Good day, everyone, and welcome to today's program. At this time, all participants are in a listen only mode. Later, you'll have the opportunity to ask questions during the question and answer session. Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr.
Lee McIntyre. Please go ahead.
Good morning. Thanks to everyone on the phone as well as the webcast for joining us this morning for the Q3 2016 results. Hopefully, everybody has had a chance to review the earnings release documents that are available on the website. Before I turn the call over to Brian and Paul, let me remind you we may make some forward looking statements. For further information on these, please refer to either our earnings release documents, our website or our SEC filings.
One thing before Brian and Paul get into the results, I just want to remind you we filed an 8 ks on October 4th giving notification the company changed our method of accounting for the amortization of premium and accretion of discounts related to certain debt securities known by the investment community as FAS 91. Our change to the contractual method which is used by the majority of our peers will provide better comparability of our results. As a result of that change, we restated our historical results and provided the historically restated information in the 8 ks and our earnings materials today naturally reflect those restatements. With that, let me turn it over to Brian Moynihan, our Chairman and CEO for some opening comments before Paul D'Onofrio, our CFO, goes through the details. Brian?
Thank you, Lee. Good morning, everyone, and thank you for joining us today to review our Q3 results. Our results this quarter continue our progress on our long term strategy. We continue to drive responsible growth and deliver more of the company's capabilities to our clients and customers. This progress is becoming clearer with each successive quarter, and you can see the highlights of that on Slide 2.
We reported earnings of $5,000,000,000 or $0.41 per diluted share, an EPS improvement of 8% from the year ago quarter. We improved operating leverage across the businesses, utilizing technology to lower costs and improve our processes. Our pretax earnings improved 17% compared to Q3 2015. This pretax earnings comparison is important as it eliminates the unusual movements in the tax line like this quarter's tax charge for the U. K.
Corporate tax rate change. Like last quarter, I thought I'd address a few topics we're hearing from all of you. To do that, let's look at Slides 34 of the earnings material. A first question is, are we making progress driving our responsible growth strategy? Yes, we continue to show progress throughout all the businesses.
Our revenue growth has more clarity as we move past the periods of significant impacts from implementing regulations, running off non core portfolios and divesting non core businesses. Revenue grew 3% over the Q3 of last year. Behind that improvement is our continued investment in this great franchise, in our sales teams, in our technology across the board. These sales teams and the build up we've been doing there helps us to increase our capacity to serve our customers and clients. An example of that is in our consumer business.
They are focused on being the core bank to all our households. This has resulted in fewer checking accounts than we had years ago, but the average balance of the checking accounts we have has doubled, and they are now roughly at $6,500 per account. You can also see this in the growth of our Merrill Edge brokerage balances, which now total over $138,000,000,000 adding investment relationships to the mass market customer base. In general, consumers are deepening their relationships with us as they use our straightforward investing tools to get them started on a path to investing. For our affluent and wealthy customers, our customer progress also continues.
Our global wealth and investment management teams, U. S. Trust and Merrill Lynch, not only managed $2,000,000,000,000 plus in investment balances, but also managed nearly $150,000,000,000 in loans and more than $250,000,000,000 in deposits. And we continue to see net flows of core assets in that business. On the commercial side, clients continue to respond to our universal banking model for a simplified stop for financing, investing and advisory services.
We will continue to operate within our established risk framework and define customer groups, and we aren't reaching for growth. This will drive more sustainable results over a longer period of time for our shareholders. And then with our global peers restructuring, including in the markets business, I think this quarter is another great example of our global business global markets business' importance to our investing and issuing clients. We saw better client activity driving the best third quarter results we've had in 5 years in Investment Banking and in Sales and Trading. And we're doing that with a smaller balance sheet, fewer people and lower value at risk or VAR.
So growth and deepening, all consistent with our responsible growth strategy, continues across all the customer bases. Paul will talk to you more about the statistics and the successes. Another question that we get asked is can credit remain this strong? Well, many of you asked that last quarter and the quarter before that and the quarter before that. In this quarter, it still got better again with our charge off ratio declined to 40 basis points this quarter at an historic low.
This is driven by changes we made right after the crisis, think in 2008 and 2009, and long term benefits of that effort continue to come through. And by the way, sticking to our will go strategy even as times have been relatively better. U. S. Consumer health is generally good.
Over the past few quarters, exposures in our oil and gas were causing industry concerns for commercial losses have improved and charge offs have receded. Other commercial credit remains very strong, and Paul will touch on these topics later. Another question we get asked is what can we do to drive earnings even if we stay in this low rate, low growth environment? We aren't waiting for interest rates to rise here at Bank of America. We're driving our earnings growth now.
We work on the things that we can control, expenses, loan and deposit growth and fee growth. Long term rates are down compared to last year, yet earnings have grown. Despite that, net interest income is up 3% from Q3 'fifteen, while net interest yield has been stable because we grew core loans and deposits. Paul will take you through loan growth details later, but I want to pause a moment and talk about our deposit growth. Deposits are a core part of what drives our franchise earnings.
We have $1,200,000,000,000 in deposits. That's proof that customers entrust us to safeguard their money. We are heavily weighted to mix those deposits towards consumers, whether they're general consumers or wealthy consumers. This, in turn, provides a very stable base of funding for the company and allows us to be less reliant on the markets we're funding. Nearly $450,000,000,000 or 36% of our deposits are noninterest bearing, a very strong mix.
Deposits on average grew $68,000,000,000 year over year or 6%. The teams have done tremendous work here, and this quarter wasn't an anomaly. This is the 4th consecutive quarter where we have grown deposits more than $50,000,000,000 over the previous year. On our commercial teams, we remain focused on growing deposits also. They're growing deposits that are LCR friendly and doing great work with our industry leading cash management capabilities.
As a result, year over year, global banking grew deposits 3% to 300,000,000,000 dollars Our consumer and wealth management teams combined have $860,000,000,000 in deposits. They grew this large base by 8% in the past 12 months. For the first time, consumer topped $600,000,000,000 in deposits. These deposits are growing because our capabilities in the business are the best in the industry, customers and clients see that. Whether it's our 21,000,000 plus mobile banking customers, our 34,000,000 plus online customers or the more than 5,000,000 customers that come into our financial centers every week.
These customers show that they appreciate the capabilities and integration of our networks. So when we look at what else can we can do to control and drive earnings in a low growth environment, we get asked a lot about expenses and can those expenses keep being driven down and go lower? Well, the answer is yes. Last quarter, we gave you a 2018 expense target, and we continue to make progress towards that. Our expenses declined 3% from the Q3 of 2015 to 2016.
Our efficiency ratio improved to 62% this quarter. That is a 400 basis point improvement from last year's Q3. We continue to deliver on expense reductions while continuing to invest in technology and sales teams and other matters that are
important for the future of this franchise.
After you take into account the additional large bank FDIC assessment at the start of this quarter, expenses also down on a linked quarter basis even as we continue to invest and absorb all the severance, regulatory, resolution planning and other repositioning costs to continue to reduce our operating costs. We have been innovating in technology, and we'll continue to do so to improve processes and eliminate the need for paper and humans handling that paper. Our simplify and improve initiatives continue to help drive those costs down. And that leads to the question we also get asked, can we deliver and sustain returns above our cost of capital? As Lee talked about earlier, we restate our results to change under FAS 91 and reduce the variability and make us more comparable to peers.
As you can see, that makes it a little easier to see the longer term return on tangible common equity trends. This quarter, we reported 10.3%, is now stabilized above the cost of capital, even given our larger and larger capital base. We still have work to do here to drive it to our ultimate goals, but this quarter is another strong step in that direction. And importantly, on Slide 4, you can see that each business has improved its leverage. They grew their earnings, had strong efficiency and returned far above the cost of capital.
And all that continues to bode well as we look ahead. So as we look forward, we are driving responsible growth and maintaining discipline on costs, and this has allowed us to deliver more capital back to you, and we'll keep on doing that. Now let me turn it over to Paul to cover the numbers. Paul?
Thanks, Brian. Good morning, everybody. Since Brian covered the income statement highlights, I will start with the balance sheet on Page 5. Strong deposit growth drove a small increase in the size of our balance sheet versus Q2. Deposits rose $17,000,000,000 or 6% on an annualized basis.
During the quarter, long term debt fell by 5,000,000,000 dollars We put cash to work growing securities in our investment portfolio and more modestly through loan growth. Global liquidity sources rose driven by deposit growth and we remain well compliant with LCR requirements. Tangible common equity of 174,000,000,000 dollars improved by $2,800,000,000 from Q2 driven by earnings. In the process, we returned $2,200,000,000 in common shareholders to common shareholders through a combination of dividends and $1,400,000,000 in share repurchases. On a per share basis, tangible book value increased to $17.14 of $1.60 or 11% from Q3 2015.
I would note that this increase was driven by both retained earnings as well as share repurchases below tangible book value as we reduce shares 3% from Q3 2015. Turning to regulatory metrics. As a reminder, we report capital under the advanced approaches. Our CET1 transition ratio under Basel III ended the quarter at 11%. On a fully phased in basis, CET1 capital improved $4,000,000,000 to $166,000,000,000 Under the advanced approaches compared to Q2 2016, with CET1 ratio increased 40 basis points to 10.9% and is well above our 10% 2019 requirement.
RWA declined roughly $20,000,000,000 driven by reductions in global markets exposures and improvements in credit quality driven by runoff of non core legacy exposure. We also improved our capital metrics under the standardized approach. Here, our CET1 ratio improved to 11.8%. Supplement leverage ratios for both parent and bank continue to exceed U. S.
Regulatory minimums to take effect in 2018. Turning to Slide 6. On an average basis, total loans were up $23,000,000,000 or 3 percent from Q3 2015 and while up from Q2 2016, growth was at a slower pace. Consistent with past periods, we break out loans in our business segments and in all other. Year over year, loans in all other were down $30,000,000,000 driven by continued runoff of 1st and second lien mortgages, while loans in our business segments were up $53,000,000,000 or 7%.
In Consumer Banking, we continue to see growth in residential real estate and vehicle lending offset somewhat by home equity pay downs, which continue to outpace originations. In Wealth Management, we saw growth in residential real estate and structured lending. Global banking loans were up $26,000,000,000 or 8% year over year. On the bottom right of the chart, note the growth of $68,000,000,000 in average deposits that Brian mentioned. Turning to asset quality on Slide 7, we believe a number of factors, including our strategy of responsible growth, enhanced underwriting standards since 2,008 and a healthier economy have transformed the risk profile of Bank of America as we look forward to future economic cycles.
Total net charge offs of $888,000,000 improved $97,000,000 from Q2. Consumer losses declined across a number of products and commercial losses also declined driven by lower energy losses. Driven by these improvements, provision expense of 850,000,000 dollars declined $126,000,000 from Q2. We had a small overall net reserve release in the quarter as consumer real estate releases more than offset bills and other products. On Slide 8, we provide credit quality data on our consumer portfolio.
We remain focused on originating consumer loans with borrowers with high FICO scores and our asset quality remains strong. Net charge offs declined $71,000,000 from Q2. This improvement was broad based across consumer real estate as well as credit card. Note that credit cards accounts for more than 2 thirds of losses in our consumer portfolio And within our U. S.
Credit card book, the loss rate improved to 2.45%. NPLs improved and reserve coverage remained strong. Moving to commercial credit on Slide 9, net charge offs of 110,000,000 dollars improved $26,000,000 from Q2. With respect to energy, exposures are down, losses improved, oil prices have stabilized and we have $1,000,000,000 of reserves. More specifically, energy charge offs of $45,000,000,000 decreased $34,000,000,000 from Q2.
While reservable criticized decline from Q2, we did experience an increase in NPLs this quarter, which was concentrated with 2 clients, 1 in metals and mining and 1 in energy. Overall, our commercial portfolio continues to perform well. As I shared with you last quarter, the metrics in the commercial portfolio speak for themselves in terms of quality and performance. The reservable criticized exposure declined and as a percentage of loans remains low. The commercial net charge off ratio is 10 basis points.
Excluding small business, it is 5 basis points and has been around 15 basis points or better for 15 consecutive quarters. And the NPL ratio remains low at 45 basis points. Turning to Slide 10, net interest income on a GAAP non FTE basis was $10,200,000,000 $10,400,000,000 on an FTE basis. As Lee mentioned earlier, we changed our accounting method for the amortization of premium or discount paid uncertain of our debt securities from the prepayment method to the contractual method. The contractual method is used by our peers and should make it easier for investors to make comparisons.
Compared to Q3 2015, NII is up $300,000,000 or 3 percent as loan growth, higher short end rates and higher security balances funded by deposits more than offset the negative impact of generally lower long end rates over the past several quarters. Okay. With respect to asset sensitivity as of ninethirty, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by $5,300,000,000 over the subsequent 12 months. This is lower than the sensitivity we reported at June 30. The reduction was mostly on the long end driven by the change to the contractual method and slower prepaid speeds based upon recent trends and customer behavior.
Note that the sensitivity on the short end at $3,300,000,000 has not changed significantly. Turning to Slide 11, non interest expense was $13,500,000,000 that's $500,000,000 lower or 3% lower than Q3 2015 driven by cost reductions across the company. This is the initial quarter of the increased FDIC assessment to show up to the deposit insurance fund. The increase in expense for us is roughly $100,000,000 per quarter. Compared to Q2 2016 expenses were stable as good core expense control was offset by the higher FDIC cost and modestly higher incentives.
Q3 litigation expense was 250,000,000 dollars which is fairly consistent with both Q3 2015 as well as Q2 2016. Most expense categories were lower year over year. This trend was led by personnel expense, which includes the Q4 2015 expiration of the fully amortized advisor awards and wealth management. The rest of the improvement was driven by reduced cost of mortgage servicing coupled with SIM efforts and other initiatives. Our employee base is down 3% from Q2 2015.
While the overall headcount is down, it's important to note that year over year we added over 1,000 primary sales associates across consumer, Wealth Management and Global Banking. Turning to the business segments and starting with Consumer Banking on Slide 12. Consumer earned $1,800,000,000 continuing its trend of solid results and reporting a robust 21% return on allocated capital. I would note that pretax pre provision earnings rose $377,000,000 or 10%. Expense and NII improvement were both notable and together enough to more than offset higher provision expense and prior year divestiture gains.
Revenue was relatively flat on a reported basis compared to Q3 2015 as 4% growth in NII was offset, as I said, by the absence of approximately $200,000,000 of divestiture gains in Q3 2015. As a reminder, these gains in Q3 2015 result from divestitures of an ancillary appraisal business, a card portfolio and some financial centers. Excluding those prior period gains, revenue improved year over year and growth in pre tax pre provision earnings was even more substantial. Falling 400 basis points, Consumer Bank's efficiency ratio of 55% improved meaningfully year over year. Okay.
Turning to Slide 13 and key trends. 1st, on the upper left, the stats are a reminder of our strong competitive position. Looking a little closer at revenue drivers compared to Q3 2015, net interest income continued to improve as we drove deposits higher. Average deposits continued their strong growth, up $50,000,000,000 or 9% year
over year
outpacing the industry. With respect to non interest income, service charges were up modestly, while card income was down. Spending levels and issuance were strong, but revenue growth was muted by customer rewards. We are attracting relatively higher quality card customers that on the one hand have higher spending habits, but on the other hand receive more awards. This has 2 important benefits to note.
First, rewards deepen relationships, helping to grow deposits and make them more sticky, for example. 2nd, in our experience, these customers have lower loss rates and a reduced need to interact with call centers, thereby allowing us to lower costs. Turning to expenses, in the upper right, they climbed 7% from Q3 2015 despite excuse me, turning to expenses, they declined 7% from Q3 2015 despite the higher FDIC assessment charges in the quarter, expense reductions are the result of a number of initiatives. For example, mobile banking penetration helps to optimize our delivery network while improving customer satisfaction. More chip cards help us lower fraud costs and digitalization of processes and statements helps us eliminate paper and related handling.
One can observe the impacts of these types of initiatives on the cost of deposits, which continued its March lower, dropping below 1.6% this quarter. Focusing on client balances on the left, in addition to deposit growth, Merrill Edge broke its assets at $138,000,000,000 are up 18% versus Q3 2015 on strong account flows and market valuations. We also increased the number of Merrill Edge accounts by 11% from Q3 2015. We now have nearly 1,700,000 households that leverage our financial solution advisors and self directed investing platform. Moving across the bottom right of the page, note that loans are up 7% from Q3 2015 on strong mortgage and vehicle lending growth.
As reviewed in previous quarters, we continue to focus on originating high FICO score loans, which have generally produced low loss rates and strong risk adjusted returns. Loan growth included consumer real estate production of $20,400,000,000 up 21% from Q3 2015 and in line with Q2 2016 as customers continue to take advantage of historically low interest rates. We retained about 3 quarters of 1st mortgage production on the balance sheet this quarter. Average vehicle loans were up 17% from Q3 2015 with average booked FICO scores remaining well above 750 and net losses remaining below 30 basis points. With respect to U.
S. Card excuse me, U. S. Consumer Card, average balances grew 7% from Q2 on an annualized basis aided by seasonal back to school lending. We issued more than 1,300,000 cards in the quarter and spending on credit cards adjusted for divestitures was up 8% compared to Q3 2015.
Turning to Slide 14 in digital banking trends. As I mentioned earlier, we continue to see strong momentum in digital banking adoption with use across service, appointments and sales. Mobile Banking is transforming how our customers bank and reshaping our consumer segment. Importantly, as adoption rises, particularly around transaction processing and self-service, we see improved efficiency and customer satisfaction. We continue to improve capabilities with the latest example being the launch of our Spanish mobile app, which attracted over 800,000 active users in the 1st 10 weeks.
We added roughly 1,100,000 new mobile users in the quarter. The pace of user growth has increased despite an already impressive penetration rate of our checking account holders. With more than 21,300,000 active users, deposits from mobile devices now represents 18% of deposit transactions and 26,000,000 checks were deposited via mobile devices this quarter. That is an average of 280,000 deposits per day, an increase of 27% year over year and the equivalent to volume of 8 30 Financial Centers. Digital sales now represent 18% of total sales and we are now we now have more than 3,500 digital ambassadors in our financial centers driving further adoption.
Also, as you know, we are a leader in person to person and person to business money movement through digital transfers and bill payment capabilities. Consumers moved $243,000,000,000 in Q3, up 6% from last year. And while all this is transformative, I would just remind you that we still have a little less than 1,000,000 people per day walking into our centers across the U. S. This in person interaction is important in terms of deepening and retaining personal relationships, providing more complex financial help and creating opportunities for further engagement.
Turning to Slide 15, Global Wealth and Investment Management produced earnings of $697,000,000 up 10% from Q3 2015. Now it's no secret that this segment operates in an industry undergoing meaningful change as firms and clients adapt to the new fiduciary rules and other market dynamics. The good news is we start from a position of strength with $2,500,000,000,000 in client balances. We have market leading brands and a wide range of investment service offers from self-service to fully managed. Plus, we have the resources to continue to invest in market leading capabilities that address the changing needs of our clients.
Year over year, revenue was down modestly, but expenses were down even more, improving pretax margin to 25%, up meaningfully from Q3 2015. Overall, revenue declined 2% from Q3 2015 as NII growth was more than offset by lower transactional revenues. NII benefited from solid loan and deposit growth, Non interest income declined from Q3 2015 driven by lower transactional revenue that continues to be impacted by market factors as well as migration of activities from brokerage to manage relationships. Non interest expense declined nearly $313,000,000 or 6% from Q3 2015 with half of that benefit derived from the expiration of the amortization of advisor retention awards that were put in place at the time of the Merrill Lynch merger. The rest of the improvement was a result of work across many categories of expense more than offsetting higher FIC costs.
Moving to Slide 16. We continue to see overall solid client engagement. Client balances approached $2,500,000,000,000 and are up from Q2, including higher market valuations, dollars 10,000,000,000 of long term AUM flows and continued loan and deposit growth. Average deposits compared against Q3 2015 are up 4% driven by growth in the second half of twenty fifteen. Compared to Q2, average deposits were impacted by seasonal tax payments.
Average loans were up 7% year over year. Growth remained concentrated in consumer real estate and structured lending. Lastly, earlier this month, we announced some innovations to our IRA products and services, which we believe positions us to better serve our clients given new fiduciary rules. These innovations are industry leading and address not only the new fiduciary rules for retirement accounts, but also client preference for more choice and new ways to invest. First, we announced the rollout of a new offering called Merrill Edge Guided Investing.
This solution offers clients online investing enhanced with professional portfolio management. With the addition of this solution, clients have 3 fundamental choices, which they can mix and match to best meet their needs. Clients can invest online completely self directed through Merrill Edge or if they are interested in enhanced professional portfolio management, they will be able to use Merrell Edge guided investing or they can choose fully advised working 1 on 1 with a financial advisor via brokerage or fee based advisory platforms. We also announced that beginning in April 2017 for clients that choose to have a financial advisor provide advice with respect to their IRA accounts, we will provide this service through our fee based advisory platform Merrill Lynch 1, As we believe
this is the best way
for us to deliver for IRA clients who choose to have this level of service and advice. Clients will also have the option to invest their retirement through Merrill Edge either completely self directed or through Merrill Edge guided investing. Turning to Slide 17, Global Banking earned $1,600,000,000 which is up 22% year over year. Q3 reflects good revenue growth, solid cost control and solid client activity. The efficiency ratio improved to 45% in Q3.
Compared to previous 3rd quarters, investment banking fees this quarter were the highest since the merger with Merrell in 2,009. Return on allocated capital was 17%, a 300 basis point improvement from Q3 2015 despite adding a couple of $1,000,000,000 of allocated capital this year. Global Banking continues to drive loan growth within its risk and client frameworks, producing solid year over year improvement in NII. Revenue growth also benefit from roughly $175,000,000 from gains on FVO loans this quarter versus losses in Q3 2015. Higher treasury fees also added to revenue growth.
A decrease in non interest expense compared to Q3 2015 reflects good expense control that offset modestly higher revenue related compensation and higher FDIC costs. Looking at the trends on Slide 18 and comparing Q3 and comparing to Q3 last year, average loans on a year over year basis grew $26,000,000,000 or 8%. Growth was broad based across large corporates as well as middle market borrowers and diversified across most products. Having said that, as we noted last quarter, the pace of commercial loan growth has slowed over the past couple of quarters. Demand across the industry appears to have slowed as well.
We remain diligent in certain sectors such as commercial real estate and energy and we are also closely monitoring certain international regions. Average deposits increased from Q3 2015, up $10,000,000,000 or 3 percent from both new and existing clients. As we grow treasury services, we remain focused on quality deposits with respect to LCR. Switching to global markets on Slide 19, let me start by reviewing what I said last quarter regarding this segment. The past few quarters are examples of the importance of this segment to not only its clients around the world, but also to the customers and clients of all our business segments.
Again, this quarter, Global Markets delivered for clients by helping them raise capital, buy and sell securities as well as manage risk. We continue to invest in and enjoy leadership positions across a broad range of products. We believe this improves our sustainability we believe this improves the sustainability of our revenue and makes us more relevant to clients across the globe. We've been there for clients when they needed us across all these products. Our results this quarter reflect this strategy and continue commitment to clients.
Global Markets earned $1,100,000,000 and returned 12% on allocated capital. Revenue was up appreciably year over year and even outpaced typical seasonality by posting modest improvement over Q2 2016. Total revenue excluding DVA was up 20% year over year on solid sales and trading results, which rose 18%. It's worth noting we achieved these results with slightly less balance sheet, lower VAR and 7% fewer people. Continued expense discipline drove costs 1% lower year over year as increases in revenue related incentive were more than offset by reductions in operating and support costs.
Moving to trends on Slide 20 and focusing on the components of our sales and trading performance. Sales and trading revenue of $3,700,000,000 excluding DVA was up 18% from Q3 2015 driven by FIC. In terms of revenue, this was the best Q3 in 5 years. Excluding DVA and versus Q3 2015, fixed sales and trading of $2,800,000,000 increased 39% as we built momentum as the quarter progressed across the host of credit products and continued gains in rates products. Mortgages showed particular strength among credit products as investors sought yield.
Equity sales and trading was solid at $1,000,000,000 in revenue, but declined 17% versus Q3 2015, which benefited from higher levels of market volatility and client activity. On Slide 21, we present all other, which recorded a net loss of $182,000,000 This loss includes a previously disclosed tax charge of $350,000,000 due to the Q3 UK enactment of a tax rate reduction, which reduced the value of our U. K. DTA. The loss in the current period compares to earnings of $152,000,000 dollars in Q3 2015 as lower security gains and higher expense litigation offset higher mortgage banking revenue.
NBI revenue this quarter includes $280,000,000 benefit from higher valuations on our MSR driven by slower expected prepaid speeds based upon recent observed trends and customer behavior.
Okay. Let
me offer a few takeaways as I finish. We reported solid results this quarter that were consistent with our strategy of responsible growth. We remain focused on delivering responsible growth as well as strengthening and simplifying Bank of America. Capital and liquidity strengthened. Asset quality remained strong.
We grew revenue. We grew deposits. We grew loans. We delivered for clients in capital markets. We lowered costs.
We invested in our future by adding sales professionals and deploying technology that helps customers better live their financial lives and improves satisfaction. And importantly, we returned more capital to our shareholders. With that, let's open it up to questions.
We'll take our first question from John McDonald with Bernstein.
Wanted to ask about expenses. Could you talk about what kind of timing expectations you have on the various projects helping to drive down your expenses further in 2017 2018? Maybe just remind us what are some of the big items that you're working on? And should we still think about $53,000,000,000 in 2018 as kind of your hard target that you're shooting for?
Well, let me start with the last part first. Nothing's changed at all for our thoughts regarding the 2018 target that we discussed in the Q2 call. Again, I would note that year over year we reduced expenses by $500,000,000 And I would also just point out to remind everybody that if you look at expenses over a longer term, we reduced quarterly expenses ex litigation by $4,800,000,000 from Q3, twenty eleven. That's a $19,000,000,000 run rate. So if you think about what we have to do between now and 2018, I think we've talked about this before, roughly
a third of that is going
to come from continued progress on delinquent loan servicing. The other 2 thirds is going to come from a lot of different initiatives across the company. We've talked about SIM, our simplified and improved initiative. We're going to be utilizing technology to digitize processes, eliminating handling costs. We're going to get technology efficiencies from data centers consolidation and for more efficient servers.
As I said, we're going to continue to make progress on delinquent loan servicing costs. Hopefully, see some modest improvement in litigation. Very important part of this is the shift to self serve digital channels, mobile online ATM. So that's what the list sounds like and it goes on and on. I would emphasize this shift to self serve.
We're seeing good momentum with more than 21,000,000 mobile banking active users and that's growing every week, every month. 18% of our deposit transactions are now completed through mobile devices. That's better for customers. It's also better for our shareholders. It's 1 10th the cost of walking into a branch.
So it's all these things kind of put together. It's initiatives across the whole company. It's going to come a lot from support and operations, but there's a little bit in the front office as well
as we get more efficient.
In terms of the timing, Paul, is it something that we should think of as ramping throughout 2017 and is have a longer tail at the end? Can you give us a sense there?
Yes. I would say
it's going to be fairly spread out throughout the whole process. However, as you think about 1 quarter over a next, it's not going to be straight down every quarter. Not every quarter is the same. There's going to be some lumpiness. If you look at the Q4, for example, we traditionally have some seasonality in the Q4.
So generally we'll make progress, but don't expect that you're going to see it in every single quarter.
Okay. Thanks. And then a second question just quickly on net interest income. Can you help us try to translate your 100 basis point rate sensitivity into something closer to what one Fed hike might do for your net interest income? And what would be the trajectory of NII and NIM if we did get a Fed hike this quarter?
What would you expect more in the near term next quarter or 2 on NII and NIM?
Yes, sure. So let me, yes, I can help you through that. So if you look about a 25 basis point, that would be 1 quarter of our $5,300,000,000 in sensitivity. If you want to assume that 25 basis points increases the long end by 25 basis points, you kind of know the answer. You can roughly take a quarter of it, perhaps even a little bit more because we're probably more asset sensitivity more asset sensitive on the first 25 than the last 25 of that 100.
But if you don't want to increase on the long end, just look at the short end. We've disclosed it's $3,300,000,000 You could divide that by 4 and get a pretty good sense of what 25 basis points would do over the subsequent 12 months.
Great. Thanks.
And we'll take our next question from Glenn Schorr with Evercore ISI. Please go ahead.
Hi. Thanks very much. Just curious for a point of clarification. Brian had mentioned global markets feels like it's taking a little share, alluded to global peers restructuring, completely get it, believe it's going to happen. Just curious if you can give a little color on where you might see some of that evidence taking shape, products, whatever?
Yes, I'll try to do that. But let me just start with a couple
of thoughts. First of all,
I think it's difficult to see share shifts in global markets in any given quarter. The fee pools are just not as transparent as they are in, let's say, investment banking fees or other areas. What we know is client activity was up in the Q3 and that's what drives our short term results. Over the longer term, one, it's easier just to assess what's going on with Peoples and share. So I just want to point out from 2014 to 2015, on declining fee pools, we're pretty sure we improved our share, 3rd parties tell us that.
And I think that share has come from a number of regions and a number of firms and a number of products as competitors adjust their strategies and capabilities. More specifically, we've been investing in rates for a number of years. I think we're making some progress there. We have a very strong credit platform. As you know, I think we're making progress there relative to competitors around the world.
And I think we're investing in equities and I think your equities revenue is down, but I think you're seeing improvement relative to the fee pool in equities as well. I do want to emphasize very importantly that our strategy is to have a diversified product portfolio across both FIC and equities and globally. That's what our clients need and want from us. And so, you could see gains 1 quarter in one place and see something lower in another place and that's okay with us. That's our strategy.
It's about what the client needs in any given quarter. If we're doing a little bit worse in one place, we're probably doing better in another place.
Fair enough. Nature of the business, I guess. One other one in, Guim, I appreciate all the color on the different products and what you're doing in Wealth Management. The curious move in the quarter was the move away from the commission based IRAs. And I'm curious, is that more specifically done to avoid the best interest contract?
I'm just curious based on how we roll forward if the SEC comes in, what that might mean? You talked about giving customer choice, but this sounds like less choice for the FA.
Look, clients are going to have 3 ways to invest in their IRAs. They're going to do it completely self directed from Merrill Edge. They're going to be able to do it online, but enhanced with professional portfolio managed through Merrill Edge guided investing. And again, for those clients who want 1 on 1 advice and service from their FA, they're going to be able to do that on a fee based advisory platform. What we decided not to do is use the best interest exemption to allow IRA accounts to be added to our brokerage platform where clients pay on a transaction basis.
After reviewing all her options, let's say, if a client chooses 1 on 1 advice and service on her IRA,
we believe the best way
to provide that advice is through Merrill Lynch 1 on our fee based advisory platform. We took a lot of time to make this decision. We took months thinking about this. We did research. We believe this is the best interest of our clients and our advisors.
I don't doubt that. I just I worry about just the execution of it. I mean, I'm assuming that it means that the advisor has to talk to the client and explain this whole thing and just Yes,
that's right. But the advisors are going to talk to their clients and explain the best interest exemption. That's going to be a much harder conversation than the one we're going to have. Fair enough. All right.
Thanks, Paul.
And we'll take the next question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hey, good morning. Good
morning, Betsy.
Couple of questions, just one on loan growth. Could you give us a sense as to how you think you're trajecting there? We talked a little bit about market share and trading. Could we talk a little bit about how you think you're doing in the lending side of the equation and if there's any legs there?
Look, we feel good about loan growth. The economy feels good, so we're confident that we can grow. But of course, there's going to be some uncertainty. And as I said, in certain sectors and certain regions around the world, I would remind you that we're focused on responsible growth. So in some of those we're going to look a little bit different than some of our competitors in some places, but we feel good.
I mean year over year, if you look at our business segments, we had 7% loan growth.
So one of the areas that, I just want to dig in a little bit more to is on the mortgage side where you have had some good loan growth, but I'm just wondering if there's more opportunity there as it relates to either taking some duration exposures or on credit as you've moved into some wider credit boxes with My First Home, which is insured by Fannie Freddie, but just want to get some color on that.
Betsy, if you go to Page 6 of the materials, you can see that we're continuing in the mortgage area overall. So think both in the home equity and first mortgage loan. You can see that we continue to run off some of the non core portfolios and overall the balances grow in the business segments and we expect that to continue. We're doing about 2,000 applications a day, about 1,000 each plus in each of the products that has continued to grow. And so we'll continue to drive that core capability to customer.
In terms of expansion of product sets, we have a limited product for that we built for similar to 3% down payment for $500,000,000 a year of production just to give us a more competitive product there, but limited to size. And we'll do some other things, but we're going to stick with the core credit. Remember who you're talking to here, Betsy, and our experience of mortgage is probably deeper than most people. So we will stick with what our customers need and what we think the right business for the company is.
Okay. So as you're thinking about your revenue growth from here, which are the 3 key legs that you expect you're going to keep that revenue growth going?
Well, I think if you think about the growth, you've got the interest side and you've got the fee side. And if you think about the interest side, it's going to be driven by balanced growth between loans and deposits. And I think we keep growing deposits year over year $60,000,000,000 we're paying 4 basis points in consumer. And think about that dynamic and putting that to work in anything we can is important. And we continue to grow loans at less rate than we grow deposits.
So that's going to drive our NIM as just a bigger and bigger, lower, lower cost deposit base. And on the loan side, I think consumer is growing better now than commercial in linked quarter. But overall, we expect commercial will kick back in a little bit as the economy continues and some of the uncertainty lifts in the political season here. So on loans and deposits, it will just be grinding out. As you've seen year over year, core growth of 7% on loans and growth on deposits.
On the fee side, what you're seeing is the dynamic and especially consumer fee areas finally turn a little bit stable and then turning force in card revenue and things like that, which we've hit sort of the inflection point where
the
rundown and relative interchange due to selling some portfolios and getting out of non core portfolios and putting on the core portfolios with rewards attached to it, which helps us generate deposits, things like that, have stabilized and starting to see in the last few quarters card income starting to move up a bit and on service charges, it's been relatively stable. So on the fee side, it will be driven more by wealth management and markets and things like that and consumer stable, which is good because it had been a drag for a long time.
And then on the expense side, you indicated all of the various technology efforts that you've got underway. But is there more that you can do on the comp side as well?
We continue to when we have less people going through our bonus pools and stuff, you can see the comp continues to drift down. A large part of the comp obviously is the financial in the wealth management business, which there's no meaningful changes there. But in the other businesses, we continue as we have less people. We continue to reduce that as a percentage of revenues.
Okay, thanks.
We'll take our next question from Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning. Maybe you could talk a little bit about the credit cycle. I think one of the major pushbacks from investors is that we're going to start to see credit get worse, but I think you guys have been pretty clear that you are not lowering standards to drive growth. So how do you think about the cycle from here? I guess that's the start.
I think I said it earlier, this is you think about the last several quarters of earnings calls, it's been kind of getting better than this and every quarter it gets slightly better. And that in part is because we are still getting the benefits of the changes made 6, 7, 8 years ago coming through the consumer business, I. E, that what we call back book portfolios or legacy portfolios or whatever word you want to use, continue to run off with higher credit risk in them and we keep putting on and have put on and continue to put on higher credit quality. So I think if you think about overall charge offs of $8.80 this quarter, that's driven by the consumer business and that's driven by the card and some in the legacy home equities. And so keeping the card business where we want it is critical.
And you're seeing us continue even as we start to grow that portfolio both nominally and rate the charge off picture strong. And so when you go back and look at what happened during the crisis, the charge offs came abnormally from the edges of credit and we've kept ourselves out of that.
So you feel like you can keep your lease ratios as you grow pretty stable?
We have done that.
Right. Okay. And just maybe a follow-up on the capital ratios. Paul, I saw that the RWAs dropped while the balance sheet grew a little bit. So it seems like you reduced risk.
I guess where was that and can that continue?
Yes. That was you were speaking on the advanced approaches we had to drop. We had to understand it as well, just a little bit less. And that drop came again from legacy portfolios running off and from continued work by our global markets teams to better manage their balance sheet relative to those ratios.
Is there any more detail or can you get a little more from here? Yes.
I think look, there's always more to do and we're focused on a lot of different regulatory metrics. We're looking at all of them. There are some that may be a little bit more important than others right now. We're focused on all of them and I think there's more to come there. Obviously, as we could grow the balance sheet, as we grow loans and deposits, we're going to continue to see some increase, particularly on the standardized side.
But I think we can relative to that growth, I think we can continue to make a little bit of progress incrementally.
Okay, great. Thanks.
And our next question comes from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Good morning, Matt.
Can you
talk about the strategy within the securities book? You did mention that you added some later in the quarter and obviously deposit growth has been exceeding loan growth to justify that. But maybe give some color in terms of what you're buying, the duration and how make sure it doesn't get too big relative to the size of the balance sheet?
Yes. Matt, you pick up on the core thing that drives. We have a securities portfolio because we have more deposits coming in than we have loans. Our view of that portfolio is we don't take credit risk there. And so we have 2 alternatives, treasuries and mortgage backed securities or cash, I guess, is the 3rd.
And so that's how we invested. And Paul can take you through his earlier comments a little bit and give you some color on that. But I think people always have to remember the reason why we have more is because our deposits grew at $60,000,000,000 year over year and that's more than our loans grew by quite a bit. So Paul, you want to answer, give some color on that?
Sure. Just one step back. Obviously, what we're doing every day is managing earnings capital, liquidity and interest rate risk. We think about that portfolio and where we want to invest things. This quarter, as you noted, we did our deposit growth exceeded loan growth.
And so we did add significantly to the investment portfolio. Most of that incremental amount, we devoted to treasuries just as we think about the balance in that portfolio, we wanted to just add a little bit more treasuries. That's really kind of it.
Okay. And then a little bit related, but on the deposit side, obviously very strong growth year over year. You mentioned the $60,000,000,000 and really little to no repricing despite the one bump in Fed rates that should impact the year over year comp. So I guess the question is, if we do get a rate increase, do you think you've got more flexibility to limit deposit repricing given it's basically worked so far and the loan growth is obviously not enough to absorb the deposit growth you have?
So just on the remember that the reason why you don't see much repricing is really 2 or 3 dynamics. 1 is a full $450,000,000,000 of our deposit of non interest bearing, so they aren't going to reprice. The great debate is about what's the how sticky are those. And if you think about that, those are dominated by our consumer business and our non expiring accounts and consumer have doubled in size over the last 5 or 6 years due to focusing on primary accounts. We're up to 90% primary accounts in the household where they run their household finances through our account and therefore the direct deposit or check and things like that.
So the first thing to remember is $1,250,000,000 non interest bearing and the dominant part of that consumer and also in the wealth management and the core transactional account of both consumers. And then on the business side, similarly, we have driven our deposits to be really LCR friendly and core operating accounts. And so those aren't going to move. The non interest bearing aren't going to move much and the big debate is how much balance will be in there and we feel confident the balances will stay just because of the nature of the accounts. And then when you go to the dynamic, remember that even with all this deposit growth, one of the things we continue to do and the impacts less and less is we are expecting consumer business running off CDs still at a fairly decent clip that were historically used to fund prior companies' balance sheets that we don't need the funding at that cost.
So we have some rollover, but that continues to decline. That weighted average cost drops off and that cost drops off and drives down or holds steady the weighted average cost. And then if you look at money markets and other interest bearing, they really haven't moved much. So we feel good about the consumer we forget about the deposit base overall. We feel very good about the consumer deposit base just across $600,000,000,000 for the first time in the company's history and consumers generally.
And with that, I think we look if rates rise, we think that it's substantial value for the company. And Paul gave you a way to think about that earlier with a quarter of $3,300,000,000 25 percent of $3,300,000,000
Okay. Thank you very much.
We'll take our next question from Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. Wanted to ask about the card business a little bit. I saw in the deck that you grew card issuance the fastest level since 2,008, But we're not really and there's a burden on the fee side with reward stuff, balances are still flat. I was wondering if you could kind of walk us forward and help us understand a little bit better just the kind of ROA and kind of income direction of the card business.
When do we start to kind of see that show up in both balances? And when do you expect to see that kind of fee growth come along for the ride given the good underlying growth that we haven't quite seen yet in the financials? Okay.
So, yes, so look, I think you noticing some modest card balance growth in the quarter, which we think will continue as we add new accounts. And again, we're very focused on adding high quality accounts there. I think you probably also noticed that while combined debit and credit card spend was good in the quarter at 5%, 6% of your fuel, I'm adjusting for divestitures last year that the growth in the card income was impacted by as you noted customer reward programs. However, I think just focusing on the fee income, this is some really key benefits of our strategy, which is to attract relatively higher quality card customers and reward them for deepening their overall relationship us. This strategy really drives deposit growth and makes deposits stickier.
Plus, we believe these customers have lower loss rates. They use the call center less, which helps us lower costs. I think when you want to see the effect of this, you have to look at the overall consumer segment and what's going on there in terms of growth of profits and improvement in expenses. And this last thing I just point out, look our risk adjusted margins on card are strong at over 9%. This is in no way a signaling that we're not going to be able to grow the card income line.
I just want to get a better sense of how we think about it.
I think if you think about that more broadly, we had the last divestitures of size we made in this card business were the Q4 of last year and they're through the P and L. So you they're through the balances and through the things. So what you're starting to see if you look at the trend this year is you're starting to see core movement positive movement both in card income and in balances as we move across the year, and we expect that to continue. It will be strong responsible growth. And one of the great debates we have in the company is people say, why can't you grow this faster or why can't we're giving up too much in interchange for the preferred balance of preferred rewards.
The interesting question is, are you giving up something you'd never have in the preferred rewards, I. E. We're bringing more customer relationships in-depth and that gets us something. So incrementally, the net interchange is actually there as opposed to what theoretically get gross interchange with a non customer and affinity program. So we focus on the entire customer relationship.
It is very valuable. It's very profitable. And believe me, if we could grow it faster responsibly, we would. But the idea is just to grind out the slow steady growth and we're starting to see that come through and largely it was masked in 2014, 2015 and behind at 2013 those areas because we're divesting a lot of non core relationships. And now we have the core Finneries we want and we have the core card business we want.
And again, if you just I think you got to you can see it if you look at the whole segment. I mean, I don't want to start comparing us to peers, but just take a look at our PPNR year over year of 10%.
Understood. Second quick question is you mentioned that you're now achieving the cost of capital and ROE above 10% and capital is still building. Do you think you can continue to hold, if not improve the ROE as capital will likely continue to grow, presuming that you still will get that those benefits going forward and you're not at the point of returning more than 100% of your earnings yet?
Well, I think embedded in that is the future return of capital, and we now have a significant buffer above the other requirements. And as Paul said, we continue to try to optimize our requirements. So I think you're a little bit of a horse race between increasing earnings and increasing capital. And as we return more, you expect that the horse race of increasing earnings would stay ahead of it. But we've got room to go and we're driving at it.
But if we don't hit if the issue is that our capital continues to grow, that capital is also yours as an investor and continues to go into our book value. And so it's not going anywhere. It's there to be returned when we can get through the process of getting from where we are to higher percentages of capital return and ultimately returning excess capital.
And we have a goal to return more.
Understood. Thanks, guys.
And we'll take our next question from Mike Mayo with CLSA. Please go ahead.
Hi. You've reduced your branch count from 6,000 to 4,600. Where do you think that count can go? And on the one hand, we heard you say almost 1,000,000 customers walk into branches each day. But on the other hand, you have grown deposits, dollars 1,200,000,000,000 You did mention more self-service digital channels.
You did mention mobile banking is 18% of the deposit transactions and less reliance on branches might ease any extra pressure to sell more products in this low rate environment. So where do you think you might take the branch count to? And I don't think you mentioned the impact of the cross selling issues on Bank of America or if we wake up one day and find out that Bank of America did something inappropriate?
Well, let's go to the how we run our consumer business. So we run our consumer business consistent with responsible growth for the company. And that what that means is that you focus on deepening relationships, what we call a stair step, where it's the core deposit account, the core credit card and getting it used in the core mortgage and the core home equity and the core auto loans. That's what we've been driving at and we'll continue to drive that. That's the backbone of what we did and how we reposition this company over many years.
In terms of the branches, Mike, you rattled off all those statistics, which Paul talked about earlier, but it is a complex optimization, but it all starts with the consumer. What is the consumer going to do? And so while 18% of deposits are made by mobile deposits, 82% by their nature aren't. And where do they go? About 50 percentage points of that go through the ATM machines and about another 30 odd percent go through the teller lines still today.
And so you have to be ready and able to serve in all dynamics. And so what we continue to do is optimize the branch structure, the call structure, the ATM structure, the mobile structure and the online structure altogether. And the way to think about that optimization and why it's this extremely important business to this company is that we've gone from 300 basis points of the cost of all that to deposits to about 150 over the last 6, 7 years, and that's by continuing to optimize the physical plant as well as all these other means. And so if you ask me, the question is how far it can go, you have to also then think about what we want to go on in the branch. And so if you look back at some of the statistics that Paul had in the deck for consumer, where you talk about where you see things like appointments set up or 340,000 in the Q3.
So just think about that. 340,000 times a customer went on a mobile phone and asked to come to a branch. And so we need those branches to receive those mobile phone customers and why are they coming usually for a much more important financial transaction to them than handing us a check for deposit. And so it's a quality versus quantity and making sure we understand that. So we are optimizing all those.
And you can see on Page 14 on the lower right, you can see the different moves. I'd say we went from 7,000,000 visits probably 4, 5 years ago to 6 to 5, but those 5 are of a higher quality. And we think that's important. And there are certain transactions and certain capabilities that you just have to have at your branch that you just have to do face to face. Very difficult things like how to get a power of attorney for a parent that's sick or I want to do a mortgage, very it's still difficult to do through the phone and things like that.
So we'll have all aspects. We'll drive it down, and you can see that we continue to make that progress.
I mean, just as a follow-up. On Slide 14, it's kind saying Bank of America, we're a fintech company and look how well we're doing and you're showing some good growth rates, that chart on the upper right. So at what point does that lead to a greater number of branch reductions? Is this do you have the answer and you don't to say for competitive reasons or you don't know, it's kind of a give and take based on the customer experience? I mean, some of your competitors talk about closing 100 to 200 branches per year, you reduced 112 over the last year, but it seems to be slowing.
So I'm trying to get
a sense of that. I think I'd say that the point is, is that we run this business and we start with the consumer and their activities and their behaviors and so what they want to do. And the key is not to get ahead of them because that can cause you problems and not to be behind them because that can be cost issues and empty branches. So even in the 112 we're down, we've added branches in places like Denver. The Denver branch that we added are in the top 10% of performing branches today on relationship building.
We've added branches in Manhattan. We've added branches in Minneapolis. And so we're in a sea change in terms of what the branches look like individually. The new branches are different. We're adding branches we didn't have, and we're closing branches where the utilization isn't there.
The nature of how far a customer will travel is also different now than it was 10, 15 years ago. So I think you said what are all the different reasons. The answer is I think you said is we'll follow the customer. And I don't know the exact number because I can tell you 8 years ago when we had 6,100, there were people that said there was never going to be less branches in our system and maybe we should add more and guess what we're 4,600 4,500. All
right. Thank you.
We'll take our next question from Paul Miller with FBR and Company. Yes.
Thank you very much. And you guys took an MSR write up or a hedging benefit. I can't really which one it is about $360,000,000 but you did write up the MSR from 51 basis points to 60 basis points. Was that all rate driven, the 10 year digger up a little bit or was that also have some better credit metrics out of the servicing portfolio?
That was, you're right. We had a $280,000,000 benefit this quarter and that was from a higher valuation of the MSR, which was due to slower observed prepayment speeds. So we're just updating our the way we value that. We have to monitor our it's a Level 3 asset. So there's a lot of things that go into that.
It's hard to value and you've got to continually be looking at that valuation. And we thought it was time based upon observations of prepayment speeds to make a change in some key assumptions.
Okay, guys. Thank you very much.
We'll take our next question from Eric Wasserstrom with Guggenheim Securities.
Thanks. I just wanted to follow-up on a couple of questions related to the various consumer lending businesses. First, Paul, I am just from your response to Ken's question a moment ago on card, I heard everything you said about the risk adjusted margin and the credit quality of the portfolio, etcetera. But the just to be clear, are you expecting improving stable or deteriorating ROA based on the current competitive environment? Because it seems like many peers are underscoring the near term risks to profitability from awards and customer acquisition costs.
Look, based upon how we're growing the business, how we're running the business, we expect stability.
Stability. Okay, great. And with respect to mortgage, I thought there was about $100,000,000 benefit from rep and warrant release. How much of that reserve still exists? And what would be your expectations about potentially realizing it at this stage given sort of where we are with respect to that issue?
Yes, I think the rep and warranty is a contra revenue. So is that what you're referring to?
Yes, correct. It's the provision line item.
Yes. So you
had a negative provision in there.
Yes. So that's going to bump around, that bumps around because
Hey, Eric. Hey, Eric. It's Lee. On the I think what you're looking at what Paul is referring to, it's a contra revenue item. So it's a negative revenue item when it's a provision expense on the provision, okay.
Okay. Maybe I'll come back to you in a bit. And just finally on auto, it seemed that some peers were signaling that competitive conditions in auto underwriting were easing a bit after intensifying over the past several quarters. Are you seeing anything like that across any
strata? Look, we're continuing to see good growth in consumer vehicle lending the way that we run the business. We're up roughly 7% or $7,000,000,000 or 17% year over year. Again, though, we're focused on prime and super prime. So, originations were down modestly Q3 versus the prior quarter as we accepted a little bit less dealer flow, but we still feel good about that product offering.
The 3rd quarter average book FICO scores remained at approximately 770, debt to income is at all time lows. We're not following the market expansion to 84 months in terms of tenor. We've got a maximum tenor of 75, and I think in the Q3, we were averaging around 67. So we're getting the growth within our responsible growth framework and we feel good about it.
Thanks very much.
We'll take our next question from Steven Chubak with Nomura. Please go ahead.
Hi, good morning.
Morning, Steve.
So, I want
to kick things off with a follow-up to an earlier question on the DOL. Paul, you had noted that Merrill FAs will no longer be permitted to engage in brokerage activities and retirement accounts. And I was hoping you can give us an update as to what portion of Merrill client assets are currently in brokerage IRA? And maybe more specifically, how should we think about the net economic impact from transitioning some of those retirement assets into some of the other offerings that you highlighted, whether it be fee based, which should generate higher fees versus robo or self direct and Merrill Edge?
Sure. So the primary affected portion of our business is in the transactional brokerage retirement accounts. And if you look at our roughly $2,000,000,000,000 of GUM client assets outside of loans and deposits, we would see the DOL rule having an impact on significantly less than 10% of those balances. And again, that's as the industry works towards the full implementation of the rule in January 2018. So as you noted, we're going to see some geography movement on the P and L.
There's going to be some shifts. And if I had a guess today, we might see some modest revenue impact in 2017, but it's really kind of way too early to know how it's all going to shake out. But we would expect to mitigate that in subsequent years.
I think
people just to Steve, when you talk about backing up to the fuller trends in wealth management, and there's been a constant decline in brokerage revenue over the years, largely because it's we've been the industry and we have been moving more to a financial advice to managed account execution. And so in that broker in that obviously, a limited portion of that's IRA related in both counts. But the reality is, this is against the backdrop that you'll see that brokerage number has been the number, it's been tough to chase for 5 years now.
Got it. Okay. And just one other quick follow-up on the same topic. The press articles that highlight some of the changes that you've made indicated that some clients that would transition to the higher touch advisory offerings will be rebated some incremental fees. And I was wondering how are you planning to apply changes to the fee structure for those brokerage assets that do in fact transition?
I'm just struggling to see how a 2 tiered structure might work in practice, 100 of billions of assets that would be affected here?
Well, I think the implementation of this has to be very carefully handled, excuse me. And the team, Andy and John, have been leaders in trying to figure this out the right way for the client and we start with what's best for the client. So what you're reading about is there'll be adjustments made to clients by clients based on their circumstances and what they want from us. And the FAs will engage in a lot of conversations about that as we go through the next several months.
Okay. Thanks, Brian. And just one more on the topic of capital, just switching gears for a moment. Following to Rullo's recent remarks, there's one area of debate has been whether the Collins floor would in fact apply to this new capital framework, I. E.
Whether you'll be forced to manage to capital minimums under both the standardized and advanced approaches. And now that you've had some time to digest the initial release or guidance, I was wondering if you can give us any insights into how you're thinking about that potential change?
Okay. Well, that look up, it's obviously a pretty technical question. And it's not like we haven't thought about it, but to be frank, it's just a speech at this point and he didn't really address that in his speech. So we don't really know we don't know the answer. That's one of the questions we have.
I think once we get the Fed's proposal, we'll have a better idea. But all I can tell you is based upon our current reading of the speech, in particular some of the changes you mentioned in CCAR around asset growth, we think that the substitution of the capital conversion conservation buffer, sorry, capital conservation buffer with the stress capital buffer would not be a material change for Bank of America, our risk profile and given how we run the company.
Got it. I recognize it's early days, Paul. So I appreciate you taking the effort to answer the question. That's it for me.
We'll take our next question from Brian Fordham with Autonomous Research.
Good morning.
Morning.
I guess I've had a couple of good quarters in FICC, both for you and the industry. And I know volatile business not really looking for quarterly expectations, but just more broadly, there's an investor debate. Is it just a couple of good quarters? Or has the business absorbed all the changes in regulation, absorbed flow rates, absorbed all the restructuring required and kind of the cycles inflecting fixed at a bottom and has upward pressure from here. So where do you come out on that debate?
Is it a couple of good quarters at this point or is thick bottomed?
Well, I think the way I come at that debate is to go back a long many years ago and sort of think through the repositioning was done in our company. And so the key was to make FICC work. You're talking more revenue, but we look at profit. And so to get the profit we needed to out of the fixed income and equities business, we had to take the cost structure down, which we did in 2010, 2011. Tom Montag and the team worked very hard at that and got to sort of breakeven down over $1,000,000,000 a quarter.
And then we ran along a number of years and then they've actually taken out year over year. You can see the costs continue to be managed well despite higher revenue. So I would say taking the discussion, I'd say that the way our fixed income business generates revenue, a lot of it is around our capabilities in debt underwriting, our capabilities all the different variations from high grade to leverage to everything that goes on. And that's a relatively stable pool of revenue that you see repeated. And what goes up or down is really the activity around that based on the market seizing up in certain quarters in terms of issuance and things like that.
When you think about the other thing that Tom and the team had to really go after, which is to broaden our capabilities in the macro segment a little bit because that was something that traditionally the Bank of America Merrill Lynch teams have came together and he's done that. So that's added some more volume to us. So we think we've been gaining share, Paul said earlier. When you look at revenue comparison among the top 10 banks without all the lead charge or just revenue, and we think we think it's driven by our fixed income capabilities and it's driven by our connectivity from the issuer of the bonds and debt to the investor and we'll continue to drive that. And so the team has done a good job and I'd say that we're at a fundamental level this quarter feels better than last year's quarter.
It's not a quarter that when you look across 4 or 5 years that we haven't come close to in many cases and done better than a few times.
Thank you for that. I guess a similar question on commercial lending. You referenced some of the strategies you've had in place driving responsible growth and how you felt good about the business going forward. But we saw this pause across the industry in the Q3 in commercial growth, the Fed numbers, your numbers, other banks reporting so far. Have you seen signs of customer demand coming back, I guess, late in 3Q and early in 4Q?
Do you have visibility and confidence that the commercial loan growth cycle more broadly is still in gear?
Look, we feel I think let me start with what we noticed in commercial in the quarter was lower industry growth this quarter. And I think that really reflected a slowdown in closed actually booked closed acquisition financing for us, which is probably maybe could be different for peers depending on the timing of transactions. And then uncertainty around the election and then I think some lingering concerns around certain countries or regions. That's what I think impacted the Q3. We when you look at the U.
S, when you look around the globe, when you kind of look at GDP growth, we're optimistic. We think the economy feels good. So in a good economy, we should be able to grow commercial loans. We'll have to stay focused on some sectors and some regions, but we think we can grow commercial loans. There's not utilization rates and revolvers.
They came off their highs, but they're at the higher end of the range, which also suggests or reflects good commercial activity. We're adding bankers in the U. S. And commercial banking and small business. We're adding them to regions where we know we have synergies or some capabilities, some big MSAs.
So there's no reason why we can't grow within our responsible growth framework, assuming the economy continues to chug along here.
I think also if you think about by sub asset class, in real estate, we modulate our growth there based on our view of wanting a diverse portfolio and then how we lend in the business. And that if you see that number, it was growing and it's flattened out a little bit and that relative to others, that was a difference. But I think but Paul's last point is a key point. There are creditworthy customers that we can do more with, and the only way to do that is because we have a talented world class commercial banking team is to add more capacity. And so and that capacity is starting to build and it takes a while because you hire a commercial banker and we sometimes give them some of the undercovered names in our portfolio or else and then they go after the prospects that we have.
And it takes a while to build those up. People don't change their commercial banking relationships in an afternoon. So in our business banking and our middle market, especially across America, we have been adding commercial bankers and we expect that to rebound our benefit given an environment which may be solid but okay. We'd expect to gain share in those markets as those bankers come on stream and become more productive. And Hauser Borsvik, Canadian Occitine is driving that.
It has proven that those bankers do get share and you'll see that come through.
Thank you, both.
We'll take our next question from Nancy Bush with NAB Research. Please go ahead.
Good morning, Nancy.
Good morning, guys. We are all, of course, very attuned to the issue of fraud after the recent news at Wells Fargo, both on the customer side and on the employee side. And I guess my question to you would be, as you move more to digital methods of attracting customers and keeping customers, etcetera, I mean, is fraud on either side becoming a bigger issue? Or if you could just speak to the whole issue of how you prevent fraud as you become a more electronic bank?
I think when you think about fraud, most people think about in terms of the electronic side, most people think about credit card fraud and fraud as a broad word, arguments about whether the charge was valid with a merchant and things like that. And so there's a long history of adjudicating that. So as we you have more and more sales go online by the consumer, the techniques for online are continuing to develop at face to face or point of sale, the chip card when we're largely through all our customers having chip cards, merchant what we call chip on chip, I. E. Our chip card used with a merchant chip machine is rising sort of 1% or so a quarter and is now, as best we judge it in the 30s, the high 20s or something like that, Nancy.
So all that being said, we expect to get leverage in our fraud losses in the consumer business year over year and we expect that to continue to come down. And so yes, that is a major initiative for us to continue to drive that down. Part of it's education to consumers, part of it's getting the chip cards in the hands and getting the machine merchant using the chip machines, part of it is the tokenization in the wallets and things that go on, and Visa Checkout and all the variations in Mastercard and getting because that's a tokenized better execution and it's more secure. And so our view as a provider has been to adopt all these wallets and technologies that have this tokenization capabilities and that then drives down the cost of losses due to merchant complaints and other types of things. So you're absolutely right.
Cybersecurity, theft of cards from other people and sold on the Internet, all that stuff is important to us. And so we spend, as we said, dollars 500,000,000 a year protecting ourselves, but also part of it is making sure we understand where our consumers are in terms of lost cards and things like that.
Well, how about on the other side there, the employee side, opening false accounts? If you could just speak how you think your methodology is different from what produced the problems at Wells Fargo?
Maybe I'll take that one. Look, I want to take just one step back because it's really answered that question. You just have to have a better appreciation for how we run Bank of America. And it truly really does start with our purpose, which is to help customers better live their financial lives. And then for there, you have to understand what we mean by responsible growth.
So response, if you ask anybody in the company responsible growth, it's about developing relationships so that we can grow with our customers over time based upon their needs and goals. It's not about the number of products that we open. It's whether customers want to meet the products and services we're offering them and use them. That's how we measure ourselves. We've spent years building controls and governance and escalation around this.
We're always monitoring them. It's just how we run the company. So that's probably the best answer I can give you in terms of how we think about this issue.
Okay. And Brian, I have a what is going to be a difficult question for you. But in response to the problems at Wells Fargo, we seen them separate the Chairman and the CEO roles. And while that may have been due to exigent circumstances, do you foresee another push now either by regulators or by shareholders to separate those roles?
Nancy, I'd say this. If we have dialogue with all our shareholders often and Jack Boved, our Lead and Pennant Director, obviously, we went through this a year or so ago and we've asked the shareholders vote and they voted on it. But the key is how we run the company, how we govern ourselves. So again, Paul's view of what he talked about responsible growth, one of the tenants is to be sustainable and sustainable, all growth has to be sustainable and it involves things like got to invest in the future, but also involves how we govern the company and our Board, the independence of our Board, the experience on our Board, how they approach their responsibilities, I think, is very strong. And I think our shareholders have understood that and agreed with that.
And so I think we govern ourselves in a very tough fashion, I. E, the Board is demanding on us and understands the strategy and has helped support the strategy through some times when people would challenge it. And I think it's proven to be the right strategy at this point. And so if you get the technicalities, our lead independent director duties are as strong as anybody in the industry. If you look at all the new governance surveys that come out, all the words about proper governance and all the different things that you've seen recently, we meet or exceed everything anybody says to go to, so I feel comfortable with
that.
All right.
Thank you. And we'll
take our next question from Brennan Hawken with UBS. Please go ahead.
Good morning. Just wanted to follow-up on the fiduciary rule questions before. So appreciate that retirement assets are less than 10% of your balances as you've highlighted before. But I think, what a lot of folks are thinking about here is that the FCC has been pretty clear that they're working on their own version of this applying to taxable. And so when people watch what you're doing here on the in the event we see a similar rule come out more broadly.
So isn't that the message that you're basically sending to FAs? And aren't you concerned that FAs might look at your platform versus some of your competitors that will offer the BIC and think that they might have greater amount of flexibility at some of those other platforms?
Okay. So look, when you look at advisor attrition today, it's at all time lows. And I don't we don't expect significant attrition for the same reasons that attrition is low today. Merrill Lynch is a great place to work and serve your clients. So if you're an FA, you're looking at a platform.
We have market leading capabilities. We have breadth of products across banking and wealth management. We have lots of options in terms of servicing clients. We have great technology that we're investing in, tremendous transparency that provided through Merrill Lynch 1, award winning research and incredible global execution through global markets. So there's a lot of reasons to be here.
This is a great place to serve your clients. We're implementing a strategy that creates significant flexibility for our advisors and we're delivering fiduciary best interest advice to clients. I said it before, but we came to this decision not to use the best interest exemption after a lot of months of thinking and research. And this is better for our advisors and it's better for our clients. The best interest exemption is going to create confusion.
It's got operational pain for clients. It's going to be inefficient and cumbersome for advisors. This is the best solution we believe for our clients and advisors.
If you look at the brass tacks financials, in the Q3 of 2016, we had $4,400,000,000 of revenue in our Wealth Management business. Of the $4,400,000,000 $500,000,000 of in total was brokerage. And so this part of the business has been declining in favor of financial advice to the client and to manage portfolios that meet the needs of the client and have investment parameters and decisions based on the client's goals. And so the goals based method is the dominant method in our business. And so you've seen a constant growth in asset management fees, net interest income and other sources of revenue and frankly, a constant decline in the brokerage business across many years.
And so the SEC has an obligation in the rules to issue a rule on this at some point and they will and we'll adjust to that there, but it's consistent we've been taking the business for 5 or 7 years.
Sure, sure. I get it. And there's no question that commissions have been declining. It's just that when you look at some of the asset classes, like alternatives and such, it's hard to get everything to kind of fit into a fee based approach. And so that was the gist of my question.
But maybe going a different direction, or as well as
the different direction? Well, yes,
just to be clear, we're not doing away with brokerage. Brokerage is going to be unless something changes in the industry and that's going to affect everybody, we're not doing away with brokerage. Brokerage is a very important part of our advisory relationship and FAs will work that out with their clients, what's best for them.
Right. But if we take the logical conclusion that your approach here with retirement would be similar to taxable under the assumption and I look, all of this there, I'm making assumptions with all of this, but we all have to, that the SEC comes out with a similar rule, then your option within, to maintain brokerage is self direct. And I could see how FAs might dislike the idea of having a component of their relationship move effectively away from them. So what has been the response from FAs of this idea that if we want to maintain brokerage, it has to go the self directed route? And has that tapped in on any of the worries that some of these brokers have seen much of their book shift over to discount brokers, that would fit in that type of an approach?
Yes, I think you've stated yourself that you're making a lot of assumptions. I think let's let it play out. We have the biggest and most capable business in the world, making more money and having better margins than anybody else. I think we'll figure it out.
Okay. Thanks.
And we'll take our next question from Matthew Burnell with Wells Fargo Securities.
Thanks for taking my question. Perhaps a bigger picture question. On your media call, you were, I guess, asked a question on Brexit. And it sounds like you do have plans in place for that, which certainly makes sense. I guess, given relative to your $53,000,000,000 cost target for 2018 and the fact that the negotiations seem to be starting to gear up early next year, how are you thinking about the costs in the Global Markets and Global Banking businesses from Brexit, if it is if it ends up being a harder Brexit than a softer Brexit?
Look, I think it's just too early to tell at this point. We don't know how it's all going to unfold in the UK and in Europe. We don't know what the effect is going to be on our clients on the new rules. So as I said on the press call, we've developed plans based upon various scenarios and we're just going to wait and see how they how everything unfolds to know what we're going to do. But as I emphasized on that call, today we're focused on our clients.
And as I alluded to, this impacts them too. So for now we're just working with them, providing them loans, helping them raise capital, store move their money, manage risk. That's what we're focused on.
Just remember materiality here. So the markets business is about 20% of our expense base today. That's the entire business. So I don't think the impact of Brexit in the overall company, we would manage it without having any impact of any great magnitude. As it relates to the European business itself, it will have an impact if it costs us more, but not to the whole company.
Okay. And then just a quick administrative question. You mentioned on Slide 9 that the non performing loans in the commercial portfolio were increased by $340,000,000 quarter over quarter. It seems like it's mostly in the energy and related space. Is that a U.
S. Or are those U. S. Credits? And what's your outlook for those balances going forward?
Yes, it was 2 credits, 1 in Metals and Mining, 1 in the U. S. And if you look at the ratio, it's at a very comfortable level. So that doesn't concern us. If you note, criticized assets were down in the quarter.
That's because these two credits that went NPL were already in reservable criticized.
Okay. Thanks very much.
We'll take our next question from Vivek Juneja with JPMorgan. Please go ahead.
Hi. Thanks for taking my question. A couple of questions. Paul, your deposits at the Fed declined pretty sharply, almost 20% linked quarter, even though you had company deposit growth and given that long term rates are still pretty low. Can you talk a little bit about what drove that thinking?
Yes. We moved some cash into securities. Again, we're always managing the trade off between sort of liquidity, capital in terms of interest rate movements and returns. And we just deployed some of that, as I said, in U. S.
Treasuries, so you can think about it going from one part of the government to the other. We just moved them to get a little bit more yield. We feel good about that move and we'll continue to optimize our cash and investment securities.
Is that saying that you don't expect rates to go up that much given that you move credit chunk at a time when long term rates are pretty low?
I'm not sure we're making any we're not projecting any view of rates. When we make that move, we're just balancing liquidity capital and earnings. It's a big portfolio. We want to we're always looking at it to make sure that we feel good about where we are at any point in time.
One more question. Earlier you mentioned that global in response to a question that global markets was doing a better job managing the balance sheet. Could you give us some more color about what specifically they're doing?
I'm not sure I really want to give much more color than that. They're doing the standard things you might do to optimize RWA, trade compression, looking at returns on various assets and just optimizing.
Okay. All right. Thanks.
We'll take our next question from Marty Mosby with Vining Sparks. Please go ahead.
Thanks. Wanted to ask you about 2 strategic balance sheet decisions. One is that there seems to be a lot more retention of mortgages. So when we have these surges, we're not picking up as much mortgage fees, but growing mortgage loans maybe a little bit faster. That is a shift.
And do you think that will kind of hold mortgage fees down and trade off for further net interest income down the road?
Yes. You've got the dynamic, but the route is, as Paul was just answering the last question, we continue to build cash that we need to put to work. These are our core customers, very high credit quality mortgages and pipeline has grown quarter over quarter and continues to grow in production capacity and capabilities. So you've got it right. I mean, the technical differences instead of recognizing the upfront gain on sale of the mortgage and capitalizing the servicing, you've seen that come through NI over time.
And so any other dynamic remember is the MSR asset will continue to drift down because we have less and less third party service.
And again, I want to point out we've done a lot of thinking about that and we think maybe there's a near term impact on earnings, but long term we think that's a better strategy for our shareholders given the risk profile of the mortgages that we're originating and putting on the balance sheet.
And then
kind of in connection with that, you talked about the big question on asset sensitivity, which is duration expectation on your deposits. As you've gone through this cycle, initially, we all assumed that there was going to be a lot more volume runoff than the volumes just keep going higher. Have you adjusted that duration? And is that part of why you're also comfortable putting on more mortgages that have that longer kind of duration feel to it?
In terms of the technical modeling for NII, we still use the same assumptions we've used. If you you could have great debate in our company whether we think those assumptions are conservative or not. But so in terms of the NII modeling, we've been very consistent in terms of what they got to Marty deposit beta and what would change and how it would work. I think the pragmatic answer is that we are 90% of our customer consumer checking accounts are core transactional accounts, the primary checking account. Those balances are touching 2 $50 plus 1,000,000,000 They've been doubled over the last 7 or 8 years.
Those balances are the daily cash flow of a household and I don't think they are going to change much. But until you've got experience, it's a model has to sort of look backwards as we'd say. And so we'll see what happens. But so far, those of us that take the side that this will be less sensitive of 1, let's just say that.
All right. And then lastly, just strategic utilization of capital. If you look at your allocation of capital and returns by business segment, you kind of do a weighted average, you come up with close to an 18% return. As profitability gets higher, that's getting farther away from the overall return, which is still around 10%. How do you envision trying to clean up either the capital positions or the overhang from overhead expenses that then brings those two numbers maybe a little bit closer together?
Thanks.
Yes. So Marty, the moving expenses down, we talked about that earlier, that helps the returns. We always have to remember that there's basically leave aside how the allocation works to the businesses, works differently. But when you think about the 10% capital requirements for us, 300 basis points or 3 percentage points of that cannot be put to use. It cannot take risk.
And so we are earning all our money on the 7%. And so when you think about the weighted average of that, it comes out over 10%. That means you're earning a lot more on the 7% even across the whole company. And so that's one of the difficulties. So how do we optimize that?
We make that 10% less dollar volume. If we can keep moving dollar volume down and keep increasing earnings, you get that. That's by all the discussion Paul had in response to earlier questions about optimizing the balance sheet, or we get expenses down or we grow less risky earnings that can generate income, but it's a constant optimization. But the basic principle of people that we sometimes forget is that when you think about 10%, only 30% of capital can take no risk and so basically earns your cost of debt.
Got it. Thanks.
We'll take our next question from Gerard Cassidy with RBC. Please go ahead.
Thank you.
Good morning, Gerard. Good morning. Good morning. How are you?
Good. Question on your digital sales. Obviously, you've had 18% of total sales coming through digital channels and 25% through the mobile. Can you share with us what products you're having the most success with selling through these channels and which products prove to be more challenging?
Well, generally, you should think that the products which are more straightforward like a card application, we build a nice auto loan execution that's kind of unique and because those things are fairly straightforward applications. Mortgage and things like that really take a lot more process around them. So I'd say cards and autos are the dominant part of it.
Is there any target of where you can get the sales to as a
percentage of total sales? Can eventually 50% of sales come through the digital channel?
I think will continue to rise in terms of dollar amount, probably rise in terms of percentage. But remember, as sales grow overall in the company, getting it to 50 means they have to win the mix race in the growth overall. But we are becoming more and more capable in delivering this and that's why you've seen the nice growth. And so we're applying it deeply where it can really be the primary method and things like cards and autos are the easier place.
And then finally, sticking with digital, is there any application in the digital channel where you could have success like you're having in the consumer bank in the Merrill Lynch brokerage channel?
Yes. They well, Merrill Edge is obviously a cross support execution. There are clients that utilize that in Merrill and in U. S. Trust and the broad consumer business.
So it's a broad execution and well recognized as being one of the leaders and by the various authorities. We believe and one of the things Terry Laughlin and Keith Banks and Andy Sieg and John and others are working on is to increase our capabilities for both the advisor and the customer and the in digital more or less stated in that in G WIM business. And so we think there's upside for us. Again, less customers, so the leverage is not quite the same and that's why we spend a lot of our time around the consumer. And there's just less leverage in the advisor.
You have to think about in that business because the advisor is the core strength that we have to the customer that we have to have an execution, which is universal between the advisor, the customers, they can all see the same thing. And so we've got some great capabilities now, MyMerrill and things like that. I think but we plan to continue to enhance them and continue to integrate them. So when they get the loans and deposit, things like that, they're much more integrated over time. You can still see it all, but it's not where we want it to be.
Great. Thank you, Brian.
We'll take our next question from Brian Kleinhanzl with KBW. Please go ahead.
Yes, thanks. I just had one quick question and it's on the $53,000,000,000 expense target. I mean, if we got into an environment where you saw revenues come back more robustly near term, I mean, could you still commit to that $53,000,000,000 target, meaning you have enough levers to pull? Or would you see yourself switching to maybe an efficiency ratio target, if all of a sudden these revenues came back stronger? Thanks.
Yes. If you remember when we made that target, it was in the context of a 1.5%, 2% GDP growth economy, much like we have now in the rate environment, incremental from where we have now. So I think the shareholders and this management team would be happy if we were having a discussion about revenue related incentives going up faster than that would be good news for the company.
Okay, thanks.
And it appears we have no further questions at this time. I'll return the floor to our presenters for closing remarks.
Thank you very much and we look forward to speaking to you next quarter.
And this will conclude today's program. Thanks for your participation. You may now disconnect.