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Executives

Kevin Stitt – Investor Relations

Ken Lewis – Chairman, President, CEO

Joe Price – CFO

Analysts

Ed Najarian – Merrill Lynch

Ron Mandle – GIC

Meredith Whitney – Oppenheimer

Mike Mayo – Deutsche Bank

Nancy Bush – NAB Research, LLC

Matthew O’Connor – UBS

Betsy Graseck – Morgan Stanley

Bank of America Corporation (BAC) Q4 2007 Earnings Call January 22, 2008 9:30 AM ET

Operator

Welcome to today’s teleconference, at this time all participants are in a listen only mode. Later there will be an opportunity to ask questions during our Q&A session and please note this call may be recorded. I’ll now turn the program over to Mr. Kevin Stitt, please begin sir.

Kevin Stitt

Thank you. 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 and these factors include, among other things: changes in economic conditions, changes in interest rates, competitive pressures within the financial service 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.

Ken Lewis

Good morning and thanks for joining our earnings review. In our time this morning, Joe and I would like to cover several topics, including various aspects of earnings in 2007, our strategy for capital markets and advisor services and our outlook for 2008. We’ll cover what we think is relevant for both understanding the quarter and conveying to you our thoughts about the future. Additional details on our quarterly and full year results are available in the financial supplement.

Clearly the past few quarters have been stressful for shareholders, management and associates, easily the toughest environment since I’ve been CEO of Bank of America. But at the same time, it’s important to stay focused on our strategic goals and to remember that our business model was designed to handle cyclical stresses, if not the extremes we are experiencing today.

For the full year of 2007, Bank of America earned $15 billion or $3.30 per diluted share. This includes the deeply depressed results of the fourth quarter in which we earned only $268 million or $0.05 a share. You also know by now that the earnings decline from earlier periods was largely due to revaluations of structured credit positions, other market dislocations that affected our results and higher credit costs.

While the market has been rocky and certainly impacted our results, our performance, even under these conditions, has not been what it should have been. Before Joe talks about quarterly earnings and our outlook for 2008, I will spend the next few moments touching on 2007 highlights in each of our businesses. Many of our businesses had a good year from a revenue standpoint which provides a base from which to deliver strong results going forward.

Starting with global consumer and small business banking, total revenue increased 6% due to impressive performance in non-interest income and increased net interest income. However earnings of $9.4 billion for 2007 were down 17% from a year ago, due to a 51% increase in provision. Non-interest income grew 13% due to good card performance and higher service charges. We increased the allowance for loan losses by around $2 billion, due mainly to ongoing weaknesses in the housing market along with seasoning of several growth portfolios.

Product sales were strong, up 9% from last year, with net new checking accounts exceeding 2 million in 2007. That makes a total of over 9 million over the past four years. Product and process innovation helped us maintain our leading positions in most consumer categories. We regained some traction in the last half of 2007 on retail deposit growth after several quarters of sluggish results. We attained a long standing goal of a leading position in the origination of direct to consumer real estate loans and maintained our number one rankings as card services lender in the US and UK.

Our efforts in expanding small business continue to produce results with revenue growth of 13%, average loan growth of 27% and growth in active accounts online of 16%. In short, even though the economy has slowed, we continue to add new retail customers and expand our relationships with existing customers.

Global wealth and investment management earned $2.1 billion in 2007, down 6% from 2006, due to the impact of the cash funds support which Joe will discuss. On the positive side, asset management fees increased 21% in Columbia. The integration of US Trust is proceeding as planned and contributed to an increase to earnings in the private wealth management area. Earnings in premier banking and investments were up 8% due to record brokerage income and good growth in fee based assets and loan production. Loans with premier customers rose 16% in 2007 with organic growth in deposits of 3%. The Marsico sale closed during the quarter, resulting in a gain of $1.5 billion pretax, which is reflected in the “all other” segment.

Assets under management in GWIM closed the year at $643 billion, up 7% from a year ago, after adjusting for the sale of Marsico, which had a $61 billion impact on assets under management and the addition of US Trust mid-year and LaSalle.

Global corporate investment banking earned $538 million in 2007, reflecting the negative impact of significant events in the financial market. For the year, capital markets and advisory services lost $3.4 billion versus earning $1.7 billion in 2006. Outside of the capital markets businesses, the combination of business lending and treasury services earned $4.2 billion. This was down from $4.6 billion earnings in 2006 as good client activity, which drove revenue growth, was offset by higher provision expense coming off recent historic lows and increased infrastructure spending.

2007 was a year of heavy investment for the future growth of our treasury business. As you saw in the press release last week, we have completed most of the strategic review of capital markets advisory services and remain dedicated to customer and client activity, however we are returning to a more basic strategy.

We are currently marketing our prime brokerage business and are downsizing our CDO and certain structured products businesses. We are resizing international platforms, emphasize core competencies in debt, cash management and trading. In other words, we will play to our strengths and deemphasize those businesses where we lack scale. These actions should result in a smaller balance sheet and lower head count and if we started with this action plan on day one of this year, would probably leave our revenue in the capital markets business somewhere around the 2005 level.

Not included in the three business segments is equity investment income of $3.7 billion in 2007 which reflects results from principle investing that benefitted from favorable market conditions, dividends and other returns from our strategic investments. The contribution to equity investment income from principle investing was approximately $2.2 billion. That’s higher than we expected a year ago and was driven by a robust market in the first half of the year.

Before I turn it over to Joe, let me make a couple of comments about my expectations in 2008. Our economic expectations project minimal GDP growth and although a slowdown, not a recession, as we expect a pretty rocky start to the year, improving thereafter. Absent a market disruption event, like we experienced in 2007, I would expect our earnings per share in 2008 to be well above $4.00 a share. As I’ve said earlier, US Trust is going well and is on target to be accretive in 2008. Likewise early results from LaSalle were positive and are expected to add to earnings in 2008.

Business in general is good and we now believe that we will exceed our cost savings projections. Over the quarter our commercial deposit base has grown 5% in the LaSalle footprint as class benefit from Bank of America’s expanded credit in treasury services capabilities. Countrywide is expected to close early in the second half of this year, since we believe the impact of Countrywide to earnings will be neutral in 2008, all of our comments today about 2008 exclude the addition of Countrywide.

With our write downs this quarter, we are comfortable that current CDO values are appropriate but could be subject to further changes based on market conditions. At the time of the LaSalle announcement, we had estimated a tier one capital ratio, which is our most constraining measure, of approximately 7.5%. Our current capital position is not at our 8% tier one target principally due to the combination of the LaSalle acquisition as well as lower earnings.

Our goal continues to be getting back to that target and we’ll do that through earnings generation, capital raising and no net share repurchases. Given our outlook for the economy and our earnings potential in 2008, we have not changed our philosophy about the dividend and remain proud of record of 30 straight years of increases. The environment is very tough and we expect it to remain so for some months to come. We stay concerned about the level of domestic consumption and spending given the long housing slump, subprime issues and higher fuel and food prices.

Our core businesses of retail banking, card, consumer, real estate, small business, commercial banking, treasury services and asset management remain very sound and in many cases we believe are world class. We also have strengths in fixed income and certain other capital market businesses and our retooling of these businesses puts us on good footing as well.

Our initiative spend in 2008 is targeted at $1.4 billion, which is more than we spent in 2007 and signals that we have stepped up investments for the future. Those investments focus on areas like the mass affluent customer base as we continue to expand our offerings to relationship customers that give us more of their business, in essence scaling what is already a proven model. We have focused a lot of attention on retirement opportunity to capitalize on the continuing change in demographics to grow revenues associated with this shift.

We expect to see continued growth in our mass consumer business as we focus on the cornerstone products of relationship. This is helping us regain momentum in our deposit growth, add to our leading position in core services, both domestic and international and increased our share of the mortgage market.

With our new goal to market model and our commercial and treasury businesses, we’ve brought productivity gains and improved client satisfaction. Innovation and products distribution and process improvements stemming from all of our associates efforts in 2007 will serve us well as we start the new year.

While we have reassessed our strategy in investment banking and capital markets, we by no means have hunkered down, now looking forward to leveraging our strengths in 2008. We’ve also been anticipating the normalizing credit environment that we’re experiencing and have been working closely with our customers and clients to assure them that we are in the lending business, but at the same time we’re focused on getting paid for the risk we take. With that I’ll turn it over to Joe to expand a bit on the quarter as well as on some of the points that I have referenced.

Joe Price

Thanks Ken. Before I dive into the businesses, let me take a minute to summarize some of the larger items affecting this quarter’s results. Now either Ken or I have discussed these items at different times during the fourth quarter. We had a negative CDO and subprime related charges during the quarter of $5.3 billion, $4.5 billion is reflected in trading and $750 million recorded in other income. Provision expense rose to $3.3 billion and included additions to reserves of $1.3 billion.

Our other expenses include costs for VISA. We also had a charge of approximately $400 million to support Columbia’s cash funds and incurred a write down of around $400 million associated with mezzanine securities we had previously purchased from Columbia’s cash fund. Our weak trading revenue reflects some negative results on positions other than CDOs and lastly we booked a $1.5 billion gain on the sale of Marsico that Ken referenced.

Now LaSalle closed on October 1 and distorts the trend in many items and while we don’t intend to breakout LaSalle results going forward, we are providing a good bit of detail this quarter. As Ken said, the LaSalle businesses are doing well and the integration is on track. Revenue was $685 million consisting of $470 million in net interest income and $215 million in non-interest income. Most of the revenue was related to commercial banking.

Expenses were $615 million including merger costs and negligible cost saves resulting in an earnings contribution in the quarter of about $0.01. At closing on October 1, LaSalle added $63 billion in loans, $30 billion in securities and $63 billion in deposits to our balance sheet. Asset quality has been consistent with our expectations and reported provision expense was $8 million.

Of the increases in NPAs and criticized exposure of the total company, the addition of LaSalle represented 47% or $1.2 billion and 78% or $5.2 billion of the increases respectively. As Ken mentioned, things are on track. Cost saves are now projected to be higher than originally expected, but in 2008 this will likely be offset by some short fall in operating earnings, principally in the markets related portion of the business.

We completed all out assessments and are into the execution phase which involves changes to sales processes, product offerings, customer marketing and systems conversions. Now let me move into some brief comments about the fourth quarter business performance before I talk in detail about capital markets and advisory services, credit quality and a few other topics.

In global consumer and small business banking, earnings of $1.9 billion in the fourth quarter were down 28% from a year ago as revenue growth of more than 7% or $843 million was more than offset by higher provision of $1.5 billion, adding almost $1.3 billion to the allowance for loan losses. Sales performance in the quarter totaled more than 12 million units, up 11% over last year. As you can see, total retail deposit balances including our wealth management balances are up 10% from a year ago, driven by a combination of organic and acquisition growth.

On an organic basis, through much of the year, we lagged the market but have regained some momentum in market share in the last half of the year with linked quarter growth of 1%. Debit card purchase volume increased 13% over last year and revenue grew by 12% to $564 million for the quarter. Net new retail accounts drove service charges up 17% over last year. Card services revenue grew 3% from last year as ending managed loans were up 12%.

Now this 3% revenue growth is muted as the IO strip had a negative swing of $260 million year to year and without the swing card revenue increased 9%. The right down on the IOs during the fourth quarter was $167 million, driven principally by higher projected credit losses. Purchase volumes were up 6% from last year, driven by international growth as US growth rates remained lower at 4%. Cash volumes are up 20%.

The first mortgage originations across the company were approximately $25 billion, an increase of 5% from last year and although down originations from the previous quarter, our direct consumer market share continues to grow despite the market disruptions. Mortgage banking income on a consolidated basis increased $231 million to $386 million on a linked quarter basis, mostly from higher servicing income. Average home equity loans are up 5% from the third quarter after adjusting for LaSalle.

Now switching to global wealth investment management, earnings of $334 million were impacted by funds support during the quarter. As Ken mentioned, we recorded a pretax gain from the sale of Marsico in the quarter of $1.5 billion, which was recorded in our corporate results outside this business segment. As a result of this sale, assets under management was reduced by $61 billion of the total $106 billion that was managed by Marsico. Marsico continues to manage $45 billion in AUM for Columbia. Revenues will be reduced by about $450 million annually and expenses by around $150 million annually.

Now included in the results for Columbia was the charge of just under $400 million versus the $600 million we had estimated earlier in the quarter to support Columbia’s cash funds due primarily to structured investment vehicle exposure. Columbia’s exposure to SIVs across the entire cash fund complex is just above 4% with around half of that being exposure to non-bank sponsored SIVs. All exposure is senior paper and has been marked by the Columbia funds at year end. The support agreements remain in place if needed.

Aside from the SIV impact, asset management fees in Columbia grew 21% year to year. Going forward, revenue should rebound as the absence of the market disruption impact and the addition of US Trust will offset the impact from the Marsico sale. Additionally, incremental investments in marketing campaigns, client facing associates and our retirement and affluent initiatives is expected to drive future growth in all three of the core units.

Equity investment gains for the total corporation in the fourth quarter were $317 million which is at the low end of the range we discussed last quarter due to market conditions. Also included in all other was a $400 million write down, related principally to a mezzanine SIV investment we previously purchased out of the Columbia funds. This investment has been written off.

Finally, let me turn to GCIB and address capital markets and advisory services. Unfortunately I have to once again report losses in this business. Markets seemed to recover a bit in early October, only to seize up again in November, making it feel like a repeat of August. Given the current market conditions, I’ll again go into more detail than usual in order to provide the level of transparency that most of you are looking for.

C mass had a loss this quarter of $3.8 billion as revenues declined $4.4 billion from the third quarter. Investment banking produced revenue of $577 million and although down 24% from a year ago, exceeded third quarter results by 32%. Sales and trading results were down $4.5 billion primarily due to the $5.3 billion write down of CDO and subprime related exposures taken in the quarter.

Let me take you through C mass by products. I’ll start with liquid products as they produced $584 million in sales and trading revenue for the quarter, tops for the year and up 32% from a year ago. We had strong results with interest rate products and foreign exchange and less of a drag from out muni business that was still burdened by spread widening.

Turning to credit products, sales and trading revenue was a negative $455 million for the quarter, compared to a negative $885 million in the third quarter. The losses are centered in a couple of legacy books that we continue winding down after our third quarter experiences. As you know, the market has not been real accommodating for that purpose.

Now before going into other capital markets businesses, let me address where we stand on our non-real estate origination business. Our share of the leveraged lending forward calendar dropped from $28 billion at the end of September to just over $12 billion at year end. Our funded positions helped our distribution increase just over $1.5 billion to $6 billion. There was a good deal of activity as we entered around $5 billion in new commitments, syndicated some and had some deals terminate. Our third quarter mark, which included consideration of deal fees was pretty close to what it took to distribute and mark our current exposure. Now there were really no investment grade deals funded during the pipeline in excess of normal levels.

On the CLO front, we are down under a billion dollars of leveraged loan inventory due to some executions and sales during the quarter. Now let me cover equities real quick before turning to structured products. Sales and trading revenue in equities of $198 million compared to $244 million in the third quarter. The decline here was driven by lower client activity in equity capital markets and lower equity derivatives revenue.

Now turning to structured products which includes residential mortgage and asset backed securities, commercial mortgages, structured credit trading in our structured securities businesses, including our CDO business. Sales and trading results in the quarter were a negative $5.5 billion driven by the marks on our CDO and other residential mortgage exposure as well as on our CMBS origination business.

On the CMBS side, we ended the quarter with $13.6 billion in funded debt. That compares to $8.4 billion at the beginning of the quarter with fundings of just over $11 billion being offset by securitizations of about $9 billion and the addition of $3.4 billion from LaSalle. As you’re aware, the CMBS market has been slow resulting in some securitizations that have not been profitable. We’ve reflected that in our year end marks and losses from this activity for the quarter totaled around $130 million. This mark also covered our forward pipeline which was down to just over $2 billion at year end from almost $10 billion at September 30.

Now we continue to wind down our structured credit trading business and experienced some additional losses there. We also experienced negative marks on our non-subprime residential non-agency security exposure, our remained subprime whole loan exposure and our remaining subprime securities manufactured for distributions. All in, net marks on these books were around $330 million. The remaining subprime exposure is around $0.5 billion and held in security form.

Now on the CDO side, our losses in the quarter were $5.1 billion after excluding the subprime whole loan marks just mentioned. This includes charges associated with our super senior exposure, counter party risk associated with wraps on our insured super senior exposure and other sales and trading exposure including the CDO warehouse. The super senior CDO exposure, before adjusting for the write downs on our super senior piece is shown in the supplemental information we’ve provided. The highlighted column which shows $12.1 billion, again before our write downs, depicts our subprime exposure that is not insured and where subprime consumer real estate loans make up at least 35% of the ultimate underlying collateral. Approximately $4 billion of our marks were against this exposure.

Now to give you a little more background on our exposure, for high grade, about 40% of our collateral is not subprime and of the remaining 60% that is subprime, two-thirds is ’06-’07 vintage and one-third is ’05 and prior. For our 287 mezzanine exposure, 60% of the collateral is not subprime and of the subprime collateral, 60% is ’05 and earlier vintages. On the cash side for mezzanine, the collateral was heavily weighted towards subprime with about two-thirds being later vintages. On the CDO squared side for the cash position, about half is non-subprime collateral. Approximately one-quarter is non-subprime on the 287 puts side. The subprime collateral is mostly later vintages in these exposures.

Now in addition to the mark on our super senior, a little more than a billion dollars of our charges related primarily to the write downs on our CDO warehouse and on other sales and trading positions that had been retained and manufacturing CDOs or taking as collateral under financing transactions. The combined subprime CDO sales and trading positions at 12/31 are carried at $600 million or about $0.30 on the dollar. Finally we also took charges to cover counter party risk on the insured CDOs of around $200 million.

Now from a valuation and management standpoint, we’ve evolved towards a view that for many if not most of these structures will see terminations and therefore have looked through the securities to the net asset value supported by the underlying securities. In these cases we utilize external pricing services consistent with our normal valuation processes. We’ve priced over 70% of the exposure in this manner. The remaining exposure valuations were derived by reference to similar securities or on projected cash flows, the majority being by reference to similar securities.

For those that we valued using cash flow, consistent with my comments earlier, we generally assume that the structures would terminate early and therefore you can think of it as almost an IO valuation. I might note that we also tested our overall valuation by cash flow analysis. Now stepping back from the process, while we’re stilling carrying exposure, much of the remaining value is from either the non-subprime collateral, early vintage subprime collateral or shorter term cash flows off the toughest collateral.

Now let me spend a minute or two recapping what we have said recently about the results of our strategic review of the investment banking and capital markets business. As you heard Ken say, it’s back to basics. We’ll focus on core strengths and natural advantages. We’ll exit businesses that don’t align with those objections. Now we remain committed to serving our corporate sponsor and institutional investor clients needs with a wide range of investment banking services across industries.

Specific actions in the short term involve selling our prime brokerage business and restructuring our international platform. These actions should result in total revenue levels in capital markets and advisory services more in line with the 2005 levels if these actions were already implemented. Some of the revenue reductions won’t happen until later in the year, so the quarterly average at the end of the year will probably look more like the ’05 run rate.

Obviously there are expense reductions associated with right sizing the business that will occur throughout the year, but those tend to lag the revenues somewhat. The headcount reductions will include the 650 front office associates we announced last week and there will be infrastructural reductions to come as well. Exit costs, severance and goodwill related charges, should be around $0.05 of earnings but we believe those will be more than offset by the gains associated with the sale businesses we’re exiting. Also, by the end of 2008, we’re expecting trading access to have been reduced by more than $100 billion.

Now let me switch to credit quality. On a HEL basis, net charge offs in the quarter increased 11 basis points to 91 or $2 billion. On a managed basis, overall net losses on a consolidated basis in the quarter increased 7 basis points to 1.34% of the managed loan portfolio or $3.3 billion. Net losses in the consumer portfolios were 1.77% versus 1.62% in the third quarter.

The credit card represents almost 75% of total consumer losses. Managed consumer credit card losses as a percentage of the portfolio increased to 4.75% from 4.67% in the third quarter which is in line with what we’ve been telling you for several quarters. 30 day plus delinquencies increased 21 basis points to 5.45%. We have seen an increase in delinquency in our card portfolio in those states most affected by housing problems.

To give you a little insight, the quarter over quarter rate of increase in 30 day plus delinquencies in the combined states of California, Florida, Arizona and Nevada, increased over five times the pace of the rest of the portfolio. That group makes up a little more than one-quarter of our domestic consumer card book. Now we’ve mentioned before that we expect to be in the 5-5.5% range for overall consumer card loses for the full year of ’08. That compares to the 4.75% we experienced in the fourth quarter. We still expect to be in that range but our normal seasonal patterns like the typical balance drop in the first quarter may cause us to exceed it on a quarterly basis, obviously, for the weakening in the economy to drive it higher.

Credit quality in our consumer real estate business, mainly home equity, deteriorated as a result of housing market conditions getting weaker. The problems today have been centered in the higher LTV home equity lines principally in states that have experienced significant decreases in home prices. Home equity reported an increase in net charge offs of $179 million or 63 basis points, up from 20 basis points at the end of September. 30 day plus performing delinquencies were up 25 basis points to 1.26%. Non performers in home equity rose to 1.25% of the portfolio from 82 basis points in the prior quarter.

Even though our average refreshed FICO score remains strong at 721 and the combined loan to value is at 70%, we have seen a rise in the percentage of loans that have a CLTV above 90% which is driven by the more recent vintages. 90% plus CLTV currently represents 21% of the loans versus 17% in the third quarter. Now we believe net charge offs in home equity will continue to rise given seasoning in the portfolio and softness in real estate values.

We increased reserves for this portfolio to 84 basis points but wouldn’t be surprised to see losses cross the 100 basis point mark by the middle of this year as we work through higher CLTV vintages. Relative to the industry’s performance, we believe that our results will continue to benefit from our relationship based direct to consumer strategy. Again, continued economic deterioration could drive losses higher.

Our residential mortgage portfolio continues to perform well with losses at only 4 basis points in the fourth quarter. While we have seen some deterioration in sub-segments, namely our community reinvestment act portfolio under our low to moderate income programs that total some 8% of the book, nothing really stands out to us at this point.

Our auto portfolio closed the year with approximately $25 billion in loans. As many of you remember, we exited auto leasing in 2001 so we’re talking loans in this portfolio, not leases. Net charge offs in the quarter were $99 million or an annualized 1.53% of the portfolio which is up 41 basis points or $22 million from the third quarter due to normal seasonal patterns as well as signs of deterioration in the most stressed housing markets.

Now switching to our commercial portfolios, net charge offs increased in the quarter to $381 million or 47 basis points, up 5 basis points from the third quarter. Despite deterioration in small business and home builders, the overall portfolios remain sound. Net losses in small business which are reported as commercial loan losses are up $40 million from the third quarter and the net charge off rate has risen to 6.33% from 5.89%. Excluding small business, commercial net charge offs increased $70 million from the third quarter, representing a charge off ratio of 14 basis points.

These small increases are still coming off historic lows and part of the losses reflect net charge offs from homebuilders which were approximately $19 million in the fourth quarter, a decline of $2 million from the third quarter. Criticized exposure for all commercial rose from $10.8 billion in the third quarter to $17.6 billion due to the addition of LaSalle which was around $5.2 billion and an additional $1.5 billion at legacy Bank of America due mainly to the homebuilder segment exposure.

NPAs rose $2.6 billion to almost $6 billion with LaSalle representing $1.2 billion of the increase and that was $873 million in commercial and $339 in consumer and legacy Bank of America added $1.4 billion. Again $183 million was commercial and about $1.2 billion consumer. As you would expect, additional consumer NPAs include home equity and residential mortgage, while additional commercial NPAs involve commercial real estate, homebuilders to be specific.

Homebuilder exposure was $14 billion at year end from a utilized or outstanding view and $21.6 billion in total commitments reflecting the LaSalle addition. 39% of our homebuilder exposure is listed criticized and while it could move higher, we believe the portfolio is well collateralized and reflects both granularity and geographic diversity.

Now coming back to small business, losses have increased significantly throughout the past year. The sector remains one of the more important and faster growing part of the economy, one in which we grew revenue 13% over 2006 and earned more than $1 billion in 2007, despite higher losses and increased reserve. While our risk adjusted margins are still attractive in this business, our losses remained elevated. The deterioration has been driven by seasoning of some large 2005 and 2006 business card vintages.

We have since instituted a number of underwriting changes, such as using more judgmental credit decisions, lowering initial line assignments and changing our direct mail offerings. The results have been a 15-20 point increase in average FICOs at origination, 15-20% reductions in average line amounts and a meaningful drop in approval rates. So while we’ll take some time to work through these earlier vintages, small business remains a critical customer segment with attractive, profitable growth opportunities for us.

Now looking again at the total loan book, 90 days past due on a managed basis increased 5 basis points to 66 basis points while 30 days past due increased 33 basis points. Fourth quarter provision of $3.3 billion exceeded net charge offs, resulting in the addition of $1.3 billion to the reserve. Deterioration drove approximately two-thirds of the increase reflecting ongoing weakness in the housing market, principally in home equity and the homebuilders sector of our commercial portfolio. Small business also experienced deterioration. The remaining one-third of reserve build was due to growth and seasoning mainly in the consumer unsecured lending US card and foreign card portfolios.

Now switching to net interest income, compared to the third quarter on a managed basis, net interest income was at $824 million of which core, which means excluding the trading related, represented $816 million. Adjusting for LaSalle, core net interest income was up $346 million or just over 3% on a linked quarter basis.

The reported decrease in the net interest margin on a managed basis of 14 basis points was driven by several factors. First, the impact of the Fed funds LIBOR spread during the quarter. Secondly, the impact of the LaSalle premium or goodwill being a non interest bearing asset, drove just over 15 basis point decline. Third, a onetime benefit of restructuring our international aircraft leasing operation. And finally, core asset growth and funding.

Going forward the Fed fund LIBOR spread impact is dissipated such that when coupled with the rate environment it should offset the absence of the onetime benefit leaving our core net interest margin somewhat stable to this quarter. As you can see from the bowl chart, our interest rate positioning had become more LIBOR-ily sensitive compared to the end of September. This change was primarily driven by actions we took as we felt the downside risks had become greater than reflected in the forward rate curves.

As rates reacted to signs of a slowing economy in the fourth quarter we had shifted our cash flow swap off balance sheet position from $113 billion paid fixed to a $34 billion received fixed position and that was our position at year end. I might note that as of today, we shifted back more closely to where we stood at the end of the third quarter as this downside risk looks to now be imbedded in the forward rates.

We continue to benefit from curve steepening, but with a forward curve that reflects a 2.5% funds rate by the end of 2008 and may settle at 2.25% tonight, we think most of the downside risk is now built in and that the Fed’s moves this morning are consistent with that.

Now just a couple of comments on expenses in the quarter. Obviously our efficiency ratio is elevated as a result of the losses in capital markets. Also, this quarter includes expenses for the VISA items. These costs were equally between our consumer bank and our commercial banking group. GCIB incentive compensation costs were higher in the quarter as we balanced the need to retain core personnel to execute our strategy going forward against the weak trading performance. The fourth quarter included $140 million merger and restructuring costs for various acquisitions, the bulk of which were for LaSalle and US Trust.

Now let me say a few things about capital. Tier one capital at the end of December was 6.87%, down from 8.22% at September 30 due mainly to the acquisition of LaSalle which closed on October 1, and lower earnings in the fourth quarter. Since the LaSalle announcement in April, we have raised $1.6 billion in tier one capital and the preferred market and we’ve reduced our share repurchases. Now we remain committed to getting back to our 8% target in order to fulfill our needs from the LaSalle and Countrywide acquisitions and to replenish capital for our reduced earnings in the second half of last year.

While market conditions will dictate the ultimate timing of our actions, it is our intent to access the markets in the near future and we have a variety of alternatives available to us. The ongoing earnings impact of these capital actions falls in the $0.10 a share range, plus or minus a couple cents, excluding the impact of amounts related to Countrywide. The trading asset reduction related to our C mass business restructuring will also help us in getting back to our tier one target.

Also as you know, we began marking to market our 8.2% investment in China Construction Bank, increasing OCI by $8.4 billion net of tax. While tier one was unaffected, it has a positive impact on the tangible and total capital ratios of about 50 basis points.

One final comment before expanding on Ken’s comments about 2008. The forward lower effective tax rate in the fourth quarter reflects the reassessment and catch up of our annual rate given the lower earnings and a onetime tax benefit from the restructuring of our foreign commercial aircraft leasing operations. Looking to 2008, you should expect a more normal tax rate of 33-34% on a non FTE basis.

Going forward into 2008, there’s considerable uncertainty about the economic environment. It’s unclear what ramifications the housing downturn, higher energy costs and the subprime crisis will ultimately have, but we do feel good about our relative position in our businesses as we think about delivering results in 2008 and beyond. As Ken mentioned, we’re not in the recession camp, as we expect the economy to grow minimally and not contract, picking up momentum throughout the year driven by moderate growth in both consumer and business investments [unintelligible]. However, certain industries like homebuilders and certain states may look or feel recessionary during 2008.

In talking about our ’08, I think we’ve given you starting points as a base for LaSalle, so my comments about growth exclude its impact. The loan and deposit growth generated by the franchise are expected to benefit net interest income as will the expected steepening of the yield curve. We expect mid single digit growth in loans, excluding the addition of LaSalle, to be driven by commercial, credit card, home equity and unsecured loans.

Deposits will grow as we continue to benefit from our market leadership and innovation and we expect to grow faster than the market. Consequently, assuming the forward curves materialize, we expect growth in managed core net interest income to be in the high single digit range on a normalized basis and above that on a reported basis from the addition of LaSalle.

Let me also remind you that the change in NII in first quarter is impacted by day count as well the fourth quarter one time leasing transaction that I mentioned earlier. Total revenue will be impacted by the bounce back from trading losses as well as lower equity investment gains. We think a run rate of expectations for equity gains would be around $300-$400 million in 2008 and will be dependent on liquidity events with our customers and dividends from our strategic investments.

Excluding the impact of trading and equity gains, non interest income should grow in the high single digits, led by consumer fee increases in mortgage, card and service charge revenues. Credit quality will continue as a headwind from the impact of the housing market conditions on consumer asset quality. Similarly, we would expect to see challenges in the consumer dependent sectors of our commercial portfolios. Given our economic assumptions, we could see provision expense up 20% compared to reported 2007 levels. Obviously, continuing deterioration including a recession, could take this number higher, however our strong market position, attractive risk adjusted margins and substantial distribution advantages position us well versus the competition.

Now on the expense side, we’re aiming for strong positive operating leverage from heavy expense control as well as savings realized from the LaSalle integration. These cost savings are expected to slightly exceed our estimates and we expect to get more than half or our all in savings target of $1.25 billion in 2008. Since we’re on expenses, remember that similar to the first quarter of the last two year, we will have an additional expense of $0.04-$0.05 in EPS related to our expensing certain equity based compensation awards for retirement eligible employees or FAS 123.

Now to reiterate what Ken said up front, let me say while we are cognizant of the headwinds in the economy and its impact on the marketplace, we feel good about our relative position and absent things getting dramatically worse, we think ’08 will be a reasonable year for earnings. With that, let me open it up for questions and I thank you for your attention.

Question-and-Answer Session

Operator

(Operator Instructions) Now we’re going to go first to the site of Ed Najarian from Merrill Lynch, your line is open.

Ed Najarian – Merrill Lynch

Hi, good morning. Couple of questions, first of all, you’ve held the line nicely in the fourth quarter in terms of your credit card loss level and consequently have held the line in terms of your outlook in the 5-5.5 range. I guess the first question is, is there anything about what’s going on in the economy or what’s going on with the deterioration of the consumer in general and also what’s going on with some of the other card providers and what they’re reporting would lead you to raise that guidance?

Ken Lewis

I think we feel fine about the guidance Ed because as you know, we have been pretty accurate in telling you what it was going to look like quarter to quarter in the past. The only thing that would change it would be if you hit an actual recession and it was pretty severe, then of course you’ve got to go back to the drawing board. But given our outlook, 5-5.5 looks pretty good. As Joe said, you may get a first quarter anomaly because of the reduced balances which is typical that you may go over it, but it looks pretty solid, absent of recession.

Ed Najarian – Merrill Lynch

Secondarily, you alluded to some more capital issuance and also we’ve had a decline in the market, a pretty significant decline in the market value of China Construction Bank, which I know doesn’t impact tier one but does impact tangible now. Could you put some more color around exactly what or close to what your plans are in the first half of the year for capital raising initiatives?

Joe Price

Ed, what we try to do in the remarks we gave you a few minutes ago was to kind of give you a framework for that. You’ll recall a little over a week ago we talked about that the Countrywide acquisition would require a couple of billion dollars incremental to what would be issued in that transaction to support the asset base. You couple that with what it would take to get us back towards 8% or toward our target and that’s kind of the way you frame our needs now. The blend, we have obviously a number of alternatives to us from a preferred standpoint and that’s where we’d most likely be looking.

Ed Najarian – Merrill Lynch

Let me make the question a little easier. Would we be looking for more of a capital raise than the $2 billion that you announced with respect to Countrywide?

Joe Price

Yes and that’s why I framed it in kind of the EPS impact I mentioned earlier.

Ed Najarian – Merrill Lynch

And should we assume that the vast majority of that capital raise will be in some kind of a trust preferred tier one type of non-common equity type of issuance?

Joe Price

Still evaluating that but obviously you know whether it’s preferred or whether it’s got some component of convertible, the dividend versus the EPS dilution impact of some kind of convertible would be encompassed in the $0.10, kind of plus or minus two that I gave you earlier.

Ed Najarian – Merrill Lynch

And then, sorry to take up too much time here, but just one more. It looks like your subprime CDO write downs are less significant than some of your competitors and you alluded to the fact that I guess most of the driver of your decision process for how much to take in subprime CDO write downs was a mark to model process. It sounds like you are taking a mark to model process and assuming that you will hold those CDO positions through to maturity, is that the correct way to look at the vast majority of that?

Joe Price

No it’s probably the other way, Ed, we kind of come to the view from a management standpoint that a lot of these structures terminate and therefore we look through to the net asset values of the underlying securities and that would really be, Ed, the ones that we have kind of cash flowed to term in essence we’ve looked at those and said they’re more like an IO so you kind of cash flow to termination and just value that piece and that kind of puts an IO floor on the value of that. But it’s probably more of a termination view than a hold to term view that you referenced earlier.

I think what you’ll find is we’ve seen a bit of a bigger multi sector player as opposed to straight subprime imbedded in a lot of the structures and that probably tends to be one of the biggest drivers and then obviously the vintage of the underlying portion that is subprime.

Ken Lewis

Ed, we have tried, we obviously tried our very best to look at others and see their mark downs and it gets real hard because the paper is just different.

Ed Najarian – Merrill Lynch

Right, okay, alright thank you very much.

Operator

We’ll go next to the site of Ron Mandle from GIC, your line is open.

Ron Mandle – GIC

Yeah hi thanks, I was going to ask pretty much the same question about CDOs, I guess my only concern is that if I read the table right it’s CDO squared so anything you can elaborate on that regarding the underlying attachment points, that type of thing.

Joe Price

Ron if you look back in the comments I made earlier, I tried to give you a feel for how much of the underlying collateral was not subprime related and then the vintage that was in it and I think that probably points you to how much of the collateral was not subprime as maybe being the primary driver from that standpoint.

Ron Mandle – GIC

Okay and then so would it be safe to assume that the subprime part you’ve written down very, very heavily and the non-subprime part you’ve written down lightly? Would that be a way to think about it?

Joe Price

It’s a way to think about it, it varies by particular structure because in some it may be earlier vintages subprime that would not make that necessarily correct but I think in general that’s a fair way for you to be thinking about it.

Ron Mandle – GIC

Okay and just one other thing. You mentioned in your guidance that we should think that the loan loss provision could be up 20% or so and I was just wondering is that managed or reported that you’re thinking about?

Ken Lewis

Reported.

Ron Mandle – GIC

And managed, what’s your thought in that regard?

Ken Lewis

You know if you take, probably for that purpose take the fourth quarter run rate and build some kind of similar increase off of that from a charge off or managed loss standpoint.

Ron Mandle – GIC

So managed losses, the fourth quarter managed losses times four plus 20%?

Ken Lewis

Not to get real specific but I think that’s probably a reasonable way to think about it.

Ron Mandle – GIC

Okay, thanks very much.

Operator

We go next to the site of Meredith Whitney from Oppenheimer, your line is open.

Meredith Whitney – Oppenheimer

Good morning, I have a couple of questions. First of all Joe if you could just walk me through the insurance, this is on page 19 of the slide deck, because I’m getting 12.1 from the prior period and then 8.1 from the current period. It doesn’t show where you’ve marked down, I know you breezed through the numbers in terms of where you marked down in the insurance exposure and since that is such a timely relevant issue could you walk us through how you think about those exposures, what mark down you took, what preparation you’ve taken in terms of subsequent downgrades by the rating agencies on those companies that are providing the insurance and then just a follow up if I may.

Joe Price

It’s a mouthful but if you look at the column before the 12 you can see that our insured exposure was about a little over $4 billion for the subprime related pieces and as a starting point let me give you a tiny bit of background on the underlying exposure for the CDO squared exposure that’s insured. You made notice in one of the footnotes on there, it’s got more than 35% of subprime collateral we classified as subprime. But for that CDO squared one there’s over 70% of the underlying collateral is not subprime and that that is is pre ’06-’07 so that gives you on that one.

And then on the high grade positions that are there, they’re about 50/50 subprime non-subprime collateral and then again when you look at the subprime collateral, a little over half I think is pre ’06-’07 vintage so it kind of gives you a feel for the quality of the underlying paper from that standpoint.

We took about a $200 million valuation allowance on what would be deemed the expected recovery from insurance after we ran through those models and that was based on the applicable insurer. You know it’s spread among some number of them. I’ll note that the one that’s most notable in the marketplace, ACA, we are not relying on for coverage there. And so Meredith if you go back and say “what’s the valuation diminution,” which again would be much more limited given the underlying collateral, what we expect there and then you pair cut it and that was our 200 number.

Meredith Whitney – Oppenheimer

Okay but if I could just follow up on that before I have the other follow up. As I understand, regardless of what asset class insurance is covering, if the set insurer gets downgraded, the insurance covering any of those asset classes gets devalued. So it wouldn’t really matter, is that the right way to think about it? Whether it’s prime or subprime, the effective insurance is worth less.

Joe Price

Yeah but you obviously look to your underlying value first then you assume what kind of diminution in value there would be to be able to size your reliance on insurance and my point earlier was that [siten] of that reliance is relatively small and then you do as you described, regardless of what it is, if you’re relying on an insurer you have to assess it based on collectability of that particular insurer.

Meredith Whitney – Oppenheimer

Okay but is, what’s now the $4.1 billion of insurance, that’s the only hedge you have, is that right?

Joe Price

On the super senior? Yeah that’d be fair.

Meredith Whitney – Oppenheimer

Okay and then the other question I had which is, you guys have been great about your thoughts on consumer credit and that wasn’t, as Ed said, tracked where you guys expected and where we had expected, but the commercial side looked like it spiked up. Now is there any one item in that commercial book that caused it to spike up and has anything changed from a qualitative perspective that you can illuminate us with, please.

Joe Price

When you say spike up you mean in?

Meredith Whitney – Oppenheimer

In the loss and delinquency numbers.

Joe Price

No, again, if you think about criticized for instance which spiked up quite a bit, it was principally driven by the addition of the LaSalle assets. And so a lot of your commercial statistics, remember that that franchise had a lot more commercial orientation to it and less consumer which was one of the attractive parts about the ability to grow it, is driving that. And then within the legacy book, the spike up, remember that our small business statistics roll into the commercial statistics and so that was part of it and that’s why we went into a little more detail there for you and then the rest is principally homebuilder or homebuilder related driven.

Meredith Whitney – Oppenheimer

Okay, I’m sorry I lied, one last follow up. If you guys look at the option that you have on your CCB ownership and then look at the capital levels that you have now and the opportunities that come about because we are in a distressed market for financials, what’s your priority in terms of securing the capital levels to the 8% or taking advantage of an opportunity that may come about this year? That’s it and I’m done.

Ken Lewis

It’s a combination Meredith.

Meredith Whitney – Oppenheimer

That’s all I get?

Ken Lewis

Yeah.

Meredith Whitney – Oppenheimer

Okay, alright thank you.

Operator

We’ll go next to the site of Mike Mayo from Deutsche Bank, your line is open.

Mike Mayo – Deutsche Bank

Hi. Your period end credit card balances were up about 6% in only three months so I’m wondering if that’s indicative of stress with consumers or anything else going on?

Joe Price

Mike, you know, obviously there was a little dip in payment rates and I’m talking US consumer credit card here for a minute, but not significant and we really didn’t see by the time the end of the year rolled around, we didn’t see that big of a spike in you know kind of number of customers making minimum payments or that big a change in customers paying full so I think it’s generally the fourth quarter balance driven seasonality coupled with that slight change in payments. Now probably the Canadian card acquisition that was relatively small in terms of the size of growth you know it would be contributing to that, came in, I guess on the average balance basis also.

Mike Mayo – Deutsche Bank

And then separately, Ken, you said you expect to earn over $4.00 this year, I’m simply trying to reconcile that with kind of an operating number for the fourth quarter and if I simply take your kind of onetime items on page ten of the presentation slides, you know you get a number, maybe $0.92 or so and if you annualize that $0.92 you’re at about $3.70 for the year, so maybe I’m missing some onetime item that’s not on that page or maybe there’s something else because when you’re at that $3.70, you said take $0.10 off for the capital raising and take $0.05 for some of the retirement expenses, so what should be offsetting those negatives to get you over $4.00, at least conceptually?

Ken Lewis

Well, Mike, the first thing is that, for the first time in several years we have a wind at our back on NII and so we said a high single digits even before LaSalle and that’s probably the single biggest driver that that wind at our back on NII, because that’s going to be a pretty big number. And then we mentioned the other pretty nice increases in non-interest income but if you had to say just one single item conceptually, it would be NII.

Mike Mayo – Deutsche Bank

And the Fed cut rates 75 basis points this morning, but what’s the impact on your financials and then what do you think the impact will be on the borrowers?

Ken Lewis

On our financials I guess you go back to the comments that we made earlier. The way we’ve positioned the company and the way we were thinking about forwards would have had us already thinking about a 2.5 kind of end of the year funds rate. And so while different parts of the curve structure obviously change differently, that in essence would have been imbedded in kind of the discussions we’re having unless it incrementally drives rates lower than what was already in the forwards.

So that kind of that side of it, on the customer side obviously we’ve got we’ve got a number of variable rate type of instruments out there that re-price based on the various indices, prime or LIBOR, et cetera and so it will obviously have an impact from a customer’s borrowing standpoint on that side.

Mike Mayo – Deutsche Bank

I guess what I mean by that last question is, Bank of America’s funding costs, at least relative to Fed Funds, have gone up as all banks funding costs have gone up. How much do you look to pass on those costs to the end borrower and therefore that kind of mutes some of the benefits of the Fed rate reductions on the end borrower?

Ken Lewis

I’m having a little trouble with you. If you go back to looking at, the best way to think about it probably is to fault you back to the bubble charts that we’ve got as opposed to individual line items because that captures everything on a forward basis and that’d be kind of the best way to think about a down rate. You probably should back up to the 930’s and think about it there because again these things are based off of forward curves.

But on the funding side, clearly you know we have a lot of market based funding that would come through and then on the deposits side obviously there would be some pass through, not dollar for dollar, given the competitive environment we all live in. But there’d be a piece of it coming through on that side also. And that would be now that the LIBOR Fed funds curve or spread is a little more in line, that’s probably what drives as much on the deposit pricing side as the pure Fed funds.

Mike Mayo – Deutsche Bank

And then lastly, this is not just unique to you, but you intend to raise capital yet the dividend level seems kind of precious to maintain, I just conceptually, why is the dividend so important to maintain when you’re raising so much more capital and your tangible equity ratios at 3.6%?

Ken Lewis

Well just because, you know if you’ll think about over a broader term or have a longer term perspective, we’ll get back to the capital levels pretty quickly and return to a more normal state with where we think earnings will go, so it’s just, we think it’s so temporary that that’s a better way to go Mike.

Mike Mayo – Deutsche Bank

Alright, thank you.

Operator

We’ll go next to the site of Nancy Bush from NAB Research, LLC, your line is open.

Nancy Bush – NAB Research, LLC

Yeah guys, I’m going through all the numbers here and I think I’m going to have to get a transcript in the end to sort of sort them all out. But we’re all looking to see whether companies have, quote, kitchen sink-ed the quarter. Do you think you’ve kitchen sink-ed the quarter and if you didn’t, where didn’t you kitchen sink it?

Ken Lewis

I think we tried to be as prudent as possible in assessing everything we could assess and do the right thing but you do have parameters under which you operate and you have accountants looking at things that you do so within reason we think we did what we should have done.

Nancy Bush – NAB Research, LLC

If there’s sort of a point of weakness, is it in credit cost, is it in more mark downs, if we had to sort of poke and probe the model for next year’s points of possible negative surprise, so where do you see it primarily? Is it credit cost?

Joe Price

You know Nancy we tried to give you in the outlook there kind of a view on credit cost. Obviously the economy continues to deteriorate farther that’s a soft spot. And you know likewise, if we were to see other market disruption events, probably driven by credit, quite frankly, you know that would be the type of areas that we would be focused on throughout the year next year.

Nancy Bush – NAB Research, LLC

Okay. Secondly, you made a couple of allusions to market share gains and deposit gains in the fourth quarter in the consumer bank. I think you said you had regained traction in deposit growth and you picked up some market share. Can you just tell me what was going on there, A, why were you finding that you were losing share and what happened in the fourth quarter to regain share and grow consumer deposits faster? Is there a product issue, emphasis issue, you know what was going on?

Joe Price

Yeah, well, you may remember over the last year or so coming off really the MBNA merger where we probably lost some traction on retail deposits, because that’s what we’re really focused on here in your question, and it took longer than we expected to regain traction. We had begun to emphasize refocus on that you know throughout really the last year or so but it really probably took more hold in the last half of this year and got us back on square footing, taking advantage of our distribution model, et cetera. Now, having said that, it still remains very competitive from a pricing standpoint but it’s really focused and deliberate focus on trying to drive one of our core products.

Ken Lewis

Nancy, we’ve asked ourselves the same question and it just took us a little longer than we thought to regain the momentum and we can’t really pinpoint it further than that.

Nancy Bush – NAB Research, LLC

And if I could just ask one final question. Joe, on the small business losses, I mean you gave quite a bit of detail but you have 6% plus annualized losses there is still an interesting number, an eye catching number. Is it primarily the composition of the loans, was there some lessons to be learned in underwriting, what is the biggest issue there?

Joe Price

Yeah, Nancy, that is correct. When we looked at our market share several years ago in small business, we clearly were underpenetrated given the size of our franchise in our scope and we looked to grow that business. We probably defaulted to underwriting some of that in more of a consumer scoring oriented model and have since learned that you probably need to put more judgmental underwriting in that versus pure scoring.

We’ve cut line sizes, probably advanced a little higher amounts per line and a number of other things and those vintages which would principally be the ’05-’06 vintages are what’s driving a lot of our issues there and again earlier in ’07 we began to curtail but that as those vintages come through, that’s what we’re seeing and so absolutely there were some lessons learned there.

Ken Lewis

Nancy, you also see the evidence of that is much lower approval rates.

Nancy Bush – NAB Research, LLC

So we can expect to see losses perhaps in the near term continue to rise there and then perhaps decline in the latter part of the year?

Joe Price

Yeah, as those vintages season, that would be correct and you know we’re not quite as high volumes as we were in that period in terms of new balances.

Ken Lewis

But they are relatively small in aggregate, that’s the good news.

Nancy Bush – NAB Research, LLC

Thank you.

Operator

And we’ll go next to the site of Matthew O’Connor of UBS, your line is open.

Matthew O’Connor – UBS

Good morning. You mentioned tightening underwriting standards for new loans in small business and a couple of other areas. Do you have the flexibility and are you reducing lines that are still outstanding for credit card and home equity?

Joe Price

Yeah, each product differs but you obviously have flexibility on risk based pricing and other factors in the card business which you know if a customer doesn’t accept then you in essence, you know provide no more funding capacity to and they would wind down if they didn’t accept those change and things of that nature. So a rather detailed or specific parameters in each product and then clearly on the home equity side if someone’s equity in the home or the CLTV has dropped through the floor you have flexibility there. The tougher ones are the ones that are borderline on the home equity side but you absolutely have flexibility.

Ken Lewis

Matt, actually particularly on credit card, it is a very robust risk based pricing model.

Matthew O’Connor – UBS

And then just a follow up on card specifically, I think MBNA’s model was very high lines to encourage balance transfers, so I’m just trying to gauge how aggressive you are there. I mean if a customer is still current and they have a $50,000 line outstanding, would you reign that in a little bit or if they’re still paying as is, you probably don’t touch it at this point?

Ken Lewis

It will depend on what we see from an overall standpoint. Otherwise, you look at the total behavior, you look at other lines, but if they are paying as expected we wouldn’t touch it, I mean if they’re behaving, not just with us but if they’re behaving across the whole spectrum of their debt accordingly then we wouldn’t do anything.

Matthew O’Connor – UBS

Okay, alright thank you.

Operator

And we’ll take our next question from the site of Betsy Graseck from Morgan Stanley, your line is open.

Betsy Graseck – Morgan Stanley

Thanks, on small business just one follow up, have you done anything to assess the degree to which the deterioration exposure is coming from housing related areas?

Joe Price

Yes but I guess I’d say that with most all the consumer products, to the extent we’re seeing deterioration, it is clearly leaning towards those states that have had the most housing challenges and Betsy from that standpoint. But this one has the added piece of the ’06 ’07 vintages in addition and then I’d say probably on small business you tend to see probably a heavier utilization of home related home equity lines than you might see in some other places which again would drive you into those higher home price depreciation states to where some of its centered. But overriding that would be this vintage discussion that we said earlier.

Betsy Graseck – Morgan Stanley

Okay and the time frame for the seasoning in these portfolios is roughly what now?

Joe Price

Probably, I’m generalizing here, but an 18 month kind of run.

Betsy Graseck – Morgan Stanley

Okay and just, a little bit bigger picture, what kind of economic environment do you have baked into your tier one ratio outlook?

Ken Lewis

Very, very modest growth, virtually none in the first half and then picking up in the third and fourth quarters to possibly get to a 2% growth rate by year end. But very modest growth but not a recession.

Betsy Graseck – Morgan Stanley

Okay so, if there were a recession, would that change how you’re thinking about your tier one targets?

Ken Lewis

Well, no, but it may link them, the time a little bit or you know I don’t know how severe you mean by a recession so if it’s a mild short recession, probably not much. But then you got to determine how deep and how long do you think it’s going to be.

Betsy Graseck – Morgan Stanley

Okay and then the outlook for the provisions where you’re looking for the 20% plus on a reported basis year on year roughly, do you have explicit expectations for housing values, I know it’s very granular market by market that you need to think about housing but I’m just wondering if you have as a result of the announces you do, an expectation for the type of housing values that you’re anticipating that arrive to that provision expectation?

Joe Price

I think I’d probably actually move you to the Case-Shiller type of expectations and those would give you, you know in the most distressed states highe single digit maybe even low double digit kind of year over year 12 month rolling. But it depends on which state.

Betsy Graseck – Morgan Stanley

Okay but you’re using that kind of input into your forecast?

Joe Price

Right.

Betsy Graseck – Morgan Stanley

And then, lastly, if I recall correctly your first lien mortgage exposure, you have a variety of insurance or hedging that you’ve done against that and I would assume that those are still in place, is that correct? Has that changed at all with what’s been going on with the model lines?

Joe Price

No and remember that our insurance is not for that portfolio is not model line driven. We sell the second loss position into or basically insure it with a funded structure so there’s not counter party risk and we’ve got some with the GSEs, a slight amount with the GSEs so you can think of that as a counter party, but the bulk of it doesn’t have real counter party risk on it.

Betsy Graseck – Morgan Stanley

Okay and has that at all been tapped yet?

Joe Price

No.

Betsy Graseck – Morgan Stanley

Okay and it’s on the aggregate net charge offs for the first lien portfolio?

Joe Price

Yes, well its individual buckets so it’s not like a blanket policy, you know you’ve got specific loans underlying the particular tranches of structure.

Betsy Graseck – Morgan Stanley

Okay but none of them have been tapped at all?

Joe Price

Nope.

Betsy Graseck – Morgan Stanley

And then lastly on this CCB option that you have, is it possible to discuss what types of circumstances would lead you to exercise the option that you have to invest further in CCB?

Ken Lewis

We’re contemplating all of that as we speak and so I can’t give you an answer other than it’s under active discussion in terms of do we invest more and or monetize some portion of the gain and we’re just in the embryonic stages of deciding that.

Betsy Graseck – Morgan Stanley

Okay and with the Fed action today, I mean I realize that you’re expectation has been for a lower Fed funds rate using the forward curve but it does seem like we’re getting it earlier in the year than we had anticipated or at least the forward curve had anticipated. Does that impact those kind of discussions or decisions?

Joe Price

Not those discussions, I mean obviously may accelerate some benefit from a margin standpoint but not on the discussions that Ken was alluding to.

Betsy Graseck – Morgan Stanley

Alright, regarding the CCB. Okay, thank you.

Operator

As I’m showing no further questions at this time I’ll turn it over to Mr. Lewis and Mr. Price for any final remarks.

Joe Price

We thank you and no final remarks and have a good day.

Operator

This does conclude today’s teleconference, have a great day, you may disconnect at any time.

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