeing loan demand stabilize, we may have seen a trough in September. In 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 stabilizing. Credit spending continues to grow. 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.
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 third 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 three 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 first quarter volatility, the concern was obviously market risk. We've handled this market risk well. 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 billion. Credit risk is the current focus in this quarter, and you can see the highlights of that on slide three. 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 released reserves, for example. We believe we are staying ahead of the commercial risk by aggressively re-reviewing 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 rate, 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 from those views and re-ratings, but it's more focused on the certain industries, and Paul will touch on that. In the first couple weeks, we've seen the criticized assets come back down on some of those clients who refinanced. Meanwhile, overall non-performing loans remain around $4.5 billion, with commercial basically flat to the last quarter and consumer growing around $200 million. Overall, the balance of non-performing loans remains at a modest 48 basis points to loans. This is a testimony to the decade of responsible growth this company's engaged in.
Importantly, deferrals. 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 billion in total consumer balances that remain on deferral, $7.5 billion are mortgage loans. Those are well secured and low loan to value, and among other, many other, positive attributes, including 25%-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 card 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.
We expect that the reserve builds are behind us, which means the P&L impact of those losses should be in our financials already. The question becomes, after managing the risk is, have we been investing in the company at the same time? That you can see as you move to slide four. Through our continuing 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 billion + in checking balances. We saw strong growth in Merrill Edge, in our consumer customer investment platform by $40 billion in assets year-over-year. We've seen depth and penetration and digital engagement across the whole consumer business. In our wealth management business, even as we, our advisors work from home, our private bankers and financial advisors grew households again this quarter. In fact, we reached a record new client balances of $3 trillion. We also continue our investments in our market expansion during the market expansion in the crisis. We added 13 new financial centers in the quarter and continued to offset that number with closures that were pre-planned before the pandemic.
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. 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 weeks. You can see these digital engagement highlights on slide four. This quarter, we had 2.3 billion in total digital logins in our consumer business. Erica is up to 16 million users. Zelle is at 12 million 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 they, how these, our clients have interacted with us to do things like just deposit checks. That was up dramatically over the quarter as our advisory clients embraced our new digital capabilities. The middle, 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. Here we in the CashPro area, we've rolled out a bunch of new features and user interfaces and capabilities last week to allow companies and company treasurers to better manage their money around the world in all kinds of currencies and all kinds of environments.
In summary, $5 billion 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 am starting on slide five and six 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 Q2 2020, 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 of $4.9 billion or $0.51 per share, compares to $3.5 billion 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 costs of the COVID environment. Lower rates and loan balances caused NII 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 $700 million 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 $1.8 billion, investment banking fees were the second-best quarter in the company's history. Brian noted progress in activities levels across many of our businesses, 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 more heavily, 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 three things. First, we built litigation reserves for litigation with respect to some older matters. Second, we had an increase in COVID-related costs. Third, this is the first 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.
With respect to the linked quarter change in pre-tax, pre-provision income, I would also point out that the $1.3 billion of the decline was driven by two more abnormal items, the prior period loan sale gain of $700 million, and this quarter's elevated litigation expense of about $600 million. In addition, given a reversal in U.K. tax policy, our results included a $700 million positive adjustment to our tax expense as we revalued our U.K. deferred tax asset that had been previously written down. Our ROTCE was 10%, and ROA was 71 basis points. Moving to the balance sheet in slide seven, we ended the quarter little change from Q2 at $2.7 trillion 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 billion 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 $3.2 billion 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 billion 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 CET1 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 billion capital cushion above that requirement. Our TLAC ratios also increased and remain 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 eight and nine show a five-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 billion 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 a decline in higher yielding card loans was more than offset by the addition of PPP loans and residential mortgages. In terms of the path 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 significantly 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 of resurgence in COVID cases further impacting the economy. On slide nine, 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. 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 $10.1 billion. $10.24 billion on an FTE basis. Net interest income declined $719 million from Q2 2020 and $2.1 billion from Q3 2019. 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 from Q2. Compared to Q2, the increase in prepayments was 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-term rates did reduce the cost of both deposits and long-term debt, this funding cost 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 two, you could see C&I loan demand start picking up. As Brian noted, we are also seeing spending on credit cards slowly picking up. 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 fatigue and stabilization of long end rates should result in less bond premium write-offs than currently impacting NII. 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 $14.4 billion, which are $1 billion higher than Q2. First, about $600 million 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 help 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 $13.7 billion. Turning to asset quality on slide 12. Our total net charge-offs this quarter were $972 million 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 million decline in net charge-offs was driven by lower credit card losses. The loss rate on credit card declined to 249 basis points of average loans.
Provision expense of $1.4 billion, driven by a $417 million net reserve build this quarter. While total reserves grew modestly from Q2, total loan balances declined $44 billion, 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 great interest 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 2020, 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 break 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 million, 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 billion remaining, which are mostly consumer real estate related and have strong collateral values. Credit card deferrals have declined from more than $7 billion at the end of Q2 to around $400 million 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&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 billion 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 $2.2 billion flat compared to Q2, and remained low at only 42 basis points of loans. With respect to commercial real estate, excuse me, 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 billion, which represents 7% of total loans for Bank of America and less than 25% 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. 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 million in this book on NPL status, and year to date, we have seen less than $200 million in net charge-offs, and we hold nearly 3.7% of allowance against these loans. I'll just take 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 billion 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%-55% that can weather a meaningful price decline. While 60% of these loans are classified as reservable criticized, only $120 million 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 and 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 $2.1 billion in Consumer Banking in Q3 versus roughly $100 million 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 to wealth management on slide 17 and 18, 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 million was down 32% from Q3 2019, 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 1,400 net new relationships in the Private Bank. Client balances rose to a record $3.1 trillion, 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 COVID-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 million in Q3, which included adding $555 million to credit reserves. Net income declined $1.2 billion from Q3 2019, 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, tax advantages leasing revenue was lower while IB fees rose. As I mentioned, investment banking fees for the company, you know, were $1.8 billion, 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. It's worth noting that we have 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, 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 an 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 DVA. This quarter, net DVA was a loss of $116 million. Global Markets produced $945 million 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, you know, higher brokers clearing and execution costs associated with higher activity in Asia. Sales and trading contributed $3.3 billion 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. On slide 24, we show all other which reported a profit of $296 million. Compared to Q3 2019, the improvement in net income is driven primarily by the prior year $2.1 billion pre-tax impairment charge associated with our merchant servicing JV. Compared to Q2 2020, the earnings reflects the $700 million tax adjustment associated with our U.K. deferred tax asset. The tax expense improvement versus linked quarter was mostly offset by 2Q's $700 million 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 pre-tax income. Just a reminder, these tax advantage investments, which are driven by our commitment to ESG, also result in pre-tax partnership losses booked in consolidated other income. These partnership losses are normally seasonally high in Q4. Okay. With that, let's jump to Q&A.
At this time, if you'd like to ask a question, please press the star then one on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Again, it is star then one to ask a question. We can take our first question from Glenn Schorr with Evercore. Your line is open.
Hi. Thanks very much. You've historically been incredibly stable in trading, and again, you are this quarter. 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. 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, you know, with total revenue up 4% year-over-year. Equities is up 6%, FICC's up 2%. We had no days with trading losses again this quarter. If you kind of look at, you know, I don't really like to talk about competitors, but, you know, every competitor is gonna have a different business mix. And many of our competitors, I will say, you know, 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, you know, we look at results over longer time periods. As noted, you know, sales and trading is up 22% year-to-date.
I would also note that we're gaining share, we think, in equities and other parts of our markets business, and we certainly have gained share in investment banking. You know, there's been quarters where we've done better, I mean, than some of our peers. Go back to Q1 when you'll see in equities where we, you know, basically did better than all our peers. We're staying focused on meeting the 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, deferral's mostly over, and you have a $35 billion capital cushion. I'm curious what you feel is a more natural number. At some point, we'll get off buyback suspension. What's a more natural number for your capital cushion? What might be your intentions on what to do with that excess? It feels like organic growth. You're going to make more money than you can plow into organic growth for a while.
Well, that's a good list to work with in terms of citing the things. 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. You know, trough quarter for NII last quarter, expenses coming down, built the reserves. You know, we'd expect that we'll get through the stress test, then we'll start to go into capital redeployment as we did before. Our general goal is to run about 100 basis points over the minimum.
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 our we had a stress capital buffer that was, you know, that was 2.5 and we didn't use all of it. We've got plenty of cushion here from an operational basis in terms of the ability to use capital management once we're free and clear.
Thanks, Brian.
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, you know, is there an opportunity here to kind of press your advantage a little bit and try to accelerate market share and sort of what that might mean for expenses if you did?
Well, I think we've been able to push market share. If you look at the FDIC data, I think we were up 60 or 70 basis points in aggregate deposit market share June 30 to June 30, and everybody had the benefit to the monetary policy. You know, what we watch is where the market share is gonna stick to the ribs. 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 million per branch moving to $100 million per branch. And, you know, and think about the wealth management business adding financial advisors. We just keep driving that total.
If you think about, you know, we have $1.7 trillion in deposits, $800 billion+ in Consumer Banking. A lot of other people forget that we also have, you know, a personal business in GWIM with $200 billion, $250 billion+ in deposits. We have pressed our advantage. In Consumer Banking, those who've been around the company, you know, we repositioned the Consumer Banking business from 60% primary checking to 90%+. You know, that's 1 million new checking accounts year-over-year. There were 800,000, 900,000, something like that, in a year where, you know, we've been shut down for a couple quarters, you know, from some of the activity at the branches. You know, that's strong performance. We're pressing that all the time.
The magic has been we've been able to manage expenses between $13 billion, $13.5 billion a quarter. You got to add the merchant to it to the $13.7 billion Paul did, and still invest at that rate. Look at that page four on the digital growth. It's just, it's very strong. Our Zelle is, I think we're 30% all the Zelle transactions. Erica, you know, moves. And then, Life Plan this quarter, we put out a new product that you can do your own financial plan, and half a million customers in a couple weeks. It's across the board in each element of the franchise, investing $3 billion in technology. 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. As Paul said, you know, our investment banking's grown, and we're keeping driving it.
That, that's helpful. You feel comfortable that, you can still, I mean, you know, add the $200 million to the $13 billion to $13.5 billion , so $13.2 billion, $13.7 billion. You still feel comfortable doing all that and keeping expenses in that range?
Yeah. That's just the operational excellence platform. If you look at whatever page that was, look at all those quarters, you know, you go back even before that, you know. Think of all the investment we've making. I think that's years that we show you maybe. Think of $10 billion, you know, $9 billion-$10 billion in technology development, code development, new initiatives in that period of time, expenses stayed relatively flat. Think about redeploying, you know, probably 300-500 new branches across that 3-4 years in markets we've never been. Think about refurbishing. We've done 300-400 branches this year so far. We've opened in the new markets, you know, et cetera.
Just this quarter, just this little quarter, we opened 13 branches in new markets. You know, we're pressing our advantage. You know, the board asked me and I, you know, we'd have the discussions with our major shareholders, you know, could you press it harder? The answer is, you know, if I talk to 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, and drive it in a way that stick to the ribs.
Okay, great. Thanks.
And we can move next to Betsy Graseck with Morgan Stanley. Your line is open.
Hey, good morning.
Hey, Bet.
Thanks for the time. I wanted to dig in a little bit on the point you were making, Paul, earlier about the cash and the redeployment, into, you know, securities. I just wanted to get a sense as to 4 Q, how much of a NIM uplift do you think you're gonna get from that? You know, what percentage of cash have you used already? What is gonna be, you know, guiding you on how much more to use here? Is there a limit for how much cash you're willing to redeploy into securities?
Yeah, sure. So, in the third quarter, we deployed about $100 billion of our cash into mortgage-backed securities and treasuries, you know, over the third quarter. You know, 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, you know, impact in Q4. With respect to future deployment, we have some firepower left. You know, I hesitate to give you a number, but call it maybe another $100 billion-ish. I'm not telling you we're gonna deploy all of that, you know, in the fourth quarter.
We're continuing to assess deposits, and we'll likely continue to deploy more cash, very likely continue to deploy more cash, into securities moving forward, but no answer right yet exactly how much. The size and the, you know, the pace of that will be influenced by a number of judgments, including things like, you know, loan demand and customer deposit behavior. We'll also balance the mix of purchases as we assess the trade-offs between capital liquidity and earnings.
The 1 percentage point you're talking about is a yield lift on the portfolio versus cash?
No. That is if you compare what we're buying, mortgage-backed securities, treasuries, to what we were earning in cash or repo.
Yeah.
The pickup in yield on that investment is a little less than 1%.
Yeah. Okay. Yeah, I got it. All right. Then maybe, if you could speak a little bit to, you know, both yourself and Brian, to the discussion around the C&I loan utilization. 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 2021?
What we see is it just hasn't been going down. It kind of ran down throughout, you know, second quarter into first quarter, everybody panicked borrow, people drawing the lines, and then it ran down. You know, some of these companies are making more cash flow than they've ever made even. What you're starting to see is a couple things. One is in areas like, you know, auto retail dealers and stuff, they, the inventories are gonna have to build. They're also gonna have nothing to sell, so they'll build those back up. You're seeing it in suppliers of parts and things. You know, they're building their inventories because they're seeing more final demand on the products that sustain, and that, I think, is the key.
It's more just talking to people and seeing that, you know, 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 million under revenue companies running in the numbers that Paul gave you, which is what we call business banking, you know, they can't get it much lower now because they're paying their payrolls and doing their things. They're gonna start to build back up as they start to expand to meet their client demands. You know, that's what we did. It was just a conversation we had, that we've had with them.
Talking to them in these deep reviews we've done, you know, it's been, you know, it's been clear that they're feeling better that the core demand, you know, from May to June to July to August to September picks up. You know, the only big question 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.
Yep, I got it. Okay, that's helpful. Thanks very much.
And we can move next to Mike Mayo with Wells Fargo. Your line is open.
Hey, Mike.
Hi, this is a follow-up to, you know, you guys pressing your advantage. I mean, I guess it's good news, bad news. Good news is you're growing households, your deposits, the corporation up 1/4 year-over-year, your digital banking's growing. That's great. Your award is your NII has gotten crushed, right? It's the short term versus long term trade-off. 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, you know, monetize the benefit of these relationships, but it's just not happening yet.
I think, Mike, you have to think about it two ways. One is for the new customers coming on, bringing us $100 billion in incremental checking deposits year-over-year, that is money coming on at basically zero that you can redeploy, as Paul said. 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 know, you have to kind of get underneath it and come out the other side, as you well know. But, you know, 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. 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. You know, 50% of the sales are coming digitally. That helps us grow. You think about just on the consumer, if you look at page 15 on the investment side, you're seeing that build up by, you know, $40 billion year-over-year, $20 billion quarter-linked quarter. That materialized a balance. The good news is, you can 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 know, you only have $200 million, $225 million in total quarterly deposit interest costs. It can only go from $225 to zero. There's not much left in it.
It was $1.6 billion, I think, last year this quarter. 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 forward projections. It's the depth of relationship. It's not any single product, as you well know. We're pressing the advantage because frankly, even in a low rate environment, more core deposit customers, more core checking accounts than deposit in addition to our wealth management business in GWIM, more GTS business, we'll make more money on. You might get a twist of rates in a given quarter, you know. Just think back, we had this discussion in the mid-2000, you know, 2013, 2014, 2015. You saw the earnings come up even before the rates moved.
Are there ways to, you know, we know, you know, this is the linchpin to a customer relationship. It's just, you know, 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 to getting your money's worth for all the effort you put in to gather these new households?
Well, I think, you know, 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. Penalty fees, I think are, you know, not the way to go. You know, core account fees for the structures are there. The reality is that most of the, you know, our preferred book, which is 80% of the consumer deposits by definition, is way above any minimum requirement for fees. You've got the volume. You're getting the, you know, 80% of consumer deposits, you know, in a book with only about 20% of the customers.
You make it up in your expenses and your operating capacity there. That's how you ultimately make it up even in a low rate environment is just the sheer. We have 4,300 branches in this franchise, Mike. In 1999, we had 4,800, just to give you a sense.
Right.
I think, Mike, you deepen with them. You deepen with them, you know, in loans. You deepen with them in wealth management. You know, 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 $13.7 billion in the fourth quarter. You know, just trying to figure out, like, is that still an elevated number from COVID and because if you annualize it, and you add the 1Q seasonal bump, you know, you're kind of, call it, mid-$55 billion range for next year, which feels high, but I wanted to give you guys a chance to address that.
Yeah, I think the $13.7 billion, the roughly $13.7 billion for Q4, that probably includes net COVID expenses of $300 million-$400 million.
Okay. As you think about the timing of that $300 billion-$400 billion coming off, I guess it can be tricky, but what are you assuming at this point?
$300 million-$400 million, right? I mean, $300 million-$400 million per quarter. I mean, in the fourth quarter, it was higher this quarter. In the fourth quarter, kind of baked into that number is $300 million-$400 million of net COVID expenses. You know, that'll come off over 2021. You know, we'll get more of it at the end of the year than we will in the beginning of the year. It'll, you know, I don't know, ratably come down. I would expect maybe half of that to be in, you know, per quarter to be in that on a full year basis.
Okay. Separately following up on net interest income. You talked about it moving higher in 2021. I assume that's on a linked quarter basis. There's some, you know, day count challenges in the first quarter. Maybe just elaborate a bit on 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. You know, that headwind early in the year should be offset by the deployment of the cash into securities. By the middle of the year, we're hopeful that loan growth will be a tailwind as the economy recovers. We think NII should move, you know, forward and up from here.
If I work through that math and think about, you know, again, to adjust for the day count and some of those as you want the, would your expectation be that net interest income dollars in 3Q of next year be higher than this year?
Yeah, I mean, 3Q to 3Q?
Yeah.
I'd have to look at that. I mean, certainly higher than. Yes. Yeah, I would say I would expect that 3Q next year would 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, two NII questions. Just near term, it sounds like you might be expecting a little bit of lift net of all the factors you talked about in NII in the fourth quarter or kind of flattish up a little. Just kind of what's the near-term outlook on NII?
Yeah. The near-term outlook is, as I said, it's gonna be we think at least flat, and we're optimistic it's gonna be up.
Okay.
You know, we think we're at the low point 3% for NII. We've got the other ones of reinvestment on securities, and we've got the lower average loan balances given where we're ending this quarter on loan balances. You know, we think those headwinds are gonna be offset by the deployment of the excess cash that we've done and we'll probably continue to do in the fourth quarter. At least flat and optimistic up.
Okay. How when you think about redeploying cash, rates are still very low today. You know, what how do you balance the risk of locking in low yields and duration risk, you know, against looking to protect NII, you know, and thinking loan growth might come back? You know, expressed some optimism there.
Yeah, it's a very good question. We are always balancing liquidity, capital, and earnings. I don't wanna go into a lot of detail, but we are maintaining the asset sensitivity of the company with these purchases.
Okay. And then, one, you know, nitpick here. In the other income category, you know, it was a net loss in non-interest income, - $250 million. You mentioned, you know, tax advantage investments and other things. Is that kind of what we should expect going forward? You're getting the benefit in the tax rate, but this other income kind of runs at a little bit of a loss, or there's some other issues there?
Yeah. Yeah, no, I think that I would expect that. I think other income's gonna bounce around quarter to quarter, but it should on average be down $200 million, given, as you said, the investment in our renewable energy products and other ESG efforts, you know, which create partnership losses.
Okay. Okay, that's kind of a new runway for that.
Remember, in the fourth quarter, those partnership losses are always higher. So, think maybe a couple of 100 million higher.
Okay, more than $250 million this quarter.
Yeah. We get the benefit in the tax line throughout the year.
Yeah, 10% for the fourth quarter. 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, you know, the fourth quarter, absent unusual items, 10%.
Okay. Thank you.
I would just remind everybody that these tax advantage investments are things we're doing to help, you know, society. We're talking about, you know, low income housing. We're talking about wind and solar. These are things that are part of our ESG effort.
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, you know, the benefits net of the cost, the losses, or positive the company's earnings.
Got it. Thanks.
And we can move next to Kenneth Usdin with Jefferies. Your line is open.
Thanks. Good morning, guys. I was wondering if you could elaborate a little bit more on just your expectations for just how the loss cycle is gonna evolve. Paul, I believe you mentioned that you wouldn't expect losses to really start moving up until mid-year next year. You know, 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.
Yeah, sure. Regarding the charge-offs, I think we've covered it. You know, 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, you know, without bankruptcy until 180 days past due, it's just not likely we're gonna see consumer net charge-offs will show up until kind of mid- 2020, mid- 2021.
Yeah. If you go back and think about it, what we thought was gonna happen, you know, third quarter this year pushed out. You know, going back to the first quarter we looked at. The second quarter we looked at, we pushed it out further. The third quarter, we pushed it out further. It keeps pushing out based on the, you know, frankly, the characteristics of our consumers are stronger than the characteristics generally in the United States. And, you know, characteristics of the United States are their consumers are doing better because of all the things you mentioned than the unemployment statistic would indicate in models. It's just pushed it out, but it's now into the second half of next year.
Yeah, I guess I'm just trying to.
The short-term-
Sorry, go ahead.
Remember, the near-term path of charge-offs is gonna be driven by, you know, delinquency roll and, you know, things like that. If, you know, what's delinquent at the end of this quarter. As Paul said that, you know, 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 and down as a percent on a smaller, you know, balance. So, it's the credit quality's been strong.
Yep. You know, you made the point about not being quite clear yet on if you should release reserves, just given the uncertainties. I guess, you know, how much is future stimulus a part of that equation? What do you look 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.
You know, if there were a stimulus plan would help the unemployed. The businesses are still struggling to get their business utilization up. You know, those obvious businesses you all know. States and towns so they don't have further reduction in budgets or, and/or, you know, 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, you know, there hasn't been, you know, right now there's it's not baked in, as Paul said earlier. If stimulus coming in would move, you know, 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 less.
All right. Thanks very much.
And we will move next to Charles Peabody with Portales. Your line is open.
Yeah, 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. At the very least, you'll cover charge-offs, but will you also provide for loan growth?
We would. It, you know, just think about, you know, a couple percentage of loan growth given the level of reserving wouldn't change it dramatically. If we had fast loan growth, which I don't think the economy is gonna support in the near term, you know, we'd have to grow faster. That'd be a high quality problem to have to build reserves for loan growth.
Sure, sure. The second question is, can you give some color on the pipeline for investment banking, what that looks like versus the second quarter or the year ago, fourth quarter?
The pipeline looks solid for investment banking. Again, you know, the second quarter was a record quarter for us, and the third quarter was the second-best quarter for us. So, you know, investment banking's normally down sequentially, you know, third quarter to fourth quarter. I don't think you can expect to see the same type of volume in the fourth quarter that we saw in the second quarter or perhaps the third quarter. The pipeline looks solid. We're even seeing some M&A pickup in, or at least from a discussion standpoint.
Yep. Tom Montag and I, you know, have been very pleased with the work that Matthew Koder's done with that team over the last year and a half or so since he took over and just, you know, driving great coverage, driving great connectivity to our middle market business and the fees there continue to grow. He's done a very good job with the management team in that business, and we'd expect him to keep making progress.
Yeah. We've gone from just in middle market alone, we've gone from fourth to second in a year with 9.5% market share. We talked about market share gains earlier.
Great. Thank you.
And this does conclude the question- and- answer session. I'd like to turn the program over to Brian Moynihan for any closing remarks.
Number one, thank you all for joining us and your interest in our company. Second, a solid quarter of $5 billion+ in earnings. Nearly $5 billion in earnings, $0.51 a share. A 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 billion 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.