Good day, everyone, and welcome to the Bank of America earnings announcement conference call. At this time, all participants are in a listen-only mode, but later you'll have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing star and one on your touchtone phone, and you may withdraw yourself from the queue by pressing the pound key. Please note this call is being recorded. It's now my pleasure to turn the conference over to Mr. Lee McEntire. Please go ahead.
Good morning. Thanks to everybody on the phone as well as the webcast for joining us this morning for the fourth quarter results. Hopefully, you guys have had a chance to review the earnings release documents available on the website. Before I turn the call over to Brian and Bruce, let me just remind you, we may make forward-looking statements. For further information on those, please refer to either our earnings release documents, our website, or our other SEC filings. With that, let me turn it over to Brian Moynihan, our CEO, for some opening comments before Bruce Thompson, the CFO, goes through the details. Thank you.
Thank you, Lee, and good morning, and thank all of you for joining us to review our fourth quarter results for 2014. As we think about the year, we've accomplished a lot, including resolving many significant legacy issues that were overshadowing the underlying progress in our franchise. Settling these issues obviously came at a cost and drove a decline in year-over-year net income. Importantly, settlements removed uncertainty for all of us, for investors, regulators, rating agencies, and others. It allows us to focus on the core business and operations of the company going forward. As we move to slide two, you can see that we have a simplified and stronger company. Today, we reported earnings of $3.1 billion after tax. The company is simpler and more straightforward with improved risk profile. Everything we do now is focused on driving the company forward and delivering for our customers and clients.
On this slide, you can see some of the important results. This year, we completed arguably the industry's largest ever cost savings program, which achieved $8 billion of annualized savings. Let's think about that. We started that program in 2011, when we had around 290,000 FTE. Over the three years since then, driving it the right way, we completed in 2014, ending the year with around 220,000 FTEs. Non-interest expense, excluding litigation, declined to $4.4 billion compared from 2013 to 2014. It's down more than $8 billion in the last couple of years. Yet we have more work to do ahead of us. We further strengthened an already strong and liquid balance sheet and increased our common stock dividend during 2014 for the first time since 2007. As you can see on this page, our credit costs are at a decade low level.
Notwithstanding the headwinds our industry faces with rates and an ongoing global economic sluggishness, we have built a platform for growth, especially in the context of a continuously improving U.S. economy. We built a company with leading market positions across every core customer base. Our task now is to continue to build on that foundation and the progress we've made. As you look at our results, you'll see that year-over-year earnings in our primary businesses, with the exception of the Consumer Real Estate business, made progress to show stability in a volatile rate and geopolitical environment. Importantly, as you think about our company, we have been investing in growth while taking out expense. We reduced our overall headcount during 2014 by around 8%, but at the same time, we invested. We invested by reallocating resources to sales capacity from those savings, increasing in all our core businesses.
We invested by reallocating expense reductions to product capabilities, our mobile capabilities, our cash management capabilities, and other capabilities around the world. We've invested some of those savings in our technology, spending over $3 billion in 2014 to improve and protect our company. You can see the results in the appendix pages, and Bruce will touch on them in the line of business presentations. We expect to continue this effort going forward. We have teams working on it every day. They are working to reallocate non-productive expense to drive towards growth, allowing us to maintain the good expense management you've come to expect from our company. At the same time, we're laser-focused on winning market share and growing with our customers. The economy continues to improve, and we look forward to reporting that progress during the year ahead.
With that, I'll turn it over to Bruce to take you through the quarter's numbers.
Great. Thanks, Brian, and good morning, everyone. Let's start on slide three, and I'm going to go through the details. During the fourth quarter, we recorded $3.1 billion of earnings, or $0.25 per diluted share. Let me give you a few thoughts on revenues. There were two significant adjustments to revenue, as well as negative DVA charges, that in the aggregate, reduced reported revenues this quarter by $1.2 billion pre-tax, or roughly $0.07 a share after tax. Of the components of the $1.2 billion impact, we recorded a roughly $578 million negative market-related adjustment, which, as you all know, we refer to as FAS 91, and net interest income for the acceleration of bond premium amortization on our debt securities that was driven by lower long-term rates.
Otherwise, our core net interest income, which excludes this market-related adjustment, was pretty stable, with the fourth quarter coming in a little bit better than we signaled to you all during our third quarter earnings call. In addition, this quarter, we adopted FVA, which is for funding valuation adjustment, and incurred a $497 million charge against our sales and trading results as a result of that adoption. As we normally provide to you, our credit spreads tightened, and this tightening caused a negative charge for DVA in the trading account of approximately $130 million during the quarter. Expenses during the quarter were well managed. Our total non-interest expense in the fourth quarter was $14.2 billion, which included approximately $400 million in litigation expense during the quarter. This level of expense is the lowest level of expense that we've seen since the Merrill Lynch merger.
Credit costs during the quarter improved as our provision for credit losses was $219 million and included $660 million in the release of reserves. On slide four, reduced asset levels in our Global Markets business drove our balance sheet levels lower. It's coming down $19 billion from the third quarter of 2014, and we finished at just over $2.1 trillion in assets. We continued our focus on balance sheet optimization for liquidity as we continued to shift our discretionary portfolio into HQLA-eligible securities from non-HQLA loans, and also improved our deposit composition. As we signaled to you in the third quarter earnings call, discretionary portfolio first lien loans declined from the third quarter of 2014 levels, but we were very pleased with the loan growth we saw in our core businesses during the quarter.
If we look in those core businesses, Global Banking loans increased $4 billion during the quarter. Within Wealth Management, loan balances grew $3 billion. Our U.S. consumer credit card receivables increased $2.9 billion during the quarter. We did have a $2.7 billion decline in our direct and indirect portfolio as we transferred a portfolio of student loans to held for sale. Our deposits grew from the end of the third quarter while short-term funding declined. We executed another successful issuance of $1.4 billion of preferred stock early in the third quarter, and that benefited regulatory capital. Shareholders equity improved with both the earnings growth as well as the improvements in AOCI. As a result of that, our tangible book value increased to $14.43 per share, and our tangible common equity ratio improved to 7.47%. If we move to regulatory capital on Slide 5.
Under the transition rules, our CET1 ratio was 12.3%. If we look at our Basel III regulatory capital metrics on a fully phased-in basis, CET1 capital improved $6.2 billion during the quarter. That was driven by earnings, deferred tax utilization, as well as the improvement in AOCI. Our Operational Risk-weighted assets during the quarter increased again. They now represent 34% of total risk-weighted assets. Notwithstanding that increase, we were able to keep our Basel III advanced ratio at levels consistent with what we saw at the end of the third quarter. Under the standardized approach, our CET1 ratio improved from 9.5% in the third quarter of 2014 to 10% at the end of the year. If we look at our supplementary leverage ratios, we've done a lot of work over the past year to improve those. Obviously, the fully phased-in kick in 2018.
If we look at where we ended the quarter at our bank holding company, our SLR ratio was at 5.9%, and at our primary banking subsidiary, BANA, we were at approximately 7%. If we turn to slide six, funding and liquidity. Long-term debt ended the quarter at $243 billion, down $7 billion from the third quarter of 2014. We've done a lot of work over the past couple of years to smooth out our parent company maturity profiles, and as you can see, we have $22 billion scheduled to mature in 2015, and comparable amounts over the next four or five years. Our global excess liquidity sources reached a record level during the quarter and closed at $439 billion. Within those global excess liquidity sources, our parent company liquidity improved $5 billion from the end of the third quarter to $98 billion at the end of the year.
Time to required funding increased to 39 months during the fourth quarter. During the quarter, we continued to increase our estimated liquidity coverage ratios at both the consolidated as well as at the bank levels. At the end of the year, we're well ahead of the 100% fully phased-in 2017 requirement at the consolidated level, and at more than 90% at the bank level, which is well ahead of the 80% phased-in 2015 requirement and are well-positioned to achieve the 2017 requirement. If we turn to slide seven on net interest income. Our NII on an FTE basis was $9.9 billion, down from the third quarter of 2014 as a result of the more negative market-related adjustment I mentioned a moment ago, which also drove a reported net interest yield decline of 11 basis points.
Lower long-term rates coupled with a flattened yield curve resulted in adjustments to our assumptions to our bond premium amortization, which drove the $578 million of market-related adjustments in the fourth quarter versus the negative $55 million we saw during the third quarter of 2014. We adjust this market-related adjustment. NII was $10.4 billion and declined less than $100 million from the third quarter of 2014, despite the challenging rate environment we saw during the fourth quarter. The adjusted NII decline was driven by the impacts of the lower discretionary loan balances within the consumer real estate portfolio. If we look at net interest yield on an adjusted basis, it was up a touch from the third quarter of 2014 to 2.3%.
Given the movement lower in rates that we saw during the quarter, we did become more asset sensitive, such that a 100 basis point parallel increase in rates from what we saw at the end of the year would be expected to contribute roughly $3.7 billion in NII benefits over the course of the next 12 months. Given the move in rates, the sensitivity is now more evenly weighted to both long-term as well as short-term rate moves. Before we leave this slide, I do want to remind you that during the first quarter of 2015, we have two fewer interest accrual days than the fourth quarter of 2014, which will negatively impact NII by a couple hundred million dollars. Non-interest expense, and I'm moving to slide eight, was $14.2 billion in the fourth quarter of 2014 and included approximately $400 million in litigation expense.
As I said earlier, this is the lowest quarterly expense amount that we have reported since the Merrill Lynch merger. If we exclude litigation, total expenses were $13.8 billion, which declined $300 million from the third quarter of 2014 and was driven by our LAS initiative cost savings as well as lower revenue-related incentive costs within our Global Markets business. If we compare these expenses to the fourth quarter of 2013, we were down $1.2 billion, driven by LAS cost savings, New BAC benefits, and to a lesser degree, the lower revenue-related incentives. Legacy Assets and Servicing costs ex litigation were $1.1 billion in the quarter, $200 million lower than the third quarter and $700 million lower than the fourth quarter of 2013.
As we continue to work through these delinquent loans, we expect these quarterly costs will come down a few hundred million dollars more by the end of 2015. Headcount was down 5,800 during the quarter. As we look at expense, a reminder that we will record our normal annual retirement-eligible incentive cost in the first quarter of 2015, and we expect that number to be roughly $1 billion, consistent with what we've seen the past couple of years. If we turn to asset quality on Slide nine, credit quality continued to improve during the quarter. Q4 provision expense was $219 million, and we released a net $660 million of reserves given the continued pace of asset quality improvement, particularly within our consumer real estate portfolio. Reported charge-offs were $879 million and declined from the third quarter of 2014.
I would remind you, both periods of net charge-offs included NPL sales and other recoveries, and the fourth quarter included approximately $150 million of costs related to actions that were taken in relation to our DOJ settlement, which were previously reserved for. If we exclude the recoveries and the DOJ component, charge-offs in the fourth quarter were just over $1 billion versus a similarly adjusted net charge-off amount of $1.2 billion in the third quarter of 2014. Loss rates on this same adjusted basis were 47 basis points in the fourth quarter of 2014 versus 52 basis points that we saw in the third quarter of 2014. Let's now move to the business segment results, which we start on Slide 10 with Consumer and Business Banking. Our results within Consumer and Business Banking show solid bottom-line performance with earnings of $1.8 billion.
Those were down from the fourth quarter of 2013, due largely to lower release of loan loss reserves and, to a lesser degree, higher tax rates. The business generated a solid 24% return on allocated capital during the quarter. Revenue was up slightly on a year-over-year basis despite net interest income being down as our non-interest income grew more than 5% with a strong improvement in card income. If we look at customer activity during the quarter, we had a solid deposit growth, and our rates paid is now at five basis points. Loans on a linked-quarter basis increased seasonally, driven by U.S. consumer credit card. Our card issuance remains very strong at 1.2 million new cards in the fourth quarter of 2014, of which approximately 67% of those were issued to existing customers. If we look at all of 2014, we issued 16% more cards in 2014 than 2013.
It increased the percentage of the issuance to our existing customers, which is consistent with the overall strategy. Credit quality improved again as our U.S. credit card loss rate fell to 2.7% and continues to have a very strong risk-adjusted margin at just below 10%. Our Merrill Edge brokerage assets grew to $114 billion, which is up 18% year-over-year on new accounts, strong account flows, as well as higher market levels. Our mobile banking customers reached 16.5 million in the fourth quarter, and now 12% of all customer deposit transactions are done through mobile devices. If we adjust for portfolio divestitures, combined debit and credit purchase volume was up 4% relative to the fourth quarter of 2013, and if we back fuel out, was up 5%. Let's move to Consumer Real Estate Services on slide 11.
The improvement in the results compared to the third quarter of 2014 was driven by the third quarter of 2014 DOJ settlement, which impacted expense, provision, as well as income tax. Revenue did increase slightly over the third quarter of 2014, while expense, even after we exclude litigation, declined from the third quarter, as both fulfillment costs on the production side and costs on the delinquent loan servicing side were down from the third quarter. Core production revenue and servicing fees were both stable compared to the third quarter of 2014, while servicing income did benefit from better MSR hedging results. On the production front, first mortgage retail originations were stable with the third quarter of 2014 at $11.6 billion, and the pipeline was consistent with the third quarter of 2014 as well, albeit up on a year-over-year basis.
On home equity, we're the number 1 lender, and line originations during the quarter were $3.4 billion, in line with the third quarter of 2014 and up north of 70% on a year-over-year basis. The credit quality of those second lien originations remains very strong, with average FICO scores over 790 and combined loan-to-value ratios at less than 60%. Expenses in the segment did include $262 million of litigation costs in the fourth quarter versus $5.3 billion that we saw in the third quarter of 2014. We continue to work through and resolve RMBS securities litigation matters, including this quarter, the FHLB of San Francisco matter. With the resolution of that, we now estimate that we've resolved approximately 98% of the unpaid principal balance of all RMBS as to which RMBS securities litigation has been filed or threatened against all Bank of America-related entities.
LAS expense ex litigation this quarter was just over $1.1 billion, as we achieved our first quarter of 2015 goal a quarter ahead of schedule. Importantly, the number of 60-plus day delinquent loans that we have dropped to 189,000 units, which is down 32,000 or 14% from the third quarter of 2014. If we turn to slide 12, Global Wealth and Investment Management delivered another strong quarter. Pre-tax margin was strong. Net income was just over $700 million, but was down from the fourth quarter of 2013 as solid fee-based growth was offset by lower net interest income and higher expense. Record asset management fees offset some weakness we saw in transactional activity and still drove a 7% increase in non-interest revenue relative to the fourth quarter of 2013. Our asset management fees now represent 45% of revenue within this segment, up from 40% a year ago.
Non-interest expense did increase from the fourth quarter of 2013 as a result of higher performance-based incentives, as well as increased support costs, excuse me. We increased the number of financial advisors, and year-to-date retention of our experienced financial advisors remains at record levels. Return on allocated capital was 23%. Client balances were nearly $2.5 trillion, up $36 billion from the third quarter of 2014, and were driven by strong count client balance inflows. Long-term AUM flows were $9 billion for the quarter and represented the 22nd consecutive quarter of positive flows. Our record loan flows during the quarter reflect $3 billion in growth over the third quarter of 2014 in securities-based as well as residential mortgage lending, and our period-end deposits were up $7 billion or 3% from the third quarter of 2014.
If we turn to slide 13, Global Banking earnings for the quarter were $1.4 billion, up from the fourth quarter of 2013 on lower credit costs and, to a lesser degree, reduced expenses. Net income was partially offset during the quarter, on a year-over-year basis, by lower investment banking fees off of what was a record level in the fourth quarter of 2013. Return on allocated capital was strong at 18%. We look at the investment banking revenues of north of $1.5 billion. We feel very good about the results. They were up on a linked-quarter basis, and our investment banking team executed very well in a tough distribution environment given the volatility of rates as well as energy prices.
Provision was a slight benefit in the quarter and reflected continued low loss rates and a small reserve release compared to the year-ago period, which included a reserve addition of $434 million. We look at the balance sheet with points to two. Average loans were $271 billion, up $3.7 billion from the third quarter of 2014 levels. If we switch to Global Markets on Slide 14. The business reported a modest loss in the quarter, but that did include a $497 million charge to implement FVA. For those unfamiliar with FVA, Funding Valuation Adjustment is an adjustment to the fair value of uncollateralized derivative trades to account for the present value of funding costs. This is an accounting practice many of our peers have also adopted. As you all know, this is a one-time transition cost for implementation.
Separately, net DVA for the quarter was a loss of $130 million versus a loss of $617 million during the fourth quarter of 2013. Earnings are down from the fourth quarter of 2013 as a result of a decline in sales and trading revenue that was mostly offset by a decline in expense. If you recall, on our fourth quarter 2013 call, fixed sales and trading during that quarter included $220 million in recoveries on legacy positions in the fourth quarter of 2013. Sales and trading, adjusting for net DVA and FVA, were $2.4 billion in the fourth quarter of 2014 versus $2.8 billion in the fourth quarter of 2013 after we adjust for the recoveries. On this same adjusted basis, fixed sales and trading revenues of $1.5 billion compare to $1.9 billion in the year-ago period.
December results were particularly challenging during the quarter, with the toughest areas of performance being the credit-sensitive businesses within FICC, most notably mortgages and credit trading, which are generally our largest trading revenue-related businesses. On the positive side, we saw increases in both FX and rates revenues versus the prior year that were driven by increased volatility given global deflationary expectations leading to the US dollar strengthening. Equity sales and trading was up modestly from the fourth quarter of 2013, as increased volatility was a positive for secondary flows across both our cash and derivative trading businesses. On the expense front, the decline reflects litigation expense of $655 million in the fourth quarter of 2013. If we take that litigation expense out, expenses still declined 5% from the fourth quarter of 2013 as the incentives were reduced to align with the revenue performance that we saw.
On Slide 15, All Other. The results in the fourth quarter of 2013 reflect lower revenue from NII, largely associated with the market-related adjustments that we've discussed, as well as lower securities gains and equity investment income, partially offset by gains on the sale of certain loans with long-term standby agreements that were converted to securities. Significant equity investment income is largely a thing of the past for us as we've reduced the size of the principal investing positions in the business as well as strategic positions and should be modeled accordingly. You'll also notice we took additional reserves for the payment protection insurance, but at a lower level than we saw during the third quarter of 2014. Our fourth quarter 2014 expense is down year-over-year on less non-mortgage litigation expense and lower infrastructure costs.
Our effective tax rate for the quarter was 29%. I would expect the tax rate for the company in 2015 to be in the low 30s, absent any unusual items. One other thing I want to mention before wrapping up is some movement in our business lines that you'll see as we report them to you in 2015. In the first quarter of 2015, we expect to align business banking into our Global Banking business, which takes this more commercial business out of our core Consumer and Business Banking unit. In addition, we expect to move the home loans portion of our Consumer Real Estate Services business to Consumer Banking, as this product remains integral to their relationships with us.
To conclude my comments, as we look at both 2014 and the fourth quarter of 2014, capital and liquidity reached record levels which provides a solid base to support our businesses that hold leading or top-tier positions in the industry. We continue our focus on expense and operating leverage after reaching significant milestones this year on both New BAC as well as LAS cost-saving initiatives. We reported a quarter of much lower legacy assets in servicing, operating, and litigation costs, which have been burdening our reported results. Asset quality continued its trend of improvement against the slowly improving U.S. macroeconomic backdrop. We continue to remain well-positioned to benefit in an environment where rates start to increase. With that, we'll go ahead and open it up for questions.
At this time, if you'd like to ask a question, please press star and one on your touchtone phone. You may withdraw your question at any time by pressing the pound key. We can take our first question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hi. Good morning.
Good morning, Betsy.
Hey, I just want to talk a little bit about the asset sensitivity and how we should be thinking about that from here. In particular, as you know, the long end of the curve has come down since the end of the quarter. Just wanted to understand, is that FAS 91 effect, Q to date, given what the long end of the curve has done? Then maybe you could speak to what you're doing to try to minimize any further pressure.
If you recall, Betsy, we've historically been saying that the 100 basis points is in the $3.1 billion-$3.2 billion range. Think of the increase to $3.7 billion more or less just representing the recapturing of the FAS 91 that we saw this quarter. That's why we referenced that there's been more asset sensitivity on the long side. The short end side really hasn't changed at all.
Sure. Given the fact that the 10-year is now yielding like 1.8% or so, should we assume if we end the quarter in 1Q at 1.8%, that the same type of 10 basis points down drives FAS 91 effect is the same in first quarter as it was in fourth quarter? Is it because you're more asset sensitive, there's a little bit higher impact?
No, it's a good question. I think when we looked at this last night that the movement that we've seen so far in the first quarter of 2015 is almost identical to what we saw during the fourth quarter. If you were to snap it off of what we saw last night, it would be a comparable type number, realizing we still have two and a half months to go.
Okay. Is there any giveback in refi activity that you're expecting?
Yeah. I'd say, if we referenced refi activity increased as a percentage of overall mortgage production in the fourth quarter. As I said in my prepared remarks, if we look at the pipelines and compare the mortgage pipeline at year-end relative to the comparable period, it's up pretty significantly, and we'll just have to see how that plays out, realizing that the first quarter does tend to be a little bit seasonally slow.
Peter.
The other thing, Betsy, is that in January to date, there's been a stark move in the amount of applications coming in, a very stark upward move due to this last rate fall-off. As those things close through, we'd expect to see some pickup in production this quarter from the refi.
Got it. Okay, that's super. Thank you.
We'll take our next question from John McDonald with Sanford Bernstein. Go ahead, please.
Hi, Bruce. Just wanted to follow up on the NII. On the core side of NII, the FAS 91, your core NII held up well despite what you'd indicated in October about kind of being conservative with the buy ticket. I guess, how did you kind of hold the core in on NII, and how are you navigating that now in what feels like an even more difficult environment for kind of reinvesting cash flows today with the 10-year where it is?
Sure. It's a good question, John. I think that there are a couple things. The first is, if you look at in the quarter, I think we did a good job with respect to the overall debt footprint, which was down $7 billion, which helped us out a little bit. Secondly, if you look at, we were able to get another basis point out on the deposit front. Throughout the quarter, we saw some loan growth that was a little bit better than what we would have seen when we spoke to you during the quarter. The other thing that we did see during the quarter is we were able to invest and get some of the investments in the portfolio in, I believe it was in mid-November when rates did back up.
As we go forward, we do have liquidity to invest in the second and third months of the quarter, and we'll be prudent with how we invest it relative to OCI risk. The other thing I would say, just before we leave this, John, that I should have referenced with Betsy's point is that it's easy to focus on the FAS 91 because we're resetting the amortization of premium. I think the other thing you need to realize that we did see in the quarter is with the rate movement up, while you do have a negative on FAS 91, you've got a significant positive from a capital perspective, where OCI in the quarter from the rate movement was north of $3 billion.
Got you. On the core piece, Bruce, do you expect it to be more challenging to kind of hold into that 10.4 with the 10-year where it is? Does it make it more difficult than, how should we think about the risk to the 10.4 if rates stay low?
Well, I think as I said in my comments, the 10.4 you really need to start at with about 10.2 because you've got two less days during the quarter.
I'd say there's a little bit of headwind to hold that on a core basis, and we're obviously doing everything we can to keep it as close to 10.2 as we can, realizing that we're not going to take outsized OCI risk.
Okay. Shifting gears on expenses, you got the LAS target a quarter ahead of time. Do you have a year-end target? I think you said you expect to continue to reduce the LAS to 1.1. Can you just clarify that?
Yeah, I think as we look out and we look at the plans and actions along with the progress that we've made on the 60-plus day delinquents, I would think broadly speaking, and as you know, this number can bounce around a little bit, that we'd look to have the LAS expenses down to the $800 million type area by the end of the year. We're obviously working through plans as we look out to 2016 to continue to drive that number south of $800 million as we go forward.
Okay. How should we think about the kind of core rest of Bank of America expenses where you came in nicely at the $12.7 for the fourth quarter? Obviously, you mentioned the stock option expense stuff in the first quarter, as we think about 2015, what are you hoping to do on the core expense base?
John, I'll answer sort of at a broad level, Bruce can touch in. If you think about in the fourth quarter, a couple of things happened. One is you've got to remember the markets where the revenue it was down, be careful not to forget that as we see it coming back this quarter, expect it to rise as it traditionally does in the first quarter. That would be an increased expense, which you should want, obviously. For the rest of it's basically a continuous process of taking out expenses either bringing the bottom line or reinvesting the growth. To give you a straightforward way, in the fourth quarter, the reduction in headcount of approximately 5,000. 1,100 or so was LAS, and the rest was core activity where we just keep grinding down the expense base.
At the same time, we've added salespeople during that quarter. What we're trying to do is, I wouldn't expect it to fall dramatically, I'd expect you guys to be able to see us continue to make strong investments in sales capacity, technology, products, while holding expenses relatively flat with a slight downward bias, irrespective of, you just got to be careful of compensation related to revenue because we'd all want that to be higher.
Okay. Thank you.
Our next question will come from Brennan Hawken with UBS. Please go ahead.
Yeah. Hi, good morning.
Good morning.
In FICC, seems a little bit below what certainly what I was looking for, and I know you highlighted some of the difficult markets that you're large in. Was there any specific positional pain given what we saw in some of the credit spreads and some of the movements there?
No, not at all. You have to go back to the core premise that we talk about, which is that the banking and Global Markets businesses are run as an integrated business, and a lot of the activity that we see within the markets area is in market making and other things that are done off of the new issue platform from an underwriting perspective. I think what we saw during the quarter, particularly in December, was that there was a significant slowdown as we saw overall volatility in the markets from both a new issue as well as a secondary market perspective that flowed through. There were no losses or particular pain points within the Global Markets piece of the equation during the quarter.
Okay, thanks. That helps. Can you guys add any comment to the press reports we've seen recently about you all rationalizing the PB business and cutting ties to 150 hedge fund clients?
Well, I think this is a customer profitability exercise that as we look at driving the franchise the way Tom and Fab Gallo and the team have done a good job of repositioning the equities business. We have to constrain the prime brokerage a bit due to size because it's low balance sheet return, as you'd be aware of. Importantly, it's a customer profitability. We're looking for customers who will use us with multiple products and services, whether it's fixed income, equities, in all aspects of fixed income. As we take the scarce resource, which is the GAAP balance sheet and the RWA balance sheet, and allocate it across customers, we've got to make sure we get the returns, and this was a natural reflection of it.
Should we expect to think about some revenue headwinds in your equities business as we model out 2015 as a result of some of those efforts?
I'd say no. It's all pretty much through it right now, and as you look at the revenue sort of quarter-to-quarter run, ±$1 billion, and Fab and the team have done a good job of increasing the yield from the other clients at the same time. I would say, absent market forces, I wouldn't expect it to have much of an effect.
Terrific. Okay. Helpful to hear about the target of around 800 for LAS by year-end and then driving it lower in 2016. Can you help us think about how you think about that number to zero? Ultimately, given the title, the L in the LAS, right? That's got to go to zero eventually. How should we think about that?
You've got to be careful. There's an and in there. It is all a servicing expense, and the company is in that unit for all good loans and bad loans. It doesn't go to zero, but it's got to get a lot better because if you start to noodle on the 4 million or so units we have in first mortgage servicing and think about the annualized cost, we've got to get it down significantly to make servicing mortgages make sense to us. That's a project that we're working against doing it the right way for the customer, doing it the right way for the regulatory environment, and the consent orders and all the things that have gone on that you're well aware of. We just got to keep peeling that away.
When we say 800 or so, that is the next way station on our train ride here. It's got to go a lot further than that for the 3.5 million-4 million of good units we have.
Okay, no indication about where that sort of settling out level might ultimately be? Even if not a when, but kind of what the number would be?
Well, I think we've talked about a half billion, I'm not sure that's a great performance net over time either. Just assume that there's nobody more interested in driving that number down to a normalized servicing cost than this company.
Fair enough. Last one from me. You guys hit on in the wealth management business and the margin there, support costs and revenue-related comp. Could you maybe quantify how much each of those factors impacted the margin change quarter-over-quarter?
Yeah, I think if you look at a couple of things. The first is that from a margin perspective, you had a little bit of a headwind with NII being lower than what it was. As you look at the support costs during the quarter, I would think of that as being about 200 basis points on the margin during the quarter that we saw.
Great. Thanks a lot.
Thank you.
Our next question will come from Glenn Schorr with Evercore ISI. Please go ahead.
Hi. Thanks very much. I wonder if we could get your best comment that you can give us on energy-related exposures. In your Q, you have a general comment of energy and $20 billion, but if you could break it down a little bit more, what's secured, what's not secured, what's investment grade, what's not, and just how overall you feel you're positioned, that'd be helpful.
Sure. I think if we look at the amount of funded exposure across what we refer to as oil and gas, that the amount of funded exposure, which includes derivative exposure was roughly $23 billion at the end of the year. As you look at that $23 billion, I would think of it generally as 60% that's directly reflected or affected by the price of oil. There are a lot of those that are not. You've got roughly $22, $23 billion funded, 60% directly affected by oil. Well north of 80% of that are investment-grade borrowers. For those non-investment-grade borrowers, they're obviously secured facilities, and in most cases, have formulas upon which they can borrow based on the value of the assets that were secured by.
I think if you think overall, the one of the things to give a perspective that we see is in the consumer spending in January on debit and credit cards, basically, we've seen the spending go up by 3%. If you look at the fuel side of that, it's about 5% of that total spending, and it is down 28% year-over-year. Our consumer customers are getting a benefit, but they're re-spending that benefit, and overall spending levels are growing through it. There's a technical risk to the oil producing companies that Bruce just talked you through. The overall economy, even the first week or so of January, we're seeing the benefits to the consumer very starkly in a year-over-year comparison.
I definitely appreciate all that. You said that was the funded to oil and gas is commitments, a larger number, I think, for that.
Yeah.
Do you have any ability to pull back on the commitments?
Well, I think on average, the fundings are roughly 50% of what the commitments are. As it relates to the pulling back of commitments, I think what I would point to and what our teams did a very good job with is we obviously have commitments in the originate to distribute piece. Which if we look at, we ended the year, I believe, with two commitments of investment-grade borrowers on an originate to distribute basis. One of which has had a significant positive event from a financing perspective already this year. The other is a single A credit that will get done in the second quarter. Outside of the investment grade originate to distribute, I think there was a couple hundred million dollars that still needed to get done.
You're not pulling commitments from borrowers, as it relates to commitments that needed to be distributed, the teams have done a very good job.
I don't want to put words in your mouth, it sounds like you're semi-comfortable with the positioning. There'll be some hits along the way, this is not a major risk to the portfolio. Again, I don't want to put words in your mouth.
We're comfortable with the positions. You should assume as we're making these commitments in environments where oil is higher, we're continually running and stressing those portfolios to be comfortable with the commitments. As Brian referenced, to the extent that we're in a prolonged period where these prices persist, to the extent that there are costs that run through because of difficulties that a commercial or corporate borrower may have. That as we look across the overall credit platform, you'd expect there to be offsets given what we're seeing with consumers and other people that are benefiting from lower energy prices.
Okay, that's helpful. Last one for me is, I didn't hear anything on TLAC. If you could tell us where you think your ratio shook out net of the conservation buffer and the SIFI buffer, that would be helpful.
Yeah. I think if you look at where we are from a TLAC perspective, we're generally in the 21% type area. Embedded in that 21% type area is the fact that structured notes, we've assumed for that purpose that we would not benefit from structured note funding, and if we refinanced out those structured notes, you'd pick up another 1%-2% based on the current size of the debt footprint.
Okay. I just want to make sure the 21% is net of the conservation buffer and your SIFI buffer or a gross of?
No, it's gross of. That's a gross of.
Okay.
You're roughly 21, call it plus another 1-2 for structured notes. Then depending on the exact treatment of the buffers as we go through that number would be reduced by the buffers.
Got it. Okay, perfect. Thank you very much.
Our next question will come from Jim Mitchell with Buckingham Research. Please go ahead.
Good morning. Just a quick question on the balance sheet and NII. Appreciate the efforts to keep NIM flat, to really get NII growing, we got to start to see, I guess, the balance sheet on a net basis grow. I think your balance sheet was down close to $25 billion this quarter. At what point do we start to see the net balance sheet, the restructuring of the balance sheet start to give way to growth?
Yeah, I think what you're going to see as we go forward is that as we look out into our forecasts and models, we would expect there to continue to be strong deposit growth throughout 2015. As we referenced before, obviously the goal with that deposit growth is very much a focus to grow loans within our core customer segments. As I referenced, we saw that within the Global Banking space this quarter. We saw it within Wealth Management. We're seeing pickups in overall mortgage activity. I think you are likely to see the balance sheet creep up as deposits come in and as we look to grow loans. I just want to make sure, though, that we remind you that we will continue to see the discretionary portfolio that's got whole loans in it, that in this rate environment, they will continue to repay.
As you judge how we do on loan growth, you need to look at the core businesses. As I said, we would expect to start to see the balance sheet move up. At the same time, we're trying to get things that don't have a return and aren't core to what we do off. To your point, I think we're largely through that.
Yeah. I think if you think about it, say two years ago, I think we cited about $100 odd billion of non-core loans. That's down around $30, and a dominant part of that is still in the home equity area, quite frankly. In the card business, in the business banking area where we had some stuff that was put on by some predecessor companies, we're largely through all that, and that's why you're seeing some growth there. Then, the card you saw grow, it's seasonal, but it grew, and it's been stable for a number of quarters. The good home equity side is growing quite strongly. The stuff will run off in home equity, still has high charge-off content. It's a better decision economics for the company to run it.
The rest of the loan balances, we ought to see growth with the exception of the sort of discretionary residential mortgage holdings, which will continue to run down based on a better view of what we want to do for outcome management going forward.
Okay. I think, Bruce, to your point, the sort of the de-leveraging around trying to improve the leverage ratio, the impact of that should be easing going forward. Is that what you're saying?
That's correct.
Okay. Just one last follow-up on-- I don't know if you mentioned this, where you guys are in the NSFR?
Yeah, we've done a lot of work. We've not put anything out public on that. As we've looked through it and sorted through it, we do not see that being a constraint as we go forward.
Okay, great. That's it for me. Thanks.
Thank you.
Our next question will come from Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning.
Morning.
The capital ratios grew more than expected. Obviously, the decline in rates helped the positive earnings, and you mentioned the DTA consumption. As we think about 2015 and the drivers of capital, is it kind of more of the same, or is there, call it optimization overall, not just the loan runoff that you addressed, but as we think about you've had final rules for the last few months, there's still some adjustments to the business throughout. How should we think about the capital build? If you have an estimate for 2015, that would be interesting as well.
Sure. We're not going to provide an estimate, but what I would say is that as you look at overall capital levels, if you start with the numerator, as we project out and look at the earnings stream, we think that at least through 2015 and possibly into the first part of 2016, that on average, and you can have some quarterly bounces around based on timing and payments, but that generally we should accrete capital over the course of at least four and up to six quarters, largely based on the pre-tax earnings of the company as opposed to the after-tax earnings. That's what you saw during the fourth quarter. The other thing on the numerator, as I referenced that if we were to snap a quarter today, there would be OCI benefit from the downward movement in rates.
As it relates to what we're seeing on the risk-weighted asset side, I would say generally we continue to benefit, although it declines a little bit each period. We continue to benefit from the runoff of some of the Global Markets positions that would've been put on in the 2005 to 2008 timeframe that tended to have tenors of seven to 10 years. In addition to that, as we continue to have payoffs, and as we continue to move out some of the tougher consumer real estate assets and put higher quality real estate assets on that are better credit borrowers, while the asset levels may stay comparable, you do have an RWA pickup from that as well.
On RWA, any numbers you could provide in terms of how much benefit you get from the, I guess it's probably from the credit correlation book and some of those contracts and the real estate running off, just those two pieces?
No. I think as you look forward, outside of Operational Risk this quarter, we had roughly $30 billion of risk-weighted asset benefit under the advanced approach. Roughly half of that was in the consumer books, half of it was in the wholesale books. I think you will continue to see benefits, but I do not think you will see the quarterly benefit of that magnitude on a go-forward basis.
Okay. Then just separately, the home equity charge-offs increased a fair amount versus 3Q. Obviously 3Q is a very low level. Remind me what is going on there. I think there was an accounting or a methodology change a year ago. Has that fully worked through? Is there a seasonality or a reset? What is going on?
The biggest thing you had in home equity this quarter is that I believe it was roughly $150 million that went through charge-off that was related to the DOJ settlement. Realize you have $150 of charge-off, $150 of reserve. From a net P&L perspective, it was a push. You did have that during the quarter, and it is the reason that we wanted to give you the core charge-off number Q3 to Q4. As we implement the DOJ settlement, you will see both charge-off and reserve release come out in each of probably the first and second quarter. We should be largely through that.
Okay. Thank you.
We'll take our next question from Steven Chubak with Nomura. Please go ahead.
Hi, good morning. Bruce, I was hoping you can maybe help explain what prompted the increase in Operational Risk RWA. The 34% I guess, makes you an outlier relative to some of your peers, whereas previously you were more in line. I know the process typically is you submit the models to the regulators or the Fed, and then they give you feedback. I wanted to know, was the increase prompted by the feedback from the regulators themselves as part of the annual review, or was it what you determined based on your own internal models?
Answer the question slightly differently, which is that as we work through an iterative process with our regulatory supervisors we do believe at this point that from an OpRisk perspective that we are adjusted and the amount of OpRisk RWA that we have now is consistent with what you would need to exit parallel run.
Okay, understood. We shouldn't expect any further increases as a percentage of RWA going forward, or is it simply too early to make that determination?
We think with respect to OpRisk RWA that we're there. We obviously need to get through those elements that are the rest of parallel run. From an OpRisk perspective, we feel like we're there.
Okay. That's really great. Just one more quick one from me. I didn't hear in the prepared remarks any color on the investment banking backlog, didn't know if you can give us an update there as well.
Yeah. It's interesting, we have to be a little bit careful. I would say as we looked at the backlog and the pipeline, particularly from an M&A perspective, that we feel very good about where the pipeline was at year-end. It's one of the stronger year-end pipelines that we have. I think the only tone of caution I would say is that we've obviously seen a little bit more volatility in both the fixed income and equity new issue markets. As it relates to the amount of business that we're winning that's getting queued up and is in the pipeline, we feel very good about that. It was a good backlog at year-end.
Okay, great. That's it for me. Thank you for taking my questions.
Thank you.
We'll take our next question from Eric Wasserstrom with Guggenheim. Please go ahead.
Thanks. Good morning.
Good morning.
I just wanted to follow up on a couple of topics that have been touched on already. Maybe just starting with the risk-weighted asset discussion once more. I just want to make sure I understand all the puts and takes of what's going into the risk-weighted asset calc. It sounds like on the positive side, obviously, there's the benefit of GAAP balance sheet reduction as well as the trade-off between lower quality and higher quality assets. It sounds like the Operational Risk component is now sort of fully baked in. Are there any other components that could drive that up in a way that's different from what's going on the GAAP balance sheet?
I think the only thing that's out there is that as part of exiting parallel run, we're working through with our supervisors the different wholesale and other credit models that you need to exit parallel run. We're working through that. I think absent that, you're largely at the point of looking at, and you'd expect that the RWA is going to largely follow the GAAP balance sheet. The one thing that I think you all know this, where you could possibly diverge from that, is that there is a pro-cyclicality to the extent that you have volatility in the markets businesses as it relates to the stress VaR calculations that go into the risk-weighted asset. Outside of that, you would directionally expect it to follow the GAAP balance sheet.
Okay. With respect to the GAAP balance sheet, what is your overall expectation about the net growth over 2015?
Yeah. I think you're probably going to largely see it in the ZIP code and probably be most correlated to the overall deposit balances. If you look at the range that we've been running at over the last 12 months, it's been in the $2.1 to $2.15, $2.175 type area. I'd expect that area or that range to hold for 2015.
Great. Just to talk about the asset quality for a moment. Obviously, it was the lowest provision that we've seen from you in some time. Many of your peers are sort of inflecting from the point of asset quality improvements to some modest now deterioration and the rebuilding of reserves. I just want to get a sense from you about where you think you are in that spectrum.
Sure. Well, I think if we go back, and let's start with the fact that we saw during the quarter that if we back out any impact of loan sales as well as the DOJ settlement, charge-offs in the fourth quarter came down from $1.2 billion to just over $1 billion. I think as you look at charge-offs when you're at virtually zero from a commercial perspective, it's hard to see getting much better than that. I do think where we're probably a little bit different is that as we continue to work through, and we had another solid improvement of a couple billion dollars from an NPL perspective within the consumer real estate space, that we continue to work through and reduce those tougher consumer real estate credits.
I think that if you look at this billion-dollar charge-off type level that we've seen, we're probably at areas where you're going to see that flatten out. I think as we look forward, there may be a little bit of reserve release on the front end, on the first half of the year, and you'd probably expect that to flatten out and go away as we get through 2015.
Great. Just finally on the LAS expense, which I know you've touched on several times. I'm just wondering if the pace of that improvement changes at all as you're getting sort of into the later stages of delinquency and foreclosure inventory improvement.
Yes. That's on the plus side, is that you sort of have an ability to push the numbers down faster as economy continues to improve and the market continues to improve and the opportunities for borrowers and time passes, frankly. The flip side of that, though, is in the states that in the areas where the process is slow, you're sort of boiling the beaker and what's left is in the really slow areas. We've sort of caught up in the states where the process goes through at a reasonable fashion, and we still have the laggards in places that the process is judicially oriented. I think you're absolutely right. There's a bias that as you get better at it can get lower. It starts improving. Against that, you get some of the rocks that are harder to move because the process is so slow.
Secondly is, remember we took up to almost 58,000 employees in that business, and there's a lag to getting the real estate costs out and letting off the buildings and all the stuff that we have to do. We got to be a little careful getting ahead of ourselves. The headcount comes out first, the facilities then come out second. We're working hard on that. You're right that once you can see the pace of improvement continues almost nominally or even nominally better than the past. They're obvious. Those are some things that work against you in terms of assets left are harder. Secondly, there's a lag to the hard costs over and above the people costs.
Great. Wonderful. Thanks very much.
We can take our next question from Guy Moszkowski with Autonomous Research. Please go ahead.
Good morning.
Morning, Guy.
I just want to go back to the net interest margin discussion a little bit. I thought that I heard you say in the prepared comments that there had been a shift in the balance of the asset sensitivity to more of a balance between long-term versus short-term rates. I was wondering if that is strictly a function of the FAS 91 issue in a falling long rate environment, or is there something more structural that you've been doing with the portfolio that has caused that to happen?
It's the FAS 91, Guy. You're absolutely correct.
Okay. If we can just take a look at that one sort of historically for a second. Obviously, over time, that has caused quite a lot more volatility in your NIMs than it has for a lot of the peer group. I seem to remember that for regional banks, say, that often have the same issue, there's a difference, I guess, in the way they accrue versus doing the constant resets that you do. I was wondering why you do it in the way that you do, which seems to create more volatility.
We probably wondered the same thing this quarter. All kidding aside, I think if you go back, you're right. There are two ways that you can do this. The first is the way that we do it, which is you have the premium, you look at the average life of the premium. In each quarter, you reset it and basically retroactively make that adjustment from when it started. That was the determination that we had made a number of years ago. You're right, the other way that is allowed and provided for under GAAP is that you just basically adjust as you go and take it through the P&L as you go. You can do it either of two ways. We obviously do it the way that we do.
Would you ever consider changing that? If you were to do so, would there be a significant one-time charge that would be associated with that?
No, I think it goes the other way. The reality is that we run through the P&L, that amortization to catch up for ineffective rates ended up being lower than when the premium was set on. I think the way that we do it is absolutely appropriate. Keep in mind, the other thing, and I referenced in my earlier comment, is that as you do this from a balance sheet perspective, you're always adjusting the valuation of your AFS securities to be the fair market value at the time that you publish your financials, and obviously that flows through OCI.
Yeah, fair enough. You also talked about changing line items or lines of business where certain things are booked as we move into 2015, and that was fairly clear, except I was wondering, will this also entail moving the very large investment portfolio of your mortgages from all other into the consumer category?
It will not result in a large portion of mortgages being moved. There may be a smaller amount or a percentage of it that we continue to evaluate because the one thing that we want to make sure that we do is to have the geography of the financial statements motivate the behavior of the people that serve the client base that they do. There may be possibly a relatively small amount of home equity loans that could travel into the consumer business. It's not going to be anything that distorts things in any meaningful way.
Got it. Thanks. Final one for me. You talked a little bit about the investment banking backlog at the turn of the year. More broadly for Global Markets and Global Banking kind of taken together, can you give us a sense now that we're a couple weeks into the year how the, in particular, say, trading activity has started off? Given some of the increase in volatility, especially with big moves like what happened with the Swiss franc today, are you instructing the Global Markets business to pull back on risk? Generally, are you seeing that some of those volatility levels are in some way beneficial?
Yeah. I think there's a couple parts of that. The first is I think if you look at overall risk levels that we ran within the Global Markets business, and if you look at our information that we put out at year-end, that even with a little bit of a pickup in volatility at year-end, VAR was at low levels, and overall balance sheet levels were at low levels as we exited the year. I think we're nine trading days into the quarter, I think it's a little bit early to forecast what you would expect for the quarter for the overall sales and trading businesses. The only thing I would say is that clearly the activity levels that we've seen, that it's been more of a return to normal than what we experienced in the month of December.
I wouldn't want anyone to draw any conclusions when we're nine days through 62 trading days in a quarter.
Sure. It's early. Thanks very much. I appreciate the color.
Thank you.
We can go next to Paul Miller with FBR. Please go ahead.
Hey, thank you very much. Most of the questions have been answered. On your legacy assets, I know, and you talked about this a little bit, where your default numbers have dropped roughly to 189k from a roughly, I think, 220. Did you sell anything, or is that all improvement in just credit in the quarter? In other words, did you move the houses out, or did you also sell?
Yeah. My recollection is there was roughly a third of that came from the sales of both servicing as well as the underlying loans themselves. In addition to that, we saw continued improvement in the net new 60 pluses. We obviously worked others through the normal foreclosure process as well as for those borrowers that cured.
One of the things because you made a comment about that the low oil prices has improved some of the consumer credit, consumer spending and all that. Are you seeing any improvement in working through those 60-day defaults from that? Those loans are just so old, relatively speaking, in the default bucket that the low oil prices really doesn't help out?
I'd say it's much too early to figure out what the oil price impact would have on mortgage defaults. What we're saying is you're actually seeing consumers spend the money they're getting, and you're seeing the consumer credit quality stay strong. If you project out a period of low prices, you would see a benefit on the consumer side offset by the commercial side. I'm not sure. Paul, in the context of what's in that 60-day bucket, they don't have a meaningful impact. Had any meaningful impact so far. It's pretty early days. The good news is, if you look at our delinquencies in our first mortgage portfolio, they keep coming down, and that's what drives long-term reduction.
Brian, I missed it. I was writing it down as fast as I could, but you talked about how you're seeing consumer balances increase over the last couple of months, I guess, or last month. Can you go over those numbers again?
The consumer spending increase. Is that what you're referring to, Paul?
Yeah.
Far, January of 2015 versus January of 2014, spending on credit debit cards is up about 3% year-over-year, and that's overcoming a drag effect of about a percentage and a half from lower fuel prices.
Okay. Hey, guys, thank you very much.
Thank you.
We can take our next question from Marty Mosby with Vining Sparks. Please go ahead.
Thank you. I wanted to kind of drill into the markets business a little bit. In the sense that we've seen pressure on fixed income the last two quarters, is there anything in the drivers of that weakness that would jeopardize the seasonal uptick that we usually see in the first quarter?
I think if I understand your question, I think that the answer to that is no. If you go back and look at, with the exception of last year, the fourth quarter does tend to be the weakest quarter of the year seasonally. It was obviously a little bit more so this quarter. Structurally, there's nothing that would lead you to that. Obviously, it's a market that ebbs and flows. No, there's not anything structural that would lead you to believe that that should be different.
There's a lot of noise in the markets business, and I've tried to take out as much as I could. What I'm trying to look at is expense elasticity relative to the revenues. From third quarter to fourth quarter, it looked very effective with about 80% in relation to expenses to revenue reduction. Over the last year, when you take out the litigation expense, looks like operating expenses only declined about 20% of what revenues declined. I was just curious what you thought maybe the right elasticity number would be there.
I think largely what you saw in the fourth quarter was a reflection of the change in the incentive levels due to the lower revenue, and you'd expect that to happen. Let me bring that up a little higher to a more broader point, which is about two or three years ago, Tom Montag and team made a fundamental restructuring of that business to drop its expense base to where as long as we get $2.5 billion more revenues, more or less, we start making some money. If you adjust the FCA charge, which is the one-time charge they made somewhere around $300 million this quarter to give you a sense. In its worst quarter, it earns $300 million. In its best quarter, it earns over $1 billion.
That largely is really marginally profitable when you see the revenues go from the high $2 billion to the, say, $3 billion level up to the $4 billion level. Most of that comes through with a tariff on compensation of around 19%-20% or something like that. There is elasticity. As you get to lower levels, you start to hit the floor on the fixed cost structure.
That's very helpful. Brian, lastly, you've talked several times about the core expenses and the investment you're making. A lot of the core businesses, really all except banking, show declines in net income sequentially and year-over-year. Do you feel like you're investing to try to kind of reignite some of that growth going forward?
One of the things you got to be careful of is they reflect all these charges that we talked about in NII get pushed out to all the businesses. There's some elements that really aren't the business' control, for lack of a better term. Secondly, you're still seeing as we move from a period where reserve releases were going on at the business level, you're seeing provision changes across the board that have it. By and large, if you look at the fees and the direct expenses, which are the two things they control the most, you see a pretty good relationship going on and pretty good stability. I'd say as you look across the businesses, the consumer bank continues to make good progress on sales capabilities and its actual sales. You can look at some of the later pages, you can see it.
I'd say wealth management, we got to make sure the expenses and the revenue stay in line there. We talked about that last quarter. John Thiel and the team, especially under Merrill Lynch, are doing a good job of getting after that. But then in banking, I think you've seen a pretty good relationship if you back out sort of the unfundamental impacts of FAS 91 and the provision and things like that, which those are adjustments we make at the top of the house and push through.
Thanks.
We'll take our next question from Mike Mayo with CLSA. Please go ahead.
Morning, Mike.
Hi. You highlighted that the expenses are at the lowest level since the Merrill merger, and we estimate that they're down almost one-fourth over 5 years, that's certainly good. We also note that revenues are down quite a bit over that timeframe, too. How do you evaluate the trade-off between more aggressive restructuring and investing in the franchise? Specifically, you're pretty much done, I think, with New BAC. Would you have a program, maybe even Newer BAC or a new restructuring plan?
I'd say, Mike, the other piece of that is obviously the credit cost you got to think about in terms of if you look back and look at the higher revenues levels at the time. The charge-off run rate was $2 billion-$3 billion a quarter. In one quarter, it was $10 billion, if you remember, for cards especially. Be careful about that. I'd say your point really is what do you do from now forward? We talk about in the core expense base, leave aside the LAS, the litigation, all that stuff, but just the core expense base. Basically, what we continue to do is to take out non-productive expenses and invest part of that back in a franchise and bring part of that to the ability to see that core line continue to nudge down.
Remember that when we're doing this, we're absorbing health cost increases, wage and salary increases, severance comp increases. We are heavily focused on maintaining a rational balance between the core revenue and the core expense dynamic going forward. You should expect, assume that there's a continuous program of looking at this, just to continue to simplify our company, continue to take out the vestiges of the cost of the crisis. As we have downsized the company, take out the overhead that was harder to shake out, as you're well aware. We're laser focused on it. I think on the other hand, we continue to invest in sales capacity, and you see that reflected in things like card sales and home equity sales and auto loan sales, direct auto loan sales all increased.
Don't expect another new program with expense targets. It's more of a day-to-day perspective now?
No. Remember, we absorbed, if you think of 60% of our costs being people costs, you think of inflationary level of cost increases of 3% on those, basically to keep costs down and flattish, you've got to work your tail off. That's the sort of process going forward. We had to drop the cost down to get them to a reasonable level. We'll continue to make improvement relative to revenues. If the world gets different, we will then have to revisit it. Right now, in this revenue environment, even slow growth environment, we can keep the cost flat as revenues start to rise.
Then a separate question, what are your key financial targets for 2015? I know you've expressed some of your targets, assuming interest rates increase. If interest rates don't increase, what should investors evaluate you on at the end of 2015? All I have to go on without the higher interest rates is page 42 of the proxy that talks about the PRSUs, and it says as long as you get over a 50 basis point ROA, you go in the money on the PRSUs. I'm not sure if I should be looking at the 50 basis point number or it's 80 basis points, 100% in the money, or the 1% number that you've talked about before. Again, assuming rates don't go up, what's your ROA and ROE target for 2015?
Mike, we don't give specific projections, our goal is to continue to take the earnings from the $3 billion level this quarter and drive them forward. Our view is that based on everything we see, as we see the impact of all the work we're doing, plus the roll over the cost base, the reduction in LAS cost, the litigation falling back to the kinds of levels we saw this quarter, you'll see us move towards those long-term goals of 1% ROA and 12% return on tangible common equity.
One last try. That 1%, 12%, that assumes higher interest rates. If your forecasts do not expect higher interest rates as soon as they do right now, at what point would you take additional action with expenses, and how do you think about that?
We take additional action expenses every afternoon. In other words, we had 4,000 reduction FTE in the fourth quarter of 2014, Mike, out of the core franchise to keep getting efficient. We work it on expenses every day, and we have teams of people working to do all the things that you'd expect us to do.
All right. Thank you.
We can take our last question from Nancy Bush with NAB Research. Please go ahead.
Good morning, guys. Two questions. Brian, I'm a little bit confused about the card growth. I think you said you got 1.2 million new cards out in the fourth quarter. You mentioned something about it being seasonal. You've got lots of ground that you can gain in that business, and I just kind of want to clarify whether this is something extraordinary going on here and what your projections are for the future for growth there.
Nancy, sorry if we confused you. Let's talk about the production of new card units. That's the $1.184 million. If you look on page 19, you can see that, and you can see it building from the fourth quarter 2012 to 830,000. The first is production of units, and the second was balances. Balances in the card business were up in the fourth quarter, almost $3 billion, $2.5 billion-$3 billion. That we got to be careful because Christmas season, people spend and borrow, and then they pay down. The point there is that has a little seasonal help to it. But if you look back in prior quarters, you've seen a stability in our card balances, which as we continue to sell more units and people continue to use the card, we ought to expect a positive growth there. But it's units at $1.2 million.
Balances grew at $2.5 billion-$3 billion, and the balances are common in seasonality. The units have been above 1 million new production units each quarter for the last several quarters.
Is there one particular card that's proving to be very popular? I see your ads for the cashback cards, et cetera. Is that the card of choice at this point?
That is our core card offering. We've simplified our offering to three or four core products, and that's the biggest one, and it's contributing to sort of card income being up year-over-year by about 7%. That card's selling well. The good news, as you can see, is 67% came through basically our web online sales process and our branch sales process in the core customers. We continue to drive it.
Okay. Secondly, the 25% margin in wealth management. I think back to the old days when you had much fatter margins in that business. What do you see as kind of a normalized margin in wealth management? Number two, to what impact is the wealth management margin being maybe impacted by sort of high liquidity levels that customers are maintaining, and do you see that changing?
I'd say a couple of things to that, Nancy. I think the first is that we've said that over the course of a couple of years, that we need that wealth management margin to get to 30%. I think you've got a couple of things going on right now. In the low rate environment, that business has an artificial drag because, as you know, you don't tend to pay out compensation, which is a significant portion of the expense to those things that are net interest income related. We also have in 2016 some deferred comp and other programs running off. As we go through over the course of the next couple of years, between the business growing, a normalization of rate environment, and some other things, that should be a 30%-type pre-tax margin business.
Okay, great. Thank you very much.
Bye. Okay, I think we're through all the questions, thank you very much for joining us, we'll look forward to speaking next quarter.