WB 微博

Operator

Good morning, ladies and gentlemen. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wachovia Fourth Quarter 2007 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer period. [Operator Instructions]. As a reminder ladies and gentlemen, this conference is being recorded today, January 22, 2008. I would now like to introduce Ms. Alice Lehman, Director of Investor Relations for Wachovia. Ms. Lehman, you may begin your conference

Alice Lehman

Thank you operator and thanks to everyone for joining our call this morning. I know it's been a busy morning. We hope you've received our earnings release by now, as well as the slides we'll be using in today's presentation and our supplemental quarterly earnings report. If you haven't, all of these documents are available on our Investor Relations website at wachovia.com/investor. In this call, we'll review the financial highlights package. In addition to this teleconference, this call is available to a listen-only live audio webcast. Replays of the teleconference will be available by about 1 PM today and will continue through 5 PM Friday, March 21st. The replay phone number is 706-645-9291, and the access code is 206047152. Our CEO, Ken Thompson will kick things off. He will be followed by CFO, Tom Wurtz and our Chief Risk Officer, Don Truslow. We will be happy to take your questions at the end. Of course, before we began I have a few reminders. First, any forward-looking statements made during this call are subject to risks and uncertainties. Factors that could cause Wachovia's results to differ materially from any forward-looking statements are set forth in Wachovia's public reports filed with the SEC, including Wachovia's current report on Form 8-K filed today. Second, some of the discussion about our company's performance today will include references to non-GAAP financial measures. Information that reconciles those measures to GAAP measures can be found in our filings with the SEC and in the news release and supplemental material located at wachovia.com/investor. Finally, when you ask questions, please give your name and your firm's name. Now, let me turn things over to Ken.

Ken Thompson

Thanks Alex and good morning to everyone, and thank you for joining our call on a very busy day. As you have seen in our press release, our fourth quarter results were poor. GAAP earnings of $0.03 per share and operating profit of $0.08 per share are not numbers that we are proud of and they do not in any way represent our expectations for the future. Our fourth quarter profits were severely impacted by $1.7 billion in marks, primarily in the fixed income division of our Corporate and Investment Bank, and by an overprovision of just over $1 billion to increase our credit reserves in the face of a very weak housing market. These actions were necessary based on what we believe is a very realistic view of the market challenges that we face in 2008. During the quarter, we took other actions to strengthen our company. As you know, today our subprime CDO exposure is just north of $800 million. We reduced our CMBS mark-to-market exposure by over $6 billion, while recording CMBS marks costing far less than what we believe, investors were expecting from us. We did a deep-dive review of our commercial real estate, retail mortgage and auto-finance portfolios, and we have a clear view of our positions in each of those areas as we go forward. We raised $2.3 billion of straight preferred equity in December and $800 million in trust preferred in September to improve their capital levels over third quarter levels. And after rigorous planning, we entered 2008 with good momentum in a number of our businesses; retail, small business, commercial, brokerage, asset management, cost of fixed income, asset-based finance, treasury services and our wealth markets. Nevertheless, based on recent action in our stock price, I am certain that investors are anxious about several questions on Wachovia, which I want to address now. The first question is, what is the level of the losses in your Pick-a-Pay mortgage portfolio? And as we have said since the Golden West acquisition, we looked at the Golden West experience of the early 1990s. At that time, California had 10% unemployment and 20% house price depreciation, and charge-offs peaked in 1994 at 20 basis points. Based on our portfolio today, that 20-basis point peak would translate to about $250 million in charge-offs. Our expectations for the this year are that charge-offs will exceed that historical peak. But even if charge-offs reach three or four times that peak, our Pick-a-Pay portfolio will generate very meaningful bottom-line profits in 2008. And I do not believe that investors grasp that fact today. The second question, does Wachovia have enough capital? After our December preferred offering, Wachovia's capital levels were higher at year end, and at the end of the third quarter in spite of the marks and in spite of the reserve builds that we did in the fourth quarter. And we are confident that those capital levels will increase as we go through 2008. And the third question, will Wachovia cut its dividend? And the answer to that question is we have no plans to cut the dividend, because we don't need to cut the dividend. We are confident in our ability to meet our 2008 business plan and that plan, as we have said before, will generate cash earnings that will cover our dividend payments, continue to build necessary credit reserves, improve our capital ratios and support growth in our business lines. So now with that introduction, I am going turn the floor over to Tom Wurtz, to review our fourth quarter results and later to Don Truslow, to give you a look at credit quality and risk management.

Tom Wurtz

Thanks Ken. Good morning to everyone on the phones. We appreciate the time you are investing in us. As you can see, we have changed the format of materials representing to include a highlights document to provide an overview of results and permit us to provide additional detail on topics, we think are of interest to investors. We also continue to produce the quarterly earnings report package, which provides the detail disclosures you are accustomed to. So, if I could ask you to turn to page one, you see GAAP earnings of $51 million or $0.03 per share and operating earning of $0.08 per share. These are the earnings for the quarter, so I am not suggesting you should think otherwise. But I would like to give you some sense for the baseline performance underlying these results by highlighting some of the big items which detracts it from earnings. We had approximately $0.90 per share of writedown and over provisioning. Also operating earnings reflect about $0.03 of non-merger severance expense, about $0.03 of additions to our legal approval and $0.02 impact from an accounting change related to recognition of credit losses. So, it's not hard to get back to a view of operating earnings in excess of a part of dollar per share. I hope as we go through this package, I can make you confident of several points, which I don't think are accurately reflected in our share price for debt spreads. First, as Ken mentioned our intention to execute on our 2008 plan that keeps the dividend very safe, provides ample capacity to build reserves, support balance sheet growth and permits us to meaningfully grow our capital base. Second, our remaining net mark-to-market exposure to further CMBS market volatility is relatively modest and there is only 25% of what it was just six months ago. Third, while we expect NPAs in the mortgage portfolio to continue to increase substantially over 2008, this clear evidence that our Pick-a-Pay portfolio is to-date performing very similar to that of the average prime portfolio in the industry, in terms of 60-day delinquency as an example. Four, our second lien home equity portfolio of $32 billion has a delinquency rate that is one quarter as high as the industry. And finally, we have a higher Tier 1 capital ratio at the end of the year than we did at September 30th. Now, turning to page two, net interest income is demonstrating solid performance in spite of rising NPA levels. We took action early on to make sure that we would be well positioned to benefit from following short-term rates and clearly based on what the Fed's action today confirms the best to most likely scenario over the course of 2008. On the fee income side, we had solid growth in the major line items, service charges, fiduciary and asset management fees, our commissions and the number of lines and the Corporate Investment Bank performed very well also. The provision of $1.5 billion compares to charge-offs of $461 million for the quarter. Expenses up more than you would expect from the addition of A.G. Edwards, because of the pattern of incentive accruals primarily in the Corporate and Investment Bank, non-merger severance expenses, ROE expenses and our continued commitment to investing in growth initiatives will bear fruits [ph] to future growth. However, 2008 expenses should benefit from expense synergies at Golden West and A.G. Edwards, as well as the actions we took in the second half of 2007 to rationalize our businesses. The tax rate of about 29% essentially reflects the recapture of taxes occurred earlier in the year, when we expected higher earnings for the year. Turning to page three, details on strong liquidity positions both at the bank and the holding company level. We are confident that we are very well positioned to deal with challenging markets and it continued our very disciplined approach to modeling our liquidity needs in this environment. We believe, we're one of the most liquid players among the major peers. We also believe that given the highly secured nature of our loan portfolio, our capital levels are appropriate, given our risk portfolio compared to peers. However, we do understand the power of the uptake of ratios, and as I mentioned earlier, we will take due-diligent and balanced approach to rebuilding capital levels, while we invest in the future. Page four shows that we grew core deposits 8% year-over-year, while low costs grew at 5% rate. We feel very well positioned to grow deposits in 2008. Due to the facts that are shown in the second bullet point, specifically leveraging the world savings franchise, we've had great results to-date and are very optimistic there. The A.G. Edwards FDIC sweep deposits will also be coming onto our balance sheet over the first three quarters of the year. We will make a very strong intent to have impounds for mortgage accounts that we originate going forward, plus building a mortgage escrow balances. De novo expansion will continue this year with about 110 new branches. And finally, with new product introduction, our Way2Save program, we think it has great merit and it will be very attractive to customers. So, we are very optimistic and we will do well on the deposit side over the course of 2008. Page five, summarizes loan growth overall consumers grew 3% linked-quarter, while commercials grew 8%. It's worth highlighting that home equity is down 5% year-over-year, as it clearly have not been reaching for growth. Furthermore, our home equity line of credit loans or ELOC have a lower drawer rate today than a year ago, and again we believe it's because the way we sell the product. We are not selling as the product that wait for customers to drain the equity out of their home, we're using it more of as a tax management product. In 2008, you can see we expect decent loan growth in the course of the year and expect better spreads as well. The banking market is generally fairly slow on the commercial side to adjust the widening credit spreads, but we are beginning to see some evidence of rationalization there, and what we can say is that we are going to do everything we can to meet customers needs. What we do after it reflects the facts that our costs are higher and our capital is worth more. Page six, shows key metrics for the General Banks. In summary, good loan growth with origination volumes reflecting a slower market and very good discipline, very solid deposit growth and record customer acquisitions and solid sales performance, and continued best-in-class customer satisfaction. Page seven, reflects the impact to increased credit cards to the General Bank's bottom line, which is down by 18% versus the fourth quarter of 2006. In 2008, we will continue with our de novo expansion activities, our Western expansion activities, with an intense focus on expenses and risk management discipline. The big driver of fee income will be service charges, interchange income and other banking fees. They are all positioned to grow well. Mortgage banking fees will continue to languish, but it's at a level which is fairly inconsequential to our overall results. Turning to Wealth Management on page eight. In a nutshell, record results on strength and fiduciary and investment management fees, strong client acquisitions and good expense discipline, we expect more of the same in 2008. The commercial mortgage insurance brokerage business has been relatively weak as a reflection of lower premiums in the markets. So we continue to have good sales activity, but the commission levels are simply lower in 2007 and it doesn't appear to be a near term, it's just for an improvement in 2008. Before we get to the Corporate Investment Bank, page nine gives a summary of mark-to-market disruption losses across the entire company. And so, you can see looking to the bottom line in the fourth quarter columns, you see total writedowns at $1.7 billion. Of that $1.7 billion, $1.6 billion is in the Corporate Investment Bank, $17 million is in the Capital Management Group on further writedowns to commercial paper assets taken out money market funds back in August, and $94 million in impairment losses in the parent, reflecting the review of all our equity and fixed incomes securities for others than temporary impairment. So compared to our 8-K filing which provided an update through the end of November, since CIB's losses were a little lower then expected for ABS CDO and other subprime-related assets at the just over $1 billion and higher for CMDS at $600 million and other items netted to a modest positive. So now turning to the Corporate Investment Bank, on page ten; principle investing results, relatively low as the third quarter results captured most unrealized gains in the direct portfolio through a partial sale of those assets in the accounting mark-to-market for the assets we continue to hold. So, we sold a portion of the portfolio, took the gain and that set a new branch mark for the market price. And so a lot of the gain was reflected in the third quarter and so relatively modest gains in the fourth quarter. Note that we have adopted a fair value of accounting as of January 1st of this year. So on a going forward basis principle investing results will depend on how the market performs that we will in the first quarter capture the unrealized gains in our funds portfolio. Origination, down about 13% from a year ago, reflecting a weakness in structured products and leveraged finance. But a very solid performance of high-grade global rates and M&A. Their traditional banking business and CIB continues to do well. But the provision expense is primarily associated with commercial real estate loans from the real estate lending business that was moved from the General Bank to CIB back in the early spring and we began reporting it as a sub-segment or a component of the CIB segment in our third quarter results. Losses there are almost entirely from residential-related real estate loans, with income property loans continuing to demonstrate very solid fundamentals. Page 11, provides detail on the CMDS leverage finance, mark-to-market exposure. As of January 18th, we had net exposure of $3.6 billion, of which 50% is AAA-rated or equivalent. Obviously price volatility for NASDAQ is heavily impacted by its duration, so we've added a data point to reflect the equivalent notional value of ten-year loans which would have the same price volatility as our mark-to-market CMDS assets. The graph on the right shows that you would expect our portfolio as the same price elasticity as the similarly rated portfolio of about $870 million in ten-year CMDS securities. The reduction in exposure is a function of three factors: sales, writedown and movement to our investment or loan portfolio. In Q4, after taking writedowns through our income statement, we moved $1.6 billion of loans to our loan portfolio. Similarly, subsequent to year end, we moved $2.5 billion of European real estate loans to our portfolio after marking them to market at December 31st. We view these assets as solid investments and I believe that the markets are significantly undervaluing the underlying cash flows and future performance. So again, any required remarks we would take to the income statement and then, we would make an independent decision as to whether we want to leave him in a mark-to-market portfolio or move them to a loan portfolio. In several cases, we have elected to move to a held-for-investment portfolio and for a reference the average LTV on the assets moved in the fourth quarter, which were around 57%. So it gives you a sense that they are very solid assets. We continue to have mark-to-market exposure to leveraged finance market through funded positions of $1.9 billion and unfunded commitments of $7.2 billion. We distributed about $2.5 billion in the quarter and have equity bridge exposure of only $15 million at this point. I'm not going to dwell on page 12, but point out that it shows the $684 million of exposure to ABS CDO subprime assets is $821 million at the end of the year, reflecting lower fourth quarter write-downs than we had originally indicated. So again, when we filed our 8-K most recently, we would have said... we would have had remaining exposure of $684 million that turns out in fact to be $821 million not reflecting any new assets we have discovered, but discovering the rights that we have to the assets and their performance is better than we would have anticipated at the time we did our 8-K. We have $4.178 billion of the super senior ABS CDO exposures, hedged with financial guarantees, of which $2.2 billion is hedged with mono-lines and $2 billion with AA-rated financial companies with market caps in excess of $80 billion each. We currently hedge our exposures to mono-lines through CDS markets, and believe we would loose about $400 million on these assets, if the mono-line protection was assumed to be worthless, and that prior to the hedges we hold against those mono-lines. Turning to page 13, you see metrics versus Capital Management Group. Q4 reflects the combination of an outstanding year, absent the addition of A.G. Edwards which was with us for the entire quarter, and brokerage was up 4%, per broker revenue up 4%, managed assets up 19% and solid expense control on a year-over-year basis. That translated to a margin over 23%. Asset management had a solid quarter, with a 30% improvement in margins compared to year ago. And to-date, broker revenue attrition remains right in line with the assumptions we made, when we announced the A.G. Edwards deal. So the integration continues to go very well there. As we turn to page 14, we see these metrics translate to segment earnings of $350 million, in spite of higher legal expenses and $17 million in additional marks on commercial paper assets. We feel very good about our execution from both an operating standpoint and on the integration front, and believe we are poised for strong result by a complete meltdown in the equity markets. Don will now go over about next nine pages, and I will finish up with our outlook for 2009.

Don Truslow

Great, thanks Tom. As you aware, we are in a challenging credit environment driven by stress liquidity conditions in the capital markets which are further fueling, what is turning out to be an unprecedented decline in housing prices. The direct effect of this troubled environment on us is evident and increase non-performing assets and provision expense for our consumer mortgage loan portfolios and that portion of our commercial real estate loans which are tied to housing. Also there, if one is aware, we began seeing time to the end of the third quarter of how dramatically the housing market disruptions might affect borrowers and that conditions worsened materially, as the fourth quarter unfolded it. We responded by adding resources and focusing attention to handling problem loans and by aggressively selling properties what we need to foreclose and take the property back I will take a little additional time this morning from the usual to walkthrough our credit statistics. I think, the results this quarter reflect our rigorous efforts to better understand how these rapidly changing market conditions are affecting our borrowers currently and how they maybe impacting us and our customers over the next few quarters. I will start on slide 15. This provides a quick overview of some key credit statistics and as Tom mentioned, followed by nine slides, which provide a deeper look behind some of our portfolios. On slide 15, non-performing assets were up $2.2 billion, with nearly all of the growth coming in the form of non-performing loans. Foreclosed properties were up only a modest $55 million in the quarter. The increase in non-performing loans was driven by a $1.1 billion increase in consumer mortgage non-performing loans and $770 million increase in commercial real estate loans, again primarily residential-related commercial real estate loans. Provision expenses, as been noted was $1.5 billion, exceeded net charge-offs by... charge-offs up $461 million, exceeded those by about $1 billion very much in line with our pre-announcement from early December. Net charge-offs ran at a 41-basis point annualized run rate in the fourth quarter, finished the year at 22 basis points. Commercial net charge-offs during the quarter were 34 basis points annualized and consumer net losses were 46 basis points annualized. In dollar terms, our losses were up $255 million from the third quarter, primarily reflecting higher write-offs for commercial real estate, consumer mortgage and auto loans. Commercial real estate net charge-offs in our real estate financial services business, which is what houses our traditional commercial real estate business we think about and the commercial bank rose by $106 million, are reflecting write-downs across several residential projects. Consumer mortgage loan net charge-offs were up $108 million, with the largest increase coming from the Pick-a-Pay mortgage product, where losses rose by $80 million. Roughly $63 million of this $80 million increase in charge-offs for the Pick-a-Pay product during the quarter was due to a change in our loss recognition methodology. Estimated losses are now recorded when our loan reaches 188 days past due, versus the prior factors used before buying Golden West, which recognized the losses at the time of an actual property sale. So the $63 million in methodology change essentially constitutes a catch-up required to adopt this change. Losses in our dealer and services portfolio, which mostly consist of auto loans rose $49 million over the third quarter to $147 million, partly due to seasonality but also representing a weakening in market conditions. And then lastly on page 15, accruing commercial past dues at 90 days were 5 basis points and accruing consumer 90-days past dues were 23 basis points. Looking over to slide 16, as we pre-announced in December, our provision expense exceeded net charge-offs by just over $1 billion, leaving the ending allowance for credit cost at $4.7 billion or just over 1% of loans. The increase largely reflects changes during the quarter of our estimates for expected losses in certain portions of the consumer mortgage portfolio, the real estate financial services, commercial real estate portfolio, potentially tied to the residential projects and our auto loan portfolio. The largest increase in the allowance, roughly $550 million of the $1 billion over provision, relates to increased loss expectations for the portion of the Pick-a-Pay portfolio, as a result of deteriorating conditions in the housing market during the quarter. We have begun experiencing higher loss rates, where we have loans in markets that experienced rapid price depreciation since 1999 and are now seeing a rapidly declining trend in housing values. Most of the builds in the allowance for the Pick-a-Pay product is for the loans in those markets, where the estimated current loan to values have risen or are expected to rise above 95%, were originated over the last three years and are exhibiting a higher likelihood of the fall. So, when you carve out this pool of loans that constitutes about $8 billion of the $120 billion Pick-a-Pay portfolio. After the build in the allowance balances, the resulting reserves loosely allocated for the Pick-a-Pay portfolio total about 56 basis points or a little more than three times the largest historical loss rate that Ken mentioned earlier in the portfolio... in his conversations. And the reason I say it loosely is because, there is not strict allocation in the loan loss reserve, again the entire loanloss reserve is available for losses in any part of the loan portfolio. Also during the quarter, we completed an extensive portfolio review of our residential builder... residential land and condo loans in our real estate financial services, commercial real estate portfolio. And as conditions deteriorated in the housing market during the quarter, we added nearly $220 million in the allowance against these loans, in addition to the increase in net losses we recorded during the quarter. The expected loss factors were also adjusted for the automobile loan portfolio, given the softening markets accounting for about $100 million of the increased allowance. So that gives a feel for what drove the $1 billion overprovision. Turning to slide 17, this provides a view of Wachovia's consumer mortgage portfolio, excluding the equity loan products, which we'll get to in a subsequent slide. Total mortgage loans were a $168 billion at year end, including a $120 billion of the Pick-a-Pay products. Starting first with more traditional mortgage products or non-Pick-a-Pay products. Loans totaled $48 billion and losses were a modest $16 million or about 13 basis points and non-performing loans were also at fairly modest levels totaling $253 million at the end of the quarter. For the Pick-a-Pay product the portfolio has an original loan-to-value, about 71% and on original FICO score of about 673. And as a reminder, the Golden West underwriting practices focused on a rigorous appraisal process and the borrower's ability to fund 20% to 30% of the purchase price upfront. Using estimated current valuation updates that we ran in November, the average current loan-to-value across the portfolio is basically unchanged from origination, coming in around 72%. Our review would expect there is wider distribution of values around that average. And given the significant weakness in the California housing markets, we have seen a run-up in non-performing loans or loans past 290 days or more were moved into non-perform, and a rise in losses as I had mentioned. Focusing on the non-performing loan portion of the Pick-a-Pay portfolio, these loans have an average current estimated loan-to-value of about 81%. Charge-offs as I mentioned earlier, totaled $93 million for the quarter or about 31 basis points, but again roughly two-thirds of the charge-offs number was due to the change in loss methodology that I've touched on. At quarter end, there were a modest amount of foreclosed properties, about 634 properties, which originated in the Pick-a-Pay portfolio and represented $170 million in balances, of which about $130 million were homes in California. This compares with 562 properties and $155 million in balances at the end of the third quarter. Lot of great work is going on here. During the quarter we acquired 682 properties and sold 610 properties, with sales actually exceeding acquisitions in the month of December. We are very much taking the approach of aggressively pricing and selling collateral, as it comes back to us, believing that in this environment that the first loss is the lowest loss. The fact that we service these loans, they're on our balance sheet and we've got our own appraisers embedded in the markets. It gives us an advantage in being able to move these properties faster than many others are able to in the markets. The most problematic portion of non-performing loans is where the estimated current loan to values have risen above 90%. And stepping back and looking at the entire Wachovian-mortgage portfolio... Pick-a-Pay that also excluding home equity products. This balance was about $825 million at the end of the fourth quarter up from $380 million at the end of the third quarter and of course that's where we are focusing much of our effort. Given the stressed mortgage markets and the fact that the underwriting for Wachovia's Pick-a-Pay product is different from what is a typical option payment arm, and therefore admittedly a little difficult to categorize against other more common products. We have included the next two slides to provide some help in better understanding how this portfolio is performing in this market against traditional prime, Alt-A and subprime loans. So if you flip over to slide 18, this chart is the Wachovia Pick-a-Pay 90-day past due ratios and the green diamond line and the Wachovia overall mortgage portfolio inclusive of Pick-a-Pays is in the darker blue small square line against prime, Alt-A and subprime industry results. And you can see that the Wachovia results are performing well measured against Alt-A and just modestly worse than prime, and of course subprime performance has been rather dismal. Slide 19 provides essentially the same date about vintages. We have provided this to the extent that it would be helpful to 2006 vintage is performing a little worse than some of the other vintages and if you think about the California nature of the this portfolio and where prices peak, that's not overtly surprising. But we think that slide 18 in aggregate, tells a story that is may be not well understood in the market. Flipping over to slide 20, this shows the home equity loan and our lien positions for the quarter and the story continues to be a good one here relative to what's happening in the market around these products. Our home equity product loans and loans outstanding underlyings totaled $60 billion, with about $28 billion representing loan in a first lien position and $32 billion in a second or junior lien position. 80% of these products are originated through the branched networks, with the remainder originated through relationship customer mail campaigns or with our customers online, and we believe that this explains why our credits statistics have been so strong relative to other performance in the markets. Net charge-offs were $38 million for the quarter or about 25 basis points and non-performing loans were $342 million at the end of the year. On slide 21, we also thought it would be helpful to include some industry benchmarking data for our home equity products. The green diamond lines represent credits originated primarily in the branch network and the blue square line would include all of Wachovia delivery channels, so picking up the direct mail and the mortgage company. The chart on the left is information on closed and equity loans with the chart on the right covering home equity lines of credit. And as you can see in both cases the Wachovia product is performing very well against the industry using pass-through data as a gauge. On slide 22, we've provided some loan to value and FICO breakdowns across the entire consumer mortgage portfolio and we've published this chart before in various presentations. A couple of takeaway points. The second lien portfolio loan to values are shown as if the entire amount under the lines are outstanding, when in reality the usage under these lines typically runs around 35% to 40% pretty consistently through cycles. And actually at the end of the fourth quarter, usage was around 32% versus usage a year earlier of 35%. Next, the second lien outstandings for loan to values exceed 90%, are to high-quality customers, again originated through Wachovia channels. The non-accrual second lien balances remained modest at $58 million at the end of the quarter. We'd also like to note that we've included in the quarterly earnings report package an even more detailed breakout of our original FICO and LTV's prime mortgage products and you can find that on page 15. Looking over to slide 23, this provides some highlights on the auto portfolio. We are seeing an increase in credit costs in this area, due in part to the seasonal increases as the model year changes over. And we are also seeing some weakening in the marketplace and conditions as the resale market has blossomed and defaults have risen a little bit. Losses for the quarter were 2.35%, 30-days past dues have been trending up with the industry, but are running somewhat more favorably through the industry and as we look at 2008 and really think about this business, even though we are experiencing a loss in credit costs, the margins in this business remain attractive. And then finally slide 24 reveals our real estate financial services. Commercial real estate book which encompasses genres of our traditional commercial real estate lending activities. And as I mentioned earlier in my comments, we are seeing an increase in credit costs in that part of the portfolio which is residential in nature. And as of year end, our builder landlocked and our condo of loans in this portfolio totaled about $12.4 billion. Charge-offs were $109 million for the quarter. Just to give you a sense of the granularity there were a three larger write-downs of $23 million, $20 million and $9 million, with the remainder being losses, essentially running to $5 million or less. The average maturity of our loans here is fairly, short about 1.6 years and we are proactively taking steps to step in and strengthen our position as servicing events come up. And also as I mentioned earlier, during the quarter we completed a very thorough deep-dive regional review of this portfolio, which in part led to the reserve build and the decisions to take the write-offs that we set in the fourth quarter, and we expect to see continuing higher run rate credit costs in 2008. One other thing I want to touch on very quickly, that is not in the packed insurance model on financial guarantors, given the headlines that have been there in the potential for downgrades in the mono-lines. Similar to other large financial institutions, Wachovia has instruments and deals with instruments that are lapped by mono-line, our financial guarantors in a lot of different forms. Our direct lending exposure is very modest, currently less than $150 million and essentially unfunded commitments, and that's across all mono-lines. Most of our exposure involves, traditional insurance wraps that are designed to enhance the rating, therefore transaction execution of the underlying instrument, and these instruments are typically debt issued by highly-rated municipalities or local government entities, where we have underwritten the credit of the government entity without reliance on the insurance. Given the nature of these instruments and the quality of the underlying obligors, the credit risk here to the mono-lines we think is very, very small. We have been focused, as Tom pointed out, mostly on super senior ABS CDO subprime-related businesses, where as we point out on slide 12, our exposure is the highly graded mono-lines and totals about $2.2 billion. Using an estimate of loss that we use internally, which assumes that the underlying instrument defaults and the support from the mono-line is worth zero or basically default of zero, which we believe to be a highly unlikely case, where the insurance companies would be in a position to pay nothing. Our exposure to credit loss would be roughly $400 million, against this book and that does not describe any benefit to credit default-swap hedges which we currently hold. We also involved in other type of transaction, where we had various levels of support from mono-lines in a variety of forms. But overall we believe that our credit exposure is manageable in the event of the potential downgrades, especially taking into account of how the obligations of the mono-lines are generally structured to pay out of very extended timeframes. It's a little murkier for holders of these financial assets, as what impact downgrades would have on market prices or financial instruments, which carry this insurance support and the possible flow-through dispositions [ph] managed and marked, and this is different than credit risk and right now, it's just hard to gauge what impact potential downgrades may have on valuations. So, just to wrap up, in 2008, we are expecting it to be a challenging year from a credit perspective and we expect as we have seen 2008 get off to a start year, that the capital markets will continue to be turbulent and that unprecedented conditions in the housing market will continue at least through the first part of 2008, probably all the way through and we built our plans around that outlook and believe that we are taking the appropriate steps to manage through this environment and we'll continue to do so, as the year unfolds. And Tom, with that I'll turn it back to you.

Tom Wurtz

Thanks Don. And I will turn to page 25 in terms of giving a summary and outlook for 2008. Overall, we are thinking it's going to be environment that has GDP growth of somewhere around 2%. We would expect it to be an environment with lower short-term rates and a steepening yield curve and that should be an environment, where can expect good net interest income growth driven by deposit loan growth, wider spreads and the dilution we have taken with the balance sheet. We expect solid fee growth in services charges, interchange fees, fiduciary and asset management fees in commissions and those are some of the bigger categories for us in terms of the fee income line. In the Corporate and Investment Bank, we expect solid performance in global rates and high-grade treasury and trade finance, M&A and equity, and in our dislocated businesses we expect very nominal fee income, but do expect net interest income growth in those businesses, as spreads have widened appreciably. We expect the first quarter results to include FAS 157 estimated gains of about $250 million to $350 million, as I referred to earlier with a vast majority of that being associated with the funds portfolio in the Corporate and Investment Bank. On the expense side, we expect to show a continued expense discipline and we do have synergies to be derived from Golden West. We have the first Western conversion in the October timeframe. This year we will perform the Eastern conversion in early February. We'll have synergies from A.G. Edwards, and again we will have the full year impact of the actions we did in the second half of 2007. Just a remainder, first quarter results will include FAS 123R expenses for retirement-eligible employees, transfer of stocking options to those employees, and that will range $90 million to $100 million. We expect credit costs to continue to rise, but remain at manageable levels. I think at this point it's very difficult to look out to the entire year and provided guidance which we have a great deal of confidence in, but taking a look at the first half, we think that provision expense for the termination of charge-offs and whatever reserve buildings may be necessary, should remain below 75 basis points. Our minority interest should be in line with 2007 results and our effective tax rate will be somewhere in the range of 32% to 34%, and excess capital we use to pay the dividend fund growth and growth capital. So we do not expect any material levels of share repurchase activity. And so again that kind of leads back to this matter that we have is that we do expect the dividend to be safe, we expect to build reserves, build capital and support the growth in our business units. So with that, I'll turn to Ken.

Ken Thompson

Okay, operator that completes our presentation. And at this point, we are ready to open the floor for questions. Question And Answer

Operator

[Operator Instructions]. Your first question will come from the line of Matthew O'Connor, with UBS.

Ken Thompson

Hello, Matt.

Matthew O'Connor

Hi, if I can just make sure, I understand the timing of loss recognition related to Golden West; at 90 days past due, you move them to non-performing and then, you don't charge them off so 180, correct?

Don Truslow

Yes Matt, this is Don. That's correct. There is an estimate that now takes place at 180 days, where we value the property and go ahead and report a loss. And then, as that property moves to the foreclosure process, we would update that estimate as values change within the final recognition of loss being taken with the actual sale of the property.

Matthew O'Connor

Okay, I am sure it's case-by-case. But when does it move to the OREO bucket?

Don Truslow

Well, essentially at 90 days it would move into a foreclosure process and then when we actually purchase the property back, it would be carried as OREO and the foreclosure process can vary pretty widely depending upon the stay and the volume of course or handling etcetera. So it can be 9 months, 12 months, in some cases a longer to actually get to an OREO status.

Matthew O'Connor

Okay. I guess as my concern is, the big NPA increase that you had this quarter, there could still be some lost content in there since you don't charge a loss until later. Is there anything that you can give that would give you more comfort there like for example, the properties that you sold in December that you highlighted for the losses on that and if they were what are the average?

Don Truslow

Yes, we are seeing most of the foreclosed properties we sold as I mentioned have been in California. So they have been sort of the most stressed environments. In addition, as I mentioned we are very focused on steering the velocity of properties through the OREO process. So when we get one, we are aggressive about how its priced relative to the neighborhood, what goes into fixing the property up and we are willing to pay a premium to brokers to show and move our property et cetera. So, we are in a essence willing to take a little higher severity than perhaps historically the Golden West process would otherwise dictate. In December, severities I believe got to just under 25% and so, again you have to take that in light of where most of these sales have been, so the most severely impacted properties. And we have been helped by the fact that, we had 20%, 30% real equity on the front end and so I'd expect that those severities would be less than what some other sales are experiencing in the markets.

Matthew O'Connor

Okay.

Don Truslow

I don't know if that answers your question or not. But --

Matthew O'Connor

Okay, no, it's helpful.

Tom Wurtz

And Don the current lender value on our NDA portfolio is 81%.

Don Truslow

That's correct.

Matthew O'Connor

Okay, and then just separately you had mentioned that you expected non-performers in the Golden West portfolio to rise this year. Any guessing in terms of how high this might go?

Don Truslow

I hate to forecast just giving what's happening in the housing markets, but I mean I would not be surprised to see the same sort of pace that we have had in the last couple of quarters, for the next couple of quarters.

Matthew O'Connor

Okay. Okay, thank you very much.

Don Truslow

And also I would just want to point out too, that we have in our plans for this year, as Ken indicated or alluded to, we have expected that charge-offs and our non-performs will be higher for the Pick-a-Pay portfolio. So we believe, we've built in a pretty realistic view.

Matthew O'Connor

Okay, thank you.

Operator

Your next question will come from the line of Mike Mayo with Deutsche Bank.

Michael Mayo

If you can just help me with some real simple questions, and one would be the Golden West portfolio has 31 basis points losses compared to a 20-basis point peak in the early 90s, so if unemployment is still very good at 5% and we are already seeing this higher level of loss rates, how do you think about that? I mean if unemployment really gets much worst, could it be more than let's say three times the prior historical peak?

Don Truslow

Mike, this is Don again. Good question. Remember that in the 31 basis points is about two-thirds, that relates to the accounting change. So, I don't want to diminish in anyway the 31 basis points. But there is a little bit of acceleration, if you will, of pulling some charge-offs into the fourth quarter by that change in methodology. Ken laid out the scenario of auto [ph] losses to be three, four times what they were at their historical peak and how would that impact overall financial performance. It's just hard to know where right now these losses are headed, but I do think that we have got some realistic increases built into our plans which were captured in the guidance that Tom gave around of the 75 basis points. So we expect that losses will be higher for that portfolio than the historical peaks and that takes into account, what maybe happening in the economy as well. I don't know what the challenge is and we mentioned this before, a lot of this, the current loss has been coming out of California and they came from people that otherwise have the capacity to pay but have basically just decided not to, because the selective loss on equity value in their properties. So a way we may have, it's hard to know right now, but we may have seen somewhat of an acceleration of problem loans as people have reached that conclusion and we are just going to have to see how the patterns unfold from here.

Michael Mayo

And Don if I can stay with you, I am looking at a January 11 edition of commercial mortgage alert and I can't say, I look at this weekly but when I look at the results for 2007, has Wachovia as the top-loan contributor to CMBS deals in 2007 and the number-one market share by a long shot and then, I compare that to what the CMBS has done from the past couple of weeks. And if you can just give some color, I guess that relates to your $600 million write-down for the fourth quarter, have you factored in the recent decline in the index. How much do you use the CMBS to take a write-down and how much risk do you think there is in the commercial exposure there?

Don Truslow

Mike in the chart that Tom went over around the CIB business, we have been aggressively pulling on that risk positions down. We actually pulled back on transactions earlier in 2007 and actually did chose not to participate in some of the larger deals that are out there. So, I would just tell you that we have been aggressively managing risks around this portfolio on from a credit perspective. We don't see any material underlying deterioration in the properties or the loans themselves. And then the answer to your question about current marks and market conditions, that's what happened in the CMBS has been in a large part reason for the write-downs and the market marks that we have taken that $600 million in the fourth quarter.

Michael Mayo

So that does reflect the past week or two?

Don Truslow

Now the $600 million will be as of year end.

Michael Mayo

So there might be some addition marks, if the CMBS were to stay at this lower level?

Don Truslow

Right now, our evaluation of how the market has moved versus were we have priced the portfolio at year end, as there is might be some further deteriorations but not as nearly as significant as the deterioration we saw on the fourth quarter.

Michael Mayo

And then the last question, on the CDO exposure that the mono-line ensures?

Don Truslow

Yes.

Michael Mayo

I thought you said, you had like almost $2.2 billion of exposure for insurance on the CDOs, but if we had to have a loss, it would only be $400 million and I just... so that seem kind of low, given where a lot of the CDOs have been written down. If you can help educate me.

Don Truslow

Yes, the $2.2 billion would not... that is after we have already taken some write-downs in some of those securities. So when we go through and we value the underlying collateral in those CDOs and then come back to what the shortfall would be if we had to liquidate that collateral and so therefore the mono-line just wasn't there at all, that's in essence how we get to the $400 million.

Michael Mayo

Alright, thank you.

Don Truslow

The other thing too is, each of these transactions is very unique and the mix of underlying collateral can drive different valuations. So it's hard to look at an index and generalize it to somebody's portfolio.

Michael Mayo

Thanks.

Operator

And your next question will come from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck

Just a little bit more clarity if possible on the commercial real estate charges that you talked. It sounds like you are saying the provision largely due to what the market is saying the expected valuation of the commercial real estate asset classes likely to be, but you are not seeing that in your fundamentals? Is that right?

Don Truslow

Betsy, this is Don again. The portfolio review that we did and the way we basically grade assets. They are an asset-by-asset or a loan-by-loan approach. So it takes into account the borrower, guarantors, collateral, financial strength, what's happening in the specific markets where the project exist. So it is a truly bottom-up build into what the expected losses is we think it will be and then what's the appropriate amount of reserve against it.

Betsy Graseck

And what type of economic scenario do you have as a base case in that announces? In other words if fundamentals in commercial real estate were to deteriorate, would that impact your numbers at all?

Don Truslow

We have taken into account that the residential markets in those markets are going to continue to deteriorate. So there... I mean it definitely has been our view again at the market level. So, very situation-specific as to what projects are there, what the absorption has been, what needs to come online, et cetera? So to the extent that there is a view that economic conditions will worsen in that market, that has been part of this whole process.

Betsy Graseck

Okay, but the fundamentals in the commercial real estate markets fairly are very strong right now?

Don Truslow

From the income producing side, right. But on the residential side, I think that we are beginning to see across the industry, many talk about softness on the commercial real estate project side of residential development.

Betsy Graseck

Right, and that's embedded within your provision for this year... for this quarter?

Don Truslow

Yes. Our income producing portfolio is performing very, very well.

Betsy Graseck

And did you need to take any marks against those?

Don Truslow

There may be a little bit of provision and there might have been some write-offs in the fourth quarter against some of those properties, but it was a small piece. It was mostly all driven by the residential portion of commercial real estate.

Betsy Graseck

Okay.

Ken Thompson

Betsy just as... this is Ken. We are one of the largest, maybe one of the two largest CMBS master servicers. We have got over $300 billion of CMBS that we service, and across the board zip code by zip code, what we see there and what we see in our own portfolio, we have continued strong performance. And we've taken liquidity marks, but the actual behavior outside of the retail part of commercial real estate continues to be strong.

Betsy Graseck

And am I reading slide 11 correctly that you have significantly reduced your exposure in the CMBS over the past several quarters?

Ken Thompson

Yes, you are.

Betsy Graseck

And I have just one question, particularly in first part of this year, it looks like a material decline. How was that affected, was that through actual sales or was that maybe incremental hedge that you put on or a swap or something?

Tom Wurtz

Betsy, the one significant event that led to the difference between the December 31st portfolio bounce and the January 18 bounce was the movement of about $2.5 billion of loans that are European commercial real estate assets into the loan portfolio. So, we marked them at December 31st and that's reflected in our quarterly results, then as we came through the first couple of weeks of this year, we marked them again and then decided at this attractive risk-return profile. We would very much like to have these assets in our portfolio, once we move them into portfolio.

Betsy Graseck

Okay.

Tom Wurtz

We also have been very aggressively selling our positions to going ahead and realizing losses and getting exposure off of our books.

Don Truslow

Yes, I would suspect we have been more aggressive than any firm out there at selling down our positions and it's difficult to say. On the market side, we think we are certainly among the most conservative when it comes to the market side. It's probably also just clarifying for anyone that Ken's referenced to the commercial mortgage-backed securities servicing portfolio $200 billion $300 billion. That's at the absolute top of the capital stack when it comes to credit risk. I mean so there is extraordinary low level of credit risk in being the servicer of these deals.

Betsy Graseck

Okay, and then just on capital you indicated that you issued some more trust preferreds in the quarter. Where are you with regard to trust preferred capacity at this stage?

Tom Wurtz

We are pretty well filled up on trust preferreds and so that's why we also issued $2.3 billion of straight preferred in the fourth quarter and that was remarkably well received and we think attractively priced.

Betsy Graseck

Okay, and at this stage if there is any further deterioration in the economy, how would that lead you to think about your capital levels?

Tom Wurtz

Well we go into the environment with a plan that allows us to again, meaningfully build reserves and meaningfully build capital over the course of the year, so... which is actually helping to merge, but I would say we feel very good about our position right now. That being said, if opportunistically there is a chance to issue more perk, we would likely do that.

Betsy Graseck

Okay and then just lastly on the Fed rate cuts I think most of us have been anticipating some further declines might be getting a little bit sooner than expected. Can you just talk through how you plan on either passing through the Fed rate cut to your borrowers or to your depositors?

Tom Wurtz

I think we have already announced reducing prime already this morning. So we've certainly passed it down to the borrowers from that perspective. And we still feel we're at a pretty good position with respect to management, the deposit portfolio where we'll be able to translate this Fed rate cut to kind of the elasticities that we have been anticipating. I think until you get down to rates below two in a quarter, you really don't end up napping up against many real challenges from further rate reductions on the deposit side, because again, we've built our plan assuming that there will be points of resistance from depositors and so, when we talk about our belief that we can grow net interest income strongly over the course of the year that's reflective of the fact that there is certain products that have very low rates today that are moving lower and other products will probably reach natural floors. And so it's entirely consistent with what we've planned for. In terms of the timing of the rate decrease, all that does is just simply improves the outlook for the first quarter, a modest amount but it was all embedded in the belief that rates will get down to somewhere between 2.5% to 3.25% this year.

Betsy Graseck

Okay, thanks

Operator

And your next question will come from the line of David Hilder with Bear Stearns

David Hilder

Don thanks very much for your discussion of the mono-line exposure. It's one of the more articulate I think we've heard. Could you just talk a little bit, if at all, about the CDS hedges against the mono-line exposure?

Don Truslow

David on page 12 in the footnotes, we indicate that we've got essentially...well actually that's with the large European bank. David right now, we've got probably $800 million or $900 million in credit default swap protection against the mono-lines. The thing I want add to that though is it's a very dynamic market. It is somewhat shallow and so we are I guess evaluating how we should adjust, if at all, our position in the credit default swaps against the mono-line. So I don't want people to get too locked on the $800 million or $900 million we may change that one way or another as we move along. But right now we've got $800 million or $900 million.

Tom Wurtz

It's probably also worth noting down that we been very conscious of the counterparty risk when it comes to all our hedging strategy and feel extraordinarily good about the ability to question the counterparty. But we'd just say that with shallow markets, the price transparency is a little bit less today than a lot of times.

David Hilder

Thanks. And then, back on a different issue, when you referred to that December severity number of 25% as I recall?

Ken Thompson

Yes.

David Hilder

Is that essentially the loss against the amount of the loan or from some appraised value of the house?

Ken Thompson

That would be the loss against the value of the loan. So, if you think about some markets in California that have given up 25%, 30% from their peak, that could entirely take away the equity that the burrower put in on the front end and may be a little more. And then you take into account the foreclosure costs, cost of fixing up the property going through foreclosure, the conditions that we are willing to pay to get the house moved. We've been willing to take some possibly higher severities in some markets to get the properties moved again, believing that the first loss is probably the lowest loss. And that of course is on OREOs that are coming other real estate owned that are coming through the pipeline. So properties that we've actually foreclosed on, and it doesn't really relate back to the NPAs.

David Hilder

Right, okay. Thanks very much. I do appreciate the additional detail.

Operator

Your next question will come from Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy

Could you guys share with us on the movement of the commercial mortgages from the CMBS on to the balance sheet. What type of hair cut did you take on the $1.6 billion and the $2.5 billion that you did in January?

Tom Wurtz

It's within the total marks of the billion that would have been the total of the third quarter and fourth quarter marks and mark-to-market CMBS position, so it's embedded in there. It wasn't a mark on a single day, it was a mark week after week after week and so finally accumulated to sum total. But I actually don't have that handy.

Gerard Cassidy

Would it be 5% to 10% or is that too aggressive being that high?

Tom Wurtz

I actually don't know at this point. I would say, these are the things that are in the upper tier of the capital stock basically.

Gerard Cassidy

Okay. Have you guys written-off any credit default swaps in the quarter, similar to Merrill Lynch. When they reported their numbers, they actually wrote-off some of their credit default swaps that they had with one of the mono-lines that is not doing very well?

Ken Thompson

No, we don't happen to have any new foreclosure or any exposure to that particular company?

Gerard Cassidy

Okay. And then, you mentioned that you are taking a pretty conservative view on housing prices. Have you come out with any analysis of where you think housing prices may go from a year-ago to sometime in '08 or that you could share with us?

Don Truslow

This is Don. In our allowance view that we developed or described. When we put up the $550 million, most of that related to the Pick-a-Pay and the entire risk areas, we basically use a pretty widely viewed forecast published by moodyseconomy.com that looks at projected peak across declines in housing prices by MSA across the country, as kind of a beginning point and then we further stressed those. And if you stand back for about our analysis, basically what it would suggest is, in coming up with our allowance and expected loss numbers, a new portfolio weight across the country, we're looking to stay from mid 2007 to the end of 2008, at a decline of around 20%, with the bulk of that two-thirds of it maybe coming in 2008 about a third of it in 2007.

Gerard Cassidy

Okay.

Tom Wurtz

So, that's a national average Gerard, made up of 200 and some different zip codes.

Ken Thompson

So, that's weighted by our portfolio.

Tom Wurtz

Right, weighted by our portfolio.

Gerard Cassidy

Which sounds very conservative, I give you credit for doing that. How does that square, if it is that severe which to me is unbelievably severe, how's that tied into your assumption that we could have 2% GDP growth in '08 with that type of assumption on the price declines for houses?

Ken Thompson

I mean that just is coming from this variety of economists who are producing these estimates that's it. They simply are the metrics we are providing.

Gerard Cassidy

Okay.

Tom Wurtz

Again we used that published study as a backdrop and then take an even more conservative posture from that. So, I hope it doesn't happen, but that's the view that we've used.

Gerard Cassidy

And just finally, on your construction loan portfolio of $18.5 billion at the end of the fourth quarter, what's the dollar amount of land loans in there?

Ken Thompson

Land is... give me just a minute. I believe it's about $4.5 billion to $5 billion. But hold on just a second. It looks like it is just under about $4.8 billion.

Gerard Cassidy

Thank you.

Operator

Your next question will come from the line of Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons

Hi everyone.

Ken Thompson

Hi Kevin.

Kevin Fitzsimmons

I was wondering if you can just... on credit, I know you've given a lot of detail today, but if you can help us reconcile with how and why we shouldn't come away thinking the allowance is very low and specifically the ratio I am looking at primarily is the allowance to NPA ratio being at only 88%, and which I am sure is well below peer level. And then secondly, for Ken this is looking at more broadly the model, the operating model. Given what's happening, we have been simultaneously getting hit on the steep, the banking side, the structure product side, the mortgage side. What does this do going forward to your commitment level to the diversified model and do you feel that you will get paid for that diversified model in terms of premium on the stock? Thanks.

Don Truslow

Kevin, this is Don. I will take the first part of your question. In setting the allowance, we look at the expected loss at the end of every quarter and establish the allowance around that. In taking into account what's happening in non-performs, maybe a difference with our portfolio, a lot of our non-performs are in residential consumer real estate loans where so we are secured. Do you have equity... substantial forms with equity on the front ends, that while we are experiencing higher losses than say, we've in some cases experienced historically, the loss content still reasonably low compared to other types of loans, particularly on secured loans. And then the other factor that may come into play as well is we don't have a big unsecured credit card portfolio and typically those loan portfolios don't carry any non-performs, but they do carry very large reserves. So that can skew ratios in comparison across companies as well. And then the third part that we are beginning to see is company is putting out large provisions around home equity and we just haven't seen any significant deterioration to-date in our home equity portfolio.

Kevin Fitzsimmons

Okay. Thanks.

Tom Wurtz

And let me speak to the model. One of the things that we try to emphasize today is that if you look at all of our businesses, really across the company with the exception of structures products and with the exception of credit issues going on in the mortgage markets, every part of our company other than that is having excellent results. So, across our retail bank, across our small business in commercial bank and most parts of our Corporate and Investment Bank other than some of fixed income, our wealth model is working extremely well. We are one of the three largest brokerage companies now which works extremely well for us. We bank more than five wealth households in the country and we need the product lines that we got in order to do that effectively. So and we know, because of we track all sorts of revenue going between lines of business. So we are not concerned about the business model. We certainly know that the structured products business is going through a huge change right now. We do believe that overtime investors are going to want structured products. It will probably change in the way it's doing but we will have a platform that we will be able to deliver that whatever the change is. So, we feel good about the model and once we get through this period that model is going to be very attractive again.

Kevin Fitzsimmons

Okay, thanks.

Operator

Your next question will come from the line of David George with Baird.

David George

Couple of quick questions, first on Golden West, on the disclosure you provided is very helpful. Can you tell us how much of the portfolio, A) is making the minimum payment and then B) what the deferred net interest revenue is as of year end and then I have got one follow-up on fees.

Don Truslow

David this is Don. On the deferred interest, let me quickly answer you. I think it's about $3.2 billion, $3.1 billion which is up from $2.8 billion at the end of the third quarter, checking on this $2.7 billion, okay. And that $3.1 billion just to put it in context is about 2.5% of the loan balances. So, I know there has been some concern in the past about eroding loan to values on the deferred interest, so that's just not been impactful and then I am sorry your first question?

David George

What percentage of the Golden West portfolio is making the minimum payment right now?

Don Truslow

I believe it's around and I look for this answer as well, but I don't... I shouldn't guess. I don't have that at my fingertips, but we can get back for you.

David George

Okay and then just a follow-up Tom, on the fee line is obviously principle investing and trading, moves around a lot. Just with respect to 2008, how should we think about this two lines and I guess what would you consider to be kind of a normal run rate for those two line items?

Don Truslow

Principle investing will be relatively modest over the course of 2008 again, because in the third quarter we essentially mark-to-market the private portfolio and then, as we implement fair value accounting that was essentially mark-to-market the funds portfolio and so as you go into it there will be a modest discount on the implementation of FAS 157. So as securities were sold that discount will be released, but basically it will just be what our equity returns over the course of the year on a $2.5 billion portfolio. So, certainly more modest than it's been in the past. And on trading very difficult to say. Wish I could give you more guidance on that, but --

David George

Okay, and Don, I'll just leave it at that... Don, on the Golden West minimum payment. When the deal closed, I remember the number was I think between 50 and 60, has that number gone up, what you say since the deal closed?

Don Truslow

I am sorry, David, in terms of usage?

David George

In terms of the percentage of the book that's making that minimum payment?

Don Truslow

I don't believe it has gone up. The tricky part is and what I don't know is that it's different borrowers every month. So it's hard to look at the static percentage and assumed it's the same borrowers, but I don't believe it's gone up. But we will have to check that.

Tom Wurtz

One thing I would say is when we talked about this topic at the time of the deal and then later on, our assumption was that it would be about $3.7 billion to $4 billion in terms of the deferred interest at this point, but it had less about and we had a point now on the rate cycle where the underlying entity will begin to come down and that will result and actually the acceleration of amortization of the loans since I would expect the rate of growth to diminish pretty quickly and in fact that it will likely go down to some point in next year and a half.

David George

Okay, thanks.

Operator

Your next question will come from Ron Mandel with GIC.

Ron Mandel

In regards to your guidance of little bit less amounts than you had in the past. You commented in your remarks that you expect that net interest revenue to grow strongly this year. I am wondering if you could give a little quantification of what growth strongly means and also maybe a little more numerical guidance of what you're thinking of about expense growth this year?

Don Truslow

No. We are not going to real explicit. Ron, what we'd say is that we expect loan growth in the mid to high single-digits across the entire portfolio. We expect widening the spreads, we expect deposit growth to be pretty strong relative to peers certainly and very attractive on an absolute basis. And we have positioned ourselves to benefit from falling rate environment. So, all those things should conspire to produce a very substantial growth and then from that you have to deduct the fact that as assets go to NDA, then you are losing the yield on those assets. So I think if you go through that equation, you will probably come away with a number that's within reasons, what we think.

Ron Mandel

So this sounds like you could be talking about double-digit net interest revenue growth, especially if the yield curve continues to stay even?

Tom Wurtz

I would say that's too unrealistic.

Ron Mandel

Okay, and expenses?

Tom Wurtz

Expenses should be relatively easy to gauge and that, I mean if you go back to probably the second quarter is a good reference point, you don't have a lot of confusing going on in the second quarter. We've identified what the efficiencies would be on Golden West and A.G. Edwards and we probably from expense actions we took over the second half of the year probably pulled out something in the neighborhood of $80 million to $100 million of expense on a run-rate basis and so we'll continue to show good expense discipline. So if you work all those things through, I think you'd probably come out to a reasonable expectation there. But that would be, it's very difficult looking at the last two quarters to get a good sense.

Operator

Your next question will come from the line Nancy Bush with NAB Capital Research.

Nancy Bush

Good morning. A couple of sort of unrelated questions here. If you'd speak to the issue of A.G. Edwards broker attrition, we've gotten a lot of financial press stories and rumors about that. If you could just give us the numbers it will be very helpful.

Ken Thompson

Yes. Nancy it seems like every time we have done a deal in the brokerage area, we see anecdotal information that we are loosing a ton of brokers and the truth is, this is going exactly as we expected. The brokers that we are losing for the most part are what we call non-regretted attrition, meaning that they are... their annual commissions are very low and at the same time, we are recruiting the brokers. So I would just say we started out with a goal of 3% regretted attrition that is not losing more than 3% of the brokers, you produced 250,000 at year end in revenue and we are our on-target to meet that goal.

Nancy Bush

Okay. And secondly Ken there has been a great deal of pushback on 'exotic' mortgage products with the Neg Am or the Pick-a-Pay mortgage being one in the ones that the financial press and some in Congress and others have sort of deemed to be evil instruments. Do you see a regulatory, any kind of possible regulatory strictures on the kind of products that you can offer on the mortgage company?

Ken Thompson

Yes, I don't think Nancy on our option ARM products and of course, we have contended that all along we have been lumped therein with option ARM products of other companies and ours is vastly different. And so as we look at all of the things coming out of capital here and all of the things that the regulators are talking about, we don't see anything yet that would impact our ability are also the option ARM product that we've got, not underwritten to attrition rate, it's underwritten to a fully indexed rate. We've got caps on how much the payments can increase. We didn't do any of the 228 to 327 in term of loans in our Pick-a-Pay portfolio. So for the most part it's priced off the cost of CDs at our company. So we think we are in good shape there. We think that product is going to be attractive going forward.

Nancy Bush

And I guess finally I would ask Ken I mean if...are there...is there any basis under which you can foresee that you might have to take an impairment charge on Golden West.

Ken Thompson

Well my answer to that is no, but I am going to ask our Chief Financial Office to buttress that.

Tom Wurtz

Sure Nancy. The way that you take a look at impairment is you look at based on reported business segments and that business segment is under our retail and small business sub-segment and therefore that's an extraordinarily large business and so what you do is you rate the cash flows from the total business over the future horizon and compare that to the purchase price and it's very difficult to envision the circumstance for that would be required.

Ken Thompson

And just the point that I want to make one more time is if you look at...if you go back and look at the charge-offs in '94 of 20 basis point and if you'd say now on the portfolio we've got that it could be four times that as an example. So that would be roughly a $1billion on the size of the portfolio that we've got. Now that business is still very profitable business for us in 2008. so I just think there is a big misperception on the quality and profitability of the business.

Nancy Bush

Alright and just one final question. I see that you have a new and I haven't looked at the specifics yet on the Way2Save. Product and this is kind of the first new flashy product, new product we have seen come out of the General Bank in a while. I mean is...are you able with everything else going on in the company and the deals that you are integrating et cetera, et cetera to keep the investment going in the General Bank and are we going to see sort of greater new products quite a lot out there or what's going on?

Ken Thompson

Yes you will. And we have high expectations for the latest products and I can tell you Tom mentioned in his remarks, yes we are going to build a 110 new branches this year. We've built that many last year as we prioritize capital spend and expense stand going forward our Western Expansion, our Texas expansion and continued investment in our General Bank is at the top of the charts. I am going to say for instance, we've produced $45 million in deposits in the first ten days of that product line. So it would be guidance that we gave. One of the tenets of that guidance is we will continue to invest in our businesses and the General Bank is certainly at the top of the heap there and we are investing significant dollars in '07 and now again in '08 in that business.

Nancy Bush

Thank you.

Operator

Ladies and gentlemen, we are nearing the end of our allotted time for questions and answers. Your final question will come from the line of Jason Goldberg with Lehman Brothers.

Ken Thompson

Jason?Hello.

Operator

Mr. Goldberg your line is open.

Ken Thompson

I think we lost him operator.

Operator

Your next question will come from Jefferson Harralson with KBW.

Ken Thompson

Okay, Jeff?

Jefferson Harralson

Thank you. I have a couple of questions. One is the financing cost of the preferred and all other things equal does that add about, take out about $0.06 or $0.08 out of EPS?

Tom Wurtz

Yeah, that's a fair guess.

Jefferson Harralson

Okay. And does the tangible equity ratio matter, and as you talked about raising capital or you have raised capital, is your level, the target ratio for the tangible equity ratio?

Tom Wurtz

We've typically talked about operating in the 450-460 range, and I don't think there is anything different at this point. So at the end of the quarter and we support to and so we'll build that over the course of the year.

Jefferson Harralson

Fair enough. And one final question if I can. I think it was the summer conference you mentioned that the risk was revealing itself in all areas of financial markets. And what I am hearing today, it sounds like that, you feel pretty good about most area of financial markets, but just a lot worse about structured finance and maybe mortgage losses. But can you... with the results now out, can you talk more about how risk is revealing itself in all areas of financial markets?

Ken Thompson

I mean, ever since the beginning of the third quarter, when we began to see degradation in some of our structured products portfolios, we have been looking at that. We have probably as I think, we have reduced our expenses in our fixed income operation in corporate bank by 12%. We have decreased expenses in the structured products area by 25%. We will continue to look at those areas, but we do feel strongly that those businesses at the end of this cycle are going to become important again and I think we have done good job of keeping a nucleus there that will allows us to do business in those areas. I think if you look at our marks now in the third and fourth quarter combined, and then think about something that for instance that Mike Mayo said about how big we were in CMBS origination and yet look at the losses that we took. I think our risk management has been very good, and I think, in addition to that if you look at the provision expense in the fourth quarter and if you look at what we are planning going forward, I think we are being very conservative from a credits standpoint, moving forward. So, I think we are being very conservative, and I think we are optimistic about the future, given conservatism that we have already taken. And that's why we feel comfortable given the kind of guidance that we have given you as far as covering the dividend, growing capital ratios, growing our business and we are optimistic about Wachovia. Frankly, it's just hard for me to understand the impact that our stock price has taken over the last three months, because I'll look at how we compare to others and I feel very good about where Wachovia is.

Jefferson Harralson

Alright, thanks a lot. That's very helpful.

Operator

At this time, I would like to turn the call back over to management.

Ken Thompson

Okay Operator, thank you and I think I just made my closing remarks like this. So, I will just say that we appreciate your interest in us in a very busy week. And as usual Alice Lehman and her team are available to take your calls as follow-up to this call. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's Wachovia fourth quarter 2007 earnings release conference call. This call will be available for reply beginning at 2.30 PM Eastern Standard Time today through 11.59 PM Eastern Standard Time on March, the 31st, 2008. The conference ID number for the replay is 2604-7152. Again the conference ID number for the replay is 2604-7152. The number to dial for the replay is 1800-642-1687 or 706-645-9291. This concludes today's call. You may all disconnect.