KeyCorp (KEY) 2008 Q1 法說會逐字稿

Good morning everyone.

Welcome to KeyCorp's first quarter 2008 earnings results conference call.

The call is being recorded.

At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr.

Henry Meyer.

Mr.

Meyer, please go ahead, sir.

Thank you, operator.

Good morning and welcome to KeyCorp's first quarter earnings conference call.

Joining me for today's presentation is our CFO, Jeff Weeden.

Also joining me for the Q&A portion of the call are our line of business executives, Tom Bunn and Beth Mooney, and our Chief Risk Officer, Chuck Hyle.

Slide 2 is our forward-looking disclosure statements.

It covers both our presentation and the Q&A portion that follows.

Now if you turn to Slide 3.

I'll comment briefly on our first quarter results before Jeffrey reviews them in more detail.

Overall, I was pleased with the quarter given the degree of continued market volatility and rising credit costs impacting our industry including Key.

My team and I are very focused on the increase in non-performing assets and the elevated level of net charge-offs we experienced.

However, I believe the actions we took in the fourth quarter to address the home builder portfolio and the additional reserves we recorded in the current quarter will help us through this challenging environment.

Chuck Hyle and Tom Bunn will be available to address your questions regarding credit after our formal comments.

As you recall, in February we announced that the secondary markets for commercial real estate loans and specifically commercial mortgage backed securities remained restricted with credit spreads at historic wide levels.

These wide levels continued into March with conditions worsening somewhat from the mid-February levels.

We took action to hedge our remaining exposure to changes in interest rates and credit spreads in our commercial real estate held-for-sale loans during the first quarter, and we believe the worse is now behind us in this portfolio.

In addition, we moved 3.3 billion of our student loans held-for-sale to our loan portfolio in March due to the continued disruption in the securitization market for these assets.

I would like to comment on some of the progress we have made in the first quarter with respect to our community banking operations.

During the first quarter we not only completed the acquisition of Union State Bank, which we had previously announced, but we also successfully converted them to our systems.

In addition, excluding the sale of the McDonald retail branch network which occurred in last year's first quarter, the community bank's net income was up 9% first quarter 2008 versus first quarter of '07.

We also have begun the modernization of a number of our branches.

Hopefully you'll have an opportunity to see one of the updated facilities, such as the upstate New York branch featured on this year's annual report cover.

We plan on updating over 100 branches in 2008 and continuing this effort into the next several years.

This new updated branch approach, along with the new teller platform we started piloting in the first quarter at several locations, will help us better serve our community banking clients.

While current market conditions remain challenging, we believe by continuing to focus on our relationship business model, managing our expenses, and upgrading our delivery platforms we will keep Key positioned to respond to business opportunities as they emerge.

Now I will turn the call over to Jeff Weeden for a review of our financial results.

Jeff.

Thank you, Henry.

I will begin with the financial summary shown on Slide 4.

As in the past, my comments today will be with respect to KeyCorp's results from continuing operations.

In some cases I'll comment on comparisons to both the first quarter of 2007 and the fourth quarter of 2007.

There were certainly a number of items impacting our first quarter results ranging from realized and unrealized losses on held-for-sale portfolios, higher provision expense, leverage leasing accounting adjustments and the gain we realized in connection with the Visa IPO.

Our earnings per share for the first quarter of 2008 was $0.54 from continuing operations compared to $0.89 per share for the same period one year ago and $0.06 in the fourth quarter of 2007.

In our first quarter earnings release today we provided an overview of a few of the significant items which have impacted earnings for the periods shown.

I'll comment further on these items and our first quarter results as we review the remaining slides in our presentation.

Turning to Slide 5, the company's tax equivalent net interest income for first quarter of 2008 was $704 million, up $4 million from the same period one year ago.

For the first quarter of 2008 our net interest margin was 3.14%, down from 3.50% we reported for the same quarter a year ago and 3.48% we reported in the fourth quarter of 2007.

As we discussed in our earnings release today, our margin for the first quarter was impacted by the lease accounting adjustment we incurred to increase our reserves associated with tax benefits on certain lease in, lease out transactions.

This adjustment reduced our taxable equivalent net interest income by $34 million and reduced our reported net interest margin buy approximately 15 basis points.

On an adjusted basis our margin would have been 3.29% for the first quarter of 2008.

Our expectations for the net interest margin is for to it remain in the 3.30% range during the current year as the company benefits from a modest liability position and better spreads on new lending arrangements.

These benefits are somewhat offset by elevated nonperforming asset levels and continued competitive pricing pressure for deposits.

Slide 6 highlights the changes in non-interest income between the quarters shown.

I'll make a few comments with respect to some of the line items shown from this slide.

Our trust and investment management revenue in the first quarter of last year included $16 million of revenues associated with our former McDonald Investment branch network which we sold in February of 2007.

Excluding this revenue from the prior year amount, trust and investment management fees were up $20 million or 18% in the first quarter of 2008 compared to the same period one year ago.

This is a very strong showing for both our Community Banking and the Victory Capital Business in National Banking.

Looking at line items or investment banking and capital markets income, net gains and losses from loan securitization and sales and net gains from principal investing all were impacted in the current quarter by the continued disruptions in the capital markets.

In total, these three line items were down 166 million from the same period one year ago.

The decline in fee revenue was offset by the $165 million gain we realized on the redemption of a portion of our shares we hold in Visa which completed its IPO in March.

As Henry mentioned, we believe we have now significantly reduced our risk going forward by hedging our remaining exposure for both interest rates and credit spreads in our commercial real estate loan held for sale.

Also, due to the continued uncertain conditions in the student loan securitization market we made the decision to move substantially all of our held-for-sale student loans to the loan portfolio in the first quarter of 2008.

Turning to Slide 7.

Total noninterest expense is well controlled.

The steps taken last year to review our expenses have contributed to the success in controlling the growth of our total non-interest expense.

Compared to the same period one year ago, total noninterest expense declined 52 million.

Of this decline, the divestiture of the McDonald branch network represented $27 million and the provision for [unfunded] commitments accounted for 19 million.

Also included in this year's first quarter are $19 million of non-interest expense associated with Union State Bank and tuition management systems acquisitions of which approximately $3 million of amortization of intangibles and additional $1 million is for restructuring costs.

Turning to Slide 8, average loans from continuing operations $7 billion or 10.7% from the same period last year, and $3 billion dollars compared to the fourth quarter of 2007.

Included in first quarter balance were approximately $1.5 million of loans from the acquisition of Union State Bank.

Adjusting for these balances, average total loan balances increased approximately 8% one year ago and (inaudible)% annualized from the fourth quarter of 2007.

Our outlook for average total loan growth in 2008 remains low to mid single-digit range adjusted for both acquisitions and the transfer of the student loan portfolio from a held-for-sale status due to loan portfolio.

Turning to Slide 9.

Average core deposit balances were up $2 billion or 4% compared to the same period a year ago.

Included in this year's balance is approximately $1.7 billion of core deposits associated with Union State Bank acquisition and included in the prior year balances were approximately $700 million of average core deposit balances associated with the McDonald Investment divestiture.

Net/net, the growth in core deposits adjusting for these two items was approximately $1 billion, or 2%.

Competition for deposits in our markets remain strong and the consumer and consumer preferences during the past quarter shift more to certificates of deposits as a result of the declining interest rate environment.

As we ended the second quarter and begin our marketing campaigns for deposit, our expectation for core deposit growth remains in the low single-digit range in 2008 as we balance growth versus rates paid for these funds.

Slide 10 shows our asset quality summary.

Net charge-offs in the quarter $121 million, or 67 basis points, compared to $119 million, or 67 basis points, in the fourth quarter of 2007 and $44 million, or 27 basis points for the same period one year ago.

Nonperforming assets at March 31, 2008, totaled $1.115 billion and represented 1.46% of total loans and other real estate owned and other nonperforming assets.

This compares to $764 million or 1.08% at December 31, 2007.

We continue to see migration of credit in the residential property segment for commercial real estate construction portfolio during the first quarter and other portfolios with director input linkage to residential real estate construction.

Our expectation is that nonperforming assets and net charge off levels will continue to remain elevated throughout 2008.

We have provided additional schedules in today's presentation showing a breakdown of our commercial real estate portfolio and our home equity portfolio.

Our total exposure to residential real estate continues to decline and continues to decline in the first quarter versus the fourth quarter of 2007.

The total loan loss reserve at March 31, 2008, was $1.298 billion or 1.70% of total loans.

And our coverage ratio of our allowance in nonperforming loans was 123%.

We have updated our outlook and expanded our range for potential net charge-offs in 2008 to reflect both the continued migration of credit and the transfer of student loans to the loan portfolio.

Our updated range for net charge-offs of 65 to 90 basis points for the full year.

Looking at Slide 11.

The company's tangible capital, the tangible asset ratio was 6.85% and our tier one capital ratio was 8.09% at March 31, 2008.

Our targeted ranges for tangibles and tier one ratios are 6.25 to 6.75% and 7.50% to 8.0% respectively.

Our capital ratios improved in the quarter and we believe these ratios will compare favorably to our peer group.

During the first quarter we did not repurchase any of our common shares.

We did reissue 9.9 million shares for the (inaudible) Bank acquisition and 1.4 million shares under employee benefit plans.

At March 31, 2008, we had 14 million shares remaining at the current board repurchase authorization.

We do not anticipate share repurchase activity during the second quarter of 2008.

Slide 12 is a summary of our updated outlook for selected line items for the calendar year 2008.

Now that concludes our remarks and now I'll turn the call back over to the operator to provide instructions for the Q&A segment of our call.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question of the morning will go to Gerard Cassidy of RBC Capital Markets.

Please go ahead.

Thank you and good morning, guys.

Can you tell us what your Visa unrealized gain is for the shares that you still own, but I think are limited, all the owners are limited on their ability to sell them over the near term?

Jerry, this is Jeff Weeden.

I think it's a little bit difficult to determine exactly what the unrealized gain would be based on the restriction that is are out there.

I think for the most part what was redeemed plus what was put into the escrow balances would represent what we have remaining of about 47, 48% of the original amount.

This is Henry.

I've been told that the phone is going in and out, that it's not just a bad connection wherever you are, that we may be having a little trouble on the line.

We apologize for that, but we are aware of it.

The other question I have is, I may have missed it, but on the transfer of the student loans into the held to maturity portfolio, what was the loss that you took on that transfer?

We transferred those loans over at our cost and then also increased our reserve allocation associated with those loans at the end of the quarter.

Out of the 3.3 billion or so, was that $0.98 on the dollar that you transferred, the price that you transferred them at after the reserves?

They were transferred at par and then a reserve was established.

They were transferred at 100 par but because we added to our loans, our formula we also added to the reserve specifically because of the addition of that 3.3 billion.

Oh.

Okay.

Got it.

How much was that reserve?

You can see from the subsidiary or the line of business reporting that within the national consumer business there was additional provision that was taken well above the net charge-offs for the quarter.

So without giving you a specific number, it's fair to say it was in the $50 million range.

Great.

Great.

And then finally you had good commercial loan growth in the quarter in the high single digits but you're still kind of guiding for the full year to be low single to mid digits.

Can you maybe give us some color why you think you may actually see a slow down in the rate of growth in commercial lending this year?

I think Tom Bunn may comment on this in just a second but in terms of how we also look at it part of it is we slowed down our originations associated with commercial real estate and we expect that that will continue into the second, third and fourth quarters of this year.

We may also, of course, look at actually having those balances trend down as we look at specific perhaps loan sales later on in the course of the current year.

Jerry, this is Tom.

Secondly, you have the U.S.B.

numbers which skewed first quarter a little bit.

We have about $550 million in real estate loans that came over from a U.S.B.

acquisition which would skew the IPT numbers on average $530 million for the quarter.

The, we are also seeing a reduction, not a reduction but a slowing in growing of the institutional side commitment.

And so, therefore, as we look at the economy we just don't think there's going to be as much demand as there was due to some of the market conditions in the fourth quarter and into the first quarter.

Thank you.

Our next question will go to Mike Mayo at Deutsche Bank.

Please go ahead.

Good morning.

Good morning.

Could you just comment more on the NPA increase, where it's coming from and charge-offs are flat and NPAs are going up, do you expect that to continue, just more comment on credit quality, please?

This is Chuck Hyle speaking.

I think it's fair to say that the majority of the increase in the NPA category is coming from commercial real estate specifically and the residential part.

It's a continuation from what we saw in fourth quarter.

I would characterize it by saying that we continue to see some additional degradation in the portfolio, particularly in southern California.

We get updated appraisals with regularity and so we have seen some continuing decline there.

The other phenomenon we've seen as a bit of a geographic migration, again entirely attributable to the residential part of the commercial real estate portfolio and we've seen it migrate to a couple of other markets, particularly Arizona and Nevada, although we are considerably less involved there.

So I would say that the California decline and a bit of migration would account for the vast majority of the increase in the NPLs.

We have seen a little bit of increase in the leasing portfolio and we have seen a modest increase in dealer floor plan in the NPL categories and that really accounts for virtually all of it.

Okay.

So when you say commercial real estate that's residential related, how would you define that, so we're taking home builders?

Are we talking loans for condos and land or what would you include in that list?

All of the above but it's primarily focused again focused, again, southern California and single-family construction, land and A&D, our Florida portfolio which is the other hot spot would be more condo and again, as we said before, we feel that our condo portfolio while some of it is NPL, we feel the loss content of that portfolio is still relatively modest.

The single-family part is really the part where we see the loss content.

But that's how we would define it.

We wouldn't include single-family and condo and land associated with the residential.

If you add your total exposure to commercial real estate that's somehow residential related, home builders, single-family, condo, how large is that portfolio now?

That would be about $3.4 billion.

Come down modestly from fourth quarter of last year.

That's masked a little bit by an increase of about 200 million from the U.S.B.

acquisition, but it's down a little over 100 million.

So the kind of generic size of the portfolio has come down about 300 million from the fourth quarter across all geographies I might add.

Of the 3.4 billion how much would be in kind of higher risk markets like California, Florida, Arizona and Nevada?

Florida would be about 588.

California would be about 670 million.

And I might add that if you looked at the NPL numbers, about 677 million of our NPLs are in this commercial real estate residential category.

And of that number, 63% are in Florida and California, California being the largest.

The next two states would be Nevada and Arizona, at 13%.

So three-quarters, 76% of those NPLs are from those four states.

The rest of it would be over a range 13, 14 states, mainly states that are outside of our footprint.

Do you disclose how much you reserve for that 3.4 billion.

No, we do not.

Okay.

And I guess what -- it's all leading to where do you think NPAs go?

I guess you increased your guidance for charge-offs by 20 basis points on the high-end.

Do you expect NPAs to go up a similar percentage or how should we think about that?

Visibility is pretty difficult but I would say that we do expect NPAs to go up in second quarter maybe the end of the third quarter, it's a little difficult to predict.

We are going through these loans loan by loan.

We think we have a very good handle on what's going on out there.

But with the economy where it is and lots of uncertainty out there, it's a little bit difficult to predict.

We think that, I guess what I would say is that the additions of NPL decelerated towards the end of the quarter.

Hard to know at this stage of the game whether that's a false gone or whether it's going to be a continuation.

But February was a horrible month in this business.

The deals that we had planned to sell didn't happen.

But we are seeing some that in that, particularly towards the end of March and early part of April.

So we are beginning to see a little bit of activity.

Some sales and a little bit of normality beginning to come back into it.

So again I would say that the increase in NPAs should accelerate in the second quarter but these are very, very hard things to predict.

And then lastly, where all this is leading to, are the problems spreading?

So far it's been a lot of housing related.

I mean, to what degree are you expecting the loan problems to spread?

You mentioned some dealer floor plan.

I guess that's newer?

Yes, and I thing in particularly in the auto sale side of the industry.

But, again, we see very little loss content there.

I would say that coming back to commercial real estate for a second, we have seen virtually no leakage.

The rest of our commercial real estate portfolio outside of the residential piece that I just talked about.

And even within that part, the geographic leakage has been relatively modest.

So we are still quite satisfied with our, the remainder of our commercial real estate portfolio.

As far as the broader portfolio is concerned, we have seen some migration, again in line with the economy.

But other than the sectors that I mentioned earlier, particularly the dealer floor plan, there's nothing particularly material there at all.

All right.

Thank you.

Our next question goes to Matt O'Connor at UBS.

Please go ahead.

Yes.

Henry, your company seems to be in a position of strength versus some of your peers and obviously you are being mentioned quite a bit in the papers regarding some potential acquisitions and specifically on National City.

I know it's difficult to comment on these things, but what can you tell us on your interest level for end market consolidation and anything you care to say specifically on National City?

Actually, Matt, it's not just difficult it's probably inappropriate for me to comment on any specific merger acquisition.

I have said before and I continue with us and others to look at end market opportunities especially in some of the markets where we would admit that we don't have the optimal market share to be as competitive and to maximize our profit generation.

So I think we are going to be well-positioned here if some companies come to the decision that they could be, do a better job for their shareholders and their communities and their clients as part of a stronger company.

And that's been consistent for quite a while.

Okay.

And I guess related question but a little bit easier to answer hopefully.

Obviously there's some dislocation going on.

There's a capital raise.

National City is trying to raise capital or do something.

What are you seeing both in terms of commercial customers and consumer customers in terms of potentially picking up some additional market share?

Well, let me ask Beth Mooney if she would comment on that because there are disruptions in a number of areas on the West Coast and Ohio and a couple of markets and we always view those as opportunities and we are strategically trying to do some things there.

Beth, would you like to comment?

Thanks, Henry.

Yes, Matt.

I would tell you that the first quarter we did see strong loan deposit growth across most of our regions and anecdotally we did see some nice pickups in our Great Lakes regions around deposits and small business customers, and so I would tell you that our pipelines are strong and our business is strong across our franchise.

We did see some stronger growth in the Great Lakes than we've seen in previous quarters.

Okay.

Then just lastly it is a question for both Jeff and Henry as well.

On the capital side, your capital ratios are probably a little bit above a lot of your peers, but does it make sense to raise some additional capital here for some opportunities that might come around?

Obviously the window is kind of open and closed and it feels like at least for a day the window is open.

Well, Matt, this is Jeff Weeden.

We constantly look at forms we have.

The forms of capital we look at would be more in the trust preferred type market.

We continue to look at that or senior debts, sub debt, but to provide bank funding at additional capacity and that's just the normal course of our operations both at the holding company as well as at the bank level.

But nothing specific beyond that.

Okay.

All right.

Thank you very much.

Our next question goes to [Broraf Putincar] at Sinova Capital.

Please go ahead.

Morning guys.

Thanks a lot.

My question has been answered.

Very good.

Thank you.

We'll go proceed to our next question.

This is [Tim Subunya] at OSS Capital.

Please go ahead.

Hello?

Yes, we hear you.

A question on student loans.

Should the market open up for the, ABS market open up for student loan securitization, would you consider student loan securitization as a strategy or is this something moving your portfolio to healthy maturities something that signals a shift in strategy on student loans?

This is Jeff Weeden, I think what we would look at with respect to new originations if we sense that the market would be changing, we may again look at new originations going into a held-for-sale status, but with respect to the other, we made the decision that we are putting it into held-for-maturity classification and we have no immediate plans to change that.

So that's really a decision that we made.

We made that based on the fact that we don't believe the market will be as fluid in the near term as what it was obviously prior to about July of last year.

Thanks.

(OPERATOR INSTRUCTIONS) We'll go next to [Ed Timmons] at Stifel Nicolaus.

Please go ahead.

Good morning, guys.

The margin was a little bit weaker than we expected.

Can you just talk briefly about your balance sheet position as it stands now, how it's changed throughout the quarter and how you're looking at it going forward through the rest of the year?

I think our balance sheet what we've really done, we've tried to continue to reduce risk in the balance sheet in the first quarter by again going through a hedging or remaining positions that we have in our commercial real estate held-for-sale book of business.

And again moving the student loan portfolio to a, from a maturity position.

So with the activities that we have coming up and looking at the deposit initiatives throughout the second quarter here, that will, should help generate new deposit flow and activities.

I think our position and our capital gives us the ability to compete in the marketplace.

And the fact is that we can get spreads at this particular point in time because of where we are positioned and the changes that have happened in the marketplace.

I think customers are finally recognizing the fact, too, that having availability to capital is important and they know the cost of that has gone up.

And with the rates coming down have you seen any slowing in the migration towards time deposits from your customers?

Yes, Ed, we actually see, as you can see in our first quarter financials, a mix shift towards certificates of deposit.

It is clear consumer customer preference in a declining rate environment going to CDs.

We've seen that in prior rate cycles and you add to that given the competitive landscape that that is an attractively priced instrument in the market.

So we continue to see hi demand and competitive pricing and pressure around certificates of deposit.

But as Jeff just mentioned, also in the second quarter we are launching a series of consumer deposit campaigns in addition to certificates of deposits to continue to garner strong transaction counts.

And I guess lastly what kind of demand are you seeing out in the market for distressed assets and did you guys sell anything this quarter?

Do you have any expectations for second quarter, third quarter?

This is Chuck Hyle.

We haven't seen a lot of activity.

As I said earlier February was sort of everything seemed to be locked down, nothing was really trading at all.

A little bit of an improvement in March.

But we know a lot of money is out there, but we haven't seen a lot of transactions.

We sold a very modest amount in the first quarter.

And hopefully the expectation is that as liquidity improves over the second quarter those numbers will go up.

Okay.

Thanks.

We'll go next to a followup by Mike Mayo at Deutsche Bank.

Please go ahead.

Yes, just on the other question about the margin because you guys are liability sensitive and the margin went down and I'm just really trying to understand the industry dynamics taking effect here.

Is it simply the level rates going so low that you have less pricing power on the down side or, just a little bit more color?

Mike, this is Jeff Weeden.

If you look from the first quarter last year we had basically a 9 basis point lease accounting adjustment to the positive.

This quarter we have 15 basis point adjustment to the negative.

That had a dramatic impact obviously on the margins, about 24 basis points of the overall decline.

Also as rates continue to decline you play a little bit of catch up on your consumer deposits so you're adjusting which they lag a little bit on the way down.

Also now as we go into the second part of this year, the last three quarters of the year, we will start to get more benefit associated with our (inaudible) paid variable swap position.

And that's identified.

You can go to the annual report on page 48.

You can see in there there are a number of forward spots that we put in place last year that were to come on board this year as part of our overall AL strategy management approach that treasury and the team knew that there was more of a bias going into last year, coming into this year that rates would be declining.

So to protect ourselves on a declining rate environment we put in a number of those swaps.

Those will start to benefit us as we go through the next three quarters.

Okay.

And then separately, I'm still looking at the commercial segment of the industry and I see the line of credit fees were down quite a bit.

Can you comment more on what you're seeing among your commercial clients.

Also have line utilization levels increased?

In other words, are you seeing signs that your commercial customers are getting weaker?

I think in terms of the loan fees to see -- fourth quarter we had very high levels of loans syndication activities and first quarter we typically go into the seasonal slow time.

This is historical.

You see this year end throughout.

But I think we had much more activity in the fourth quarter than we did in the first quarter.

So that had an impact on that particular area.

We are seeing additional utilization of line and that's as a percentage and that should be normal because new origination associated particularly on the commercial real estate side are down dramatically.

And so you have prior commitments that are out there and are being drawn.

You are seeing that come up while the prior commitments on commercial real estate are obviously are coming, continuing to decline.

New activity is out there but it is not as strong as what it was a year ago at this particular point in time.

When you say prior commitments are drawn down, is that more than what you saw last quarter?

No, I think it's just a matter of without putting new commitments in place, Mike, you just have existing commitments that are being drawn specifically on commercial real estate as the projects are coming to completion and are being filled out.

And these are projects other than what we would be calling the home builder residential property section, we spent a lot of time on earlier in the call.

Mike, this is Tom.

Another thing I would add to Jeff's comments, as long as we continue to have the market dislocation, whether it's capital markets or the private placement market you are going to see more demand coming out of our commercial clients and our institutional clients outside of real estate.

Now I will tell you we are continuing to be very selective about new clients and new commitments because we know that quite honestly demand will continue to grow and I think we can afford to be selective and support our incumbent client base and some really strong new clients.

But I don't think the dynamics of the capital markets are any different than it was in one quarter.

Tom, do you think, in other words you are acting more as an intermediary again, the traditional bank function.

Do you think that sticks longer term or capital markets recover and that business goes back out?

Mike, if I had that crystal ball I would probably be doing something else.

I do --

Are you trying to say you wouldn't be talking to me?

I do think that we don't anticipate a return to normalcy in the capital markets as we look at our business because I think if you believe normalcy returns then you start doing things that would require you to take things to the capital market.

As Jeff said earlier, we assume that the securitization market, the CMBS market and other capital markets will remain challenging and so that's why we are being very selective as to how we use our capital.

All right.

Thank you.

And we'll go next now to Terry Mcevoy at Oppenheimer & Company.

Good morning, just one question if I could.

The $1.9 billion of home builder and condo exposure loans that you put into a special asset management group in the fourth quarter, was it those loans that contributed to the $340 million increase in commercial nonperforming loans or nonperforming assets or was it possibly the remaining $1.5 billion if I use that total value or total number of 3.4 billion?

Terry, this is Chuck Hyle.

I would say that the vast majority of it came from that grouping that we moved into special assets.

Again, a piece of it would be further deteriorations southern California and some is migration.

But I think the theme here is out of footprint, smaller residential builders is really the epicenter of this topic.

We'll go next to John Boland at Maple Capital Management.

Thanks for taking the call.

If I can just get some clarity on your thoughts on two issues.

One, what would be the criteria that you might be looking at should you be doing acquisitions?

What kind of metrics are we looking at there?

And the second would be the following up on the controlling expenses.

Are there any benchmarks or any metrics that you might be trying to get down to, any kind of guidance you could shed there would be appreciated?

I will take the -- this is Jeff Weeden.

I'll take the expense one first.

Obviously we are trying to control expenses.

Our guidance has been low single-digit growth and expenses.

We are continuing to make investments in our Community Bank.

You saw the investments that we are making with respect to branch modernization, new teller platform, new technology and, of course, the amortization associated with that flow through the expense side of the balance sheet -- or the income statement, sorry.

So we are controlling expenses.

We haven't said this is a specific target for any of those particular line items.

As far as criteria on M&A, I think it really has varied and I think from the sense that obviously in today's market capital is going to be an important criteria of any type of transaction that we look at.

And so capital and then returns that we can get going forward.

And I think return thresholds and hurdles probably have gone up as a result of the price of what we would look at for capital in today's market environment.

And I would just tell you that we don't look to just do acquisitions to get bigger.

It's very hard with the charges for any sizeable acquisition to be accretive in that year.

But we would, it would be hard for me to imagine almost never, it would be hard for me to imagine us doing a deal that wouldn't be accretive to our existing shareholders in a very short period of time, meaning outside of that first fiscal year where charges to get things done.

Then to the degree how strategic it is to build in a slow share higher growth market and we participate in some of those, mostly in the Rockies and the Northwest.

We view that differently than we would one in our slower growth marketplaces.

So there is no algorithm that we plug things in and say it's a go or no go.

There are some decision points along the way that involve our judgments.

Okay.

Thank you.

We'll go next to David Pringle at [Wells] Point Research.

Please go ahead.

[Wells] Point.

Good morning, gentlemen, and Beth.

Good morning.

Just so I sort of got it right there were four major southern changes in the quarter, there was 165 million on Visa, the 34 million effect from leasing, 101 million on the loan sales and 27 on the credit for the reversal of the provision in the expense line, were those the four?

David, I think you will see those are four.

There are also included in some of the other categories such as the investment banking, capital markets line item you will see some other negative items as you look at the specifics within that category and there's a detailed portion of the income statement of the press release that will provide that particular level of detail.

In essence, you've got the major line item.

And, Mr.

Meyer, that does conclude the question and answer period for today.

I would like to turn the call back to you for any closing comments.

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