nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.

Bank holding companies (including bank holding companies that also are financial holding companies) also are required to obtain the prior approval of the Federal Reserve Board before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines to create interstate banks. The Interstate Banking and Branching Act also permits a bank to open new branches in a state in which it does not already have banking operations if such state enacts a law permitting de novo branching.

Changes in Regulations

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they might have on Bank of America and our subsidiaries cannot be determined at this time.

Capital and Operational Requirements

The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common shareholders’ equity, trust preferred securities, minority interests and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjustments. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents our qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. Our Tier 1 and total risk-based capital ratios under these guidelines at December 31, 20062007 were 8.646.87 percent and 11.88 percent, respectively.11.02 percent. At December 31, 2006,2007, we had no subordinated debt that qualified as Tier 3 capital.

authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

In addition, the ability of Bank of America and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of Bank of America, our stockholders and our creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.

Source of Strength

According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC–either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default–the other Banks may be assessed for the FDIC’s loss, subject to certain exceptions.

Additional Information

See also the following additional information which is incorporated herein by reference: Net Interest Income (under the captions “Financial Highlights—Highlights – Net Interest Income” and “Supplemental Financial Data” in Item 7, Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations (the “MD&A”) and Tables I, II and XIII of the Statistical Financial Information)Tables); Securities (under the caption “Balance Sheet Analysis – Debt Securities” and “Interest Rate Risk Management—Management for Nontrading Activities – Securities” in the MD&A and NotesNote 1 – Summary of Significant Accounting Principles and Note 5 – Securitiesof the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplemental Data (the “Notes”)); Outstanding Loans and Leases (under the caption “Balance Sheet Analysis – Loans and Leases; Net of Allowance for Loan and Lease Losses” and “Credit Risk Management” in the MD&A, Table III of

the Statistical Financial Information,Tables, and NotesNote 1 – Summary of Significant Accounting Principles and Note 6 – Outstanding Loans and Leases of the Notes); Deposits (under the caption “Balance Sheet Analysis – Deposits” and “Liquidity Risk and Capital Management—Management – Liquidity Risk” in the MD&A andNote 11 – Deposits of the Notes); Short-Term Borrowings (under the caption “Balance Sheet Analysis – Commercial Paper and other Short-term Borrowings” and “Liquidity Risk and Capital Management—Management – Liquidity Risk” in the MD&A, Table IX of the Statistical Financial InformationTables andNote 12 – Short-term Borrowings and Long-term Debt of the Notes); Trading Account Assets and Liabilities (under the caption “Balance Sheet Analysis – Trading Account Assets”, “Balance Sheet Analysis – Trading Account Liabilities” and “Market Risk Management—Management – Trading Risk Management” in the MD&A andNote 3 – Trading Account Assets and Liabilities of the Notes); Market Risk Management (under the caption “Market Risk Management” in the MD&A); Liquidity Risk Management (under the caption “Liquidity Risk and Capital Management” in the MD&A); Operational Risk Management (under the caption “Operational Risk Management” in the MD&A); and Performance by Geographic Area (underNote 2224 – Performance by Geographical Area of the Notes).

the financial services industry produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services and at more competitive prices. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and Internet-based financial solutions. Many of our competitors have fewer regulatory constraints and some have lower cost structures.structures than we do. Increased competition may affect our results by creating pressure to lower prices on our products and services and reducing market share.

Credit risk.When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contract.contracts. A number of our products expose us to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest lenders,

the credit quality of our portfolio can have a significant impact on our earnings. We allowestimate and establish reserves for and reserve against credit risks based on our assessment ofand potential credit losses inherent in our credit exposure (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify.

For a further discussion of credit risk and our credit risk management policies and procedures, see “Credit Risk Management” in the MD&A.

Federal and state regulation.Bank of America, the Banks and many of our nonbank subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. This regulatory oversight is established to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Bank of America and its nonbanking subsidiaries are also heavily regulated by securities regulators, domestically and internationally. This regulation is designed to protect investors in securities we sell or underwrite. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and increasing the ability of nonbanks to offer competing financial services and products.

Governmental fiscal and monetary policy.Our businesses and earnings are affected by domestic and international monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending, investing and investingcapital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States, non-U.S. governments and international agencies. Changes in domestic and international monetary policy are beyond our control and hard to predict.

Liquidity risk. Liquidity is essential to our businesses. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.

For a further discussion of our liquidity pictureposition and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk and Capital Management” in the MD&A.

Litigation risks. We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed

with third parties and the vast array of associates and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, unlawful tampering with our technical systems, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly.

For further discussion of operating risks, see “Operational Risk Management” in the MD&A.

Products and services.Our reputationbusiness model is important.based on a diversified mix of businesses that provides a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure by competition to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to incur substantial expenditures to modify or adapt our existing products and services. We might not be successful in developing and introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or developing and maintaining loyal customers.

Regulatory considerations.Bank of America, the Banks and many of our nonbank subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. This regulatory oversight is established to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Bank of America and its nonbanking subsidiaries are also heavily regulated by securities regulators, domestically and internationally. This regulation is designed to protect investors in securities we sell or underwrite. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and increasing the ability of nonbanks to offer competing financial services and products.

Reputational risks. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our failure to address,actual or to appear to failperceived failure to address various issues that could give rise to reputational risk that could cause harm to Bank of America and our business prospects. These issues include, but are not limited to, appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; money-laundering; privacy; properly maintaining customer and associate personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

Products and services.Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure by competition to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not be successful in introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or developing and maintaining loyal customers.

Risk management processes and strategies.We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad

and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financialfinan-

served as President and Chief Investment Officer of Columbia Management, Bank of America’s asset management organization. He first became an officer in 1981. He also serves as President, Global Wealth and Investment Management and a director of Bank of America, N.A., FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Amy Woods Brinkley, age 51, Global52, Chief Risk Executive.Officer. Ms. Brinkley was named to her present position in April 2002. From July 2001 to April 2002, she served as Chairman, Credit Policy and Deputy Corporate Risk Management Executive;

and from August 1999 to July 2001, she served as President, Consumer Products. She first became an officer in 1979. She also serves as GlobalChief Risk ExecutiveOfficer and a director of Bank of America, N.A. and, FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Barbara J. Desoer, age 54,55, Global Technology and Operations Executive. MsMs. Desoer was named to her present position in August 2004. From July 2001 to August 2004, she served as President, Consumer Products; and from September 1999 to July 2001, she served as Director of Marketing. She first became an officer in 1977. She also serves as Global Technology and Operations Executive and a director of Bank of America, N.A. and, FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Kenneth D. Lewis, age 59,60, Chairman, Chief Executive Officer and President. Mr. Lewis was named Chief Executive Officer in April 2001, President in July 2004 and Chairman in February 2005. From April 2001 to April 2004, he served as Chairman; from January 1999 to April 2004, he served as President; and from October 1999 to April 2001, he served as Chief Operating Officer. He first became an officer in 1971. Mr. Lewis also serves as a director of the Corporation and as Chairman, Chief Executive Officer, President and a director of Bank of America, N.A. and, FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Liam E. McGee, age 52,53, President, Global Consumer and Small Business Banking. Mr. McGee was named to his present position in August 2004. From August 2001 to August 2004, he served as President, Global Consumer Banking; from August 2000 to August 2001, he served as President, Bank of America California; and from August 1998 to August 2000, he served as President, Southern California Region. He first became an officer in 1990. He also serves as President, Global Consumer and Small Business Banking and a director of Bank of America, N.A. and, FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Brian T. Moynihan, age 47,48, President, Global WealthCorporate and Investment Management.Banking. Mr. Moynihan was named to his present position in October 2007. From April 2004.2004 to October 2007, he served as President, Global Wealth and Investment Management. Previously he held the following positions at FleetBoston Financial Corporation: from 1999 to April 2004, he served as Executive Vice President with responsibility for Brokerage and Wealth Management from 2000, and Regional Commercial Financial Services and Investment Management from May 2003. He first became an officer in 1993. He also serves as President, Global WealthCorporate and Investment ManagementBanking and a director of Bank of America, N.A. and, FIA Card Services, N.A., LaSalle Bank, N.A., LaSalle Bank Midwest, N.A. and United States Trust Company, N.A.

Joe L. Price, age 46,47, Chief Financial Officer. Mr. Price was named to his present position in January 2007. From June 2003 to December 2006, he served as GCIB Risk Management Executive; from July 2002 to May 2003 he served as Senior Vice President Corporate Strategy and President, Consumer Special Assets; from November 1999 to July 2002 he

He first became an officer in 1993. He also serves as Chief Financial Officer and a director of Bank of America, N.A. and, FIA Card Services, N.A.

R. Eugene Taylor, age 59, Vice Chairman and President, Global Corporate and Investment Banking. Mr. Taylor was named to his present position in July, 2005. From February 2005 to July 2005, he served as President, Global Business and Financial Services; from August 2004 to February 2005, he served as President, Commercial Banking; from June 2000 to August 2004, he served as President, Consumer and Commercial Banking; from February 2000 to June 2000, he served as President, Central Region; and from October 1998 to June 2000, he served as President, West Region. He first became an officer in 1970. He also serves as Vice-Chairman and President, Global Corporate and Investment Banking and a director of, LaSalle Bank, of America,N.A., LaSalle Bank Midwest, N.A. and FIA Card Services,United States Trust Company, N.A.

As of February 26, 2007,20, 2008, there were 272,123 record holders263,761 registered shareholders of Common Stock. During 20052006 and 2006,2007, Bank of America paid dividends on the Common Stock on a quarterly basis. The following table sets forth dividends paid per share of Common Stock for the periods indicated:

For additional information regarding the Corporation’s ability to pay dividends, see the discussion under the heading “Government Supervision and Regulation—Regulation – Distributions” in this report andNote 15 – Regulatory Requirements and Restrictions of the Consolidated Financial StatementsNotes on page 149127 which is incorporated herein by reference.

For information on the Corporation’s equity compensation plans, see Item 12 on page 153 of this report andNote 17 – Stock-Based Compensation Plansof the Consolidated Financial StatementsNotes on page 156133, both of which isare incorporated herein by reference.

Item 6.  Selected Financial Data

See Table 5 in the MD&A on page 2116 and Table XII of the Statistical Financial InformationTables on page 9582 which are incorporated herein by reference.

nonbanking financial services and products domestically and internationally through three business segments:Global Consumer and Small Business Banking (GCSBB),Global Corporate and Investment Banking (GCIB), andGlobal Wealth and Investment Management (GWIM).

At December 31, 2006,2007, the Corporation had $1.5$1.7 trillion in assets and approximately 203,000210,000 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Financial Condition and Results of Operationsthe MD&A are incorporated by reference into Management’s Discussion and Analysis of Financial Condition and Results of Operations.the MD&A. Certain prior period amounts have been reclassified to conform to current period presentation.

Recent Events

2007 Market Dislocation

During the second half of 2007, extreme dislocations emerged in the financial markets, including the leveraged finance, subprime mortgage, and commercial paper markets. These dislocations were further compounded by the decoupling of typical correlations in the various markets in which we do business. Furthermore, in the fourth quarter of 2007, the credit ratings of certain structured securities (e.g., CDOs) were downgraded which among other things triggered further widening of credit spreads for these types of securities. We have been an active participant in the CDO market and maintain ongoing exposure to these securities and have incurred losses associated with these exposures. For more information regardingCapital Markets and Advisory Services (CMAS) results including CDOs, leveraged finance and related ongoing exposure, see theCMAS discussion beginning on page 27.

In addition, the market dislocation impacted the credit ratings of structured investment vehicles (SIVs) in the market place.GWIM manages certain cash funds which have invested in SIV transactions. We have entered into capital commitments to support these funds and have incurred losses associated with these commitments including losses on certain securities purchased earlier from these funds at fair value. For more information on our cash fund support, see theGWIM discussion beginning on page 31.

In 2008, we continue to have exposure to those items noted above, and depending upon market conditions, we may experience additional losses.

Current Business Environment

The financial conditions mentioned above continue to negatively affect the economy and the financial services sector in 2008. The slowdown of the economy, significant decline in consumer real estate prices, and the continued and rapid deterioration in the housing sector have affected our home equity portfolio and will, in all likelihood, impact other areas of our consumer portfolio. We expect that certain industry sectors, in particular those that are dependent on the housing sector, and certain geographic regions will experience further stress. For more information on the impact of the current business environment on credit, see the Credit Risk Management discussion beginning on page 44.

The subprime mortgage dislocation has also impacted the ratings of certain monoline insurance providers (monolines) which has affected the

ration acquisition, net client inflows and favorable market conditions combined with an increase in brokerage activity. This increase was partially offset by a decrease in all other income of $447 million due to losses of $382 million associated with the support provided to certain cash advance fees, interchangefunds. Noninterest expense increased $768 million driven by the addition of U.S. Trust Corporation, higher revenue-related expenses and marketing costs.

AUM increased $100.6 billion to $643.5 billion at December 31, 2007 compared to December 31, 2006 reflecting the acquisition of U.S. Trust Corporation, net inflows and market appreciation which was partially offset by the sale of Marsico. For more information onGWIM, see page 31.

All Other

Net income increased $1.4 billion to $2.9 billion in 2007 compared to 2006. Excluding the securitization offset, total revenue increased $283 million resulting from an increase in noninterest income of $1.6 billion partially offset by a decrease in net interest income of $1.3 billion. The increase in noninterest income was driven by the $1.5 billion gain from the sale of Marsico and an increase of $873 million in equity investment income, partially offset by losses of $394 million on securities after they were purchased from certain cash funds managed withinGWIM at fair value. In addition, net interest income, noninterest income and noninterest expense decreased due to certain international operations that were sold in late fees.2006 and the beginning of 2007. Merger and restructuring charges decreased $395 million. For more information onAll Other, see page 34.

Financial Highlights

Net Interest Income

Net interest income on a FTE basis increased $367 million to $36.2 billion for 2007 compared to 2006. The increase was driven by the contribution from market-based net interest income related to ourCMAS business, higher levels of consumer and commercial loans, the impact of the LaSalle acquisition, and a one-time tax benefit from restructuring our existing non-U.S. based commercial aircraft leasing business. These increases were partially offset by higher Noninterest Expense and Provision for Credit Losses, primarily driven by the addition of MBNA. For more information onGlobal Consumer and Small Business Banking, see page 26.

Net Income increased $408 million, or six percent, to $6.8 billion in 2006 compared to 2005. Total Revenue increased $2.1 billion, or 10 percent, to $22.7 billion in 2006 compared to 2005, driven primarily by higher Trading Account Profits and Investment Banking Income, and gains on the sales of our Brazilian operations and Asia Commercial Banking business. Offsetting these increases was spread compression, in the loan portfolios which adversely impacted Net Interest Income. In addition, Net Income in 2006 was impacted by increases in Noninterest Expense and Provision for Credit Losses, and a decrease in Gains on Sales of Debt Securities. For more information onGlobal Corporate and Investment Banking, see page 33.

Global Wealth and Investment Management

Net Income increased $87 million, or four percent, to $2.4 billion in 2006 compared to 2005. The increase was due to higher Total Revenue of $463 million, or six percent, primarily as a result of an increase in Investment and Brokerage Services partially offset by an increase in Noninterest Expense of $295 million, or eight percent, driven by higher personnel-related costs.

Total assets under management increased $60.6 billion to $542.9 billion at December 31, 2006 compared to December 31, 2005. For more information onGlobal Wealth and Investment Management, see page 38.

Net Income increased $23 million to $767 million in 2006 compared to 2005. This increase was primarily a result of higher Equity Investment Gains of $902 million and Net Interest Income of $446 million offset by lower Gains (Losses) on Sales of Debt Securities of $(495) million in 2006 compared to $823 million in 2005. For more information onAll Other, see page 41.

Net Interest Income on a FTE basis increased $4.2 billion to $35.8 billion in 2006 compared to 2005. The primary drivers of the increase were the impact of the MBNA merger (volumes and spreads), consumer and commercial loan growth, and increases in the benefits from asset and liability management (ALM) activities including higher portfolio balances (primarily residential mortgages)hedge costs and the impact of changesdivestitures of certain foreign operations in spreads across all product categories. These increases were partially offset by a lower contribution from market-based earning assetslate 2006 and the higher costs associated with higher levelsbeginning of wholesale funding.2007. The net interest yield on a FTE basis decreased two basis points (bps)22 bps to 2.822.60 percent infor 2007 compared to 2006, due primarily to an increase in lower yielding market-based earning assets and loan spreads that continued to tighten due towas driven by spread compression, and the flat to inverted yield curve. These decreases wereimpact of the funding of the LaSalle merger, partially offset by widening of spreads on core deposits.an improvement in market-based yield

Provision for Credit Losses

The provision for credit losses increased $3.4 billion to the following:

The Provision for Credit Losses increased $996 million to $5.0 billion in 2006 compared to 2005. Provision expense rose due to increases from the addition of MBNA, reduced benefits from releases of commercial reserves and lower commercial recoveries. Reserves were increased in the home equity and homebuilder loan portfolios on continued weakness in the housing market. Reserves were also added for small business portfolio seasoning and deterioration as well as growth in the consumer portfolios. These increases were partially offset by lower bankruptcy-related credit costs onreductions in reserves from the domestic consumer credit card portfolio.

sale of the Argentina portfolio in the first quarter of 2007. For more information on credit quality, see Provision for Credit Risk ManagementLosses beginning on page 53.58.

Gains (Losses) on Sales of Debt Securities were $(443) million in 2006 compared to $1.1 billion in 2005. The decrease was primarily due to a loss on the sale of mortgage-backed securities in 2006 compared to gains recorded in 2005. For more information on Gains (Losses) on Sales of Debt Securities, see “Interest Rate Risk Management – Securities” beginning on page 77.

Table 3

Noninterest Expense

Income Tax Expense

Income tax expense was $5.9 billion in 2007 compared to $10.8 billion in 2006, compared to $8.0 billion in 2005, resulting in an effective tax rate of 28.4 percent in 2007 and 33.9 percent in 2006 and 32.7 percent in 2005.2006. The increasedecrease in the effective tax rate was primarily due to the charge to Income Tax Expense arisinglower pre-tax income, a one-time tax benefit from the change in tax legislation discussed below, the one-time benefit recorded during 2005 related to the repatriation of certain foreign earningsrestructuring our existing non-U.S. based commercial aircraft leasing business and the January 1, 2006 addition of MBNA. For more information on Income Tax Expense, see Note 18 of the Consolidated Financial Statements.

During the second quarter of 2006, the President signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Among other things, TIPRA repealed certain provisions of prior law relating to transactions entered into under the extraterritorial income and foreign sales corporation regimes. The TIPRA repeal results in an increase in the U.S. taxes expected to be paid on certain portionsrelative percentage of our earnings taxed solely outside of the income earned from such transactions after December 31, 2006. Accounting forU.S. In addition, the change in law resulted in2007 effective tax rate excludes the recognitionimpact of a $175 million charge in 2006 resulting from a change in tax legislation. For more information on income tax expense, seeNote 18 – Income Taxesto Income Tax Expense in 2006.the Consolidated Financial Statements.

$82.7 billion in 2006,2007, which was due to growth in client-driven market-makingmarket- making activities in equity products, partially offset by a reduction in interest rate products. For additional information, see Market Risk Management beginning on page 72.

Commercial Paper and Other Short-term Borrowings

Commercial Paper and Other Short-term Borrowings

Commercial paper and other short-term borrowings provide a funding source to supplement Depositsdeposits in our ALM strategy. The average balance increased $28.6$47.1 billion to $124.2$171.3 billion in 2006,2007, mainly due to the increase inincreased commercial paper and Federal Home Loan Bank advances to fund core asset growth, primarily in the ALM portfolio.portfolio and the funding of the LaSalle acquisition.

Period end and average Long-term Debt

Average long-term debt increased $45.2$39.7 billion and $32.4to $169.9 billion. The increase resulted from the funding of core asset growth, the addition of MBNA and the issuancefunding of, subordinated debt to support Tier 2 capital.and assumption of liabilities associated with, the LaSalle merger. For additional information, seeNote 12 of– Short-term Borrowings and Long-term Debt to the Consolidated Financial Statements.

Shareholders’ Equity

Period end and average Shareholders’ Equityshareholders’ equity increased $33.7$11.5 billion and $30.6$6.2 billion primarily due to the issuance ofnet income, increased net gains in accumulated OCI, including an $8.4 billion, net-of-tax, fair value adjustment relating to our investment in CCB, common stock related to the MBNA merger. This increase alongissued in connection with Net Incomeemployee benefit plans, and issuances of Preferred Stock, waspreferred stock issued. These increases were partially offset by cash dividends, netdividend payments, share repurchases and the adoption of Common Stock and redemption of Preferred Stock.certain new accounting standards.