M&T Bank Corp (MTB) 2003 Q4 法說會逐字稿

Welcome to the M&T Bank fourth-quarter 2003 year end earnings conference call. At this time all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. If at any point during the presentation [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mike Piemonte.

Good morning, this is Mike Piemonte. I'd like to thank everyone for participating in M&T's fourth-quarter 2003 earnings conference call both by telephone and via webcast. Hopefully, everyone has had an opportunity to read our news release issued this morning. If you have not read our news release, you may access it along with the financial tables and schedules from our web site www.MA&DTBank.com and clicking on the investor relations link. Also before we start I'd like to mention that comments made during this call may contain forward-looking statements, relating to the banking industry and to M&T Bank Corp. M&T encourages participants to refer to our SEC filings found on form 10-K and 10-Q for a complete discussion of forward-looking statements.

And now I'd like to introduce our CFO -- Mike Pinto.

Thank you Mike, and good morning everyone. Before I respond to questions I'd like to cover a few points from this morning's earnings release. I'll began with a summary of the fourth-quarter, focusing on the changes from the fourth-quarter of 2002 and the third quarter of 2003. Before we get into the financials for the quarter I'd like to point out again that a large part of the variances from 2002 are the result of our merger with Allfirst Financial on April 1st, 2003.

A huge amount of time and effort as well as the conversion and integration (indiscernible) the two franchises and while there's still much to be done results so far have been encouraging. As we get into the details of the quarter we will quantify some of the effects of the merger.

As previously announced, we also began expensing stock options in January of 2003. As a result, net income in the last quarter at 2003 was reduced by $8 million or 7 cents per share compared with $7 million or 8 cents per share in the fourth-quarter of 2002 and $9 million or 7 cents per share in the [indiscernible] quarter.

As we have discussed before, M&T is one of a few companies electing to use the retroactive restatement method. We start (ph) only recognizes expense related to option grants in the current year but also for those options granted in previous years.

This method requires us to restate prior years to include the expense that would have been recognized in those years had the same method been used, so that the numbers are comparable. As a result, all references to 2002 in our earnings release and on this call reflect these restated numbers.

Diluted earnings per share -- which include the amortization of core deposits and other intangible assets and merger related costs -- were $1.35 in 2003 fourth-quarter up 8 percent from the $1.25 in 2002's fourth-quarter and 5 percent higher than the $1.28 in the [indiscernible] quarter.

The amortization of core deposits and other intangible assets amount to 11 cents per share in the third and fourth quarters of 2003 compared with 7 cents per share in 2002;s fourth-quarter. Merger related costs, net of applicable taxes, totaled $2 million in the recent quarter or 1 cent per share compared with $12 million or 10 cents per share in the late (ph) quarter. These amounts represent the after tax cost for professional services, travel, and other expenses associated with the Allfirst acquisition and the related integration of data processing and other operating systems and functions. There were no merger related costs in 2002's fourth-quarter. As mentioned in the earnings release this morning M&T does not anticipate incurring any significant additional merger-related charges.

Fourth-quarter diluted net operating earnings per share -- which exclude the amortization of core deposits and other intangible assets and merger-related costs -- were $1.47, up 11 percent from $1.32 recorded in last year's -- in 2002's fourth-quarter and down 1 percent from the $1.49 in the late (ph) quarter. This morning's press release also contains a tabular reconciliation of GAAP and non-GAAP results including intangible assets and equity.

Net income for the fourth-quarter of 2003 was $167 million up 41 percent from a year earlier and 7 percent from the 156 million in the sequential quarter. Net operating income for the quarter was $182 million, up 44 percent from 2002, and down 1 percent from the 183 million in the linked (ph) quarter. The return on average assets was 1.35 percent in the recent quarter, compared with 1.42 percent in 2002's fourth-quarter and 1.24 percent in the third quarter of 2003.

Net operating return on average tangible assets was 1.57 percent in the quarter, compared with 1.56 percent in 2002's fourth-quarter and 1.55 percent in the third quarter of 2003.

Return on average common equity was 11.77 percent for the quarter, compared with 15 percent in the fourth-quarter of 2002 and 11.37 percent in the linked quarter. The net operating return on average tangible common equity was 28.33 percent for the quarter compared with 25.54 percent in the fourth quarter of 2002 and 30.67 percent in the late (ph) quarter.

The net interest margin in the fourth-quarter was 3.96 percent -- down 32 basis points from 2002's fourth-quarter and six basis points from the linked (ph) quarter. Much of the decline in net interest margin from 2002 was a direct consequence of the impact on the margin of the acquired portfolios of assets and liabilities. Excluding this impact the net interest margin was 4.24 percent or 4 basis points lower than the prior year.

The decline in margin from the sequential quarter reflected the Federal Home Loan Bank of New York not making a dividend payment in the fourth-quarter of 2003 and the [indiscernible] repricing of loans at lower rates.

The end of period loans totaled $36 billion, down approximately $1.4 billion from the third quarter of 2003 -- reflecting the securitization of $1.3 billion of mortgage -- residential mortgages during the fourth-quarter.

Approximately 1.2 billion of these mortgage-backed securities were retained in amities investment securities portfolio. In addition due to a slowdown in origination activity average residential mortgages held for sales declined approximately $260 million during 2003's fourth-quarter.

Total average loans for the fourth-quarter were $36 billion compared with $37 billion in the linked (ph) quarter. Excluding residential mortgages, annualized growth rate in our premerger franchise compared with the linked quarter was one percent in average in (indiscernible) balances, 5 percent in average commercial or mortgage loans and 13 percent in average consumer loans.

Consumable growth again was led by the growth in the order loans and the home equity portfolios. In the acquired portfolios, average loans declined during the fourth-quarter by approximately $500 million. Average commercial loans -- including commercial mortgages -- declined $284 million and average consumer loans, excluding residential mortgages, declined $188 million from the linked quarter. As we have mentioned before, much of this decline was a result of our de-emphasizing certain specialized lending businesses and due to prepayment activity [indiscernible] home equity loan products. Additionally average line usage in the new markets declined during the quarter although committed lines were up slightly.

Turning to credit for the fourth-quarter of 2003 net charge-offs were $32 million, representing an annualized rate of 35 basis points total loans. Although this was up from the very low levels of $16 million or 17 basis points in the linked quarter it compares favorably with $31 million or an annualized rate of 48 basis points in 2002's final quarter.

Once again, net charge offs in the acquired portfolios were insignificant. Provision for loan losses for the fourth-quarter of 2003 was $28 million. For the full year, net chargeoffs were $97 million, up 28 basis points of average loans, significantly lower than $108 million or 42 basis points in 2002.

The provision for loan losses for the full year was $131 million, more than covering chargeoffs for the year and bringing the total allowance for loan losses to 614 million or 1.72 percent of total loans. This compares with the allowance levels of 1.70 at the year end 2002 and 1.67 percent at the end of the linked quarter.

The level of nonperforming loans showed a noticeable improvement declining by $45 million -- or 16 percent -- during the quarter to $240 million. The nonperforming loans ratio declined 10 basis points from the third quarter of 2003 to 67 basis points. Nonperforming loans totaled $215 million or 84 basis points of total loans at the end of 2002's fourth-quarter.

Loans past June [indiscernible] still accruing for $155 million -- this has changed from the 154 million at the end of 2002's fourth-quarter but down $19 million or 11 percent from 174 million at the end of 2003's third quarter.

This category includes $125 million in loans that are guaranteed by government-related entities.

Nonincome trust income excluding securities transactions were $234 million -- up slightly from the linked quarter -- and 69 percent higher than the $138 million in the fourth-quarter of 2002. A $7 million decline in mortgage banking fees from the linked quarter was offset by increases in other categories.

Turning to expenses, operating expenses which exclude merger-related charges and amortization of intangible assets were $354 million, relatively unchanged from the linked quarter, and up 115 million from the fourth-quarter 2002. Most of the increase from 2002 was related to operations in M&T's new markets.

Operating expenses for the fourth-quarter of 2003 included a reduction in expense of $4 million due to a partial recapture of the valuation allowance associated with M&T's capitalized mortgage servicing rights.

This recapture reflected an increase in the value of those servicing rights as a result of higher [indiscernible] mortgage loan interest rates at the end of the recent quarter compared with the end of the linked quarter.

Higher loan rates, generally lower than expected prepayment rates, used to value mortgage servicing rights. Operating expenses in the third quarter 2003 included a similar expense reduction of $12 million. For the full year of 2003, operating expenses included net impairment charges of $2 million. In 2002 operating expense included charges for the impairment of capitalized servicing rights during the three and twelve-month period ended December 31st of $13 million and $32 million, respectively.

Excluding the impact of mortgage servicing rights valuation recaptures, operating expense in the fourth-quarter at 2003 was lower than the prior quarter by $8 million or 2 percent. This improvement was largely due to a $14 million decline in salaries and benefits.

Adjusted to exclude security gains and intangible amortization -- as well as merger related costs -- M&T's efficiency ratio in the fourth-quarter was 53.9 percent compared with 53.2 percent in the previous quarter and 51.7 percent in the fourth-quarter of 2002.

Before we turn to questions let me briefly hit some of the highlights for the full year of 2003 which include the results of three-quarters of our operations in our new markets. Most of these were covered in detail in he earnings release.

Diluted net operatings earnings per share were $5.70 -- up 11 percent from 2002.

Net operating income was $661 million -- up 35 percent from 2002. Net operating return on average tangible equity was 28.49 percent in 2003 compared with 26.71 percent in 2002. For the full year, merger related charges totaled $39 million after-tax or 34 cents per share. There were no merger related charges in 2002.

As I mentioned earlier, M&T does not anticipate incurring any significant merger related charges going forward.

Diluted GAAP earnings per share were $4.95 -- up 4 percent from 2002. Average loans were up 33 percent to $34 billion and end of period loans were up 39 percent to $36 billion. The net interest margin of 4.09 percent in 2003 was down 27 basis points from 2002. Noninterest income was $831 million -- up 62 percent from 2002. Operating expenses were $1.3 billion -- up 44 percent from 2002. Based on these operating numbers and excluding the effects of securities gains, M&T's efficiency ratio for 2003 was 53.6 percent, compared with 51.3 percent in 2002.

Finally, as we mentioned in our press release, we expect 2004 to present M&T and other banks with many challenges. Our estimate of GAAP based diluted earnings per share in 2004 is in the $5.90 to $6.10 range. This estimate of course is subject to many uncertainties, including actual events and circumstances that may occur throughout the year.

We will now open the call up to questions before which the operator will briefly review the instructions.

[Operator Instructions].

Rosalind Looby with CSFB.

Couple of questions for you. First off, with regarding Allfirst you commented that you had run off some loans both consumer and commercial there. Could you comment on the nature of the commercial portfolios you ran off? I know you mentioned in the past, trying to get out of telecom [indiscernible] national leasing, etcetera and just comment on how much more and a much longer we should expect that sort of loan purchase to go on?

I think, Roz, there's no change in the categories of loans that you mentioned. It's all the same -- pretty much the same portfolios and some of the large syndicated loans we have really -- are trying to rationalize those portfolios. I think there's still some to go. There's still some in the maritime portfolio that we might look to get out of in the next quarter but I think the vast majority of that has been done to date.

So maybe one more quarter of this.

Probably. I would guess -- yes.

Changing areas. You are not [indiscernible] deposits on average seemed to drop substantially during the quarter -- my calculation has been about 600 million. Your net deposits were up but your [indiscernible] were down. Is that a reflection of potentially title escrow related deposits [indiscernible] deposits or no?

I think you hit the nail on the head. Last quarter our deposits were [indiscernible] deposits went up, and I kind of said that a lot of that is due to processing that we do for our other entities and the offset to that tends to be in float because what we're doing is we're taking checks in and then sending them out for collections so you can looked at -- if you looked at our average balance sheet and look at the net between noninterest bearing deposits and other assets, you'll notice that the other assets also fell about 600 million.

So and all that would -- I mean, specifically, almost -- there were two mortgage customers that we had whose balances actually dropped about 300 million between the two of them and the related flow from those accounts also dropped about 300 million so the net difference was zero.

Okay. Got it. Back to Allfirst real quick, if I may -- obviously you did the conversion July 4th. There's a reflection of some cost savings in here. Can you comment on the amount of cost savings that's in here either on a run rate basis or percentage basis and comment on when you might expect the full run rate of cost settings to be in the expense numbers?

I think from our perspective we're at the run rate now. We had said that we would be at that run rate at the end of December. And I think we've achieved that target at the end of December.

Ed Najaran with Merrill Lynch.

Ed Najaran with Merrill Lynch. Basically two quick questions. No. 1 can you give us a little further comment on your margin outlook and No. 2 -- you talked about challenges for M&T in the banking industries for '04. Can you just give us some color on terms of the challenges that you, see, specifically for M&T? Thanks.

First of all, on the margin outlook, I think what we're looking at and this is all in context of our economic environment is for the [indiscernible] funds rate to go up between now and the end of the year to 2 percent. So that's what we're looking at and that's pretty much what is in the forward curve right now. And if that happens, then our margins should be in the 380 to 4 percent range. So relatively flat to where it is now is where I'd call it if in fact the Fed [indiscernible] out that way. But that brings us to the second part of the challenges. I think it's becoming increasingly difficult to predict what's happening in the economy.

The unemployment numbers on Friday was a good indicator of that. As you know, job growth was very subdued. Actually there was hardly any to say that the bond market really reacted tremendously to that, sending interest rates much lower. So when we see that sort of activity happen every month or so it becomes increasingly uncertain to predict what's going to happen to rates and was going to happen with the economy. So that's what I'm referring to. It's not -- it's not clear to me that the economy has fully recovered. And until we see the job growth actually materialize, we won't be sure of it. On the other hand our commitments to our customers are up significantly -- the pipeline that we have is up significantly and that's indicating a different sort of environment.

So I guess the uncertainties are the biggest challenge that I see.

Seeking to just a follow-up. You alluded to a flattening yield curve in terms of state (ph) funds going up in terms of your outlook for next year and at least, obviously in the near-term based on Friday's employment data we had declined in the long end of the curve in terms of yield. So is a flattening curve -- does that make much of a difference in terms of your debt interest income outlook?

I wouldn't say it's a significant difference, I mean we are exposed to the yield curve. But it's not very significant. Our estimate is, therefore, 25 basis point change in the yield curve -- in the yield curve spread and [indiscernible] tends to three months.

We -- that has an impact of about $7 million on our net interest income which is nothing, which is less than 1 percent.

Mark Fitzgibbon with Sandler O'Neill.

First question I have for you is on the securitization -- I wondered if you could tell us when you did that during the course of the quarter and what impact if any it had on the net interest margin in 4Q?

Well to answer the first question we did it in November and December -- we did two tranches, one in November and one in December. And the total was $1.3 billion. We kept about $1.2 billion of those securities in our investment security portfolio. So the impact of the margin was negligible.

Okay and then, the second question. I think you had mentioned that annualized loan growths C&I growth was about 1 percent for legacy M&T and 5 percent for the CRE book. I'm wondering -- are there any parts of your footprint that are doing particularly well, that have very very strong pipelines vs. other areas that may not be? And if you could differentiate for us?

If you look at that legacy M&T bank, then I think the pieces that are doing well are the Middle Hudson Valley and towards [indiscernible] New York City and the pieces that are doing (indiscernible)relatively (indiscernible) relatively flat are upstate New York up around Rochester. If you exclude what happened when the [indiscernible] portfolio loan [indiscernible] pretty healthy at a annualized 7 percent rates so there's pretty good loan growth rate in our legacy markets.

And to follow-up on our question of cost savings? Do you feel today that the potential to take more cost out of the Allfirst franchise exists than did when you announced the transaction or foreclosed it?

I think the potential is always there. I think we have to be a little bit careful because Allfirst brought to us several businesses which we didn't have -- especially the cash management and the trust investment businesses. Both those businesses tend to be higher efficiency ratio businesses. So we have to be careful that we don't -- we don't focus too much on reducing expenses but also focus on the revenues that come to us with those businesses. Also the merger with Allfirst takes us to a whole new level in terms of the size of the bank and I think we need to invest more in redundancy and backup sorts of things, which we've never done in the past. So I think when we drive from this merger, we planned that we were going to do that and really not try and cut expenses to the bone. So I guess it's a long way of saying that right now I wouldn't really expect tremendous increases in savings.

What we're doing, however, just on the other side of that -- we've now got good information on each of the businesses in the new franchise as well as the old legacy franchise and we can compare those businesses across the franchises and try and get best practices from both sides, both from the new markets as well as from the legacy markets. So we're trying to do a best practice kind of exercise which we think will give us some synergy going forward.

Bob Hughes with KBW.

Quick question on capital. I noticed your tangible common equity ratios has gotten back close to where you guys have targeted it to be historically. How do you feel about resuming share repurchase at this point, given your outlook which you articulated in your guidance?

Thanks, Bob, for the question. I think we're nearing our target ratio and I wouldn't be surprised if we started buying back shares in the first-quarter.

Jason Goldberg with Lehman Brothers.

With respect to your 590 to [indiscernible] I imagine you spent some time on that I kind of -- you gave us your expectations for the margin. If maybe you could just give us your thoughts on what you're looking for for other income statement items for 2004?

Well I think, clearly, the mortgage fee income is going to be impacted negatively. As we see it right now. However -- I mean what happened with the bond market on Friday kind of changes that a little bit so it's hard to predict. My way of looking at these things, Jason, is that we try and run a business that is diverse enough and diversified enough that when one piece of the business goes down, another piece goes up. So I think what we're planning right now is for pre (ph) income to be relatively flat with mortgage declines mortgage fee declines being offset by good growth in every other fee income category.

And your overall thoughts on overall balance sheet growth?

Balance sheet growth is not going to be too robust. We're planning for mid single digits, balance sheet flow and loan growth. So, again, we're not seeing a significant increase in revenue from our legacy franchise. If you include Allfirst in there, we should get a good boost from Allfirst because Allfirst -- as you know -- was in our both our balance sheet and our income statement for nine months in 2002 and is going to be in for a full year in 2003. So if you [indiscernible] in the numbers then we see low double-digit growth in revenue. And we hope to keep expense growth lower than that and that's how we come to our GAAP estimates.

Adam Barkstrom with Legg Mason.

Real quick, Mike, you mentioned this on the call but I just wanted to clarify. Had to do with the MSR. I guess how much of that -- the allowance was taken back in [indiscernible] and fourth-quarter, I wonder if you could highlight that again. And then, if you could highlight for us, where that the valuation reserve stands as of today?

I believe, in our earnings release, we mentioned that we had taken $4 million into income in -- sorry, we reduced expenses by $4 million due to a reversal of fee allowance and in the earnings release let me just get this -- we mentioned that mortgage services -- the allowance was -- just stay with me a second here -- was $129 million. And the residential mortgage loan service (indiscernible) was $13 (ph) billion.

Brian Harvey with Fox-Pitt, Kelton.

This is actually [indiscernible], I work with Brian. Two questions for you. First, can you comment on your mortgage warehouse and perhaps the impact that origination activity has had on earning assets and in margin? And then, my second question is on the other expense line. Salary expenses were down significantly but other expenses looked like pretty much it's an offset to that. Can you just comment on blank (ph) quarter increase?

[indiscernible] mortgage pipeline is down considerably from the height of second quarter. As I mentioned in my remarks on average the balances are down $260 million from the third quarter to the fourth-quarter. So, obviously, that leads to a decline in net interest income. We typically were making about 4 percent on that pipeline -- 4 to 5 percent so you could say that that impacted on net interest income. Of course we made up in other loan categories.

Secondly, with respect -- what was your second question there?

Comment on the increase in [indiscernible] quarter and an increase in other expenses?

Yes of course other expenses as we mentioned again, the capitalized servicing rights, there was a $12 million reversal last quarter, in the third quarter, and there was only a $4 million reversal in the fourth-quarter so the difference of those two is $8 million.

Right. I guess even accounting for that, it looks like it was up $9 or $10 million [indiscernible] quarter if I am calculating correctly.

I don't think there were any major categories -- it was a typical fourth quarter expense.

Jon Fox with Fennimore.

Thank you Mr. Fox, we'll move on to our next question. Jay Weintraub (ph) with KBW.

You had a nice decline in non-accrual loans this quarter plus the 90 plus were also down. Could you tell us what that was about -- what loan types it was? How that might even broken down between M&T and Allfirst? Also were there any loan sales involved?

None of them were loan sales per se in terms of portfolio sales and most of them were commercial loans that we got out of -- worked out of so the total of that was $40 million. I don't recall there being any significant Allfirst names on the list. But there were mostly commercial -- large commercial loans. In fact the top three loans -- the decline in the nonperforming loans was $20 million just for three loans. And your second question?

That was it, it was all related to the decline in the non-accruals. Also the 90 plus? Was that the same story?

Well the 90 plus includes two categories of loan -- government guaranteed loans that's part of our normal [indiscernible] business and number you'll see go up or go down just because of what we have in the pipeline. We don't -- those portfolios are not at risk because the principle amounts are guaranteed by government agencies.

Right. I know that. Was there anything else in any other part of the portfolio that was interesting?

No. Not to my knowledge, no.

[Operator Instructions]

Jason Goldberg with Lehman Brothers.

Maybe just extrapolate a bit on terms of your interest rate activity. You made the comment that a plus 100 fed fund scenario the margin -- you think the margin (indiscernible) four percent. I guess we're are looking for no fed increases throughout the year. How would your margin behave in that scenario?

I think we're pretty -- with regard to the level of rates we are pretty well hedged. So we don't take interest rate risk, we don't try and make money by guessing where rates are going, so my guess is that if fed funds rate paid [indiscernible] we'd be in the same range.

Jackie Reeves (ph) with Rhinebeck (ph).

[indiscernible] follow-up and is this on your pipeline with respect to loan volume? Could you described maybe a bit more in detail that pipeline up significantly comment with respect to the legacy and the [indiscernible] franchise, the new footprint and whether it's your existing customer base or some new customers?

I think basically it's new customers and its commitment. We follow -- we have a system that tracks our loan commitments and that system shows that during the quarter commitments were up significantly actually from prior quarters. So we saw activity there.

For example, just to give you an example. Total commitment in our commercial and commercial real estate franchises, we estimated at about $700 million at the end of the year and that was the same number at the end of the third quarter was $200 million. And this is a process by as you know most about customers are small middle market customers so this is across the board. And it includes both the Allfirst franchise as well as the M&T franchise. We really didn't have much information on Allfirst before that because we didn't have our system in place. But that's a good indicator in my mind, of course, it'd be even better when they take down those commitments. Because what we've seen at the same time is the line usage ratio has gone down.

What has that gone down to?

There, again, you can look at it [indiscernible] in our existing franchise, it's down to lower the 40s so it's about 42 percent and it used to be up as high as 53 percent.

Ed Najaran with Merrill Lynch.

Just a quick follow-up on your '04 earnings guidance. If you -- look at the midpoint of your range talking about $6.00 or approximately there for '04 -- if you take $1.35 add back a penny, in terms of merger related cost this quarter that's $1.36 annualize that, you're at 544 so you're talking about going up about 10 percent from the fourth-quarter run rate. Nevertheless, you're talking about no margin expansion or even a little more compression, not a lot of balance sheet growth, not a lot of additional expense savings from offers. And just wondering if you could give us some color as to what do you think the key growth drivers are going to be in terms of getting to that approximate $6.00 level for '04?

First off, your math is excellent. So I commend you on that. Then, secondly, basically we're looking at, like I said, about mid single digit growth in our balance sheet and that then flows over to our revenue. And this is the legacy piece excluding Allfirst. And then, we're hoping to keep our expenses on the legacy piece to low single digit so what we're trying to do is get operating leverage so by doing that, we want to boost up our legacy income to about 9 to 10 percent growth year-over-year.

The other piece that you've got to focus on is that Allfirst was there for nine months in 2003 and its 20 in for 12 months in 2004. As I said, previously, Allfirst is now accretive to us so the way we bought them and the way we paid for Allfirst has made their acquisition date [indiscernible] in both third quarter and the fourth-quarter so that accretion helps us again going forward.

Okay. In terms of Allfirst, is there any additional operating leverage there in your mind vs. where we were in the fourth-quarter?

Yes because as I said we reached our run rate savings in December. So it wasn't there for the full quarter -- for the full fourth-quarter.

Kent Usten (ph) with UBS.

First of all on the provision I was wondering this quarter you had [indiscernible] excess in the charge-off with the improvement [indiscernible], just wondering where the unallocated stands right now and if you have any [indiscernible]?

That's a tough question to answer because I don't think we've done all our calculations for the unallocated. We try to keep that more or less flat and the reason why you see our allowance go up and the provision of $28 million was because we securitized those loans -- the residential mortgage loans? They happen to be the least risky loans in the portfolio so when we took them off, we didn't really reduce the allowance a whole bunch for those loans.

Okay, and the second question was just generally speaking -- you talked about one of the reasons for the deposit to be down a little bit because of the escrow balances. Could you talk a little bit about where the deposit trends as far as inflows on the retail side and what you're expecting on that front in '04 as well?

We've been very happy actually with our deposit [indiscernible]. If you look at it over three quarters, second-quarter, third-quarter, fourth-quarter -- you will notice that our deposit growth has been pretty good and especially in the non-interest-bearing deposit category. It just -- in the third quarter it was very high and again, driven by escrow balances and other kinds of accounts where we do processing [indiscernible] and that was offset as I said in the float line. And that's why that came down a little bit (ph) but, generally, we're very happy with that deposit growth. We're seeing good volume in our new markets and in our Baltimore franchise and in the consumer side and we expect deposit growth to be positive next year too.

Okay, so no negative effects from what you can see from either a shift towards markets or towards other types of products?

Not yet, not yet. Though I mean, there's a prediction of that going on all the time constantly but we haven't seen that shift happen right now.

I think for us the most important for a bank like us, a regional bank like us -- the most important market rate is really the money fund rate. I think if that goes up then we'll see some pressure on our money market savings deposit.

Joel Hall with Sandler O'Neill.

I just want to get clarity that the guidance that you provided for '04 is not dependent on any fed moves. Is that correct?

Yes more or less. We (indiscernible) hedged portfolio so we don't believe that we have any exposure to rate to the level of rates. So we feel comfortable.

Okay, we thank everyone again for participating and if there are clarifications of any of the items on the call or the news release, please call our investor relations department at area code 716-842-5138.

Ladies and gentlemen, we thank you for your participation in today's conference. You may disconnect your lines at this time and have a pleasant day.