美國銀行 (BAC) 2009 Q4 法說會逐字稿

Welcome to today's teleconference.

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

(Operator Instructions).

Please note today's call's being recorded.

It's now my pleasure to turn the program over to Kevin Stitt.

Please begin, sir.

Good morning.

Before Brian Moynihan 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 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.

And with that, let me turn it over to Brian.

Good morning, and thank you for joining us on this busy day on our earnings call.

Over the past several years I've met or spoken with many of you regarding the various businesses that I've run within Bank of America, and in my new role as CO I would tell you that I'm honored to serve this Company, its customers, associates and, importantly, its shareholders.

I firmly believe that we have built one of the best franchises in the industry, if not the best, with the ability to serve customers and clients of all types on a global basis.

My team and I plan on leveraging our leading market positions with capabilities that we believe match or exceed our competitors.

Our goal is to refocus our efforts here at Bank of America, refocus our efforts and attention on those core capabilities that will make Bank of America a winner in the years ahead, drawing on our long tradition of operational excellence and strong execution.

I know there's several banks and several companies reporting this morning, so I know that you're anxious to get directly to the numbers.

So for the firs -- fourth quarter of 2009 Bank of America had a net loss of $194 million before the $5 billion impact of preferred dividends and repayment of TARP, which results in a loss of about $0.60 per diluted share.

Included in the $5 billion was $4.6 billion related to TARP-preferred stock, including the $4 billion associated with repurchasing TARP-preferred, as the book value of our preferred was less than the amount paid.

For the full year 2009, before preferred dividends, net income was $6.3 billion, or a loss of $0.29 per diluted share after deducting preferred dividends and TARP repayment.

TARP dividends and the TARP repayment for all of 2009 represented $0.94 per diluted share.

The financial crisis has taken its toll on our Company in many ways during 2009.

With respect to our investment by the government, during 2009 we repaid the $45 billion of preferred stock; we paid dividends of $2.6 billion; we paid termination fees on a proposed asset wrap of $425 million; we paid about $3 billion in various insurance fees, including our normal FDIC expense; and we prepaid billions in FDIC premiums.

In addition, we issued the government warrants to buy 122 million and 150 million shares of our Company at $30.79 and $13.30 respectively.

In summary, these are heavy costs and representing just some of the challenge that our associates had to contend with in 2009 as they competed in the market, but with these behind us, we clearly look forward to 2010.

Moving to the revenue, total revenue for the fourth quarter of 2009 on an FTE basis was in excess of $25 billion, while pretax preprovision income was approximately $9 billion, even after the impact of some unusual items that Joe will detail a little bit later.

There were several positive trends in the quarter.

First, credit quality appears to be stabilizing, if not improving.

Net credit losses in dollar terms decreased $1.6 billion from the third quarter of 2009, supporting our comments in October that overall credit costs were peaking.

Second, the capital markets environment reflect a strong investment banking revenue, up substantially from our third quarter, which was already a strong quarter in the business, and we retained our second place position in that business.

Next, results in our global wealth and investment management team continue to prove strong asset management fees and brokerage income driven by increasing markets and increased client activity.

In addition, the number of our financial advisors have stabilized at 15,000.

Across our franchise new deposit generation maintained its positive momentum, with overall total corporate-wide average deposits of nearly $6 billion despite the substantial drop of $15 billion in wholesale funding.

In addition, we continue to meet and exceed many of the milestones around both Merrill and Countrywide's integrations.

Now unfortunately, any earnings impact of these positives are more than offset by continued high-level credit costs, lower customer activity due to the economic environment, and some other items that have been headwinds most of the year 2009.

Total credit extended in the fourth quarter was $177 billion, including commercial renewals, versus $184 billion during the third quarter, as growth in our commercial areas was more than offset by lower mortgage production.

The large components of this production for the fourth quarter were $87 billion in first mortgages, down from $96 billion in the third quarter, $66 billion in non-real estate commercial, $11 billion in commercial real estate.

The remaining $13 billion includes $9 billion in other consumer retail loans and $4 billion in small business loans.

Despite these new extensions loan balances overall declined, principally due to charge offs, lower consumer spending, lower commercial client activity and a resurgence in the capital markets allowing larger corporate clients to issue bonds and equity replacing loans as a source for funding.

We know that the companies -- our companies who are our clients continue to be very cautious and we're not yet seeing the typical business level activity for recovery.

As we move to provision expense, in the fourth quarter it decreased from the third quarter by $1.6 billion, driven by lower net charge offs.

Credit costs included a $1.7 billion addition to reserves versus $2.1 billion in the third quarter.

Roughly half of that reserve increase in the quarter was driven by a change in reserve coverage in consumer credit card to a full 12 months.

Let me make a few comments about the current economic environment.

For almost six months now we -- many major economic indicators have been improving at the national and global levels, which hopefully indicates we've reached the bottom of the cycle.

Our economic team here at Bank of America currently forecasts global growth in 2010 above 4%, led by emerging markets and growth in US GDP of about 3%.

Embedded in that aggregate outlook our view is in four economic indicators we believe highly correlate to future economic performance.

First, the labor market.

We believe we can anticipate positive job growth during the first half of 2010, but even with that the number of unemployed will remain very large for quite time and extend the drag on consumer spending and overall economic growth.

Second, in the housing market, although home prices in the largest 20 markets have posted to back-to-back monthly price increases for the past few months, the potential new round of foreclosures supply represents some downside risk to that stability.

Third, on household net worth, the recovery in the equity market and stabilization in home prices have led to recovery in total household wealth over the past several months, but consumer balance sheets, especially those of less-affluent customers, remain under stress.

Fourth, the manufacturing, there's ongoing recovery in US manufacturing that's benefiting from a firming global economy, as you can see in the recent ISM survey results.

So all this tells you while things are improving slowly, the US economy remains fragile.

For our Company, the recoveries and strong performance in our market-sensitive businesses offer diversification to offset the core credit headwinds we continue to face in our core commercial and consumer lending businesses.

Although we believe we saw the peak in the third quarter, net loss levels remain elevated for the next several quarters.

Additions to the reserve have come down and although there may be some additions in some business lines in the first half of 2010, overall we believe at the corporate level significant additions of reserve are hopefully over.

While we still have several quarters before we can discuss the actual normalized earnings we believe the economy is stabilizing, markets are opening, and customer sentiment is improving.

Now at this point, let me turn it over to Joe for additional color and commentary on the numbers.

Joe?

Thanks, Brian.

Over the next few minutes I'll plan to cover the performance of each of our businesses; credit quality, the margin and some other topics including comments about 2010.

But before getting into the business results let me highlight the large results that impacted earnings in the fourth quarter, and you can see this on Slide six.

As most of you are aware, structured notes issued by Merrill Lynch are mark-to-market under the fair value option.

This resulted in a hit to earnings of $1.6 billion, $4.9 billion for the whole year, on a pretax basis, primarily due to the narrowing of Merrill Lynch credit spreads.

If you remember, the mark was a negative $1.8 billion in the third quarter.

ow, as a reminder, the impact of mark in our structured notes does not impact Tier 1 capital.

Looking forward, while most of the negative marks should be behind us, the Merrill Lynch spreads are still outside Bank of America's, but not by much.

Additionally, our spreads are clearly outside predisruption levels.

On the credit valuation side, the adjustments on derivative liabilities -- and this is principally in our trading businesses -- resulted in a negative impact of $186 million versus the negative impact of $713 million in the third quarter.

Our global markets revenue absorbed additional write-downs this quarter of $1.1 billion due to legacy positions versus a net positive of $218 million in the third quarter.

Included here, on the commercial real estate side we took a charge of approximately $850 million.

The remaining $250 million of marks were spread over leverage financed, structured credit trading, CDO exposure and auction-rate securities.

Equity investment income included the pretax benefit of $1.1 billion, which was a write-up related to our BlackRock ownership driven by their equity issuance in connection with the BGI acquisition.

In noninterest expense we recorded over $500 million for litigation-related matters.

In the fourth quarter tax rate, or the tax benefit of a loss, was higher than statutory due to tax benefits on certain foreign subsidiary restructurings in connection with our merger activities, as well as benefits from tax audit settlements.

For 2010 we'd expect the effective rate to trend closer to statutory, less $1 billion to $2 billion in what I'd call recurring benefit, absent any unusual items or changes in tax rules.

Now let me quickly touch upon some of the highlights in each of the businesses this quarter.

In our Deposit segment -- and this is on Slide eight -- earnings were $595 million in the quarter, down approximately $200 million from the third quarter.

Net interest income of $1.8 billion was relatively flat with the third quarter, while noninterest income of $1.7 billion decreased $257 million, due mainly to the actions we highlighted in October around overdraft fee policy changes.

We estimate the impact was about $160 million, in line with what we conveyed to you in October, with the rest of the decline coming from normal seasonality and to some extent customers better managing their cash flow.

Non-interest expense of $2.4 billion was flat to the third quarter.

Now on Slide nine you can see average retail deposit levels for the quarter, excluding Countrywide ,were up almost $12 billion, or almost 2% from the third quarter, which we believe is quite strong.

We continue to see a products mix shift from CDs to higher-margin liquid products, with checking products now representing 43% of the retail deposit balances.

Merrill Lynch continues to show momentum, as financial advisors provide the customers with benefits and an expanded product suite through cross selling.

And global card services -- and this is on Slide 10 -- we had a loss of $1 billion, in line with third quarter results.

Revenue was down 2% from third quarter due to lower net interest income and fees.

And although provision was almost flat, or down $51 million, managed net losses were down approximately $920 million.

Provision was impacted by an increase in the consumer credit card reserve coverage to 12 months -- and that was about $800 million -- and reserve additions for maturing securitizations, and that totaled about $550 million.

These increases were partially offset by reductions in reserves for improvement in the domestic portfolios, and I'll come back and give you a little more on credit in a few minutes.

Average managed consumer credit card outstandings were down 3.5% from the third quarter to $163 billion.

Now on an encouraging note, and this is on a per average account basis, retail spending on credit card was up 8%, and debit was up 5% for the holiday season versus last year.

We also continued to add new accounts, 586,000 new domestic retail and small business credit card accounts in the quarter, with credit lines totaling approximately $4 billion.

Now Home Loans and Insurance -- and you can see this on Slide 11 -- experienced production levels slightly below third quarter activity, but included better MSR hedging results.

As a result, total revenue for the quarter was $3.8 billion, up $382 million from third quarter levels.

Production income decreased $55 million, as higher margins were offset by lower production volume in secondary market gains.

Now this is also the line item where we record reps and warranties expense, which was up a little this quarter, as well.

Servicing income increased $447 million, primarily due to better MSR performance net of hedge results.

Now the capitalization rate for the consumer mortgage MSR asset -- and that's versus a combined consumer and commercial you might see reported in the industry -- ended the quarter at 113-basis points versus 102-basis points in the third quarter, as interest rates were higher at the end of the quarter, lowering prepayment risk.

The provision decreased $647 million to $2.2 billion, while net charge-offs decreased $462 million to $1.5 billion.

Additions to the reserve of $748 million for the quarter were down $185 million, with most of the reserve addition associated with our home equity purchased impaired portfolio.

Fourth quarter first mortgage fundings for the corporation were $87 billion, down 9% from the third quarter, or $96 billion, which was reflective of the rate environment.

Approximately 42% of these fundings were for home purchases versus approximately 39% in the third quarter.

Now we continued to maintain strong market share during quarter, which we estimate to be in the 23% to 24% range.

Given the industry outlook for refinance and purchase transactions indicated by the Mortgage Bankers Association for 2010 volume of $1.3 trillion, about 40% less than last year, we'd expect lower production levels over the next few quarters.

Turning to Global Wealth Investment Management -- you can see this on Slide 13 -- they earned $1.3 billion in the fourth quarter, an increase of $1.1 billion from third quarter levels, due mainly to the BlackRock gain and lower provision.

Asset management fees and brokerage income were up $75 million due to market valuations, but more importantly, increased sales and transactional activity offset by various other items.

In addition, there were no charges for supporting the cash funds versus the approximately $135 million of support in the third quarter.

As a reminder, Columbia's money market funds no longer have exposure to structured investment vehicles.

Now provision was down approximately $460 million, due to an improved credit outlook for the consumer real estate side and the absence of a large fraud loss in the third quarter.

Assets under management ended the quarter at $750 billion, up $10 billion from the end of September, and the improvement in the market and positive flows generated by advisors were partially offset by continued outflows in the Columbia cash complex.

We ended the quarter with over 15,000 financial advisors, up slightly from the end of September, and with improved retention trends throughout the quarter.

Also, as you already know, we finalized details on the sale of a long-term asset management business of Columbia to Ameriprise and that's expected to close in the second quarter of this year.

Using the low end of the range we disclosed we believe this will have minimal P&L impact, but we expect to monetize nearly $800 million of good will intangibles, thereby improving capital slightly.

Now Global Banking -- and you can see this on Slide 14, and remember that this encompasses our commercial bank, corporate bank and the investment bank -- had an increase in earnings of $224 million versus the third quarter, due mainly to improved investment banking income and lower credit costs.

And although commercial and corporate clients are being cautious given the economy and loan demand down is down, we continue to see improving liquidity un the cap -- in the credit markets, with credit spreads and market prices more reflective of the underlying risk.

Provision expense decreased 12% to $2.1 billion, while net charge-offs decreased 18% to $1.4 billion.

And we did continue to add to reserves during the current quarter, $627 million, mainly associated with commercial real estate, slightly higher than the addition in the third quarter.

Average loans as reported for the quarter were down 4% from the third quarter, as clients continued to aggressively manage working capital and operating capacity levels.

In doing so, the clients continued to take advantage of the robust bond markets to manage bank debt levels and build cash in anticipation of a stronger economy.

As a result, we saw average deposit levels increase $15 billion, or almost 7% from the third quarter.

Investment Banking fees across markets and banking were up $746 million -- and this is detailed on Slide 15 -- to $2.1 billion before the elimination of self-led deals.

The combined Bank of America-Merrill Lynch franchise ranked number two in global and US investment banking fees in 2009.

Now Global Markets -- and you can see this on Slide 16 -- earned $1.2 billion in the fourth quarter, down almost $1 billion from the third quarter.

Lower sales and trading results, combined with higher write-downs on legacy assets, drove the decrease.

As you can see on Slide 17, Sales and Trading revenue in the fourth quarter was $2.2 billion versus $5.3 billion in the third quarter.

Now absent the legacy asset charges, on a business-as-usual basis we saw $3.3 billion, reflecting the normal seasonal slowdown.

Both fixed income and equity income declined, although rates in currencies and commodities within fixed income held up well.

Lower market volatility, a reduction in risk appetite of customers, especially in the last couple of weeks of the quarter, and the normal seasonal slowdown contributed to the decline in revenue.

However, we've seen a typical strong start to January on the back of the seasonally-slow December.

Noninterest expense was down 11% from the prior quarter due to lower incentive comp, and we detail on Slide 18 a number of the most pertinent legacy exposures in the capital markets business, and further detail is provided for you in the supplement.

As I noted earlier, the charges we took this quarter were centered in the in the commercial real estate area and from the legacy of predisruption asset standpoint we remain the most focused on commercial real estate and [monitor] line credit default swaps, as you might imagine.

Now, not included in the six business segments is Equity Investment income of approximately $800 million in the fourth quarter, due mainly to improved market valuations.

In addition, on a consolidated basis we had security gains of approximately $1 billion, partially offset by impairment charges on non-agency RMBS of approximately $200 million.

Now let me switch to credit quality and that starts on Slide 20.

We told you last quarter that we thought we were close to the peak in total net losses and it appears that that's the case.

It feels to us like we're moving from stability to an actual improvement, but obviously, given the weak economy, we remain cautious.

In the fourth quarter we saw improvement in almost all categories, including delinquencies, excluding our Jenny May repurchases, which I'll discuss in a minute, losses and criticized levels.

Consumer credit losses continued to show the flow through an improved early stage delinquencies earlier in the year, in the unsecured lending portfolios and some stabilization in consumer real estate.

Commercial portfolios reported lower charge-offs as a result of slower deterioration and slightly improved asset valuations, although commercial real estate will continue to lag the consumer recovery.

The rate of downward risk migration in the criticized loans is clearly slowing.

Fourth quarter provision of $10.1 billion exceeded net charge-offs, reflecting the addition of $1.7 billion to the reserve, which was lower than the addition of $2.1 billion in the third quarter.

Consumer reserve additions were $1.3 billion, and approximately $800 million related to increasing our reserve coverage on consumer credit card to 12 months.

About $550 million was added for card securitization that matured and came on the balance sheet during the quarter.

We also added approximately $540 million associated with the Countrywide purchased impaired portfolio.

And in consumer real estate loans we increased reserves by $270 million.

These increases were offset by reductions in other products, where delinquencies continue to improve.

Now on the commercial side we added $560 million for commercial real estate, primarily for non-home builder, and reduced reserves in small business by $280 million, as credit quality continued to improve, partially due to stricter lending criteria that we implemented earlier in the year.

Our allowance for loan and lease losses now stands at $37.2 billion, or 4.16% of our loans and lease portfolio.

Our reserve for unfunded commitments is $1.5 billion, bringing total reserves to $38.7 billion.

Now, I'll give you more details in a minute, but based on an estimated position of $11 billion in reserves related to the adoption of FAS 166 and 167, effective January 1 of this year, our credit reserve on a pro forma basis would be just under $50 billion, improvement in our reserve coverage of 416 -- 4.16% by 60 to 65-basis points.

Now, on the held basis, net charge-offs across almost all of our businesses in the quarter decreased $1.2 billion, or 42-basis points from third quarter levels to 3.71% of the portfolio, or $8.4 billion.

On a managed basis, overall net losses in the quarter decreased $1.6 billion to $11.3 billion, and of the $1.6 billion decrease the consumer decrease was 77%, or about $1.25 billion.

Even though loss rates were down this quarter, loss rates are somewhat distorted by reductions in balances, so that's why I continue to talk in dollar terms.

Credit Card represents 54% of total managed consumer losses, and as you can see on Slide 22, managed consumer credit card net losses were $4.9 billion compared to $5.5 billion in the third quarter.

Losses decreased due to a drop in early stage delinquencies in the second quarter of '09.

If you couple that with 180-day charge-off policy, you can see what drove the reduction.

30-plus delinquencies in consumer credit card decreased $541 million, the third consecutive quarterly drop leading to the reserve actions that I mentioned earlier.

Now obviously one quarter doesn't make a trend, but we feel much better about the loss levels this quarter and that they signal stabilization, if not an improvement trend.

Now, a delay of recovery in the US economy beyond our expectations or unforeseen events can obviously keep pressure on [performance].

Credit quality in our consumer real estate business appears to have stabilized, given that home equity charge-offs were down, even excluding one-time items in the third quarter.

Now before I get into the individual consumer real estate products, let me remind you of a couple of important drivers, as I have the last couple of quarters.

Total consumer NPA's, which are highlighted on Slide 23, increased $1.3 billion in the fourth quarter compared to an increase of $1.9 billion in the third quarter, and now total $22.3 billion.

This is primarily comprised of consumer real estate with the lion's share being first mortgages.

Now there are a number of things affecting this portfolio, but as a reminder, we generally place consumer real estate on nonperforming at 90-days past due and take charge-offs at 180 days, at which time we write the loans down to appraised value.

We perform quarterly valuation refreshes, taking additional write-downs as needed.

We also have troubled debt restructures, or TDRs, which we explained last quarter, that are reflected as NPAs, even though most were not 90-days past due when the restructuring or modification was made.

Now while our efforts are to responsibly keep all owners in their homes and paid as we think that reduces the overall cost, the impact is that the NPA number is elevated.

However, once a loan has been evaluated under all of our various programs, if no other alternatives exist, the loan will be released into foreclosure or charged down.

Now, our residential mortgage portfolio -- and I'm on Slide 24 now -- showed net losses of $2.4 billion, or 207-basis points, in line with the third quarter.

30-plus delinquencies increased approximately $72 million before the impact from repurchasing delinquent government insured loans from securitizations, and that would be less than we would have seasonally expected.

Repurchasing delinquent government insured loans from securitizations added $9.4 billion to the 90-plus days delinquency levels, although they're still insured.

We repurchased those leans for economic reasons since we can finance them at a cheaper rate on the balance sheet and our risk exposure is the same, whether with a service or a holder of these assets, since they're insured.

Now, on the non-performing asset front we saw an increase of $1.2 billion, less than the $2 billion in the third quarter, reflecting the third quarter in a row of declining new non-performing loans and higher cures.

Of the $17.7 billion of residential mortgage NPAs TDRs make up 17%.

About 60%, or $10.7 billion of the NPAs, are greater than 180-days past due and have been written down to appraised values, which is considered when we evaluate our reserve adequacy.

I should also note that we saw continued stabilization in severity and improvement in the average size of charge-offs this quarter.

Our reserve levels were slightly increased on this portfolio during the quarter, representing 1.9% of period-end balances versus 1.87% in September.

Now when we think of dollar loss level was most likely peaked, given the weakness in the economy and the continued pressure on home prices, we could see further deterioration in this portfolio.

Now, switching specifically to home equity -- and I'm back on Slide 25 -- net charge-offs decreased $410 million to $1.6 billion in the fourth quarter.

This is the second quarter in a row with decreases after adjusting last quarter for the accelerated charge-offs related to an adjustment to our loss severities due to the protracted nature of collections under some insurance contracts.

The drop was a bit greater than we expected, driven by improvement in later-stage delinquency performance, so we're a little skeptical that we can hold at this dollar level, as prior to December we'd have told you we didn't expect losses to be well into 2010.

We'll have to see how this one plays out, but don't be surprised to see it bounce around a little before we see sustained quarter-over-quarter improvement.

Now 30-plus delinquencies were flat, again better than seasonal expectations.

Non-performing assets in home equity, principally loans greater than 90-days past due, were essentially flat at $3.9 billion.

44% of our NPAs were TDRs where we believe we've improved the likelihood of repayment.

And just over 80% of the non-performing home equity loan modifications in the fourth quarter of '09 were performing at the time of reclassification into TDRs.

Now, in addition to about 20%, or approximately $790 million of the NPAs, were greater than 180-days past due and had written down on appraised values.

We increased reserves for this portfolio to $10.2 billion, or 6.81% of ending balances, and that's 5.29%, excluding the purchased impaired loans, due to further deterioration in the purchased impaired portfolio.

Now Slide 26 will provide you deals on our direct and indirect loans, which includes the auto and other dealer-related portfolios, as well as consumer lending and that charge-offs in direct and indirect decreased 11% to $1.3 billion, or 5.2% of the portfolio.

We saw the expected decrease of about $184 million in consumer lending charge-offs and expect hat trend to continue due to the improvements in delinquent amounts.

Slide 27 shows the deals of purchased impaired Countywide portfolio, where charge-offs were lower this quarter.

Las quarter we added $1.3 billion due to continuing deterioration.

The addition this quarter of $540 million relates to further deterioration, as well as reassessment of modification benefits as we gain more experience with customers going through the modification process.

Now as we did last quarter we provided more details on the slide for you, so I won't go through that any more.

Now, looking forward I'd say this portfolio's valuation -- and remember, the purchased impaired portfolio is a life-of-loan reserved portfolio -- is most sensitive to HBI and our success under the modification programs.

We would also expect the lion's share of charge-offs to come through in the next few quarters.

Now switching to our commercial portfolios -- and you can see this on Slide 30 -- net charge-offs decreased in the quarter to $2.3 billion, or 278-basis points, down in dollar terms about 14% from the third quarter, or 7% excluding approximately $190 million in fraud-related losses in the third quarter.

Net losses in our $18 billion small business portfolio, which are reported as commercial loan losses, decreased $112 million to $684 million compared to increases in the past quarter.

Small business losses look to have peaked as indicated by several linked-quarter declines of 30-plus delinquencies, as well as 90-plus delinquencies, which are down 11%.

Excluding small business, commercial net charge-offs decreased $249 million from the third quarter.

$1.6 billion represented a charge-off ratio of 205-basis points.

The losses in the quarter were split 53% non-real estate and 47% real estate.

Within commercial real estate, net charge-offs decreased $128 million to $745 million representing a charge-off ratio of 4.15%.

Home builder losses constituted 37% of commercial real estate losses and were down 26% from the third quarter.

Non-home builder losses were down 6%, reflecting decreases in multifamily rentals and commercial land, offset somewhat by increases in retail and office.

Now we wouldn't expect losses to peak in this portfolio until well into the year, if not near the end of this year.

The losses will be a little lumpy and bounce around, so we don't read much into the decline this quarter, especially given the non-home builder deterioration.

Now commercial NPAs -- and this is detailed on Slide 31 -- rose $607 million, down 39% from last quarter, to $13.5 billion.

84% of the increase was due to commercial real estate, driven by non-home builder exposures, mainly retail, commercial, land, multifamily rentals and multiuse.

Home builders dropped again this quarter by 7%.

Now, let me give you a little color behind the makeup of our commercial NPAs.

Commercial real estate makes up about 60% of the balance, or about $8.1 billion, with about $3.2 billion, or 40% being home builders.

Outside of commercial real estate NPA balances are concentrated in housing-related and consumer-dependent portfolios within commercial domestic.

The most significant of these industries are commercial services and supplies -- and here think realtors, employment agencies, office supplies, et cetera -- at 5% of the total commercial NPAs, followed by individuals and trusts at 4% and media at 3%.

No other industry comprised greater than 2%.

Approximately 90% of the commercial NPAs are collateralized and approximately 35% are contractually current.

Total commercial NPAs are carried at about 75% of original value before considering loan loss reserves.

Now on a pretty encouraging note, reservable criticized utilized exposure in our commercial book actually decreased $1.4 billion in the fourth quarter compared to an increase of $2.9 billion in the third quarter, and is the first decrease since 2006.

This decrease reflected declines in commercial non-real estate, both domestic and foreign, offset somewhat by an increase in real estate.

This increase in commercial real estate to $23.8 billion was driven mainly by increases in office, multifamily rentals, and hotels and motels.

Now, as I mentioned earlier, we added the commercial reserves in the fourth quarter, of which almost all was related to commercial real estate.

Total commercial reserve coverage at the end of December increased to 2.96% of loans, with real estate coverage being 5.14%.

Now let's move off credit quality and talk about net interest income, and here I'm on Slide 34.

Compared to third quarter, on a managed and FTE basis net interest income was up $50 million.

Managed core NII increased a little better than expected by approximately $140 million, while market-based NII decreased about $90 million.

The core NII increase was driven by several factors, including less of a credit drag, principally due to the improvements we saw in credit card performance, improved hedge results, increased deposit balances, and the lack of a few one-time negative items in the third quarter.

Now offsets were lower loan levels and some initial impacts of not repricing for risk in the card book.

The core net interest margin on a managed basis increased seven-basis points to 3.74%.

Now looking forward, remember, we took down the discretionary portfolio during 2009 and also experienced paydowns.

Loan demand has been weak and we would expect it to stay that way until business and consumer confidence improve, and as I just mentioned, we've lost some ability to reprice for risk in the card book.

These factors will suggest we'll see a decline in core managed net interest income this year from 2009 based on the current forward curve.

Now also remember, you always get a negative first quarter impact due to fewer days in the quarter.

Now on the positive side, once we see the economy strengthen and rates begin to increase beyond what's in the forwards, we should see less credit drag, [stronger asset] growth, and deposit cost benefits.

To that point, our interest rate risk position continues to be asset sensitive, as you see from the bubble charts on Slide 35, where we benefit as rates rise and are exposed as rates decline.

That position is relatively unchanged from how we were positioned at the end of September.

Keep in mind, these impacts are based off changes to the forward curve and are relative to our base forecast.

While we remain cautious about the economy, we continue to believe an asset-sensitive position makes sense, especially given the low absolute level rates.

Now, let me say a few things about capital, and you see this on Slide 38.

The Tier 1 capital ratio at the end of December was 10.4%, down 206-basis points from the third quarter, due mainly to our repayment of TARP.

However, the equity raise associated with the TARP increased Tier 1 common 138-basis points to 7.81% while our tangible common equity ratios increased to 5.57%.

Now as a reminder, the appreciation above our current carrying value for BlackRock or the China Construction Bank is included -- nor cap -- China Construction Bank is included in net capital.

Preferred dividends this quarter were $5 billion, of which $4.66 billion was associated with TARP, including the negative impact of repayment, or 54% per share per quarter given no tax benefit.

Excluding TARP, preferred dividends during the quarter were $340 million, which is approximately the level we should experience going forward, and liquidity remains strong.

Now, since we raised significant amounts of equity and were quite active in the debt markets during the second and third quarters we didn't do any benchmark deals during the fourth quarter.

And as of December 31, our time to required funding metric, the amount of time that the parent company can meet its debt obligations without new issuance, was 25 months.

On secured long-term parent company debt maturities in 2010, including those from debt at the legacy, Merrill Lynch & Company holding company, will be approximately $46 billion spread over the course of the year and we'll continue to be opportunistic in assessing the debt markets in 2010, but probably will not match maturities, given our funding base and the asset levels.

Now, impacting both capital reserves effective January 1, 2010 will be the adoption of FAS 166 and 167, as I referenced earlier, and I'm on Slide 40 now.

As most of you know, this involves the consolidation of certain assets that are currently carried off the balance sheet.

In short, an adjustment will be made to the first quarter of the balance sheet that increases assets and the allowance for loan losses and decreases capital for the allowance increase.

Other than geography, there's no impact to P&L.

Currently, our best approximation is the net incremental increase in assets of approximately $100 billion.

The largest component of this amount is a net interest of $67 billion due to consolidation of the credit card trust, comprised of a $90 billion increase in credit card receivables, less securitization assets already on our balance sheet, and an increase in the allowance for loan losses.

Other components to the increase include $5 billion of home equity receivables and approximately $28 billion from consolidation of other special purpose entities, including our multi-seller conduits.

Risk-weighted assets are currently expected to increase only $14 billion, as many of the credit card assets were already included in our calculation.

Also, remember we have a deferred tax asset limitation for Tier 1, so the full reserve charge pretty much hits capital.

The additional allowance for loan losses is expected to be approximately $10.7 billion; $10 billion for credit card and $700 million for home equity, while the impact of regulatory capital is expected to be a reduction of approximately $10 billion, including the deferred tax limitation.

Tier 1 and Tier 1 common impact is expected to be a reduction of approximately 70 to 75-basis points, while the impact of tangible common is expected to be a reduction of approximately 50-basis points.

These estimates are on a fully phased-in basis.

The bank regulators made optional a phase-in approach, but the benefits aren't very big.

Now, this is a little heavier than we previously indicated due to the change in our credit reserving policy for credit cards that I mentioned earlier and a change in the capital rules affecting our conduits.

Now, if the credit card loans come back on balance sheet we're reserve it at 12 months, which increased the impact of adoption on Tier 1 by, say, about 15-basis points.

We can also now drop the held-versus-managed discussion and you can see back on Slide 7.

The impact of being card securitizations on the balance sheet in 2009 would have added $9.3 billion to net interest income, $2.1 billion to noninterest income, and increased provision or charge-offs by about $11.4 billion.

Again, the impact nets to zero, but the geography changes.

And as a reminder, we'll issue $1.7 billion in common stock to associates as part of year-end compensation and $3 billion through the sale of assets, which will increase capital.

Looking ahead to 2010 and in line with my earlier comments and Brian's remarks, we believe we are passed the peak in total credit costs, which is great news for us.

I believe 2010 will be a tale of two periods; the first being gradual improvement in the economy and the second being a more significant improvement in consumer and commercial activity.

During the first period we believe we'll see slow, but continued improvements in overall credit quality, about provisions and charge-offs dropping after adjusting for the impact of FAS 166 and 167, but this is obviously dependent on continued improvement of the economy.

Now even though the economy appears to have stabilized, the ultimate level of credit losses and reserve actions will be dependent on whether the stabilization is sustained, as well as the duration of the credit cycle.

But as Brian mentioned, assuming future economic performance is consistent with our outlook, we do believe significant reserve additions are over.

However, certain segments in the commercial area are still deteriorating and probably won't stabilize of the turn until late in the year at best.

Now there'll probably be continued reserve additions for at least six months in commercial real estate and some lingering reserve additions in residential real estate.

Revenue levels, at best, will be volatile, as the headwinds of a shrinking loan portfolio, the Card Act, Reg E and higher mortgage rates.

More specifically, the Card Act will manifest itself throughout the year in net interest income, as the Act impacts our ability to risk-based repriced credit cards and in card income due to restrictions imposed on certain fees.

Overall, after mitigation strategies, we still believe the impact will be some $800 million after tax related to consumer credit card in the US.

We felt a little of this in the fourth quarter, but it'll ramp up in 2010.

Likewise, we believe Reg E will impact service charges starting in the middle of the third quarter of 2010 for changes beyond those we instituted in 2009.

We're still sizing the impact of net -- impact net of mitigation and how we think customers will behave and consequently we'll provide more guidance in the future.

Offsetting these headwinds should be lower provision, expense control, and potential growth in other businesses, like investment broker services, investment banking, trading, and commercial banking, but again, this is heavily dependent on market recovery.

Whatever the scenario, we believe we're positioned quite well to take advantage of whatever the global economy offers.

Now much of our performance will correlate with the domestic economy, but will also be influenced by the global economy.

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

(Operator Instructions).

Let's go first to the site of Glenn Schorr with UBS.

Your line is open.

Hi, thanks very much.

So the positives have been pretty good, all things considered, can you give us a little clue on what you're doing on the asset side as there's, obviously, limited loan demand and your capital and liquidity ratios are pretty good?

Well, Glenn, obviously the asset side's correlated to the economy, and so you're correct.

We're seeing a downdraft clearly because just of charge-offs, one matter, but loan demand is still weak.

We are beginning to see, quite frankly, in some of the commercial regions a little pickup in the pipelines, but I would call it little and early, but you're beginning to see a little bit of that.

The consumer businesses continue to have decreases and probably will again until you see a little more consumer confidence come around.

Kind of leaves us with the discretionary portfolio and we did add to the discretionary portfolio through securities this quarter some, but we've got to remain reasonably cautious about where the curve is at this time, and so you did see some of that come in, but we'll be very measured as we do that going forward.

So I think, Glenn, the simple way to think about it is in a -- as the economy continues to improve you'll see better fundamental loan demand and the issue before that is whether you're going to reflect the economy.

Got you.

So I don't want to put words in your mouth, but is it fair to say really short, really high quality for now on the securities portfolio?

Well, we'll add some and we did this quarter.

We added some with loan duration, mortgage-based stuff, but we also added some shorter duration.

But if you think about the prepayments occurred in the mortgage book and the other -- in the other longer-duration assets that are going off, so we have some ability to replace some of that without giving us too much OCI risk, if you want to think of it that way, the high quality -- but high quality, yes.

And I apologize if you disclosed it and I just missed it, but do you give the duration of the securities portfolio -- average duration?

I think by the time the Q comes you'll see the details.

Got it, okay.

Maybe this is somewhat related.

Bank of America has a decent amount of debt coming due over the course of the next 12 to 18 months, but you also have capital and liquidity and the balance sheet's come in a little bit.

Can you just talk about your expectations on the funding side?

Overall debt issuance?

Yes, overall debt issuance, yes.

As I mentioned before, given the liquidity base and given the asset side of the balance sheet, don't expect us to replace maturities completely.

Now, we need to stay active and we will stay active and there are some attractiveness to the rate environment, et cetera, from that standpoint, so -- but the way you should look at it is -- and if you go back in my remarks you'll see we gave the actual numbers of what's coming due -- we'll continue to let some of that drift down as opposed to full replacement.

Good.

And then I don't know if there's much you can say.

In the prepared remarks you told us that the reps and warranty charge was a little bit higher, but there seems to be a mounting concern that those numbers start to add up.

Is there any help that you can give us in terms of sizing the amount of claims against you from the various counter parties?

Yes.

Obviously I don't want to go into the details on specific clients or customers or insurers from that standpoint, but think of it as -- and we've kind of gone through this, not recently, with some of the earlier days of -- right after the acquisition of Countrywide.

There's several buckets.

There are claims that come back from the GSD, there are claims that come back from purchasers of loans, think of that as private transaction.

And then there's mono line wrap things.

We continue to work each of those based on the claims that are presented.

I wouldn't -- I'd be disingenuous if I didn't say people were throwing everything over the wall they can because they are in a view of trying to get something back.

But look, this is a loan by loan, detailed review of the facts and circumstances, whether it's curable, whether the loan's been performing for an extended period, all practices and those things, and we reserve for it on a FAS 5 basis, think of it as quarterly.

We book in the hundreds of millions of dollar kind of number, which is.

I think I mentioned before, netted against the production income and we'll continue to do that.

But, look, this is not a quick process.

This is a multi-year extended process looking at individual credits.

And as -- and I appreciate that answer.

As you go through it and as you start to have some experience on where replacements are needed versus cases you win, does that give you a good enough window into the future to be boosting reserves other than what the current billing is?

In other words, you don't disclose to us what the size of the past originations and sales had -- in question are, or the reserves are, but people basically want to get a feel from you of whether or not you feel you're well enough reserves or if this is going to be persisting and mounting issue of the coming eight quarters?

Look, I think the way to think about it is Countrywide had a reserve, we adjusted that purchase accounting, we've been adding to it quarterly -- or dealing with it quarterly with the expenses each quarter since then and we'll continue to manage it that way.

Yes, we do get more experience every quarter as we go through the individual loans.

Remember, though, that we've had some pretty tough consumer real estate portfolios that have been wrapped by insurers.

We exited a business back in '01 that we went through some of the same kind of exercises with, so the same team that has done those workouts, which I might add continue today from back then, and that's what I was talking about, the protracted nature of how this process works -- or the ones on it -- and so we do have quite a bit of experience in how to estimate on a FAS 5 basis and I'd only characterize the reserves that we are carrying as in the billions.

So we feel pretty good about where we stand.

But, look, we'll continue to get claims and we'll continue to work through it and this doesn't go away over night.

Okay.

Thank you very much.

We'll go next to the site of Matt O'Connor with Deutsche Bank.

Your line is open.

Hi, guys.

Hey, Matt.

Matt, how are you?

I guess first on the credit side, Joe, you provide a lot of comments regarding specific loan buckets.

It seems like some are trending up still a number [are inflicting here].

So as we think about total charge-off on a managed basis heading into 1Q, do we get a little tickup overall and then it starts to trend down from there, or how should we think about the [mass] charge-offs quarter to quarter?

Matt, I'll almost tell you you got to go back and think product by product, because as I mentioned before, commercial real estate, especially non-home builder, will be somewhat lumpy and episodic.

Other components of the commercial side, especially small business, feels like it's on a downward trajectory.

Core domestic, as you saw the reservable criticized drop, is an indicator that thinks steel more stable in that side, but obviously they're economic dependent.

On the consumer side, again, I'd tell you to go back and look by product.

Card, we saw pretty good change.

We've seen probably a little more drop in delinquencies, but not quite at the same pace of the drop earlier, so that ought to factor into your thinking.

And then on real estate, we feel pretty good about the levels that we're experiencing, but as I said in the comments, home equity is probably doing a little better than we might have expected, so it wouldn't surprise us to see that bounce around.

And then the foreclosure market, or the houses coming on the marketplace potentially have an effect, although we feel we've got that as considered as we could, given the knowledge we've got.

I think we've said that they'd remain elevated.

I think you have to be careful about the speed of which the government works through the portfolios in terms of quarter-to-quarter linkage, but the overall balances and the most troubled portfolios have come down and the overall progress the team's made in collections effort is better, so you've just got to keep that in balance because the underlying economy is still not healed and unemployment's still high.

Okay, thanks.

And then, Brian, a bigger picture question for you.

We've seen you make a couple changes to the senior management team so as we think about the core businesses, any meaningful changes or deeper dives that you're taking now in terms of the products, the way that you deliver to customers or even the customers that you're targeting?

The business model's sound.

In other words, the core customer base on the consumer side, whether mass market consumers and high net-worth (inaudible) consumers and then the small business, medium business, large businesses, and then the investor communities.

That business model's sound, intermediating for our corporate clients to the investors, so don't look for us to make any changes.

We've got a couple dispositions we have to make, but in terms of the core business model, it's sound, it operates, the market shares are there and it's just taking this massive customer base and taking the product capabilities and putting them together on better and better ways and driving them, whether it's a company or whether it's individual.

So don't look for any management changes.

Okay.

I guess as a follow up, in terms of the size of the balance sheet, given that you're adding some securities here, it seems like you're comfortable with the overall size, plus or minus?

Yes, it'll bounce around.

We're talking about rel -- across our large balance sheet we're talking about relatively minor adjustments and then-- so it'll bounce around.

There's no need to grow -- we have enough room to grow the core loans when they start to grow them within the size -- for a while just based on where we are, but don't expect it to bounce around -- to move dramatically either way.

Okay.

Thank you very much.

We'll take our next question from the site of Ed Najarian from ISI Group.

Your line is open.

Hi, Ed.

Quick question on capital ratios.

Given the changes you've outlined with regard to 166 and 167 and then obviously indicated continuing to build capital ratios with the common stock issuance and the $3 billion asset sale, but that still seems like it's going to bring us a little bit short of the 8.5% Tier 1 common ratio that you talked about when you did your equity offering.

Have you had any follow-up discussions with the regulators as to where capital ratios need to get into '10 in light of your new outlook on 166 and 167?

And should we think of the capital actions that you've outlined for 2010 as all that's required, or could there be more that's required?

Look, we don't talk specifically about conversations with regulators, we can't, so think of it more as the way as the way we look at the Company and we manage.

We're pretty much in line with our expectations of capital.

Now clearly, when we made the decision here in closing the books to change the reserve level coverage for card, that had an impact on the -- on this -- compared to the pro forma that we would have showed you it was based purely on 9-30.

The outlook on capital, you've got a lot of things coming at you.

You've got the market risk rules.

You've got the Basel II pieces.

You've got the -- I call it the December 17th proposals.

A lot to work through over time.

In the near term we think all of those are manageable and considered and the way we look at capital and how we came up with what we felt comfortable with in the raise from that standpoint, obviously supplemented by these few things still to get executed.

So no -- at this point, no major contemplation of any other actions other than those, unless something falls out, as Brian said, as we look at the aggregate company for things from that standpoint.

So until we see some kind of additional clarity from regulators on capital ratios you wouldn't expect any additional actions other than the things you've already outlined?

At this point, no, not at this point.

Okay, and then just a real quick follow-up, sort of housekeeping, mapping question.

When we look at the Merrill Lynch structured note loss, I'm assuming that's in your income statement in other income and the marks on legacy assets is a net against trading account profits, is that correct?

Yes to the first part.

The second part, it kind of depends.

Some of that'll be in other also.

Okay.

Thank you very much.

We'll go next to the site of Betsy Graseck with Morgan Stanley.

Your line is open.

Thanks, a couple of questions.

One is on the recision loans that was discussed a little bit earlier.

Can I just understand how you think about what kind of NPL should fall out of these loans that you're buying?

Are these all going NPLs, is the roll rates 100% NPLs, or what kind of experience have you had?

And to what degree are you reserving for these, as you buy them versus as they perform relatively to expectations?

Are you talking about the insured loans that I referenced in the delinquency numbers, Betsy?

Yes.

Yes, those are -- think of those as government insured so they are performing past due -- not non-performing past due, so what I was trying to do is, if you pull our delinquency stature, if you look at them, you'll see a pretty big jump in the 30 and 90 and first mortgage past-due performing, and I didn't want you to get misled by that, so I was simply explaining what that was.

So those are insured so they would in theory not carry a reserve.

We -- obviously when you look at our reserve coverage numbers they're in the loans and so they kind of in essence distort that a tad, but in the grand scheme of things it's not that big.

Right, because you expect the insurance to pay?

Can you expect insurance to pay?

Yes, these are FHA type.-

Right, right.

And then on the loans that you're buying from private investors, et cetera, that might not be wrapped same kind of question, are you reserving point in time of purchase, are you reserving as they perform relative to your expectations?

Just give us the extent on that.

You mean basically rep and warranty questions --

Correct.

-- on the whole loan as opposed to --

Correct.

Few and far between.

If you think about the hierarchy of reps and warranties think of them as probably be in the -- quite frankly they're probably the clearest in GSEs, mono lines are next and then in private sales the reps and warranties generally by this time are somewhat unenforceable, not from a data standpoint, but just from a lack of time and they've run out, so don't -- that ones -- I wouldn't put that one on your radar screen.

Okay.

And then you discussed the coming capital actions, which will add to common Tier 1, like the issuance of stock and then the asset sales that you're anticipating, as well as warrants, right?

I think there's warrants outstanding in the money.

Can you give us some sense as to whether or not that's going to be action that you take this quarter?

The warrants here, you're talking about the ones associated with TARP?

Correct.

Yes, those are warrants that -- I think we said in the press release when we did the TARP announcement and payback that we would not intend to repurchase those, so those presumably would be sold by the government that they're -- when they're ready to do that.

We have certain registration activities we have to go through to go through to help them do that, but they'll do that at their own calling and you wouldn't see a capital impact of that, obviously, until those were either exercised or some kind of a current by whoever ultimately holds those.

The other asset sales clearly that we had committed to increase capital by $3 billion, that process we're under way in a review consistent with what we talked about before to identify the appropriate either businesses and/or discretionary assets to make that claim.

So those are the real two big things.

The simple thing on the government warrants is, it won't be any capital hit to us because they'll be somebody else's hands.

Yes, some of it's in the money, so I'm just surprised that you haven't -- the actions hasn't started yet.

Yes.

Well, let me -- the treasury hasn't sold them per se.

Once they sell them, if they're in the money, somebody wants to exercise them.

In other words, it won't be triggered by us I guess is the point.

Right, I understand that.

Brian, could you just give us a sense of how you are going to be managing your team?

What are the marching orders that you're going to be delivering to your group?

Is it more top line, bottom line, market share, net new business?

Could you just give us a sense of your priorities?

If you look across the businesses they have different priorities.

Obviously, in Sally and Tom's area the top line is there to get and they've got to drive at that and so they're going to drive more of a top-line driven with expenses matching and on a rational basis.

If you look on the consumer side, Joe and Barbara and and the teams below them having worked over there, that's more matching.

Really we're so big in the consumer business so the revenue growth will be measured and matching a good expense management capability against that and really dealing with, in both card and deposits, the changes and trying to figure out ways to recover some of those changes either through deposit pricing or other ways.

So the challenges are different but the way I'm going to drive the team is consistent.

We'll recognize the opportunities and challenges and drive the businesses -- these six or seven major businesses and customer groups along those -- along differentiated lines and being carefully driven.

But we as a company will be grinding through, because of our size, revenue that will not outdistance the economy by a lot just because we're so big and we got to be realistic about it, but that means managing expenses and businesses that (inaudible).

Would you think about coming into the Market with some goals or targets that you're going to be assessing your management team against?

Yes, we will, and that's really as we get into the first quarter and go through that.

This call's about last year's fourth quarter, so work with the management team now and so expect that as we get into some of the analyst conferences and the earnings release after the first quarter.

And then lastly, on the CFO search, could you just give us a sense of your timing on that?

As soon as possible.

But obviously there's folks internal to BAC who I would think are in the running, as well.

At what point do you cut off the external search?

I think our intent to go external and so the process is already started and a list is starting to be -- the list of candidates are being approached and so stay tuned, but this is obviously a key hire for us as a Company.

Anything in particular that you're looking for?

Someone who's good.

Okay.

Thanks.

We'll go next to the site of Paul Miller with FBR Capital Market.

Your line is open.

Yes, thank you very much.

Brian, last year Ken Lewis talked about a pretax provision number of around $45 billion for 2009, which you basically came in at $45 billion, $50 billion number, and we know it's very volatile, but can you give us any guidance of where you think that number's going to shake out in 2010 and does it change now that you bring on the managed credit card portfolio and how much does it change by?

We -- I can give you the guidance what we see in the fourth quarter, which is on the fourth or fifth page in here, but we're not going to give guidance about that for 2010.

And I think for the question of whether your view or other analysts view of how you included the managed versus non-managed presentation I think is something we'll shake out here.

So Lee and Kevin and some others makes sure people see how the 167, et cetera, comes through.

But I think all of you should make sure we understand that, because there is a major difference in the card business contribution on (inaudible) basis that way.

Overall, frankly, though in the card business, remember that we'll bring -- over time, in periods of time, that charge will come down, but that business will always have -- it's big at a charge-off rate that approaches what will be the normal environment.

There'll still be -- you can't discount.

It'll always be a relatively large dollar amount of charge-offs, even in good times, going through that business just because of the nature of it.

So I think that -- with your sophistication, as you look at this you'll bring the managed in and then you'll figure out a normalized basis.

Long answer say we won't put that on the table for 2010, but clarity on guidance to help manage (inaudible) we'll give you.

Can you just touch base real quick on your cash position.

You were about $120 billion.

It's something a lot of people are looking at and hoping you can bring this back into the portfolio at some point and get a decent spread on, or is it something that the regulators -- I know you don't want to talk about regulators per se, but you saw the Basel cores -- Basel white paper, I guess, that talked about that banks have to -- should hold a lot higher liquidity.

Is that something you're preparing for with this $120 billion of cash or plus, or do you think you can bring that back in and deploy that on the portfolio at some point?

Look, I think we probably don't think of it just as cash because you think of it more as how do you manage the liquidity and the liquidity can be redeployment into highly-liquid (inaudible) securities that have withstood these kind of downturns, so there's an opportunity to manage it from that standpoint.

If you look at what we've done, though, here recently, clearly the payoff of TARP, net of the equity raise, was a use of cash.

We've -- but we've also seen wholesale funding come down as retail deposits have gone up.

We've let the debt footprint run off a little bit and we have redeployed some, as I referenced earlier, in securities.

But clearly, the balance sheet is not what it was at one time if you look at all the combined entities.

Going forward, I'd probably say I don't focus, again, as much on the individual line item as I do the overall liquidity.

You are correct that world has changed and I don't think people are going to run -- anyone's going to run the kind of liquidity levels you saw before the disruption, so we will have "elevated liquidity," but don't think of it as having to stay in cash is probably the best way to think about it.

Okay.

Thank you very much, gentlemen.

Thank you.

And let's move next to the site of Jefferson Harralson with KBW.

Your line is open.

Thanks, good morning.

Good morning.

I was going to ask you about your loan modification experience, and recidivism rates, I see, in your non-asset -- nonperforming asset activities there's a large increase in the return to performing status and your consumer loans that went from $1 billion to roughly $2.2 billion.

Can you talk about what drove that number, a large increase of return to performing status and your experience with loan mods and recidivism rates?

Yes, we tried to give you -- and this wouldn't be all loan mods by any mean, but we tried to give you the TDR numbers.

If you look in that slide package at both home equity and first mortgage we try to give you the experience of what is paying to modify terms so you can actually see that.

We do -- actually we feel pretty good about it.

Think of -- and think of those as having to be six months of performance, either leading up to the modification side they would have been current leading into it, or if they are put in nonperforming that modification having to -- or had been on nonperforming they'll have to have six months performance before they actually go.

So think of the stats I gave you in those two slides as being indicative of our view of a big subset being the TDRs.

And I think on an overall basis we would say that the modifications done over the last few quarters probably will have better reperformance than those done early on because the early on ones, especially let's call it early on in '08, may not have had quite the level of borrower relief embedded in them, so I think it'll get better over time is the way we're looking at it.

And asking a similar question on the commercial side, are you seeing the interagency white paper on change in how you look at commercial real estate more focused on cash flows versus appraisals, are you seeing that have an impact on how you look at nonperformers, or is it slowing down the inflow of new NPLs?

No, not given the cash flow lending mechanism, the view that we've always had it really doesn't change our view.

Okay, thanks a lot, guys.

We'll go next to the site of Mike Mayo with CLSA.

Your line is open.

Good morning.

Good morning.

One real factual question and then a real conceptual question.

The factual question is, what is the line utilization for your commercial borrowers?

Stayed at about -- I think bouncing between 57%, 58%.

Stayed there this quarter compared to last quarter, so we've seen stability in that line.

57%, 58%?

Yes.

And wasn't that close to the all-time low, though?

Yes.

We're kind of in that trough, but it's kind of leveled in that trough as opposed to continuing is the way to think about it.

Okay.

Mike, rather than give specific percentages because it's a little -- it's going different in middle market areas, but the point is, is that commercial clients are drawing it to the lowest levels we've seen in a long time because they just don't have the demand and that's something that's stabilized, but that's where they sit.

Stabilized low basically.

But you're willing to offer them the loans, they just aren't borrowing?

That's what -- they have the capacity to borrow, assuming on the borrowing restrictions, then they have to build inventory receivables and stuff to actually get the cre -- the capacity, but the structure's there for them to borrow if they have the demand.

Why do you think they're not borrowing?

Why don't you think the demand is there?

I think they are looking at the economy.

When we talk to them they're looking the at economy the same way we are, saying it feels better but until I see some fundamental demand build up I'm going to hire or build up inventories in expectation of sales.

Now, the internet and the global companies are a little bit better because the international piece is a little stronger, but they're just cautious.

They're cautious unemployment levels and they've done a very, very good job as a group to get themselves underneath this economy and they're not going to blow it now, so they're being very cautious.

And then the big picture question, Brian, since it's the first call since you were CEO, there are a couple of questions went in this direction, but when I think of Hugh McColl in the '90s he wanted to build the biggest bank in America, that was his goal.

When I think of Ken Lewis last decade he wanted to create on of the most optimized banks and the most efficient banks.

As we think about what you want to achieve in a big picture sense, are you able to articulate really what you want to achieve, or will that take some more time?

I think from a broad basis the mission will be to be the best financial services firm in the world and balance between the goals of Hugh and Ken and others, which is we've got to make sure that we really do a great job with the consumers and that's customers and clients overall in the consumers.

Right now that's a little difficult because of the economy, but balance between the customers and associates and the shareholders.

So it's not a different thing.

It's just that we are at a point where we don't have to think about do we need a product or service, we're just at a point that we need to execute.

I know that sounds simple to say, it's hard to do, but it is absolutely critical, and will generate a lot of cash out of this franchise as the economy recovers.

And then last follow up.

The balance between customers, associates and shareholders, is that balance changing?

Is it changing so much it might hurt your ability to compete?

You might add a fourth category, the government or regulators, too, how is that balance changing?

Well, I think if you think about the industry we are adjusting to the -- Mike, you know the rating changes and Card Act and so as that -- those questions come in we have to figure out -- and our job as management figure out how we're going to get a return on your capital and your investment given those challenges.

And we have very bright people, we have a very good franchise, a great customer base.

We don't -- it's not going to be an insurmountable hurdle, but the rules have changed and we've got to take that into account.

But the belief in that is, that's because customer behavior's changed and the impact on some of the things we did over the last ten years on the customer didn't come out the way they did in tougher economic times and we have to reconfigure them.

All right, thank you.

We'll go next to the site of John McDonald with Sanford Bernstein.

Your line is open.

Hi, good morning.

Good morning, John.

What are your opportunities for expense leverage in 2010 and beyond?

And Joe, is the fourth quarter expense a good run rate for 2010, and could you remind us what kind of cost saves you might have incrementally from that run rate?

Well, think about the -- I think I mentioned that we had some heavy litigation cost, remember in the third quarter we had wrap costs to exit the proposed wrap, so that's one item that's floating in there.

On your -- you also had some continued leverage coming out of the acquisitions, but quite frankly, we got more this year out of Merrill Lynch's expense base than we might have anticipated and until the "systems changes" come in, which will be -- think of them as later next year rather than earlier, you may be at a run rate here for a few quarters on expense saves that doesn't take another leg up until a little bit later into next year.

You also -- obviously you have let's call it revenue-driven expense items, (inaudible) business and others that were down this quarter would have had lower expense component compared to that.

It goes back to Brian's point about how we're managing those businesses and which ones we're pushing, but those are all the dynamics working on this.

Obviously remember Q1 always has this weird animal with FAS 123R that levels out, but that'll be elevated with a larger market platform this year, this year being 2010, things of that nature.

So that's the backdrop you're working under.

I think to the point of the individual businesses, if you go back to Brian's comments about how he's managing the Company, clearly on some of the businesses there we'll be looking for very tight expense control given the dynamics of the revenue side.

Others hopefully will drive revenue up that will have expense growth associated with it from that standpoint.

So I think you've got a reasonable base if you take those things into consideration to work with.

Okay, and I apologize if you mentioned it.

Do you have any color on the comp ratio in the investment bank in the fourth quarter and what -- any impact from changes in the mix of compensation between cash and stock?

Well, I think you should think of us as migrating towards the Bank of America policy, which traditionally would have had a heavier deferred component than maybe the Merrill one at certain times in their history.

Think of the add on this year, although we call it expense in the current year, for the TARP repayment contribution by the associates being $1.7 billion.

That would be an added on top of your normal comp payout, deferred portion versus current.

Now they're entitled to that stock day one so you get to expense it, but you can't transfer it until later from that standpoint.

So that'd be the way to think about the mix.

In terms of the ratios, we don't give the specific ratios for just the markets business.

You can look at Tom's individual business line, but you got to remember part of the investment bank was in the banking group, et cetera, but we don't give the specifics for that particular unit.

Okay, and last follow up, Joe.

A quick review of the puts and takes on your margin outlook.

What are the sources of incremental downside pressure you mentioned going into '10 and don't you have some off debts is from maybe relief of interest reversals as we get out further?

Well, we've actually not had this quarter -- that was one of the items that drove us to a little better than expected performance this quarter in the margin.

I'd say the credit drag on the margin dropped by about $1.5 billion.

Think of it as closer to $1 billion this quarter and it was about $1 billion, $1.50 billion.

I'm rounding, but generally speaking.

That'll continue to abate as credit quality gets better, although you may have seen -- as I mentioned, just talking about charge-offs, may have seen a bigger improvement in Card last quarter if you just track delinquencies than you might see here going for at least for the near term, but that'll be a positive.

We have lower loan levels, flat out, and then some of those are in your higher margin levels.

We have a lower discretionary book year over year, again, as opposed to linked quarter.

That'll have a drag on us.

And then the repricing of risk in the Card book will be something we have to manage through.

On the other side, though, clearly, as we move into a higher rate environment you see the benefit of our deposit base flip from stability, which is how you see it today, to lower funding costs coming out of this thing, so that's a positive.

Clearly as the economy begins to recover or you get the loan growth back and all of those other factors then we'll be able to reassess the discretionary side also as we come into more strength in the economy.

Okay, thanks very much.

We'll take our final question from the site of Moshe Orenbuch with Credit Suisse.

Your line is open.

Great, thanks.

If you could give a little more color about how the actions that you've taken in terms of loan modifications and other forbearance have affected charge-offs now and how you think that pattern might be reflected in the next couple of quarters and how we should think about that with respect to the reserve over first half or several quarters of 2010?

I think on the charge-off side, modifications -- as I referenced earlier, Moshe, you've got to have performance -- subsequent performance to keep them from continuing to deteriorate from a delinquency standpoint, nd so I would say that the only effects they have had on actual charge-offs are where we've had actual performance that kept them out of those buckets that would roll into the charge-off delinquency status.

It's hard to theorize on had we not made the modification exactly how many would or wouldn't have gone, so that's a difficult thing to view.

From a reserving standpoint, it's -- you're correct.

You can think about it more.

You saw the action we took on the impaired portfolio.

Part of the charge this quarter was a reassessment as we've gotten more familiar with customer behavior, ie, how many customers actually take the modification, how many of them are -- get -- flush the gamers through the system, get to the real people that need them, et cetera, so that's one of the reasons you saw us take reserve action there.

We're probably carrying a little more reserve in a couple of the other consumer real estate products in anticipation of continued some level of redefault in our projections and things like that, so that's the conceptual way, but I don't have any numbers to put around it for you.

Okay, but it seems reasonable that the -- I don't want to say excess reserves, but that the reserves have built -- have certainly at least built in that for activity and to the extent it is worse than there should be, at worst adequate reserves and potentially some excess to be recovered?

Subject to the economy.

Right.

Subject to my other rule changes that might come out I guess is the way to think about it.

Okay, thanks very much.

Thank you, everyone, and we will see you next time.

And this concludes today's teleconference.

Have a great day.

You may disconnect at this time.