美國銀行 (BAC) 2008 Q3 法說會逐字稿

Good day everyone and welcome to today's program.

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

Later you will have the opportunity to ask questions during the question-and-answer session (Operator Instructions).

Please note this call will be recorded.

I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr.

Kevin Stitt.

Go ahead please.

Good afternoon.

This is Kevin Stitt, Bank of America investor relations.

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 conditions 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 afternoon and thanks for joining our conference call on such short notice.

We have several items to discuss today.

To say the least, these are turbulent times for the banking industry with events unfolding on a daily basis that are breathtaking, both as to the speed of occurrence and unprecedented in the impact on both the markets and the economy.

But at the same time, the banking industry is evolving much as we thought it would a couple of years ago.

With greater clarity than we had before, we are experiencing a consolidation in the industry that is producing less than a handful of large banks at the top, fewer banks in the middle and thousands of smaller banks at the bottom.

With the announced acquisition of Merrill Lynch, Bank of America will be one of just a few banks that early next year will hold collectively more than 30% of the deposits in the US along with extremely strong positions in commercial banking, investment banking and asset management.

With our size, scale and strong market share, Bank of America's positioned to benefit as the economy stabilizes and starts to recover.

However, over the next several months and into 2009, we expect that continued market turbulence and economic uncertainty will produce less than normal earnings but also require that we be willing and able to provide liquidity and support to commercial and retail customers.

That customer support in the near-term will benefit us greatly in the longer term.

Consequently, we think the prudent decision is to strengthen our capital position now rather than taking the risk of being exposed to any number of uncertainties in the US and global markets.

Congress's passage of the financial plan as well as other programs put in place is a good start in stabilizing the credit markets and injecting liquidity into the system.

However, we believe it will take time before substantial benefits are seen in increased liquidity, reduced market volatility or improved investor sentiment.

Therefore we believe it is in the best interest of the shareholders to get our Tier 1 capital ratio to our targeted goal of 8% and improve our other capital ratios.

In addition at least in the short-term, we believe it is wise to position our dividend to better match our reduced earnings performance.

Accordingly, we're reducing the quarterly dividend by 50% to $0.32 a share and have announced that we intend to raise $10 billion of common stock in offering.

Today's actions will results in our Tier 1 ratio on a pro forma basis including Merrill Lynch to be around 8%, our target.

Additional capital will ensure that we can handle the economics scenario we face, continue to be a source of liquidity to our customers and still take advantage of opportunities to grow our market share.

Given reported earnings for the third quarter and an economic outlook that shows a weaker economy going into 2009, we paying a lower dividend is prudent capital management.

While it is tough for me to announce a dividend cut, I see it as taking one step backwards in order to take two steps forward.

While I will call the dividend cut temporary, I will say that once our earnings return to more normalized levels, I will be the first one to ask our Board for a dividend review.

Our history of paying dividends is impressive and I look forward to the day our dividend can get back in line with where it has been.

Earnings for the third quarter of $1.18 billion or $0.15 per diluted share were disappointing.

But we're talking about earnings, not losses.

Good performance in several of our businesses was offset by market turbulence, losses related to several onetime events and continued high credit cost.

Although it is difficult to focus on what is going right at this time, we ask that you as investors recognize how well several of our businesses are performing.

We're seeing impressive execution in consumer banking as well as momentum in commercial banking both in lending and in treasury management.

Offsetting much of this success was several events related to the market turbulence.

These events including losses associated with exposure to Fannie and Freddie, support of the Colombia cash funds, a challenging trading environment, additional negative marks on certain balance sheet positions and potential losses related to our auction rate securities settlement.

In addition, the economy weakened materially from the second quarter as evidenced by rising unemployment, bankruptcies and continuing home price declines.

This weakening drove an increase in expected credit cost causing us to substantially add once again to our allowance for loan losses which now exceeds $20 billion.

In light of our outlook for the rest of this year and 2009, the dividend and capital actions better insulate us from problems that may occur.

These actions allow us to be be positioned for businesses as usual and for growth opportunities at the expense of others.

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

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

Then Joe will delve a bit deeper into certain issues such as capital markets, credit quality, capital and Countrywide.

In the third quarter as I mentioned, net income was $1.2 billion with $704 million available to common shareholders of $0.15 per diluted share including the impact of merger and restructuring charges of $0.04.

Total revenue for the third quarter was $19.9 billion on an FTE basis, down approximately 15% from the second quarter excluding Countrywide but up approximately 5% from the third quarter a year ago.

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

Net interest income rose 4% from the second quarter excluding Countrywide while non-interest income decreased 36%.

Driving much of the decrease in non-interest income was the impact of continued market disruption in trading account profits, equity investment income and other income.

Non-interest expense was flat with the second quarter excluding Countrywide.

Provision expense of approximately $6.5 billion increased by $620 million from the second quarter while net charge-offs rose $737 million to $4.4 billion.

Increase in reserves of approximately $2 billion brings the allowance for loan losses -- loan and lease losses above $20 billion as I mentioned to almost 2.2% of our loan and lease portfolio.

Credit cost remains at high levels reflecting weaker housing markets and an increasingly slowing economy particularly in geographic regions that have experienced significant home price declines.

This weakening which was exacerbated by recent increases in unemployment and bankruptcies resulted in additional credit deterioration across many of our portfolios.

Excluding the addition of Countrywide, core deposits at period end versus the second quarter increased approximately 4% or almost $27 billion, $21 billion of retail deposits and almost $6 billion of commercial.

We believe that retail growth is a multiple of the overall market.

We also believe this is being driven by flight to safety.

It is producing faster than normal organic growth in retail and commercial customers.

During the quarter, net new checking and savings accounts were 1.8 million which was an increase of 44% from second quarter results.

After adjusting for the sale of prime brokerage in the quarter which represented about $9 billion in loans, commercial lending, excluding small-business, increased $5 billion, a portion of which we believe is related to recent disruptions in the credit markets and is a combination of new business and drawdowns.

Countrywide contributed an estimated $259 million in net income excluding $72 million in merger-related charges.

Given the 107 million shares issued for Countrywide, the earnings are clearly accretive to the overall earnings.

In addition to earnings, the integration effort with Countrywide, credit quality and actual savings are all generally in line with our previously disclosed expectations.

You may have seen our announcement this morning with various state attorneys general to create a home retention program to modify troubled mortgages with interest rate and principal reductions for Countrywide customers.

That loan modification program is in line with our expectations, so there is no impact on our purchase accounting adjustments.

Unfortunately, given our early earnings release, we don't yet have the detailed P&L's for our individual businesses which we will issue later this month.

Before I turn it over to Joe, let me make a couple of comments about our thinking given the current environment, some of which references my earlier comments.

Our economic expectations project minimal if any GDP growth for the remainder of 2008 as any stimulus actions in the short-term will be more offset by the slowing economy.

This expectation combined with current market conditions including housing, unemployment and restricted credit supports our view that the economy is moving to a more recessionary environment.

Unemployment weakness is expected to continue into and through a good part of 2009 with the possibility of unemployment rising above 7%.

Consequently, credit quality will continue to be an issue over the next several quarters with provision and charge-offs remaining at elevated levels and perhaps not peaking until well into 2009.

We see commercial credit deteriorating but not expected to rise to the levels seen in the last two cycles.

Shifting gears, we closed the acquisition of Countrywide on July 1 and continue to see that investment as being economically attractive in the long-term and in the short-term as well.

Our Tier 1 capital ratio is estimated to be 7.50% at quarter end, down from 8.25% at June 30 due to addition of Countrywide.

Given the dividend reduction and capital raise, we believe that Tier 1 levels including Merrill Lynch on a pro forma basis will be around our target.

Given our current economic outlook, we believe most of our core businesses will drive earnings for the remainder of the year and into next year along with the continued tight grip on expense levels across the Company.

Most importantly, we remain committed to serving our customers and clients will driving profitability during these tougher times and we believe our capital actions will enhance that capability.

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

Thanks Ken.

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

Turning to GCIB and more specifically capital markets and advisory services, results this quarter were materially impacted by market events.

Investment banking fees across the Corporation were down 32% from the second quarter to $474 million as market activity slowed given widening spreads and the lack of deal flow.

Total revenue in CMAS excluding investment banking fees, or what we call Sales and Trading, was a loss of approximately $242 million versus a positive $1.2 billion in the second quarter.

Now we would characterize market disruption charges this quarter as approximately $1.8 billion.

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

Now let me start with leveraged lending where we ended the quarter with exposure of $6.6 billion.

That was comprised of $2.3 billion unfunded and $4.3 billion funded and was down $3.7 billion from June 30.

The reduction since the end of June was driven by cash sales consistent with the previous quarters, meaning no transfers to the accrual book.

The unfunded portion generally represents new business at market terms.

Now during the quarter we wrote down an additional $145 million versus $503 million in the first half of this year as pricing continued to erode a bit during the quarter due to market volatility.

Importantly, legacy or pre-disruption exposure totaled $4.2 billion at September 30, all of which was funded and that reflects a reduction of about $2.4 billion from the ended June.

Now for prospective total leveraged exposure at September 30, 2007 on the beginning of this disruption was over $32 billion.

Now on the commercial mortgage-backed securities side or CMBS side, we ended the quarter with $8.2 billion in exposure of which 7.5 was funded.

As I mentioned last quarter, approximately 80% is comprised of larger ticket floating rate debt, most of which was acquisition related.

This floating rate debt was written down approximately $145 million this quarter.

Now this exposure was reduced by a little over $1 billion this quarter based on the sales that we had.

Now as we said before, this product is difficult to hedge as compared to the remaining $1.7 billion of exposure which is primarily fixed-rate conduit paper.

In a related matter, we recorded $34 million of losses associated with equity investments we made in the acquisition related financing transactions.

Now 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 $952 million.

The losses were largely comprised of approximately $725 million of super senior CDO write-downs and a charge of approximately $225 million to reflect the counterparty risk associated with our insured super senior positions.

At the end of September, our net subprime super senior related exposure dropped to $2.9 billion and when combined with earlier repurchased asset-backed securities, our exposure was $4.3 billion.

We also took an additional $222 million of charges on the insured deals bringing our reserve on the receivable to $700 million.

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

Now spread widening on corporate loans drove an overall value decline on our non-subprime exposure in the CDO area this quarter.

All CDO-related losses are included in the $952 million that I referenced earlier.

Now as you are aware like many of our competitors, we agreed to offer to buy back auction rate securities that we had sold to certain customers.

The total amount of ARS that we have agreed to repurchase is approximately -- or offer to repurchase is approximately $4.5 billion.

The impact of that agreement was a cost of over $300 million which was split principally between CMAS and GWIM, or our global wealth and investment management business.

Now we also closed the sale of our prime brokerage business, generating a net gain of just over $200 million and also sold our remaining held USAir credit card accounts or our remaining USAir credit card accounts for a gain of approximately $280 million.

Other items of note in the quarter included a loss of $320 million on preferred stock we held in Fannie and Freddie which hit the equity investment income line.

Now finally in GWIM, we provided additional support to the Columbia cash fund of $630 million related to the structured investment vehicle restructurings as well as other financial institution holdings.

Now needless to say, we had our share of issues to deal with in the quarter.

Before jumping into credit quality, let me point out that we have added a new line item to our P&L or income statement under non-interest income, that is insurance income.

With the inclusion of Countrywide in the third quarter, our insurance revenues are now broken out on a separate line.

Revenue from our legacy Bank of America insurance businesses are included here versus in other income in the previous quarters along with the Countrywide businesses.

The Countrywide activities include the Balboa home and auto business sourced through lender relationships as well as revenues from the primary mortgage reinsurance business.

Now let me switch to credit quality.

On a held basis, net charge-offs in the quarter increased 17 basis points from second quarter to 1.84% of the portfolio or $4.4 billion.

That would be 2.01% if you exclude the Countrywide portfolios.

On a managed basis, overall consolidated net losses in the quarter increased 16 basis points to 2.32% of the managed loan portfolio or $6.1 billion.

And again excluding Countrywide, that would be 2.51%.

Managed net losses in the consumer portfolios were 2.89% versus 2.83% in the second quarter and again excluding Countrywide, that would be 3.25%.

Managed consumer credit card net losses represent almost 60% of total consumer losses.

Managed consumer credit card net losses as a percent of the portfolio increased to 6.40% from 5.96% in the second quarter, approaching the high end of the range we expressed last quarter.

30 day plus delinquencies in managed consumer credit card increased 36 basis points to 5.89% while 90 day plus delinquencies increased six basis points.

Now we've continued to see increased delinquencies in our card portfolio in those states most affected by housing problems while our foreign portfolio remains relatively flat.

California and Florida make up a little less than a quarter of our domestic consumer card book but represent about one-third of losses.

Clearly with current net losses at 6.40% should unemployment rise above 7%, we would expect to see losses exceed 7%.

Now current credit quality in our consumer real estate business continued to deteriorate from the second quarter also.

We have begun to see a slowdown in the rate of deterioration in home equity, although residential mortgage continues to increase.

Our largest concentrations are in California and Florida which combine to represent about 40% of home equity portfolio and about 66% of the losses.

Home equity net losses increased $40 million to $964 million or 2.53% versus the 3.09% in the prior quarter.

Excluding Countrywide, the current quarter would be 3.15%.

Now legacy Bank of America 30 plus performing delinquencies increased 19 basis points to 1.46% while nonperforming assets increased 12 basis points to 1.76%.

Consistent with the prior quarter, a large percentage of net charge-offs related to loans where the borrower was delinquent and had little or no equity in the home, that represented 87% of those in the third quarter.

Now while we're encouraged by the tapering off of deterioration, the worsening economic environment continues to put pressure on portfolio performance in home equity.

We've seen utilization tick up slightly to 49% primarily driven by line management strategies versus additional draws and slower payments.

Through September we've blocked or reduced approximately $11 billion in lines to higher risk customers and in higher risk states.

Our ending home equity balance of $123 billion -- and this is without Countrywide, so the legacy Bank of America portfolio -- grew 1% during the quarter.

New business and increased utilization both contributed about $1.9 billion in growth which was partially offset by paydowns and charge-offs.

Now as we said last quarter, with the increased economic and credit pressures we continue to believe that the loss rate could cross the 4% market in 2009.

Our residential mortgage portfolio showed an increase in net losses to $242 million or 37 basis points for the quarter.

That would be 41 basis points excluding the Countrywide portfolios.

We continue to see deterioration in our community reinvestment act portfolio which totals some 7% of the residential book.

Additionally, California and Florida which combined represent or comprise 42% of the legacy Bank of America balances, drove 62% of the net losses through August.

The annualized loss rate from the CRA book was 1.26% and represented 29% of the residential mortgage net losses.

Although approximately $129 billion or 50% of our residential mortgage portfolio carries risk mitigation protection, it does not cover our CRA portfolio.

Now the $129 billion, approximately 92% is protected where we sell mezzanine risk exposures to cash collaterallized structures, thereby leaving us with no counterparty risk.

The remaining 8% is protected by GSE's.

Now I should note that we continue to reduce whole loan balances ex-Countrywide by converting them to securities as one of many actions we're taking to fortify liquidity.

This is the effect of bringing down the average loan balances thereby negatively impacting the reported loan loss rate.

However, having said that, we do see continued deterioration as evidenced by our decision to increase reserves to 54 basis points on this portfolio.

Obviously worsening economic conditions could drive that number higher.

Our auto portfolio at the end of September was about $24 billion in loans.

Net losses in the quarter were $114 million or an annualized 1.57% of the portfolio up from 1.26% in the second quarter which had been helped a little by the seasonal trends.

Now within card services, we have a consumer lending business that has about $29 billion in unsecured consumer loans.

Largely due to increased unemployment and increased bankruptcies this portfolio is also experiencing rising delinquencies and losses.

Net credit losses were 8.43% in the third quarter up 136 basis points over the second quarter.

Loss rates have also been impacted by tightening and underwriting criteria resulting in a significant slowdown in loan growth.

Now like our other portfolios, California and Florida continue to have outside delinquencies and loss contributions in relation to their outstandings.

Loss mitigation initiatives have been implemented in this portfolio as well including increased collection efforts and tighter account management.

During the quarter we increased reserves on this portfolio by about $700 million to a level of around 10.5% of ending loans.

Switching to commercial or the commercial portfolios, net charge-offs increased $266 million in the quarter to $960 million or 113 basis points up 29 basis points from the second quarter.

Much of the deterioration this quarter was driven by commercial real estate which was $126 million, mainly home builders.

Net losses in small-business which are reported as commercial loan losses, are up $50 million from the second quarter and the net charge-off rate has risen to 10.64%.

The rest of the increase was broadly spread across various industries.

Now if you exclude small-business from commercial domestic, our loss rate dropped to 23 basis points which is still below normalized levels.

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

The continued increases are consistent with the seasoning of these vintages and while clearly too high, are generally in line with our forecast from last quarter.

Now turning to criticized, our criticized utilized exposure in our commercial book excluding available for sale and fair value loans increased $5.5 billion from the end of June spread across more than one dozen industries.

Commercial NPA's rose $1 billion to $5.1 billion.

Nearly half of the increase in commercial NPAs was in commercial real estate and mainly in home builders.

Now with respect to the total legacy Bank of America loan book, 90-day performing past dues on a managed basis increased two basis points to 81 basis points while 30-day performing past due increased 21 basis points to 2.58%.

And as Ken said, third-quarter provision of $6.5 billion exceeded net charge-offs resulting in the addition of approximately $2 billion to the reserve.

The majority of the reserve increase was in the consumer portfolios, most notably consumer unsecured lending, credit card and residential mortgage reflecting the current stress on the consumer.

We also increased the domestic commercial allowance excluding the small-business portion, by approximately $150 million reflecting modest deterioration across the portfolio.

Our reserve now stands at $20.3 billion or 2.2% 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 second quarter on a managed and FTE basis, net interest income was up $1.04 billion of which core which we define as excluding trading related, represented $960 million.

The increase in core NII was driven by the addition of Countrywide which represented about $644 million with the remaining increase of $316 million due to balance sheet positioning, loan growth and day count.

We estimate the Fed fund's LIBOR spread dislocation cost us about $400 million in the quarter compared to historical spreads.

The core net interest margin on a managed basis decreased seven basis points over second quarter to 3.79% due primarily to the addition of Countrywide.

Excluding Countrywide, the margin would've increased nine basis points.

Our interest rate risk position is less liability sensitive relative to our position at the end of June.

Now going forward, the negative disparity in the Fed fund's LIBOR rates will have a continued negative impact on net interest income.

Okay, let me say a few things about capital.

Tier 1 capital is estimated to be 7.50% at the end of September.

Given the capital actions we announced today, we believe that Tier 1 on a pro forma basis with Merrill Lynch would be around our targeted ratio of 8% after closing the transaction.

Obviously that is dependent on our current fourth-quarter outlook.

We ended the quarter at 4.0% and 2.6% for tangible total and tangible common respectively.

These ratios will be enhanced with the capital actions we're taking.

Now let me switch and follow-up on what Ken said about Countrywide.

We closed the acquisition of Countrywide on July 1 so third quarter results reflect a whole quarter's impact.

We estimate that it was accretive by about $0.06.

Now going forward as we integrate the operation, it's going to be increasingly difficult to split out the Countrywide contribution.

And that integration process leads me to another item.

As we indicated in the past once we reached a point of determining our operating environment, we would indicate how we would handle the Countrywide debt.

And while I don't want to get into all the details here, let me say that we preliminarily determined where the various operations would fit within our corporate structure.

And as we transfer those operations, our Company intends to assume the outstanding Countrywide debt totaling approximately $21 billion.

Accordingly, you'll see us filing notice with the New York Stock Exchange to de-list that debt.

Now the process we followed in determining the operational structure prior to assuming the Countrywide debt will be the same process we intend to follow with the Merrill Lynch acquisition.

Now in our package we've included some highlights for Countrywide reflecting third quarter results.

As you can see, average total assets at Countrywide were $151 billion.

Average loans and leases net of the purchase accounting adjustments were $78 billion and average deposits were $59 billion.

The total revenue for the quarter was $2.4 billion of which approximately $644 million was net interest income.

Non-interest income was $1.7 billion including $1.2 billion of mortgage banking income and about $500 million of insurance income.

In the third quarter, MSR adjustments related to Countrywide were approximately $375 million and mortgage originations from the Countrywide franchise during the quarter were $40 billion versus $59 billion in the second quarter.

Driving the decrease in the second quarter was an overall reduction in the mortgage market as well as a reduction in refinance activity given the rate environment.

Now as Ken said, we continue to be on track as far as costs save and integration efforts.

Credit quality results were also in line with our expectations.

Now switching to Merrill Lynch for a minute, we're happy to announce that John Thain will be assuming a major role at Bank of America once the acquisition closes.

John will be in charge of what we currently call global corporate investment banking as well as global wealth and investment management which will incorporate most of Merrill Lynch's businesses.

Our transition teams and legal day one teams are being formed and milestones are being established.

Now subject to shareholders approval, we intend to close that deal as soon as we can which could be as soon as year-end.

Going forward into '09, let me reiterate that there's considerable uncertainty about the economic environment and it does appear that the market disruptions, housing situation and rising unemployment are starting to take their toll on the economy.

Those banks with market presence and strong balance sheets can weather and even benefit from the situation and we do feel good about our relative position in our businesses versus the competition.

Loan and deposit growth generated by the franchise are still expected to benefit net interest income in the short-term and we believe growth will continue in non-interest income from our consumer businesses.

Consumer credit quality will continue as a headwind due to what appears to be further deterioration in housing and unemployment levels and their subsequent impact on consumer asset quality.

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

Given these scenarios, we would expect net losses to be at least at levels we experienced in the third quarter.

Now on the expense side, again as Ken mentioned, we're aiming for improved operating efficiencies and heavy expense control as well as savings realized from the Lasalle integration and now Countrywide.

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

(Operator Instructions) Matthew O'Connor, UBS.

You provided a lot of good detail on the reserves and asset quality by subcategory.

Specifically I'm looking on page 24 in the commercial breakdown and it just seems like there has been a lot of deterioration in terms of higher non-performers, higher charge-offs and the loan loss reserves have only gone up a little bit.

I was just wondering if you could revisit how you reserve there and if there might be more meaningful reserve (inaudible) going forward?

I think (inaudible) and I think focusing on that slide, to look at it is a good way to do it because if you look at some of the increases that have occurred compared to the charge-off rates that we have seen, look at the -- I referenced in my prepared remarks the core commercial business when you exclude small-business and the commercial real estate, and there charge-offs went from about 13 basis points up to 28, we did see an increase in non-performing loans in that book of business and we did see some increase, a sizable increase quite frankly in criticized utilized.

But if you look at where we reserved for that business, we were reserved at just under 100 basis points or 94 basis points.

What we would generally say is we are running -- we're still running below our normalized range of losses for that portfolio which is obviously the largest of the portfolios.

So it's somewhat of a function of our existing reserves in addition to the details of the underlying loan quality.

I guess specifically on the commercial real estate book where there has been a little more deterioration and the reserves just ticked up a couple bips.

The commercial real estate is where we have built some level of reserves before but a very similar kind of approach to that.

Obviously the home builders are the place that have the largest -- where we have the weakest borrowers from that standpoint.

So we would expect to see continued elevation in the charge-off rate on the commercial real estate side but not to the extent of some prior downturns where you saw a very different kind of commercial real estate lending.

And that's kind of what is driving the view of how much we reserve there.

And then Ken maybe you could just provide a little more color in terms of the timing of the capital rates here?

Obviously a lot has changed the last couple of weeks and it seems like the timing could be very smart before either Wells or Citi gets out there with their raises and the shorts come back in.

How much of it is the environment as you're looking forward thinking that commercial loss and consumer loss will be a lot higher?

How much of it is for the Merrill deal and how much of it is just kind of opportunities to grow organically since a lot of other banks are pulling back?

I guess I should say all of the above and shut up.

You kind of hit the high points.

What we have seen, gosh, even in the last 45 days things worsen in the economy, a view that the recession is going to be a little deeper than we originally thought.

(inaudible) coverage going to take longer, that the charge-offs are going to remain high for a more extended period of time that we would have thought just since last quarter.

So that was one piece.

In that kind of environment we think it's prudent to have higher levels of capital and not be dependent on getting back to your targeted ratios as long as we would have done it in a normal environment.

Secondly, we did think that there was -- there seems to be that there has been clutter.

We obviously had three big capital raises by Goldman, JPMorgan Chase and GE.

We had the possibility of Wells, Citi and others getting out of the marketplace as well.

And then finally, we are seeing opportunities that we have never seen before with clients when you do business with us.

And we want to just maintain that strong capital base and be able to absorb additional business as we go forward.

So it really is a lot of the above.

We don't look real smart today given what happened but all in all, we just thought it was prudent to get out there sooner rather than later.

You know you could talk about a mess on estimates, but estimates don't seem to mean as much as they used to and we thought just having a level of profitability over $1 billion might distinguish us among our competitors during this particular environment.

Just lastly if I may, it's still early with TARP program out there, but you have written down the Countrywide assets quite a bit and Merrill's side has taken quite a bit of hits as well.

Any additional thoughts on how you might dispose of those assets with the benefit of the TARP program?

Mat, first I guess we would say that we think the TARP program is a beneficial thing overall and are glad to see it have gone through.

With regards to individual transactions, you know we will evaluate them as they come up, our opportunities.

And I say that because you can compare that to this morning where you saw us announce an effort to try to keep people in their homes with principal and rate reductions that we think is a better cash flow answer to our investors that we service loans for, but also loans that we hold on our balance sheet that were marked through the COuntrywide activity, from that standpoint.

So we will have to evaluate it versus the other alternatives in each particular scenario that we come across.

Meredith Whitney, Oppenheimer.

I have a couple of questions.

My first is can you characterize the momentum of the deposit build throughout the quarter?

I assume that the momentum of the commercial paper decline was back-end loaded, but can the offset of the strong deposits -- if you could qualify that, that would be helpful.

In fact, Joe has got some numbers right here that show some incredible momentum toward the end of the quarter.

Meredith, if you look at our -- let's focus on retail deposit growth for a minute.

On the retail side, average balances grew about $8 billion which by itself we think is -- will be higher than the industry.

But if you look at the more recent period, so you just take the end of the period levels, we're up about $21 billion and we did see a lot of that increase come in in the last -- let's call it the last 30 days.

Okay (inaudible) is that continuing into the fourth quarter?

Pardon me?

It's only a few days but is that continuing at the same pace into the fourth quarter?

Yes, we've continued the first few days.

Like you said, it's early but at least the daily reporting that I see and that we see and Liam does shows some continuation of that.

Secondly, the commercial deposit growth shows not as large because the book is not as large but shows exactly the same kind of characteristics with it being backloaded toward the end of the month.

And then secondly, one of the things that really caught my attention was the 44% increase in net new accounts.

That means individuals are moving their relationship business, not just a CD or something.

Okay, so you guys have the benefit of the offset of strong deposits.

Others may not be so lucky.

But as the commercial paper market continues as it has been over the last couple of weeks, what does that do to your card business?

How does it change the dynamics of any of your consumer lending businesses on a day-to-day basis?

I know you have been cutting lines on a risk-based basis anyway.

But is there any near-term impact protraction or disruption the commercial paper would have on your lines?

From a consumer lending standpoint, any of modifications we've made have really been focused on risk mitigation and trying to make sure we're underwriting the quality of paper we want to be underwriting as opposed to any funding driven implications for that standpoint.

So just this discussion and all of this is done out of the bank level obviously.

But just as the discussion on deposits that we just had, that coupled with our other sources of liquidity at the bank level have allowed us to continue to serve customers based on the criteria that we felt good about; so really not an impact there.

Obviously the CP markets freezing up has an impact on any kind of term funding you would like to do.

But that probably has a little more impact on some others than us.

And then the last question which is related to your assumption on unemployment, given the fact that California, one of our biggest states is already well above 7% unemployment, I would love to be more positive than I am, what are you seeing that I am not?

Because I would be much more pessimistic about a 7% base case unemployment scenario.

Well we said over seven as opposed to try to put a point estimate, although you're right in saying lower over seven rather than higher.

We think quite frankly where you're seeing those highest unemployment rates kind of correspond to where you saw the highest growth.

So you really have seen that push forward so let's kind of say they correspond to the housing related states or the places that states have the most housing related issues versus nationally.

While consumers are under stress, if you look at our delinquency trends across the US, they are much more pronounced to the negative in those particular states that already have that level of unemployment in them.

The only positive I can think of is the states that we're mentioning, who would you bet on over the longer-term?

Florida and California are going to be states that grow and are going to be prosperous over time and that is the positive.

Fair enough.

Thanks very much.

Mike Mayo, Deutsche Bank.

I guess when you look at loan growth, it's good news and maybe bad news.

Can you kind of talk about where the loan growth is coming from if you strip out Countrywide and how much that loan growth is involuntary due to drawdowns by corporations, really how you balance that loan growth with a drive to keep asset quality still good?

I tried to give in the prepared remarks a comment about home equity on the consumer side for a minute.

I mean there, most of the utilization increase was driven by the line reductions, the unfunded line reductions and about half and half of the net additional growth came out of new business process draws net of paydowns.

If you look at on the commercial side as I think you are alluding to, earlier this year and leading into this quarter we did see a lot of opportunities.

We continue to see opportunities and the easy example is to think about the backup in the auction rate securities market.

So whether it's governments or municipalities, medical type of -- or hospitals etc., you see some good solid growth where it's our -- you know, we have the opportunity for good client selection, good structure selection etc.

I would say the general draws on revolvers are on backup lines.

The rhetoric is a little bit ahead of the actual in terms of you read more about it in the headlines than we're seeing.

We are seeing some from that standpoint and a good bit of it is quite frankly high investment-grade borrowers but also admittedly that some of the weaker borrowers, not obviously the weakest that can't draw on it.

So it's really a blended mix from there but not a noticeable amount of kind of at the edge draws from that standpoint.

I think the thing that we are seeing that I can't recall ever seeing is people actually coming to us saying we've made a decision that we want to bank with you and you be our bank and we are going to move the whole relationship.

Usually what happens is they want a loan and then they promise somewhere down the road to move their treasury management or whatever and they actually are bringing the whole relationship this time.

Again these are well-written, well underwritten and good pricing.

So that really is good news.

(inaudible) you mentioned NII might be heard ahead and could you just explain that a little bit more?

Because it sounds like you have some good trends here but NII should go down I guess you said due to LIBOR?

Well I was just saying that LIBOR or the Fed fund LIBOR spread was obviously pretty high early in the quarter and even last quarter and we were wishing for it to go back to normal.

Given where it went at the end of this quarter, we are wishing for it to get back to where it was when we thought it was bad is a way to think about it.

Mike, if you looked at that spread because of the posture of our balance sheet or the composition of our balance sheet, we get hurt being liability sensitive and having let's call it more LIBOR based or proxy based on LIBOR funding.

So as that stays elevated, compared to the funds rate which is more akin to what our assets price on, we obviously get hit some for that.

If you looked at the end of September at how elevated the interbank lending rate was and you projected that and said it would stay out there or stay at a reasonably elevated level compared to this past quarter, I was just saying that is a headwind coming at us that would temper what we would otherwise be able to do.

And then lastly, link quarter you said excluding Countrywide, your expenses were flat but I think if you exclude Countrywide, your revenues were down quite a bit even stripping out some of those onetime items you mentioned.

So where do you guys stand on improving efficiency?

Ken, I know you don't like having a 57% efficiency ratio.

So how should we think about that during the tougher times?

First of all, the trading results just in general as the spreads widen really hurt the revenue.

Investment banking was down because of the obvious inactivity.

So those who would be two big -- the card income, because of you've got losses embedded in that revenue item through the (inaudible) you have got -- that hurt.

On the other side -- and then you had as you mentioned all the one-off items.

It was kind of a perfect storm kind of quarter that looked a lot like the first quarter, unfortunately.

So I think it's hard to kind of interpolate from all of that happening what your real revenue run rate is.

I would say though that we may have to adjust the -- get us some time to get some regular run rates.

But we may have to accept a little higher efficiency ratio because Countrywide -- our mortgage company inherently has a higher efficiency ratio and we will have to take that into account.

But this particular efficiency ratio was driven by poor revenue, not really poor expense control.

Betsy Graseck, Morgan Stanley.

Hey, a couple of questions.

One is on the CCB investment.

I think you have your three-year period here this quarter.

In addition you had increased your investment in CCB last quarter.

I'm just wondering how you are thinking about the position that you have today and either increasing or decreasing at the margin?

Well we first always make the comment that we view it as a long-term strategic investment and would plan to hold a substantial ownership position over a long period of time.

And then beyond that Betsy, we kind of -- what we do talk about should we monetize some of it while still maintaining a big position and we will just kind of look at that both this quarter and going into next year to determine if in fact we want to do something.

The capital raised and the dividend cut kind of allow us to look at it as another leverage pool if we wish as opposed to needing to pull it.

I know you increased your investment into second-quarter.

Did you do so as well in the third quarter?

No.

Then on Tier 1, if I could just get a sense of how you're thinking about Tier 1.

I understand that 8% is your target but we also have an expectation for a pretty difficult environment ahead and probably rising nonperformers.

So I am wondering if there's anything that keeps you targeting 8% versus potentially having a little extra cushion for tough times ahead.

I would probably say that generally we're comfortable with 8% and quite frankly we feel we can run the Company on a little less than that.

And that would be why you've historically seen us take advantage of strategic opportunities and then kind of build back over x number of quarters.

Realistically the actions we're talking about today just accelerate getting us back to that point and then obviously a lower level of dividend payments will contribute over time to a little more rapid continued building of capital.

So that is really the focus as opposed to recalibrating 8%, although it's really a plus or minus as opposed to being a straight (inaudible)

Okay, I guess I am wondering if you had interest beyond the $10 billion that you're seeking would you choose to upsize your offering?

More than likely, yes.

Is there any level you would cap if off at?

Well we have got x amount of shares and so that is one.

I have forgotten that exact number but I think --

I think Betsy that the first of all overallotment size may be maybe a little more than that but as Ken said, it's something in that -- if it's over 10, it's in the low teens.

Right, okay.

Just on (inaudible) that comes into play first quarter '09.

Is that right?

Well it comes into selected areas but we don't actually get governed by that.

We start our parallel prospectus in the future as opposed to being a 1-1-09 person.

Okay, so you wouldn't be announcing your (inaudible) Tier 1 any time soon?

No.

I guess that will prevent the system -- investment banks that are now banks, prevent them from claiming these (inaudible) ratios.

I'm not so sure about that, given that all of Europe is on Basel II.

We are kind of the odd man out there.

Anyway, okay.

Thank you.

Brian Foran, Goldman Sachs.

I guess last quarter your pre-provision earnings growth was a lot better than expected and even if we back out all the write-downs in Countrywide, it seems like it shrank this quarter.

So how can you I guess help us quantify what the core pre-provision earnings momentum is right now?

Well it's hard because of the -- because you've got some embedded credit losses in your credit card revenue that is not in provision but up there in that (inaudible).

And then you've got an investment banking environment that was worse.

And then you have got the poor trading environment on top of all of these onetime items.

So it just makes it very difficult.

Clearly the second quarter is going to be a better predictor of what this thing will look like when (inaudible) on the other side.

But the way I look at it is that we not that long ago -- it couldn't be that long ago because I can still remember it, we were a $5 billion net income plus Company per quarter and that was before Countrywide, before LaSalle, before cost savings and before Merrill Lynch and cost savings on top of that.

So on the other side of this, you have got a powerhouse but we have got to get past all the things we have been talking about.

And then on the deposit growth, the growth has been great, pricing industrywide has gotten worse.

So are the new deposits coming on at higher or lower cost than they would have been last quarter?

Early in the quarter we ran a CD special as more of a retail focused sales activity type of thing, ran it for a week, picked up the good bit of net new money in that one.

But even than we didn't price like some of the competitors were pricing and really felt like we probably got a good bit of the business that was in the market during that week.

Here as of late, it has been I guess what I would call a little more of a flight to safety or some kind of concept of that nature where we have been pricing as we always price competitively but not out front by any means.

We try to stay pretty disciplined and we have got that growth in that pricing environment.

We've got -- I think it was $9 billion in eight days or something like and that was just more of a test than anything else and helped the morale of the consumer sales force.

But the fact that Washington Mutual is now owned by Chase is very positive because they were a huge outlier on rates.

And then if Wachovia were to get -- if Wells Fargo were to get Wachovia, that would be very positive as it relates to rates because they are a very rational pricer.

So we see better times ahead on the outliers as well.

Lastly if I could, is the tax rate this quarter just lower earnings or are there some benefits arising from Countrywide that would recur?

Think of it as just adjusting to the annual effective rate, no major items coming out driven out of Countrywide.

David Hilder, Putnam Investments.

Can you provide any information on what Merrill's earnings in the third quarter were?

No.

I think they announce on the 16 and obviously (inaudible) a separate public company and we have to let them be on their own and announce their own earnings.

Any prospect of closing the Merrill transaction materially before year-end?

No, as I said in those prepared comments, the focus would be on trying to get it done at year-end.

So before year-end think of that as basically the end of the year.

Nancy Bush, NAB Research LLC.

I guess I would -- I have asked this question I think for the past couple of quarters and I would ask it again is when do we start seeing credit quality in the small-business portfolio stop getting sort of dramatically worse?

For a couple of quarters it was previous underwriting criteria.

Now it seems to become the economy.

So how much longer does this go on?

Nancy, I guess one of the ways to think about this is you can see that we continue to increase our reserve associated with that paper which has got some nature of forward-looking view in that.

The vintages that we have talked to you about before clearly are continuing to season.

That is -- this is more akin to consumer than commercial in terms of performance in an economic slowdown.

So that is adding to what otherwise would have come through but the best thing I can do is kind of point you to see that we are in fact continuing to increase the reserves or carry a higher level of reserve on that paper.

Nancy, I don't want to mince words.

I'm very happy this is relatively small but it's a damn disaster.

Well you get points for candor Ken.

My other question would be this and this is sort of more philosophical and Ken it's probably directed at you.

We keep hearing that there's plenty of liquidity in the system but the banks are not lending and I think you -- Joe you made a statement that you pull back on $11 billion of home equity lines etc., etc.

You know, Ken how do you feel about your lending posture at this point?

Is there some patriotic duty to lend here?

When does this come to a halt?

I don't couch it under patriotic duty but I think some of the things we are doing on behalf of Countrywide will help the country and will help people stay in homes.

Nancy, I have said for some time despite all the things that we are doing, it's going to take some more time and some more pain because you have got the world de-levering.

It's not just the investment banks or some capital markets here.

The consumer is having to de-lever and throughout the world people are de-levering and it's going to take some time to readjust.

Yet we are making every good loan we can find and getting new relationships and actually doing very well in the marketplace but it's not going to be pretty for a while.

Ken, do you think what actually is happening is just the marginal credit is now being excluded?

You say you're making every good loan you can find and I hear the same thing from the rest of the banks, but then we have got XYZ auto dealer out there who can't make a loan, can't get funding for lending and etc., etc.

I mean is it just a whole re-evaluation of consumer credit quality and what that now means?

Yes, I think you're not -- I don't think anybody's making prime or Alt-A loans anymore, just to name one.

In every product, the standards have been raised and in most cases pricing is better or worse for the consumer.

So it is just very different than three months ago, six months ago and nine months ago and that's going to continue for some period of time.

We're going to take one more question.

Jason Goldberg, Barclays Capital.

Just to be clear, I know when you kind of announced the Merrill deal you kind of alluded to raising capital and possibly cutting the dividend.

The $10 billion you're raising today, should we expect that to be that and then done or look for additional capital once the Merrill deal is closed?

We have considered the Merrill deal in our [intentions] here so that the numbers we were talking about as I've mentioned in the prepared remarks covered our anticipated needs from a Merrill standpoint.

Jason, we have not -- we're not contemplating a dividend cut.

We're going to cut the dividend.

Right, okay and then you talked about loan losses peaking I guess towards the latter part of next year.

Can (inaudible) talk to you think provision kind of peaks before then or in conjunction with that and just I guess how your thought process rolls out?

About like that.

We think we we will have elevated levels of provision the entire year.

What we need to see is have some vision out 12 months where we see losses starting to come down.

And the big thing is to get these reserve bills out of the way.

We can easily absorb the loan losses.

It's these reserve bills that hurt so much.

Okay and then just lastly, I guess now that you are formally I guess guaranteeing the Countrywide debt, maybe just tell us I guess what was the hesitancy to do that I guess before today?

Well, as we move the operations around, we had to determine -- and all of this still has to occur.

We've just kind of told you our intentions on this.

We just -- the normal process we followed is what is the operational movements that we will make to combine the operations when we do that.

We've said the debt would fall in line and that is -- quite frankly that is kind of what we said the whole time as opposed to kind of the very precise things people have been chasing us on.

But that has been very consistent with deals we have done in the past from that standpoint.

Thanks for joining us.

This concludes today's conference call.

You may disconnect your lines at any time.

Thank you for joining us.

Enjoy the rest of your day.