Good day and welcome to today's program. At this time, all participants are in a listen only mode. Later, you will 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, sir.
Good morning. Thanks to everyone on the phone as well as the webcast for joining us this morning for the Q1 2016 results. Hopefully, everybody's had a chance to review the earnings release. The documents are available on our 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 those, please refer to either our earnings release docs or our website or the SEC filings. Let me just remind you, please limit the number of questions so that we can get to everyone's so we can get through all the questions that everyone has. And with that, I'm pleased to now turn it over to Brian Moynihan, our Chairman, CEO for some opening comments before Paul D'Onofrio, our CFO goes through the details. Brian?
Thank you, Lee, and good morning to everyone. We want to thank you for joining us to review our Q1 results. Today, we reported $2,700,000,000 in earnings this quarter or $0.21 per diluted share. As you can see in the results, 2 large items impacted this quarter's results, recorded negative market related NII adjustments for bond premium amortization. That adjustment alone cost us $0.07 per diluted share.
And we also recorded a $0.05 per share diluted share cost of seasonal retirement eligible incentives. When you think about revenue, net interest income excluding that bond premium adjustment was $10,600,000,000 this quarter. This is improvement linked quarter and year over year. Our loans are growing across the franchise and compared to the prior year are up 11% in our business segments. In addition, deposit growth remains very strong.
Our deposits were up $64,000,000,000 from last year or 6% to over $1,200,000,000,000 This growth reflects our progress to grow responsibly and deepen relationships with all of our core customers. Moving to non interest income, it declined year over year. Of note, the downdraft in that was driven by capital markets and related activities. And to a lesser degree mortgage servicing and other fees as we continue to wind down our 3rd party servicing book. However, the other banking sources of non interest income were relatively stable.
Switching to cost, we continue to drive cost down in this company. Cost year over year in the Q1 were down 6%. FTEs were down 3%. That is $1,000,000,000 per quarter, dollars 4,000,000,000 on an annualized basis. And if you focus just on the core costs excluding our LAS and litigation, those were down $600,000,000 from the Q1 of last year or $2,400,000,000 annualized.
We're going to keep driving those costs down as we continue to move forward through 2016. Turning to Slide 3 and looking at the business segment earnings, you can see the good year over year results because of the operating leverage in those businesses. The only exception is the results in Global Banking, which were negatively impacted by the increase to energy related reserves. The combination of the business segments outside the all other group earned $4,500,000,000 in quarter 1 this year compared to $3,900,000,000 in quarter 1 of 2015. Offsetting those earnings were the $1,900,000,000 loss in all other.
That loss primarily reflects the 2 large adjustments I mentioned earlier and some legacy litigation costs. You can also see the returns and efficiency ratios for each of our segments and note with the exception of LIS, which came close to breaking even this quarter, they earned above the cost of capital. Moving to Slide 4. During the period of during the Q1, there was a lot of talk with the market volatility a company buying surrounding the question about global growth and the forward looking economic picture. However, we don't see any evidence of our customer base changing.
Spending by consumers remains strong and is up year over year over 4%. Loan demand remains solid throughout the franchise. And we continue to position our company to face any potential economic outcome. When you think about this, it's important to remember the work we've done over the past few years to simplify and strengthen our foundation. We remain a different company today than that would have which have ended the last downturn.
We start with a clear strategy to serve the core financial needs of the customers. We've gotten out of businesses, portfolios, products and client relationships that don't meet those strategic goals. We simplify the company in every area. We cut the number of legal entities in half and we also reduced costs through programs like new BAC that produced loan more than $8,000,000,000 in annual savings and our SIM program which continues to operate today. But at the same time, we've continued to invest in the areas we can grow, dollars 3,000,000,000 in technology related growth initiatives, especially in areas of digital practice, whether it's in consumer banking, commercial banking, where we lead the industry with mobile and online platforms.
We've also invested more in client facing teammates, funding that investment through elimination of bureaucracy and simplification and elimination of management jobs. We believe that we have to continue to drive our productivity and we'll continue to do so in 2016. In the end, when you think about all this, it makes our company more resolvable. As you all know, we received the latest input from our regulators on our resolution plans yesterday. Those plans were filed 9 months ago and we've been busy at work since the day they were filed to continue to remedy the deficiencies and shortcomings stated in those plans and we will do so by the October submission date.
As we move to Slide 5, you can also see the financial foundation that we've built in this company, liquidity and capital at record levels. Tangent book value per share, the market of what we as shareholders own in our company now stands at $16.17 and has approved over $5 a share over the last few years even as we've taken the hits that are now largely behind us. Our funding structure continues to improve. Long term debt has been cut dramatically. Deposits have increased over 20% and all that most of that growth is coming through our consumer banking wealth management segments.
Our loan book is now well balanced, half consumer, half commercial. And importantly, the consumer piece is much more secured lending than it was before the last crisis. As we look in global markets, whether it's our level 3 assets which are more risky, the total trading assets or VAR, they're all down significantly over the last few years. So as you can see, we've simplified our company and our operating structure. As we look ahead to 2016, we remain focused on what we can control.
We intend to keep driving the core customer activity you see in the loan and deposit and customer flow growth in each and every business, focusing intently on the Wealth Management Global Markets businesses to take advantage as markets have stabilized. We'll continue to drive on focusing on cost and drive those costs down and we'll continue to drive to deliver more capital to you as we did in the Q1 as investors. With that, let me hand it over to Paul.
Thanks, Brian. Good morning, everybody, and thanks for joining us. Starting on Slide 6, we present a summary of the income statement and returns for this quarter, highlighting comparisons to Q4 2015 as well as Q1 2015. Earnings this quarter were $2,700,000,000 or $0.21 per share. These earnings include the negative impact of the FAS ninety one market related adjustment, which reduced EPS by $0.07 They also include $850,000,000 of FAS 123 retirement eligible incentive expense, which reduced EPS by $0.05 For comparative purposes, the aggregate impact of these two same items in Q1 2015 reduced EPS by $0.08 Revenue on an FTE basis was $19,700,000,000 this quarter.
Adjusted for FAS 91, revenue was $20,900,000,000 a decline of $700,000,000 from Q1 2015 on a similarly adjusted basis. This decline was driven by the reduction in sales and trading revenue and IB fees as well as mortgage banking income offset by improvement in adjusted NII. Expenses were $14,800,000,000 approximately $1,000,000,000 or 6% lower than a year ago, driven by good discipline across the entire company. Before moving to the balance sheet, I want to note an adjustment to the financial statements this quarter reclassifying some operating leases. We moved $6,000,000,000 of leases to other assets and we made conforming reclassifications to prior periods to improve comparability.
This reclassification had no effect on net income. However, as a result of this reclassification, quarterly NII is lower by approximately $50,000,000 other income is higher by approximately 180,000,000 dollars and depreciation expense is higher by about $130,000,000 While these changes are small and don't affect profits, I wanted to note them so that you can more easily adjust your models. Turning to Slide 7 and the balance sheet. Total assets increased $41,000,000,000 from Q4 driven by higher global markets repo activity as well as increased cash. Deposits rose $20,000,000,000 from Q4, while loans increased $4,000,000,000 Driven by deposit inflows, liquidity rose to $525,000,000,000 Time to required funding while down remained strong at 3 years and note that the Q1 included the $8,500,000,000 settlement payment to Bank of New York Mellon as trustee in the Article 77 suit, which was reserved for over 4 years ago.
Tangible common equity of $167,000,000,000 improved $4,700,000,000 from Q4. On a per share basis, tangible book value increased to $16.17 up 9% from Q1 2015. Turning to regulatory metrics, as a reminder, we report regulatory capital under the advanced approaches. Our CET1 transition ratio under Basel III ended the quarter at 10.3% and really is only comparable to Q4 as prior periods were reported under the standardized approach prior to our exit from Parallel Run. On a fully phased in basis, CET1 capital improved $3,400,000,000 to $158,000,000,000 as improvements from earnings and OCI were partially offset by dividends and repurchases.
Under the advanced approaches compared to Q4 2015, the CET1 ratio increased 30 basis points to 10.1% and is now above our fully phased in 2019 requirement. RWA decreased roughly $18,000,000,000 driven by reductions related to retail exposures as credit quality improved. We also provide our capital metrics under the standardized approach. Here our CET1 ratio improved to 11% with the same capital improvement as Advanced, but less of an RWA improvement given standardized is less risk sensitive. Supplement deleverage ratios for both the parent and the bank continue to exceed U.
S. Regulatory minimums that take effect in 2018. Turning to Slide 8, we had solid loan and deposit growth in the quarter. Reported loans of $901,000,000,000 on an end of period basis increased $4,000,000,000 from Q4 and are up $28,000,000,000 or 3 percent from Q1 2015. Loans in our primary lending segments were up 14,000,000,000 dollars or 2% from Q4, which is 8% on an annualized basis.
We continue to see solid commercial loan growth in Global Banking. In Consumer Banking, we continue to see strong growth in consumer real estate and vehicle lending. Lastly, in wealth management, we also saw continued growth in consumer real estate. Loans outside the primary lending segments in LES and all other were down $10,000,000,000 from Q4 driven by continued paydowns of 1st and second lien mortgages as well as loan sales. During the quarter, we sold FHA loans totaling $2,700,000,000 and NPLs and other delinquent loans of roughly 1,000,000,000 recording a small gain on sales and other income.
Turning to deposits, on an ending basis, they reached $1,200,000,000,000 this quarter, growing $64,000,000,000 or 6% from Q1 2015. Growth was led by our consumer businesses. Consumer Banking grew $43,000,000,000 or 8% year over year. GRUN grew nearly 17,000,000,000 dollars a 7% pace and global banking grew at a 3% pace. Turning to asset quality on Slide 9.
Outside the energy sector, credit quality is strong. Total net charge offs were $1,100,000,000 in Q1 and Q4. We had some immaterial movements this quarter from minor adjustments, but overall very little change in consumer losses. Commercial losses declined slightly from Q4 despite a slight increase in energy charge offs. Provision of $1,000,000,000 in Q1 was up $187,000,000 from Q4.
While net charge offs were flat, total reserve release declined as reserve releases in consumer were mostly offset by reserve increases in commercial driven by energy exposures. On Slide 10, we provide credit quality data on our consumer portfolio. Net charge offs declined $41,000,000 from Q4. Consumer real estate charge offs benefited from continued portfolio improvement and fewer one time items, primarily collateral valuation adjustments on the consumer real estate. Adjusting for those items, consumer net charge offs were relatively flat versus Q4.
Delinquency levels and NPLs improved and reserve coverage remains strong. Moving to commercial credit on Slide 11, net charge offs improved $35,000,000 A decline in non energy net charge offs from Q4 more than offset a modest increase in energy losses. Energy charge offs increased $17,000,000 from Q4 to roughly $100,000,000 in the quarter. Given that asset quality outside energy remains relatively stable, let's focus on energy. We continue to support our energy clients while managing lending limits and actively engaging with stressed borrowers.
Our overall committed energy exposures declined slightly from Q4, while utilized exposures were up by $500,000,000 As discussed last quarter, within energy, we believe 2 subsectors, refining and marketing as well as vertically integrated, which by the way tend to be large market cap and or sovereign supported. These 2 subsectors are less dependent on oil prices and therefore carry less risk than our exposures in E and P and Oilfield Services. Looking at our 7,700,000,000 dollars utilized exposure to the higher risk E and P and OILFO Services clients, we saw a decline of $600,000,000 from Q4 as payoffs and charge offs more than offset drawdowns. In addition, this quarter we moved $1,600,000,000 of our energy exposure to reservable criticized and we added 525,000,000 dollars to our energy reserves. We made these adjustments based upon another quarter of not only low oil prices, but also volatile oil prices.
This moves our energy reserve to just over $1,000,000,000 and while these reserves cover our full energy portfolio, they would represent 13% of our $7,700,000,000 E and P and Oilfield Services exposures. We believe that percentage is probably more relevant as you compare exposures across the industry. Turning to Slide 12, net interest income on an FTE basis was 9,400,000,000 Included in NII this quarter was a FAS 91 negative $1,200,000,000 market related adjustment for bond premium amortization. This adjustment in Q1 2015 was a negative $500,000,000 and including TruPS related charges, Q4 was also negative $500,000,000 Adjusted NII of $10,600,000,000 improved approximately $500,000,000 compared to Q1 2015, excluding FAS ninety one and improved $100,000,000 from Q4 after also excluding the troughs charge. Several factors contributed to the improvement from Q4.
We had good commercial loan growth funded by deposits. We also had about $100,000,000 in seasonal benefits in Q1. Offsetting these factors, we had one less day of interest and lower dividends on our Federal Reserve stock as required to contribute to the Highway Trust Fund. Lower long term rates also offset some of the benefit of the Fed rate hike in December pressuring NII. Lower long term rates was also the driver of increased asset sensitivity in the quarter.
As of threethirty 1, an instantaneous 100 basis point parallel increase in rates is estimated to increase NII by approximately $6,000,000,000 over the subsequent year. About 40% of this estimated $6,000,000,000 increase comes from short end rate improvement and the rest is from a long end rate improvement split equally between FAS 91 and reinvestment at higher rates. Turning to Slide 13. Non interest expense was $14,800,000,000 in the quarter. That is $1,000,000,000 or 6 percent lower than Q1 2015 driven by good expense discipline across the company.
Legacy asset costs excluding litigation excuse me, legacy asset servicing costs excluding litigation were $729,000,000 this quarter declining $292,000,000 from Q1 2015 and $64,000,000 from Q4. Litigation expense of $388,000,000 was in line with Q1 2015 as we work to resolve remaining legacy issues. 1st quarter expense also included FAS 123 annual retirement costs of $850,000,000 slightly below Q1 2015. Q1 of both years also included about $300,000,000 of seasonally elevated payroll tax expense. Adjusting for all these items, I.
E. The litigation, LAS, FAS 123 and the elevated payroll tax expenses were $12,500,000,000 This decline of $600,000,000 from Q1 2015 was driven by lower revenue related costs associated with sales and trading and investment banking as well as revenue in our wealth management business. The roll off of advisor retention awards put in place after the combination with Merrill Lynch and lastly, SIM initiatives that are improving productivity and helping us lower costs so that we can continue to invest in growth. Our employee base is down 3% from Q1 2015 and increases in client facing professionals were more than offset by reductions in LAS and other operations staff. Lastly, before leaving expense highlights, I want to remind you that quarterly FDIC insurance expense is set to increase at the large banks until the deposit insurance fund reaches 1.35%.
For us, this will increase expense by approximately $100,000,000 pretax starting in Q3 2016. Okay. Turning to the business segments and starting with Consumer Banking on Slide 14. Consumer earned $1,800,000,000 22% better than Q1 last year. These earnings reflect continued core customer growth coupled with strong expense management, Lower provision expense from continued improvement in asset quality also benefited the bottom line.
This work generated a strong 24% return on allocated capital. Note that allocated capital increased slightly for 2016 pursuant to our normal capital allocation reviews completed in Q1. On Slide 15, we focus on some important trends. 1st, in the upper left, we continue to lead the industry in a number of ways as you can see from the stats. Revenue increased $242,000,000 or 3 percent from Q1 2015 as NII growth more than offset lower non interest income.
Net interest income benefited from higher client balances. Non interest income was down due to lower mortgage banking income offset by increases in card income and service charges. We continue to see mortgage banking income come down given our strategy to book more of our originations on the balance sheet. Expenses declined 2% from Q1 2015. On the bottom left, you can see the year over year decline in FTEs as mobile banking growth continues to help us optimize our delivery network.
Note, while overall FTEs are down year over year, sales specialists are up almost 900 from Q1 2015. Lastly, our deposit franchise continues to drive operating leverage. Our cost of deposits as a percent of average deposits continues to improve and now stands at 171 basis points, which we believe is best in class in the industry. Focusing on mobile banking users in the upper right for a minute, we added 910,000 net new mobile users this quarter. We now have nearly 20,000,000 active users and deposit transactions from mobile devices now represents 16% of deposit transactions.
Interestingly, this quarter we added more net new users than any quarter in the last 3 years. And we continue to add new features and capabilities, improving convenience and satisfaction. One way we are promoting adoption is by deploying digital ambassadors in our financial centers. Digital ambassadors engage with customers who come to our branches to transact. They educate these customers on alternatives to branch banking, which are not only more convenient for them, but also less expensive for us.
Digital sales, digital appointments, digital satisfaction, all continue to achieve new highs. Focusing on client balances, you can see Merrill Edge Brokers assets are up 7% from Q1 2015 on strong flows offset by lower valuations. Moving to the bottom right of the page, note that loans were up 8% from Q1 2015 on strong mortgage and auto growth. Okay. Moving to Slide 16.
This is a new page that presents some statistics around loan growth and the quality of originations in our consumer segment. Starting with card, we issued 1,200,000 cards in the quarter, which is a bit lower than the past few quarters. Average balances were impacted by the sale of a $1,700,000,000 non strategic card portfolio late in Q4. Adjusting for that divestiture, loans were up from Q4. Spending on credit card adjusted for divestitures was up 8% compared to Q1 2015.
As we have discussed many times and shown here, we are originating high FICO loans that have produced very low loss rates and strong risk adjusted margins currently exceeding 9%. Moving to vehicle lending, one sees similar high quality low risk lending stats. Average book FICO's are around 780 and loss rates are low. Also, the tender of these loans is relatively conservative compared to the industry as nearly 90% of our loans are less than 73 months. Margins obviously aren't as high as credit card, but average balances are growing well across multiple channels within the business.
Our underwriting standards are producing similar results in consumer real estate lending, which is presented on the bottom of the page. Net loss rates on 1st lien mortgages have been negligible. Remember, we began booking these loans in the consumer segment in the Q1 of 2014 and the macro consumer environment has been healthy, particularly for high FICO borrowers. Turning to Slide 17, Global Wealth and Investment Management produced earnings of $740,000,000 up 13% from Q1 2015. Year over year revenue was down, but expenses declined more improving Ptrack's margin to 26%.
Overall, revenue declined 2% from Q1 2015 as strong NII growth was more than offset by lower market sensitive revenue. Asset management revenue declined on lower market values. Transactional revenue was also down and continues to be impacted by the shifting of activity from brokerage to managed relationships as well as market uncertainty. NII benefited from solid deposit and loan growth. Non interest expense in the Q1 of 2016 benefited from the fully amortized advisor retention awards given at the time of the Maryland's merger.
We have not seen a noticeable attrition
as a result of this.
Lower revenue related incentives also contributed to lower expense versus Q1 2015. Moving to Slide 18. Despite lower market levels, we continued to see overall solid client engagement and we continue to invest in the business growing client facing professionals year over year. Client balances are $2,500,000,000,000 Long term AUM flows were down this quarter as a result of market volatility, which impacted client behavior. Average deposits grew $9,000,000,000 from Q4 and average loans also grew this quarter concentrated in consumer real estate lending.
Turning to Slide 19. Global Banking earned 1,100,000,000 dollars down from both comparative periods as energy reserves weighed on results. Despite this increased provision expense, Global Banking was able to deliver a 12% return on allocated capital. And note that we allocated $2,000,000,000 more in capital to Global Banking for 2016 pursuant to our annual evaluation of allocated capital. Global Banking continues to drive solid loan growth within its risk and client frameworks and this drove a nice increase year over year in NII mitigated to some degree by spread compression.
That NII improvement combined with revenue growth from credit cards and treasury fees partially offset a decline in investment banking and other marks on loans and hedges. Non interest expense compared to Q1 2015 reflects a decline in revenue related expense offset by the cost of adding sales professionals over the past 12 months. Looking at trends on Slide 20 and comparing to Q1 last year, it was obviously a tough quarter for the capital markets with spikes and volatility causing declines in client activity. However, clients still have financing needs and here is where the diversity and strength of our franchise allows us to continue to look to deliver for them even when capital markets are less attractive. You can see that trend in our average loans and lease balances, which increased again this quarter and are up 14% year over year.
Growth in loans was broad based across C and I, CRE and leasing, although recently we have slowed growth in CRE. Spread compression on average across all our customer sizes has moderated relative to a year ago. Average deposits also increased from Q1 2015, up $11,000,000,000 or 4%. We remain focused on our deposit mix, which is strong with only 3% classified as 100 percent runoff balances. On the other hand, total firm wide IB fees of 1,200,000,000 were down 22% from Q1 2015 with declines broad based across M and A, DCM and ECM.
Switching to global markets on Slide 21 and comparing Q1 last year, again, the challenging market condition caused revenue compared to Q1 2015 to be down. The quarter included the benefit from the resolution of a litigation matter and we also had lower revenue related costs compared to Q1 2015. All of this resulted in global markets reporting earnings just under $1,000,000,000 Reported revenue was down year over year, but note that last year DVA negatively impacted revenue versus added to revenue this quarter. Total revenue, excluding DVA, while up from Q4, was down 17% from Q1 last year on lower sales and trading revenue as well as global markets share of lower IB fees. Non interest expense declined 23% from Q1 2015 driven by lower litigation.
Adjusting for litigation, expenses were down 9% as a result of lower revenue related expenses demonstrating a disciplined approach to compensation. Moving to trends on the next slide and focusing on the components of our sales and trading performance. Sales and trading revenue of $13,300,000,000 excluding net DVA is up 25% from Q4 with improvement in both FIC and equity, but down 16% from Q1 last year. Versus Q1 2015, fixed sales and trading of $2,300,000,000 fell 17%, reflecting a tough environment for credit related products as well as a tough comparison to a strong Q1 2015 in currencies. Equity trading was $1,000,000,000 declining 11%, reflecting weaker trading performance in a challenging market environment.
Average trading assets continued to trend down as did VAR, which remains at historically low levels. Turning to legacy assets and servicing on Slide 23. This segment lost $40,000,000 this quarter. I'm not going to spend a lot of time here, as trends are consistent with past quarters. Revenue was down a bit from lower servicing fees as the portfolio of service loans declines.
Revenue was also impacted by lower net Hespergyls. As the portfolio shrinks, we continue to lower servicing costs, particularly with respect to delinquent loans. The number of 60 plus day delinquent first mortgage loans serviced continued to decline and is now only 88,000 units. Excluding litigation, expense this quarter was $729,000,000 dropping nearly $300,000,000 from Q1 2015 and down $64,000,000 from Q4. On Slide 24, we show all other, which reported a loss of $1,900,000,000 Results were impacted by the $1,200,000,000 FAS 91 market related adjustment, the FAS 123 seasonal retirement eligible incentive costs and litigation costs.
The loss here is higher than Q1 2015 for a number of reasons. First, the market related adjustment is more negative this year than last. 2nd, we had higher gains on sales of loans in Q1 2015 than this period. 3rd, provision expense is higher as both periods had a benefit from provision, but this quarter that benefit was smaller than Q1 2015. Lastly, litigation costs were higher this quarter versus Q1 2015 as we worked down legacy issues.
The effective tax rate for the quarter was about 28%, which is better than we expect for the full year absent any unusual items. One expected item that we want to bring to your attention is another UK tax rate reduction recently proposed in the Chancellor's budget. We expect this to be signed into law in Q3 and will result in a tax charge of about $350,000,000 to reduce the carrying value of our UK DTA. The vast majority of this charge will not impact regulatory capital. Okay.
So let me offer a few takeaways as I finish. Given the market volatility, revenue growth was challenging this quarter. However, we compensated for this by managing expenses well. If one adjusts this period's reported results for the non cash FAS 91 market related NII amount and the FAS 123 costs, earnings are largely in line with recent quarters. You can see progress most clearly in our business segments, which don't include these adjustments.
Taken as a whole, the segments, not including all other, improved earnings by 16% versus Q1 2015. The drivers of this improvement were solid loan and deposit growth across our customer groups. Net charge offs were largely unchanged as modest increases in energy were mitigated by other improvements. We strengthened our capital liquidity and we returned $1,500,000,000 in common dividends and repurchase to shareholders. To Brian's earlier point, we have done years of work to simplify the company and reduce risk.
With $167,000,000,000 intangible common equity, dollars 12,000,000,000 in credit reserves and twice the amount of liquidity of a few years ago, We believe we are well prepared to help customers and clients in good and bad times and we are focused on growing earnings in many different economic scenarios. With that, let's open it up to Q and A.
We can take our first question from Jim Mitchell with Buckingham Research. Please go ahead.
Hey, good morning. Just maybe let's focus I'll focus my question on expenses and then I'll get back in the queue. But I think outside of incentive comp expense is generally were better than I was expecting. And how much of that is to simplify and improve? And how much more do you think there is to do on some of these core expenses, I guess number 1?
Look about from Q4 to Q1, dollars 300,000,000 in core expense decline. Dollars 100,000,000 of that is the roll off of the amortization of the awards we gave to advisors around the Merrill Lynch acquisition. 200 of it is just good solid expense discipline being driven by SIEM and other initiatives. If you look at the supplement, you're going to see expenses came down in nearly every category.
And you think there's more to do there? And I guess maybe in the context of your discussion around digitization and consumer, that seems like that could be a longer term tailwind. Do you guys agree? And do you think that's a material mover or just more incremental?
Jim, I think there's a lot more to do here because at the end of day, adjusting the efficiency ratio for the 2 major adjustments, which won't recur next quarter, you get in the mid-sixty 6 percent, sixty 7 percent and we need to drive that down in the low 60s, even with the realities of Wealth Management business not being as profitable and a big part of our revenue stream, but very return on capital beneficial. So then if you flip and say how are we going to get down there, you're exactly right. If you look, we drifted down even further this quarter in numbers of branches, well, numbers of customers, but deposits are up. If you look at headcount and consumer, we continue to reposition it towards the sales and relationship management side and away from the transactional side. And so that digitization, which is we're at 19,600,000 mobile banking consumer customers.
And interesting enough, we're growing on the online customer base, meaning computer based customers grew over 1,000,000 customers from last year's Q1. So all that just drives more and more transactions and more and more cost structure of the day to day transactional stuff into those environments and saves us money overall. And at 170 and 70 basis points, there was a time when that was 300 basis points 5, 6, 7 years ago. We thought we got into 2 low-2s, 2 20, 2 40 and thought that was pretty good and now we're at 170,000,000 and my guess is we can continue to push it down.
That's helpful. And maybe just one ticky tack question on the FDIC charge. It wasn't clear, Is that an annual expense or is that going to be quarterly at $100,000,000
It will be quarterly $100,000,000 beginning in Q3 until the fund gets up to its adequate level and then it will come down. Okay.
All right. Great. Thank you very much.
Our next question comes from Matt O'Connor with Deutsche Bank.
Good morning.
Good morning.
Any outlook you can provide in terms of the potential for additional reserve boost related to energy? We heard one bank yesterday talk about maybe another 500,000,000 dollars although a lot of variability around that number they pointed to. And obviously, their book is different than yours. But any thoughts, if conditions say where they are now on additional reserve boost? And then just related to that, look for additional reserve release in the rest of the portfolio, given as you mentioned trends continue to be strong or even improve in some areas?
Sure. Look in terms of reserve builds, we think the reserves we have right now are the right reserves for our portfolio. Build and releases in the future are going to be based upon how companies adapt to the level and duration of low oil prices as well as our net charge offs. We think companies are adapting. In terms of reserve releases, we would expect releases in consumer, but at a slower pace than we've seen in the past as we run off the legacy portfolio and dependent upon the real estate market.
Consumer releases would likely go to offset any bills in commercial.
Okay. It's helpful. And then just separately kind of big picture from a regulatory point of view, if I look back to last year, you've had kind of some steps forward, some steps backwards, obviously had to resubmit on CCAR, that was net positive once you get the results back. You got the approval for the extra 1% buyback, I think symbolically, a lot of investors view and I view as positive. You got the living will issue that came up yesterday for you and a number of others.
And just at a very high level, maybe give us some update on how you're feeling from the regulatory point of view and where the areas are that you feel like you still need to improve?
I think from a global perspective, we continue to implement all the rules and regulations that have changed over the last few years. Importantly, Volcker was an implementation mid this year. And a lot of the work has been done. If you think about LCR, SLR, the core Basel rules and the changes we absorb the advanced increases over the last year and now we're above the 10% advanced including $100,000,000,000 or more of RWA for the commercial assets and the op risk of capital of $40 odd,000,000,000 And so we've absorbed a lot of that into the run rate. And I think we're now to the point of fine tuning the company around the rules and regulations and continue optimizing it.
And I think that we've obviously submitted the CCAR work. We did tremendous amount of work just on the expense side. That was another $40,000,000 of incremental expenses quarter in the Q1 to continue to get us using 3rd party to continue to make sure we kept our run rate at best in class. And so that's and being reviewed as we speak. And then we've got obviously as you spoke about the continuation of finishing up the resolution plan, which we has probably spent at least $250,000,000 on external parties to help us with and a lot of internal work.
And then that's all been in the run rate as we speak and ultimately provide relief as we get through it. So I think overall you've seen us implement most of the rules and optimize the company. We need to continue to do that. That ought to provide some RWA opportunities in the future, but it will continue to take time. But we've I think we're in pretty good shape.
And now the question is just to finish up a couple of these key tests on the resolution plan that you can see. They've unprecedented transparency. You've got the same letter I got. So you know exactly what we have to do, and we'll get it done.
I can just add maybe 2 thoughts. 1, this is not an episodic activity for us. This is That's 1. 2 is, it's not a group of people who are doing this. It's everybody in the company.
It's we have a significant it's really being led in many ways by the line of business. We've got involvement from all of the support functions. So it's become part of the culture of the company to get to the right standards across all the regulations.
And we can take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning.
Good morning, Betsy. Good morning, Betsy.
Hey, couple of questions. One is on the quality of the book. You went through and I reminded us how much you've improved the quality of book in the consumer. Could you speak to that in the commercial as well ex energy? And then give us a sense as to whether or not you think that's embedded in the CCAR results?
I'm just trying to get an understanding of whether or not you think that RWA hit that you had to take could potentially come down as commercial rolls?
So outside of on the commercial side, outside of energy and metals and mining, we don't see issues with credit quality. We're obviously watching very carefully, but it feels very good outside of those 2 sectors. What was the second part of your question?
It's on the CCAR results.
Yes, yes, absolutely. So look, if you look at our CCAR results, either on an absolute basis or on a comparative basis, you can see what a third party, the Fed, thinks our losses would be. You're going to see that again in a few months. And I think you can really see when you look at those results how much we've improved the credit quality of the company both across both consumer and commercial.
Do you think that can help in the buyback ask as you go through it's just a question about this year, but just over time?
Over time, Betsy, our view is that we can grow the company and grow responsibly as we talk about. So there's opportunities for growth and that's what on the consumer segment, a lot of questions we get is how can you grow and keep your credit disciplined. You must be changing. You can see that the stuff coming on today is as strong as anything we put on and the commercial you should assume is the same. And so there's still plenty of opportunity for us to grow, which is just good for earnings and prospects.
When you flip it to the other side of it, yes, our job from the management team was to set this company up that it would never have the kind of risk embedded in it that would lead us to difficult times in a real recession, leave alone the CCAR analysis. And if you see the CCAR analysis over time, you see our loss content continue to come down. And that should serve us in good stead to be able to take out capital over time as you said. And if you think about the commercial book, it's things like commercial real estate, we have been very disciplined in what we inherited through all the deals and development loans, all that stuff is really not existed at any consequence. So we feel very good about the commercial book.
Okay. And then just separately, you talked a bit about the mobile user increase. And I just wanted to get your sense as to the opportunity from here. You recently launched the new app with mobile pay, which you've been doing internally, but now you can do externally.
Could you
give us a sense as to how that's resonating with clients? Is there an opportunity set here for you? And are you going to market it a little bit more aggressively going forward?
So let's just framing from the overall top. Last year, this quarter, we had 17,000,000 mobile users. This year, we have 19.5. And as Paul said, there was an interesting point that the nominal rate of growth this quarter was one of the highest we ever had. So even though smartphones are penetrated, you think you've kind of penetrated the customer base, it's still growing fast.
So that's number 1. And then as I said earlier, Betsy, and you've followed our company for a long time, you might you'd have seen a plateauing in the online the computer based banking, for lack of better term, people come in through bankofamerica.com. And that now is growing as fast nominally or faster mobile, which means people are also using both sides. And so that's one thing. So the core activity is growing.
And if you look at the activity in the core customer base from card usage and both debit and credit card usage is up 4% plus year over year and that's good. The online mobile part of the spend is now up to 20% of the spend and is growing 15% per year versus the 4%, 4.5% growth on the total. So that's tremendous. Then you get in the wallet categories, just to give you a sense. Just in the last week, the growth rates in enrolled cards was 12% week over week growth in terms of volume enrolled 100 odd 1,000 cards came on.
The payment usage was up 3% week over week. So you see this just phenomenal growth rate. If you analyze that out, that's a weekly growth rate and ebbs and flows for the holidays and everything else, but think about that. And you see that usage going up, but the mobile wallet payments are still less than 0.2% of the total payments made with plastic at Bank of America. So you still have a lots of opportunity to convert activity to a platform which is more convenient for the customer.
And then the other thing we've and then a part of that you talk about is the new consortium to build a new P2P deployment for the banking system. We're up and operating that. We still have a few more months before the rest of the colleagues in the consortium get up and then we'll start to push that out in the market heavily. I think it's a tremendous improvement over what we have today, even though we have a fair amount of volume on it today through ClearExchange. And that was an effort to get us all together so we could have a very interoperable payment network.
We've got the Visa checkout work that's going on where we're preloading customers cards and their wallet were about as best we can tell 13%, 14% of all the spend in Visa checkout today. We've got 1,000,000 plus cards will drive that forward. And if you put that all together, you're seeing tremendous volume off of all these mechanisms. In the month of March, to give you an example, We had almost $60,000,000,000 of payments off the computer based platform and about $20,000,000,000 off the mobile based platform. So think about the size of that.
Now given all that, we still sent out about $8,000,000,000 of cash out of our ATMs in the month of March. That's $250,000,000 a day or more. So it's still you have to have all the capabilities and that's what we're building towards. And going back to I think Jim's question earlier, the cost structure keeps moving in your favor as you keep driving this activity through.
I mean, eventually, you've got an elimination of checks and some of your bill pay costs actually go down as well, I would assume?
Yes. Eventually is always an operative word. Even today, I think there's about a quarter 1000000 checks a day. People take a picture of them and send them in on their mobile phones and that didn't exist 3 years ago, but still a quarter of a 1000000 of them that would have to go away. So it will be a while.
Okay. But that's in line with expectations to bring down the consumer expense ratio. I mean, is that really the driver of getting the consumer expense ratio down? Is the back end on the payments piece?
Yes. It's everything about payments, processing payments, fraud losses, discussion with customers about the payment the multiple payment faculties that they could use and how they interface. And so it has been a huge driver. Remember, we went from 6,100 branches down to 4,600 or whatever today and the customer base has increased by 10% and the volume of deposits is up by I think 30% to 40% and checking deposits are up dramatically. So I think year over year checking deposits were up 8% or 10%, I think Lee, right, something like that.
So the activity level is growing up on a smaller and smaller base and that cost structure in retail is driven by 2 things, the people, which were increasing sales and relationship management content and the physical plant. And you're absolutely right, driving all that out. Near as we can tell, we spend about $1,000,000,000 a year just moving cash around in our company. So less cash moving around saves us money.
Okay. And just remind us what your goal is to get the consumer expense ratio to?
The goal is to have it keep going down every day, week, month, quarter. And I think Betsy, with all these things, you got to be careful about letting my consumer colleagues think they're doing too good a job, so they keep putting pressure on them. So I'm not going to give them a goal that they think they've achieved something.
All right. Thank you.
Our next question comes from John McDonald with Bernstein.
Yes. Hi, good morning. I was wondering about on the net interest income side, if you could talk a little bit about Paul, what kind of outlook we should think about for the core net interest income that was 10.6% this quarter. If rates are relatively stable and we don't see any hike for a while, how should that trend with all the puts and takes?
Sure. So look, we're hesitant to give guidance given the volatility rate that we've experienced. Guidance has not been that helpful in my opinion, but I'll give you a couple of thoughts. 10.6%, if you think about maybe as a launching off point, given some of the seasonal NII gains we had in the Q1, I think a more reasonable launch point would be more like 10.5%. Then you go to the Q2, we've obviously got to deal with lower long term rates.
2nd quarter is always a little bit seasonally lower for us. So there's some progress there is going to be challenged. But I think as you head to this Q3 Q4, when you consider what we're I think we can do on deposit growth and loan growth and if rates follow the path along the forward curve, we would expect to make progress in the latter half of the year.
Okay. And you do get a day count help modest in the second quarter from the first through, right? Shouldn't that help?
It's a leap year. So I think it's normally down 2, but now it's down 1 or
flat. And maybe right. Flat,
yes.
Going to second, okay. And then just on trading, there was a quote in the media from you this morning, Paul, saying March felt better in certain areas. Could you just give us a little color on what changed in March on the trading front? Did it work out better? Has that carried over a little bit into April?
And how are you thinking about the Brexit vote from a risk and revenue impact potentially as that comes up this spring?
Sure. So March felt I think a lot better than certainly January February. And April, it's really too early, but April feels at least starting out like it's more like March than it is like January February. In terms of Brexit, we are focused on our clients and customers. They're going to need there's going to be volatility potentially around the vote and around any changes after the vote and we're working very closely with our customers to address kind of their how they need to manage their risk.
From our own company perspective, we are going to listen. It's the UK's decision. We're going to after we find out what the decision is and understand it, then I think we will react to it and do what we think is in the best interest of our customers and clients and shareholders and other constituencies.
Okay. Thank you. And in
terms of March, what could you just any color on what got better, what felt better, which areas of the business could you help on that?
No, I wouldn't say, look, I think you heard from competitors that Asia was a little better in March. We were stronger in the U. S. Than we are in Asia. We have a significant business there, but so there was some improvement out there.
But no, I wouldn't have any more specifics than that.
Okay, thanks.
Our next question will come from Glenn Schorr with Evercore ISI.
Hi, thanks very much. On Slide 12, you noticed your asset sensitivity increased a bunch from the prior quarter. You mentioned driven by the drop in long end rates. Could you talk through how that actually works and then how much of the $6,000,000,000 is short end versus long end?
Sure. 40% of the $6,000,000,000 is going to come from an increase in short end rates. And then the other 60% is split equally between FAS ninety one and reinvesting at longer term rates. The 1091 piece is relatively straightforward. I mean, we had a $1,200,000,000 decline in Q1 because interest rates went down 50 basis points.
We're going to retrace that if they go back up.
Yes.
Separate one, if you look at the ROA for year on year, it's a large amount on a percentage basis from 59% down to 50%. I'm just curious, I wouldn't think weak capital markets in the quarter was the big driver, but I guess the question is, what's the big driver of it? And are the new business you're putting on coming in at higher ROA, so we should expect that to rise from here assuming not so crazy markets?
Look, if you think about our ROA and you adjust for FAS91 market related NII adjustments and retirement eligible expenses, you're going to get into the mid-70s. And then if you give us some credit for the progress we've made in LAS over the last few years and continue that progress you're going to get even higher. From there it's about growing loans, growing deposits, growing loans, putting on, like you said, assets that are accretive to what we have on the books right now and importantly, continuing to grind and work on expenses. And so that's what we got to do.
Okay. One last tiny one is Wealth Management Margins increased a couple of 100 basis points quarter on quarter, 500 year on year without the help of revenues. Expenses were down a bunch. You mentioned the 100 roll off of the previous amortized retention awards. What's the rest of the expenses inside wealth management?
Because that's pretty good in a world that didn't have much revenue
So it's compensation related given the fact that revenue was a little weak because of the volatile markets. That's not to say we're not working on bringing down costs in that segment as well, but specifically to answer your question in Q1, that's what drove it.
Is that non production expenses, meaning usually the comp stuff goes hand in hand with revenues?
Yes. It's not they're working on all their elements of expense. So you've got that right. But also remember, as the NII increases, there's not as much expense attached to that. So that's one of the operating leverage points in Wealth Management that we were losing a lot last year that we're going to get back as short term rates rise because they're a heavy deposit business.
Remember, they alone are $260,000,000,000 of deposits in Wealth Management, which and those deposits and loans continue to grow, which continues to produce more core NII as well as what everybody thinks of them as being a large investment management trust fee type company. But they are a big bank in there the loans grow and that's going to drive that up and that is marginally more profitable for the shareholder.
Okay, perfect. Thank you.
Our next question comes from Paul Miller with FBR and Company.
Hey, thank you very much guys. On the legacy asset, on the you lowered your loans from $103,000 to $88,000 on the high touch servicing or default servicing. How much of that was sold or are you guys just working through the book?
I would classify it as little to very little sold this quarter. It's just working service loans, delinquent service loans down.
Just working it down. And has the new stuff coming in, is that still a material amount? Or has that been is that mainly done? Like you're not really getting a lot of new stuff coming into this bucket?
Very little from any production that was done after the crisis, Paul, as you could expect. So the delinquency statistics. So really you still have modifications that the re modification work going on because people have had modification for years, some portion of them go back in the situation and then you have just the normal flow. But that number keeps working itself down and based on the quality of our portfolio, it should come down even significant for where it is. It's just this is a grind now.
This is just working through some are involved in litigation, take time. It's just a grind to work them out now.
And then you said like in the quarter and you disclosed this very, very clearly that it's about $700,000,000 on this. I mean, where can we can this be cut in half by the end of the year? And when does this really become immaterial, you think?
Well, the as we've told you, our target our next weigh station on improving this thing is 500 at the end of the year and we're well on our way to get there, Paul. But your experience of this business, that is not an acceptable number, but I just need to keep them tracking it down. What's interesting and if you look at the headcount that we show you and stuff, what is changing is their headcount down isn't 9,800 or something like that 9,900 at the end of the quarter. So it's come down from a high 58,000 internal people plus external contractors dramatically. Now we've got to get some of the harder costs out, meaning the systems and technology that was overbuilt for a $12,000,000 servicing portfolio, the real estate and that takes a little harder work.
So we're grinding all that out. So say 700 and change to 500 and change and ultimately we've got to get it down to significantly below that 500 to make it make sense as a servicing. I think it's okay, but to actually be an effective servicing platform, we should drive it down. Your point about immateriality is something this is becoming less and less of an event to us. And so what we got to execute on it, it's not going to have the impact when we had 3 $100,000,000 of quarterly cost a few years ago.
$1,400,000 of 60 plus day delinquent loans serviced.
So $500,000,000 by year end, that's our next goal. And then when we get there, we'll give you another one. But we're just like I said earlier to Betsy on the consumer side, we got to keep moving this in the right direction. And we have an idea where we can get to, but we want to make sure we get the first piece out.
Okay, guys. Guys. Thank you very much.
Our next question comes from Eric Wasserstrom with Guggenheim.
Good morning, Eric. Thanks very much. If I could just refer back to Slide 16 for a moment. There's been a lot of debate about the dynamics in the auto lending market, about deterioration underwriting and the risks of large amounts of used cars coming off of lease. And could you give us any granularity about what you're seeing sort of in lending across the FICO spectrum and how you're anticipating that residual issue to play out?
Sure. Look, I mean, just some perspectives. We're maintaining our market share in auto lending, but we're very focused on originating prime and super 5 loans average cycle scores you can see on the page 78. And debt to income ratios are at all time lows. Again, we're not following the market from a structuring standpoint to the longer tenors.
90% of our loans are 73 months or lower. So that's our strategy. And I think if we stick to that, we'll be fine. We did pull forward from we had an opportunity this quarter to get more flow. We had planned to do that in later quarters.
We pulled that volume to this quarter and we'll evaluate in future quarters.
And you asked a question about residual values and the volume of cars sold and what happens. And we also as part of our stress testing our portfolios, internal stress testing and also in part for the CCAR, DFAST work, we stress the collection the recognized collection value of cars down 40% and it's not it obviously have more losses, why wouldn't you? But what really controls your losses is the quality portfolio and what runs through that calculation. And that number is because the high quality is very low. So we test that question you're asking, which is what happens if residual values or used car values continue fall dramatically in a recessionary environment or something and that's one of the things we test and it's not a big number.
All right. And when you say that you pulled forward some flow, what do you mean by that?
You said the opportunity we have relationships where on flow on the flow side and when we see opportunities, we can pull some of that in. Originations come through the branch, they come online and they come through our relationships with financial institutions who have relationship with dealers.
And our relationship with dealers also.
And yes, our direct relationship with dealers. So every once in a while we will see an opportunity to add some balances and if it's within our underwriting standards, we'll consider it.
And that was primarily on the indirect side? Yes.
Okay. Okay. Thanks very much for the color.
Our next question is from Mike Mayo with CLSA.
Hi. My short question is, when will the return on equity go into the double digit range? Look, you have a good franchise and balance sheet. You're showing growth in loans, deposits, online banking, other areas, and you're showing lower and better expenses, branches, headcount risk, but it's not adding up. I mean your stock is 15% below tangible book value and this was yet 1 more quarter of mid single digit ROEs and worse than peer efficiency.
So my question is why is Bank of America less efficient than peer? And it's tough on the outside to know because you have $2,000,000,000 of expenses in other that's not allocated to the business lines. What is your plan B if rates don't go up? And when will the ROE go into the double digits?
Okay. Well, hi, Mike. Thank you. So I guess I would start by again, just so everybody understands the facts. If you adjust for FAS 91 and FAS 123, our return on tangible common equity be roughly 8.5%.
And again, as I said before, we've made a lot of progress in LES and if you give us any credit for the progress we think we're going to make in the future, we're going to be able to take that 8.5% even further. We've made I think so the key is we've got to continue to make progress on expenses. I'll get to revenue in a second, but we've got to continue to make progress on expenses. And again, I think we've demonstrated that we can do that. If you look just year over year, expenses are down $1,000,000,000 or 6%.
If you go back to Q1, Q1 2011, we've taken quarterly expenses down core quarterly expenses down $3,500,000,000 So that's a $14,000,000,000 run rate. We've got to continue to do that. If you look this quarter at our consumer and G WEN segments, you can see the operating leverage. If you look at the whole company and you back off 1091, you can see the operating leverage. So we've just got to continue to work on expenses.
We're not sitting around waiting for rates to go up. It would help if they did and that's what we're focused on.
All right. Well, if I can follow-up, despite all the progress that you've made and you talked about the LAS expenses, you can talk about new BAC, you can talk about the quarterly expense rate since 2011, but your core EPS is still $0.33 this quarter and it was a weak tough quarter, tough environment, but it's still in that $0.35 range. So despite all those expense savings, we're not seeing it in the core EPS number, it's still around $0.35 So where did all those expense savings go? Or is this going to come through in future quarters? And yes, I know I've asked this question on many earnings calls.
And also, I thank you, Bank of America, for having that and Brian for having that opening letter from the Lead Director in the annual report. Jack Bovedaert says that he wants to engage more with investors. So I do hope that he takes my questions at the Annual Meeting to engage a little bit more because I've asked this so many times, I still don't feel like I have an answer that I understand. So just one more try at it, Paul. Just what where are these expense savings going if EPS is still in the same range?
So they're going you sort of have identified the opportunity that we have in a different market environment. It's a judgment I think we have to make. But a portion of these savings are going to increase
growth in
the future. A portion are going to the bottom line. That's the lever we can pull over an extended period of time to adjust for the market environment. We've proven we can get the expenses out. If we wanted them all to drop to the bottom line, we could do that, but we need to invest in growth at the same time and we've got to balance that.
So no new BAC coming up or anything like that. It's just as I guess Brian you've said you grind it out. It's just it'd be nice to see more of the progression. Is it you think it's a 2016 event, 2017 event or we just when rates go up, we'll see more of it?
Look, in terms we are focused on driving down expenses every day, every quarter, every week. You can call it anything you want. We've got a lot of focus on this and I think you're going to continue to see progress. Our operating leverage on an adjusted basis this quarter was meaningful. You can see it.
If you adjust for FAS 91, revenue down 3%, expenses down 6%. We're getting the operating leverage. Look at the GWIM segment, look at the consumer segment. We're focused on it.
All right. Thank you, Paul.
Our next question is from Steven Chubak with Nomura. Please go ahead.
Hi, good morning. So I had a follow-up given some of the tailwinds you had spoken to, whether it be the higher margin NII growth and the absence of the legacy Merrell Awards. And I suppose as it relates to that, is our preparation efforts for things such as DOL compliance potentially going to weigh on the margin in future quarters?
A couple of things with that. The 26%, if you think back across the last year when we discussed this, we had the ATP piece and so a chunk of that's that chunk is good expense management. I said earlier, sort of the margin net interest income stabilizing, improving, they've been growing the balances, now it's more stable. So I think it is a good starting point. It will in some cases, you would hope it wouldn't go up a lot because that would mean asset management fees and other things are growing, which attach more compensation, less marginal profit, which would be good news because the overall profit would grow better.
But you should assume that that's a level we should hold on to if in a relatively stable environment as we see this quarter starting out at. When you go to the fiduciary, we've been working on that obviously just because it's the final rule and it came out recently we've been working on it. So I don't think I think to the extent that there's cost embedded in that, a lot of it's in the run rate and it'll be marginally in the run rate for the next few quarters. A hugely substantial cost. And if you even look, we've spent a lot of time educating our teammates about doing it.
There are operational costs, but I don't think it's material in the grand scheme of things.
Thank you. I'll just add a little bit to that. I think from the very beginning, we supported the fundamental objectives of the Department of Labor. And if you look at our goals based strategy, it delivers a lot of what they're getting at with that goal in terms of a best interest standard. Our Merrill Lynch 1 advisory platform, which we successfully completed the transition of a lot of clients this quarter, That's a great example of how we've been upfront to create an experience that is really transparent, single fee schedule, etcetera.
That's a significant investment. And we're guessing that that investment is really going to pay off here in terms of implementing this rule. If you look at the roughly $2,000,000,000,000 of GOM client assets we have outside of deposits and loans, we think the Department of Labor will probably impact less than 10% of that. And certainly given the implementation schedule, we wouldn't expect to see much of an impact if any impact in 2016. And as we digest the rules, we'll just have to evaluate how it's going to affect out years.
Okay. So it sounds as though a lot of the incremental expenses already in the run rate and that you don't anticipate much revenue disruption based on the final rule as written?
Correct. That's correct.
Okay. Got it. And maybe just focusing on the expense base within global markets, we're certainly pleased to see the absolute level of dollar expense was, from what I could tell, the lowest level that we've seen over the last 5 years. So clearly, some of the efforts that you highlighted to right size the cost base have more inferred. And as we think about the expense trajectory for this business, what should we expect in an environment where the trading revenues are relatively stable or consistent with what we saw in the most recent quarter?
Is that 2.4 reasonable run rate expectation?
We're going to continue like every other segment, we're going to continue to work on bringing our costs down in this segment as well. I think there's lots of things we can do from an operational standpoint to improve profitability over the medium and long term and we're focused on that. You're right. Here compensation expenses are significant and they're going to be consistent with the revenue performance. I think we were disciplined this quarter in terms of our compensation expense and you saw that in the numbers.
They've been adjusting as you read about in the press, there is a it's not in a run rate yet and comes in next quarter because it happened mid March. They made major adjustments in size of platform in mid March. And give you example, equity salespeople year over year are down 60% or 70% on a base of that's probably down 15%, 20% at least. So fab in that business continues to reposition. Bernie and Jim continued on the fixed income side.
So they made some major adjustments in headcount. So we'll hold it down here. It's you want this expense to go up because that means the revenues come back up. So you got to be careful. But the fundamental operating platform has embedded in the run rate cost to actually continue to develop a systems architecture, continue to drive the compliance of Volcker and all that stuff is in the run rate.
So the chances of sort of the non compensation related expenses moving a lot is not the big deal. And the question is just how do you incrementally keep management down?
The other thing to remember just in this quarter, I would just point out again that we did have a little bit of help from litigation. We had a reversal of the prior matter that
helped on the expense line.
Okay. And can you quantify how much of a benefit that provided, Paul?
We don't generally comment on those sorts of things. It was look, it was north of 100,000,000
dollars Okay. Got it. And just one more final one for me. Just on the Investment Banking side, you talked about stability in March continuing into April on the trading business. 1 of your competitors talked about actually seeing some improving trends in the capital raising environment in April versus what was clearly a challenging quarter in 1Q.
I didn't know if you were seeing some improvement on the capital raising side as well. And if you can give us an update just in terms of backlogs for Eric and some of the other pockets like M and A that would be helpful.
Okay. As you might imagine that the pipeline looks great because everybody people need to transact. They just haven't they just didn't do it in the Q1. So it's building up. In periods where there's volatility like this, the best thing our bankers can do is to be in front of CEOs, boards and CFOs, they're doing that.
There is going to be have to be financing activity at some point because clients need to finance and so our pipeline looks good. I wouldn't necessarily say we've seen any in the first few days of April, we've seen any dramatic increase in capital markets activity, but there's certainly lots of dialogue. The pipeline looks good again because I think it's there's a lot of pent up demand there.
I think the simple thing to think about in the investment banking and capital market side is the work is ready to go. We just if we continue to see the stability, you'll see it come through. And that's our comments are really based on it's still stabilizing as we speak. And so if that happens, you'd expect to see it start pulling through and it would be up from the quarter over quarter. But yes, there's still a few more weeks of stability that you have to see for people to actually pull the trigger on financing and stuff.
Obviously, the markets right now are stable. People can finance if they want to. I think it's just a question, as Brian said, of CEOs and Boards, just making sure that the stability we're seeing right now is something that they can count on as they go to market.
And we
can take our next question from Ken Usdin with Jefferies. Please go ahead.
Thanks. Good morning. Brian, right at the outset, you said that there's really been no meaningful change in the customer base activity. And then following on your comments stable capital markets. You're growing the core loan book now double digits still, 11%.
I'm just wondering how much of that is the environment holding up? How much of that is still kind of the spigot opening from reasonable growth? And just your outlook in terms of customer behavior on the lending side?
I think the other thing, Ken, is that you have to remember that for a long period of time, we are fighting the runoff of the non core assets, which are now small enough that we could actually overcome. So there are a lot of quarters where the core activity was growing, but you couldn't find it because if you look at the slide, you can see sort of the all other, which is the investment portfolio really mortgages and then the LAS assets are now small enough for the quarter to quarter runoff. But solid across the board. I mean, I think that in the segments we focus in, on the consumer side, prime, super prime, there is strong activity. Mortgages, you could see the origination volumes this quarter were solid.
I think if you think of home equity has kicked back up a little bit again because people see home equity in their house, the auto business is strong, but it will ebb and flow with how many units get sold ultimately because that's the nature of the business. Although I think we can gain share there because our share on our direct to consumer business was very low. We didn't even do it 2 years ago and now we're to $500,000,000 or more a quarter. So I think from a consumer side, the card business, because we've now sold through all the portfolios we have to sell, I think you should see stable and start to see better year over year comparables than we've had the last several years. Obviously, the last big portfolio went out in the 4th quarter.
And so I think we feel good. If you look at the online customers, the creditworthy customers that we deal with are there to borrow and we're lending to them. And if you go on a commercial side, as Paul said earlier, I think you'd expect the CRE we want to be careful in CRE. So we're doing very fundamentally structured loans, but in C and I and a nice news of business banking, not a huge business for us, frankly, but they finally are making it through their run off and that's good. And so I think across all those businesses, you should see it may not grow as fast as normally it has.
2 years ago, we had the international book grow in corporate that we slowed that down based on our judgments about risk. And so I think it's a pretty balanced growth. And so the question always is, do you have to your credit standards to grow? No, we don't because you can see that. And then secondly, is there opportunity to actually get growth?
And the answer is yes. But and that's just good hard work.
Yes. Brian, to that last point, how much opportunity actually without pointing to compromising, but how much more spigot opening can you still do? Your point about the post crisis, the tightening up internally, are you still under lent, if at all, or you still have to be somewhat careful about where we are in this stage of the economic cycle being that we're 7 plus years into an expansion?
We have to be careful and that's why I think we wanted to show you some of the there are 2 3 basic principles the 2 3 basic principles that you have to follow. 1 is we had to balance the portfolios between commercial and consumer. 2nd, we had to get the consumer to secured portfolios dominating versus unsecured, both credit card and other loans that would really put us behind in a tough situation last time. And then 3rd, you got to maintain your individual quality of underwriting consumer. It's more formulaic and commercial, more deal selection and customer selection.
But if you look at it, let me I'll just give you the simplest way to think about this. We have moved probably from 8 out of 10 mortgage holders who are absolutely within our credit box, absolutely do business with getting their mortgage somewhere else to maybe 7. So we still got 7 more to go without talking about expanding the credit parameters in our mortgage business when I owed it. So think of that as a demonstration point that you could go over and over again. So there's plenty of market share out there.
And then one of the things, Ken, we're looking at is we look across our 90 odd markets in the United States. There are areas where we have tremendous opportunity to expand our market share where the franchise just wasn't balanced. Some areas of franchise, the wealth management business is a high percentage and some places low. The middle market business is very high market, very strong good market shares in certain markets and a third of that in other markets. And so where we're deploying these people is also based on our view of which market.
So it's going into that market, hiring talent, using this massive customer capability we have to go drive it, again target the exact customers we want. So even on a geographic basis, whether it's a deposit business and expanding in some of those markets, but also in the commercial lending business and otherwise there's opportunities without compromising credit.
As Brian said, that's where those added sales professionals are going. They're going in markets where we think you have synergies across commercial, GWIM and consumer.
Okay, got it. So in some you think this 10% plus kind of primary lending is still achievable from that's what it sounds like from what you're saying?
Well, I think we've been told people focus more on mid single digits type of numbers and given 2% growth 1.5%, 2% growth economy as opposed to 10%. But the core business is growing faster and then we're still running off, but we told people to focus in at that level.
Okay, understood. Thanks, guys.
Our next question is from Nancy Bush with NAB Research.
Good morning, Nancy.
Good morning. Ryan, I think we've all over the last few years been quarter in terms of volatility and continued low rates, etcetera, etcetera, is banking normal, at least for the foreseeable future. And under that scenario, if you believe that, would you have you begun to look at take a second look at your businesses again? And will there be any sort of reallocation of capital going forward? And are there businesses you might want to exit?
So I'm not sure you can consider 1st quarter banking normal in the sense that we still have extra costs we got to get out of here, Nancy, that we continue to work down. Litigation was elevated in the quarter from more than normalized level that we feel we can achieve and things like that. But leave that aside, the basic principles we continuously look at the franchise to see about optimization. So generally when people ask that question, they're thinking about a couple of different areas. One is the markets area.
We show you the market's profitability returns in its business. But if you get into the supplement, you'll see you can never call markets business an annuity business, but what drives our business is really a connection between the issuer clients, the commercial borrowers and commercial clients and the investor clients that we serve and to do that. And then our wealth management business because that's a group of people rely on the research platform. If you look, the interconnectedness of that is massive and whether it's by us getting out of proprietary trading and Volcker and things like that, the whole the real business is driven at that. And so if you we've taken a balance sheet from impliedly at the time of Merrill probably nearly to $800,000,000,000 or more, maybe closer to $1,000,000,000,000 down to $500,000,000,000 and the revenues have stabilized.
And I think that's a good place for us to be. Number 1 research plant in the world, number 1 in the U. S. This year, the ability to use it in wealth management, the ability to use it to inform our corporate customers. So we look at how we pair away things and look at it.
So in the international business, we've paired back there was 1200 to 1200 people that were downsized in markets and banking in the Q1. So we keep it's not in or out, it's more how do you keep pairing it back. And so if you look across there, we always look at that question. We continue to look at it. But right now, we really like the franchise and the connectivity between the franchise of all the different elements focused on markets, focused on wealth management, focused on the core business.
And I think now the question is with low rates, we just have to grind the cost down. And that's going to come out of really all the pieces in well for a while it was kind of you could go at it at a fairly high level and drive it. Now it's really incrementally idea by idea and taking it out. And that's why you see that constant improvement of core cost of $2,000,000,000 run rate Q1 last year to Q1 of this year is not is working at it. It just takes more time because 130,000,000 square feet of real estate down to 80,000,000 going to 70,000,000 there's a lot of work to get out of that real estate.
All right. And just as an add on, and looking at costs in the consumer bank, I mean, and you look at your mobile penetration and how it's going up, etcetera, etcetera. I mean, is there sort of a magic number in terms of mobile transactions, mobile penetration, just the whole use of mobile in your company where I think you've been a leader that will lead to sort of a step down in branches? I mean, are we sort of on this threshold of being able to take branches down yet another however many?
Well, I think the
if you think
of branches and think about it as offices as opposed to the historical notion of a place where you transact. The question of how many you have is going to be how many relationship managers you need and how many places they have to sit. And so what we've done is consolidated the branches to being bigger. So the sheer number, so we had 6,100 or 4,600. Each year, we repositioned 200 or 300 of them.
I mean, it's but what we're doing is getting out of smaller branches and building into bigger branches. So we consolidated 3 into 1 and build up that branch has in it U. S. Trust people, wealth management people, small business sales people. So what we're actually if you think about as a real estate question, the number is not as important as they're full and that they're marginally driving the profit and you can get a lot of sales people per square inch, a lot of customer activity per square inch, that's where we're going.
And so you're going to see some of the new prototypes that we've deployed. You can see in place like Denver, we're now in our 3rd branch and we'll continue to build out that are much look much more like a sales office than what people's visions of a transitional branch. But going to the earlier question, Nancy, I don't know where this stops. And I'm not that's not saying I'm trying to hide an answer that I have, it's just that if you and I are here last year and we were and you said 17,000,000 mobile users, that's good penetration, it's 2,000,000 more a year later and as computer based banking is up $1,500,000 or something like that, which is kind of remarkable on top of that. So we don't know where this goes, but we're going to be pushing ahead, following our clients and making sure we stay with them.
At the same time, our customer satisfaction scores are now reaching an all time high, which means the way we're doing it works for them. And you've given me your feedback about our customer focus and capabilities over the years, but they're back to the highest they've ever been. And that's importantly managing that transition carefully and that's what we got to keep doing.
Okay. Thank you.
I just want to echo just a couple of thoughts that Brian said. I think the branches are going to become not a destination where people come to transact, but a destination where people come because they need a product or service, because there's been something changing in their lives. They need to start saving for their kids' college or they need a new they need a mortgage or they need a credit card. I mean, it's more about they're coming there because of some life event or because of some product or service they need, not for everyday transaction banking. We'll still have the branches that can do that for people who prefer that, But I think over time people will recognize the convenience and safety of doing these things online, doing them electronic, not through paper.
And the branches will become we're organizing our branches so that they become destinations for people who need help with their financial lives.
Thank you.
Our next question comes from Marty Mosby with Vining Sparks. Please go ahead.
Thanks. I wanted to focus on mortgage banking and the retention of those loans more on the balance sheet than continuing to push them to the GSIBs. Is that regulatory driven or are you really kind of looking for that higher retention rate because you're looking for some assets that have duration? Is that one of the better maybe option adjusted yields that you can get at this point?
Marty, you can come at this a fairly straightforward way, which is we have $1,200,000,000,000 in deposits and we have $900,000,000,000 in loans. And if we put our own mortgages on the balance sheet, we know the quality, we know the customer and we know that the servicing cost ultimately will be a lot less of how we're doing it. If we buy 3rd party loans and so to extract the value of those deposits, we got to invest in something, we invest substantially in treasuries, We have to back to mortgages and mortgage backed securities. And so the question is why buy someone else's when you're producing your own. So it's really a very pragmatic view of we want to control our destiny in mortgage going forward so that the customer we look in the eye and originate the mortgage with is the customers we service for, as a customer we have the asset quality with and there's no third party involved.
So it's more driven by us just getting to our own controlling our own destiny.
And a follow-up to that is if you look at the impact of that on the business segments, you actually are increasing the portfolio by about 30%, which is showing that retention. However, if you look at all other, it's more than over swamped that growth. You had about $45,000,000,000 reduction and getting back to Mike's question about where is the benefits going, just the reduction in all other that $50,000,000,000 almost $50,000,000,000 of loans is over $1,000,000,000 worth of NII that is kind of going away whereas you're having to do and invest and spend money to generate the 30% growth in the business. So is the runoff still part of where some of the leakage is that we're hoping to get in all the improvements and growth that you're showing in the core? And when does that what's left is about 100 $1,000,000,000 when is that finally done so that you wouldn't have that leakage anymore?
Well, the we used to there's an element that just as we used to book that retaining piece in the central area. We stopped doing that. That's showing a changeover. So you got to think of it a little bit together. But and it's consistent with our peers.
Most people have their consumer businesses book the loans they retain. We just didn't do that for years. But remember those you got to remember that you got to think of a whole balance sheet. You're looking at the loan category. The money comes out of the center because of liquidity demands and the rules.
It goes into treasuries and other securities, which are not in that chart because they're not loans, mortgage backed securities and treasuries and that still has a yield to it, not as dollar denominated as much as mortgages, but has a yield to it. That has been driven more by the liquidity demands in LCR than it is by anything else, which is the centralized portfolio. We've gone for $100,000,000,000 liquidity 4 or 5 years ago to $500,000,000,000 So that has a cost to it in that in prior years that could have invested in high yielding assets, but not mortgages don't count for liquidity.
Got you. Thanks. And again,
look, the facts are we've been growing overall. So year over year, including those segments, which as you point off by our strategy are running off faster, we're still growing the overall balance sheet.
And we'll take our last question as a follow-up from Betsy Graseck with Morgan Stanley.
Hi. As a follow-up on mortgage, so I think one of your suppliers or one of your partners PHH mentioned that you were going to be pulling back some of the servicing to yourself. And I just wanted to understand, did you have to do anything to build for that book of business? Or is this already something that's in your run rate on the expense side and we're going to be bringing in incremental revenues on the mortgage servicing side?
It's marginally will be absorbed. If you think about it, the total number of loans is relatively small, the total and it will go on the platform, very
little change.
Okay. And is this the beginning of pulling it all over?
I think I would just say that we're trying to be consistent with our strategy of controlling our own destiny.
Okay. All right. That's great.
And it appears we have no further questions. And ladies and gentlemen, this will conclude today's Bank of America earnings announcement call. We thank you for your participation. You may now disconnect and have a great day.
Thank you.