Fifth Third Bancorp (FITBI) 2001 Q4 法說會逐字稿

Good morning, and welcome to Fifth Third's (Company: Fifth Third Bancorp; Ticker: FITB; URL: http://www.53.com/) fourth quarter earnings conference call. This call contains forward-looking statements relating to present or future trends or factors affecting the banking industry and specifically the operations, markets and products of Fifth Third. Actual results could differ materially from those projected. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or to reflect events or circumstances after the date of this call.

At this time, I'll turn the call over to President and CEO, George Schaefer.

Good morning, and thank you for taking the time to listen in.

Neal and I are going to take a few minutes to review the quarter and our prospects for future periods and then, we'll open it up for your questions.

By this time, I'm sure most of you had a chance to take a look at our results released earlier today. I think everyone would agree that this has been a good quarter for us and a great year.

Revenue growth was strong across all of our businesses. Checking account growth continues to be as good as at any time in our history. And credit quality continues to be manageable, despite a difficult environment. From my perspective, the highlights for the quarter were number one, a continuation of the strong deposit growth trends. The growth we've seen on the consumer side over the last few quarters had continued, with the momentum over to the commercial side, as well.

Average interest checking balance has increased 27 percent for the quarter and average demand deposits are up 29 percent over last year and 13 percent sequentially. Consumer demand deposits are up a pretty amazing 55 percent over the fourth quarter last year. And commercial demand are up 15. Essentially, we've added about two billion in demand deposits over the end of last year.

Obviously, the magnitude of these deposit growth numbers is somewhat affected by the increased cash position of the consumer in an uncertain economy and typical fourth quarter increases in demand balances. But these are really strong numbers and indicative of our focus and success in attracting new customers in all of our markets, including some really impressive strong numbers up in Michigan and particularly in Chicago.

The second point is strong revenue growth and service income growth. Our data processing business was up 52 percent for the quarter. This is the eighth straight quarter that MPS has come out better than 30 percent growth over prior year.

Our deposit service income is up 35 percent. Our investment advisory business is up four percent, despite a poor economy for most of the quarter. And our commercial banking revenues are up 73 percent.

Number three, our balance sheet's as strong as it's ever been. Our capital ratio is now nearly 11 percent. And we created a billion dollars in capital in 2001. I think that's pretty amazing that our equity account is up by a billion dollars.

A lot of our competitors seem to have charged off about a billion dollars of their equity. And this is even after a 19-percent increase in the annual dividend and the integration charges associated with Old Kent. Essentially, this means that your piece of Fifth Third increased in value by 12 percent this year, not too bad for a recession year.

Number four, our loan growth. Overall, loan growth has remained steady, with average total loans and leases increasing, despite four billion in sales, securitizations and divestitures throughout the year.

Excluding the impact of these transactions and ignoring significant for sale flows, fourth quarter average loan balances would be up about five percent. Our retail installment loans were up eight percent over the fourth quarter of last year. And we doubled last year's productions.

And finally, credit quality. Our credit quality continues to be among the best in the industry. NPAs remain extremely low as a percentage of total loans and leases at 57 basis points or only 235 million on a $71 billion balance sheet. And net charge-offs remain relatively stable at 52 basis points.

We don't really have an economist on staff, so I can't tell you how far off the recovery is. I would say, though, that these ratios are still within our 10-year averages. The key to effectively weathering times like these is to always be ready and focused on quality and complete relationships.

I would tell you two things. Number one, we're extremely proud of the quality of the overall loan portfolio. And number two, I'm confident in our ability to move through this period based on our relationship focus, our Midwestern footprint, our low in-house lending limits and most importantly, the tremendous strength on our balance sheet.

In reviewing the fourth quarter financial highlights I think taking a look at couple of numbers will really bring it into focus.

Net income of 385 million is up 21 percent over the prior quarter and 24 percent more than last quarter annualized. EPS, at 65 cents, is 18 percent over the 55 cents we reported last year. ROA is 216 compared to 187. Return on equity is back at 20 percent. And this is on a big .

Our capital ratio now is almost 11 percent -- 10.8 percent. And this again is one of the strongest in the industry. And the overhead ratio is in the mid-40s with the mortgage hedge gains. This number is still a little higher than you typically see from Fifth Third and we do expect to improve that in the year 2002.

The bottom line after reviewing these numbers, you can see that revenue growth is as good as at any time in our history. Our new customer and deposit growth is even better than that. We've already exceeded the merger promises that we made in November of 2000 with our Old Kent acquisition. The balance sheet is rock solid. And Neal promises me it's the best in the industry.

And our focus will continue to remain the same, sustaining solid revenue and deposit and direct loan growth in our retail businesses, continuing our momentum in deposit gathering in the commercial side with a focus on treasury management and wealth management services and expanding the contribution of the investment advisory and EP services to our overall business mix.

For the year 2002, we feel very confident about our prospects going forward for a number of reasons. Number one, core deposit and revenue growth, like I said, is as strong as at any time in our history, with similar trends expected this year.

And there's considerable market share upside in our markets due to the fact that we only have about seven or eight percent of the market in our footprint.

And number three, our balance sheet is just as strong as ever. And it gives us a great deal of flexibility going forward.

Number four, loan growth and credit quality have held up reasonably well and very well in comparison to our peers. We have significant operating leverage.

And finally, perhaps the most impressive thing about this year is that all of this was accomplished with significant amount of time and resources devoted to integrating Old Kent. It was the largest acquisition in our history. That's a $25 billion institution with 300-and-some branches that we integrated into the Fifth Third model while performing these kind of numbers out there.

Now, I'd like to turn it over to Neal for some additional review of our businesses and some trends to expect in the future -- Neal.

Thank you, George.

I would like to spend the bulk of my time around line of business results, try to give you some color as we head into 2002. Let me walk through those.

First of all, MPS, as George said, up 52 percent year over year, which includes $15 million in revenue from USB, which we completed in the year. But if you excluded USB, we'd still have 32-percent growth in the quarter.

Most of you recognize that fourth quarter is always among our strongest in the MPS line of business. And it's held up awful well in this economy, partly due to 60 percent of our revenue today is EFT. Forty percent of it's merchant. And if you really look at our merchants, they're the type of merchants that I think have weathered this economy quite well.

The other thing I'd point out, we're still very early in the USB acquisition. We think it brings us a couple of things that not only expands the product line down into some of the small merchant categories that we think we can lever greatly and market, but we also have added several new sales offices to expand our ability to sell more MPS product nationally.

On the investment advisor side, obviously we're coming out of a year where it's been a tougher market but I think a couple of bright spots on the investment advisor side. Brokerage had a very strong year for us. And that's really been a result of the retail partnership that we've had. And we continue to see that growing nicely.

We also had a nice strong year in private banking. And I'd say in our affiliate markets, the affiliate, we've seen a nice pickup with several of our affiliates, having better than 20-percent growth, even though market values went the other way on them. I think we had six affiliates above 20-percent growth.

In the commercial side, a couple of things I would point out, as George mentioned earlier, we've seen nice momentum building on the deposit side and on the fee product areas. And I'd say that's really the result of the focus that we had on the retail side coming to the commercial. We had 15-percent growth year over year in commercial demand deposits. We had 25-percent year-to-date growth in treasury management fees, international income up 34 percent. And all of those growth rates really as a result of focus market by market by each of our sales people and I'd say nice year-over-year increases.

On the retail side, as George said earlier, a couple of things. The deposit and the fee income growth in this area is very good. We're coming out of a year where obviously, bringing our product and our sales focus within the Old Kent footprint has had a big impact on the area. But it's really everyone's participation.

As George also mentioned, we still only have seven to eight percent market share in each of our markets. So we think there's plenty of upside still within the retail side of the business and strong growth coming in all categories.

Let me spend a moment on the balance sheet and margin. Net interest margin was up 14 basis points sequentially, 24 basis points over the fourth quarter of last year, certainly the result of lower interest rates.

And I'd say a couple things as we look forward to next year. I think it's likely that funding costs stay very manageable in this economy at this point. I think on the earning asset side, we've seen a 164 basis point decrease in the yield on the average earning assets. I'm sure there's more to come. But I think all of that is quite manageable. It's scary when we almost get to four-percent margin at Fifth Third. We're usually well south of that. So that's quite positive.

I would say the bulk of the rest of the items on the balance sheet -- we had a busy year on the asset side, as George mentioned, four billion in securitization, divestitures and the like. So I think it's quite difficult to get a handle on, you know, sort of, core loan growth rates. But I think we had a very good year on the retail side. And I think commercial, several categories were stronger than we expected.

Let me spend a real quick moment on credit quality. George covered it. We think very stable sequentially, as we pointed out in our 8-K within those kinds of expectations. I would say, in total, non-accruals of 250 million versus a $42 billion loan portfolio gives us a lot of comfort. The 52 basis points of charge-offs is certainly up from what we've seen in the last couple of years but probably keeping with 10-year averages for ourselves. And we feel pretty good.

The other thing I'd point out is the Old Kent portfolio's been very stable for us. We've been very pleased at the overall quality of that portfolio. In a deal, sometimes they can provide nasty surprises. And I think we've been very happy with that in our credit quality statistics.

Most of you probably notices, we had a securities gain of just shy of 18 million versus six million a year ago, a couple of things there. Obviously, rates have come down an awful lot. We shrunk the investment portfolio modestly.

And I would tell you, it's not likely that you'll see ongoing security gains. But it's really a result of positioning the balance sheet as we head into 2002, given the significant rate move that we've seen as a result of the Fed's dramatic movement down.

If you ask where all that money went, I think a couple of things. Obviously, the biggest one is charge-offs. You can see charge-offs coming in at 52 basis points, which are a couple basis points higher than I think we indicated in the 8-K and yet, credit quality I'd describe as stable. If you look within the losses, I think consumer losses up modestly. And I think that's one we'll continue to watch but feel pretty good where we're at.

Let me spend a moment on operating expenses. As George said earlier, operating expenses were essentially flat sequentially if you back out 14 million in incremental expenses with the USB acquisition closing in the quarter and some of the mortgage activities. So I would say, on the operating expense, we think that'll continue to come down below a 45-percent overhead ratio in subsequent quarters. And we feel good about that.

And I'd say, in summary, a couple of things. We feel great about the balance sheet, given this economy and given the trends we're seeing. I think the revenue growth we've seen in a difficult economy are quite strong, not only on net interest income but the fee categories are as strong as we've seen them and I'd really say a function of all our sales people's focus. You don't get to those by any one market or any one product. So we're quite happy with the revenue we've seen.

And I think, on the operating expense side, we feel like -- all the conversions are behind us and what we're really working on today is continuing to build those efficiency gains that you'd expect to see from us.

With that, I'll turn it back over and open it up to questions. Be happy to answer any questions, George and I, that you might have.

Thank you. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you do have a question, please press the number one key. One moment for questions, please.

Our first question is from Christopher Marinak of Robertson Humphrey.

Yes. Hi, Neal and George. Good morning.

Good morning.

Can you give us some feedback, Neal, on how the mortgage servicing asset is valued as of the end of the year?

If you look at the size of the -- let me point you to a page. If you look at our servicing portfolio, I think it peaked two quarters ago at -- bear with me while I get you to the page -- page 10 of our earnings release. It peaked at $34 billion on the residential side. I think it's slightly below today.

A couple of things, obviously. We've just come out of two quarters of the fastest prepaid speed that we've seen. We have had that hedged. We've had it reviewed by third parties. And I'd say we're quite comfortable. I would tell you that the curve got steeper late in the fourth quarter, that prepaid speed also slows down but so does the valuation. It came down dramatically during the year. And that started to go back up, Chris. So I'd say, you know, our approach is one of no surprises. And you've come through a pretty tough prepay year. And we would have a positive mark on that.

OK. Very good. And then, secondly, can you the deposit growth in the Old Kent markets with the original Fifth Third markets the last quarter?

Yeah. I -- this is George, Chris. I think the deposit growth rates have been pretty consistent across all the lines. Typically, in an acquisition like an Old Kent, the other acquisitions that we've done, you get some deposit run up because, you know, of local offices being acquired.

Here, we really didn't experience that in the -- in the Old Kent side. We held onto a lot of those deposits there. But in places like Chicago -- I think I mentioned this earlier. You know, with the Superior Bank collapse, people looking at the credit rating of Fifth Third and we've seen this not just in Chicago but, kind of, everywhere, this flight to quality. We are getting a lot of deposit inputs because people's financial advisors are telling them, hey, put your money in a strong bank. And Fifth Third's the highest rated bank, I think anywhere in our footprint.

So we're seeing strong deposit growth trends up in the Chicago market due to some unusual circumstances in that side. Our sales effort up in Michigan has been really good. But then, when you go to places like Evansville, Indiana or Naples, Florida, we're seeing big plusses in deposit trends everywhere. So it was pretty broad. I don't think you could single out and say hey, it's because Old Kent was up significantly or not up significantly. I think, generally, if you look at 100 branches in Ohio or 100 in Michigan, you're going to find similar trends on both sides there.

Very well. Thanks, guys.

OK.

Our next question is from Chip -- excuse me -- Chip Dixon, of Lehman Brothers.

Thank you. Good morning. A couple questions. One, if you would just address the issue of how sustainable you view the revenue. Were there any unusual items in the quarter? Secondly, talk about your view of the state of the economy and then, finally, about your capacity to acquire.

Yeah. Let me take a short, first of all. We certainly didn't forecast revenue growth being that strong. We actually believed some of those headlines we saw. But I would tell you, the revenue growth, because it's coming in what I would call categories, it isn't coming from mortgage banking sequentially. It's not coming from, you know, capital markets kind of activity.

I would tell you we're more confident than most that the revenue growth rates will be continued strong. Now, fourth quarters, we always see some positives. And certainly, we're mindful that people are parking an awful lot of liquidity in this market. But I'd tell you, Chip, they aren't the usual, you know, categories that we'd be concerned about one time or driven by economic conditions. We're year over year down in mortgage banking revenue. We might be the only bank in America with that because of all the divestitures.

Chip, I think the other thing, these revenue growth and fee rates, I think you're starting to see some of our cross selling initiatives start to take place. We're starting to measure, you know, for every mortgage we do and what kind of checking accounts we get, what kind of home equity products, how many credit cards, how many brokerage accounts in all of our lines of business. For every commercial account, how many 401(k) plans are we getting in that side, for the brokerage accounts? What are we getting in checking accounts?

And we've really got a good measurement system now that we've put in place on the cross selling. And so, we feel really good about this revenue generation and fee generation. We've finally figured out we have 5.1 million customers here. And if you look at our cross sell numbers, they would not be at the high end of the industry. And we're doing some really targeted cross selling now. In telesales, we've got about 80 people in a telesales unit that are having outstanding results.

And we're starting to bundle and package and super size. Just like when you go in McDonald's, when we sell you a checking account now, we're, sort of, super sizing the relationship there and giving you, you know, a biggie brokerage account or something to go along with that.

So we're doing a lot of innovative and I think, cross selling. And you know we've had great sales culture here. But now, we're giving our people that are out selling some real tools and giving them -- instead of saying call on your 5,000 customers at the branch, we're giving them the data that says hey, here's the 50 most likely where you can get business. And so, we're starting to see a lot of good positive trends there.

We've also put in a pretty good account retention program. That's helping us keep a lot of the business that normally would have left. And this shows when a deposit in somebody's account goes up significantly. If you normally kept $1,000 in your account, all of a sudden, you got 20,000 in there, this keys up on the screen in the morning. And we're asking our people to call that person or that company and ask if we can help them investing some of that stuff. So we put a lot of those kind of initiatives in there. So I think you're starting to see some of that.

OK.

On the acquisition side, right now, we don't have anything high on our acquisition list right now. We've got a lot of cleanup items to do here still. We've got -- as you know, we keep this revenue initiative list, product enhancement list. That's a couple hundred million dollars of process improvements, additional items that we're working heavily on.

And we're really focused on upgrading a whole lot of our systems and processes. For the last four years, we've done -- we've been pretty acquisition oriented. And we're taking a little breather right now in these couple of months to upgrade some of our systems here, which we think are going to show some really good results there.

Chip, another way we look at it, we are -- eight of our affiliates that are above two percent on assets are about 40 percent of our asset base today. So I would say we've made great progress. And I think we see the ROAs in each of our affiliates probably the strongest we've seen in our -- in my here. But I think we still have an awful lot of upside. Not everybody's earning 2.16 at this point. But we've seen great progress out of the gates in Michigan and in Chicago in those categories.

OK. And the economy?

We try not to read the "Wall Street" each day.

I think here, Chip, my basic indicator of the economy is the number of people we're trying to hire. And there's still about 850. Here in Cincinnati and throughout Ohio and in the Michigan markets, we're paying our own employees a $500 finders fee to bring in tellers, clerks, loan officers, whatever. We're still having a difficult time finding employees.

You know, I drove by a gas station here in Cincinnati, 99 cents a gallon for gas. Interest rates are down 475 basis points from a year ago. Those are all the positive sides of the economy. Now, here in the manufacturing base, yeah, it's a little soft out here. But housing and cars have been going pretty strong out here. So, as always, as we've been for the last 30 years, we're pretty optimistic.

Thanks.

That number for those jobs is 1-800 -- no.

Thanks.

Our next question is from Fred Cummings, of McDonald Investments.

Yes. Good morning. as a follow up there, what's related to the profitability of the Michigan banks? Neal, can you give us a feel for where they are? You it sounds like they aren't above two percent yet. And also, I had a second question.

Yeah. I would say, Fred, a couple of things there. If you -- if I started at the highest, in northern Michigan, they'd be -- they'd be two-and-a-quarterish kind of return on assets. Eastern Michigan, I think finished the year just shy a one-eighth on assets. That's in Detroit. And in Grand Rapids, you would see us just above two on assets. And I think and those guys have done a great job. And over in Chicago, we would be -- in Chicago, we...

for December.

Yeah. So, you know, in Chicago, I'd say we're under . We think it's already. And that was predominantly a thrift, you know, from the deals that Old Kent had put together. So, like I said, we feel awful good in the core trends that we see in those categories.

And secondly, with respect to the consumer charge-offs, I'd imagine that's predominantly in the automobile portfolio. Can you comment on the mix of the consumer charge-offs there?

Yeah. Fred, that's true. It is -- that's the bulk of our consumer portfolio. You know, at this point, you know, we have always had a very strong credit scoring model and have not done subprime. We've divested all of the subprime stuff that we had in the Old Kent paper. So I'd say, you know, we certainly watch those trends. Those numbers have bounced around. But we've seen two better quarters in the last two quarters. But if you went back to March of last year, we're closer to $30 million in gross charge-offs there.

OK.

So I think it's too early to say that's necessarily a bad trend. I think at this point, we think it's one we watch.

OK. And then, lastly, George, can you comment -- in reading the press release -- are you committed to remaining in the mortgage servicing -- on the servicing side of the business?

Yeah. So far, Fred. This is proved in our own footprint with a portfolio that we have. And again, with all the operating efficiencies that we can achieve in processing, we think we are a low-cost provider in that -- in that business in our own area.

You know, the rule of thumb is, what, two-and-a-half or three times your origination volume is, kind of, what the size of the portfolio. And I think we're today at about 38, 39 billion in servicing and doing a pretty good job at that. Now, do we want to be the world's biggest service or no? Do we want to hold on to our customers within our footprint? Yeah, we do. But that seems to be going pretty well.

That's another comment that I might make, Fred. You know, we just moved our operations into a $70 million site out in Madisonville, here in Cincinnati. That's about a 450 -- I mean, 450,000 square foot operation center here. And we do think we are going to get some production efficiencies out of the move to that site. There's a lot more workflow and we've put a lot of enhancements in. So that ought to make it flow pretty smoothly. But yeah, we're going to stay in this business for a while.

Fred, I would say -- and if you tracked we did during the year, our servicing portfolio would include markets that we're no longer in. So I would say that in general, the absolute dollar size of that portfolio probably trends back toward, as George said, two to three times our origination volume. So I think just by reducing several of those markets, we aren't an originator anymore in, you know, 40-some-odd states. So I think you will see that come down. And I think that's OK with us.

Our next question is from Catherine Murray, of JP Morgan.

Yes. Good morning and congratulations on a good quarter. Just a couple of questions. First of all, in the asset quality deterioration, I think you have explained what went on in the quarter. But as you look forward, just what are you seeing? Is any of the pressure coming off? If so, how would you characterize that? And at this point, what's your best guess for how long that asset quality pressure will linger?

I don't know, Catherine -- this is George -- that we've seen the pressure coming off out there. I don't think we're seeing it increase as severely as it was out there. And I think the -- you know, I think the regulators have been through on a couple of traunches with taking a look at everything out here. So I think we feel a lot better about where we stand and the relativity there, but again, dependent on the economy and dependent on what happens. I think it's way too early to say hey, we're going to see any kind of declines in those numbers. I think typically, we're going to reflect what's going out there in the economy.

But like we mentioned, because we generally have much smaller, you know, shares of these credits, we try to stick to a $25 million in-house limit. I think we only have 82 credits that are above that. And I think I mentioned in December up at a conference that our total Enron exposure was like 2.3 million of an airplane lease for a year 2000 aircraft that we think is pretty much money good on that side there. So we really haven't seen the pressure declining. But we think we got a much better handle on it and feel that it's very, very manageable here.

OK. That's helpful. And, George, would your comment about the pressure not coming off apply equally to the loss levels also?

Yeah. Yeah. I think so. That's -- you know, we -- you know, the charge-offs that we've taken, Catherine, those have not been mandated. Those are us cleaning up our own -- that's not because the regulators walked in or sent us a letter or something out here. So we've, as we've always done, tried to stay ahead of that curve.

OK.

Catherine, I also think if you look at our list that we look at every two weeks, we probably have as many coming off that list. And that's one of the things -- you know, it's one thing if you just have them coming on. And I think we're getting as many resolved as we tend to see. So I think that gives us some comfort that it isn't just dead in the water.

OK. That's good. And then, separately, on the net interest income, obviously, the growth there was really -- was really high. Nothing came out that indicated there was any kind of one-time contributor to especially the sequential quarter growth. Would that be an accurate statement? And then, I guess, as a follow up there, therefore, should we assume that the net interest income growth should stay quite high?

Yeah. The only one-time event, I would say, is Alan Greenspan. And we didn't have any control over that.

Right.

But...

But, Neal, was that a big part of the sequential quarter increase?

Yeah. I think what you're seeing is two events in the fourth quarter. One, we always get better mix in the fourth quarter. But also, you're seeing lower deposit rates. In the categories that we've seen great growth, you're seeing those rates come down. And that's started to show up in the sequential numbers.

Now, you know, how much lower can it go? You know, I wouldn't describe as deposit yet but we're certainly closer. And I think all of us are watching asset re-pricing closely.

OK. And then, just one final thing. On the operating expenses, the 14 million number that you gave, is that just for the USB, in other words, the number we should be backing out for USB? And I guess related to that, should we be backing out in number for the mortgage bank as we look at year-over-year operating expenses?

Yeah. The first question is easier.

Right.

The USB, that is the $14 million. If you look at our mortgage banking and you recognize that we had a pooling with a much bigger mortgage company a year ago, year over year, when you step back and look at it, you know, what did we put behind us is probably a $60 million kind of number. That's -- how much of that's expense and how much of that's managing the side of it, I would say run rate expenses were pretty clean in the fourth quarter to what I think you'll see going forward.

I think the secondary market and just pure volume revenue, it's hard to put a handle on it given the kind of activity you had the last two quarters. So it's hard for me to extrapolate, Catherine, going forward, how much revenue you have in mortgage banking. But that's what we're trying to pin down.

OK. Great. Thank you.

Our next question is from Brad Vanderploge of Robert Baird.

Hi. Thanks. Good morning. I -- first of all, just clarification on the Chicago bank ROA. I thought I heard two different numbers. I just wanted to make sure I got the right .

of the month...

OK.

... number that most of you wouldn't typically see. But I would say the month of -- the month of December was for a full year. I think we're closer to and then, the fourth quarter .

OK. Good. Thanks. And then, in the loans 90-or-more days past due, you break out what the residential mortgage component is. Can you just talk about the other categories since that number is growing as well?

I can't give you a specific off the top of my head, Brad. What I would say is a quarter -- or excuse me -- a third of the 90-day past due is residential mortgage. I would say that other pieces of it are pretty well split between the other consumer and commercial.

OK. And last question. Just on the intangible amortization, you give the total amount. Is that primarily goodwill or is there some CDI in there, as well?

Yes. There is CDI in it. The exact dollar amount, I'm going to have to get back to you. But we, kind of, said that the amortization impact for this year will be two to three cents a quarter.

OK. Thanks. Good quarter.

Thank you.

Thanks, Brad.

Our next question is from John Balkind of Fox Pitt Kelton.

Good morning, guys. Just a couple of quick questions, one on the tax rate. It looks like it was a little bit lower in the quarter. Is that just year-end true up or are we going to see a lower rate going forward?

And then, the second question is on the non-performers breakout. Saw that construction spiked a bit. Is that just one project? And can you give a little color on what's going on in that category?

First of all, on the question around tax rate, I would say I think you'll see a relatively stable effective tax rate from us. We're obviously in a couple more states. But I think you'll see reasonably stable. It was down slightly due to some year-end true up. And we've had a lot of tax projects as we've collapsed charters between states and the like.

OK. And then, the construction NPA increase?

I don't know the specific -- I think there are a couple items. They're all small dollars, nothing that jumps out at me.

Sounds good. Thanks, Neal.

Yeah.

Our next question is from Ken Puglisi of Edler O'Neil & Partners.

These questions may be a little redundant. But, Neal, you indicated that it gets a little scary when your margin gets up around four percent. You also indicated that you feel pretty good about the margin. Can we assume from that, you just don't see it changing very much from here or you see it coming down from here? That's number one.

Secondly, on the tax rate, Neal, you indicated that you think it will stabilize. Stabilize where?

Just one other question. And then, I apologize for not doing my homework on this. But the minority interest that showed up in the fourth quarter, how should we model that going forward?

That is reasonably stable. It's part of a REIT that is in our tax planning strategies. It is where we've dropped down some mortgage-related assets into a REIT and done a security around that that has a minority interest component. The -- as it relates to -- I think you'll see our tax rate modestly lower. I don't think it's dramatic. But, you know, I think our effective rate's been in around 34. It's probably 32ist or somewhere in that category.

OK. Neal, and that's not an number. That's just...

Correct.

... tax. OK.

And your other question was margin. I don't see it going up but I don't see it going down dramatically. I would say that's 100 percent driven by the asset side re-pricing and loan growth as we go into 2002. I don't see -- you know, we've watched rates come down a lot. I'm not sure I believe that they're going back up tomorrow. So I think funding costs will be very well behaved, given all the mix positives that you see happening on our balance sheet. So I don't think we'll give it back quickly that some have feared.

OK. Thank you very much.

Thank you. That concludes this morning's conference call. Thanks for your participation and interest.