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Executives

Kevin Stitt - Director, Investor Relations

Kenneth D. Lewis - Chief Executive Officer

Joe L. Price - Chief Financial Officer

Analysts

Christopher Kotowski - Oppenheimer & Co.

Betsy Graseck – Morgan Stanley

Matthew O'Connor – Deutsche Bank

Paul Miller – FBR Capital Markets

Edward Najarian – ISI Group

John McDonald – Sanford C. Bernstein

Nancy Bush – NAB Research

Jefferson Harralson – KBW

Michael Mayo – Calyon Securities

Jeffery Harte - Sandler O'Neill & Partners

Bank of America Corporation (BAC) Q3 2009 Earnings Call October 16, 2009 9:30 AM ET

Operator

Welcome to today's teleconference. (Operator Instructions) It's now my pleasure to turn the program over to Kevin Stitt.

Kevin Stitt

Good morning. Before Ken Lewis and Joe Price begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results 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 and for additional factors, please see our press release and SEC documents.

And with that, let me turn it over to Ken Lewis.

Kenneth D. Lewis

Good morning and thanks for joining our earnings review. Before we get started, I want to say a couple of things to the investment community. This is the first time I have addressed you since my announcement to retire and I just wanted to say thank you for the support you have shown me during my time with you, as well as the support you have shown the company. It's been a pleasure to lead Bank of America and to interact with all of you.

As I've said before, we have a vast amount of talent in the company and we have market-leading positions in geographies, businesses, and distribution capabilities that are the envy of the industry. I have no doubt that Bank of America will thrive and my absence will not slow the momentum that is starting once again to move this company forward.

Okay, while it's never easy to talk about earnings when you are reporting a loss, there are several things this quarter than indicate that there are better days ahead. Frankly, earnings this quarter were fairly consistent with the expectations we discussed three months ago. We indicated in July that profitability would be tougher in the second half of the year versus the first half due to the absence of several unusual positive items that helped first half earnings, as well as due to the normal seasonal drop in revenue that occurs in the second half.

We did experience the seasonal impact and although revenue overall dropped in the third quarter, results were better in some businesses than the normal seasonal pattern. Overall, the pace of deterioration in credit quality slowed and was somewhat better than expected in several portfolios.

On the negative side, earnings reflected the impact of the charge for terminating the government asset guarantee terms fee associated with the Merrill acquisition, as well as the negative accounting impact associated with the improvement in our credit spreads. But as I said last quarter, I would rather see the operating improvements and take the accounting lumps that come with our company's improving spreads.

For the third quarter of 2009 Bank of America had a net loss of $1.0 billion, before preferred dividends, or a loss of $0.26 per diluted share after deducting preferred dividends of $1.24 billion, including almost $900.0 million related to the government and TARP. The termination of the government asset guarantee term sheet resulted in an expense of approximately $400.0 million in the quarter. The mark on the Merrill-structured notes was a negative $1.8 billion and the mark on the company's own derivative liabilities was $700.0 million.

Total revenue on an FTE basis was in excess of $26.0 billion while pre-tax, pre-provision income was approximately $10.0 billion, including the impact of the $3.0 billion of negative items just mentioned.

There were several positive trends in the quarter. The balance sheet continues to be managed prudently, resulting in lower risk-weighted assets, increased liquidity, and improved capital ratios. As we experienced in the second quarter, Merrill Lynch continued to provide a significant contribution to operating revenue. The capital markets environment was better than expected and resulted in a 37% increase in sales and trading revenue and solid investment banking revenue, although down seasonally from the previous quarter.

Results in Global Wealth and investment management reflected higher asset management fees and brokerage income driven by increased client activity and stabilization among our financial advisors. New deposit generation maintained its positive momentum with overall corporate-wide average deposits up more than $14.0 billion. We continue to meet or exceed many of the milestones around both the Merrill and Countrywide integrations.

Finally, and not the least, we believe we may have peaked in total credit losses this quarter, although the levels going forward will continue to be elevated and certain businesses will still experience power losses.

Unfortunately, any earnings impact of these positives this quarter were more than offset by continued high level of provision expense, lower customer activity due to the economic environment, and the other items that I just mentioned.

Total credit extended in the third quarter was $184.0 billion, including commercial renewals versus $212.0 billion in the second quarter. The larger components were $96.0 billion in first mortgages, $66.0 billion in non-real estate commercial, and $8.0 billion in commercial real estate. The remaining $14.0 billion includes other consumer retail loans and small business loans.

Despite these new extensions, loan growth overall declined due to lower consumer spending and a resurgence in the capital markets, allowing corporate clients to issue bonds and equity, replacing loans as a source of funding. Additionally, companies continue to be very cautious and we are not seeing the level of seasonal inventory builds or capital expenditure spending at any meaningful level.

Provision expense in the third quarter decreased from the second quarter by $1.7 billion, but included a $2.1 billion addition to the reserves and that's versus a $4.7 billion in the second quarter.

Now, before I turn it over to Joe let me make a couple of comments about the current environment. Merrill Lynch continued to be accretive to earnings year-to-date as these market-sensitive businesses offer diversification to offset the core credit headwinds we are facing. Although expected to peak this year, net loss levels will continue to remain high going into 2010. Additions to the reserve will most likely continue at least through the fourth quarter, but as you saw this quarter, the level of reserve addition is down substantially.

We continue to position the balance sheet to write off the recession with deleveraging actions earlier this year, shrinking certain asset positions and substantially adding to reserve levels.

Our outlook for the economy is close to the consensus view, with unemployment peaking around the 10% level. We believe the pace of new bankruptcy filings for individuals has slowed somewhat but still see some additional pressure on home prices. Based on this economic scenario, results in the fourth quarter are expected to continue to be challenging as we close the year.

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

At this point, let me turn it over to Joe for additional color and commentary.

Joe L. Price

I plan over the next few minutes to cover the performance of each of our businesses, credit quality and some other topics, but before getting into business results, let me highlight the large items that impacted earnings in the third quarter, and you can see these on Slide 5. As most of you are aware by now, structured notes issued by Merrill Lynch, which are mark-to-market under the fair value option, resulted in the hit earnings of $1.8 billion on a pre-tax basis due to narrowing credit spreads. If you remember, the mark was a negative $3.6 billion in the second quarter. Now, as a reminder, the impact of marking our cash liabilities does not impact Tier 1 capital.

Credit evaluation adjustments on derivative liabilities—and these are principally in our trading businesses—were revalued, resulting in a negative impact of $714.0 million versus a negative of $1.6 billion in the second quarter. Again, a good thing, but still negative to earnings. Market disruption valuation adjustments this quarter in our global markets business were actually a net positive of $200.0 million.

On the CMBS and related exposure side in global markets, we took a charge of approximately $600.0 million related to exposures in the hotel industry and equity investments. On our remaining CDO-related exposure we recorded a loss of $138.0 million. These negative charges were offset by positive marks in legacy assets, primarily on the recovery of value on exposures by monoline. This enabled us to recover a portion of the valuation allowances against the reduced receivables from monolines.

Now, the third quarter tax rate, or tax benefit, of the loss was higher than statutory due to a shift in the geographic mix of our earnings globally. In the fourth quarter we expect the effective tax rate to trend toward statutory, absent any unusual items.

Now let me quickly touch upon some highlights in each of the businesses this quarter. In our deposit segment, on Slide 7, earnings were $798.0 million in the quarter, up from $509.0 million in the second quarter. Net interest income of $1.7 billion was flat with the second quarter, while non-interest income of $1.9 billion increased 10%. Non-interest expense of $2.3 billion declined 11% due to the absence of the FDIC special assessment charge that was incurred in the second quarter.

Now on Slide 8 you can see average retail deposit levels for the quarter, excluding Countrywide, were up almost $8.0 billion, or 1.2% from the second quarter, which we believe is about industry growth. We continue to see product mix shift from CDs to higher margin checking accounts.

Now, Merrill Lynch continues to show momentum here as financial advisors provide to customers the benefits of an expanded product suite. Checking balances now represent over 40% of our retail deposit base.

In late September we announced changes of our overdraft fee policies. These changes were intended to help customers avoid excessive overdrafts by better managing their finances. As a result of these changes, future fee revenue streams will be negatively impacted beginning in the fourth quarter.

Now we are assessing proactive strategies to further strengthen consumer trust and more evenly balance our fee structure across our entire customer base. Additionally, as most of you are aware, the Federal Reserve is expected to issue a final ruling in the fourth quarter addressing Reg E. The proposed ruling may further impact our fee revenue on a go-forward basis. We will be more explicit about the impact once the final ruling is known. But as things currently stand, given the changes we made, absent any mitigating actions, I would expect revenue to negatively impacted between $150.0 million and $200.0 million in the fourth quarter.

The global card services is on Slide 9. Although a loss of $1.0 billion dollars was recorded, this was an improvement over the second quarter results by almost $600.0 million, due mainly to lower managed provision expense. Both managed revenue and expense levels were flat with the second quarter.

Provision dropped $766.0 million due to reserve reductions of approximately $560.0 million this quarter, which occurred in consumer credit card, consumer lending, and small business as delinquencies improved. I will come back to this in a minute, as we actually reduced reserves $1.2 billion but we had to put up reserves of about $600.0 million associated with maturing credit card securitizations. Average managed consumer credit outstandings were down 2.4% from the second quarter to $168.0 billion.

In the third quarter retail purchase volume—and this will be both debit and credit volume—was flat with the second quarter, although down 7% from a year ago. We continue to add new accounts. 700,000 new domestic retail and small business credit card accounts in the quarter with credit lines of approximately $4.5 billion.

Now home loans and insurance—and you can see this on Slide 10—experienced an increase in mortgage rates for most of the quarter although we have seen a drop in the 30-year fixed rate closer to 5% at the end of the quarter. As a result, total revenue for the quarter was $3.4 billion, down $1.0 billion from second quarter levels due to lower production and lower MSR hedge results. Production revenue decreased $565.0 million due to the lower volumes and margins. Servicing income decreased $672.0 million, primarily due to lower MSR performance, net of hedge results, reported in the line of business. As forecasted HPI, or the Home Price Index, improvements hurt our MSR valuation. HPI improvements increase the change of repayment or refinance, thereby increasing projected prepays fees.

Now the capitalization rate for the consumer mortgage MSR asset ended the quarter 102 basis points, down 7 basis points from the second quarter.

Provision increased $171.0 million to $2.9 billion and reflected an addition to the reserves of $900.0 million, most of which was associated with the home equity purchased impaired, or the SOP 03-3 portfolios.

Total first mortgage fundings in the quarter were $96.0 billion, down 14% from second quarter, or $111.0 billion. Approximately 39% of the fundings were for home purchases versus approximately 30% in the second quarter. And we continue to maintain strong market share during the quarter, estimated to be in excess of 20%. And although we've seen volatility in the rate environment, and it has started to cause the re-fi volumes to trail off for most of the third quarter, we have observed volumes picking up with the recent decline in rates.

Global Wealth and Investment Management—and you can see this on Slide 11—earned $271.0 million in the third quarter, down from second quarter levels due mainly to higher provision expense. Growth in asset management fees and brokerage income was more than offset by additional Columbia cash support to purchase all remaining SIV, or structured investment vehicle, exposure and other troubled assets, principally from certain cash funds.

Provision was up $277.0 million due to the charge-off of a single commercial client and higher additions to the reserve. Assets under management ended the quarter at $740.0 billion, up $35.0 billion from the end of June as the improvement in market valuations more than offset outflows from the money market funds.

We ended the quarter with approximately 15,000 financial advisors, flat with the end of June and an indication of ongoing stabilization in that group.

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

These are in the low end of the range we disclosed, think of this as having minimal P&L impact but monetizing nearly $800.0 million of goodwill and intangibles, thereby improving capital slightly.

Now Global Banking—and you can see this on Slide 12, and remember it encompasses our commercial bank, corporate bank, and the investment bank—essentially broke even in the quarter with $40.0 million in net income, down from the second quarter due to the absence of the gain from the sale of our merchant processing business to a joint venture. Loan spreads continued to widen as facilities were re-priced at higher market rates.

Although commercial and corporate clients are being cautious, given the economy, and balances are down, we continue to see improved credit spreads as market prices reflect underlying risks.

Provision expense decreased 9% to $2.3 billion but still included a sizeable reserve addition during the quarter of $592.0 million, mainly associated with commercial real estate.

Average loans as reported for the quarter were down 4% from the second quarter as clients continued to aggressively manage working capital and operating capacity levels. Significant bond issuance for loan repayments also impacted balances. However, average deposit levels increased $10.0 billion, or 5%, from the second quarter levels.

Investment banking fees—and this is across the corporation—were down $392.0 million—and this is detailed on Slide 13—to $1.3 billion versus the second quarter but still represented a strong quarter in our mind given the seasonal trends. The combined Bank of America/Merrill Lynch franchise ranked number one in high-yield debt, leveraged loans, and MBS, number two in ABS and syndicated loans, and ranked number three in global, and number two in U.S. investment banking fees for the first nine months of 2009.

Global markets on Slide 14 earned $2.2 billion in the third quarter, up $800.0 million, or 58%, versus the second quarter. Strong sales and trading results, which you can see on Slide 15, combined with lower market disruption charges, drove the increase. Risk-weighted assets declined 5% reflecting a more efficient use of the balance sheet and market value changes.

As you can see on Slide 15, sales and trading revenue in the third quarter was $5.3 billion versus $3.9 billion in the second quarter. Lower credit valuation adjustments on derivative liabilities, which were an actual negative mark in the quarter of approximately $700.0 million, and lower market disruption charges, where we had an actual positive mark of approximately $200.0 million in the quarter, helped this quarter.

But even so, results were better than we expected, given the normal seasonal slowdown. Structured products, rates and currencies, and equity trading all improved versus the second quarter.

Non-interest expense was down from the prior quarter due to merger-related cost saves and a change in compensation that delivers a greater portion of incentive pay over time.

We detail on Slides 16 and 17 a number of the most pertinent legacy exposures in the capital markets business. I won't go into detail, but as you will see, most of the exposure showed improvement or reductions versus the second quarter.

Not included in the six business segments is equity investment income of $886.0 million in the third quarter, due mainly to improved market valuations. In addition, on a consolidated basis we had security gains of approximately $1.6 billion, partially offset by impairment charges on non-agency RMBS of $411.0 million.

Now let me switch to credit quality, and this starts on Slide 19. Consumers continue to experience stress from higher unemployment and under-employment levels, ongoing high bankruptcy levels, as well as depressed home prices, leading to higher losses in almost all of our consumer portfolios. Likewise, commercial portfolios reported higher charge-offs as a result of the prolonged recession and the impacts of continued stress on the consumer- and housing-related sectors and deterioration in non-home builder commercial real estate.

Third quarter provision of $11.7 billion exceeded net charge-offs, reflecting the addition of $2.1 billion to the reserve, which was lower than the addition of $4.7 billion in the second quarter. We even had reserve reductions in certain portfolios.

Consumer reserve additions were $1.5 billion, $1.3 billion associated with the reduction and expected principal cash flows on the Countrywide purchased impaired portfolio, $660.0 million for consumer real estate loans, $600.0 million associated with card securitizations that matured and came on the balance sheet during the quarter, offset by reductions in the allowance for credit cards that were already on the balance sheet and where delinquencies improved $600.0 million. And a reduction in the allowance for consumer lending and dealer financial services of $530.0 million.

Commercial reserve additions were approximately $600.0 million, essentially all earmarked for commercial real estate, although a decrease of $140.0 million in reserves for small business were offset by an increase in other non-real estate commercial. Our allowance for loan and lease losses now stands at $35.8 billion, or almost 4% of our loan and lease portfolio. Our reserve for unfunded commitments now stands at $1.6 billion, bringing the total reserve to $37.4 billion.

Now we expect some reserve increases, including reserves for maturing card securitizations, for the next quarter or two, but as Ken said, at levels reduced from the current quarter.

Now even though the economy has shown some signs of stabilization that point toward recovery, the ultimate level of credit losses and reserve additions will be dependent upon whether the stabilization is sustained, as well as the duration of the credit cycle. And I should note here that my comments about future reserve additions do not take into account the impact of FAS 166 and 167 that will be implemented next year and will result in the consolidation of certain assets such as the credit card trust on the balance sheet.

Now the held-basis net charge-offs across all businesses in the quarter increased $923.0 million, or 49 basis points, from the second quarter levels, to 4.13% of the portfolio, or $9.6 billion. On a managed basis, overall consolidated net losses in the quarter increased $1.2 billion to $12.9 billion. Of the $1.2 billion increase, the consumer increase was almost 60%, or $720.0 million. Now due to the reduction in balances, principally in unsecured products, the loss rates are somewhat distorted so that's why I'm talking in dollar terms.

Credit card represents 53% of total managed consumer losses, and as you can see on Slide 21, managed consumer credit card net losses were $5.5 billion compared to $5.0 billion in the second quarter. Losses increased due to a jump in early-stage delinquencies in late 2008 and early 2009. If you couple that with the 180-day charge-off policy, you can see why losses increased this quarter. 30-day-plus delinquencies in consumer credit card decreased $868.0 million, the second consecutive quarterly drop, leading to the reserve actions I mentioned earlier.

Now, we continue to be cautiously optimistic that delinquency trends signal a stabilization in losses, however, as I mentioned earlier, delayed recovery in the U.S. economy beyond expectations or unforeseen events could obviously keep pressure on this performance.

Credit quality in our consumer real estate business continued to deteriorate in the third quarter. But before I get into individual consumer real products, let me remind you of a couple of important drivers, as I did last quarter.

Total consumer NPAs, which are highlighted on Slide 22, increased $1.9 billion in the third quarter compared to an increase of $3.2 billion in the second quarter, and now total $21.0 billion. This is primarily comprised of consumer real estate with the lion's share being first mortgage.

Now there are a number of things affecting this portfolio that as a reminder we generally place consumer real estate on non-performing 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 restructurings, or TDRs, which we explained last quarter, that reflected as NPAs, even though most were not 90 days past due when the restructuring or modification was made. While are efforts are to responsibly keep borrowers in their homes and paying, as we think that reduces the overall costs, the impact is that the NPA number is elevated.

Now, former moratoriums on foreclosures have been lifted as the MHA program and other modification efforts are now up and running, therefore once a loan has been evaluated under all the various programs, if no other alternative exists, that loan will be released into foreclosure.

Now our residential mortgage portfolio—and I'm on Slide 23 now—showed an increase of $162.0 million in losses to $1.2 billion, or 205 basis points, an increase of half as much as we saw in the second quarter. Much of the increase was driven by a revision of our estimate of the impact of the REO process and what that has on net realizable value. Absent that catch-up adjustment, charge-offs were virtually flat at $1.1 billion, or 180 basis points. 30+ delinquencies rose $1.9 billion, representing the repurchase of delinquent government insured, or guaranteed, loans from securitizations. Excluding the repurchase, 30-day delinquencies were up slightly, about $139.0 million.

Now on the non-performing asset front, we saw an increase of $2.0 billion, less than the $2.8 billion in the second quarter. Non-performing TDRs increased $841.0 million in the quarter. Approximately 60% of the new TDRs into nonperforming were performing at the time of reclassifications. Of the $16.5 billion of residential mortgage in NPAs, TDRs make up 18%. Now, about 57%, or $9.4 billion of the NPAs are greater than 180 days past due and have been written down to appraised values, which should be considered when evaluating reserve adequacy.

I should also note that we saw stability in both severity and average size of charge-offs this quarter. Our reserve levels were increased on this portfolio during the quarter and represent 1.87% of period end loan balances versus 1.67% in June.

Now, given the weakness in the economy and the continued pressure on home prices, we may see continued deterioration in this portfolio, and therefore may add further additions to the reserve.

Now switching specifically to home equity—and I'm back on Slide 24—net charge-offs increased $131.0 million to $1.97 billion in the third quarter. However, we accelerated charge-offs of $223.0 million during the quarter related to an adjustment to our loss severities due to the protracted nature of collection under some insurance contracts. Excluding that adjustment, net charge-offs would have dropped in the quarter. 30+ performing delinquencies are up $184.0 million, or 15 basis points, to 1.4%. Non-performing assets in home equity, principally loans greater than 90 days past due, decreased to $3.8 billion, a decrease of $146.0 million, which is the first decrease since the start of this credit cycle.

Now as I explained last quarter, we've been working with borrowers to modify their loans to terms that better align with their ability to pay. When we do that, under most circumstances the loans are identified as TDRs. Non-performing TDRs in home equity increased $218.0 million. Almost 90% of the modified home equity loans were performing at the time of reclassification into TDRs, elevating NPA levels.

Now to give you some color, TDRs, where we have improved the likelihood of repayment, make up 43% of home equity NPAs. In addition, about 17%, or 656.0 million of the NPAs are greater than 180 days past due and have been written down to appraised values.

We increased reserves for this portfolio to $9.7 billion, or 6.39% of ending balances, and that would be 5.12%, excluding the purchase-impaired one, due to further deterioration in the purchased-impaired portfolio and continued to elevated levels of delinquency on the rest of the portfolio, while delinquency growth has slowed versus the previous quarter, delinquency levels continue to be elevated.

On Slide 25 we provide you details on our direct and indirect loans, which includes the auto- and other-dealer-related portfolios as well as consumer lending. Net charge-offs in dealer financed decreased 3% to $194.0 million, or 1.85% of the portfolio, as we've experienced improved collateral values. We saw the expected leveling off in consumer lending charge offs and expect them to decrease due to the improvements in delinquent amounts.

Slide 26 shows the details of the purchased impaired Countrywide portfolio, which shows lower charge-offs but with actual trends of frequency and severity continuing above our expectations, we added $1.3 billion to the allowance on this portfolio. We have provided more details on the slide for you given the charge this quarter so I won't go through that in detail. In looking forward, I would say this portfolio's valuation—and remember the purchased impaired portfolio is a life-alone reserved portfolio—is more sensitive to HPI and our success under the modification programs. We would also expect a lion's share of the charge-offs to come through in the next few quarters. Now similar factors for the drivers behind our valuation of non-agency CMO securities, which drove the OTTI charge that I mentioned earlier.

Switching to our commercial portfolios—and you can see this on Slide 29—net charge-offs increased in the quarter to $2.6 billion, or 309 basis points, up in dollar terms about 25% from the second quarter. Net losses in our $18.0 billion small business portfolio, which are reported as commercial loan losses, increased $23.0 million, to $796.0 million, compared to an increase of $140.0 million in the second quarter. As we've discussed before, many of the issues in small business relate to how we grew the portfolio over the past few years, which is now compounded by the current economic trends.

However, we think we are close to the peak in small businesses losses as indicated by several linked quarter declines in 30+ delinquencies, as well as 90+ delinquencies, which are down more than 10%. Our current allowance for small business stands at 15% of the portfolio.

Now excluding small business, commercial net charge-offs increased $505.0 million from the second quarter to $1.8 billion, representing a charge-off ratio of 228 basis points. The losses in the quarter were split almost equally between non-real estate, which is about 52%, and real estate. Of the $261.0 million increase in non-real estate losses, 72% was driven by two fraud-related losses. And within commercial real estate, net charge-offs increased $244.0 million to $873.0 million, representing a charge-off ratio of 4.67%.

Now this is the first quarter that non-home builder losses now constitute a majority, or 57%, of our commercial real estate losses. The increase in net charge-offs from the non-home builder portion of the portfolio was driven primarily by multi-family rental and multi-use property types. Commercial NPAs—and this is detailed on Slide 30—rose approximately $1.0 billion, an increase of just about half of the second quarter, to $12.9 billion, or $12.7 billion excluding small business. 44% of the increase was due to commercial real estate, driven by non-home builder exposures. Home builders actually dropped again this quarter.

Now let me give you some color behind the make-up of our commercial NPAs. Commercial real estate makes up about 59% of the balance, or about $7.6 billion, with a little less than half of that being home builders. Outside of commercial real estate, the balance is concentrated in housing-related and consumer-dependent portfolios within commercial/domestic. NPAs are most significant in commercial services and supplies—think realtors, employment agencies, office supplies, etc.—at 6% of the total commercial NPAs, followed by individuals in trust at 4% and vehicle dealers and media at 2% each. No other industry comprised greater than 2%.

Now just over 90% of commercial NPAs are collateralized and approximately 34% are contractually current. Total commercial NPAs are carried at about 75% of original value before considering loan loss reserves.

The reservable criticized utilized exposure in our commercial book increased $2.9 billion in the third quarter compared to an increase of $8.5 billion in the second quarter and is the lowest increase since the fourth quarter of 2007. However, it was still an increase and reflective of the continued deterioration in the U.S. economy with about 60% of the increase being real estate. Commercial real estate criticized increased $1.7 billion to $29.9 billion.

While home builders with $6.7 billion still represent the largest concentration, we actually saw a reduction there of about $670.0 million. The largest increases were in office, multi-family rental, and multi-use properties. Outside of commercial real estate we saw further weakening and, again, housing-related and consumer-dependent businesses. 85% of the assets in commercial reservable criticized are secured, of which approximately 10% is our highly secured asset-based lending business.

Now while we obviously will see some continued deterioration, our past rated credit discussion over the past couple of quarters have felt much better, which is translating to lower flows into criticized.

And as I mentioned earlier, we added to commercial reserves in the third quarter, of which almost all was related to commercial real estate. Total commercial reserve coverage at the end of September increased to 2.76% of loans.

Then we move from credit quality and talk about net interest income—and here I'm on Slide 32—compared to the second quarter on a managed and FTE basis, net interest income was down $356.0 million. Managed core NII dropped approximately $283.0 million while market-based NII dropped by $73.0 million. The core NII decrease was mainly due to lower loan levels, almost across the board, due to weaker demand, and the impact of our earlier deleveraging of the LM[?] portfolio, partially offset by the impact of the favorable rate environment and improved pricing.

Also impacting our net interest income was the drag from asset quality, both non-performing as well as interest reversals. This negative impact on core managed NII in the third quarter was $1.15 billion due to non-performing assets, approximately $330.0 million in interest reversals, approximately $820.0 million. Combined, this impact was approximately $40.0 million worse than the second quarter. Now, most of the interest reversals relate to the credit card business.

The core net interest margin on a managed basis decreased 6 basis points to 3.65% due mainly to lower loan levels and higher-yielding assets such as cards.

Now turning to our interest rate risk position, we continue to be asset sensitive where we benefit is rates rise and are exposed as rated decline. As you can see from the bubble chart on Slide 34, which as you know is based on the forward curve, our interest rate risk position is slightly more asset-sensitive relative to how we were positioned three months ago. The change in sensitivity is primarily due to a lower level of rates.

Given how low rates are, we remain flush with liquidity and believe an asset-sensitive position makes sense, as we are positioned to benefit as rates rise in the future.

Now let me say a few things about capital—and you can see this on Slide 37—the Tier 1 capital ratio at the end of September was 12.46%, up 53 basis points from the second quarter, due mainly to managing the size of our balance sheet. Our Tier 1 capital level is $100.0 billion in excess of the 6% well-capitalized minimum requirement. Tier 1 common increased 35 basis points to 7.25% while our tangible common equity ratio increased at 4.82%. Tangible common equity rose as a result of improved valuations in securities available for sale, which increased OCI. As a reminder, the appreciation above our current values for either Black Rock or China Construction Bank is not included in OCI.

Preferred dividends this quarter were $1.24 billion, of which almost $900.0 million is associated with TARP preferred, or $0.10 per share per quarter, given no tax benefit. I remind you that this is up from the second quarter due to the preferred exchanges for common in the second period which recognized the discounts from the exchange. This level of preferred dividends in the third quarter is expected to remain about the same next quarter.

Now going forward into the final quarter of 2009 and in line with Ken's remarks, we believe we are at a peak in total credit losses, or at least very close to it. Having said that, it's difficult to call a specific quarter when credit costs start to drop substantially from the peak. Excluding the purchased impaired portfolio and the amount we put up for maturing securitizations, reserve additions would have been minimal this quarter. And once we hit the inflection point on losses where we no longer have to build reserves, we should get some lift.

We improved our strong balance sheet again this quarter with a robust and even more conservative liquidity position, stronger credit reserves, and higher capital ratios. With credit losses possibly peaking soon, we believe the level of our reserves and revenue generation over the next several quarters will enable us to get through the period with minimal impact on capital levels.

Merrill Lynch once again contributed positively to earnings and has done so over the first nine months of the year. The Merrill Lynch integration effort is on track and continues to make headway.

With Countrywide we are in the process of launching significant system conversions over the next several quarters and plan to finalize the Countrywide integration by June of next year.

Cost saves at Merrill were approximately $1.0 billion this quarter, or $2.2 billion for nine months, so we're well on our way towards exceeding 45% of the total cost saves, which were projected at $7.0 billion annually in 2009 and well ahead of our original 2009 goal. We continue to see decent business momentum this quarter and with further stabilization in both the economy and credit quality we can continue to improve our competitive position, which should enhance the bottom-line.

With that, we will open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christopher Kotowski - Oppenheimer & Co.

Christopher Kotowski - Oppenheimer & Co.

A couple of things. One, is I was wondering, in looking at the sort of consolidated P&L, we still see other than temporary impairment losses on AFS debt securities. Just about every credit spread that we look at improved during the quarter and I was just curious why are there still losses there, given the environment?

Joe L. Price

Losses there were driven principally off of two places. One was the, as I mentioned in the remarks, in the non-agency CMOs that principally came over from either Countrywide or some from the Merrill Lynch investment portfolio and as we recalibrated the severities and the cash flow expectations off of all those, that's what drove the impairment for us from that standpoint.

And the other, probably the other third—it's probably two-thirds, or maybe it's closer to a half-half—related to some of the market disruption charges that I mentioned in the markets business where the CDO charges. Some of those securities, and you can see this in the supplement or if you go back in the 10-Q, have a piece of them carried in the available for sale, and it was related to that same charge.

Christopher Kotowski - Oppenheimer & Co.

Again, just odd, because all the markets seemed to have improved. The other thing was the $277.0 million reserve to a single client out of Global Wealth Management. In general, I think of that as sort of a granular, non-credit-intensive business. Can you give some color on that and give us comfort that there aren't others like that in there?

Joe L. Price

Yes, the charge—I think you're referring to the total change in credit costs as opposed to just a particular charge, so it was probably half of that, but it did relate to a fraud-related item. One of the larger credits but a fraud-related item. It was a commercial credit.

Christopher Kotowski - Oppenheimer & Co.

And I don't know if there is any comment you can make about timing on the succession announcement.

Kenneth D. Lewis

No, I can just say that there is an appropriate sense of urgency, but combined with wanting to obviously make the best decision, it's the most important decision a board can make, and so I am assured that there is the proper balance in getting it right but also doing it with a sense of urgency, but I can't give you a date.

Operator

Your next question comes from Betsy Graseck – Morgan Stanley.

Betsy Graseck – Morgan Stanley

A couple of questions on credit and earnings power. On credit, if I back out what you provided for in the CFC provision that you did this quarter, which is it fair to say that that's kind of a catch-up provision? And you would think that you're done with that? Is that a fair assessment?

Joe L. Price

I think in this whole downturn, I've learned never to be done with anything. But we tried to lay out on the slide the detailed characteristics so you can see the delinquency improvement and kind of the trends on it in the package, so if we're not done that should be the lion's share but it is sensitive to home price indexes or home price out in the future, and then also modifications. But the lion's share should be behind us.

Betsy Graseck – Morgan Stanley

And what are you thinking about in terms of home price change one year forward? Because I think that's what you would be reserving for, is your forward look for one year.

Joe L. Price

Yes, for 03-03, you know, it's a life of loan thing so you kind of look forward, but we're pretty consistent with kind of the Case-Shiller details on both the state level as well as nationally.

Betsy Graseck – Morgan Stanley

So is the provision that you would get to, about $10.0 billion ex the CFC, a core run rate for this quarter do you think, or . . .?

Joe L. Price

Well, if you just did the math and took that and said what did you build—I think I made this comment in the remarks—if you took that out, the 03-03 provision, and then you took maturing securitizations, everything else kind of netted off. But we're not suggesting that charge-offs have absolutely peaked. I mean, we think we are near, or somewhere near, from that standpoint and then hopefully if the economy can continue to show stability and improve we would not have to have the level of reserve build on top of that. So I think that's the way to think about it.

Betsy Graseck – Morgan Stanley

And reserve build is really a function of NPL growth, is that fair?

Joe L. Price

It differs by the pieces, so it's less about NPA growth and more about our view of the forward look at charge-offs on the consumer products and then principally on the commercial, corporate side. It's pretty much loan-by-loan and risk-rating driven. So think of the reservable criticized as driving a big piece of that.

Betsy Graseck – Morgan Stanley

And how do you think about what your reserve does over the next couple of quarters or the next couple of years?

Joe L. Price

Probably tracks economic activity. You know, the better the economy—I mean, if you think about credit quality in general, the core is where the charge-offs go and obviously if the economy continues its path of stabilization and then growth, then we ought to be able to track that. That would suggest to you that at some point those are not needed but right now it's too early to call that.

Betsy Graseck – Morgan Stanley

And the earnings power question, it seems like you are indicating that as rates rise and as demand for credit comes back, you've got some earnings power. The other question I had is just from the liquidity that you indicated, you know, a significant amount of liquidity at this stage. What would drive you to put some of that excess liquidity back to work sooner?

Joe L. Price

Earlier it was probably as much about making sure we got the Merrill Lynch BAC or BAS platforms put together, understood contingent liquid requirements, and things of that nature. We're kind of through that exercise and now it has probably as much to with opportunity and maybe a little of the other still left over. So you will see us put some to work in what I would call a liquidity portfolio. We've done some of that this quarter but the duration will probably stay reasonably short until we see the curve in an appropriate position.

Betsy Graseck – Morgan Stanley

And is there anything associated with TARP repayment? Are you holding any excess liquidity to pay back TARP?

Joe L. Price

Well, obviously the most beneficial thing would be to take the TARP dividend out with some of that liquidity and so that's obviously one of the things in the thinking, yes.

Betsy Graseck – Morgan Stanley

And is there any expectation you can give us on time frame for that?

Joe L. Price

I didn't hear you.

Betsy Graseck – Morgan Stanley

Is there anything you can give us with regard to expectation for repaying TARP?

Joe L. Price

All I can say is we're supplying all the information and doing everything we can on our part, but you probably heard that some more specific guidance is supposed to come out from the regulators regarding repayment criteria very shortly, so we'll need to make sure we meet those criteria, but nothing else has changed from what we've said in the past. That's our goal.

Betsy Graseck – Morgan Stanley

And would you use any excess liquidity to pay down debt as opposed to issue? You've got some issuance coming due over the next year.

Joe L. Price

Yes, this quarter if you looked at what we did, we probably had about 3.5x to 4.0x the maturity than we had issuance. I mean, we were out in the market, we issued, part of showing that we could and then where we wanted to keep the avenues open, so you would probably see us do a little more of that over time, too.

Operator

Your next question comes from Matthew O'Connor – Deutsche Bank.

Matthew O'Connor – Deutsche Bank

Loans continue to decline at a pretty rapid rate, both for the overall industry and for you as well. I'm just wondering with some signs that the economy is bottoming is your appetite to make loans and keep them on your balance sheet increasing at all?

Kenneth D. Lewis

I would just say that we are actively looking for every good loan we can make. Obviously it's the core of how we make money so that the attitude hasn't changed but if the economy starts to get better and there is demand, then we will be there to supply credit.

Matthew O'Connor – Deutsche Bank

And do you have thoughts of where we might first see that demand? Which categories.

Joe L. Price

My guess, I would think on the commercial side you would probably see it first in the middle-market areas because once business confidence comes back and you see the middle-market companies begin to build their inventory and spend more on capex, put people back to work, etc., that's probably on the commercial side where you would see it more so than maybe large corporate, which would tend to go into the marketplace a little bit more.

And on the consumer side, it's probably first mortgage and areas of that nature versus home equity and things of that nature that you would see it first.

Matthew O'Connor – Deutsche Bank

And then just separately, I just had a clarification question. On Slide 15 where you show the sales and trading revenue, obviously both periods are being impacted by the CVA write-downs as well as the market construction noise. If we look at the equity income line, is that a pretty clean number, quarter-to-quarter? I figure there's not that much noise in those two numbers.

Joe L. Price

The only reason I'm hesitating on that is to see how much derivative liability impact you had in there. It should not be a whole lot but it's probably a little bit. But I think compared to fixed income, that one's pretty apples-to-apples.

Matthew O'Connor – Deutsche Bank

The Tier 1 common dollars actually went up a couple of billion from quarter-to-quarter, even though net income was negative. I was trying to figure out are there more deferred tax assets that are now being allowed or what's driving that increase in capital?

Joe L. Price

There was a piece of that that relates to deferred tax assets where our carry-back capacity, where we refined our carry-back capacity and had some incremental ability, so there was a piece of that and I will come back to you, or get Lee or Kevin to, on anything that was main but that was one of the bigger drivers.

Matthew O'Connor – Deutsche Bank

Do you know offhand how much additional DTA is being excluded, that could come back in over time?

Joe L. Price

We don't have a lot of haircut DTA there. We do have some remaining for GAAP purposes and therefore it's not in the DTA, unutilized—or let's call it reserved against carry-forwards—and so it's more of that, but counted in several billion, not a ton more than that.

Matthew O'Connor – Deutsche Bank

So the regulatory capital from here will be mostly driven by net income and then whatever happens on the balance-sheet size.

Joe L. Price

Yes, and you do have volatility from the DTA to the extent that over time you move out of carry-back into carry-forward, a lot of moving parts on it, so you could get a little bit there but it shouldn't be that big a number.

Operator

Your next question comes from Paul Miller – FBR Capital Markets.

Paul Miller – FBR Capital Markets

I had a question, mainly on the credit card. Can you talk about how, if you're loan modding some of those credit cards and are they coming up in the TDRs and how they are impacting both the NPAs in the credit card portfolio and the reserve methodology?

Joe L. Price

When you talk about mod—there's a lot of different ways you can modify credit cards. There are two principle ways that you think about it: those that are in early-stage collections; and then some that you kind of put on a fixed plan. And in both of those cases the re-performance period is I think three and four months respectively from that, so you would only see it change in the delinquency stats after they met the full minimum payment for those periods. So that's the real impact. Less impact on TDRs. That's more of a mortgage product related thing for the consumer.

Paul Miller – FBR Capital Markets

The issue is we are hearing a lot of anecdotal data about a lot of credit card modifications taking place and we're just wondering, are you loan modding your credit card portfolio and how much of an impact is it having on your overall performance?

Joe L. Price

Again, yes, we are trying to help our customers there and we are modifying and trying to do various work-out strategies with customers, but once you do that you still have to meet minimum payment standards and requirements and they have to meet full re-performance for, again, three to four months before you see them change in delinquency status. So any impact on the delinquency status that you are seeing I think is true-performance driven, you know, sustained-performance driven.

Operator

Your next question comes from Edward Najarian – ISI Group.

Edward Najarian – ISI Group

First just a quick question. Joe, you made a comment about capital ratios, right at the end of your remarks, in terms of capital ratios staying relatively stable through the next several quarters. And I was wondering, did you mean that to include with the impact of FAS 166 and 167 or excluding the impact? And if it is excluding the impact, what would you say the 166 and 167 impact is on your capital ratios?

Joe L. Price

Yes, I was excluding. I was talking about kind of from an operating standpoint. From a FAS 140 standpoint, or amendments to FAS 140, as best we can tell right now, we project there to be about $125.0 billion that comes back on the balance sheet in January. Think of about $70.0 billion of that being in cards, so you can make your own estimate on what you think the reserves would be. The rest of it would be—the delta between those two would principally by multi-seller and some home-equity securitizations. But the lion's share of the reserve impact will come out of credit card.

And since that's on the balance sheet already, for regulatory purposes, the risk-weighted impact really would exclude cards that are already on there, so think of that number—again, if we were estimating or we were trying to call today what we think it will be out in January, somewhere in the $25.0 billion to $30.0 billion range. For RWA.

Edward Najarian – ISI Group

So that's additional RWA and then you have the reserve impact as well?

Joe L. Price

Yes.

Edward Najarian – ISI Group

Is there any way to quantify those two things together in terms of basis points on Tier 1 ratio?

Joe L. Price

The only reason I'm hesitating is I would just as soon you make your own view as to the reserve cost, to what the reserve requirement will be on the various components that come on because we're not settled yet on that. But think of $30.0 billion of RWA—I'm looking at Kevin, I'll come back to you on the exact number of RWA for basis points—and then the other one would simply be the reserve impact, so that's more of a dollar thing for you.

Edward Najarian – ISI Group

Second question kind of comes back to the issue with respect to declining loan balances. I don't know if, number one, you can give any sense of sort of how many more quarters—I know it's a tough question to answer—or to what additional extent you would expect loan balances to decline before they stabilize. And as that's happening, what's your appetite to replace net loan run off with investment securities or mortgage-backed securities, given the very low rate environment on MBS?

Joe L. Price

One way to think about further declines in loan balances is just to kind of look at the ending balances versus the average, because you can see that there are some categories where you still have downdraft, you know, coming into next quarter on it, for a little while.

When that actually changes has probably goes back to my earlier comment; it probably has a little more to do with where business, or economic activity, is from a demand standpoint, as Ken referenced, than anything else.

In the interim, kind of back to Betsy's question, you know, what's the best use of our excess liquidity during this period. Clearly repayment of some TARP would be on the agenda when we can meet—when we get approval for that. Clearly you can manage through some of this by reducing your debt footprint while you have excess liquidity and let maturities outrun new issuance.

And then when you get to deploy in excess liquidity and securities, the appetite I would say, we have some but we're going to be patient and then we would probably, if we do something shorter term, we would probably keep the duration in reasonable well.

Kenneth D. Lewis

Your inventory level number is probably going to be a key one, going forward, because you do have some companies with very, very tight inventory levels and as you start to get the economy improving, they're going to have to start building inventory levels and then you'll start seeing some at least working capital loans.

Edward Najarian – ISI Group

So it would be fair to say that in the current rate environment, sort of in the near term, with MBS yields this low, that your first sort of reaction in terms of the use of excess liquidity would be to pay down higher-cost debt.

Joe L. Price

Yes, I don't know that I would put first, second, or third, I would just say that's one of the ones that you saw us do this quarter where we let maturities outstrip issuance.

Operator

Your next question comes from John McDonald – Sanford C. Bernstein.

John McDonald – Sanford C. Bernstein

Just following up on the NII. When you net together those balance sheet considerations with maybe a little bit better trend in interest reversals, is your hope to keep NII core and NII pretty flat going forward?

Joe L. Price

Yes. You've got a couple of things—it also depends on where short-term rates go because you've got a deposit impact when you start coming out of this thing that will be favorable. So I kind of put the credit drag in the deposit side on the favorable piece and until demand picks up that's going to be the challenge. So over time, those are the factors that we really are going to deal with.

In the near term, I don't want to forecast fourth quarter margin or net interest income on there, but our goal would be to try to retain reasonable stability there. Obviously I've got some hedge and effectiveness and things like that that can work against me in the near term but that's clearly the goal. But demand for higher-yielding loans is going to be the wild card on it.

John McDonald – Sanford C. Bernstein

And the reserve additions for card loans that are maturing, is that typical for these to come on with a natural maturation or is this related to you supporting some of these troughs where the excess spreads have come down.

Joe L. Price

Natural maturities. And we'll have some more of that in the fourth quarter. Just FYI.

John McDonald – Sanford C. Bernstein

A question on Global Wealth Management. Are we seeing leverage there to the improving markets? Investor sentiment obviously this quarter was hurt by the provisioning in cash support charges, but is that a business you feel like is under-earning and should have some leverage as things get better here? Global Wealth, retail brokerage.

Joe L. Price

Absolutely. I mean, once you take some of these things that the business had to absorb this quarter out and then start looking forward, both the stability of the FA trends, the productivity levels that we saw out of that, a lot of very positive momentum and you add that to market lift and that should take us forward.

John McDonald – Sanford C. Bernstein

Ken, since it is the first time, as you said, you've addressed the shareholders, the investment community, since the announcement, maybe you could give us some thoughts on what drove your decision and the timing.

Kenneth D. Lewis

Nothing more than what I've already said, that I came back from some time off and had reflected on about forty years, or two-thirds of my life, being with the company and felt like it was an appropriate time. I've always felt I would intuitively know that, and I did. And so it was just forty years with the same company and eight years as CEO is enough.

John McDonald – Sanford C. Bernstein

And also, if I could ask, to what extent will you be involved in the screening and the selection process for a successor and do you have any views on whether an insider or outsider would be best for the company and the shareholders?

Kenneth D. Lewis

I have voiced opinions, but there is a special committee that is looking at it and will look at all the aspects of different ways to go and then will make a recommendation to the board. So I probably should express my opinion privately but wait for the selection committee to make their recommendation to the board.

Operator

Your next question comes from Nancy Bush – NAB Research.

Nancy Bush – NAB Research

You said that Merrill was accretive for the quarter and you talked about the stabilization of FAs, etc., etc. Could you give us some kind of color on whether you're at the place in revenue generation with Merrill that you would like to be right now or whether some of the losses, personnel, etc. that were very well publicized in the last couple of quarters have actually cost you revenues that you now can start to recoup?

Kenneth D. Lewis

It's hard to quantify any of that. I would say that, just in terms of expectation, that we are right where we thought we should be. And then of course, we are ahead on expenses. I have been very impressed with Tom Montague's ability to attract really outstanding people when we have lost or need to fill a position.

So we would be at a point now that's better than we were three months ago or six months ago. And so I think each quarter you are going to see us more going toward our full potential than maybe the first and second quarters. And things have settle down, obviously, a lot more.

And then you could say the same thing on the wealth management side. I am very pleased with the things that Sally [Garshec] is doing and we do now see stabilization in that financial advisor network. And that was very important to get that point.

Nancy Bush – NAB Research

On the issue of loan demand, etc., can you comment on utilization of lines? Are we starting to see a flattening of the decline there? Or is it still sort of accelerating at an accelerating rate?

Kenneth D. Lewis

Nothing sticks out to me across on the utilized lines. I mean, clients are obviously conserving cash, as evidenced by some of our deposits. They're not using their lines. Back in the disruption period, you clearly had a bounce in a couple of industries, but if anything, you're seeing less utilization and in some cases in maturities people are actually permanently cutting down, or coming in at lower overall amounts to, in essence, save their commitment fees.

Nancy Bush – NAB Research

On the Tier 1 common ratio, it started out with, I think the regulators were saying 4% target and then it became 6% target, and it might be a 7% target. Do you have any sense at this point about where that number is going to need to go over the long term? Can you bring it down?

Joe L. Price

I don't know that I have a good prediction. There are so many different opinions out there that you hear and none are necessarily official. I do feel like the pressure will be on higher quality capital, with your total capital structure, and that focus, while still on Tier 1, will be more acutely on Tier 1 common over time. So the way we think about it when we run the company is what's the base line and if the base line is 4 or 5 then let's define that and then what's the cushion over that that you need to absorb unexpected and to have room to operate. Then the question will be is there something on top of that. And I think that's kind of the discussion. It will also be driven, obviously, by the business mix, especially to the extent that they increase the capital needs around certain trading activities and things of that nature.

Operator

Your next question comes from Jefferson Harralson – KBW.

Jefferson Harralson – KBW

I want to ask some bigger picture questions in your credit card business. In comparative years, decently higher losses and less profitable. Can you talk about where your credit card business is, any changes you're making from here. Any comments you can make about loss expectations and timing to profitability in that business.

Kenneth D. Lewis

I can only say that we would acknowledge that the business has changed. The inability to do risk-based pricing has caused us to look at things differently. And so we have a lot of people looking at the business, talking about and looking at the changes that need to be made, both in infrastructure and other ways we can make money, but it would be premature to tell you what it's going to look like in any exact form, but it is going to be different. We acknowledge that and we are working on it.

Operator

Your next question comes from Michael Mayo – Calyon Securities.

Michael Mayo – Calyon Securities

Joe, you said consumer fees may go down $150.0 million to $200.0 million in the fourth quarter. Did I hear that correctly?

Joe L. Price

Yes, I was talking about in the deposit business. Given the changes that we instituted, without mitigation. That's kind of the number.

Michael Mayo – Calyon Securities

So that would be the overdraft charges. So we should kind of bake that decline in there permanently, or no?

Joe L. Price

We are obviously looking for mitigation actions and other things we can do. Some of those may be on the expense line, some of those may be elsewhere but for right now that's our best estimate of the raw impact of the changes we are making.

Michael Mayo – Calyon Securities

And commercial real estate loan losses had a big jump, from 3.3% to 4.7%. How much of that jump would be due to refinancing, how much from CER, and how much from borrowers simply not paying. Just kind of a rough sense.

Joe L. Price

I don't have the exact break down. I will have to come back to you on stuff, but think of the appraisal process as probably being one of the biggest drivers of the losses. As we try to keep our appraisals accounted in a couple of months, in terms of how current we try to keep them. And that, with property values falling, as these appraisals have come in, that's been one of the biggest drivers.

Michael Mayo – Calyon Securities

And what was the catalyst for a renewed appraisal process?

Joe L. Price

When something goes sub-standard or when something goes into your classified categories, you clearly would do it. Once it's in there, the formal requirement is an annual one but we try to stay as current as we can on those.

Michael Mayo – Calyon Securities

And correct me if I'm wrong, even if the appraisal says the value of the property is way down, but the borrower is still paying and is expected to pay, you don't have to write that down, is that correct?

Joe L. Price

There is some truth to that but each credit depends on the exact circumstances of the individual credit. The reliability of the repayment source, all the other things.

Michael Mayo – Calyon Securities

And then a very simple question with a tough answer. Credit losses have peaked, perhaps, by your estimates. With your assumption unemployment is 10%, how much higher would the credit losses potentially go if unemployment goes to 11%, or just what is the ongoing sensitivity of your credit losses if unemployment goes higher than expected?

Joe L. Price

I don't have a good estimate for an overall number like that. It kind of depends because it's really net new claims that I think are part of what we see is really it, so if you saw kind of a gradual roll, I think it would be very manageable. If you saw an instant spike, it would have a pretty big impact on us across the board because that would suggest that the rest of the economy is very weak also.

Michael Mayo – Calyon Securities

Ken, any lessons from the last year, five, twenty years, any thoughts you want to leave us with?

Kenneth D. Lewis

No, I sit here at the moment thinking that we have built the best financial franchise in the world and that I look forward—it will be from afar, I guess—but I look forward to seeing it play out over the next few years.

Operator

Your next question comes from Jeffery Harte - Sandler O'Neill & Partners.

Kevin Stitt

Unfortunately, we have to run to a meeting. And we will call you on the phone. And for those of you who haven't been able to get your questions in, we will follow-up with everyone. Thank you very much.

Operator

This concludes today’s conference call.

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Source: Bank of America Corporation Q3 2009 Earnings Call Transcript
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