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44
Acceleration of Equity Awards
During the second quarter of 2007, a charge of $39.8 million was taken against salaries and associate benefits. This charge was taken
as a result of the accelerated vesting of equity awards in conjunction with the transition of the Banking leadership team, consistent
with the terms of the awards. This charge is not included as a restructuring charge associated with our 2007 cost initiative.
Income Taxes
We recognized a $69.0 million one-time tax benefit in the second quarter of 2007 resulting from previously unrecognized tax benefits
related to our international tax position. In addition, we recognized a $29.7 million reduction in retained earnings associated with the
adoption of FIN 48 in 2007.
Business Outlook
The statements contained in this section are based on our current expectations regarding the Corporations 2009 financial results and
business strategies. Certain statements are forward looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Actual results could differ materially from those in our forward looking statements. Factors that could materially
influence results are set forth throughout this section and in Item 1A Risk Factors.
2009 Expectations
The Company expects continued pressure on profitability as deteriorating global economic conditions continue to have an impact on
credit performance and require the Company to increase its provision for loan losses.
Credit:
As of December 31, 2008, the Companys allowance is consistent with an outlook for $8.6 billion of managed losses in
2009. This loss outlook assumes that the U.S. unemployment rate increases to around 8.7% by the end of 2009, and that
home prices, as measured by the Case-Schiller 20-City Index, decline by an additional 10 percentage points by the end of
2009.
The Company expects 2009 provision expense levels to be higher than 2008 provision expense levels.
In addition to the effects of the weakening economy, the Company expects that in 2009 the charge-off rate in the U.S.
Card sub-segment will be adversely impacted by (i) continuing pressure from the unsecured closed-end loans included in
the U.S. Card sub-segment; and (ii) from the implementation of the OCC minimum payment policies. The Company
expects that the conversion to the OCC minimum payment policies will increase the U.S. Card charge-off rate by
approximately 10 basis points in the first quarter of 2009, and by approximately 50 basis points in subsequent quarters of
2009. The Company expects that the impact of the new minimum payment policies on the Companys charge-off levels
will begin to subside in 2010 as customers adjust to the new policies. The impact of the new policies has been factored
into the Companys expectations for charge-off levels in the U.S. Card sub-segment, as discussed above, and in the
Companys outlook for total company managed charge-off dollars for the next twelve months associated with the
allowance for loan and lease losses.
The Company expects that the charge-off rate in the U.S. Card sub-segment will be around 8.1% in the first quarter of
2009.
Earning Assets: The Company expects that new loan originations, reduced by weakening demand from credit worthy borrowers, will
not be sufficient to offset rising charge-offs, normal amortization and attrition, and weaker credit card spending. As a result, the
Company expects a decline in managed loans. We expect that the decline in earning assets will be more modest, resulting in a
continuing shift from loans to high-quality investment securities backed by mortgage and consumer loans.
Deposit Growth: The Company expects deposits in the Local Banking segment to grow in 2009. The Company also expects to
continue to maintain disciplined pricing and deposit margins in 2009.
Revenue Margin: The Company expects a modest decline in 2009 revenue margin as compared to 2008 revenue margin, although
there may be variability between quarterly periods.
Cost Management: The Company expects to continue to benefit from cost cutting actions taken in 2007 and 2008 and will pursue
additional efforts to achieve sustainable efficiency through cost reductions, including realizing synergies from the Chevy Chase Bank
acquisition.