Alastair Borthwick
Chief Financial Officer at Bank of America
Thank you, Brian. And since Brian hit the highlights of the income statement, I just want to reiterate, we saw good returns in the quarter with return on tangible common equity of 14% and return on assets of 79 basis points. So I'm going to begin my comments on Slide 7 and the balance sheet. And as you can see during the quarter, the balance sheet declined $127 billion to a little more than $3.1 trillion. And that reflected an $88 billion decline in deposits and a decrease in our global markets balance sheet. We utilized the combination of cash and some rotation from securities this quarter to fund our loans growth, given the decline in deposits.
Our average liquidity portfolio declined in the quarter, reflecting a drop in deposits and lower securities valuation. And it remains very elevated at nearly a $1 trillion, for reference that was $576 billion pre-pandemic just to give you an idea of how much liquidity has increased over the period. Shareholders' equity increased $2.5 billion from Q1 with a few different components we should note. Shareholders' equity benefited from net income after preferred dividends of $5.9 billion and the issuance of $2 billion in preferred stock. So that's $7.9 billion flowing into equity. We paid out $2.2 billion in common dividends and net share repurchases.
AOCI declined as a result of the increase in loan rates. And we saw that impact in two ways. First, we had a reduction from a change in the value of our available-for-sale debt securities of $1.8 billion, and that impact CET1. Second, rates also drove a $2 billion decline in AOCI from derivatives that does not impact CET1 and that reflects cash flow hedges mostly put in place last year against some of our variable rate loans and that provided some NII growth and also protected CET1 at the same time. With that equity growth, we saw book value increase in the quarter. With regard to regulatory capital, our supplemental leverage ratio increased 10 basis points to 5.5% versus our minimum requirement of 5% leaving plenty of capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements.
Okay, let's turn to Slide 8 and we'll talk about CET1, where our capital levels remain very strong. We have $172 billion of CET1 and a 10.5% CET1 ratio, which increased from the first quarter and remains well above our second quarter 9.5% minimum requirement. That 10.5% CET1 ratio is also expected to be just above our new 10.4% requirement from CCAR when it's confirmed by regulators at the end of August. And that new level will be effective for us on October 1. I'll walk through the drivers of the CET1 ratio this quarter. First, $5.9 billion of earnings, net of preferred dividends, which generated 36 basis points of capital.
And looking at the chart, you can see how we used that. We grew loans by $38 billion and with a decline in our Global Markets balance sheet and some loan sales and other balance sheet initiatives, we were able to hold RWA flat this quarter. Second, we returned $2.7 billion of capital to shareholders representing 16 basis points. Third, this quarter, the movement in treasury and mortgage-backed securities rates caused a decline in the fair value of our available-for-sale debt securities and that lowered our CET1 ratio by 11 basis points. And we remained well positioned for that rate movement as our hedge of a large portion of this portfolio continued to protect it from AOCI movements. So we ended the quarter above our expected minimum of 10.4% required October 1. And we expect to build some additional buffer on top of that in Q3.
Moving beyond the third quarter, we should just remind you our balance sheet growth last year means our G-SIB surcharge and CET1 requirement will move higher by 50 basis points beginning in 2024. And I just want to make sure we repeat that for clarity, it's 2024, because I know others have different timelines for their requirements. Given our additional higher G-SIB minimum over the next six quarters, we'll work to move above that expected CET1 minimum of 10.9% by January 1, 2024. And we'll look to exceed that with another 50 basis points of internal management buffer on top of that requirement.
Okay, so now let's talk about the biggest use of CET1 this quarter, and I'm referring to loans on Slide 9. As you review the average loan data, we just want to remind you that our discipline around responsible growth has remained tight. Average loans have climbed back over $1 trillion they're up 12% compared to Q2 '21 led by commercial growth of 15% and complimented by consumer growth of 8%. Each line of business and product segment reflected good growth and geographic and industry participation within that growth has also broadened over the past several quarters.
As we turn to linked quarter comparisons, I'll use lending balances. And the $25 billion linked quarter commercial improvement came mostly from new loans and also included some improved utilization from existing clients. From an asset quality standpoint, 98% of the commercial loan growth was either investment-grade or secured. Consumer loans grew $10 billion linked quarter led by both credit card and mortgage, and also increases in auto and securities-based lending. And for the first time in years, home equity balances increased modestly. Card loans grew $5 billion from Q1, reflecting healthy spend levels even as payments rates remain elevated.
Within our growth, our average FICO was 771 as you can see on Slide 23 in the appendix. And as we've done in the past in the appendix on Slide 32, we've provided that daily lending loan chart that shows trends through the quarter and you can see both commercial and consumer loans balances are now back to pre-pandemic periods, with really only credit cards still remaining 15% to 20% below that period.
Moving to deposits on Slide 10, across our past 12 months, we've seen solid growth across the client base as we've deepened relationships and added new accounts. Some of the year-over-year growth was impacted by a higher level of tax payments across consumer and GWIM clients and businesses in Q2 of this year those elevated tax payments drove the decline in deposits from Q1. Year-over-year average deposits are up $123 billion or 7% and retail deposits with our consumer and wealth management clients grew $129 billion, and we believe our retail deposits of $1.4 trillion continue to lead all competitors.
Within the consumer balances, I'd just like to point out the small business deposits of $177 billion grew 14% year-over-year and that reflects continued reopening of small businesses across America and the consumer spending supporting their growth. The average balance of these accounts is more than $40,000.
On wealth management, we saw clients paying higher tax bills this year, and we saw some new deposits to market based funds, much of which remained in our own complex. With our commercial clients, deposits were up modestly year-over-year, even as customer tax payments are higher this year. And some have recently begun to seek higher yields and use cash strategically for acquisitions and other operational activities.
Turning to Slide 9 and net interest income, on a GAAP, non-FTE basis, NII in Q2 was $12.4 billion, and the FTE net interest income number was $12.5 billion. Focusing on FTE, NII increased $2.2 billion from the second quarter of last year or 21%. And that's driven by benefits from higher interest rates, including lower premium amortization and loans growth. NII compared to the first quarter rose $870 million and that came in a good bit higher than the $650 million plus that we signaled on our last earnings call.
The benefits of higher rates, lower premium amortization, loans growth and the additional day of interest more than offset the impact of lower securities balances. Our net interest yield was 1.86% improving 17 basis points from Q1 and benefited from the rising rates, loans growth funded with cash and a 4 basis point improvement from lower premium amortization and securities.
Looking forward, we want to provide the following NII guidance and we just have to provide a few caveats. First, we base the guidance on interest rates in the forward curve materializing, and I'm referring to the curve on July 15. Second, we assume modest growth in loans and deposits. And third, we assume deposit beta is reflecting disciplined pricing to achieve our growth. If those assumptions hold true, we can see NII in Q3 increased by at least $900 million, possibly $1 billion versus Q2. And then we expect it to grow again at a faster pace on a sequential basis in the fourth quarter. And the way we think about those NII increases given the expense discipline that we have is we expect the majority of that to fall to the bottom line for shareholders.
Focusing on asset sensitivity for a moment, as you know, we typically disclosed our asset sensitivity based on a 100 basis point instantaneous parallel shock in rates above the forward curve. And on that forward basis, asset sensitivity at June 30 was $5 billion of expected NII over the next 12 months. More than 90% of that is driven by short rates. That's down from $5.4 billion at March 31, largely because the benefit of higher rates is now already factored into our baseline of actual NII after we grew the $870 million. Now, given that the yield curve is projecting 125 basis points of rate hikes over the next couple of meetings, we thought it was also appropriate to provide the disclosure again regarding asset sensitivity on a spot basis. And on a spot basis, our sensitivity to a 100 basis point instantaneous rate hike would be $5.8 billion or $800 million higher than the forward basis at June 30.
Okay. Let's turn to expense and we'll use Slide 12. Our expenses were $15.3 billion, up a couple of hundred million or 1.5% from the year ago, period and down modestly compared to the first quarter. I want to focus on the more recent comparison versus the first quarter. We had higher expense for regulatory matters related to certain issues. And those offset the seasonal decline from the first quarter, elevated payroll taxes and revenue related incentive costs.
Let me pause for a moment on the $425 million expense we've recognized for regulatory matters in the second quarter. A little more than half of the amount relates to fines to resolve regulatory investigations relating to our administration of prepaid unemployment benefit card programs in certain states and that we announced last week. The balance of the expense relates to an industry-wide issue and it concerns the use of unapproved personal devices and that has not yet been fully resolved.
As we look forward more broadly on expenses, we continue to invest heavily in technology, in people and in marketing across the businesses. And we continue to add new financial centers and renovated old ones in expansion and new growth markets. To help pay for those investments, we continue to look for opportunities to simplify our processes and reduce work, driving our costs lower to self-fund our new investments. Our headcount this quarter includes roughly 2,300 summer interns, and we hope they will consider us to be a great place to work and join us full time next year. This is the most diverse group of talent we've seen yet. Absent the addition of those interns, our headcount was down a little more than 700 associates, and we like many other companies are doing many things to tackle challenging labor market conditions. And we're meeting that challenge pretty well so far.
Turning to asset quality on Slide 13, I want to repeat what we've said now for many, many quarters. The asset quality of our customers remains very healthy and that's true in both consumer and commercial. So net charge-offs of $571 million increased to $179 million from Q1 driven by loan sales and some other credit decisions that we made as opposed to core credit deterioration. Absent those losses, net charge-offs were down modestly compared to the year ago period and up slightly from Q1. Provision expense was $523 million in Q2 driven by the charge-offs, as we had a small reserve release of $48 million. And that release includes builds for loan growth, it includes builds for a dampened macroeconomic outlook in the future and the builds were offset by continued asset quality improvement and the effect of reduced pandemic uncertainty.
On Slide 14, we're highlighting the credit quality metrics for both our consumer and commercial portfolios. And a couple of things are worth repeating again this quarter. Consumer delinquencies remain well below pre-pandemic levels, and you can see the decline in reservable criticized and NPLs saw a modest decrease driven both by the loan sales mentioned earlier, and other improvement across commercial.
Turning to the business segments, let's start with Consumer Banking on Slide 15 and the consumer bank earned $2.9 billion on good organic growth delivering its fifth consecutive quarter of operating leverage. Strong top line growth of 12% driven by net interest income improvement, it was more than offset by increase in provision expense resulting from the prior year's much larger reserve release. And while reported earnings were down, pretax pre-provision earnings for consumer grew 26% year-over-year, which highlights the earnings improvement without the impact of that reserve action.
Card revenue was solid and increased modestly year-over-year as spending benefits were mostly offset by higher rewards costs. Service charges were down nearly $200 million year-over-year as our previously announced insufficient funds and overdraft policy changes were in full effect by June. The third quarter will reflect the full run rate going forward, and we believe these changes are helping to improve overall customer satisfaction and further lower customer attrition.
Expense increased 2% as much of our increased salary and wage moves in the quarter, impact consumer banking most, and as revenue grew, we improved the efficiency ratio to 54%. Reduced costs associated with continued shifts in client behavior to digital engagement is also allowing us to invest in higher marketing, more technology and higher wages for our people. We also continued our investment in financial centers opening another 19 in the quarter, while we renovated 157 more.
Notable customer activity highlights included 240,000 net new checking accounts opened in the second quarter and marking the 14th consecutive quarter of net new consumer checking account growth. This led to a record 35 million consumer checking accounts with 92% of them considered to be their primary account. Additionally, small business accounts are enjoying the features of their business advantage rewards and showed growth of 5% from last year. We also grew investment accounts 6% year-over-year and not surprisingly the market impacted customer balances negatively on the investment side. At the same time, over the past 12 months, we've seen 21 billion of positive client inflows.
Lastly, once again, we opened over a million credit cards in the quarter and we grew average active card accounts and saw combined credit and debit card spend up 10%. And as you saw earlier, we had solid lending activity with continued low loss rates. Our 43 million active digital users signed on this quarter, a record 2.8 billion times with our Erica users up 30% year-over-year and we captured over 123 million total client interactions in the second quarter alone. You can see all the other digital metrics and trends on Slide 26.
Turning to wealth management on Slide 16, you can see, we produced strong results earning $1.2 billion and producing 16% year-over-year growth. Revenue growth was 7% as NII generated through our banking assistance for these clients more than offset modest declines in assets under management fees from market impacts during a challenging quarter. Clients and advisors recognize this value of a holistic financial relationship across investments and banking and doing that at Bank of America differentiates both Merrill and the Private Bank, and it helps to diversify and differentiate our earnings in this business compared to other brokers.
Our talented group of financial advisors coupled with powerful digital capabilities allowed modern Merrill to gain nearly 4,500 net new households. We also gained 650 more in the Private Bank this quarter, and that's a very solid showing by both given the complexities of serving our clients in challenging market conditions over the past 90 days.
We added $25 billion of loans over the last year, growing 13% and marking 49 consecutive quarters of loans growth in the business and that is consistent and sustained performance. Assets under management flows and deposit growth were little more muted this quarter, as clients paid taxes impacting the quarter-to-quarter comparison. Year-over-year, our deposits are up $17 billion and overall investment flows were $78 billion over the past four quarters with total flows of $110 billion. Expenses increased 2% driven by higher employee related costs and resulted in operating leverage of 6%.
Turning to Slide 17 and Global Banking, you'll see the business earned $1.5 billion in the second quarter, down $918 million year-over-year and driven the absence of the large prior period reserve release and lower investment banking revenue. As you know, it was a tough comparative quarter for the business as the industry investment banking fee flow declined 50%. And while we acknowledge that's a big drop, we just want to remind you that before the pandemic, our quarterly average for investment banking fees was in the range of $1.3 billion to $1.5 billion, compared to the $1.1 billion we put up in the second quarter. So we view this level as temporary, and we believe it can rise back to more normal levels in the next few quarters when economic uncertainty becomes more muted.
While the company's overall investment banking fees declined, we held onto our number three ranking in overall fees, and we maintained our market share through the first half of the year compared to 2021. At the same time, we saw very strong loans growth. Lending loans grew $18 billion linked quarter and are up $62 billion or 19% year-over-year. That loans growth and higher rates drove net interest income growth, which was able to offset the drop in investment banking fees, leaving revenues in the business fairly flat year-over-year. Also impacting revenue was half of the firm's $300 million leverage finance valuation marks.
The market turmoil and abrupt slowdown in the second quarter sparked a downturn in the leverage finance markets, causing a number of the deals across various market participants to get marked down. Some of those deals have been funded and we're working through any remaining exposure to get them through the market. The provision expense increase reflects a reserve build of $143 million in Q2 compared to an $834 million release in the year ago period. And finally, we saw expenses increase by 8% driven by higher personnel costs and a share of the noted expenses for regulatory matters.
Switching to Global Markets on Slide 18, and as we usually do, we'll talk about the segment results, excluding DVA. Second quarter net income of $900 million reflects a solid quarter of sales and trading revenue. It was another quarter that favored macro trading while the credit trading businesses faced a more challenging market environment with widening spreads in the face of increased inflation fears and recession beliefs.
Focusing on year-over-year, sales and trading contributed $4 billion to revenue, improving 11%. FICC was up 19%, while equities was up 2%, that FICC improvement was primarily driven by growth in our macro products while credit traded products were down. We've been investing heavily over the past year in several of the macro businesses identified as opportunities for us. And we were rewarded for that this quarter.
Our strength in equities was driven by good performance in derivatives and offset by a weaker trading performance in cash. Lastly, also impacting revenue was the other half of the firm's $300 million in leverage finance markdowns. Year-over-year expense declined reflecting the absence of costs associated with the realignment of a liquidating business activity, partially offset by that share of the regulatory costs. Absent these impacts, expense was relatively unchanged and the business generated an 8% return in Q2, impacted by both the elevated leverage finance marks and regulatory matter expense.
Finally, on Slide 19, we show all other, which reported a loss of $318 million declining from the year ago period, driven by the prior period $2 billion tax benefit from that U.K. tax law change. Revenue is roughly a couple hundred million higher than Q2 '21 due to the absence of some prior period structured note losses. Expense increased as the result of the regulatory matters and the realignment of liquidating activity last year to all other. And as a reminder for the financial statement presentation in this release, the business segments all are taxed on the standard fully taxable equivalent basis. And in all other, we incorporate the impact of our ESG tax credits and any other unusual items. For the quarter, our effective tax rate was 9% that benefited from two things. First, ESG investment tax credits and second, roughly $300 million of discrete tax benefits that applied to this quarter, excluding those tax credits and discrete items, our tax rate would've been 26%.
And with that, we'll jump into Q&A, please. Thank you.
