Sovereign Bancorp Inc Q4 2007 Earnings Call Transcript

 

Sovereign Bancorp Inc (SOV)

Q4 2007 Earnings Call

January 24, 2008 9:00 am ET

Executives

Joe Campanelli - President and Chief Executive Officer

Mark R. McCollom – Chief Financial Officer

Bob Rose - Head of Risk Management

Analysts

Gerard Cassidy - RBC Capital Markets

Heather Wolf - Merrill Lynch

Bob Hughes - KBW

Matt Kelley - Sterne Agee

James Abbott - FBR Capital Markets

Ken Usdin - Banc of America Securities

David Pringle – Salespoint Research

Presentation

Operator

Good morning, my name is Latrisha, and I will be your conference operator today. At this time I’d like to welcome everyone to the Sovereign Bancorp 2007 fourth quarter and year end earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Mark McCollom, CFO of Sovereign Bank, please go ahead, Sir.

Mark McCollom

Thank you, Latrisha, good morning everyone. I’d like to thank you for participating in Sovereign’s earnings call for the fourth quarter of 2007. As a reminder, during this call you will hear statements about our strategies, plans and objectives, as well as estimates of future operating results that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve significant risks and uncertainties. Actual results could differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference include but are not limited to general economic conditions, changes in interest rates, deposit flows, loan demand, changes in accounting principles, and other factors.

During today’s call you will hear remarks from Joe Campanelli, our president and CEO, as well as myself. We will then follow with a question and answer period at which time Bob Rose, our head of Risk Management will be available for questions as well. With that I’d now like to turn to call over to Joe.

Joe Campanelli

Thank you, Mark, and good morning everyone. I too would like to welcome you to our fourth quarter earnings call. As you know the entire industry is facing significant challenges. We are fully focused on managing these issues prudently and implementing strategies that will put us in the best position to improve the operating earnings of our franchise.

In times like these there are often issues that lie outside of our control and we are clearly feeling the effects of those. While we are all hopeful that the environment and related macroeconomic trends will stabilize sooner rather than later, we are taking aggressive actions to manage these issues as we can, and focus on improving our operational and financial performance. Some of the industry-wide items trigger charges that we outlined for you in our 8-K that was filed in January 14. Mark will review the financial details of that and the rest of our numbers in a moment, with particular emphasis on credit quality and capital strength. I know these are two important areas of focus, as they should be as part of the economic cycle.

Before I outline the strategies we are implementing to manage risk going forth, I would like to spend a moment discussing the events of the past year, both our accomplishments and challenges. Over the last year, we have also set a number of new goals to reach for 2008 and beyond. Consistent with our objective, the focus on businesses that will drive sustainable earnings growth, we did the following: we stopped originating correspondent non-prime loans in 2006, and made the prudent decision to sell these loans in fourth quarter of ’06 and first quarter of 2007.

This transaction set over $3.3 billion of un-performing assets from our balance sheet and ultimately preserved 100s of millions of dollars in capital as we exited this business prior to terra collapse devalued these assets. We also shut down our auto-put print wholesale mortgage production offices during the same period and sold 2.9 billion of all state residential mortgages. We recently made the decision to stop originating automobile loans in the southeast and southwest after it became clear that the financial performance of this business in these markets were not meeting our expectations. We are focusing our energy on auto lending within our corporate geographic footprint, where we have a long footprint of profitable lending. Other cost-cutting initiatives were completed on time and slightly better than planned, eliminating over $100 million of operating expenses.

While deposit growth did not live up to our 2007 targets we are encouraged of the initial results of our retail pilot test program. Through this program we expect to increase deposit growth and revenue by tapping into a large, existing customer base, in addition to increasing the rate of new customer acquisitions. We experienced losses in certain non-core businesses. These losses have caused us to more closely scrutinize the strategic for of these ancillary business units and build stronger risk management controls around all units. We regularly evaluate each of our business lines to makes sure that they are contributing to shareholder value, and we will continue to do so going forward.

Since the fourth quarter 2006, Sovereign’s business strategy has centered on simplifying our business model to reduce business risk, improve core profit fundamentals and improve the predictability of our income strengths. While I note that much of that work has been part of our industry conditions and necessary charges that we’ve had to take to accomplish this work, we are resolute that the actions we have taken in 2007 are the right long-term moves for our company.

As we look ahead to 2008 the key focus of our management tea, will be on the following: improving the retail customer banking experience has been one of our top priorities. This was a goal that we established in late 2006 and some progress has been made through the streamlining of our checking account product set from 10 everyday checking offerings to five, the elimination of 4,000 grandfathered accounts into one of our everyday offerings which has already reduced our rate of attrition.

However, we know that we are leaving far too much potential revenue on the table. For example, on approximately 60% of our 1.8 million households are undersold with two or less services per household. Households that have four or more products or services are three times more profitable than our limited service households. To that end we have developed a robust retail banking model called Customer First which is being launched throughout our retail network. The success of the Customer First pilot test during the fourth quarter was very encouraging. DBA sales, credit card sales, home equity sales and small business loan sales, also great opportunities. With this new process in place, over 85% of our customer deposits will be portfolio managed, which we believe will greatly increase customer retention and cross-sale opportunities.

We have currently established some baseline metrics for all of these areas and will share those starting points with you after the first quarter so that you’ll be able to track our success with this important initiative. We are very fortunate to be able to leverage the expertise of one of the leading banks in the world by working closely with Banco Santander in the development of this program. With the recent addition of Roy Lever, we now have the proper leadership in place to implement and execute our retail strategy. Roy brings over 30 years of retail banking experience to Sovereign.

Another area of opportunity will be in improving credit spreads across several product channels. In this type of economic environment, we have to make sure that we are getting paid appropriately for the use of our balance sheet capital. Balance sheet usage will be at a premium as we are very focused on building our capital levels as quickly as we can. We’ll be actively managing our loan portfolios, turning out single service customers within loan margins.

We have reorganized our commercial businesses to more effectively deliver on this strategy. We have named Pat Sullivan, with over 30 years of experience, as head of commercial banking. Pat has the leadership to instill pricing and credit discipline across these areas.

Today’s banking environment dictates proactive measures to strengthen capital and mitigate risk. As a result we have discontinued the quarterly stock dividend to bolster and mitigate risk during the ongoing challenges in the financial services industry. This step will help the company to prosper when more favorable conditions resume. The board will review the dividend policy from time to time and expects to resume dividend payments when industry conditions normalize.

The third focus of 2008 will be credit risk management. We have tightened our underwriting standards for condominium construction lending back in 2005 and are seeing the benefits of this today. Having exited the out-of-footprint wholesale mortgage production offices and corresponding home equity offices last year, we are less exposed to mortgage turmoil that many of our peers are facing today. The remaining residential and home equity portfolios have been underwritten by us and are of sound quality. For example, we have no option ARMs, we have never offered teaser rate ARMs, or products with punitive repayment penalties.

We have just over $1 billion in presidential mortgages that were reset over the next 12 months. Of this 75% will have similar or lower payments. Of the 25% that rest upwards, we have actively called these customers and do not see any significant problems. Therefore we do not believe we have any exposure to any rate reset risk. Furthermore, we have a dedicated commercial lending and credit staff working together towards timely risk identification and intervention in all of our commercial product portfolios. In addition, we have the capacity to continue to make appropriate provisions in a timely basis if required as the year upholds.

With the recent hiring of Roy Lever, the appointment of Pat Sullivan, our management team is now complete. It is important that you meet the team. I look forward to introducing them to you at our analysts that we will begin planning in the next two months. In addition to Roy and Pat, our executive management team consists of: Matthew Kerin, who runs Consumer Blending as well as several corporate service functions; Sal Rinaldi, who heads up Operations, Technology and other support functions; Bob Rose, our head of Risk Management; Tom McAuliffe, our head of Human Resources; And Mark McCollom, who you know is our CFO.

We are fortunate to have a committed and motivated management team. Each of these executives has over 20 years experience in banking and have all been through prior economic downturns, including the last major recession in the late ‘80s and early ‘90s. We know what steps to take at this point in the cycle and have committed to strategies that should enable us to pursue our goals and operate our business without disruption.

I’d now like to turn things over to Mark, who will go through the financial details of our earnings.

Mark McCollom

Thanks, Joe.

For the fourth quarter, our operating earnings for EPS purposes were $94 million or $0.18 per share compared to 95 million or $0.19 per share last quarter, and 167 million or $0.33 per share a year ago. The only two items we’ve excluded from operating earnings this quarter were the goodwill impairment charge and the other than temporary impairment on Fannie Mae and Freddie Mac securities. As I mentioned last quarter, beginning with the first quarter of 2008, we’re only going to be reporting one number, GAAP earnings. Then we will provide you with enough detail on any unusual items, up or down so that each of you can make your own individual assessment as to the core nature of each of these items.

On a GAAP basis, including all the charges mentioned above we reported a net loss of $1.6 billion or a los of $3.34 per share. I’d like to quickly highlight the charges announced last week, along with a few other items of particular interest before we discuss our core trends. First our impairment charge on goodwill, as announced we recorded a non-cash goodwill impairment charge for the fourth quarter of 2007. The final impairment charge recorded was $1.6 billion. Valuation metrics for banking companies decreased significantly in the latter half of 2007, which impacted our assessment of the fair value of the consumer and New York Metro segments. This did not impact our tangible capital levels or regulatory capital ratios since goodwill is already deducted when computing these ratios.

A combination of a weaker consumer credit market, lower valuations for banking companies and our decision to stop originating automobile loans in the southeast and southwest resulted in a goodwill impairment charge for the consumer segment. We also recorded a goodwill impairment charge on a portion of the goodwill in the New York Metro segment. The good will in this segment relates primarily to Sovereign’s June 2006 acquisition of Independence Community Bancorp.

Earnings for this segment have been negatively impacted by the current operating environment. Consequently revenue and deposit growth have been less than expected. However, I would say that our strategic value that we see in the Independence acquisition remains the same. While revenues and deposit growth have been less than expected there, they’ve also been lower in the rest of our franchise on a percentage basis. That acquisition is still contributing the pro rata amount we expected it to. The New York Metro market continues to provide compelling opportunities for it and we foresee it to be an important driver in our business strategy.

Next, our valuation adjustment related to certain Fannie Mae and Freddie Mac preferred stock securities. Due to widening credit market spreads we recorded a non-cash impairment charge of $180 million pre-tax, related to approximately $803 million of Fannie Mae and Freddie Mac preferred stock securities, which are rated AA minus and AA3 by S&P and Moody’s respectively. Since we cannot predict whether the market value of these securities will recover in the near term from the significant value impairment, and other than temporary impairment charge was warranted in accordance with generally accepted accounting principles.

Next is our provision for the quarter was in excess of charge-offs. We increased our allowance for credit losses by $88 million this quarter which was due primarily to a $50 million increase in our allowance to increase reserves related to our indirect auto loan portfolio. Net credit losses related to indirect auto loans have increased in recent quarters and are expected to remain elevated through the first half of 2008.

Although our residential and home equity portfolios have continued to perform well, we did increase our allowance for credit loss for these portfolios given the slowdown in the housing sector as well as general economic conditions and their potential impact on the loan portfolio. These moves raise our allowance for credit losses to 1.28% at year end from 88 basis points a year ago, and 114 basis points last quarter. I’ll be speaking more in detail on credit quality in a few moments.

Next we had some losses related to financings. We recorded pre-tax charges of $27.4 million related to an estimate loss on financings provided to two mortgage companies that have defaulted on certain agreements. Liquidity at these companies has been impacted by adverse developments in the real estate market which has decreased investor demand for loans originated and sold by these mortgage companies. We have exited relationships and restructured other similar agreements in this sector and we believe that our remaining exposure going forward is well contained and reserved against.

Lastly, our CDO, our collateralized debt obligations, Sovereign holds $750 million of highly rated CDOs in its investment portfolio. Just as a quick reminder, these are not backed by sub-prime mortgages or asset-backed securities, but instead are backed by investment grade corporate debt. The continuing widening of credit spreads impacted this portfolio during the quarter. Our unrealized securities losses on this portfolio which are reflected in other comprehensive income, which is a component of shareholder’s equity increased $94 million during the quarter to stand at 187 million. We have not experienced any losses to date on the CDO book, and do not anticipate any losses in future periods. We do not have any loss exposure so cumulative losses on the pools exceed 5.9% which is three times the historical average loss rate.

Moving onto net interest margin: for the quarter our net interest margin expanded three basis points to come in at 2.77%, up from 2.74% last quarter and compared to 2.60 in the fourth quarter of last year.

Our commercial loan growth was very solid this quarter. Average commercial balances increased $923 million from the third quarter as a result of positive seasonality in auto finance, C&I growth in our core markets, particularly Massachusetts, our CCRC, continuing care retirement community business, and other businesses across our geography.

C&I and other commercial loans grew $350 million during the quarter to close at 14 billion. Our commercial real estate loans grew $390 million to finish at 12.1. And multi-family loans grew about $180 million to close at $4.1 billion. That was principally due to some timing we have in that business on secondary sales of this product. Yields on the commercial portfolio decreased 26 basis points as a result of Fed rate cuts as the majority of C&I loans are variable rate.

Our average consumer loans decreased $100 million during the quarter to $27.2 billion. On a spot balance basis, consumer loans decreased $370 million. Within the consumer loan category, our residential mortgages continue to run off in accordance with our plan. Average balances are down $613 million and period-end balances are down $669 million from third quarter levels.

Home equity loan growth was strong this quarter. Our average portfolio balance increased $140 million which is about 9.5% annualized and spot balances grew about $140 million to close at $6.2 billion. Yields in this portfolio also decreased 26 basis points as a result of lower short-term rates.

In our auto loan portfolio, growth there was more than 50% slower this quarter than in more recent quarters. Average balances grew $379 million as compared to $690 million in the prior quarter to close at $7 billion. On a spot balance basis auto loans grew $176 million to also close at $7 billion.

The originations that we did have were in higher tiers, 700 plus FICOs and as a result the yield on this portfolio expanded 5 basis points, which was slower than in some prior quarters to end at 7.14%.

For the quarter, our originations were $930 million with a weighted average yield of this new volume of 7.02%. The average FICO on this new business was 744 and the split between new and used was more weighted to new than any in quarter in the past coming in at 62% new cars, 38% pre-owned, and this reflects tighter underwriting standards that have been put in place in this business over the past several months.

As Joe mentioned, we have decided to shutdown production in our out-of-footprint markets and we will continue to closely manage the remaining Southeast and Southwest portfolio which will runoff relatively quickly over its short weighted average remaining term.

Moving on to the liability side, average deposits increased $190 million during the quarter to finish at $50.2 billion. In that number was expected planned runoff of $524 million in higher cost government and wholesale deposits. Excluding those higher cost deposits, our average deposits increased $713 million which is an annualized growth rate of 7.1%.

We did have solid growth during the quarter in our retail money market and CD categories and while this is still growing we have also been successful in passing along some of the short-term rate cuts in our deposit pricing and as a result of that we’re able to lower our deposit costs 11 basis points during the quarter.

We were able to take advantage of the dislocation of LIBOR relative to Fed funds during the quarter as we were able to continue borrowing at sub-LIBOR rates. This benefited our margin by approximately 5 basis points and this is evidenced in the 23 basis point reduction you see in our wholesale borrowing costs for the quarter.

This has normalized somewhat in the first quarter from what we saw in the fourth quarter. As a result, our margin outlook for the first quarter is relatively stable. What we’ve been saying the last two quarters most likely plus or minus 5 basis points and based on what we are seeing today, I would say its more likely that we would be in the flat to down 5 basis points side of that range for the first quarter.

Moving on to fee income, our fee income was adversely impacted both this quarter and last as a result of some of the charges taken. However, excluding these charges, fee income for the quarter was very solid and where appropriate I will try to provide you color on the trends excluding some of these charges.

Our fee income before securities gains and losses was $153 million for the quarter and this is up from $141 million last quarter and $149 million a year ago. Consumer banking fees were up $4.3 million linked quarter to end at $77.4 million and this was a result of increased NSF fees and seasonality as well as interchange fees.

Commercial banking fees were $56.7 million in the fourth quarter and this compares to $44 million last quarter. Now last quarter commercial banking fees were negatively impacted by a market value adjustment of $6.2 million on our syndicated loan trading book. Excluding this item, commercial banking fees were up $6.3 million from the prior quarter and that is a combination really across the board; deposit fees were up strong as well as cash management fees, as well as loan fees.

Moving onto mortgage banking, mortgage banking revenues were $9.2 million for the quarter as compared to $3.8 million last quarter. Including in this quarter’s numbers is a mortgage servicing rights impairment of $2.1 million and if you would exclude that, our mortgage banking revenues for the quarter were $11.3 million.

Capital markets revenues for the quarter were loss of $18.3 million and this is principally a result of the $27.4 million of the losses on financings to mortgage companies I mentioned earlier.

Excluding this loss, capital markets revenues were $9.1 million compared to $6.8 million last quarter. That $6.8 million number is also normalized for a loss of $19.4 million we had similarly related to mortgage company finances.

Moving on to our operating expenses, G&A expenses for the quarter were $338 million, down $4 million from last quarter, a linked-quarter decrease of 1.2%. All in all, our expenses remained relatively flat to third quarter levels although there was some movement between certain line items. There are some unusual items to the plus side and some to the minus side that resulted in this total expense number.

Our G&A to average assets was 1.63% versus 1.66% last quarter and 1.56% a year ago. Our efficiency ratio was 54.5% compared to 55.8% a year ago and 57% last quarter.

Moving on to other expenses, our other expenses in the fourth quarter totaled $1.63 billion. Obviously this is where the goodwill impairment charge of $1.6 billion was recorded.

Moving on now to asset quality, I want to point out to folks on the call that we’ve added a new page in our financial package it is Table H which highlights by loan type, trend in loan composition, net charge-offs both in dollars and as a percentage of average loans as well as total past due loans excluding non-performers.

I know that these calls can get tedious with the volume and numbers that are discussed, but I do want to spend a few moments here discussing these credit quality trends as I know this is a principal focus for many of you on the call. As opposed to going through these metric by metric I will instead focus on each portfolio of our loan book so that you receive a more complete picture of our credit situation.

I will start with our consumer businesses. Primary residential lending comprises $13.3 billion at period end -- and this includes Alt-A -- and this totals 23% of our loan portfolio. As you know, we have been de-emphasizing balance sheet usage for residential loans and we have reduced our portfolio by $4 billion since last year. Our net charge-offs were up $1.9 million on a linked quarter basis, but remained pretty low absolute level of charge-offs at 11 bips annualized.

Non-performers in residential increased about $11 million in the fourth quarter. Delinquencies though declined $10.4 million from the third quarter to end at $361 million and total delinquencies now stand at 2.7% of residential loans outstanding. Year-over-year these delinquencies have increased from 2.2% to 2.7%.

As Joe mentioned, we’ll continue to emphasize we have no negative amortization loans, no option ARMs, nominal interest only exposure. Although we do have Alt-A loans, our Alt-A loans are due more to a low doc/no doc program rather than a lower credit quality. Our Alt-A book is approximately $2.8 billion with FICOs at origination of around 720.

All in all, our residential trends are holding up reasonably well in our view but we do believe there will be continued weakening in residential housing throughout 2008. Based on that assessment and these recent trends, we did increase residential reserves by $4.9 million during the quarter.

Also as a reminder we do have a credit default swap in place which covers approximately $3.3 billion of our residential portfolio. Under the terms of this credit default swap, Sovereign is responsible for the first $5.2 million of losses on the remaining balance of loans in the structure and then we are then reimbursed for the next $55 million of losses under the terms of that credit default swap.

Moving on to our home equity business, since we exited the national correspondent piece of this business, we have been discussing our portfolio in two pieces: the $5.6 billion of super-prime in-market loans and the $434 million of loans in a wind down mode from the sale of the correspondent business.

For the in-market portfolio business, credit continues to hold up well. Home equity net charge-offs increased $2.9 million from last quarter to $3.8 million but this still represents a relatively low 25 basis point annualized rate.

Non-performing loans for in-market home equities increased nominally during the quarter from $12.5 million to $16.5 million. Total past due home equity loans were only 55 basis points at year end versus 48 basis points at September and 28 basis points a year ago.

We did increase our home equity reserves by $6.9 million during the quarter to 50 basis points of total reserves to reflect general weakening trends and we believe we are now well protected at this level going into 2008.

As a reminder, 37% of this home equity portfolio are first lien home equities; 66% are fixed rate loans; and the original FICOs and combined LTVs are very strong at 785 and 62% respectively.

The second piece of our home equity business is the portfolio and run off mode from the sale of our correspondent business. Last quarter we significantly increased reserves against this portfolio. The portfolio was run down $23 million during the fourth quarter from pay downs and pay offs and now remaining are $367 million of first lien loans and $131 million of second lien loans.

During the quarter, net charge-offs of $14.6 million were applied against the basis of these loans. This amount was in line with our forecast and no additional reserves were required to be recorded at year end.

As a reminder, I would expect the remaining base adjustment to be utilized against first quarter 2008 net charge-offs. Therefore, thereafter net charge-offs will start to be recorded and deducted against our allowance for loan losses. However, we currently have over $50 million of allowances also recorded against this portfolio which our models continue to show will be sufficient to cover future losses.

Moving onto auto lending, as we have said, our auto performance specifically in the Southeast and Southwest, did not meet our expectation for 2007. I have stated at several conferences that we are anticipating net charge-offs of $10 million or so per month in this business for the next nine months and then we would expect to see declines based on recent underwriting changes that we implemented.

While in the fourth quarter, net charges came in higher than we forecasted at $34 million and 57% of these net charge-offs came from the Southeast and Southwest compared to 48% of our charge-offs coming from this region in the prior quarter. This is one significant factor in our ultimate decision to discontinue auto originations in these out-of-footprint regions.

Our auto delinquencies have increased to 3.2% at year end from 1.8% a year ago. Based upon this increase and our decision to cease originations in the out-of-market regions, we increased our auto reserves by $51 million during the quarter. We still believe the loss issue began to stabilize in this portfolio in the second half of 2008. However, we believe full year 2008 net charge-offs on our entire auto portfolio will be in the $140 million to $150 million range.

Moving on to our commercial portfolios, commercial real estate balances were $16.6 billion at year end. Net charge-offs in commercial were $4.6 million or 11 basis points annualized up from the prior quarter but within the range we have seen over the past year. Commercial real estate non-performing loans were up only $1 million during the quarter to $68 million and this number is actually down $9 million from where we were a year ago. Commercial real estate delinquencies improved during the fourth quarter to 43 basis points which is down from 61 basis points in September but up from 32 basis points a year ago.

Our C&I trends show similar numbers. Our net charge-offs were $13.6 million, 39 basis points annualized which is up from the prior quarter but also down from where we were a year ago. Non-performing loans were $85 million, up from $78 million last quarter and $69 million a year ago. About half of this increased year-over-year is due to the 10% portfolio growth that we have seen during the year in our C&I book.

Our C&I delinquencies were 48 basis points down from 50 basis points in September but up from 36 basis points a year ago.

In summary, our credit outlook for the coming quarters calls for continued weakness in our consumer portfolios. Our commercial credit will be more product-specific. Certain portfolios such as homebuilders will fare worse versus others such as multi-family lending which should continue to be quite strong.

Bob Rose, our Head of Risk Management, will be available during Q&A to add additional color on our credit quality.

Until the markets stabilize somewhat, it’s difficult to predict within a narrow bandwidth how our portfolios will behave in 2008. That said, we have stress-tested our portfolio over a wide range of scenarios and believe that we have the financial flexibility to execute our business strategies should financial conditions worsen beyond our forecast.

Moving on now to capital. Because of some of the charges that occurred during the quarter, our capital ratios were impacted to varying degrees. The principal culprit than impacted capital was the negative adjustment from our other than temporary impairment of our agency preferred stock as well as additional other comprehensive income hits coming from the investment portfolio and hedged mark-to-market adjustments. All told, these items impacted tier 1 leverage by 13 basis points and tangible capital ratios by 28 basis points.

Additionally, consistent with last quarter, we continue to hold excess cash and securities of $4 billion over year end in order to maintain compliance with the regulatory requirement. This impacted our tier 1 ratio by approximately 30 basis points and our tangible ratios by around 20 basis points.

Despite these issues and despite some of the other charges we took, our tangible capital declined to 3.95% from 4.09% last quarter and our tier 1 leverage ratio was at 5.89%. The last two quarters have been challenging from a capital perspective as they have impacted the solid capital progress we have been showing for the four quarters from June 2006 through June 2007.

Capital is stronger year over year by 15 to 30 basis points depending on the ratio and we remain committed to getting back on the path of capital growth that we were showing two through six quarters ago.

Over the past 12 months we have taken a number of steps to bolster our capital base in this weakening economic environment by doing the following: disposing of over $7 billion of non-core assets and businesses; eliminating auto originations in the Southeast and Southwest which will further reduce our asset base in 2008; we reduced operating expenses by over $100 million in 2007; and we discontinued our quarterly common stock dividend which will conserve approximately $160 million of capital in 2008.

Our capital currently exceeds the levels defined as well capitalized by our regulators and our forecasts indicate that we can maintain this designation even under continued worsening of industry conditions. We stress-tested our credit losses to the worse losses in our region over the last 25 years by loan category. While it is unlikely that all loan categories would experience historically high loss levels at the same time we assume this under our worse case scenario. Under this scenario our, capital remained well capitalized even without the recent action we took with respect to our dividend.

However, we felt in this environment it was prudent to provide a cushion on top of that cushion which led to those actions. Given our current tangible equity ratio of 3.95%, we believe it’s very possible to achieve our 4.5 interim goal by the third quarter of 2008.

Consider these numbers: the current analyst mean estimate of earnings is approximately $510 million and our intangible amortization this year will be approximately $100 million. For nine months, those two items equate to 56 basis points of capital growth. Add to this approximately 20 basis points or higher of capital relief, we will receive once we have a longer-term solution in place for our regulatory requirement and this equates to 76 basis points of capital growth which will take our tangible equity up above 4.7. This is before the addition capital we would get through our recent dividend action. This will then give us a cushion to allocate to balance sheet growth, further other comprehensive income degradations, etcetera.

With that we’d now like to open the lines up for our Q&A on our fourth quarter earnings call.

Question-and-Answer Session

Operator

Your first question comes from Gerard Cassidy - RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

Regarding your exposure to the mortgage companies that you touched on, Mark could you share with us, do you have any mortgage exposure left to the companies that you’ve written-off the loans to? What is the remaining mortgage exposure to maybe other customers that are there in that business?

Mark R. McCollom

We have Gerard. We had put in a road show packet several months ago that our total portfolio is around $450 million to $500 million of loans in that space and the majority of those customers have held up well in this environment.

The ones that have triggered these losses was really a handful of larger names of which there were may be five or six. Of those five or six we believe that those are now properly reserved, losses have been taken, we’ve been reducing our exposure to them significantly and we wouldn’t anticipate any losses coming out of the names we’ve already taken charges for going forward.

Obviously you have the remaining portfolio and that portfolio is just like the rest of our commercial book; there will always be some level of credit risk there but we think the types of structures and the types of financings that we had that were problems we think those are behind us here as of 12/31.

Gerard Cassidy - RBC Capital Markets

In your guys’ analysis of that portfolio, what has been the migration of those credits from past to possibly special mention or substandard, is there a continued degradation in credit in that portfolio or has it stabilized?

Bob Rose

Relative to the mortgage warehouse companies within that portfolio there has actually been a slight improvement in credit quality from the third quarter into the fourth quarter with a couple of pay downs; there was one large credit in that group that was classified that filed bankruptcy and we have been liquidating that collateral.

The remainder of them, while they have an elevated level of criticized and classified assets, they have been improving modestly and we expect further improvement in 2008 in them, because they are at their heart conforming inventory loans and the quality of the collateral backing them up is relatively good collateral that is Fannie, Freddie eligible collateral.

Gerard Cassidy - RBC Capital Markets

In terms of the mortgage company that did go bankrupt when you were liquidating, what were you receiving on the dollar in the liquidation?

Bob Rose

On that liquidation, which is not yet complete and remember these are mortgages and these are mortgage servicing rights. We have been expecting to receive anywhere from $0.97 in the aggregate, $0.94 to $1.05 in that liquidation.

Gerard Cassidy - RBC Capital Markets

Moving over to the liquidation portfolios, Mark, you mentioned obviously automobile you’re exiting certain businesses. What’s the dollar amount of both the home equity/residential liquidating portfolio and the auto portfolio and when do you expect them to be essentially run down to zero?

Mark R. McCollom

The correspondent home equity business is about $434 million as of year end and that’s net of the reserves that we carry on that portfolio, and that’s split about 75% of that is first lien and about 25% second lien and the LIFO on that will trickle down principally over the next two years. There is a slight tail after two years but most of that’s gone by the end of ‘09, and then for the indirect auto for the Southeast/Southwest there’s about $2.6 billion and that tends to have about a two to two-and-a-half year average life, so you’d expect to see that 2.6 come down pretty significantly as well over the next two years. There will be some tail beyond two years, but the bulk of that would be behind us by the end of ‘09.

Gerard Cassidy - RBC Capital Markets

Finally, you mentioned I think in the press release your exposure to some syndicated loans, what’s the size of the syndicated loan portfolio in the C&I area? Also what’s the size of your CMBS portfolio if you have that?

Mark R. McCollom

We took a charge in the third quarter related to that syndicated book when credit spreads were widening, typically that was a small portfolio for us. It probably averaged during the year $100 million to $150 million. We have recently made decisions to reduce our volatility there and as of year end that portfolio is about $30 million.

Gerard Cassidy - RBC Capital Markets

And CMBS, is there any exposure there in terms of what’s on the balance sheet?

Mark R. McCollom

We also took some charges there in the third quarter, made a decision in the fourth quarter to move those loans, well we actually sold a portion of those CMBS loans and then the rest we moved back in the portfolio. We don’t want to take the volatility right now while credit spreads are moving around so much. We may start that up again in 2008 if credit spreads normalize.

Operator

Your next question comes from Heather Wolf - Merrill Lynch.

Heather Wolf - Merrill Lynch

Mark can you update us on the section 29 partnership and how that impacted your equity method expenses and also the tax rate?

Mark R. McCollom

Sure, the section 29 synthetic fuel credit transaction actually that law sunsetted at the end of 2006. We have been writing off through our income statements $4 million per quarter in expenses. We were also then receiving tax credits related to that. For 2007, the total amount of tax credits we received was about $19 million. So you wrote off approximately $16 million of the investment pre-tax. You had also about $1 million a month in operating losses related to that partnership, but then you were receiving back -- and this varied by year -- anywhere between $19 million and $28 million of after-tax tax credits. That would be the impact and again both that expense and the related tax credit benefit are going away in 2008.

Heather Wolf - Merrill Lynch

Was there some kind of a true-up or can you tell us what happened to the minority interest expense popping up from $7 million to $27 million this quarter?

Mark R. McCollom

Not related to the section 29, we hold or held some small investments in stock funds. Those were adversely impacted with market values declining in the fourth quarter. We have actually liquidated either in the fourth quarter or in the first quarter we have liquidated those portfolios.

We also have some low income housing tax credits, which we are keeping, but as we receive the K1s and some of these partnerships had a true-up in some of the amortization of those investments as well but I would expect to see that other expense line and that minority interest line normalize to what it was kind of back in the second quarter is probably your best benchmark, as third quarter had a pop from one of those equity method investments of about %7 million. So, if you normalize for those two quarters, you’re at about that $8 million to $9 million range per quarter.

Operator

Your next question comes from Bob Hughes - KBW.

Bob Hughes - KBW

Mark, I was curious about some of the movement you referred to in expenses. I don’t think you went into tremendous detail. Maybe I missed something earlier. The compensation benefits declined quarter to quarter, what’s that related to?

Mark R. McCollom

Sure. I will step through a couple of the numbers here Bob. Comp and benefits declined principally due to as you get towards year end, you take a look at some of your incentive compensation accruals and we did not hit some of our corporate targets, so as a result we had some reversals there.

As well as what we did just have some favorable, we are more on a sort of pay as you go self-insured basis on our benefits and we did have a healthier quarter as an organization in the fourth quarter which resulted in some positive benefit there as well.

Offsetting some of that would be in the occupancy line. Occupancy was up. We had about a $2.4 million occupancy charge in the quarter for some unused, underutilized real estate and in the other expense line you see that number jumped up pretty significantly. Most of that, about $8 million of that, was related to increased legal expense which was due to our portion of the Visa/AMEX and Visa/Discover settlements.

We are a 21 basis point owner of Visa and in order to have those lawsuits cleared out as a condition for Visa to launch its IPO, each bank had to pay its pro rata share of those benefits or that settlement rather and for us that was about $8 million.

When you take some of the ins and outs, there were some positives and negatives. Also in there was a couple of million dollars we paid for severance costs and shutdown costs for the Southeast, Southwest. So when you take out all of those ins and outs, positives and negatives, it nets down to where our net number of $338 million is I think pretty close to a run rate, but I acknowledge there is some noise line to line.

Bob Hughes - KBW

I know it’s hard to call right now, but what do you think a reasonable run rate for your quarterly provisioning would be? You’ve taken a number of actions against specific troubled portfolios, autos emerging to be a bit more problematic. Some of these issues I think you would characterize as effectively putting behind you. We’re now seeing the effects of broader credit deterioration and I feel like there could be more pressure on provisioning from auto as well despite the action in the fourth quarter.

Could you give us any sense for where you’re seeing provisions in ‘08?

Mark R. McCollom

The sense I will give you Bob is I did just put out a number for auto that we’d expect losses there to be $140 million to $150 million and our intent as that business winds down is we’ll continue to at least match charge-offs in that business. So, even if you expect things to get weaker in auto as you’re going to have over one-third of that $7 billion is going to be running off so you would expect there to be either flat growth or negative growth in overall auto and that will have the impact of increasing your overall reserves in that portfolio, if you follow me.

So as balances decline but you continue to match charge-offs with provision for that loan segment, the allocated reserve that you have in that segment as a percent of the balance will increase. We think that even if things would get a little bit weaker there, we think by matching charge-offs in a shrinking portfolio, you’re reasonably covered.

Outside of that, we are not going to give a tight prediction on where provisioning and charge-offs will be in our other portfolios other than the comments I already gave is that I would expect you’ve seen trends the last couple of quarters where resi and home equity are weakening but they are weakening gradually and on the commercial side we would also expect some level of weakening and again different pockets there are going to perform better than others.

Bob Hughes - KBW

Finally, how would you suggest that we gain any comfort with the broader credit profile, particularly given that this auto mess came on the back really of your prior balance sheet restructuring and dealing with some one-off issues in other? I think it’s getting hard to claim that each of these issues are isolated and it creates I think a real overhanging concern regarding your broader credit profile.

Joseph P. Campanelli

Part of our concern is that as we were looking at the demographics of what was going on in the Southeast and Southwest relative to the year-over-year changes in the housing prices, the imbalances between supply and demand on the housing front, the decline in construction jobs and other demographic concerns, we felt the outlook there was going to continue to get more troubling so that led to our decision based on the current performance and the outlook to pull back into areas where we’ve got tighter relationships.

We’ve also realized that in the Northeast where we have other relationships with dealers, such as cash management and floor plan lending, that the credit performance is much higher, and over 60% of our originations are with relationships like that. We’ve really significantly tightened up over the last year on the credit profile, not only on the underlying collateral in new and used but on the credit underwriting terms relative to bureau scores, and debt to income level, and loan to values.

While we are not insulated from a downturn in the economy, we do believe the Northeast is well positioned within the asset classes we have. As Mark talked about, when you look at commercial real estate, while we believe there is more pressure today on all asset classes than a year ago, we feel the ones we are concentrated in will hold up better.

The office market is very strong; Philadelphia, New York, Boston, those generally remained strong. We are looking closely at hospitality and other segments and they appear to be holding up well. So that while we are not insulated, we certainly feel there’s no boom period in the Northeast so we don’t anticipate any material bust period either within these segments. Bob, did you want to add?

Bob Rose

I would add some of the things that both Joe and Mark said, if you break our portfolio down into its component pieces, the residential book was underwritten by us, for us and it displays modest loan to values, it has modest exposure to states that you would consider would have higher risk profiles, the home equity portfolio bears that similar characteristic of underwritten by us for us, and has extremely favorable FICO scores and loan to values.

Again, low exposure to places that you read about in the paper every day. We have been sampling cells on a matrix of these portfolios looking in at the higher loan to value of the lower FICO scores, some of them you could characterize as sub-prime based on a current or an original FICO score.

I mean that’s what we are trying to get at is examining some of the lower quality assets and we find that the underwriting was robust. They, or the majority of them, would have been approved without intervention by Fannie or Freddie underwriting systems and so we are confident that the residential and home equity books are solid portfolios not displaying characteristics wild underwriting.

On the auto side, we’ve been running several loss forecasting models and we’ve been choosing the more conservative of them and even been factoring in December, it is always a tough month in that business for losses, and using forecasting techniques that take into consideration the nature of the fourth quarter and losses in auto. I think Mark characterized well that we expect these to level off and tail down in the latter part of 2008.

As we cycle out of those, Bob, the parts of the portfolio that will remain and be emphasized there are our traditional strong footprint. We have, as you know, a good dealer book of wholesale [floor plan] and we are doing business in the indirect world with lots of those dealers that we are dealing with on the wholesale side.

Our exposure, we talked about our exposure to homebuilders before. It is not outsized and we are all over it as all the other banking companies are we are working with all those elements of our commercial portfolio which have seen a little bit of creep in classifications in segments of homebuilder, naturally; for-sale housing we call it. As well as building-related segments and a very tiny creep in the rest of the portfolio; not large.

Operator

Your next question comes from the line of Matt Kelley - Sterne Agee.

Matt Kelley - Sterne Agee

In light of the capital levels, would you consider any other asset sales or branch sales throughout your network as a way to shrink the overall balance sheet or raise some new funds as a method to shore up those capital levels?

Joseph P. Campanelli

Matt I would say that we are always looking at our balance sheet for ways to optimize it. If you look to this year and particularly this quarter where we shrunk our exposure to residential we’ve obviously been shrinking our exposure in the investment portfolio over multiple years. So we always cull through our balance sheet and see if there are businesses or assets where we are not getting an acceptable risk-adjusted return and we’ll look at that if the numbers make sense.

Matt Kelley - Sterne Agee

Including branch sales as a potential?

Joseph P. Campanelli

We made a decision last year to shut down 40 under-performing branches. In many cases it didn’t make economic sense to sell them and actually with their geographic locations it was more efficient to just shut them down and consolidate the deposits into existing branches.

But if you did have a case where you had an under-performing branch or a cluster of branches that was not at all centered towards any other branches that they could fold into then a sale would make sense. We haven’t done one of those in several years, but it certainly is not something we categorically rule out.

Matt Kelley - Sterne Agee

How would you quantify deposit pricing just over the last couple of days and weeks in terms of your ability to pass on some of these rate reductions by market? Have you had any discrepancies there between the New England market and the Mid-Atlantic, New York market?

Joseph P. Campanelli

On deposit pricing our philosophy is that we don’t want to be the highest rate in the market and we don’t want to fall into the trap of putting a lot of teaser rates out there. We like to have a competitive, everyday rate that puts us in the middle of pack or slightly above the middle of the pack on rates and we’ve been able to very proactively manage our deposit costs down but yet still see for this past quarter, I mean, if you think to your more rate-sensitive products -- CDs and money markets -- we were still able to manage to 7% annualized growth in these two categories, despite passing on some of those rate cuts.

Matt Kelley - Sterne Agee

Have you noticed some of the end market competitors being more active in reducing rates over the last couple of days?

Joseph P. Campanelli

No, not in the last couple of days. I think everyone, obviously, with the 75 bips a week ahead of the meeting caught everyone a little off guard; and typically most banks, even the most proactive banks typically have a week of operational turnaround to put any rate cuts into effect.

Matt Kelley - Sterne Agee

What should we be using for a tax rate for ’08 and ’09?

Joseph P. Campanelli

For 2008 and 2009 I would suggest it will be somewhere in the 20% range for 2008; it could be a little bit higher, could be a little bit lower; obviously some of that depends on ultimately what you have for pre-tax earnings for the company will determine that. For 2009 you would drift up a little bit from whichever base you start with.

Operator

Your next question comes from James Abbott - FBR Capital Markets.

James Abbott - FBR Capital Markets

Good morning. I was wondering if you could give us a sense on what your outlook for loan growth is. If you just look at the loan growth from the quarter and then back out what auto loan growth was, you are in the maybe $500 million range for the quarter and then you start liquidating that auto portfolio. I am just wondering, would you expect to see substantially more than $1 billion worth of growth for the year of 2008, or is that too aggressive or too weak

Joseph P. Campanelli

I think when you think to 2008 our total earning asset growth is going to be very modest. If you go down our portfolios, the residential portfolio we are continuing to migrate downwards. The investment portfolio continuing to migrate downward. You will see some normal growth in our in-market home equity business; you would expect to see some normal growth in our commercial businesses. You would expect to see normal growth in our in-market auto business slowed from last year, but then offset by the run-off in that portfolio.

So when you put all of those together, total earning assets, again the growth will be nominal or could even be slightly down. But the NII growth that our company is anticipating would be a result of mix shift both on the asset side shifting out of some of your lower spread asset classes into more profitable ones and then seeing that same dynamic occurring on the deposit base as well.

James Abbott - FBR Capital Markets

So margin increased but actual earning asset volume is down a little bit. Thank you for that answer. On the reserve ratio, I would imagine with the losses that you are expecting from the auto portfolio at a minimum, and then I suppose it sounds like you are running not real close, but closer anyway, to running out of reserves for the correspondent home equity piece. Would you anticipate building the reserve, and if so, to what level? What have the discussions been?

Joseph P. Campanelli

When you say running out of reserves, there are two sets of reserves against that corresponding business. There was one when it was placed in the held-for-sale category we had a basis adjustment that was just reducing the book basis of the loans; that basis adjustment is what is running out here in the first quarter.

Behind that then we have over $50 million of allowance for loan losses while it is not a basis adjustment, it is allocated loan loss reserves specifically against that portfolio. When you combined the basis reserve when it was a held-for-sale portfolio and the allowance, those reserves we believe are sufficient to cover embedded losses in that portfolio as it runs down.

James Abbott - FBR Capital Markets

Okay my mistake there. Back to the question though, is the reserve-to-loan ratio at 1.2%, I would imagine that will trend upward over the year for Sovereign, for all banks, but do you have an idea as to where you are aiming for by the end of the year?

Joseph P. Campanelli

I think to forecast that number is same the same as Bob’s question on forecasting charge-offs and provisions. They are all tied together. Again, we are giving guidance what respect to the auto portfolio of $140 million to $150 million of losses because that is going to be in excess of 50%, we would hope. It certainly was in excess of 50% in the fourth quarter of where we saw charge offs. It was $34 million of our $60 million but then in our other portfolios again, we would expect to continue to see mild weakening similar to what you have seen in the last few quarters.

James Abbott - FBR Capital Markets

Actually you remind me of another question that I had thought of was on the auto loan projections of let’s say it is $150 million, just to talk about one number; wouldn’t that be about 2% or just a fraction over 2% of auto loans, which is kind of similar to what you had in the fourth quarter. It strikes me that the rate of acceleration of losses from the auto portfolio is really ramping up here. As these loans season, of course, it gets worse. Your thoughts there?

Joseph P. Campanelli

While we do anticipate elevated losses in the first half of 2008 with a lot of the underwriting changes, and I gave some earlier statistics with increasing our average FICO in that business to over 740 in the fourth quarter as the origination underwriting changes we have made the last two quarters. Typically you see a loss curve season in auto at the 12 to 18 months range is when you reach the [APEC] of your loss curve and as the underwriting changes we made starting in the summer of 2007 cycle through and become a more significant portion of overall losses in auto, that will have the impact of driving those losses down.

Losses are clearly elevated from what our initial forecasts were which again, led to the decision to shut down the expansion markets. I hope that explains that while we expect things to be elevated, at some point we do see that reverting with the underwriting changes that we have made.

Operator

Your next question comes from Ken Usdin - Banc of America Securities.

Ken Usdin - Banc of America Securities

Mark, with the relatively modest increase in NPAs I am just wondering, did you sell any NPAs this quarter?

Mark R. McCollom

A handful of small, maybe under $1 million of troubled loan sales.

Joseph P. Campanelli

Into some prior quarters.

Mark R. McCollom

The programs that we were on all year, but no large names, Ken.

Ken Usdin - Banc of America Securities

My second question is just a follow up on your comments about NII growth. Mark, I am just wondering if you could just walk us through little bit more of the dynamics of the margin this year? How much of it is just mix shift; assets, deposits versus what you are expecting out of the curve and out of pricing? If you have any idea of at what point do we really potentially see a meaningful upward trend to the margin, just based on those factors?

Mark R. McCollom

It is mix shift first and foremost. Yield curve, while we are still looking at specific changes to the 75 basis points, if you look at some of our interest rate risk numbers that we do share we’ve been attempting with a lot of the balance sheet moves that we made over the last 15 months to put ourselves in a more neutral posture.

In our most recent reports on interest rate risk, a 100 basis points parallel shock provided just a nominal benefit to the company. I wouldn’t expect yield curve, just looking at the forward curve, to give us a lot of benefit; it may actually end up ultimately giving us a slight negative. Particularly what’s important to us is that relationship between Fed funds and LIBOR which I referenced gave us a benefit in the fourth quarter. As you see funds to LIBOR normalize to where it has been, that will have a little bit of a negative impact.

It really comes back to mix shift and being very aggressive on use of your balance sheet on the asset side and then the Customer First pilot program that Joe spoke to, as we start to see the benefits of that in the latter half of 2008, that will start to set the table for us going into 2009 for what we hope would be continued margin expansion.

Ken Usdin - Banc of America Securities

You mentioned in the release about continuing to be tight on efficiency; it sounds like, can you quantify for us how much you actually did save this year versus that original 100 plan and is there another plan in the works, a material cost savings plan that you’re thinking through?

Mark R. McCollom

I’ve mentioned before for the fourth quarter that while there are some ins and outs that the total number I think is a pretty good representative number. If you look fourth quarter to fourth quarter, we declined from $355 million down to $338 million. So you are down about $68 million annualized just $17 million quarter to quarter. So $68 million.

We had referenced all along, I mean our total plan got in excess of 100 but then you give back something because we’ve got $1.3 billion expense base if you just take 3% salary increases and 3% cost of living across the other areas, right there is $40 million coming back the other way.

So the fact that quarter over quarter, year over year when we were down $68 million annualized I think shows that we did achieve in excess of $100 million of core savings.

Joseph P. Campanelli

Ken, as far as going forward we do have an ongoing program where we will be looking for efficiencies; some of those take longer such as vender negotiation for contracts that maturing; really leveraging our scale.

One of the things that we’ve done which we think will have a positive impact is the new organization, we have put all of our operation technologies under one executive so that we can really use our leverage and negotiate better terms and conditions with our vendors. We have really streamlined the business model with all the commercial reporting up to Pat Sullivan and all of retail reporting up to Roy. So we look at gearing ratios and opportunities to really make sure we are taking best practices and efficiencies and pushing them quickly throughout the company.

So while there is not a major program to go through and eliminate a wholesale number of jobs, it is clearly an opportunity to continue the momentum we built in 2007 to be much more efficient on how we run our company. We would expect to identify those opportunities and many of those would be reinvested in things we want to do with the customer experience and whatnot.

We are confident that we can continue to find ways to improve our efficiency.

Operator

Your next question comes from David Pringle – Salespoint Research.

David Pringle – Salespoint Research

Forgive me if I missed this, but did you talk about the dollar amount of your residential construction portfolio?

Mark R. McCollom

I don’t think we spoke about it per sae; the residential construction portfolio is $1.1 billion.

David Pringle – Salespoint Research

How much of that is land?

Mark R. McCollom

Very little of it is land, it is about $71 million.

Bob Rose

Of that $1.1 billion, that includes condominiums which as Joe referenced earlier, we had made significant changes to our underwriting exposures there starting in 2005.

Joseph P. Campanelli

A material part of that was the underwriting requirement, so that portfolio has held up quite well in spite of what could be a slowing in sales; it could always be converted for rental.

David Pringle – Salespoint Research

How much is the condo exposure?

Mark R. McCollom

The condo exposure within the $1.1 billion is approximately $450 million today.

David Pringle – Salespoint Research

Does that have any geographic concentrations in it?

Mark R. McCollom

It is concentrated in Mid-Atlantic; approximately half of it is in the mid-Atlantic states; New England, 27%; there is about 17% in Florida and the rest of it is in a variety of states in the United States

David Pringle – Salespoint Research

Do you have a 90 day past due number at the end of the year?

Mark R. McCollom

Yes we do

David Pringle – Salespoint Research

Perhaps you can include that in your press release

Mark R. McCollom

90 days and still accruing is $69 million.

Operator

Your next question comes from Gerard Cassidy - RBC Capital Markets.

Mark R. McCollom

Gerard, we are starting to cycle through here the second round of questions so we’ll take Gerard’s and then we’ll let all of you get back to your day.

Gerard Cassidy - RBC Capital Markets

Getting back to the CDO that you mentioned earlier, what would cause the temporary impairment where it goes to the shareholders’ equity section of the balance sheet to become permanent similar to the Freddie Mac securities that you took this quarter. What would have to happen to that CDO other than an outright default?

Mark R. McCollom

Other than an outright default, it would have to be that we would declare that we do not have the intent and ability to hold that security to its maturity of which these, on an average basis, are about nine years remaining life. As long as we have the intent and ability to hold and we do not believe that we’ll take principal losses, at the end of nine years we would get back that $187 million of current unrealized losses that are there.

The only thing that would turn that unrealized losses into a realized loss would be our decision to sell it at a time when credit spreads are very wide right now if we make that determination that it’s a for-sale security and not one we have the intent to hold to maturity.

Gerard Cassidy - RBC Capital Markets

Finally, what’s remaining on the goodwill from the independent acquisition? Obviously you took the impairment charge this quarter. How much is remaining on the books?

Mark R. McCollom

It was about 30% was written down so there would be just about $2 billion, a little north of $2 billion left from that.

Joseph P. Campanelli

Thank you all for joining us this morning. Obviously we are in challenging times but we are very confident with our strategy to really focus on core banking and our footprint, a simplified business model and executive team we have in place to make sure that we execute on the strategy we have laid out for you this morning. I look forward to talking with you more over the next couple of months as we have various analyst meetings and we go on the road.

Thank you again for joining us and have a great day.

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