美國銀行 (BAC) 2011 Q4 法說會逐字稿

Good day and welcome to today's program.

At this time all participants are in a listen-only mode and later you will have the opportunity to ask questions during a question-and-answer session.

(Operator Instructions)

Please note this call is being recorded and I will be standing by should you need any assistance.

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

Kevin Stitt.

Please go ahead, sir.

Good morning.

Before Brian Moynihan and Bruce Thompson 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.

With that let me turn it over to Brian.

Thanks, Kevin.

Before Bruce begins -- and good morning to everybody.

Before Bruce begins his portion of the presentation on the slide I thought I would make a few comments about 2011 and what we are focused on for 2012.

The last two years we have been executing on a huge transformation here at Bank of America.

After six large acquisitions in six years during the mid-2000s then the economic crisis and its aftermath we set on a course to simplify the Company, to streamline the Company, to reduce the size of the Company, to lower our risk, and build a fortress balance sheet.

During that we set goals to have 9% Basel I Tier 1 common and 6% tangible common at year-end 2011.

We set goals to reduce our non-core assets.

We set goals to bring our credit risk down and to address the mortgage risk related to the Countrywide acquisition.

At the same time, we also set goals to continue to invest in the areas where our company can grow and has its competitive advantage -- areas like our wealth management area; areas like our preferred and small business areas where we have added preferred bankers and small business bankers; areas like our commercial corporate and investment banking areas, especially in large corp investment banking outside the United States.

Along the way we had to address the issues that came up in mortgage; the slow recovering economy, which is moving forward but not as fast as we would all like, the European crisis; a muted interest rate outlook; and the revenue loss to the new regulations that have been passed.

This then resulted in our focus on costs and we announced early last fall our New BAC program and the goals that we had for it.

So as we think about 2011 we saw the following; first, on capital and liquidity.

This quarter Tier 1 common equity ratio ended at 9.86%.

Our tangible common equity ratio ended at 6.64%.

In the case of each of these ratios they are a dramatic improvement from the beginning of the year, and we made these improvements while absorbing significant mortgage-related costs during the year.

We have ratios that are in line with our peers and we expect further improvement due to the continued work on the balance sheet we will make during 2012.

In addition, our liquidity is and remains at record levels even after the downgrades we experienced in the fall.

Moving from capital and liquidity to our core businesses, on slide two you can see we continue to do what we are here for.

We simply serve our clients and customers and we do it very well.

Our core business activity continues to move forward.

During 2011 we continued to grow our deposits and our investment assets for our core personal customers.

We originated 20% more in small business loans this year in 2011 than we did in 2010.

This met our internal goals we had for that unit, but importantly also met our billion-dollar increment goal we committed to the White House and the Small Business Administration a few months back.

For our commercial clients and our corporate clients we did what we are here to do -- we provided more loans, more capital, and more market access here in the US and around the world.

For example, in the fourth quarter you can see strong growth in our loan balances in our corporate area.

And for our investor clients we achieved the number one institutional investor overall research ranking, evidencing the quality of our ideas to match our capital to help them make their investments.

In our mortgage business we continued to reshape our operations to focus solely on origination of mortgages for our customers and to do it well.

Importantly, we continue to help those who have difficulty making their payments and mortgages.

We have now crossed over 1 million modified loans in our servicing portfolios.

The third area we focused on after capital liquidity and the core businesses was cost.

It's clear that we are going to grind forward with a recovery in this country.

Our clients continue to push forward and we are seeing the activity continue to move forward, but a full recovery to what we would call normal may take some time.

So with that in mind we began to focus on bringing our costs down across the Company.

Our cost structure at Bank of America has two broad elements today.

First, the costs we incur to deal with the mortgage issues and, second, the remaining costs to run the rest of the Company for the benefit of our customers.

Overall costs were down from 2010 to 2011 and we expect substantial cost savings in 2012.

This quarter you can see that starting to take hold.

We made significant progress towards our overall FTE reduction goals.

Our period-end FTE is down about 7,000 people in the fourth quarter compared to the third quarter.

This is over and above the 2,500 people we added in this quarter for our Legacy Asset Services.

There is two things about this.

One, this shows that our New BAC implementation has begun in earnest and, second, the good news is that we expect that LAS is at or near its peak staffing.

The fourth we have been concentrating on in 2011 was trading.

Trading was strong in the first part of the year but with the issues in Europe, the US downgrades, the downgrades of our company, and changes in client risk appetite results were weak in the second half, especially in the third quarter.

However, during the fourth quarter we partially recovered, as Bruce will talk about later, yet we still reduced risk during the quarter to ensure we were well-positioned to handle what might have come up.

We still have work to do in trading but the team got after it this quarter as the quarter unfolded and we saw stronger results.

From a credit risk perspective you can see that our charge-offs and cover ratios continue to improve.

We ended the year with strong ratios, and we also ended the year with $15.9 billion in rep and warranty liability reserves.

We built significant litigation and other reserves in this area also.

So the four areas for 2011 was all about raising capital and liquidity, driving the core businesses, managing the costs, and risk management.

As we look at 2012 these themes are the same.

First, on capital and liquidity.

Bruce will talk to you later about our targets as we look forward, but the focus in this company is to continue to move through the 10% level in Basel I Tier 1 common and drive towards the Basel III implementation.

Liquidity will remain high, even as we continue to reduce our long-term debt footprint.

The second area is cost.

As I said earlier, we expect that operating costs of LAS are nearing peak.

As we finished the closure look back and we continue to reduce the delinquent units serviced by this group we expect these costs to come down during 2012.

Just for clarity, in this quarter, in the fourth quarter of 2011, LAS costs were $3.5 billion of our total cost.

$1.5 billion of that was litigation and LAS; the remaining were operating costs.

For the rest of the Company we had expenses about $16 billion in the fourth quarter, including $0.5 billion in goodwill write-downs.

We expect to see in 2012 strong cost improvement consistent with our New BAC goals.

Bruce will discuss these goals later.

New BAC is doing what we expected and the phase two evaluation is going well.

As you know, headcount drives our costs.

We saw a significant improvement in the fourth quarter and we expect to see that as we move through 2012.

As we move to the core businesses in 2012, for 2012 we can now really focus on our retail strategy.

In this quarter you see the last part of the regulatory costs coming through, that is the Durban interchange changes.

We have now absorbed the Durbin, the Reg E, the CARD Act, and all the change that occurred over the last couple years.

The focus here in consumer is to balance our customer and shareholder return needs and to continue to work on our cost structure, reducing branches as will be done this year.

We are also going to continue to meet our customers' change behaviors through our innovative offerings, especially to our 9 million-plus mobile banking consumers.

Trading continues to improve this quarter as I said and we have (inaudible) business at times and we look forward to continuing to improve in 2012.

LAS and mortgage will continue to take work during 2012 which won't be different than 2011, but for the other businesses we expect to generate strong core customer results.

We also will continue to take advantage of the growth opportunities, garnering more customers and more depth in relationship with our customers.

That should continue to provide the good returns on capital that you see in those businesses this quarter.

As we think about risk for 2012, we expect to see continued improvement in credit risk as these legacy portfolios that we have identified for you continue to run off.

Those legacy portfolios are a drag on earnings with much higher credit costs than the rest of the portfolios that we will retain and drive as we go forward.

We also expect in 2012 to continue to manage through the mortgage issues, relying in part on our significant reserves we built in 2011.

So as we look forward to 2012 the focus remains the same as it has the last two years -- continue to drive capital and liquidity, continue to drive our core business growth where we have opportunities, continue to manage our costs well, and continue to manage the legacy residual risk down.

As we think about 2012, we begin with a much stronger position, stronger capital and liquidity, stronger reserves, and that continues to give us optimism about the prospects for our franchise.

And with 2012, with much progress having been made on some of these legacy issues in the transformation over the last couple years, we can take all the energy and talent we used to drive that and dedicate it to help drive our company's success.

And we look forward to doing that.

With that I will turn it over to Bruce.

Thanks, Brian, and good morning, everyone.

I am going to start my comments on page six of the slide presentation.

As you all saw this morning, on an FTE basis we reported net income of $2 billion, or $0.15 per share, during the fourth quarter of 2011.

I would like to bring your attention to several items in the quarter that had significant impacts on the income statement.

First, in November we sold the majority of the balance of our CCB shares generating a gain of $2.9 billion.

In addition to that we exchanged trust preferred securities into a combination of senior notes and common stock during the quarter, which generated a pretax gain of $1.2 billion.

And, lastly, we had gains on sales of debt securities of approximately $1.2 billion in the quarter.

Things that went against us through the income statement during the quarter.

The tightening of our credit spreads generated a DVA loss of $474 million relating to our trading liabilities.

As Brian referenced, we had a goodwill impairment charge of $581 million that we recognized during the quarter that related to a change in the estimated value of the European card business.

And that is reported in All Other.

During the quarter we also had a credit mark on our structured liabilities under the fair value option that resulted in a negative mark of $814 million as a result of our credit spreads tightening, and that is reported in other income.

As you think about that $814 million, keep in mind that whether positive or negative it does not impact regulatory capital ratios, but it does impact GAAP capital.

Lastly, from a litigation perspective we had expense in the quarter of $1.8 billion, of which $1.5 billion was mortgage related.

If we flip to slide seven there are a lot of numbers on this page, but I would like to bring your attention to a couple things.

The first, as you look from year-end 2010 to year-end 2011 you see a continued transformation of our balance sheet where all of the focus is moving to our core client activities.

Couple things to highlight.

Total assets -- and I am speaking from third quarter to fourth quarter now.

Total assets for the quarter were down 4% or approximately $90 billion.

From a risk-weighted asset perspective, risk-weighted assets were down 6% or $75 billion during the quarter.

If we move down to Tier 1 common equity, Tier 1 common equity during the quarter increased $9 billion to $126.7 billion.

That increase in Tier 1 common, along with the reduction in risk-weighted assets, led to our Tier 1 common equity ratio increasing from 8.65% to 9.86%.

And I will go into that in a little bit more detail in a few minutes.

Tangible book value per common share was down 2%, reflecting the fact that we issued 400 million shares in the exchanges that I referenced with respect to trust referred and preferred securities.

You can see that 400 million shares in our outstanding common share change from the third quarter to the fourth quarter.

If you move to the bottom, our allowance for loan loss reserves came down $1.3 billion during the quarter as we released reserves.

Importantly though, our allowance relative to annualized charge-offs improved from 1.7 times to 2.1 times at the end of the year.

And, lastly, our liability for representations and more warrants remained relatively flat at approximately $16 billion.

If we move to slide eight, I thought it was important to give you a walk-through of the drivers of the improvement in the Tier 1 common equity ratio.

We start on the far left at 8.65%.

As we have disclosed throughout the quarter the preferred exchanges, the CCB sale of shares, and the Canadian consumer card sale in the aggregate generated 60 basis points of Tier 1 common.

Over and above that 21 basis points coming from net income and change in deferred tax asset.

Within the global markets business about 18 basis points through reductions in market risk.

Change in loan balances and other asset sales were about 10 basis points and you had a series of other things, both positives and negatives that netted out to 12 basis points, which in the aggregate increased the number to 9.86% at the end of the year.

Moving from capital to liquidity.

If you flip to slide nine you can see that our global excess liquidity sources increased from $363 billion at the end of the third quarter to $378 billion at the end of the fourth quarter.

As you think about those excess liquidity sources, recall that that does not include approximately $189 billion in additional liquidity that is available to our banking entities by pledging assets to the Home Loan Banks in the Fed discount window.

At the parent company, parent company liquidity was particularly strong at $125 billion, up $6 billion for the quarter.

As you think about that increase it's important to note that we accomplished that increase while reducing parent company debt by $17 billion during the fourth quarter.

As a result of those changes, our time to required funding increased to 29 months at the end of the year, up from 27 months at the end of the third quarter.

That liquidity base, along with other funds that are available to us, will enable us to retire $60 billion of parent company unsecured debt that matures throughout 2012.

About $24 billion of that is TLGP debt that will come due during the second quarter.

As you think about our issuance plans throughout 2012, from a plain-vanilla debt perspective you should expect us to be issuing less long-term debt in 2012 than we did in 2011.

Similar to where we were at the end of the third quarter, our parent company and broker dealers have no short-term unsecured debt outstanding.

We move from liquidity to net interest income turning to slide 10.

Net interest income was $11 billion during the fourth quarter, up $220 million from the third quarter.

The increase was driven by lower asset hedge ineffectiveness as well as less acceleration of amortization of premiums on securities.

On the positive side, contributions to net interest income from lower debt balances and rates paid on deposits were more than offset by portfolio repricing and reduction in consumer loan balances, including the sale of the Canadian card business.

Would ask you to keep in mind here that our asset liability management strategy is focused on managing interest rate risk across the entire corporation, which includes minimizing OCI exposure in managing the duration of our securities.

Moving to slide 11 on Deposits, we highlight the results of our deposit business.

Earnings for the quarter were $141 million, a decrease from the third quarter primarily driven by an increase in FDIC expense which we would expect to come down going forward.

Average deposit balances decreased 1% compared to the third quarter, driven primarily by a decline in time deposits which we had targeted to do during the quarter and will continue to do so.

During the quarter rates paid on deposits declined from 25 basis points to 23 basis points.

As we continue to focus on the cost and optimize our delivery network, you can see our branch count came down again during the quarter.

We have continue to expand our service for small business owners by hiring over 500 locally-based small business bankers during the year to provide convenient access to financial advice and solutions to our customers.

We have also continued to increase our mobile banking customer base to 9.2 million customers, which is a 7% increase from the prior quarter and up 45% from a year ago.

We turn to slide 12 Card Services earnings decreased from the third quarter to $1 billion, primarily due to the impact of the Durbin Amendment which kicked in during the fourth quarter.

Credit card purchase volumes did increase by 6% from a year ago after adjusting for portfolio divestitures and were up seasonally from the third quarter.

Within our US card business new account growth was up more than 50% from the fourth quarter a year ago.

Within Card Services ending loans declined $1.6 billion from the third quarter due largely to portfolio divestitures and continued noncore portfolio run-off that was partially offset by the increase in volume-related seasonal spend.

Credit quality within the card business continues to improve.

US credit card losses improved for the ninth consecutive quarter and our 30-plus-day delinquency rate declined for the 11th consecutive quarter.

As you look at the card business, I want to remind you that the international card business results were moved to All Other in the third quarter and prior period results were adjusted accordingly.

Within Global Wealth and Investment Management on slide 13, earnings for the quarter of $249 million were down from the third quarter as lower market levels and activity drove lower revenue and expenses were higher due to a few noisy items.

Client balances were up 3.5% from the third quarter due to fourth-quarter market levels as well as AUM flows.

Long-term AUM flows were $4.5 billion during the fourth quarter, pretty much in line with what we saw during the third quarter.

On the expense side, as I mentioned, there were several items, including higher FDIC and litigation expenses as well as other related losses and some severance costs, that we saw during the quarter.

We added 214 financial advisors to the world's leading advisory force during the quarter with total FA levels exceeding 17,300 at the end of the year.

As we look forward we would expect muted advisor growth in 2012 based on economic conditions as well as us absorbing the FA growth from 2011.

Net income in Commercial Banking on slide 14 was flat at $1 billion (technical difficulty) the third quarter.

Commercial clients continued to increased liquidity positions, driving average deposit levels up $2.2 billion from the third quarter.

Average loans were flat as the reductions that we saw within our Commercial Real Estate area were offset by about $1.7 billion of loan growth within the C&I category.

Asset quality continued to improve.

Net charge-offs were down $83 million.

Nonperforming assets were down $1 billion to $5.6 billion and our reservable, utilized, criticized exposure declined by 11% during the quarter.

If we switched to our Global Banking and Markets area on slide 15, the results reflected increased sales and trading activity excluding DVA, which I will cover in greater detail in a minute.

Average loan and lease balances during the quarter increased $10.5 billion, or 9%, primarily driven by growth in domestic and international corporate loans as well as international trade finance.

While deposit balances were down 5% versus the linked quarter, I would highlight that our ending deposits at the end of the year were up nicely as we saw good flows during the last half of the quarter.

If you turn to slide 16, I would ask you to look in the middle of the page where we have drawn a red box around our sales and trading area.

Sales and trading, excluding DVA, was $1.9 billion, or up 73%, from what was a difficult third quarter driven primarily by our fixed income currency and commodity area due to less volatility, a tightening spread environment, and a reduction in the CVA, although these are still at relatively elevated levels.

Within our FICC business, excluding DVA, credit products, structured credit trading, and rates and currencies drove much of the increase.

In equities, once again excluding DVA, results decreased by 16% primarily due to lower volumes and commission-related revenue.

We did record DVA losses, as I highlighted up front, of $474 million in the quarter as our credit spreads tightened compared to gains of $1.7 billion that we saw during the third quarter.

On the investment banking side, firmwide investment banking fees, excluding (inaudible) fees, were $1 billion, up 8% from the third quarter of 2011.

We would also note here that we maintained our number two ranking globally in net investment banking fees while gaining share during the year.

We turn to slide 17.

Commercial Real Estate Services reported a loss of $1.5 billion driven by continued elevated credit costs in the home equity portfolio, higher litigation costs, and the cost of managing delinquent and defaulted loans in the servicing portfolio.

The home loans business within the CRES area had a slight profit for the quarter.

First mortgage production of $22 billion was down from the third quarter, due primarily to our exit from the correspondent channel which we spoke of during the last quarter's earnings call.

As a result of this, core production income declined during the -- relative to the third quarter of 2011.

Results for the quarter did include $263 million in costs for reps and warrants primarily related to the GSEs, along with the $1.5 billion of litigation expense I touched on at the beginning of the presentation.

Our MSR assets decreased by approximately $500 million during the quarter, driven by MSR sales and borrower payments and ended the quarter at $7.4 billion.

MSR results, net of hedge, were positive by approximately $1.2 billion in the fourth quarter.

As we look at the cap rate on the MSR, we ended the period at 54 basis points versus 52 basis points in the third quarter.

On slide 18 we show some comparisons of certain metrics in the Legacy Asset Servicing area on a linked-quarter basis and compared to the prior-year quarter as we continue to work very hard to reduce delinquent loans and find homeowner solutions.

As Brian referenced, we are either at or near the peak of staffing this area and we are making very good progress.

Total Legacy Asset Services first lien servicing dropped 16% in the quarter while 60-day-plus delinquent loans dropped 8%.

Much of the work done to sell MSRs has allowed the transfer of more than 510,000 loans serviced in the past quarter alone.

As we look at this page it's obviously very important that we continue to shrink the activity that we have in the Legacy Asset Servicing area so that we can begin attacking the $2 billion of expenses that Brian alluded to at the beginning.

On slide 19 we show you the results of All Other, which recall includes our global principal investing business, the international consumer card business, strategic investments, our discretionary portfolio associated with interest rate protection, and the discontinued real estate portfolio.

Items of note in the quarter and All Other included $814 million related to the negative fair value adjustments on structured liabilities, the $581 million goodwill impairment charge related to European card, $2.9 billion related to CCB, $1.2 billion on the exchanges, and $1.1 billion related to the sale of debt securities.

As we move and flip to slide 20 a lot line items and data, but I would highlight a couple of things here.

We did make very good progress across most categories of expense.

If you start at the top line you can see that our personnel expense did come down in the quarter, largely driven by a 7,000 reduction in FTE headcount from approximately 288,000 to 281,000.

Those benefits were somewhat muted in the quarter due to a higher default servicing cost and an increase in severance costs associated with the headcount reductions.

You can see in the majority of the other line items that we did continue to reduce cost with several exceptions.

The first, in other general operating expense which increased $1.6 billion.

That increase was due solely to an increase of $1.3 billion in litigation as well as elevated FDIC expense, which we would expect to go down in 2012.

The other two items of note the $581 million goodwill impairment for the European consumer card business and our professional fees which tend to be seasonally high during the fourth quarter of the year.

If we turn to slide 21, let me update you with where we are with respect to our New BAC program.

We have completed the initial planning related to Phase 1 in the third quarter of 2011 and begin the implementation during the fourth quarter.

Under our original guidance we have a goal of achieving approximately $5 billion in cost savings or about 18% of the expenses associated with the areas addressed.

We stated earlier that we were aiming for 20% of the $5 billion to be achieved during 2012.

Based on the hard work done to date, we now believe we will exceed that 2012 goal.

Phase 2 evaluations for the areas outlined on page 21 began late in 2011 and we would expect to complete that work in April.

As we look at the expense base it's similar to Phase 1, but we would expect lower cost savings given that the businesses tend to be more efficient already and have lower headcount.

While the savings will be lower, we do think, however, that we will start being able to see some of those saves later this year as the initiatives to achieve the savings aren't as interdependent as the consumer businesses.

So if we take a step back and look at the lower headcount from the third quarter and combine that with New BAC, both Phase 1 and Phase 2, along with an improving mortgage environment, we believe we can realize substantial cost savings in the second half of this year.

We are not going to identify a specific number on this call, but we will update you as we move further into the year.

We now move to credit trends that we saw during the quarter on slide 22.

You can see that overall consumer trends remain positive.

Net charge-offs, 30-plus performing delinquencies, and nonperforming assets all continued to fall.

Net charge-offs in the credit card area declined more than any other portfolio, due in part to recoveries recorded to the bulk sale of previously charged off UK credit card loans.

Provision expense in consumer was $3.2 billion and included a $384 million reduction in reserves.

On slide 23 you can see that residential mortgage and home equity 30 to 89 day performing delinquent loans, excluding our fully-insured loans, were relatively flat with the third quarter.

This was not unexpected as the fourth quarter has historically had slow collections.

On slide 24 we show nonperforming asset trends for both our residential mortgage and home equity area.

Total Consumer Real Estate nonperformers trended down for the sixth quarter in a row.

Residential mortgage declined from the third quarter as charge-offs, pay downs, and returns to performing status continue to outpace new nonaccrual loans.

Home equity loans did show a slight increase as inflows outpaced charge-offs and returns to performing status.

The increase in NPAs was driven by growth in the greater than 180 days past due loans while the less than 180 day past due loans remained flat as delinquency inflows remained relatively stable quarter over quarter.

As you may recall, loans greater than 180 days past due have already been written down to their net realizable value.

Turning to overall commercial credit quality on slide 25, the trends that we saw were very similar to what I referenced when I discussed the commercial bank.

Including the provision for unfunded commitments we recorded a benefit to provision expense of $220 million that included a reserve reduction of $736 million.

Both nonperforming asset and reservable criticized levels continued to decrease.

We flip to slide 26.

We have included a slide on Basel III that we included when we reported our second-quarter earnings and I would make a couple points here.

The first is we continue to work very hard as we work toward and progress towards Basel III at the end of 2012.

You can see that significant progress in two different ways.

The first we had originally targeted getting our risk-weighted assets under Basel III down to $1.8 trillion by the end of 2012.

We have updated that goal now to have risk-weighted assets down to $1.75 trillion.

In addition to the reduction in risk-weighted assets, based on the progress that we made during the quarter we now expect our Tier 1 common equity ratio under Basel III at the end of 2012 on a fully phased in basis to be between 7.25% and 7.5%, up from our previous guidance of 6.75% to 7%.

Let me know wrap up by spending a few moments discussing our expectations for 2012.

I won't go into a lot of detail as the economic landscape is somewhat uncertain given the evolving events in Europe, the upcoming elections, and the speed around the recovery in the housing markets.

2012 we believe net interest income will remain somewhat challenged and will be highly dependent on the rate environment.

While we expect consumer loans to continue to run off, this should be somewhat mitigated by loan growth in our commercial businesses.

Additionally, we expect to benefit from continued reductions in the term debt footprint.

Most of the line items in our earnings report, whether it be card income, service charges, investment, or brokerage, tend to be very correlated with the economy.

So if we see economic growth, we would expect that to translate into higher revenues.

At this point Durbin is fully embedded in the fourth-quarter results so you have a solid base to work with there.

Investment banking, we would expect activities in 2012 to be fairly consistent with what we saw in 2011.

As Brian referenced at the beginning, we would expect to see better results in sales and trading, but once again those tend to be pretty correlated to global market conditions and the health of the recovery.

Equity investment income we would expect to drop off considerably given the sale of the CCB shares that we had during 2011.

On the expense side, in the first quarter we should start to see the positive impact of the fourth-quarter headcount reduction and the impact from New BAC.

Our goal for the fourth quarter of this year is to have sustainable cost savings, which would include not only certain New BAC Phase 1 and Phase 2 benefits, but also lowered expenses in LAS -- the benefits of reduced merger charges, lower costs associated with businesses we have exited, as well as other expense reduction initiatives.

Credit quality should continue to improve over the next few quarters but at somewhat of a slower pace, and we would also expect to continue to see some reserve reductions.

Capital and capital ratio should continue to grow.

What will drive that growth in 2012 will be mainly through earnings, and to a lesser extent, RWA levels throughout the year.

We expect that most sales of business units are essentially complete, although there will be some targeted activity within certain selected areas.

We expect the effective tax rate to be around 30%, plus or minus, depending on any unusual items.

So in summary, as we enter 2012 we expect economic headwinds and low interest rates to persist while we continue to deal with legacy mortgage issues and ongoing regulatory changes.

That being said, we enter 2012 with higher capital, liquidity, and combined reserves for credit, representations and warranties, and litigation than at any point in the Company's history.

With that why don't we go ahead and open up the line for questions?

(Operator Instructions) Mike Mayo, CLSA.

Good morning.

Can you talk about the commercial loan growth and how much is due to drawdown of existing credit lines versus expansion in new areas?

Let me just hit a couple points.

One of the things we traditionally talk about, Mike, is our -- in our core middle market, because people look at that as a market for what middle market companies are doing and the draw rate, it is relatively consistent third quarter to fourth quarter, 32%.

Down 100 basis points from a year ago, I think, round numbers and down maybe 800 or 900 basis points from where it would sit in a normalized economy.

So middle market companies are consistently drawing but haven't moved.

In the larger corporate area we had some strong growth in the fourth quarter; I will have Bruce touch on that.

But from a broad economy people are fairly stable and sitting there.

Bruce, why don't you touch on the higher --?

Sure.

If you look at -- particularly within the GBAM space I would make a couple observations.

We saw growth in both regular way corporate loans as well as in the trade finance area, so that the growth that we saw was fairly widespread.

If you look at that growth by region, we saw some growth in the US and Canada, and we also saw a very nice growth in both the Latin America as well as the Asia-Pac region.

In addition to that we also saw some growth within our mortgage area within the Global Banking and Markets area.

So not any one thing driving the growth.

I would say the one area that was probably the strongest was trade finance, but it was fairly widespread throughout the business.

Mike, just one last observation.

If you think about the capital markets driven activity in the higher grade stuff it has been very strong and the non-investment grade comes in and out really on the markets.

But I would say when I talk to sponsors and other people they are ready to go and for deals -- $4 billion or $5 billion transactions.

There is a very strong demand to do them from the sponsor side.

So I think if markets stay stable we could see some pretty good activity this year on that.

Just one separate and last question.

For new project BAC are you cutting enough?

I guess if you look at results for last year revenues, reported were down $17 billion, expenses were down $3 billion, and so a big gap between the decline in revenues and decline in expenses.

You can back out LAS and some other items; it still seems to be a pretty big negative gap.

So are you cutting as much as you need to?

You have the structural project, but perhaps more cutting for the cycle, is that needed?

Well, as we are approaching the business which are more cyclical, i.e., the trading business, investment banking, you have seen in the press that been -- in advance of even doing the work on New BAC we reduced headcount fairly significantly in some of those areas where the opportunities weren't there.

And that is more adjusting that business cost two ways.

One is the comp cost you adjust down obviously and then, secondly, the headcount, so that has been going on.

I would say you need to be -- just to remind you and you know this, Mike, is that in the -- there is negative revenue.

The rep and warranty cost is actually a negative revenue, so that has a fairly big impact.

But as we look at it we are driving towards the right cost structure for the right run rate of revenues; this company over time will continue to drive at that.

You could always say could I go a little faster, go a little slower.

But we need the balance, especially on the broad consumer business, the need to have good customer service, strong customer relationships, and continue to invest in the growth areas with getting the cost down.

So an example on the branches.

You have seen the numbers; we have dropped to 5,700 from a high of 6,100.

Our cost of operating our whole retail platform as a percent of deposits continues to work down, but we have to be careful to make sure the service quality as we do that is well managed.

So it's a balancing act.

I question every day whether we get it exactly right; could you go a little faster, a little slower but the areas are really market sensitive.

We have moved pretty quickly on cost.

The other areas you have to be very careful and reengineer the work so you make sure that you can still do a great job for the customers.

Thank you.

John McDonald, Sanford Bernstein.

Good morning.

Bruce, was wondering on net interest income was there still some level of asset hedge ineffectiveness and prepay amortization in the fourth-quarter number?

I know it was less than third, but was there something in fourth?

There was, John.

I think if you look at the delta in net interest income really four main items I will give you a little bit more detail on.

We have picked up $500 million of benefit during the quarter from less hedge ineffectiveness and prepays.

We picked up $200 million to the positive based on lower debt footprint and our deposit pricing.

On the negative side we had about $200 million less because of the rates on our mortgage portfolio and about $200 million less due to be lower consumer card business, primarily credit card which included the sale of Canadian card that we didn't have in December.

So if you take those four items that will give you the bridge, the change in net interest income for the quarter.

And do you think that you can grow net interest income from that level of $11 billion in the fourth quarter going forward?

What is going to be the drivers?

I think right now if you look at what we have seen during the third and the fourth quarter that that is reflective of the balance sheet and the rate structure today.

And I think as you look forward the only things that are going to change those numbers going forward are primarily a change in interest rates and to the extent that we see a meaningful change in loan demand.

But as we look into 2012 I think the third and the fourth quarters give you the best jumping-off point, realizing that there was still some hedge ineffectiveness and FAS 91 in those.

Okay.

So that is a good run rate and from there it depends on whether rates rise and whether loan growth picks up?

That is correct.

Okay.

Similarly on expenses, when look at page 20 lots of details there and trying to just get a sense of what the run rate might be going into the first quarter.

Taking out some of these specials it looks like maybe something similar to last quarter, a $17.2 billion to $17.4 billion, something like that.

I know you don't want to get too specific, but can you give us any kind of sense of where you might be entering the year with the expense base?

I know you don't want to get specific about your targets, but where are you going to start off?

I think that if you look at the recent quarters it bounces around a little bit based on GBAM revenues, GBAM performance, compensation and other things flowing through, as well as to the extent that there is severance or other things bouncing around.

But I think $17 billion area without any kind of one timers or anything going through is probably the right starting point to think about, John.

Okay.

And then from there you expect to get the benefits in the second half from some of the LAS and the New BAC stuff, so that should improve later on in the year from that base?

Yes, John, remember in that $17 billion type of number we are not -- Bruce is not eliminating the $2 billion of sort of core LAS operating costs.

So we expect to see that come down, as I said in my comments, that come down in the core run rate.

But we have to do this right and that is where we keep engineering the change quarter by quarter or by quarter.

The headcount reduction this quarter was part of the startup.

John, the only other thing I just want to make sure we highlight is, as we do each year and each first quarter, we have divesting of the stock compensation expense during the first quarter.

And recall that that was about $1 billion during the first quarter of 2011 so I just don't want you to be surprised when you see that in the first quarter of 2012.

Okay.

And you aren't including that when you said $17 billion?

That is correct.

I am not including that in the $17 billion, that is correct.

Okay.

Last thing for me just on the rep and warrant issue, Bruce, where do we stand on changing GSE behavior?

Is it more predictable?

What was the nature of requests and denials that you got this quarter on the GSE front and do you have a sense of how much of the GSE claims you have addressed?

Thank you.

If you go back and look at the disclosure we have back in the slide, I would say at this point -- we highlighted in the third quarter that there were some disagreements between the two parties, and I would say that there has really been no change in that perspective during the fourth.

You can see the GSE unsolved balance went up a little bit during the quarter and, quite frankly, that wasn't unexpected.

Okay.

Paul Miller, FBR Capital Markets.

Thank you very much.

The $1.5 million(Sic-see press release) litigation expense this quarter, and I know you guys have been putting a lot of money away for litigation, but is this related to the AG settlement or is it just other various suits out there?

What it relates to -- I would say there are two significant items that we would include and I am not going to quantify them.

You saw that we did have the fair lending settlement at legacy Countrywide prior to when Bank of America bought Countrywide that went through during the quarter.

And the second thing, you are correct, during the fourth quarter, while there is no DOJ AG settlement, you read what we read and we adjusted our litigation expense as well as our reserve levels to reflect the best that we could our understanding of what the deal may be.

Okay.

Second question is asset quality.

Charge-offs dropped $1 billion in the quarter, which I thought was a very good number.

Was there some internal change?

Are you pushing loans more through or are you just working loans out better?

Is there anything, any color around that number?

Two things, the first is -- and I referenced is recall that we did sell during the quarter some of the loans in the UK that were written off.

We did a little bit better than we would have expected, and that was about $300 million of the improvement.

So we did have that one-time pop or one-time benefit.

But I would say that across the board -- on the consumer side we adjusted the underwriting standards back in the fourth quarter of 2008 and the first quarter of 2009, and we are starting to see the benefits from those standards as the old stuff has flown through and the new stuff is becoming a greater percentage of the portfolio.

Then on the commercial side and I would say across the board credit quality within the commercial space continues to be very strong and we continue to feel very good about commercial credit going forward.

The last thing I would say is that we have obviously reduced the size of the commercial real estate and, clearly, think we are on the other side of the commercial real estate charge-offs.

Okay.

Thank you very much, gentlemen.

Glenn Schorr, Nomura.

Thanks very much.

Couple of quickies.

You mentioned in the outlook commentary that you think you could beat the 20% achieved for Phase 1.

I was just curious, bigger than a bread box, is that a lot more than the 20%, a little bit more than 20%?

And maybe where you are seeing the acceleration of that?

It was a constant focus, really going to the earlier comments, to accelerate anything we can that really is dependent on technology implementation.

So when you look at the broad -- in 2012 we will spend $0.75 billion to get the cost saves type of number.

So we are trying to accelerate the non-technology dependent, and that is the reference we gave you.

So we are ahead of schedule and we expect to stay ahead of schedule.

Overall the numbers will come in the goals we gave you.

Okay, that is fine.

Curious on what you have baked in to both your credit loss assumptions and your reserves in terms of housing outlook.

There has been some in the industry talking about a bottoming.

There is economic data that is getting better that is affordability metrics that are getting better, but you still have distressed inventory underwriting standards and the securitization markets have kind of frozen.

Just general thoughts on housing bottoming and how you are positioned.

Sure.

Two things, the first on just credit across the Company.

What I would expect, and I just want to make sure that we are clear, we would expect charge-offs to continue to improve during 2012 and at the same time you are probably likely to see reserve releases slow down.

So from a net perspective the jumping-off point at the fourth quarter is a pretty good jumping off point as you think about credit for 2012.

With respect to the housing piece of it, we look at and look out at macro markets and look at what the expectations are there as we look at forecasting and looking at residential real estate.

Those basically show a flat market throughout 2012.

As we project through 2012 we don't really assume any significant move up or down, it's basically flat.

From a pure activity standpoint we continue to see when we get a hold of our property we continue to see being able to move it in 60 to 90 days, and the activity is moving through the markets as the foreclosure rework was done and the activity.

So we don't try to outguess the market; we use sort of the average and we adjust it for the places we have more loans.

But the reality is you continue to see the healing in the housing market every day in terms of the amount of activity and the amount of delinquencies and the process moving forward.

And so I think it will just be a -- it's still a lot of hard work but you are seeing it move forward.

Appreciate that.

Sticking with the housing theme, just curious if there is any update on the private label potential settlement and just maybe where are we in those conversations and what is the next event timing wise.

Really no change with anything that you see out there, which I think we are expecting to see by the end of February the venue that the case will be decided.

Basically what you see out there is the same thing that we see and our sense is we will have a little bit better sense where the venue is by the end of February.

And is it Delaware versus New York, is that the battle line?

State versus federal.

State federal, sorry.

(multiple speakers) It got bumped up, that is right.

Decisions in the second circuit, our expectation is somewhere in the next 45 days or so they will make a decision of whether state in the federal court or go to state court.

Okay.

Last quickie is in the summary slide you showed $5.6 billion of pretax, pre-provision, but that is before a lot of -- all these one-timers.

There is a lot of moving parts but curious if you have a thought on what a clean jumping off point is for pretax, pre-provision going into 2012 as we factor in your thoughts on expenses and we can make our own choices on the market.

I think what I would say is the cleanest way to think about it is if you take the $5.6 billion and you adjust for the items are down below, you get to a number that is in and around $4 billion.

And as we look forward and as we look to build off of that $4 billion you have obviously got a series of things that we look at going forward.

We clearly would expect the trading and investment banking revenues to be better in 2012 than what we saw here.

We have obviously got New BAC Phase 1 that is beginning to kick in during 2012.

As we have talked about, New BAC 2 will kick in quicker than 1, probably towards the end of the year.

You have got improvements towards the end of the year in the Legacy Asset Services cost and then you have got any improvement that we see from the rate environment.

So I think as you look at those numbers, that is probably the best jumping off point.

And we are obviously working hard to drive those improvements with the categories that I just went through.

Excellent.

Thanks for all of those answers.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

A couple of questions, one on the housing.

In the past you have given the P&L hit of a 1% or a 5% decline in home prices.

I realize that your outlook is for stable, but given some of the changes that you have done in your business and asset sales, etc., I am wondering how that P&L hit has changed?

It hasn't changed that much, Betsy.

Right now we are looking at a 1% hit being about $450 million.

That is comprised between $125 million and $150 million in our purchase credit impaired portfolio, about $200 million through reps and warrants, and about $125 million through the property values that get refreshed each quarter, would be the way I would think about it.

Okay.

Then you also gave a data point here on the servicing book and 8% decline in delinquent loan service.

Can you give an update on what portion of the total servicing book is delinquent?

We can get you that.

It is in the details.

I will have Lee call you with it.

Okay.

Then last on severance, did you break out what the severance dollars were in the quarter?

We did not, but I can give those to you.

We had about $186 million of severance during the third quarter, and that jumped up to about $239 million during the fourth quarter.

Okay, and that was split between the different business lines or how would I segment that between the business lines?

Split between the business lines, the most significant piece you are going to see there is within the Global Banking and Markets area.

Okay, great.

Thanks.

Brennan Hawken, UBS.

Good morning, guys.

So was just hoping to get some more granular color on the improved Basel III guidance.

Is the driver of that improvement there mostly the numerator improvement we saw this quarter?

Can you give some color maybe on a contribution from an expansion in the RWA mitigation plans that you highlighted; any chance for more detail there?

I think if you think about -- and the way that I would think about is that there are a lot of pluses and minuses.

But if you go to page 7 where we show you the balance sheet data, we show you that Tier 1 common equity has gone up by about $9 billion during the quarter.

In addition to that we have changed our guidance on the risk-weighted asset side by about $50 billion.

So I think if you take those two changes, realize we would have had some increase in our common equity in our original numbers flowing through the income statement that if you look at those two line items and think about that in the context of $1.75 trillion to $1.8 trillion those are going to get you to about the 50 basis point increase in the guidance that we have given.

Okay.

And then thinking about monoline exposure and the capital relief that we saw from another firm announcing a settlement, when you sort of back into the risk weights there it implies maybe 600% to 700% risk weight for monoline exposure.

Would that -- is it right to think about that sort of a risk weight for you guys?

Do you get a similar risk weight when you think about your monoline exposure?

And is that exposure limited to the $1.9 billion that you disclosed in the last Q plus that $0.5 billion in CVA?

I can't speak to -- and I saw the Morgan Stanley disclosure that I think you are referencing.

I can't speak to exactly how they are doing it.

What I can say is that if you look at and in our supplemental package we show a breakout of our monoline exposure.

We did take a couple hundred million dollars in the quarter of hits through the banking and markets area for monoline exposure, and you can see at the end of the year, I believe, back in the supplemental page, we show ourselves at about $1.3 billion of net exposure from a monoline perspective after CVA.

And once again, we did take a couple hundred million dollars of expenses during the fourth quarter.

But is it right to think about it -- a risk weight that would be in the neighborhood of 700% on that exposure?

For Basel III?

It's probably a little bit higher than that, quite frankly.

Okay, thanks.

But the one thing -- remember the difference between our capital base size-wise and other people's capital base is one of the different effects here.

Sure.

We are dealing with $120 billion of Tier 1 common, so it's just a different type of number.

Right, proportionately different piece of the puzzle.

Exactly.

Thanks.

Jefferson Harralson, KBW.

I was going to follow-up on that kind of line of thought.

When you think about the total risk-weighted asset shrinking $172 billion year over year or $75 billion quarter to quarter can you just talk about kind of what that is and what revenues are associated with that decline?

Sure.

Let's go to the fourth quarter I think is probably the best place to start.

If you start on page eight and let's just go through the individual items to give you a sense.

The preferred exchanges, while we have put the shares out there, there will be a nominal P&L effect by virtue of having lower interest expense and lower preferred dividends.

The CCB sale during the fourth quarter as well as the one that we did in the third quarter, there have been some things written out there publicly about the impact that that is over $700 million of a loss of revenues that go through.

I think when you think about CCB you have to think about the offset to that, which is by virtue of doing that there was over $14 billion of liquidity that came into the parent company that basically will offset, from an interest expense perspective, the loss in preferred dividends that we would have had through that business.

You move over to Canadian card.

While the business clearly had PP&R associated with it, once you get down to the bottom line from a net income perspective the net income contribution of the Canadian card business was nominal.

You continue to move through the right-hand side of (technical difficulty) page, net income and DTA is what it is.

The reductions in market risk; as you think about those reductions in market risk and work through that roughly two-thirds of that reduction in market risk were certain assets that were legacy and other securitization type assets that we had targeted to sell that from a net income perspective didn't contribute that much.

About one-third of the 18 basis points in market risk would have been VAR and other things that tend to ebb and flow with market activity.

So to the extent that the markets get better in 2012 there could be 5 to 10 basis points that comes back on there and, quite frankly, we would welcome that because it would be suggestive of the markets getting better.

You then move over to the asset sales and changes in loans.

On a net basis the biggest piece of that is our run-off portfolio within the consumer businesses and the contribution from that run-off portfolio once again is very nominal.

Then, lastly, you move over to the 12 basis points of the other.

Some of that is mono related some of that is measurement related and I think some of it's just, quite frankly, us doing a better job as it relates to how we approach Basel I measurement.

And there were some offsets on the other side.

So as you go through this, the impact and to say that we are going to see any meaningful change in income based on what we did in the fourth quarter we just don't see that.

Recognizing that to the extent that the capital markets and the global markets come back you may see a little bit of a bump up there, but other that these are good numbers and there shouldn't be a significant revenue impact outside of what I just talked about.

All right, great.

Thanks, guys.

Just make sure -- there is revenue impacts but after charge-offs in a lot of these portfolios there is no bottom line.

And that is the thing I think it has not been clear to people and so hopefully Bruce just clarified that for you.

Nancy Bush, NAB Research LLC.

Good morning, guys.

Let me warn you in advance it's a long question.

The settlement with the AGs, which once again is rumored to be near, Brian, in your view does this mark some -- if we get this will this mark some kind of watershed event that will lead to sort of a quickening of the pace of the resolution of other issues out there?

I think in the work that has gone on to develop that settlement you have had the major servicers and then obviously the representatives of the Department of Justice and the state AGs and HUD and others work together to come up with a package of programs that we believe will be very positive in pushing the situation forward.

So I think you are right.

In hindsight we will decide whether it's watershed or not a year from now, but I think that the intent of those programs is to actually help drive the recovery in housing and how to handle customers.

So I think that combined with all the other programs and the million modifications we have done, that combined with -- whether you agree housing is up or down -- but the general stability and, frankly, the passage of time and working through it I think these are good things.

That is why we have wanted -- we and the rest of the industry have been trying to work this out really to provide that catalyst to keep pushing the mortgage situation forward.

So I think you are exactly right, Nancy.

Well, then part B of that, if we get this settlement and things start to resolve, then does profitability at your company sort of go on some kind of stair step move up?

Is there going to be some dramatic move upward as the housing issues get worked out?

I mean are legacy costs going to come down that quickly, lessening of litigation reserves, etc., etc.?

Is there going to be some point at which there is a big change in profitability at Bank of America?

Well, if you just -- the question is how fast does it come through, because just to implement the settlement and the work will take a series of months and quarters.

But I think the theme is exactly right.

If you think about the drag in 2011, so we made a few billion dollars in the fourth quarter, we had $1.5 billion loss on our Consumer Real Estate business.

For the year we made $1 billion plus and we had substantial losses in the real estate business that you can see.

So if you take those losses out the core run rate of the Company is embedded and is running every quarter.

The businesses we have that are performing are driving profit.

This has been a huge, huge drag for this company, both from an expense side and then a charge-off side and everything else.

So it will come that way.

I just caution you, Nancy, to realize that this is a lot of work, a lot of people, and a lot of particularly difficult, because of what is involved and people and their homes and stuff, that we have got to work through right.

So I just caution on the speed, but the principle is right.

Okay.

And just a question for you, Bruce.

You mentioned a reduction in FDIC expenses in 2012.

Can you quantify that or just give us some color about what the expenses were in 4Q and how they should step down?

Yes, I would think about it as we got through fourth quarter there was a true-up.

And as we go forward we would expect that expense to be down a couple hundred million dollars in the first quarter relative to the fourth quarter.

All right, thank you.

Ed Najarian, ISI Group.

Thanks.

Good morning.

You talked about the LAS costs coming down and you broke that $3.5 billion down into sort of $1.5 billion of litigation, $2 billion core.

Can you give us any sense of what you think sort of a long-term run rate or normalized level is for that $2 billion core?

I know you are probably reluctant to talk about the timing of getting there, but when you do get there, maybe even a few years away, what would be the right number to think about that $2 billion going to?

So I think, Ed, to frame that think about the 60-plus delinquent units and the progress we made this year and the progress we ultimately got to get to to get to more, quote, normalized levels.

That will take the next six, eight quarters to get through that.

But when you get down to that level the number should be more in the $300 million a quarter versus $2 billion from the operating cost side.

And so a reasonable amount to service those loans, even under the heightened servicing duties that will be embedded in the way you service delinquent loans going forward is that kind of number.

I just again say it's going to take us time to work through that.

You see the progress we have made this year.

You see the flows coming in, flowing because of on the whole servicing portfolio in terms of the improving delinquency.

Then moving the stuff through the process.

So I think that is what you are looking for, from a $2 billion down to maybe a $300 million a quarter type of number.

Okay, that is helpful.

Then second question would be on interest-bearing deposits.

Unlike other banks, we saw a pretty big step down in interest-bearing deposits.

I know some of that was probably intentional CD run-off but it really happened in most deposit categories.

Any color on that?

And in your mind did that have anything to do with sort of the snafu around the charge related to debit cards that you then took back?

Let's start from the broad strokes.

We saw an elevated level of account closings in the quarter, elevated from last year fourth quarter but, frankly, by I would say 20% versus last year fourth quarter 2010 to 2011.

But from 2009 it's actually still down in the fourth quarter of 2011 versus fourth quarter of 2009 by 20-odd-percent.

So you saw that so there is no question.

That is why we pulled it back and once we pulled it back you saw that mitigate, so that will carry us into the first quarter.

But from a deposit strategy just remember overall a couple things.

One is, if you look at our deposit pricing, we have been very conservative.

Those rates have stayed low to make sure that we continue to bring that pricing down.

In the retail world we are down to 20-odd-basis-points.

If you look even in the high net worth world we are down in that pricing, and what we have made the decision was to have our customers you can see in some of the short-term flows use the off-balance-sheet vehicles and things like that as opposed to on-balance-sheet.

So that was a strategy also.

There is a third part of this, which is our balance sheet financing construct.

With $1 trillion-plus in deposits, with the amount of equity we have is that our banks are extremely liquid and so taking wholesale-oriented deposits, both domestically and internationally, we have been just cutting that back dramatically.

So if you look in the fourth quarter there is about a $20 billion deposit reduction that was engineered off of foreign time deposits and things like that that overwhelms the good core activities in the businesses really because we just can't use the liquidity.

We are in a sense at our bank level, because liquidity is so strong and as we are downsizing assets we are creating more of it, and it's a negative carry.

So you can see our overall liquidity numbers timed to acquire funding is going up while reducing the aggregate amount of deposits from this more funding characteristic.

So I would say that, yes, we had some impact from the $5 debit fee.

That is why we made the decision to reverse it.

Those impacts in the scheme of things will be manageable, but more importantly, the real deposit phenomenon is we are seeing growth.

There is no question as we saw the second half of the quarter more stability around the markets.

The company, we saw it kick up even in the corporate side, but the real engineering deposits have been both general rate conservatism, i.e, making sure we are making money for the shareholders and doing a good job for the customers, but more importantly on the more [wholesale steps] sort of bringing it down because frankly we can't put the money to work right now.

Okay, thanks.

That is helpful.

Then finally about $21 billion of government insured mortgages that are 90 days past due, I think the whole analyst community is wondering what the risk around the guarantees on that are.

I know that question has been asked on a lot of calls to a lot of companies and it's -- just sort of everyone's answer is, well, they are guaranteed.

Do you have any more color around that risk other than just sort of saying, well, we think the guarantees are there?

I think the only thing I would say to that I think is really just further support of that.

That a fairly healthy chunk of the guarantees are from product that was purchased from correspondents, and when it's purchased from the correspondent it's wrapped by the government guarantee at that point.

So we feel very good about the fact that it's wrapped.

That was the basis on a significant chunk of those that the wrap was around them when we purchased it and we clearly haven't seen anything that would suggest any differently.

But you are not getting any feedback from the FHA or from any other kind of government entities that those guarantees could be at risk in conjunction with any kind of servicing issues that might be happening on those particular loans?

No.

I think -- we do continue to work through the servicing piece of that with the FHA to make sure that we are in conformance with their standards when we go through the foreclosure process, but that is separate and distinct from the fact that those mortgages have the FHA guarantee.

Okay, thank you very much.

Matt O'Connor, Deutsche Bank.

Good morning.

If I could just follow up on the expenses.

You have given a lot of color in terms of the initiatives and the puts and takes, but as we think about the full year I guess you have got $17 billion run rate, $1 billion of stock expense in 1Q.

And then just how quickly does the $17 billion come down throughout the year?

Obviously the capital markets is a wildcard, but maybe you can just help frame what expenses will look like for the rest of the year as well.

I think you would expect to see more of it in the second half, largely because of the LAS piece as you can see the rate of working it down comes through.

And I think it's -- the severance costs and stuff help offset the incremental quarter to quarter move, but I would say we have got plans to bring it down over the course of the year.

Because of FAS, the 123R expense in the first quarter the reported number would not be much but you would see that core run rate go down almost linked quarter -- quarter, quarter, quarter, quarter -- but it will be a little more backend loaded just because the LAS piece takes us getting through -- remember we have got the foreclosure look back which costs us $20 million a month or more in there.

You got some other things that you got to get through to get to the other side of it.

Okay.

And just in terms of magnitude, any numbers you can put like where you think you might be on a run rate basis by the end of 2012?

Matt, we --I don't think we would answer that one.

Okay.

And then just separately, in the mortgage business you had some kind of MSR gains, I think about $1.2 billion or so.

How much of that was from hedging?

And then it seems like that might have included gains on selling MSRs, which is -- I guess that helps in multiple ways, but if you could just split out the hedge gains versus the gain on sale.

Yes, I would say a couple things.

If you think about the MSR, when we went into the fourth quarter we continually look at and look to balance where interest rates are, where mortgage rates are, and what declines in interest rates will do relative to mortgage pre-pays.

And so with rates very low in the fourth quarter we lightened up a little bit on the hedge ratio.

Rates obviously went back up and we benefited from that.

The other thing I would say is that as we looked at and saw actual pre-pay speeds during the fourth quarter based on the interest rate assumptions that the pre-payments were not coming in as quickly as we would have expected, and so we adjusted our models to reflect that.

As you think about those two numbers, I would think about the $1.2 billion being split about 50/50 between the two.

Okay.

Then I guess the sales from MSRs was not meaningful in terms of --?

No, I mean sometimes you lose a few bucks, sometimes you make a few bucks, but what we have seen is that the sales that have happened had been generally consistent with where we are marked.

Obviously the real benefit, and I go back to the slide that we show that we track the number of loans and delinquencies, the goal is to continue to shrink the LAS business as quickly as possible so we can get at the expense.

And that is really what the MSR sales accomplished, not so much any real gain.

And I guess taking that to the next level, you have exited or winding down the correspondent business but obviously you still have all the loans serviced and, therefore, the MSR.

Is there an opportunity to offload that portfolio which would help make the Basel III capital by a decent amount?

Yes, I would say across the board we continue to be aggressive and looking to move the MSRs.

I think if you look at -- we are starting to see more people bring these kind of packages to the market so we feel good that we got out in front of this early and that we moved a significant amount of MSRs.

I think the other thing that you referenced to keep in mind is that we have reduced -- over the course of the last six months our MSR as we look forward to Basel III is down over $5 billion.

It had been up around $12 billion or over $12 billion and we are now in the mid-$7 billions.

So we are continuing to work that down.

I don't think you should expect to see as much sale activity over the next couple quarters as what we saw close in the fourth quarter, because a lot of what closed in the fourth quarter were things that were signed up in the third.

Do you think it's possible -- a lot of the big banks are trying to reduce the MSRs because of the Basel III restrictions.

I mean are the policy makers sensitive that if all the big banks are getting out of MSRs there is not really enough capacity to absorb it all and that could increase the cost of homeownership and mortgage rates probably?

It's not appropriate for me to comment on what the policymakers are seeing.

I do think that the one thing that is interesting is that obviously the large servicers have certain standards that are prescribed by the different bank regulators that we have signed for as part of the consent decree.

Obviously a lot of these sales do go to people that are not subject to that same regulation and scrutiny, and I think going forward it will be interesting to see how that landscape evolves.

Okay.

Thank you very much.

Chris Kotowski, Oppenheimer & Co.

Just in the supplement looking at the segment disclosure for Global Banking and Markets the allocated capital and economic capital is down 30% to 40% year over year.

Allocated capital down from 47% to 33%; economic capital from 37% to 23%.

And I guess two-part question.

Part one is somehow that doesn't seem to sync with the actual reduction in risk-weighted assets yet that we have seen.

I mean why is the capital going down so much more if the risk-weighted assets are kind of going down in tandem?

Then, secondly, I guess the question is if you look at the economic capital there of $23 billion is that enough capital to run a world-class investment bank, given that JPMorgan allocates $40 billion and Morgan Stanley has $40 billion of tangible common and Goldman has $60 billion?

I think you are now comparing a lot of different things because there is other operations that are supported whether it's Goldman or Morgan Stanley.

But we have a consistent methodology.

As the legacy assets have gone out, from an economic capital cost that has been a very efficient, for lack of a better term, reduction.

The RWA may be -- under Basel I may be 100% risk weighted or things, but the economic -- we have an economic analysis that we look at and the risk embedded in that.

As you get to Basel II and III those things come in sync, as you know.

So the equity has come down.

Let me be clear, if this unit wanted more capital we would give them more capital.

I think Bruce was clear about that.

And so they are -- whether it's their value of risk or whether it's their capital this is really due to the opportunities and things going on.

So there is drivers in the credit quality that has improved dramatically over the last four quarters in the unit.

There is drivers from the legacy assets, think of things in there from the monoline positions we talked about.

The auction rate notes we talked about, the CEO positions being liquidated and taken out, and then on top of that there is -- they brought risk down because the opportunities aren't there to do it.

We expect that risk, the good core risk, the risk we want to go back up and, as Bruce said, 5, 7 basis points of capital (inaudible) because implied in that would be making money as opposed to losing money on the trading side.

So don't think that this is a -- this is an outcome of a model that we run all the time and run it consistently as opposed to a limit on our capital or anything like that.

I think the other thing I would say if you look at the decrease, the one thing and we disclosed in the second quarter that I think you have to keep in mind is that the Bank of America Merchant Services business was moved from the GBAM business to the Commercial business.

At the time that it was moved it was over $5 billion of value.

That is pure equity.

So a significant piece, you are right, that came down was by virtue of a business being moved not necessarily what was actually going on within the trading businesses.

And if I guess going -- well, both looking back over the past year and looking forward, if you look at the risk-weighted asset mitigation can you break that up into how much of that is just getting rid of legacy assets that no longer support any current business purpose versus actually trimming back the capital lines to the various trading desks?

I think I tried to address that when we spoke to the reductions in market risk during the fourth quarter and we talked about two-thirds of it within the market risk being from getting rid of certain positions, including the securitization as well as some of the structured credit.

So once again I think about that market risk number being two-thirds stuff that we wanted to be done with and one-third there were less opportunities.

Like I said, hopefully -- so far the first couple weeks in January we have seen more opportunities so that number could come back but two-thirds of that should be gone.

Okay, thanks.

That is all for me.

Matthew Burnell, Wells Fargo Securities.

Good morning.

I just wanted to follow up on Bruce's comments on the MSR.

I understand what you are saying about what appears to be an MSR hedge benefit in the quarter.

I guess I am just curious in an interest rate declining environment to write-up the MSR seems a little counterintuitive, particularly given that a couple of your competitors in the -- large competitors in the mortgage business didn't do that.

Then I guess as a follow up on that, if you end up getting the AG settlement or the industry ends up getting the AG settlement that is rumored to be near, does that -- do you think that will require you and other industry participants to materially write down your MSRs from that specific event?

Two things.

We don't see the industry settlement affecting the MSRs.

The second thing, with respect to the MSR valuation, I would make a couple points.

The first is that while rates did decrease the pre-payment activity that we saw relative to expectations was less.

The second thing I think you have to keep in mind is that our MSR went from 52 to 54 basis points during the quarter, which is significantly lower than all of our peers.

And I think if you look at the remainder of our peers, generally people either wrote it up or wrote it down within a 5 basis point window during the fourth quarter, so I think we were very consistent with what we saw.

But, importantly, as far as the capitalization rate, we are the lowest in the industry.

Okay.

Then if I could just ask a question on Europe.

It looks like your exposure to the peripheral countries really didn't change very much quarter over quarter from your disclosure.

I guess I am just curious as to some of the recent trends that have occurred since the beginning of the year if that has what made you feel a little bit more sanguine about what is going on in Europe, and if that is flowing through your view of sales and trading and other opportunities for Bank of America this year.

You ask an interesting question, and I think if you think about what we have talked about the last couple quarters that we moved fairly aggressively within the Global Banking and Markets area in 2010 to be positioned to where we wanted to be in Europe and I think got out ahead of it very early.

But your point is exactly right, which is as we look at our company and our results that the single largest thing or how we are affected by what goes on in Europe is the activity levels that we see within our Global Banking and Markets area here in the US.

Your point, I think, is a good one that obviously November and December, given the volatility, were very difficult.

The new issue market slowed down and it was tougher to trade.

As we have seen in some of the programs and at least some of the resolution that has happened over the course of the last couple of weeks, if you look out into the fixed income markets they have picked up significantly.

The IPO backlog, if there is a market, is significant and if you look at the loan business we are seeing good flows there.

So we are only 2.5 weeks into the year, but clearly some of what has happened in Europe and how people are feeling better there has manifested itself into stronger capital markets and sales and trading during the first part of this year.

Then just one final question.

Could you update us on the status of the European card portfolio sale?

And if you were to sell that, what your expectation is in terms of the Tier 1 common benefit?

I think if you look at the aggregate of the portfolio it's about $15 billion in risk-weighted assets.

The only thing I would say at this point is that we continue to look, to go through the process.

Outcomes are stating the obvious.

We may do nothing, we could look at all of it, or there could be a piece of it that goes.

But as we go through this process, given the capital and liquidity that we have, we are going to do what makes sense and just not sell something for the sake of selling it.

Okay, thank you very much.

Andrew Marquardt, Evercore Partners.

Morning, guys.

Wanted to ask about capital and the upcoming CCAR process.

It seems like, based on your commentary, that this year will be focused on capital build and expense control.

Is it safe to assume that again you will not be asking for any deployment for 2012?

We would be clear with you; we are not going to ask until we make sure that we are well-positioned for Basel III so your assumption is correct.

Okay, thanks.

And then in terms of the upping of your capital target on a Basel III basis by the end of this year, does that kind of show the confidence that you have in terms of not only earnings and the risk-weighted assets coming down, but that there is more room to grow and that you can really show improved kind of a roadmap to being in Basel III compliance through this process as well so that there is no additional actions that may need to be taken?

I would say two things.

I think increasing the guidance first is reflective of the work that we did this quarter and how we accelerated the capital build.

Once again, if you go back to the balance sheet side you can see that we increased our Basel I capital, our common equity, by $9 billion.

You should assume that the Basel III number was very close to that.

So I think the first thing is that the raising the guidance in large part was reflective of how we accelerated the actions that we did during the fourth quarter.

The second thing to your point, obviously bringing down the amount of risk-weighted assets that we think we have at the end of 2012 is reflective of your comment.

And the third thing I would say is that we have had this capital team together now for the better part of the year and I would say we are very pleased with how the team is working.

The more you get into this the more you tend to find, and we are working very hard to drive that forward.

I would say that the other thing, moving past 2012 and beyond, you have to remember that we have been working for the last couple years to think about -- as Basel III became clearer in 2010 and into 2011 and the SIFI and all the stuff became clearer, we had to be thinking long term about how you keep positioning the Company.

If you think about the three major deducts from the numerator -- the financial institutions stakes, [BMSR], the DTA -- we have done a lot of work on two of those.

The DTA will come down as we earn, so there is leverage in that past 2012 and out into before the deducts become effective there is leverage in that.

And if you look at the -- as Bruce ran through the denominator, the piece that, Andrew, that people have to keep in mind is that this doesn't stop at 12/31/12.

The process goes on.

So there is portfolios, like the run-off portfolio, and the credit book that was at a high of 120, is down round numbers now 90; runs about $4 billion, $5 billion a quarter.

It will continue to run over that time period.

There are things like the structured credit trading book.

There are other ways to optimize beyond that.

So what we are getting as we do the work that Bruce said and the work we have done the last couple of years is attacking the biggest things first.

But there is a lot of, for lack of a better term, smaller things that you just keeping working on, working on, a lot of which is not core to what we do day-to-day.

And that is what we have been pushing through.

So you should expect us to continue to manage this as we have and continue to drive it forward.

Got it.

So it sounds like there are still some [tikitak] mitigation to go, but nothing major and it sounds like one shouldn't be concerned about kind of a major kind of action in response to a CCAR stress test?

Right.

We have one more question I think.

Yes.

And then just separately, just to pile on to the many questions on expenses.

Just want to be clear, so expense leverage there is some this year but obviously top line is going to be more muted and mixed.

Do you need to have the capital markets businesses recover before you get positive operating leverage this year?

Or is there enough expense leverage to get there regardless?

I think if you look at -- in the last couple quarters if you break out the GBAM and you can see in revenue the corporate banking profit there is really fairly stable and moves along.

And so we lost $400 million after-tax in that business this quarter.

We need that business to come back or we got to do more on expenses, so we have taken some expenses down.

So I think that that -- but coming back from the third quarter to the fourth quarter, taking out all the DVAs, you saw the results recover even in another difficult quarter.

So coming back doesn't mean back to some level that it was at the high point in the first quarter of 2010 or something like that.

Coming back means $3.5 billion, $4 billion of revenue and we start making money.

That is a lot of leverage in the platform because effectively between $2.5 billion, $2.75 billion you are under pressure to make -- that is where you kind of breakeven and start making money as a practical sense on a pure trading side.

So we need that but if we don't get it we would have to do -- go to the other side.

And that is what this New BAC 2 process is working on is what is sort of the right, for lack of a better term, fixed cost structure, even though a lot of it's variable for comp, but what is the right fixed cost structure given what we see in the market conditions and the opportunities.

So we have moved early on just sort of the marginal get it down, get some people, get some expenses down, but then more fundamentally how do we reset the base.

And so -- but we do need that to get some of the positive operating leverage.

The rest of the businesses, as you look at the consumer side and stuff, they have been ground down by the revenue changes and now we got to grind -- move forward from there.

But if you look at the businesses, whether it's wealth management, whether it's Global Commercial Banking, whether it's card, you can see those businesses performing well and they will keep clicking along.

It's really fixed and mortgage getting it back to profitability, getting the trading back to profitability, and starting to build off of $150 million base in retail.

Great, thank you.

One more question I think we had.

Moshe Orenbuch, Credit Suisse.

Actually part of what I was going to ask, Brian, was about the mitigation results post 2012, because that is something you have spoken about before.

But in terms of -- on the mortgage side, just going back to that for a second, in the reps and warranties you mentioned that no significant change or no unexpected change from the GSEs.

But you did note a little bit of a build in the amount of unprocessed claims and yet you brought the reserve down.

So what is it actually that you saw that allowed you to bring the reserve down?

Was it kind of passage through more of the book?

How should we think about that?

The only reason -- if you think about the reserve, the reason that the reserve comes down is that because, to the extent that you settle up and in pacing that you believe that you have owed, it comes out of the reserve and the reserve comes down.

I think the other thing I would say is that, as we said, we have $250 million, $275 million of rep and warrant expense.

So the reserve coming down was reflective of paying those things that were expected and accrued for, and then obviously we had a couple hundred million of expense over and above that.

Moshe, remember this is a little different than other things you can think about in a P&L in a financial service company in that there is really a sealed book of 2004, 2005, 2006, 2007, 2008 originations that you are working against.

And so the expectation is as you -- you have provided for all the activity you expect to see out of that whole pool, so you are going to work this reserve down every quarter because you are using it to pay for stuff that you calculated in your expectation.

So it's different than credit or other stuff in that that is an expected outcome because it's a sealed book.

When you look at the originations from 2009 forward to 2010 the delinquencies in our portfolios, as Bruce said earlier, are much better than you would have expected when you were originating in 2009.

So at the end of the day if the loan doesn't ever become delinquent we don't talk -- this isn't a problem.

The quality of the origination practices and stuff, the products themselves, etc.

So this is really a 2004, 2008 -- really 2004, 2007, quite frankly -- sealed bid.

Then on the private-label side we didn't -- the private-label market stopped in 2008, so you really are looking at a sealed group of loans and that is why I would expect the reserves to come down.

And agreed, as there is more impasse we are consistently applying standards of resolving and people are more aggressive on what they put to us there will be more impasse.

And we will deal with it over time.

Okay.

And just a follow up on the AG settlement.

Obviously one of the things they have talked about a lot is principal reduction.

How do you think about that as it relates to kind of current rate of charge-offs, the amount that is sitting in your reserve, and the prospective charge-offs?

How do you think a change there is going to impact those items?

We have been doing this -- we have been doing principal reductions for a number of years now and the thing it has -- it all is based on a situation that the assessment is the net present value from that is better than the alternative, which would be to foreclose and take it through for the investors.

And so I think that is a clear determinant of what the better value is and that is the basis of how you make the determination.

So I think it's -- overall, as I said before, I think reaching a solution here it would be positive, as Nancy talked about earlier, but it's a rationale set of criteria to get to these issues.

I just want to be clear and I referenced it earlier, the reserves and where we are at year-end with respect to the credit reserves within the mortgage business are reflective of our expectations from what we know now of what comes out of the DOJ AG settlement.

Great.

Thanks very much.

Thank you, everybody.

This concludes today's conference.

You may disconnect at this time.

Thank you and have a wonderful day.