美國銀行 (BAC) 2008 Q2 法說會逐字稿

Good day and 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.

I will now turn the program over to Mr.

Kevin Stitt.

Please go ahead, sir.

Good morning and welcome.

Before Ken Lewis and Joe Price begin their comments, let me remind you that this presentation does contain some forward-looking statements, regarding both our financial condition and financial results in 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.

Before we get into the analysis, I would like to say a few things.

It is clear to me, at least, that many investors see the economy getting substantially worse than it is today, causing major problems for consumer, commercial businesses and consequently, bank earnings.

Although we too are sensitive about the health of the economy and monitor it closely, we do not yet see the economy slipping into prolonged negative growth.

While we could be wrong, our analysis indicates continued economic sluggishness through the rest of 2008 resulting in some further deterioration in credit quality.

But we see eventual stabilization later this year and a start of recovery in the first half of 2009, albeit at a slow pace.

In addition, I think the market has painted our industry with a broad brush.

It seems to me there's a big difference between those banks that are diversified and those banks with concentration or funding issues.

Here are things to consider about Bank of America.

First, most of our businesses are performing very well even with the current state of the economy and the problems with housing.

We believe our revenue streams are sustainable both net interest income as you can see in our results today as well as noninterest income, which is driven by our attractive market share in several businesses.

However as I said, we are not in denial.

Credit losses are still going up, but given what we see today, they are manageable.

Second, the fact that we can absorb $3.6 billion in credit losses, take $1.2 billion in additional write downs, add $2.2 billion to our loss for credit losses and still earn $3.4 billion should tell investors something about the extent and consistency of our earnings power.

Third, our allowance for loan losses of $17 billion, our tier 1 capital ratio of 8.25% and our liquidity strength at the parent provide us with additional strength to weather the issues we see ahead of us.

Finally, there's been a lot reported about our Countrywide transaction, much of which has been exaggerated and in some cases untrue.

We will cover the details later in the call but the essential message is that Countrywide is on track and adding to the profits of Bank of America as we speak.

So with those comments, let's go over the numbers.

I will spend a few moments discussing second quarter earnings, focusing mainly on the highlights across the Company, with some specific comments on individual businesses.

Then Joe will delve a bit deeper into certain issues, such as Capital Markets and credit quality capital and of course Countrywide.

As you already know, Bank of America earned $3.4 billion during the quarter or $0.75 per diluted share before the impact of merger and restructuring charges of $0.03.

Total revenue for the second quarter reached record levels at $20.3 billion up 19% from the first quarter.

Consumer and commercial client flows remained relatively strong throughout the quarter in most of our businesses even with the continued turmoil in the housing markets.

Net interest income rose 6% from the first quarter while noninterest income rose 38%.

Driving the increase in noninterest income were trading account profits, which returned to profitability from a loss in the first quarter, service charges both consumer and commercial, and investment banking.

Noninterest expense rose 4%.

Provision expense of $5.8 million dropped slightly while net charge offs rose to $3.6 billion.

In increase in reserves of $2.2 billion brings the allowance for loan and lease losses above $17 billion or approximately 2% of our loan and lease portfolio.

As expected, credit costs remain at high levels reflecting weaker housing markets particularly in geographic regions that experienced significant home price declines.

This weakening, combined with a slower economy resulted in additional credit deterioration mainly across our domestic, consumer, small business and home builders portfolios.

Similar to the first quarter, there were several bright spots within our core retail, commercial banking and investment banking businesses that indicate ongoing stability and recurring earnings power.

While I understand that most of you are very focused on capital and credit quality, it is important to recognize our earning strength since it is paramount in how we think about the future and about our capital adequacy.

Looking specifically at global consumer and small business banking, earnings of $812 million for the second quarter were down from the first quarter but if you adjust for the Visa gain in the first quarter, earnings were up 11%.

Good growth in net interest income and service charges offset lower card income, the IO Strip Valuation, and lower mortgage banking income.

Provision was up slightly from the first quarter from higher losses particularly offset by lower - - excuse me, partially offset by lower but still substantial reserve additions.

We once again increased the allowance in our consumer businesses due mainly to ongoing weaknesses in the housing market and economy, along with seasoning of several growth portfolios, which Joe will discuss.

Product sales were strong in several areas with net new checking accounts up seasonally from first quarter to $674,000.

In residential mortgage, first mortgage originations across the company were up 2.4% to $22.4 billion compared to first quarter results.

Average retail deposits including money market accounts rose $7.4 billion or 1.4% from the first quarter as growth in checking, savings, and money market levels were partially offset by a drop in CD balances.

Retail purchase volumes in both US consumer credit card and debit card were up seasonally from first quarter and on a combined basis were up 6% from a year ago.

Global Wealth and Investment Management earned $573 million in the second quarter, up substantially from the first quarter.

Revenue increased 19% reflecting lower support to certain cash funds of $36 million compared to $220 million in the first quarter.

In addition, provision decreased $124 million due to less reserve increases than in the first quarter partially offset by higher net charge-offs Asset management fees in GWIM rose slightly from the first quarter as seasonal tax preparation fees were offset somewhat by market based activity.

Brokerage income increased 6%.

Premier banking and investments experienced good growth and deposit levels, 6% from the first quarter, helped largely by migration of existing customers into Premier.

Assets under management in GWIM closed the quarter at $589 billion, down from first quarter due to outflows in the cash complex as well as the impact of lower equity markets.

Global Corporate and Investment Banking earned $1.7 billion in the second quarter versus $107 million in the first, reflecting improved trading results and lower write downs.

In addition to lower write downs, provision expense and net charge-offs were also down from the first quarter levels.

Capital Markets and Advisory Services earned $449 million in the second quarter versus a loss in the first quarter and a profit of $627 million a year ago.

Our investment bank was very active in the quarter with investment banking fees of $765 million reflecting increased market share and good results in debt underwriting.

Debt issuance had record market volumes in April and May led by high yield which was almost 13 times the volume in the first quarter.

Excluding CMAS, the rest of GCIB, mainly Business Lending and Treasury Services, earned $1.3 billion during the quarter, up slightly from the first quarter even before adjusting for Treasury Services' portion of the gain on the Visa related transaction.

Business Lending experienced average loan growth of $10 billion or 3% while Treasury Services experienced deposit growth of 6% from first quarter as client demand for these services rose as a result of the recent market disruption.

This growth in both areas is an example of the re-intermediation of core commercial lending to larger depository institutions, a trend we view as structural after several years of dis-intermediation.

Not included in the three business segments is equity investment of $710 million in the second quarter.

These results were driven by actual cash gains, improved valuations and dividends from our various equity investments.

Before I turn it over to Joe, let me make a couple of comments about our thinking given the current economy.

Although concerned about the economy, we are encouraged by the resiliency of our consumer, commercial, and corporate customers.

Continued good revenue performance in both our consumer and commercial bank along with a bounce back in trading investment banking drove what we thought was a pretty decent quarter given the environment.

As expected, consumer credit quality deteriorated from first quarter levels particularly in home equity.

Credit quality will continue to be an issue in the second half of 2008 with charge-offs remaining at elevated levels.

Going forward, we believe actions by the Fed and Treasury along with the eventual stabilization in home values should help to significantly slow further credit deterioration.

While we don't expect to increase reserves at the pace we experienced over the past few quarters, increases in reserves in future quarters will continue to correlate with the direction of the economy and its impact on our customers.

As I alluded to earlier, our economic expectations project decent GDP growth in the second quarter of 2008 aided by stimulus actions, with growth pulling back in the second half before gradual recovery in 2009.

We closed the acquisition of Countrywide on July 1st and continue to see that investment as being economically attractive in the long term and we believe in the short term as well.

Our Tier 1 capital ratio closed the quarter at 8.25% up from 7.51% at March 31st.

Although Countrywide will drive our Tier 1 capital ratio under 8% in the third quarter, we think we can continue to move back to an 8% range over two to three quarters.

We measure capital strength from several perspectives including total shareholders equity of $163 billion as well as the allowance for loan losses of $17 billion plus.

As evidenced by some recent events I think we were all reminded that capital is only meaningful when viewed along with liquidity strength.

We continue to maintain an abundance of liquidity at our holding company where our time to required funding has increased to 22 months, significantly higher than our competitors.

Plus, we believe our deposit franchise leads others in mix, geographic scope, and size giving us a competitive stable funding advantage.

Given these parameters, our outlook for the economy and our earnings potential, we have not changed our philosophy about the dividend.

I will recommend to the Board that we maintain the current dividend of $0.64.

Given our current economic outlook, we believe the drivers of earnings for the remainder of the year will be most of our core businesses along with a continued tight grip on expense levels across the company.

Most importantly, we remain committed to serving our customers and clients while driving profitability during these tougher times.

With that, I will turn it over to Joe.

Thanks, Ken.

Let me begin by elaborating a bit more on second quarter results before turning to credit quality, capital and Countrywide.

Turning to GCIB and more specifically Capital Markets and Advisory Services.

CMAS earned $449 million this quarter as revenues increased $2.6 billion from first quarter levels.

Investment Banking fees were very good, up 15% from the first quarter and only down 7% from a year ago.

Results reflect the success Brian Moynihan and his team have had in the short term staying focused in the challenging environment and taking advantage of market volatility, client flows and continued risk reduction.

Total revenue in CMAS excluding investment banking fees or what we call Sales and Trading, was $1.2 billion, up $2.5 billion from the first quarter, as additional write downs were substantially less than we experienced in the first quarter.

We would characterize market disruption charges this quarter as approximately $1.2 billion compared to $2.8 billion last quarter.

These charges continue to be centered in CDO-related write downs and real estate as well a couple of other areas.

Let me start with leveraged lending where we ended the quarter with exposure of $10 billion, $4 billion unfunded and $6 billion funded, which was down $3.2 billion from March.

The reduction since the end of March was driven by cash sales consistent with the past, meaning once again, no transfers to the accrual book.

The unfunded portion generally represents new business at market terms.

During the quarter we wrote down an additional $64 million versus $439 million in the first quarter as market pricing continued to stabilize due to increased liquidity.

Legacy or pre-disruption exposure totaled $6.6 billion at June 30 of which $6 billion was funded.

That $6 billion has already been reduced by over $1 billion since the end of June.

For perspective, total leveraged exposure at September 30th of last year was over $32 billion.

As a reminder, we don't have any covenant lite exposure of note and over 60% is senior secured

On the CMBS side we ended the quarter with $9.2 billion in exposure of which $8.5 billion is funded.

More than 80% or approximately $7.6 billion is comprised of larger ticket floating rate debt most of which was acquisition related.

The floating rate debt was written down by $100 million in the second quarter.

As we said before, this product is difficult to hedge as compared to the remaining $1.6 billion of exposure, which is primarily fixed rate conduit product.

During the quarter we actually had a net gain of $39 million on the fixed rate exposure, $60 million in write-ups offset by $21 million in hedging losses.

In a related matter, we recorded $184 million of losses associated with equity investments we made in acquisition related financing transactions in the past.

There were several other legacy books where we continued to record losses but to a lesser extent compared to prior quarters given the reduced risk levels.

Finally, in the supplemental package you can see our CDO and subprime related exposure, along with the changes during the quarter where we recorded losses of $645 million.

The losses were largely comprised of $450 million of super senior CDO write downs and a charge of approximately $200 million to reflect the counter party risk associated with our insured super senior positions.

At the end of June, our net subprime super senior related exposure dropped to $3.5 billion from $5.9 billion at the end of March reflecting the write downs along with reductions of another $2 billion due to liquidations, cancellations and pay-downs.

During the second quarter, liquidations resulted in us taking onto our books the underlying asset backed securities.

This exposure is included on the schedule in the supplemental package along with the relevant information.

Any losses subsequent to liquidation are included in the $645 million I referenced earlier

Now, with respect to overall disruption exposure, not just predisruption exposure, not just the CDO related, we remain subject to market price fluctuations, but we think the worst is behind us on value declines, as evidenced in our results for the quarter.

This thinking is driven more by the size of our exposure, that being it is lower and the remaining collateral content, than a comment about future market volatility

Now, let me switch to credit quality.

On a held basis, net charge-offs in the quarter increased 42 basis points from the first quarter to 1.67% of the portfolio or $3.6 billion.

On a managed basis, overall consolidated net losses in the quarter increased 46 basis points to 2.15% of the managed loan portfolio or $5.3 billion.

Managed net losses in the consumer portfolios were 2.82% versus 2.19% in the first quarter.

Managed credit card losses continue to represent more than 60% of total consumer losses.

Managed consumer credit card net losses as a percentage of the portfolio increased to 5.96% from 5.19% in the first quarter which is at the high end of the range of expectations we expressed last quarter.

30 day-plus delinquencies in managed consumer credit card decreased 8 basis points while 90 day-plus delinquencies decreased 1 basis point.

While positive, this was due mainly to the seasonal trend we experience every year in card.

We have continued to see increased delinquencies in our card portfolio in those states most affected by the housing problems, while other states have actually shown some declines.

California, Florida, Nevada and Arizona make up a little more than a quarter of our domestic consumer card book but represent about a third of the losses.

As we have indicated before, we think the normalized loss rate in consumer credit card is 5% to 5.5%.

However, we have also indicated that we could see 100 basis points over that under recessionary-type conditions.

At this point, we do not foresee loss rates in excess of 100 basis points above the normalized range.

Obviously, deterioration in the economy beyond that outlook could change that.

Credit quality in our consumer real estate business, primarily home equity, continued to deteriorate from the first quarter as a result of the weaker housing market.

The problems to date have been centered in higher CLTV home equity loans particularly in states that have experienced significant decreases in home prices.

Almost all of these states have been growth markets for the past several years.

Our largest concentrations are in California and Florida which represents 41% of the home equity portfolio but 63% of the losses.

Home equity net losses increased to $923 million or 3.08%, up from 1.71% in the prior quarter.

30 day performing delinquencies decreased 6 basis points to 1.27 % while NPAs were almost flat which is definitely positive but as we know one quarter doesn't signify a sustainable outlook.

Consistent with the prior quarter, 82% of net charge-offs related to loans where the borrower was delinquent and had little or no equity in the home.

Loans with a greater than 90% CLTV on a refreshed basis currently represent 35% of loans versus 26% in the first quarter.

This change reflects the continued decline in home prices, most acutely in the states I noted earlier.

Like others in the industry, a large piece of the deterioration is centered in acquired portfolios not originated through the franchise, a practice we discontinued in the second quarter of 2007.

These purchased loans represent only 3% of the portfolio but 21% of the net losses.

Excluding these losses, the net loss rate would be 2.53% for the second quarter versus the reported 3.08% for the total portfolio.

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

We increased reserves for this portfolio to 314 basis points reflecting a continued elevated level of loss severities.

We have instituted a number of initiatives to mitigate risk in new originations as well as existing exposure, including lowering maximum CLTVs across both geography and borrower, and actively managing credit lines.

So while our view does not call for this, the loss rate could approach or even cross the 4% mark if conditions deteriorate beyond our outlook

Our residential mortgage portfolio on a managed basis showed an increase in net losses to $151 million or 23 basis points for the quarter.

We have seen some deterioration in sub-segments, namely our Community Reinvestment Act portfolio that totals some 8% of the residential book.

Additionally, California and Florida, which comprises 41% of the balances, drove 58% of the net losses.

The annualized loss rate from the CRA book was 91 basis points and represented 29% of the residential mortgage net charge-offs.

Now, although approximately $132 billion or 56% of our residential mortgage portfolio carries risk mitigation protection, it does not cover our CRA portfolio.

Of the $132 billion, approximately 91% is protected where we sell mezzanine risk exposures to cash collateralized structures, thereby leaving us with no counter party risk.

The remaining 9% is protected by GSEs.

We currently see some level of continued deterioration as evidenced by our decision to increase reserves to 34 basis points.

Assuming additional deterioration in the economy beyond our outlook, it wouldn't surprise us to see loss rates between 40 and 50 basis points by the end of the year.

Again, as we said with home equity and card, worsening economic conditions beyond our outlook could change that view.

Our auto portfolio at the end of June was about $28 billion in loans.

Net losses in the quarter were $82 million or an annualized 1.26% of the portfolio which is actually down 39 basis points or $19 million from the first quarter related to seasonal trends.

Switching to our commercial portfolios, net charge-offs increased in the quarter to $694 million or 84 basis points, up 15 basis points from the first quarter.

Most of the deterioration is driven by small business and to a lesser extent, home builders, with the other portfolios remaining relatively sound.

For example, commercial excluding small business and commercial real estate had a net charge-off rate of 13 basis points, flat with the first quarter.

Net losses in small business, which are reported as commercial loan losses, are up $113 million from the first quarter and the net charge-off rate has risen to 9.53%.

As we have discussed before, many of the issues in small business relate to the rapid growth of the portfolio over the past few years which is now compounded by current economic trends.

As we also highlighted, we have since instituted a number of underwriting changes in small business such as increasing the level of judgmental credit decisioning, lowering initial line assignments and changing our direct mail offerings.

These actions have resulted in an increase in average FICO at origination, a reduction in average line amounts and a meaningful drop in approval rates.

More recent vintages are showing the positive impact of these actions and while we expect higher charge-offs in the near term as evidenced by our reserve levels, we expect the small business portfolio to stabilize during 2009.

While it will take some time to work through these earlier vintages, small business remains a critical customer segment with attractive, profitable growth opportunities.

Excluding small business, commercial net charge-offs increased $25 million from the first quarter to $217 million representing a net charge-off ratio of 28 basis points.

The majority of the increase was due to commercial real estate, mainly homebuilders.

Approximately 60% of the $217 million relates to homebuilders.

Criticized utilized exposure, excluding available for sale and fair value loans, increased $5.6 billion from the end of March of which nearly half was driven by commercial real estate, again principally homebuilders, and the final stages of integrating of the LaSalle portfolio into our credit processes.

Non real estate and non LaSalle loan and derivative exposures drove the remainder of the criticized utilized increase.

This increase was pretty broad based rising from very low 2007 levels.

Commercial NPAs rose $1.1 billion to $4.1 billion.

As we saw last quarter, additional commercial NPAs were mostly in commercial real estate, mainly homebuilders.

Utilized homebuilder exposure was down to $13 billion from $14 billion at the end of March and total exposure declined to $19 billion.

57% of our homebuilder outstandings is listed as criticized and although pressured, we still believe, as we said last quarter, the portfolio is well collateralized.

While we expect to see a continuation of an elevated level of charge-offs, we believe this will be manageable.

Looking again at the total loan book, 90-day performing past due on a managed basis increased 5 basis points to 79 basis points while 30-day performing past due increased 2 basis points to 2.37%.

As Ken said, second quarter provision of $5.8 billion exceeded net charge-offs, resulting in the addition of $2.2 billion to the reserve.

Approximately 80% of the reserve increase was due to portfolios directly tied to housing, principally home equity, and to a lesser extent, residential mortgage and homebuilder.

The rest of the increase was due to growth and seasoning mainly in the consumer unsecured lending portfolio coupled with some stress from the slower economy.

Our reserve now stands at $17.1 billion or 1.98% of our loan and lease portfolio.

Okay, let me get off of credit quality and say a couple of things about net interest income.

Compared to first quarter on a managed and FTE basis, net interest income was up $ 810 million of which core, excluding trading-related, represented $749 million.

The increase in core NII was driven by increased margins in the current rate environment, loan growth and deposit growth.

The core net interest margin on a managed basis increased 19 basis points over first quarter to 3.86% due to the positive impact of wider spreads.

As you can see from the bubble chart, at June 30 our interest rate risk position is a little more liability sensitive relative to the June 30 forward curves when compared to the end of March.

As of June 30, we felt the market expectations of rate increases were a bit aggressive which influenced our positioning.

We should continue to benefit from curve steepening, especially from a short-end led steepening, which is what we have experienced over the last several months.

I should note that because of the Fed Funds/Libor spread widening we haven't had as much benefit as we otherwise anticipated.

Let me say a few things about capital.

Tier 1 capital at the end of June was 8.25% up from 7.51% at the end of the March due mainly to the $6.9 billion of capital we raised during the quarter.

As we indicated to you last quarter, we have reduced risk weighted assets in our capital markets area by around $30 billion to be more efficient in our use of capital.

Going forward you should expect preferred dividends to be approximately $472 million in the third quarter and approximately $422 million in the fourth quarter.

Our tax rate this quarter, excluding the FTE impact, was 30.7% which is lower than the normal range due to our periodic true-up of the effective tax rate for the year.

Finally, all our forward looking comments up to now apply specifically to Bank of America before the addition of Countrywide.

Let me switch and talk about Countrywide for a few moments.

We closed the acquisition of Countrywide on July 1st so its impacts won't be reflected if our combined results until we report third quarter earnings in October.

We issued approximately 106 million Bank of America shares at an exchange rate of 0.1822 Bank of America shares for each Countrywide share.

As required, the shares issued in the transaction will be recorded for accounting purposes at the value as of the day of the announcement or $4.1 billion versus Countrywide's July 1st tangible capital of $8.4 billion which excludes our preferred.

In our supplemental material, we have included a preliminary P&L and balance sheet for Countrywide reflecting second quarter results.

As you can see, total assets at Countrywide at the end of June were $172 billion, mortgage loans held for investment were $99 billion, deposits were $63 billion and total equity was around $10 billion which included our preferred of $2 billion.

The data on Countrywide we are providing today is a preliminary overview as Countrywide's ordinary and usual review process for analyzing the numbers continues.

Once Countrywide's results are fully completed, Countrywide Financial Corporation will file a Form 10-Q for the second quarter, so there will be additional information on the second quarter in that report.

Obviously, their second quarter results, a loss of $2.3 billion, were significantly impacted by continued credit deterioration.

Credit costs included in the second quarter were comprised of credit provision, which included reps and warranties, impairment of available for sale securities, and other smaller items which totaled just under $4 billion pretax.

I will come back to this in a minute, but much of this type cost, as it relates to the future and to the extent it can be, will get recorded in purchase accounting so it will have a much lower impact.

Mortgage originations during the quarter were $59 billion vs.

$73 billion in the first quarter and $133 billion a year ago.

Driving the decrease from the first quarter was a reduction in refi activity that had spiked during what I guess you could call a mini refi boom in the first quarter.

Refi activity dropped 35% in the first quarter to $33 billion while purchased transactions jumped 23% to $25 billion.

Activity at Bank of America showed similar trends with refi down 21% at $10 billion and purchased up 34% to $12 billion.

Under purchase accounting, we will mark Countrywide's balance sheet to fair value levels as of July 1, our acquisition date.

The impact of these purchase accounting adjustments will be included in our third quarter financial statements that we will share with you in October.

Now, let me give you some preliminary purchase accounting estimates around some of the largest exposures, realizing that they will probably change somewhat as they are finalized.

Our estimate at this time on the loan portfolio would be a loss exposure of approximately 15.6% or $14.3 billion for the held-for-investment portfolio as of the end of June.

Factoring in charge-offs already taken of $1.7 billion, this represents a cumulative loss estimate of just over 17%.

Obviously the marks are highest for subprime, option arms and home equity and lowest for the prime first mortgages.

From a product standpoint, the percentage marks range from a preliminary high in the mid 20s to a low in the single digits.

All but about $1 billion of this loss exposure will be recorded in purchase accounting.

The $1 billion reflects loss exposure on non-impaired loans greater than Countrywide's allowance for loan loss.

If incurred, that amount will flow through our consolidated earnings over a number of years.

After considering the existing $5.1 billion allowance for loan losses at Countrywide and excluding the $1 billion I just mentioned, the additional credit mark on the loan book before tax is estimated to be $8.1 billion.

In determining these preliminary marks, we assume peak to trough home price depreciation of 25% to 30% including estimated deprecation in Florida and California in the high 30s to just over 40%.

We've tried to give you some pertinent stats on the portfolio and the material and we will provide more details as the marks continue to be finalized but this should give you some understanding of our relative view at this point.

Needless to say, the loss exposure, while within the range of our initial expectations, is clearly on the higher side due principally to the continued economic weakness and decline in housing prices.

Other significant marks include re-evaluating the mortgage servicing rights, the repurchase reserves and various other items such as the adjustment of deferred loan origination fees, deferred currency gains and other miscellaneous costs and liabilities.

There are several items that can not be recorded under purchase accounting rules.

These include the future loan loss exposure I just mentioned, certain litigation exposure and a portion of the reps and warranties exposure.

Let me finish with purchase accounting before I discuss how those items will impact future earnings.

All-in our preliminary estimates total a net pretax write down of $12 billion to $13 billion which when tax effected and compared to the preliminary June 30 Countrywide tangible common equity results in goodwill of approximately $4 billion.

This number also includes our estimate of capitalized restructuring costs.

You can see from the material our updated restructuring cost of $1.2 billion after tax is consistent with our initial estimates.

Currently, we believe around $400 million will be capitalized in purchase accounting with the remainder or $800 million flowing through the income statement as restructuring expense through 2010.

Assuming these shares issued on July 1 pretty much offset our preliminary estimate of goodwill, net capital used in the transaction on a consolidated basis would be that required to be allocated to the Countrywide assets, after write downs.

Given the size of the balance sheet after the markdowns, adding Countrywide to Bank of America on a proforma basis would reduce our Tier 1 capital by approximately 65 basis points.

Estimated risk weighted assets from Countrywide following purchase accounting adjustments are around $125 billion.

While we originally envisioned selling a large block of loans shortly after the transaction closed, the markets are not currently conducive to such a sale so we will table that idea for now.

As a reminder, we closed the quarter with Tier 1 at 8.25% and have continued plans to strengthen our Tier 1 during the third quarter through earnings, the sale of Prime Brokerage and continued management of trading and other asset levels as well as several other initiatives.

While I am not going to predict Tier 1 levels at the end of September, I will reiterate what Ken said earlier and say that we feel pretty good about our ability to manage back towards our 8% target over the next 2 to 3 quarters without having to take significant capital actions to get there.

Obviously, future factors could change that opinion, most notably the economy.

From an earnings perspective, we believe Countrywide on a GAAP basis will be accretive to Bank of America earnings for the second half of '08 and through '09 including the restructuring charge.

The restructuring charge for the rest of '08 impacting the P&L is estimated to be under $200 million after tax.

We won't be any more specific about the impact on '09 earnings until we announce our earnings in January.

Now, embedded in our earnings outlook for the next few years are the assumptions for the exposures I mentioned earlier that aren't captured in purchase accounting - litigation, excess credit losses, and reps and warranties to name the more notable ones or a portion of those.

Let me give you a little more idea of how we are looking at the legal exposure.

Although Countrywide did have some legal reserves on the balance sheet, we have assumed additional exposure over a number of years.

Our people, along with two major outside law firms plus various consultants, have conducted a thorough due diligence to size the likely magnitude of the exposure.

This work was initially performed in due diligence but has been continually updated.

Our approach was to be realistic, not optimistic and focus on pending and potential claims, realizing that many of these exposures are represented principally by claims in very early stages.

It is obviously impossible to predict the exact outcome of the various claims at this stage, but based on our review, we have sized the exposure, considered it in our analysis, and feel it is manageable.

We plan to defend any claims vigorously in order to minimize the litigation expense.

We will accrue litigation expense quarterly as any losses become probable and capable of estimation.

With respect to the other exposures I referenced, which are primarily credit based exposures, we applied the same basic assumptions I went over when describing our loan portfolio marks.

I mentioned restructuring costs earlier so let me update you on cost saves we expect to achieve.

We expect to exceed our original target of $670 million after tax by about a third to $900 million and expect to realize over 10% this year.

We have received a lot of questions about Countrywide's public debt.

All I can say at this point is we don't intend to guarantee the public debt but we do understand the ramifications of not paying at maturity.

We will keep you informed as we continue to integrate the Countrywide transaction

Now going forward in 2008, let me piggy back on what Ken said and reiterate there's considerable uncertainty about the economic environment.

It still remains unclear what future impact the housing downturn, higher energy and commodity costs and the subprime crisis will ultimately have and how long the downturn will persist but let me reiterate we feel good about a relative position in our businesses versus the competition.

Loan and deposit growth generated by the franchise along with the steeper curve are still expected to benefit net interest income in the short term.

We believe growth will continue in noninterest income from our consumer businesses and as we demonstrated this quarter, we think CMAS has turned the corner and is producing good results.

Consumer credit quality will continue as a head wind due to what appears to be further deterioration in housing and its subsequent impact on consumer asset quality.

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

Given this scenario we would expect net credit losses to be at least at levels we experienced in the second quarter.

On the expense side, we are aiming for improved operating efficiency and heavy expense control as well as savings realized from the LaSalle integration and now, Countrywide.

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

(OPERATOR INSTRUCTIONS).

Our first question comes from Meredith Whitney with Oppenheimer.

Your line is now open.

I have two questions on credit quality.

The first is on the foreclosed property.

In fact, I have more broad questions - - but on the foreclosed property, you see material deceleration and you don't see that in the national numbers, granted those are lagged.

Can you comment on what you are seeing in that trend?

And my second question is you have a great chart on the commercial exposures and the draw downs and line limits.

Can you provide color on the commercial side of that just in comparison, please?

Let me start on the first one.

You may have to remind me on the second one.

But from a first of all, as you might imagine our first and foremost goal is to keep people in their homes as opposed to going through the foreclosure process.

So if you look at our restructurings and/or workouts, as a percent of total people that go delinquent, they are increasing as a percentage of the total.

But having said that, the number of customers going delinquent is also increasing.

From an actual foreclosure standpoint, our foreclosure process and taking on REO and distributing ROE, the numbers are actually increasing.

We are in fact distributing more properties or selling more properties but the inflow of properties into that is still accelerating at a slightly higher pace.

Net - net we are seeing growth in the foreclosed property category if you were to look at any particular point in time given where we are in this cycle.

On the commercial loans side, I guess you are speaking to what kind of utilizations we are seeing and then what (multiple speakers).

You show a very detailed table on the commercial side.

I am interested on the consumer side your experience with line reductions and then draw downs.

Okay.

I -- let me focus on home equity because I think that's probably the place that, that is most applicable.

If you looked at our, at our unfunded exposure at the beginning of the quarter compared to the end of the quarter we were about 50/50 funded to unfunded at the beginning of the quarter.

At the end of the quarter that had swayed more towards funded but it was driven as much by, - - or it was driven by three or four things, one growth, we did continue to see growth in new customers for both the funded and the unfunded components.

We did see draws that netted some $3 billion coming out of unfunded into funded and then we had line reductions and pay downs coupled with our charge offs that drove the remainder of that reduction.

So all in, the utilization rate is not that different but that's the components of what drove it.

Okay.

Just one final question for Ken.

There's been a rot of activity in the past month in terms of Fannie Mae proposals and short (inaudible) selling changes.

I just wanted to get your perspective on that and then a larger perspective on the industry and sort of how far we are if terms of what the government is doing, I know there's a larger question.

But what the Government is doing [bottom] on this.

Meredith, first of all I think what the treasury and federal reserve are proposing are absolutely necessary, the thing to do and I hope Congress approves them very, very quickly.

Because I can't think of a larger systemic risk than the GSEs.

We have got to restore confidence in them and this is a way to do it.

With regard to the industry, I don't pay as much attention to the rest of the industry as I do our clients and customers and us.

I'm not a member of all of these industry organizations etc.

So I don't know a lot about what's happening in other institutions.

But what - - as I said in the comments what we see at the moment absent something, you know, a severe disruption, we see as manageable, and see things improving sequentially.

So from our perspective, we have a ray of optimism now that we probably haven't had for a few quarters.

All right.

Thank you very much.

Our next question comes from Mike Mayo with Deutsche Bank.

Your line is now open.

All right.

Good morning.

Good morning.

First on capital, the goodwill of $4 billion, what had you expected that to be?

As you said, the write downs are higher.

I don't recall the goodwill there.

We hadn't disclosed anything earlier, Mike because it was so early amd we knew the level of uncertain in the marketplace.

But I guess I would say as I mentioned in the earlier comments that that was on the higher end of that.

I don't know that I ever expected negative goodwill.

So that ought to range it for you.

And book value is kind of flat despite the earnings.

I guess unrealized security losses went up.

Could you size that?

Most, yes, if you look at our OCI, it was relatively flat.

We had some pick up because we, as I mentioned I think in the last call our strategic investment in Brazil actually has gone to one year prior to the restriction lapsing.

So that came in as a positive but our agency backed mortgage backed securities because of what you're seeing and spread widening in the market, pulled the other way and that is what kept it reasonably flat.

And pro forma book value with Coountrywide.

I don't have it handy in front of me.

Kevin can you --?

We will get back to you.

You can come back to me and I'll give you a view.

And then, credit quality, you said expect credit losses to be higher than in the second quarter.

That's not exactly going out on a limb.

Can you give any more kind of range for that or kind of what you are thinking?

It sounds like you were thinking home equity might be a little bit worse than you thought before or just give a little color if you could.

What I tried to do because all of these portfolios have such different characteristics.

Mike, what I try to do, in speaking to each of those portfolios, was one give you in the supplemental package what we reserve to.

So that can give you a view as to our most current view but also if the economy continues to deteriorate I tried to size that for you a little bit with those prepared comments on each one.

I think that's the best way to go about it and for you to be thinking about it because that's how we think about it.

Maybe just a more general comment for you or for Ken.

So far you have seen problems related to real estate, residential and commercial.

It hasn't gone crazy outside of those areas.

Where are you most concerned outside of real estate?

Is the consumer getting much weaker?

Are we going to be here in two quarters from now, and you are say we just didn't see it coming?

Well, I think we've said before, some time in the next two to three quarters, we do in fact think that consumer losses will peak.

To the extent that happens, then we are in pretty good shape.

The thing for us at least, Mike, is that as we see the, as we see the increases in charge offs coming at us, they're really very manageable.

If we can just start diminishing these big reserve bills and these big losses on CEOs and leverage loans, which we see happening, then you can see then that the earnings power of this Company starts to really show through.

One last follow up.

Last quarter you said well maybe the dividend would be at risk depending on how things play out.

Now you are saying you are recommending keeping the dividend where it is.

What has gotten better than what you expected before?

Earnings tripled, and even after preferred, the number I think is $3.224 billion or something.

So, that is, that is the reason.

But I have tried to be balanced and say that obviously, you have to, as you look forward, be aware that things could change dramatically and in this day and time it is hard to be unequivocal on but again, the thing is that different from the last two quarters is we are now starting to really show some significant income and we would the most profitable financial services company in the United States this quarter.

At that gives me some reason for optimism.

All right.

Thanks.

Our next question comes from Matt O'Connor with UBS.

Your line is now open.

Hi, Ken, Joe.

I know the tangible common ratio is not one that you focus on, but pr forma for Countrywide I am getting around 2.6%, 2.7%.

Is that a level that you are comfortable with?

The shares issued, think of the shares issued in the Countrywide deal as creating common tangible equity that pretty much offsets the goodwill as we talked about earlier.

It really just is the added asset base coming off of Countrywide, which as I mentioned, is probably a little higher than what we would run on a normalized basis once you get out of a disruption period.

When you consider all of those factors together, we're pretty comfortable.

Okay.

So we shouldn't expect any common equity raise or anything like that -- maybe some preferred if the market opens but nothing meaningful?

As we said earlier, the whole, the game plan, given the outlook Ken described earlier absent some unforeseen event, is to migrate back to our tier 1 target over the next two to three quarters, and obviously that's done principally with retained earning generation which is common, which in essence is common.

Okay.

Then just separately a lot of good details on the Countrywide.

On page 35, there's all other charges of $4.6 billion.

I'm just wondering what makes up the bulk of that?

A lot of the other items that I referenced that weren't separately broken out.

Again, all of these are preliminary but you have got rate marks on various assets and liabilities, you've got some incremental components of reps and warranties, you've got miscellaneous things around the insurance operations.

It is a laundry list but no individual item rises to the level of significant of those others we broke out.

Okay.

And then just lastly, very good transaction deposit growth while some of the CDs rolled off a bit.

What is driving that and should we expect more of this mix change going forward?

Focus.

It is, we decided to make that one of our top prioriteis at the beginning of the year.

I don't think it is anything more than that.

You can see from rates that we are not leading on rates, and it is just prioritization, frankly, Matt.

Are you picking up any commercial deposits from some other banks that might be pulling credit lines and things like that?

We are picking up commercial deposits.

I can't identify exactly, you know, why, to that degree.

But we certainly have good deposit growth there too.

All right.

Great.

Thank you.

And our next question comes from Nancy Bush with NAB Research, LLC.

Your line is now open.

Hi.

A couple of questions here.

Joe, if you could just give us in rough terms what LaSalle added, particularly to net interest income and if you could just update us a little bit on what is going on there as far as integration et cetera.

Yes.

On the integration front, the end of the third quarter bleeding into the fourth quarter is our biggest component of integration.

We actually got our customer day one off this past quarter was very successful, et cetera but the big systems conversions are still coming at us.

From a performance standpoint, Nancy, I would say that cost saves are larger and more rapid than we thought.

Core operating earnings from the, from the institution are probably a little weaker given the market disruption especially the Capital Markets related component or the wholesale related component given what has gone on in the markets, but volumes and some of the mortgage type products, home equity type product obviously given again the economic environment.

But the deposit franchise and other components of consumer are very strong as we expected.

I don't, we kind of divided this thing up and put it into the individual business units so there's not a precise measurement to be able to do it.

We are still very comfortable it is accretive I but I don't an exact number because it has now been split up and put out into various units.

From a period to period standpoint, I think if you look at linked quarter, you can take that, the acquisition noise out as opposed to looking year-over-year and that's probably the best place I would guide you to.

Okay.

Thank you.

Ken, a couple of questions for you.

This is just an add on to the Washington question.

The thing that are being done there seem to be being done on an ad hoc basis, i.e.

in response to whatever crisis arises that week.

Are you getting any - - are Paulson, Bernanke, etc.

soliciting any input from the banking industry particularly from the major CEOs like yourself about a plan going forward?

I hope (inaudible) Paulson won't mind me saying this but I talked to him Saturday morning and I assume I'm not the only one he's talking to.

So, they really are, and I also am on a thing called the Federal Reserve Advisory Board that we see the fed once a quarter, and they do ask for our input and they are trying to think broadly.

I know what you said seems that way, but to the extent they can, they're thinking very broadly.

You weren't responsible for his going on the Sunday morning talk shows yesterday, were you, in saying we face months of trouble?

No, I don't have any control over (inaudible).

And I guess that there would be sort of an add on question to that.

You are one of the more optimistic I think on consumer credit quality trends peaking over in the next two to three quarters.

Either Joe or Ken, if you could just give us what you're looking at to say that.

Is it 90 days past dues, is it delinquencies?

What gives you that much more optimism than seems to be existing in the rest of the industry?

I will start and then I will let Joe follow up.

First of all, it does seem like even when you are trying to give a reasoned balanced view of things, there's so much cynicism and negative thought out there, Nancy that you sound "Pollyanna-ish" despite the fact you are not trying to be.

And we have some pretty good ability to predict the largest driver of our charge offs, and that's credit card side.

I mean the team there are just very good at doing that.

We have been within a pretty good realm of an ability to predict that.

That is the future losses, home equity obviously the pace has surprised us.

That's where we have done a lot of work.

We are doing a lot more collection work than we ever have, putting a lot more people on the issue than we have before and obviously we have changed our policies, and we think some of that will start to start showing some gains with some ability to mitigate some of these losses.

We are still predicting them to be higher, but we don't, we just don't think the pace at which they have increased will continue and we saw a little bit of that from first quarter, I mean fourth quarter to first and then now first quarter to second and so we see a little bit of that dramatic rise in the pace of the charge offs to be losing steam and we think that will continue throughout the rest of this year.

Does that apply to small business as well?

I realize that's a small piece of the company, but that has been really amazing.

No.

That would be, that would be an exception, Nancy.

We, and fortunately it is not a big piece, but we see that continuing into 2009.

Okay.

Thank you.

Our next question comes from Ed Najarian with Merrill Lynch.

Your line is now open.

Good morning.

Two specific questions, one would be for Joe and one for Ken.

The first has to do with the commercial loan loss reserve.

It seems like, I noticed that the reserve ratio on commercial lending, specifically declined by a few basis points in the quarter.

Yet, we see, pretty large increases in commercial NPA within the meaning PA as well as commercial criticized exposure.

I was wondering if you could just comment on why not much reserve build and an actual decline in the reserve ratio there when you are seeing such large increases on MPA and criticized on the commercial side.

And does that forebode some noticeable increase in commercial charge off ratio, other than what you have talked about already on the small business side?

Well, first of all we have reserves including the small business commercial piece pretty aggressively over the last two or three quarters as Nancy implied with our question a few minutes ago.

From take that out for a minute, and we did continue to add to our commercial real estate, commercial reserves during the quarter.

But it was a little more of a reallocation of some excess that we felt we were carrying given the underlying on the rest of the portfolio.

Then when you are looking at that total ratio, go back to your base our outstanding grow pretty good.

We continue to be out there doing business and quite frankly have seen, as Ken referenced in his comments, some pretty good growth in the health care kind of insurance nonprofit et cetera group grew with the market disruptions and the ARS securities and things like that.

We have been more of a solid provider for people and municipalities and other during that period.

We quite frankly have seen less people at the party on some other very good business.

Some of the overall ratio is driven by the balance in loans.

I would also say we try to get a leal of preciseness that sometimes drives me crazy, so do the analysts at times but the reserve is $17 billion.

And I think that defies at some point preciseness to the decimal point.

I guess I was referring to I am looking at a commercial reserve ratio that or commercial reserve level on a dollar amount that was pretty flat quarter to quarter.

And that, and then, and that's I think excluding anything at that went into the small business area.

Yet, again we see these big increases in criticized exposure and MPAs on the commercial side and again excluding the small business.

All I can tell you is we are comfortable with that reserve level as Ken said kind of detailed analysis that is driven by all of the underlying credit quality parameters, kind of loan by loan scenario with all of our knowledge and we feel good about that.

We have talked about the areas where we feel the ebbing pose your is the greatest, i.e.

home builder trying to give you the parameters around there.

We feel good about the quality of that portfolio, especially relative to others.

That's kind of how we do it.

I don't have anything more to add to it than the global overall coverage.

It is kind of like the issue of trying to estimate the CDO write downs.

In this you would have to know every single loan and every single risk, it is impossible to come up with a bank by bank equivalent.

Okay.

I think you mentioned, I can't remember the exact ratio.

But you mentioned, excluding residential construction and small business, that your commercial loss ratio was I think I recall in the low teens.

Yes, it is on the slide we gave you.

It shows it at 13 basis point.

Basis points.

How sustainable is that or any context on that the next 12 months?

That's a very low ratio for as big of a book as we have got.

It wouldn't be surprised to see that up a little bit but we don't see a ton of things coming can at us at this point that would cause any material change in that but we need be realistic about the economy and weakness in the economy.

There will be some activity, but there shouldn't be any precipitous change in it.

And then, second quick question for Ken, would you be willing to give us any color on what your plans are starting in the fourth quarter of '08 with respect to liquidating some of your CCB ownership and your view there?

I would be willing to tell you that it is going to be a long-term significant strategic relationship and we will always have a significant ownership position.

Is there any kind of a, is it reasonable to take the view that as we see you exercise some of your options position that that could be to have some correlation with the amount of liquidation we might see in the underlying original investment?

No.

Okay.

All right.

Thank you.

Our next question comes from Chris Mutascio with Stifel Nicolaus.

Your line is now open.

Ed got to my question first, but maybe but a different parameter in terms of dollar amounts.

When I look at the MPA on the consumer portfolio they were up $800 million this quarter and you built the reserves 2.2 billion.

If I look at the MPO on the commercial portfolio they were up $1.1 billion and the reserve build there was less than 50.

So do, does, I guess the question is does the peak or the less severe loss maybe coming from the consumer portfolios in the coming quarters, do they get offset by rising, I guess by an increased need to start building the commercial portfolio there for, excuse me, not commercial portfolio but commercial reserves and therefore the provision expense is maintained for the next several quarters.

Not necessarily.

Remember that and I had this in the opening comments, you probably need to go back and look at them.

But we continue to migrate our LaSalle portfolio into our credit process, that drove a pretty good size component of the increase in both the criticized and MPA numbers in there.

So take that into consideration too.

But back to your question, again not necessarily.

We reserve now for what we foresee in the commercial portfolio as required under GAAP and also is our view.

So not necessarily unless we were to see further deterioration beyond our current expectations.

Okay.

Thank you.

And our next question comes from Jason Goldberg with Lehman Brothers, your line is now open.

Thank you.

Sorry if you missed this but it looks like you went up on the value from $4.24 from $3.2 billion.

I guess was there a corresponding hedge offset or just more color there.

Pretty much offset.

Actually, I think overall servicing income was a little lower this quarter due the net number.

Okay.

And then secondly, I think Ken, I think in a speech a couple of weeks ago you made the comment that you thought and sorry if I get to wrong, nonperformers actually peak in the third quarter.

Is that correct and do you still feel that way?

I have never said, never commented on nonperformers.

Or losses maybe or no?

No.

I had said that, that as I think I said it in response to a question, that the, that we thought credit, excuse me, consumer credit losses would peak either late this year or possibly in the first quarter.

But that's, I mean that's our assessment at the moment.

And that's helpful.

Losses not MPAs.

Got you.

And then I guess just lastly, I guess why not guarantee the Countrywide debt?

Given if you fully intend to pay it?

I don't really have anything beyond what we had said before.

But I will make all determinations on that as we consider options of migrating to the operating environment we want to be in and how to drive best efficiencies and run that business.

That's when we will make those determinations.

Okay.

Thanks.

Our next question comes from Jefferson Harralson with KBW.

Your line is now open.

A couple of questions about Countrywide.

As you get in there and looked at their accounting, is there any accounting changes you are making being more aggressive on delinquencies, MPAs or anything like that.

You know, there will be a number of conforming accounting adjustments just which are typical in any merger we go through.

But they're most of the changes regarding how we are running the business have been previously announced or reiterated kind of in the package today and obviously any accounting will follow those, but there's not any really big significant items in terms of what point you take charge offs and things like that.

Now acquired loans this large, when you value impaired loans in an acquisition.

That's a statement of position, '03, 03, so that will have a little different [op] dates that we'll have to provide you more detail around so you will be able to see the underlying as well as the kind of net impact on us as a company given the purchase accounting adjustment.

But that's not a change as much as that's the application of purchase accounting.

You are talking about the reserve will look optically lower because the loans are coming over at mark down without a reserve?

That is one attribute and there's several others too.

Okay.

If you talk about the warranty reserve, that is going to into a purchase accounting adjustment.

How much of a purchase accounting has been occurred because of warranties?

All of the purchase accounting adjustments we showed you are preliminary.

They show some adjustment as does my comments about you know, their possible claims post that arise later that we will need to consider.

But we have broken out everything that we have you know, that at this point we have finalized enough to be able to present to you.

So this is in the 4.6 billion all other?

Looking at Kevin, I think that's where it is.

Along with a multitude of other items.

All right.

Lastly, on the just the accounting of how this goes forward, you have assumed so far, about 14.5% or 15% cumulative loss rate on the Countrywide portfolio.

No, no.

We, but if you add the one that is have already been taken it is like 17.3%.

That's what you should look at.

Okay.

Thank you.

On the 17.3% as long as that loss estimate is on par to quarter you won't show any provision or losses to the income statement in Q3 or Q4?

Correct.

Okay.

Thanks a lot.

New production and nonimpaired we will have to consider which is what I referenced earlier but if that are block of loans, that's correct.

Our next question comes from Betsy Graseck with Morgan Stanley.

Your line is now open.

Thanks.

On the point regarding the Countrywide debt where you indicated you know, you understand the ramifications of not paying, it is kind of open ended.

I just wonder if you could clarify a little bit what your implications are there.

We don't really have anything else to add to what I said earlier or responded to earlier.

We will continue to work through the process and when we decide what the ultimate legal entity structures look like, how we want to operate it, we will let will you know, but that's where we are right now.

Okay.

Is there a possibility you might at some point fully bring the CFC subsidiary into the Bank of America?

Haven't made any decisions on that.

Okay.

On CDOs have you indicated how the insurance is, who's covering you on that?

Not specifically but I will tell you because you charge a charge for -- we talked about the CDOs component.

Most of our insured exposure is high grade exposure to start with.

It is covered by full line insurers all the way down to some mono lines, obviously the charge we have taken is on the component that is covered by mono lines.

And that really is reflective, I think it was just around 200 million this quarter cumulatively on the, on the particular mono line exposure if you used the exact same valuation process that we have used for the direct CDOs come up with a receivable and consider that, we probably reserved somewhere around half of that mono line per se receivable if you want to call it that.

Okay.

Then just lastly on the trading revenues in your supplement you have got the breakout between the fixed income products and clearly you had an extremely strong quarter this quarter.

I am just wondering how much of this in your opinion is from some of the key drivers or customer acquisition, spread tightening, increased capital associated, you know, with the business.

So taking more risks et cetera.

Well, if you look at the details you will see it is across the board except restructured products where we had continued disruption charges but on, on the FX rates, on, you know, that is clearly the strong point and if you look quarter remember we had a pretty good size charge last quarter.

So performance is actually pretty consistent, strongly consistent quarter to quarter even though it looks to be up there.

I think you know, the volatility in the market and so I would say, you know, make any customer flows although clearly some ability to pick up some just given the positioning in the market.

Okay.

So you would think that this line item is really more a function of change in market volatility and spreads than new customer acquisition.

Why yeah.

Bryan is probably on line, he would shoot me if I said it was sustainable because it is a high hurdle.

We clearly good about going forward, feel pretty good about it.

Not suggesting that we can always perform at that level, but --

But no, there's increased client activity, too.

Okay.

Thanks.

Our next question comes from Joe Morford with RBC Capital Markets.

Your line is now open.

Thanks.

Good morning.

I know the Share National credit exam just finished at the end of June but was curious if you have had any initial feedback on the results of that exam, in terms of the classified trends and what level of reserves or provisions may need to be taken for that?

Not specifically to the Share National but overall you can see our results and all of that is consider because at the individual institution's that exam has been completed.

Okay.

Thanks very much.

So no new shoes to drop so to speak.

Right.

Our next question comes from Ron Mandell with GIC.

Your line is now open.

Thanks.

Ken, you said in answer to an earlier question, you thought that consumer charge offs would peak late this year or in the first quarter of next year.

Right.

I was wondering if you could elaborate on that.

What I am concerned about is you are talking about HPD continuing and, in one of the charges you show the percentage of home equity that is refreshed over 90% and single family over 90%.

A big increase in quarter, and it would seem to me that would imply that the losses would continue well into '09.

So, and you also mentioned that credit card losses would go higher.

So, just wondering if you could expand on that because it just seems to me that we are not at the, we don't see the disability of the end of the negative trends which would as a second step imply the peak in charge offs.

Well, I guess, HDD housing depreciation?

Yeah, housing price depreciation.

HPD.

Sorry.

The, well, I would, if you think about our thoughts about the economy and the fact we see sluggishness but not, but not a recession and that we see some improvement beginning in the beginning in 2009, and that we see housing price depreciation being mostly over this year, maybe going into next year, that would be kind of consistent with what we see in there for, in the charge off peak.

So, there wouldn't be a lag so even if house prices bottomed, fourth quarter of this year there wouldn't be a lag for the damage that had already occurred.

Are you talking about the peak quarterly rate of charge offs when you make comment?

No, no I am saying some time during the end of the fourth quarter or some time into the first quarter, they peak.

I don't, I am not picking I am trying to pick a month but not being specific about which month.

I understand but you are saying some time in that per we will see the peak rate of charge offs even though charge offs might continue at a high level, the peak rate will have been passed.

Correct.

Yes, Ron.

And what that would therefore mean is that you're then only dealing with charge offs and not further reserve build.

Right.

That's very important obviously when you had you $2 billion reserve build this quarter.

$5.5 billion in two quarters.

Yes.

Okay.

Thanks very much.

Okay.

We have time for one more question.

Yeah.

And our final question comes from Jeff Harte with Sandler O'Neill.

Your line is now open.

Good morning.

Morning.

If I heard you correctly you are talking about residential mortgage charge offs that they were 23 basis point this is quarter maybe going toward 40 to 50 by the end of the year.

First did I hear that correctly?

Well.

The point was they were about 23.

You can see in the supplement what we reserve to, that's a better way to think about our outlook but we were trying to be realistic and say given the continued deterioration, it wouldn't surprise us if we that you range.

We are try to go give you a feel for if in fact to give you a viewpoint.

Can you give us then a little color on the portfolio mix kind of in residential?

I would be interest ted in prime versus nonprime and then specifically in prime how much is jumbo and all.

Don't have all of the specifics at my fingertips but I will tell you that the principle increase in the charge offs that we have experienced and we continue to expect is in our CRA portfolio that in our remarks I did kind of give you specifics on.

In at that particular book, the charge off rate this period was just south of 100.

So in the low 90s.

That's driving a big part of our losses, and probably will continue to be a hunk of it.

That's because of our product mix, we weren't in subprime.

Okay.

And in the commercial, I know this has been hit a little bit, but I just kind of look at commercial loan growth of 7.5% sequentially.

That is a pretty big annualized growth rate and you talked a little bit about maybe gaining some market share.

Some other people aren't competing, how do you I guess my concern is if credit isn't necessarily getting better and yet you are growing loans aggressively, how do you know or how can we be comfortable you are not putting tomorrow's problems on the balance sheet today in the commercial portfolio.

I can't recall a time that we've able to get the credit structuring terms that we can get now and you know, including levels of equity all kind of, just the various covenants that you would want.

If there was a time that some were doing their covenant heavy at the moment.

The pricing is so much better than we have seen it in decades probably.

So we think we are putting on very good business with the right structuring and right covenants and we are conscious of the fact that the environment in which we are operating.

Okay.

Thank you.

Thank you very much for joining us today.

This concludes today's teleconference.

You may disconnect your lines at any time.

Have a great day.