美國銀行 (BAC) 2007 Q4 法說會逐字稿

Welcome to today's teleconference.

At this time all participants are in a listen-only mode.

Later there will be an opportunity to ask questions during our Q&A session.

Please note this call may be recorded.

I will now turn the program over to Mr.

Kevin Stitt.

Please begin, sir.

Thank you.

Before Ken Lewis and Joe Price begin their conference, let me remind you this conference does contains some forward-looking statements, regarding both our financial condition and financial results, and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.

These factors include among other things changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses.

For additional factors, please see our press release and SEC documents.

With that, let me turn it over to Ken Lewis.

Good morning and thanks for joining our earnings review.

In our time this morning, Joe and I would like to cover several topics, including various aspects of earnings in 2007, our strategy for capital markets and advisory services, and our outlook for 2008.

We will cover what we think is relevant for both understanding the quarter, and conveying to you our thoughts about the future.

Additional details on our quarterly and full-year results are available in the financial supplement.

Clearly the past few quarters have been stressful for shareholders, management and associates, easily the toughest environment since I have been CEO of Bank of America.

But at the same time, it is important to stay focused on our strategic goals and to remember that our business model was designed to handle cyclical stresses, if not the extremes we are experiencing today.

For the full year of 2007, Bank of America earned $15 billion, or $3.30 per diluted share.

This includes the deeply depressed results of the fourth quarter, in which we earned only $268 million, or $0.05 a share.

You also know by now that the earnings decline from earlier periods was largely due to revaluations of structured credit positions, and other market dislocations that affected our results, and higher credit costs.

While the market has been rocky and certainly impacted our results, our performance even under these conditions has not been what it should have been.

Before Joe talks about quarterly earnings and our outlook for 2008, I want to spend the next few moments touching on the 2007 highlights in each of our businesses.

Many of our business had a good year from a revenue standpoint, which provides a base from which to deliver strong results going forward.

Starting with Global Consumer & Small Business banking, total revenue increased 6%, due to impressive performance in noninterest income and increased net interest income.

However, earnings of $9.4 billion for 2007 were down 17% from a year ago, due to a 51% increase in provision.

Noninterest income grew 13% due to good card performance and higher service charges.

We increased the allowance for loan losses by around $2 billion, due mainly to on-going weaknesses in the housing market, along with seasoning of several growth portfolios.

Product sales were strong, up 9% from last year, with net new checking accounts exceeding two million in 2007.

That makes a total of over nine million over the past four years.

Product and process innovation helped us maintain our leading positions in most consumer categories.

We regained some traction in the last half of 2007 on retail deposit growth, after several quarters of sluggish results.

We attained a longstanding goal of a leading position in the origination of direct-to-consumer real estate loans, and maintained our #1 ranking as card services lender in the U.S.

and the U.K.

Our efforts in expanding small business continue to produce results, with revenue growth of 13%, average loan growth of 27%, and growth and active accounts online of 16%.

In short even though the economy has slowed, we continue to add new retail customers, and expand our relationships with existing customers.

Global wealth and investment management earned $2.1 billion in 2007, down 6% from 2006, due to the impact of the cash fund support which Joe will discuss.

On the positive side, asset management fees increased 21% in Columbia.

The integration of U.S.

Trust is proceeding as planned and contributed to an increase to earnings in the private wealth management area.

Earn in premier banking and investments were up 8%, due to record brokerage income and good growth in fee-based assets and loan production.

Loans with Premier customers rose 16% in 2007, with organic growth and deposits of 3%.

The Marsico sale closed during the quarter, resulting in a gain of $1.5 billion pre-tax, which is reflected in the all other segment.

Assets under management and GWIM closed the year at $643 billion, up 7% from a year ago, after adjusting for the sale of Marsico, which had a $61 billion impact on assets under management, and the addition of U.S.

Trust mid-year of LaSalle.

Global corporate investment banking earned $538 million in 2007, reflecting the negative impact of significant events in the financial market.

For the year, Capital Markets and Advisory Services lost 3.4 billion, versus earning 1.7 billion in 2006.

Outside of the Capital Markets businesses, the combination of business lending and Treasury Services earned $4.2 billion.

This was down from $4.6 billion earnings in 2006, as good client activity which drove revenue growth, was offset by higher provision expense coming off recent historic lows, and increased infrastructure spending.

2007 was a year of heavy investment for the future growth of our Treasury business.

As you saw in the press release last week, we have completed much of the strategic review of Capital Markets and Advisory Services, and remain dedicated to customer and client activity.

However, we are returning to a more basic strategy.

We are currently marketing our prime brokerage business, and are downsizing our CDO and certain structured products businesses.

We are resizing international platforms to emphasize core competencies in debt, cash management, and trading.

In other words, we will play to our strengths and deemphasize those businesses where we lack scale.

These actions should result in a smaller balance sheet and lower head count.

If we started with this action plan on day one of this year, would probably leave our revenue in the Capital Markets business somewhere around the 2005 level.

Not including the three business segments is Equity investment income of $3.7 billion in 2007, which reflects results from principle investing that benefited from favorable market conditions, dividends, and other returns from our strategic investments.

The contribution of equity investment income from principle investing was approximately 2.2 billion.

That is higher than we expected a year ago, and was driven by a robust market in the first half of the year.

Before I turn it over to Joe, let me make a couple of comments about my expectations in 2008.

Our economic expectations project minimal GDP growth, and although a slowdown not a recession, as we expect a pretty rocky start to the year improving thereafter.

Absent a market disruption event like we experienced in 2007, I would expect our earnings per share in 2008 to be well above $4.00 a share.

As I said earlier, U.S.

Trust is going well, and is on-target to be accretive in 2008.

Likewise, early results for LaSalle were positive, and are expected to add to earnings in 2008.

Business in general is good, and we now believe we will exceed our cost savings projections.

Over the quarter, our commercial deposit base has grown 5% in the LaSalle footprint, as class benefit from Bank of America's expanding credit and Credit Services capabilities.

Countrywide is expected to close early in the second half of this year.

Since we believe the impact of Countrywide to earnings will be neutral in 2008, all of our comments today about 2008 exclude the addition of Countrywide.

With our write-downs this quarter, we are comfortable that current CDO values are appropriate, but could be subject to further changes based on market conditions.

At the time of the LaSalle announcement, we had estimated a Tier-1 capital ratio, which is our most constraining measure of approximately 7.5%.

Our current capital position is not at our 8% Tier-1 target, principally due to the combination of LaSalle acquisition, as well as lower earnings.

Our goal continues to be getting back to that target, and we will do that through earnings generation, capital raising, and no net share repurchases.

Given our outlook for the economy and our earnings potential in 2008, we have not changed our philosophy about the dividend, and remain proud of our record of 30 straight years of increases.

The environment is very tough, and we expect it to remain so for some months to come.

We stay concerned about the level of domestic consumption and spending, given the prolonged housing sloth, subprime issues, and higher fuel and food prices.

Our core businesses of retail banking, card, consumer, real estate, small business, commercial banking, Treasury services, and asset management remain very sound, and in many cases we believe are world class.

We also have strengths and fixed income and certain other Capital Market businesses, and our re-tooling of these businesses puts us on good footings as well.

Our initiative spend in 2008 is targeted at $1.4 billion, which is more than we spent in 2007, and signals that we have stepped up investments for the future.

Those investments focus on areas like the mass affluent customer base, as we continue to expand our offerings to relationship customers, to give us more of the business, and in essence scaling what is already a proven model.

We have focused a lot of attention on the retirement opportunity to capitalize on the continuing change of demographics, to grow revenues associated with the shift, and we expect to see continued growth in our mass consumer business, as we focus on the cornerstone products of relationship.

This is helping us regain momentum in our deposit growth.

Add to our leading position in Card Services, both domestic and international, and increase our share of the mortgage market.

With our new go to market model in our Commercial and Treasury businesses, we will drive productivity gains, and improve client satisfaction.

Innovation and products, distribution and process improvements stemming from all of our associate's efforts in 2007, will serve us well as we start the new year.

While we have reassessed our strategy in Investment Banking and Capital Markets, we by no means have hunkered down, and are looking forward to leveraging our strengths in 2008.

We have also been anticipating the normalizing credit environment that we are experiencing, and have been working closely with our customers and clients, to assure them that we are in the lending business, but at the same time we are focused on getting paid for the risk we take.

With that, I will turn it over to Joe to expand a bit on the quarter, as well as on some of the points I referenced.

Thanks, Ken.

Before diving into the businesses let me take a minute to summarize some of the larger items affecting this quarter's results.

Now either Ken and I have discussed these items at different times during the fourth quarter.

We had a negative CDO of sub-prime related charges during the quarter of $5.3 billion, 4.5 billion is reflected in trading, and 750 million recorded in Other Income.

Provision expense rose to $3.3 billion, and included additions to reserves of 1.3 billion.

Our Other Expenses include costs for Visa.

We also had a charge of approximately 400 million to support Columbia's cash funds, and incurred a write-down of around 400 million, associated with mezzanine securities we had previously purchased from Columbia's cash funds.

Our weak trading revenue reflects the negative results on positioning other than CDOs, and lastly, we booked a $1.5 billion gain on the sale of Marsico that Ken mentioned.

LaSalle closed on October 1st and distorts the trends in many items.

While we don't intend to break out LaSalle's results going forward, we are providing a good bit of detail this quarter.

As Ken said, the LaSalle businesses are doing well, and the integration is on-track.

Revenue was 685 million, consisting of 470 million in net interest income, and 215 million in noninterest income.

Much of the revenue was related to commercial banking.

Expenses were 615 million including merger costs and negligible cost saves, resulting in an earnings contribution in the quarter of about $0.01.

At closing on October 1st LaSalle added 63 billion in loans, 30 billion in securities, and 63 billion in deposits to our balance sheet.

Asset quality has been consistent with our expectations, and reported provision expense was eight million.

Of the increases in NPAs and criticized exposure at the total company, the addition of LaSalle represented 47%, or $1.2 billion, and 78%, or $5.2 billion of the increases respectively.

As Ken mentioned, things are on-track.

Cost saves are now projected to be higher than originally expected, but in 2008 this will likely be offset by some shortfall in operating earnings, principally in the markets-related portion of the business.

We completed all our assessments entering into the execution phase, which involves changes to sales processes, product offerings, customer marketing, and systems conversions.

Now let me move into some brief comments about the fourth quarter business performance, before I talk in detail about Capital Markets & Advisory Services, credit quality, and a few other topics.

In Global Consumer and Small Business banking, earnings of $1.9 billion in the fourth quarter were down 28% from a year ago, as revenue growth of more than 7%, or $843 million, was more than offset by a higher provision of 1.5 billion, adding almost 1.3 billion to the allowance for loan losses.

Sales performance in the quarter totaled more than 12 million units, up 11% over last year.

As you can see, total retail deposit balances including our wealth management balances are up 10% from a year ago, driven by a combination of organic and acquisition growth.

On an organic basis, through much of the year we lagged the market, but have regained some momentum in market share in the last half of the year with linked quarter growth of 1%.

Debit card purchase volume increased 13% over last year, and revenue grew by 12% to $564 million for the quarter.

Net new retail accounts drove service charges up 17% over last year.

Card services revenue grew 3% from last year, as ending managed loans were up 12%.

As 3% revenue growth is muted as the I/O strip had a negative swing of 260 million year-to-year, and without the swing, card revenue increased 9%.

The write-down on the I/O during the fourth quarter was 167 million, driven principally by higher projected credit losses.

Purchase volumes were up 6% from last year, driven by international growth as U.S.

growth rates remained lower at 4%.

Cash volumes are up 20%.

First mortgage originations across the Company were approximately 25 billion, an increase of 5% from last year.

Although down in originations from the previous quarter, our direct-to-consumer market share continues to grow, despite the market disruptions.

Mortgage banking income on a consolidated basis increased $231 million to $386 million on a linked quarter basis, mostly from higher servicing income.

Average home equity loans are up 5% from the third quarter after adjusting for LaSalle.

Now switching to Global Wealth and Investment Management, earnings of $334 million were impacted by fund support during the quarter.

As Ken mentioned, we recorded a pre-tax gain from the sale of Marsico in the quarter of 1.5 billion, which was recorded in our corporate results outside this business segment.

As a result of this sale, assets under management was reduced by 61 billion of the total 106 billion that was managed by Marsico.

Marsico continues to manage $45 billion in AUM for Columbia.

Revenues will be reduced by about $450 million annually, and expenses by around $150 million annually.

Included in the results for Columbia was a charge of just under $400 million, versus the 600 million we had estimated earlier in the quarter, to support Columbia's cash funds due primarily to structured investment vehicle exposure.

Columbia's exposure to SIV across the entire cash fund complex is just above 4%, with around half of that being exposure to nonbank sponsored SIV, all exposure is senior paper, and has been marked by the Columbia funds at year end.

The support agreements remain in place if needed.

Aside from the SIV impact asset management fees at Columbia grew 21% year-to-year.

Going forward revenue should rebound as the absence of the market disruption impact and the addition of U.S.

Trust will offset the impact of the Marsico sale.

Additionally, incremental investments and marketing campaigns, client facing-associates and our retirement and [fueling] initiatives, are expected to drive future growth in all three of the core units.

Equity investment gains for the total Corporation in the fourth quarter were $317 million, which is at the low end of the range we discussed last quarter, due to market conditions.

Also included in All Other was a $400 million writedown, related principally to a mezzanine SIV investment we previously purchased out of the Columbia funds.

This investment has been written off.

Finally let me turn to GCIB and address Capital Markets & Advisory Services.

Unfortunately, I have to once again report losses in this business.

Markets seemed to recover a bit in early October only to seize up again in November, making it feel like a repeat of August.

Given the current market conditions, I will again go into more detail than usual, in order to provide the level of transparency that most of you are looking for.

CMAS had a loss this quarter of 3.8 billion, as revenues declined 4.4 billion from the third quarter.

Investment banking produced revenue of $577 million, and although down 24% from a year ago, it exceeded third quarter results by 32%.

Sales and trading results were down $4.5 billion, primarily due to the 5.3 billion writedown of CDO and subprime-related exposures taken in the quarter.

Let me take you through CMAS by product.

I will start with liquid products as they produced $584 million in sales and trading revenue for the quarter, tops for the year, and up 32% from a year ago.

We had strong results in interest rate products in foreign exchange, and less of a drag from our MUNI business that was still burdened by spread widening.

Turning to Credit products, sales and trading revenue was a negative $455 million for the quarter, compared to a negative $885 million in the third quarter.

The losses are centered in a couple of legacy books, that we continue winding down after our third quarter experiences.

As you know, the market has not been real accommodating for that purpose.

Before going into Other Capital Markets businesses, let me address where we stand on our non-real estate origination business.

Our share of the leveraged lending forward calendar, dropped from 28 billion at the end of September, to just over 12 billion at year end.

Our funded positions Held for Distribution increased just over 1.5 billion, to $6 billion.

There was a good deal of activity as we entered around $5 billion in new commitments, syndicated some, and had some deals terminate.

Our third quarter mark, which included consideration to deals fees, was pretty close to what it took to distributed and mark our current exposure.

There were really no investment grade deals funded or in the pipeline in excess of normal levels.

On the CLO front, we are down to under $1 billion of leveraged loan inventory, due to some executions and sales during the quarter.

Let me cover equities real quick before turning to structured products.

Sales and trading revenue and equities of $198 million, compared to 244 million in the third quarter, the decline here was driven by lower client activity in equity capital markets, and lower equity derivatives revenue.

Turning to structured products, which includes residential mortgage and asset-backed securities, commercial mortgages, structured credit trading, and our structure security businesses including our CDO business.

Sales and trading results in the quarter were a negative $5.5 billion, driven by the marks on our CDO and other residential mortgage exposure, as well as on our CMBS origination business.

On the CMBS side, we ended the quarter with 13.6 billion in funded debt.

That compares to 8.4 billion at the beginning of the quarter with fundings of just over $11 billion, being offset by securitizations of about nine billion, and the addition of 3.4 billion from LaSalle.

As you are aware the CMBS market has been slow, resulting in some securitizations that have not been profitable.

We have reflected that in our year-end marks, and losses for this activity during the quarter totaled around $130 million.

This mark also covered our forward pipeline down to just over two billion at year-end, from almost 10 billion at September 30th.

We continue to wind down our structured credit trading business, and experienced some additional losses there.

We also experienced negative marks on our non-subprime residential non-agency security exposure, our remaining subprime whole loan exposure, and our remaining subprime securities manufactured for distributions.

All-in our net marks on these books were around $330 million.

The remaining subprime exposure is around $0.5 billion and Held in Security form.

On the CDO side, our losses in the quarter were $5.1 billion, after excluding the subprime whole loan marks I just mentioned.

This includes charges associated with our super senior exposure, counterparty risk associated with wraps our insured super senior exposure, and other sales and trading exposure, including the CDO warehouse.

The super senior CDO exposure before adjusting for the writedowns on our super senior piece is shown in the supplemental information we provided.

The highlighted column which totaled $12.1 billion again before our write-downs, depicts our subprime exposure that is not insured, and where subprime consumer real estate loans make up at least 35% of the ultimate underlying collateral.

Approximately four billion of our marks were against this exposure.

To give you a little more background on exposure, for high grade about 40% of our collateral is not subprime, and of the remaining 60% that is subprime, two-thirds is '06/'07 vintage, and one-third is '05 and prior.

For our 2A7 mezzanine exposure, 60% of the collateral is not subprime, and of the subprime collateral, 60% is '05 and earlier vintages.

On the cash side for mezzanine, the collateral was heavily weighted towards subprime with about two-thirds being later vintages.

On the CDO squared side, for the cash positions about half is non-subprime collateral.

Approximately a quarter is non-subprime on the 2A7 put side.

The subprime collateral is mostly later vintages in these exposures.

In addition to the mark on our super senior, a little more than $1 billion of our charges, relate primarily to the writedowns on our CDO warehouse, and on other sales and trading positions that had been retained in manufacturing CDOs, or taken as collateral under financing transactions.

The combined subprime CDO sales and trading positions at 12/31 are carried at $600 million, or about $0.30 on the dollar.

Finally we also took charges to cover counterparty risks the insured CDOs of around $200 million.

From a valuation and management standpoint, we have evolved towards a view that for many if not most of these structures will see terminations, and therefore have looked through the securities to the net asset value supported by the underlying securities.

In these cases, we utilized external pricing services consistent with our normal valuation processes.

We priced over 70% of the exposure in this manner.

The remaining exposure evaluations were derived by references to similar securities, or on projected cash flows, the majority being by reference to similar securities.

For those that we value using cash flow, consistent with my comments earlier, we generally assume that the structures would terminate early, and therefore you can think of it as almost an I/O valuation.

I might note that we also tested our overall valuation by cash flow analysis.

Now stepping back from the process, while we are still carrying exposure, much of the remaining value is from either the non-subprime collateral, early vintage subprime collateral, or shorter term cash flows off of the toughest collateral.

Let me spend a minute or two recapping what we have said recently about the results of our strategic review of the Investment Banking and Capital Markets business.

As you heard Ken say, it is back to basics.

We will focus on core strengths and natural advantages.

We will exit business that is don't align with those objectives.

We remain committed to serving our corporate sponsor and institutional investor clients needs, with a wide range of Investment Banking services across industries.

Specific actions in the short-term involve selling our prime broke brokerage business, and restructuring our international platform.

These actions should result in total revenue levels in Capital Markets & Advisory Services more in-line with the 2005 levels, as these actions were already implemented.

Some of the revenue reductions won't happen until later in the year, so the quarterly average at the end of the year will probably look more like the '05 run rate.

Obviously there are expense reductions associated with right-sizing the business that will occur throughout the year, and those tend to lag the revenues somewhat.

The head count reductions will include the 650 front office associates we announced last week, and there will be infrastructure reductions to come as well.

Exit costs, severance, and goodwill-related charges should be around $0.05 of earnings, but we believe those will be more than offset by the gains associated with the sales of the businesses we are exiting.

Also by the end of 2008 we are expecting trading assets to have been reduced by more than $100 billion.

Let me switch to credit quality.

On a held basis net charge-offs in the quarter increased 11 basis points to 91, or $2 billion.

On a managed basis overall net losses on a consolidated basis in the quarter increased seven basis points, to 1.34% of the managed loan portfolios, or a portfolio worth $3.3 billion.

Net losses in the consumer portfolios were 1.77%, versus 1.62 in the third quarter.

The credit card represents almost 75% of total consumer losses.

Managed consumer credit card losses as a percentage of the portfolio increased to 4.75%, from 4.67 in the third quarter, which is in-line with what we have been telling you for several quarters.

30-day plus delinquencies increased 21 basis points to 5.45%.

We have seen an increase in delinquency in our card portfolio in those states most affected by housing problems.

To give you a little insight, the quarter-over-quarter rate of increase in 30-day plus delinquencies in the combined states of California, Florida, Arizona, and Nevada, increased over five times the pace of the rest of the portfolio.

That group makes up a little more than a quarter of our domestic consumer card book.

We have mentioned before that we expect to be in the 5 to 5.5% range for overall consumer card losses for the full year of '08.

That compares to the 4.75% we experienced in the fourth quarter.

We still expect to be in that range, but our normal seasonal patterns, like the typical balance drop in the first quarter, may cause us to exceed it on a quarterly basis.

Obviously further weakening in the economy could drive it higher.

Credit quality in our consumer real estate business, mainly home equity, deteriorated as a result of the housing market conditions getting weaker.

The problems to-date have been centered in the higher LTV home equity loans, principally in states that have experienced significant decreases in home prices.

Home equity reported an increase in net charge-offs of $179 million, or 63 basis points, up from 20 basis points at the end of September.

30-day plus performing delinquencies are up 25 basis points to 1.26%.

Nonperformers and home equity rose to 1.25% of the portfolio, from 82 basis points in the prior quarter.

Even though our average refreshed FICO score remains strong at 721, and the combined loan to value is at 70%, we have seen a rise in the percentage of loans that have a CLTV above 90%, which is driven by the more recent vintages.

90% plus CLTV currently represents 21% of the loans, versus 17% in the third quarter.

We believe net charge-offs in home equity will continue to rise, given the seasoning in the portfolio, and softness in the real estate values.

We increased reserves for this portfolio to 84 basis points, but wouldn't be surprised to see losses cross the 100 basis point mark by the middle of this year, as we work through higher CLTV vintages.

Now relative to the industry's performance, we believe that our results will continue to benefit from our relationship based direct-to-consumer strategy.

Again, continued economic deterioration could drive losses higher.

Our residential mortgage portfolio continues to perform well, with losses at only four basis points in the fourth quarter.

While we have seen some deterioration in subsegments, namely our community reinvestment act portfolio under our low to moderate income programs, that total some 8% of the book, nothing really stands out to us at this point.

Our Auto portfolio closed the year with approximately $25 billion in loans.

As many of you remember, we exited auto leasing in 2001, so we are talking loans in this portfolio, not leases.

Net charge-offs in the quarter were $99 million, or an annualized 1.53% of the portfolio, which is up 41 basis points or 22 million from the third quarter, due to normal seasonal patterns, as well as signs of deterioration in the most stressed housing markets.

Switching to our Commercial portfolios, net charge-offs increased in the quarter to $381 million, or 47 basis points, up five basis points from the third quarter.

Despite deterioration in Small Business and homebuilders, the overall portfolio has remained sound.

Net losses in Small Business which are reported as commercial loan losses, are up $40 million from the third quarter, and the net charge-off rate has risen to 6.33% from 5.89.

Excluding Small Business, Commercial net charge-offs increased $70 million from the third quarter, representing a charge-off ratio of 14 basis points.

These small increases are still coming off historic lows, and part of the losses reflect net charge-offs from home builders which were approximately 19 million in the fourth quarter, a decline of two million from the third quarter.

Criticized exposure from all Commercial rose from $10.8 billion in the third quarter to $17.6 billion, due to the addition of LaSalle which was around $5.2 billion, and an additional $1.5 billion at legacy Banc of America, due mainly to the homebuilder segment exposure.

NPAs rose 2.6 billion to almost $6 billion, with LaSalle representing $1.2 billion of the increase, and that was $873 million in Commercial, and $339 million in Consumer, and legacy Bank of America added $1.4 billion, again $183 million was Commercial, and about $1.2 billion consumer.

As you would expect, additional consumer NPAs include home equity and residential mortgage, while additional commercial NPAs involved commercial real estate, homebuilders to be specific.

Homebuilder exposure was $14 billion at year end from a utilized or outstanding view, and $21.6 billion in total commitments, reflecting the LaSalle additions.

39% of our homebuilder exposure is listed as criticized, and while it could move higher, we believe the portfolio is well-collateralized, and reflects both granularity and geographic diversity.

Coming back to Small Business, losses have increased significantly throughout the past year.

The sector remains one of the more important and faster-growing parts of the economy.

One in which we grew revenue 13% over 2006, and earned more than $1 billion in 2007, despite higher losses and increased reserves.

While our risk adjusted margins are still attractive in this business, our losses remain elevated.

The deterioration has been driven by seasoning of some large 2005 and 2006 business card vintages.

We have since instituted a number of underwriting changes, such as using more judgmental credit decisions, lowering initial line assignments, and changing our direct mail offerings.

The results have been a 15 to 20 point increase in average FICOs at origination, 15 to 20% reductions in average line amounts, and a meaningful drop in approval rates.

So while we will take time to work through these earlier vintages, Small Business remains a critical customer segment, with attractive, profitable growth opportunities for us.

Looking again at the total loan book, 90 days past due on a managed basis increased five basis points to 66 basis points, while 30 days past due increased 33 basis points.

The fourth quarter provision of $3.3 billion exceeded net charge-offs, resulting in the addition of 1.3 billion to the reserve.

Deterioration drove approximately two-thirds of the increase, reflecting ongoing weakness in the housing market principally in home equity and the homebuilders sector of our commercial portfolio.

Small business also experienced deterioration.

The remaining one-third of reserve build was due to growth in seasoning, mainly in the Consumer Unsecured Lending, U.S.

Card, and Foreign Card portfolios.

Switching to net interest income, compared to the third quarter on a managed basis, net interest income was at $824 million, of which core which means excluding the trading-related represented 816 million.

Adjusting for LaSalle, forward net interest income was up $346 million, or just over 3% on a linked-quarter basis.

The reported decrease in the net interest margin on the managed basis of 14 basis points was driven by several factors.

First, the impact of the Fed fund LIBOR spread during the quarter, secondly the impact of the LaSalle premium or goodwill being a noninterest-bearing asset drove just over a 15 basis point decline, third, a one-time benefit of restructuring our international aircraft leasing operation, and finally poor asset growth in funding.

Going forward the Fed fund LIBOR spread impact is dissipated, such that when coupled with the rate environment, it should offset the absence of the one-time benefit, leaving our core net interest margin somewhat stable for this quarter.

As you can see from the bowl chart, our interest rate positioning had become more liability-sensitive compared to the end of September.

This change was primarily driven by actions we took, as we felt the downside risks had become greater than reflected in the forward rate curves.

As rates reacted to signs of a slowing economy in the fourth quarter, we had shifted our cash flow swap off balance sheet position from 113 billion paid fixed, to a 34 billion receive fixed position, and that was our position at year end.

I might note that as of today, we shifted back more closely to where we stood at the end of the third quarter, as this downside risk looks to now be embedded in the forward rates.

We continue to benefit from curve steepening, but with a forward curve that reflects a 2.5% funds rate by the end of 2008, and may settle at 2.25 tonight.

We think most of the downside risk is now built in, and that the Fed moves this morning are consistent with that.

Just a couple of comments on expenses in the quarter.

Obviously our efficiency ratio is elevated as a result of the losses in capital markets.

Also, this quarter includes expenses for the Visa items.

These costs were split equally between our Consumer bank and our Commercial banking group.

GCIB incentive compensation costs were higher in the quarter, as we balanced the need to retain core personnel to execute our strategy going forward, against the weak trading performance.

The fourth quarter included $140 million merger and restructuring costs for various acquisitions, the bulk of which were for LaSalle and U.S.

Trust.

Let me say a few things about capital.

Tier 1 capital at the end of December was 6.87%, down from 8.22% at September 30th, due mainly to the acquisition of LaSalle which closed on October 1, and lower earnings in the fourth quarter.

Since the LaSalle announcement in April, we have raised $1.6 billion in Tier 1 capital and preferred market, and we reduced our share repurchases.

We remain committed to getting back to our 8% target, in order to fulfill our needs from the LaSalle and Countrywide acquisitions, and replenish capital for our reduced earnings in the second half of last year.

While market conditions will dictate the ultimate timing of our actions, it is our intent to access the markets in the near future, and we have a variety of alternatives available to us.

The ongoing earnings impact of these capital actions falls in the $0.10 a share range, plus or minus a couple of cents, excluding the impact of amounts related to Countrywide.

The trading asset reduction related to our CMAS business restructure, will also help us in getting back to our Tier 1 target.

Also as you know, we began marking to market our 8.2% investment in China Construction Bank, increasing OCI by $8.4 billion net of tax.

While Tier 1 was unaffected, it had a positive impact on the tangible and total capital ratios of about 50 basis points.

One final comment before expanding on Ken's comments about 2008.

The lower effective tax rate in the fourth quarter, reflects the reassessment and catch-up of our annual rate, given the lower earnings and a one-time tax benefit from the restructuring of our foreign commercial aircraft leasing operations.

Looking to 2008, you should expect a more normal tax rate of 33 to 34% on a non-FTE basis.

Going forward in 2008, there is considerable uncertainty about the economic environment.

It is unclear what ramifications the housing downturn, higher energy costs, and the subprime prices will ultimately have, but we do feel good about our relative position in our businesses, as we think about delivering results in 2008 and beyond.

As Ken mentioned, we are not in the recession camp, as we expect the economy to grow minimally and not contract, picking up momentum throughout the year, driven by moderate growth in both consumer and business investment spending.

However, certain industries like homebuilders, and certain states, may look or feel recessionary during 2008.

In talking about our '08, I think we have given you starting points as a base for LaSalle, so my comments about growth exclude its impact.

The loan and deposit growth generated by the franchise are expect to benefit net interest income, as will the expected steepening of the yield curve.

We expect mid-single digit growth in loans excluding the addition of LaSalle, to be driven by commercial, credit card, home equity, and unsecured loans.

Deposits will grow as we continue to benefit from our market leadership and innovation, and we expect to grow faster than the market.

Consequently, assuming the forward curves materialize, we expect growth in managed core net interest income to be in the high single-digit range on a normalized basis, and above that on a reported basis from the addition of LaSalle.

Let me also remind you that the change in NII in first quarter is impacted by day count, as well as the fourth quarter of one-time leasing transactions that I mentioned earlier.

Total revenue will be impacted by the bounce-back from trading losses, as well as lower equity investment gains.

We think a run rate of expectations for equity gains would be around 300 to $400 million in 2008, and will be dependent on liquidity events with our customers, and dividends from our strategic investments.

Excluding the impact of trading and equity gains, noninterest income should grow in the high-single digits, led by consumer fee increases in mortgage, card, and service charge revenues.

Credit quality will continue as a headwind from the impact of the housing market conditions on consumer asset quality.

Similarly, we expect to see challenges in the consumer dependent sectors of our commercial portfolios.

Given our economic assumptions, we can see provision expense up 20% compared to reported 2007 lows.

Obviously continuing deterioration including a recession could take this number higher.

However our strong market position, attractive risk adjusted margins, and substantial distribution advantages, position us well versus the competition.

On the expense side, we are aiming for strong positive operating leverage from heavy expense control, as well as savings realized from the LaSalle integration.

These cost savings are expect to slightly exceed our estimates, and we expect to get more than half of our all-in savings target of $1.25 billion in 2008.

Since we are on expenses, remember that similar to the first quarter of the last two years, we will have an additional expense of $0.04 to $0.05 in EPS, related to our expenses certain equity-based compensation awards for retirement eligible employees, or FAS 123.

Now to reiterate what Ken said up front, let me say while we are cognizant of the headwinds in the economy and it's impact on the marketplace, we feel good about our relative position, and absent things getting dramatically worse, think '08 will be a reasonable year for earnings.

With that, let me open it up for questions, and I thank you for your attention.

(OPERATOR INSTRUCTIONS) We go first to the site of Ed Najarian from Merrill Lynch, your line is open.

Good morning.

Good morning.

A couple of questions.

First of all, you held the line nicely in the fourth quarter, in terms of your credit card loss level, and consequently have held the line in terms of your outlook in the 5 to 5.50 range.

I guess the first question is, is there anything about what is going on in the economy, or the deterioration with the consumer in general, that would lead you to, and also what is going on with some of the other card providers, and what they are reporting, would lead to you raise that guidance?

No.

I think we feel fine about the guidance, Ed, because as you know we have been pretty accurate telling what you it was going to look like quarter to quarter in the past.

The only thing that would change it would be, is if you hit an actual recession and it was pretty severe, and then of course you have to go back to the drawing boards, but given our outlook, the 5.00 to 5.50 looks pretty good.

As Joe said, you may get a first quarter anomaly because of the reduced balances, which is typical, that you may go over it, but it looks pretty solid absent a recession.

Secondarily, you alluded to some more capital issuance, and also we have had a decline in the market, a pretty significant decline in the market value of China Construction Bank, which I know doesn't impact Tier 1, but does impact tangible now.

Can you put more color around exactly what, or close to what your plans are in the first half of the year for capital-raising initiatives?

Ed, what we try to do in the remarks that we gave you a few minutes ago, was to give you a framework for that.

You will recall a little over a week ago, we talked about the Countrywide acquisition would require a couple of billion dollars incremental, to what would be issued in that transaction to support the asset base.

You couple that with what it would take to get us back towards 8%, or towards our target, and that is kind of the way you frame our needs now.

The blend, we obviously have a number of alternatives to us from a preferred standpoint, and that is where we would most likely be looking.

Let me make the question a little easier, or would we be looking for more of a capital raise than the 2 billion that you announced with respect to --?

Yes.

Countrywide?

Oh, yes, and that's why I framed it in mind of the EPS impact I mentioned earlier.

Should we assume the vast majority of that capital raise will be in some kind of trust preferred Tier 1 type of non-common equity type of issuance?

We are still evaluating that, but obviously whether it is preferred or whether it has got some component of convertible, the dividend versus the EPS dilution impact of some kind of convertible would be encompassed in the $0.10, plus or minus the $0.02 that I gave you earlier.

Sorry to take up too much time here, but just one more.

It looks like your subprime CDO writedowns are less significant than some of your competitors, and you alluded to the fact that I guess most of the driver of your decision process for how much to take in subprime CDO writedowns was a mark to model process.

It sounds like you are taking a mark to model process, and assuming that you will hold the CDO positions through to maturity.

Is that the correct way to look at the vast majority of that?

It is probably the other way, Ed.

As we kind of come to the view from a management standpoint that a lot of these structures terminate, and therefore we flow through to the net asset values of the underlying securities, and that would really be it.

The ones that we have kind of cash flow to term, in essence we looked at those and said they are more like an I/O, so you kind of cash flow to termination, and just value that piece and that kind of puts an I/O floor on the value of that, but it is probably more of a termination view, than a hold to term view that you referenced earlier.

I think what you will find is we seem to have been a bigger multi-sector player, as opposed to straight subprime embedded in a lot of the structures, and that probably tends to be one of the biggest drivers, and obviously the vintage of the underlying portion that is subprime.

Ed, we have tried.

We have obviously tried our very best to look at others and see their markdowns, and it gets real hard, because the paper is just different.

Right.

Okay.

All right.

Thank you very much.

Thanks.

We will go next to the site of Ron Mandle from GIC.

Your line is open.

Hi, thanks.

I was going to ask pretty much the same question about CDOs.

My only concern is if I read the table right, it is CDO squared, so anything you can elaborate on that, you know, regarding the underlying attachment points, that type of thing?

Ron, if you look back in the comments I made earlier, I tried to give you a feel for how much of the underlying collateral was not subprime related, and then the vintage that was in it.

I think I could probably point to you how much of the collateral was not subprime as being the primary driver, you know, from that standpoint.

Okay.

And then just so would it be safe to assume that the subprime part you have written down very, very heavily, and the non-subprime part you have written down slightly?

Would that be a way to think about it?

It is a way to think about it.

It varies by particular structure, because in some is may be earlier vintages subprime, that would not make that necessarily correct, but I think in general that is a fair way for you to be thinking about it.

Okay.

Just one other thing.

You mentioned that in your guidance that we should think that the loan loss provision could be up 20% or so, and I was just wondering, is that managed or reported that you are thinking about there?

Reported.

And managed, what is your thought in that regard?

You know, if you take, I probably for that purpose would take the fourth quarter run rate, and build some kind of similar increase off of that from a charge-off, or a managed loss standpoint.

Managed losses, so the fourth quarter managed losses times 4 plus 20%?

I am not going to get real specific, but I think that is probably a reasonable way to think about it.

Okay.

Thanks very much.

We can go next to the site of Meredith Whitney from Oppenheimer.

Your line is open.

I have a couple of questions.

First of all, Joe, if you can just walk me through the insurance on page 19 of the slide deck, and because I am getting 12.1 from the prior period, and then 8.1 from the current period, it doesn't show where you have marked down, I know you breezed through the numbers, in terms of where you marked down the insurance exposures, and since that is such a timely and relevant issue, could you walk us through how you think about those exposures, what markdown you took, what preparation you have taken, in terms of subsequent downgrades by the rating agencies on those companies that are providing the insurance, and then just a follow-up if I may?

That is a mouthful, but let me say if you look at the column before the 12, you can see that our insured exposure was about a little over 4 billion for the subprime-related pieces, and as a starting point, let me give you a tiny bit of background on the underlying exposure.

For the CDO squared exposure that is insured, you made notice in one of the footnotes there, it has got more than 35% of subprime collateral, we classified it as subprime, but for that CDO squared one, there is over 70% of the underlying collateral that is not subprime, and as that is pre-'06/'07, so that gives you that one.

And then on the high grade positions that are there, they are about 50/50 subprime, non-subprime collateral, and then again when you look at the subprime collateral, or a little over half, I think, is pre-'06/'07 vintage, so that kind of gives you a feel for the quality of the underlying paper from that standpoint.

We took about a $200 million valuation allowance on what would be deemed expected recovery from insurance after we ran through those models, and that was based on the applicable insurer, you know.

It is spread amongst a number of them.

I will note that the one that is most notable in the marketplace, ACA, we are not relying on, for coverage there.

So kind of if you go back and say what is the valuation, which again would be much more limited, given the underlying collateral what we expect there, and then you hair cut it, and that was our 200 number.

If I could follow-up on that, before I have the other follow-up, I understand regardless of what asset class insurance is covering, if the said insurer gets downgraded, the insurance covering any of those asset classes gets devalued, so it wouldn't really matter.

Is that the right way to think about it, whether it is prime or subprime, the effective insurance is worth less?

Yes.

Yes, but you obviously look to your underlying value first, and you assume what kind of diminution of value there would be to be able to size your reliance on insurance, and my point earlier was, that sizing of that reliance is relatively small, and then do you as you described, regardless of what it is, if you are relying on insurance, you have to assess it based on the collectibility of that particular insurer.

Okay, is that what is the 4.1 billion of insurance, that is the only hedge you have, is that right?

On the super senior, yes, that would be fair.

Okay.

And then the other question I had which is on the, you guys have been great about your thoughts on consumer credit, and that wasn't as Ed said, tracked where you expected and where we expected, but the commercial side looked like it spiked up.

Was there any one item in that commercial, the commercial book that caused it to spike up, and has anything changed from a qualitative perspective, that you can illuminate us with please?

When you say spike up, you mean in?

In the loss and delinquency numbers.

No.

Again, if you think about Criticized, for instance, which spiked up quite a bit, it was principally driven by the addition of the LaSalle assets, and so a lot of your commercial statistics, remember that that franchise had a lot more commercial orientation to it, and less consumer which was one of the attractive parts about the ability to grow it is driving that.

And then within the legacy book, the spike up, remember that our Small Business statistics statistics roll into the Commercial statistics, so that was part of it and that is why we went into a little more detail there for you, and then the rest is principally homebuilder or homebuilder-related driven.

I am sorry, I lied.

One last follow-up.

If you guys look at the option that you have on your CCB ownership, and then look at the capital levels that you have now, and then the opportunities that come about because we are in a distressed market for financials, what is your priority, in terms of securing the capital levels to the 8%, or taking advantage of an opportunity that may come about this year?

That is it and I am done.

It is a combination, Meredith.

That is all I get?

Yes.

Okay.

All right.

Thank you.

We will go next to the site of Mike Mayo from Deutsche Bank.

Your line is open.

Hi.

Your period end credit card balances were up about 6% in only three months, I am wondering if that's indicative of stress with consumers, or anything else going on?

Mike, obviously there has been a little dip in payment rates, not, I am talking U.S.

Consumer credit card here for a minute, but not significant, and we really didn't see by the time the end of the year rolled around, we didn't see that big of a spike in kind of number of customers making minimum payments, or that big of change and customers paying in full, so I think it is generally the fourth quarter balance-driven seasonality, coupled with that slight change in payments.

Probably the Canadian card acquisition, it was relatively small in terms of the size of growth, as it being attributed to that, but it came in I guess on the average balance basis also.

And then separately, Ken, you said you expect to earn over $4 this year, I am simply trying to reconcile that with an operating number for the fourth quarter, and if I simply take your one-time items on page 10 of the presentation slides, you get a number, I don't know, maybe $0.92 or so, and if you annualize that $0.92, you are at about $3.70 for the year, so maybe I am missing some one-time item that is not on that page, or maybe there is something else.

Because even when you are at the 3.70, you said take $0.10 off the capital raising, and take $0.05 off for some of the retirement expenses, so what should be offsetting those negatives to get you over $4.00, at least conceptually?

Mike, the fist thing is for the first time in several years we have wind at our back on our NII, and so we said high-single digits even before LaSalle, and that is probably the single biggest driver, that wind at our back on NII.

That is going to be a pretty big number.

Then we mentioned the other pretty nice increase in noninterest income, but if I had to say just one single item exceptionally, it would be NII.

And the Fed cut rates 75 basis points this morning.

What is the impact on your financials, and then what do you think the impact will be on the borrowers?

On our financial, Mike, you go back to the comments we made earlier.

The way we position the Company and the way we were thinking about the forwards would have had us already thinking about a 2.5 kind of end of the year funds rate, so while different parts of the curve structure obviously changed differently, that in essence would have been embedded in kind of the discussions we are having, unless it incrementally drives rates lower than what was already in the 4s, so that is kind of that side of it.

On the customer side, obviously we have got a number of variable rate type of instruments out there that reprice based on various indices, Prime or LIBOR, et cetera, and is it will obviously have an impact from a customer's borrowing stand point on that side.

I guess what I mean by that last question, is Bank of America's funding costs, at least relative to Fed funds have gone up, as all bank's funding costs have gone up.

How much do you look to pass on those costs to the end borrower, and therefore that kind of mutes some of the benefits of the Fed rate reductions on the end borrower?

I am having a little trouble.

If you go back to looking at the best way to think about it probably is to fault you back to the bubble charts that we have got, as opposed to individual line items, because that captures everything on a forward basis, and that would be kind of the best way to think about a down rate.

You probably shoot back up to the 930s, you know, and think about it there, because again these things are based off the forward curves.

But on the funding side, clearly we have a lot of market-based funding that would come through, and then on the deposit side, obviously there would be some pass-through, not dollar for dollar, given the competitive environment we all live in, but there would be a piece of it coming through on that side, also, and that would be now that the LIBOR spread is a little more in-line.

That is probably what drives as much on the deposit pricing side as the pure Fed funds.

Lastly, this is not just unique to you, but you intend to raise capital, yet the dividend level seems kind of precious to maintain.

I just conceptually, why is the dividend so important to maintain when your are raising so much more capital, and your tangible equity ratio is at 3.6%?

Just because in a, if you think about it over a broader term, or have a longer term perspective, we will get back to the capital levels pretty quickly, and return to a more normal state with where we think earnings will go, so it is just, we think it is so temporary that that is a better way to go, Mike.

All right.

Thank you.

Thanks, Mike.

We will go next to the site of Nancy Bush from NAB Research LLC.

Your line is open.

Yes, guys, I am going through all the numbers here, and I think I will have to get a transcript in the end to sort of sort them all out.

We are all looking to see whether companies have, 'kitchen-sinked' the quarter.

Do you think you kitchen-sinked the quarter, and if you didn't, where didn't you kitchen-sink it?

I think we tried to be as prudent as possible in assessing everything we could assess, and do the right thing, but you do have parameters under which you operate, and you have accountants looking at the things that you do, so within reason we think we did what we should have done.

If there is sort of a point of weakness, is it in credit costs, is it in more mark downs, if we have to poke and probe the model for next year's points of possible negative surprise, Joe, where do you see it primarily?

Is it the credit cost?

Nancy, we try to give you in the outlook there, kind of a view on credit costs.

Obviously if the economy continue to say deteriorate farther, that would, that is a soft spot, and likewise if we were to see other market disruption events, probably driven by credit quite frankly, that would be the type of areas that we would have to be focused on throughout the year next year.

Okay.

Secondly, you made a couple of a allusions to market share gains and deposit gains in the fourth quarter in the consumer bank.

I think you said you had regained traction in deposit growth, and you picked up some market share.

Can you just tell me what was going on there, A) why were you finding you were losing share, and what happened in the fourth quarter to regain share and grow consumer deposits faster?

Is there a product issue?

Emphasis issue?

What was going on?

Yes.

Well, you may remember over the last year or so coming off really the MB&A merger where we probably lost some traction on retail deposits, because that is what we are really focused on here on your question, and it took longer than we expected to regain traction.

We had just begun to emphasize, to refocus on that throughout really the last year or so, but it really probably took more hold in the last half of this year, and got us back on square footings taking advantage of our distribution model, et cetera.

Now having said that, it still remains very competitive from a pricing standpoint, but it is really focused, and deliberate focus on trying to drive some of our core products.

Nancy, we have asked ourselves the same question, and it just took us a little longer than we thought to regain the momentum, and I can't really, we can't really pinpoint it further than that.

If I can just ask one final question.

Joe, on the Small Business losses, you gave quite a bit of detail, but that 6% plus annualized losses there is still an interesting number, an eye-catching number.

Is it primarily the composition of the loans?

Was there some lesson to be learned in underwriting?

What is the biggest issue there?

Yes.

Nancy, that is correct.

When we looked at our market share several years ago in Small Business, we clearly were under penetrated given the size of our franchise, and our scope, and looked to grow that business.

We probably defaulted to underwriting some of that in more of a consumer scoring oriented model, and have since learned that you probably need to put more judgmental underwriting in that versus pure scoring.

We cut line sizes, probably advanced a little higher amounts per line, and a number of other things, and those vintages which would principally be the '05/'06, vintages are what is driving a lot of our issue there, and again earlier in '07 we began to curtail that, but as those vintages come through, that is what we are seeing.

Absolutely there were some lessons learned there.

Nancy, you also see that the evidence of that is much lower approval rates.

So we can expect to see losses perhaps in the near term continue to rise there, and then perhaps decline in the latter of part of the year?

As those vintages season, that would be correct, and we are not quite as high volumes as we were that period, in terms of new balances.

They are relatively small in aggregate.

That is the good news.

Thank you.

We will go next to the site of Matthew O'Connor of UBS.

Your line is open.

Good morning.

Good morning, Matt.

You mentioned tightening underwriting standards for new loans and Small Business and a couple of other areas.

Do you have the flexibility and are you reducing lines that are still outstanding for credit card and home equity?

Yes.

Each product differs, but you obviously have flexibility on risk-based pricing and other factors in the card business, which if a customer doesn't accept, then you in essence provide no more funding capacity to, and they would wind down if they didn't accept those changes, and things of that nature, so a rather detailed or specific parameters in each product, and then clearly on the home equity side, if someone's equity in the home, or the CLTV has dropped through the floor, you have flexibility there.

The tougher ones are the ones that are borderline on the home equity side, but you absolutely have flexibility.

Matt, actually particularly on credit card, it is a very robust risk-based pricing model.

And just to follow up on cards specifically, I think MBNA's model was very high lines to encourage balance transfers, so I am just trying to gauge how aggressive you are there.

If a customer is still current, and they have a $50,000 line outstanding, would you reign that in a little bit, or still paying as is, you probably don't touch it at this time?

It depends on what we see from an overall standpoint.

Otherwise, if you look at the total behavior, you look at other lines, but if they are paying as expected, we wouldn't touch it.

I mean, if they are behaving not just with us, but if they are behaving across the whole spectrum of their debt accordingly, then we wouldn't do anything.

Okay.

All right.

Thank you.

We will take our next question from the site of Betsy Graseck from Morgan Stanley.

Your line is open.

Thanks.

On Small Business, just one follow-up.

Have you done anything to assess the degree to which the deterioration exposure is coming from housing-related areas?

Yes, but I guess I would say that with most all the consumer products to the extent we are seeing deterioration, it tends to, it is clearly leaning towards those states that have had the most housing challenges in them, Betsy, from that standpoint.

But this one has the added pieces of the '06/'07 vintages in addition, and then I would say probably on Small Business, you tend to see probably a heavier utilization of related home equity lines than you might see in some other places, which again would drive you into those higher home price depreciation states to where some of it is centered, but overriding that would be this vintage discussion, as we said earlier.

And the timeframe for the seasoning in these portfolios is roughly what, now?

You know, probably, I am generalizing here, but an 18-month kind of run.

And just in a little bit bigger picture, what kind of economic environment do you have baked into your Tier 1 ratio outlook?

Very, very modest growth, virtually none in the first half, and then picking up in the second, and the third and fourth quarters, to possibly get to a 2% growth rate by year end, but a very modest growth but not a recession.

If there were a recession, would that change how you are thinking about your Tier 1 targets?

Well, no, but it may lengthen the time a little bit, or I don't know how severe you mean by recession, so if it is a mild short recession, probably not much, but then you have to determine how deep and how long do you think it is going to be.

Okay.

And in the outlook for the provisions where you are looking for the 20% plus on a reported basis year-on-year roughly --

Right.

Do you have explicit expectations for housing values?

I know it is very granular market by market that you need to think about housing, but I am just wondering if you have, as a result of the analysis you do, an expectation for the type of housing values that you are anticipating the drive to that provision expectation?

I think I would probably move you to like the Case-Shiller type of expectations, and those would give you in the most distressed states, high single-digit, maybe even low double-digit kind of year-over-year 12-month rolling, but it depends on which state.

Okay.

You are using that kind of input into your forecast?

Right, right.

And then lastly if I recall correctly your first lien mortgage exposure, you have a variety of insurance, or hedging that you have done against that, and I would assume those are still in place?

Is that correct?

Has that changed at all with what has been going on with the insurance mono line?

No, and remember that our insurance is not, and our insurance for that portfolio is not mono-line driven.

We sell the second loss position, or basically insure it with a funded structure, so that there is not counterparty risk, and we have some with the GSEs, a slight amount with the GSEs, so you can think of that as a counterparty, but the bulk of it doesn't have real counterparty risk on it.

Has that at all been tapped yet?

No.

And it is on the aggregate net charge-offs for that first lien portfolio?

Yes.

Well, it is individual buckets, so it is not like a blanket policy.

You have got specific loans underlying this particular traunch of structure.

Okay, but none of them have been tapped at all?

No.

Lastly on the CCB option that you have, is it possible to discuss what types of circumstances would lead you to exercise the option that you have to invest further in CCB?

We are contemplating all of that as we speak, and so I can't give you an answer, other than it is under active discussion, in terms of do we invest more and/or monetize some portion of the gain, and we are just in the embryonic stages of deciding that.

Okay.

With the Fed action today, I realize that your expectation had been for a lower Fed fund rate given the forward curve, but it does seem like we are getting it earlier in the year than we had anticipated, or at least the forward curve had anticipated?

Right.

Does that impact those kind of discussions or decisions?

Not on those, not those discussions.

Obviously it may accelerate benefit from a margin standpoint, but not on the discussions that Ken was alluding to.

All right, regarding the CCB.

Right.

Okay.

Thank you.

As I am showing no further questions at this time, I will turn it over to Mr.

Lewis and Mr.

Price for any final remarks.

We thank you, and no final remarks.

Have a good day!

This does conclude today's teleconference.

Have a great day!

You may disconnect at any time.