M&T Bank Corp (MTB) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the M&T Bank fourth quarter 2004 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Don MacLeod, Director of Investor Relations. Sir, the floor is yours.

Thank you, Maria, and good morning. This is Don MacLeod, and I'd like to thank everyone for participating in M&T's fourth quarter 2004 earnings conference call, both by telephone and through the Web cast.

I hope everyone has had an opportunity to read our earnings release issued this morning. If you have not read our earnings release, you may access it, along with the financial tables and schedules from our web site, www.mntbank.com, and clicking on the investor relations link. Also, before we start, I'd like mention that comments made during this call may contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings found on Forms 10-K and 10-Q for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, Mike Pinto.

Thank you, Don, and good morning everyone. Before I respond to questions, I would like to cover a few points from this morning's earnings release. I will begin with a summary of the fourth quarter, focusing on the changes from the fourth quarter of 2003 and the third quarter of 2004.

Diluted earnings per share, which include the amortization of core deposits and other intangible assets and module-related costs were $1.62 cents in the fourth quarter of 2004, up 20 percent from the $1.35 in the fourth quarter of 2003 and 4 percent higher than the $1.56 cent earned in the linked quarter.

The amortization of core deposits and our other intangible assets amounted to 8 cents per share in the fourth quarter of 2004, compared with 11 cents per share in the fourth quarter of 2003 and 9 cents in the third quarter of 2004. There were no merger-related costs recognized in 2004.

Fourth quarter diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets and merger-related costs, were $1.70, up 16 percent from the $1.47 in the fourth quarter of 2003 and up 3 percent from the $1.65 earned in the linked quarter. This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Net income for the fourth quarter of 2004 was $192 million, up 15 percent from a year earlier and 3 percent above the 186 million earned in the sequential quarter. Net operating income for the quarter was $202 million, up 11 percent from the fourth quarter of 2003 and up 2 percent from 198 million in the linked quarter. The return on average assets was 1.45 percent in the recent quarter compared with 1.35 percent in the fourth quarter of 2003 and 1.42 percent in the third quarter of 2004.

The net operating return on average tangible assets was 1.62 percent in the quarter, compared with 157 percent in the fourth quarter of 2003 and 160 percent in the third quarter of 2004.

Return on average common equity was 13.37 percent in the quarter, compared with 11.77 percent in the fourth quarter of 2003 and 13.02 percent in the linked quarter. Net operating return on average tangible common equity was 29.69 percent for the quarter compared to 28.33 percent in the fourth quarter of 2003 and 29.42 percent in the linked quarter.

The net interest margin in the fourth quarter was 3.82 percent, down 3 basis points from the linked quarter and down 14 basis points from the fourth quarter of 2003. The year-over-year decline was due to the cost of funds repricing more rapidly than the yield on earning assets as the Fed raised interest rates over the course of 2004.

End of period loans totaled $38.4 billion, up approximately $450 million from the third quarter of 2004. Average loans for the fourth quarter were $38.1 billion, compared with $37.6 billion in the linked quarter. The loan growth from the linked quarter was mixed. We continue to see steady growth on the commercial side in both commercial and financial loans, as well as commercial real estate.

During the quarter, we reclassified about $130 million of auto loans extended to businesses from consumer loans over to commercial and financial loans. This reduced an apparent 11 percent annualized growth rate in commercial and financial loans to 6 percent and reduces an apparent 5 percent decline in consumer loans to a 1 percent decline.

There continues to be encouraging results from the consumer loan portfolio with home equity lines of credit continuing to grow in double digits on an annualized basis. This is offset by an ongoing weakness in the auto lending generally, as well as the continued runoff of our auto lease portfolio.

The commercial loan pipeline has improved to $1.4 billion at the end of December, up from approximately 1 billion at the end of March and June of this year and 1.2 billion at the end of September. However, commercial line usage declined to 43.5 percent in the fourth quarter, down from 45.3 percent at the end of September, but still higher than the 41.5 percent we saw at the end of 2003.

Credit quality continued to be strong during the fourth quarter. Non-performing loans totaled $172 million at the end of the recent quarter, improved from 181 million in the previous quarter end. The nonperforming loan ratio was 45 basis points at the end of the recent quarter, compared with 48 basis points at the end of the third quarter. The non-performing loan ratio improved by 22 basis points from 67 basis points of total loans at the end of 2003.

Net charge-offs for the quarter were $27 million, representing an annualized rate of 29 basis points of total loans. This was an increase from 50 million, or 16 basis points in the linked quarter, but improved from the 32 million, or 25 basis points, in the fourth quarter of 2003. Provision for credit losses for the fourth quarter of 2004 of $28 million covered net charge-offs for the quarter and increased the totaled allowance for credit losses to 627 million, or 1.63 percent of total loans. This compares with allowance levels of 1.72 percent at the end of 2003 and 1.65 percent at the end of the linked quarter.

Loans past due 90 days but still accruing were $155 million at the end of the recent quarter and at the end of 2003, compared with $140 million at the end of the third quarter of 2004. At December 31st, 2004, this category included $118 million in loans that are guaranteed by government-related entities.

Our interest income was $238 million in the fourth quarter, up 2 percent from a year earlier, but down 3 percent from the linked quarter. The linked-quarter decline is primarily due to the venture capital gain and certain leasing (indiscernible) gains recognized from the third quarter of 2004, partially offset by improved mortgage banking and trading results.

Operating and expenses, which exclude module-related charges and the amortization of intangible assets, was $346 million, down 9 million from the fourth quarter of 2003 and down $43 million from the third quarter of 2004. The fourth quarter results include an approximate $200,000 partial reversal to the valuation allowance for capitalized residential mortgage servicing rights. This compares with a partial reversal to the allowance totaling $4 million in last year's fourth quarter and a $7 million addition to the allowance in this year’s third quarter.

Excluding the MSR adjustments and the 25 million charitable donation made in the third quarter of 2004, we saw reductions in operating expenses on both a year-to-year and linked-quarter basis. Adjusted to exclude security gains and intangible amortization, as well as module-related costs, M&T's efficiency ratio in the fourth quarter was 50.6 percent, compared with 56.4 percent in the previous quarter and 53.9 percent in the fourth quarter of 2003.

Before we go to questions, let me briefly hit some of the highlights related to the full year of 2004. Most of these were covered in detail in the earnings release.

Diluted net operating earnings per share was $6.38, up 12 percent from 2003. Net operating income was $769 million, up 16 percent from 2003. Net operating return on average tangible equity was 28.76 percent in 2004, compared with 28.49 percent in 2003. The figure for 2003 also excludes (indiscernible) charges. Diluted cap earnings per share was $6, up 21 percent from 2003. Average loans were up 9 percent to 37.1 billion and end-of-period loans were up 7 percent to 38.4 billion. The net interest margin of 3.88 percent in 2004 was down 21 basis points from 2003. This was largely due to lower yields on loans and investment securities. Non-interest income was $943 million, up 13 percent from 2003 largely due to the full-year impact of the Allfirst operations.

Operating expenses were 1.44 billion, up 10 percent from 2003, again due to the full-year impact of the Allfirst operations, as well as the 25 million charitable contribution made last quarter. Based on these operating numbers and excluding the effects of the security gains, M&T's efficiency ratio for 2004 was 53.5 percent, compared with 53.6 percent in 2003. Excluding the charitable contribution, the efficiency ratio will be 52.6 percent.

Finally, as we mentioned in our press release, we expect 2005 to present M&T with many challenges. Our estimate of GAAP basis diluted earnings per share in 2005 is in the $6.60 to $6.80 range. Implicit in this estimate is a net interest margin in the range of 3.65 percent to 3.85 percent. Our economic outlook, which was used to build our business plan for 2005, includes a continuous moderate recovery in the overall economy with slow but steady loan growth and stable credit trends.

I also note that forward interest rates, which we use as our interest rate scenario, are indicating a flatter curve than the majority of forecasters are predicting. In light of our modest expectations for revenue growth over the course of 2005, we are planning to contain expense growth for the year as well.

This estimate is of course subject to a number of uncertainties in our assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds during the close of 2005.

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

(OPERATOR INSTRUCTIONS). Mark Fitzgibbon, Sandler.

Good morning, Mike. The first question I have for you is, excluding the MSR and the charitable contribution last quarter, where did the expense reductions come from?

The expense reductions are pretty much across the board. As I mentioned at the last couple of conference calls, we are fine-tuning all of our operations after we have done the Allfirst merger. So we have seen reductions actually in headcounts, we have seen reductions in the salary lines, as well as in the various different expense lines.

And you mentioned I think that your goal for the remainder of this year was pristine expense growth -- is that accurate?

For the rest of this year?

Yes. I thought you had said you expect expense growth to be pristine going forward.

No, contained is what I said. I'm sorry.

I'm sorry -- continued?

Contained.

Contained, okay.

That means we are (MULTIPLE SPEAKERS).

Yes, I know it means. Do you think you can actually drive expenses down from the current level?

I think that is a tall order. If you think about our normal 3 to 4 percent salary increase that we give everyone, I think it's a tall order to actually decrease in expenses. But I think we aim to try and keep them almost flat.

And then the second question I had relates to the buyback. I think you had bought back about 1.5 million shares this quarter. I wondered if you could share with us sort of, A, how you evaluate it; and B, what sort of internal rates of return you are generating on the buyback program?

Well, the way we look at it is that if we have excess capital -- I did mention, for example, Mark, that our tangible equity return is about 29 percent. So if you subtract dividends from that, it comes to about 21 or 22 percent that we can grow our balance sheet without issuing any more stock.

Since the balance sheet is not really growing that rapidly -- our balance sheet accrual is growing in single digits -- we have a lot of excess equity left over. Our philosophy is that we don't keep that equity on the balance sheet. We believe that we should return that equity to our stockholders. So whatever is expensed was used to buy back stock. We kind of try and calculate the internal rate of return, but that is kind of a tough exercise because you have got to estimate, you know, a terminal value on the stock five years out. And it is more meaningful to us to look at it from the other point of view and say that capital cost us. There's a cost of capital. It's about -- we reckon it's about 12 percent. And if we reckon that it's the most -- the common equity is the most expensive form of capital. So if we don't have a return on it, if we don't invest it somewhere, we return it back to our stockholders.

And then lastly, I guess over the last couple of years, you have seen a little bit of seasonal slowness in the first quarter. Is what you're seeing thus far in the first quarter consistent with that?

It's kind of really early in the first quarter to tell. But I did mention that our pipeline was higher than it was at the end of September. So we are seeing some stirring in commercial activity. That's offset by a real slowdown on the consumer side. As rates are going up, the auto lending sector has really slowed down tremendously. So that was our big growth engine over the past couple of years, and that has slowed down and you can kind of see that if you get through the details of the loan portfolios. The consumer loan portfolio didn't hardly accrue. It was fat actually in the fourth quarter and offset the good growth in the commercial loan portfolio. I think right now, we are looking to see the same thing. There obviously are seasonal impacts, but other than that, we feel quite comfortable with the loan growth going forward.

Thanks, Mike.

Heather Lawrence, Fidelity Investments.

Congrats on a good quarter. Just had two quick questions. I didn't quite hear the amount of the MSR impact on the expenses, and I didn't hear the (indiscernible) guidance. I heard the second part; it was 385. I didn't hear the first part.

The MSR during the quarter was immaterial. It was $200,000. And the low-end on the margin was 3.65 percent.

Thank you very much.

Jason Goldberg, Lehman Brothers.

Mike, with respect to your EPS guidance, how does MSR recapture, I guess, factor into that?

We have used a rate environment that has the long end growing only slightly from where it is today, so there's not much reversal of MSR planned in next year’s numbers. It's a small amount.

Okay. And then, secondly, in terms of -- net charge-offs were up I know still a relatively healthy amount. Is that kind of some human cleanup in net charge-off number, or is that kind of a more normal run rate we should expect going forward?

We tend not to think in terms of year-end clean-up, so we take the charge-offs when they occur. I mean, it's not a significant number. The numbers are so low that any one or two items in one quarter will throw the ratio one way or the other.

Fair enough. And then --.

I think a fair thing, Jason, just jump in there to say that we expect charge-offs to be more or less stable next year for the full year. From quarter to quarter, there always could be some noise. But on a full-year basis, we are expected to be the same -- around the same as it was this year.

Finally, you mentioned kind of many challenges that obviously others are impacting as well. In terms of -- maybe you can just comment in terms of the M&A environment. Are you seeing I guess more banks smaller relative to the size of you looking to seek to join up -- join large organizations as the environment is challenging, or not?

I think we are seeing -- and again, this is my opinion -- we are seeing a steady flow of deals come to us. On the other hand, our feeling is that the sellers have very high expectations, in terms of price. And most of the deal flow comes through the investment bankers who -- they come in with books. So I don't know if it's real or whether it's just people trying to drum up business. The prices seem to be very, very high at this stage, so -- and the price expectations of sellers. So we don't feel very optimistic, in terms of getting anything that would make sense for our shareholders in the short term.

Great, thank you.

Chris Chouinard, Morgan Stanley.

Good morning. I was wondering if you could talk about the commercial loan growth? The number -- you mentioned the reclassification. That 6 percent growth, could you talk about regionally if that applies across your footprint, or if one region was stronger than the other? And then if you could just follow up with a similar, any similar color you might have on consumer?

I think it's fair to say that it's across the footprint. I didn't notice any big differences from one area to the other. If you get very micro in our footprint and talk in terms of upstate New York versus midstate, then clearly, there's more volume in midstate than there is in upstate. But the Baltimore regions seem to be pretty strong to some, and I think it was fairly well spread out through the regions. Again, 6 percent is not a dramatic number, so there is hardly any room for major variances between regions in that 6 percent number.

On the consumer side, really, our HELOC is still growing at double-digit rates. So our home equity loan portfolio, our home equity line portfolio is growing pretty rapidly still. Where the slowdown is, is in the auto loan portfolio. As the two-year -- as rates have gone up, we have seen margins in that business that really aren't acceptable to us and we have chosen to kind of hold back a little bit. And I think the volume generally has gone down in that business.

If I could follow up -- on your margin guidance, thinking about that range and what could drive you to one side or the other, one of the things I've noticed is that your deposit costs have been -- your deposit rates seem to be fairly flat to down in some categories versus year-ago levels even still, while some others have -- you're seeing more increases at some other banks. Are you thinking you may have to get more aggressive on deposit pricing over the next year?

Clearly, we'll have to react somewhat to the way rates are going up. Otherwise, we'll lose deposits. But I think there are two factors in there, Chris. The one is that we will -- we don't intend to be the highest rate payer in town on deposits. We compete more on service than price. So we will always lag some of the other banks. I think you'll see the time deposit rates go up pretty rapidly, because that's where we compete. And I think the other important issue is the whole issue of mix, because as we grow our loans and as our loan growth outpaces our deposit growth, we tend to get more dependent on wholesale borrowing. And those wholesale borrowing rates increase rapidly, even though the deposit rate (indiscernible).

That and the fact that the yield curve -- in our base case, we have our yield curve going -- reducing by -- we have the yield curve reducing by 180 basis points. That will put some pressure on our margin too.

And then finally, as long as the Fed keeps raising rates almost every meeting, there is a lag effect on our consumer loan portfolios. So they never catch till the Fed stops raising rates. The best example of that is our home equity loan portfolio -- line portfolio -- where the rate changes based on prime as of the end of the prior month. So there's always like a 45-day lag from the time the Fed raises rates to when the portfolio reprices. That puts pressure on our margins in a rapidly rising rate environment.

Thanks very much.

Adam Barkstrom, Legg Mason.

I want to follow up on Chris's question a little bit, talk about the deposit growth. In the fourth quarter, it looks like it has flattened out to some degree. Maybe you could talk about the environment out there. How competitive do you think it is and how you see that going forward?

I'm sorry, Adam, I didn't catch the first part of your question.

Just talking about the competitiveness of the deposit environment. Wondering if you could give us a little more color on that, what you see for that in '05?

I think we are going to see much more competition. I think right now, the real competition is with money funds. If you look back over the past two years, rates on savings accounts have exceeded the rates on money market mutual funds, and that relationship has switched around now. And so you are seeing a lot of the money that was part in bank money market savings accounts that's quick to run back to money market mutual funds off of the brokerage houses. So that's going to be the first wave.

And then, I think many banks are in the same position, in the same position of having paid or having had losses on their deposits where they paid over the Fed fund's rate for the past two years. And I think you'll see a lot of effort to lag those rates on the way up, to get back some of that margin that we lost in the past two years.

So we're not seeing -- just sum than that up with, we will constantly see competition in every market that we operate in, but we're not seeing competition from the big players. We tend to see competition from those players who have very small market shares in each of our markets.

I may have missed this on the call, but you're talking about some of the detailed expense line items. First question -- again, I apologize if I missed this -- but on the compensation investments line, what was the driver on a linked-quarter basis to push that number down so much from third quarter?

First of all, there's a day effect, so there is number of days worked from third quarter to fourth quarter. You have to look at that, because the expenses spread over the number of days.

Secondly, we also reduced our headcount. As we go through and start looking at places where we can get more efficient, we have reduced our headcount somewhat. And those are the main things that I can think of off the top of my head on the salary and benefit line.

On the headcount, like from what to what? How much of it was reduced?

I don't have those numbers.

Okay. Going forward, can we sort of use the fourth quarter numbers? If we kind of stabilize these numbers now, is this kind of a good run rate number going forward?

Well, let me say a couple of things. First of all, there is a seasonal increase from the first quarter. I mean, for example, just take one example in the benefits area -- FICA. FICA is -- you know, in the fourth quarter, is really low because you have already hit the limit on the Social Security taxes. So that comes back; that counter gets set back to zero in the beginning of the year. So there's that. There's the annual raise cycle, which comes in in the first quarter and medical benefits and things like that, which -- I think seasonally, the first quarter tends to the higher on the compensation side.

Okay, but I guess what I was trying to get a sense out of, I mean, you talk about the third quarter over third quarter headcount reduction, etc., that we've pretty much leveled that out, it sounds like. And we should see fairly normalized expenses, although seasonably higher for first quarter. Is that an accurate recount of what you're saying?

I get very uncomfortable, Adam, when you talk about quarter to quarter, but I can say that on a year-to-year basis, you should see that. Quarter to quarter, there are so many things that cause noise. So I try to avoid predicting any one quarter.

Gotcha, great, thank you.

But I think over the year, that is a good observation.

Okay, thank you.

Ed Najaran, Merrill Lynch.

Good morning, Mike. My question has been answered. Thanks.

Bob Hughes, Keefe, Bruyette & Woods.

Mike, you mentioned that 2005 obviously is kind of present a number of challenges, but your guidance reflects growth of I believe 10 to 13 percent or so, which doesn't sound that bad to me. I missed your comments on your expectations for loan growth in 2005. If you could just review that quickly, that would be helpful. And then secondly, how does buyback play into your expectations for 2005? Are you comfortable buying back stock at a similar pace at these levels?

You missed my comment on loan growth, because I didn't make a comment on loan growth. But now that you ask, I think the way we look at it internally, we see loan growth in the mid-single digits that were, again, driven largely by commercial loan growth with consumer lagging. But all (MULTIPLE SPEAKERS).

Aside from the home equity?

Apart from the home equity. But you see, we have a pretty big auto portfolio and the runoff on that portfolio is pretty strong. So, unless we originate, we -- that portfolio keeps going down. So I think that is going to offset any growth in the home equity loan -- HELOC area. So, fair to say, we are expecting more from mid-single digit loan growth.

The second piece really feeds off the first. If we see mid-single digit loan growth, I mean, the way we manage our capital is, first of all, we look for intrinsic growth that meets our hurdle rates. If we don't see that, we are going to buy back stock. So if we see mid-single digit loan growth and, hence, mid-single digit balance sheet growth, we'd probably use the excess capital generated to buy back stock. That would be our plan.

Great. And just one follow-up on the auto. I know you guys pulled back on the reins in the indirect auto space a couple of quarters back. Are you seeing continued pricing pressure there, given auto sales overall? Do you see competitors maintaining the pedal to the metal, so to speak?

Yes. We always see that. Whenever the rates change, we tend to change our -- we tend to look at our rates very dynamically. So as the environment changes and rates go up, we tend to see people don't change rates as often as we do. So, yes, we do see people taking people that we wouldn't take, at rates we wouldn't take.

Great, thanks a lot, guys.

Brian Harvey, Fox-Pitt Kelton.

Just had a few questions here. My first one is just on the mortgage. Can you maybe give us some numbers about production, pipeline and just any sense on business on maybe gain on sales margins?

Yes. The pipeline -- the actual production of loans closed during the quarter were actually higher than the previous quarter, about $1 billion plus. The pipeline was about $1 billion again, and the applications are down about at a 5 percent rate from the third quarter.

And competition-wise on the pricing side -- has it gotten much worse?

I don't share that, but I don't know for sure.

The other couple of questions -- you mentioned the venture capital gain from last quarter and residual gain. How much was that -- the delta -- quarter to quarter?

The venture capital gain which we disclosed last quarter was $5 million. That was a onetime obviously. And then we had a couple of lease terminations and sales, which I think the number was again in that $5 million range.

Just last question. You mentioned a number of challenges in '05. Can you talk about some of those and what you think the biggest risks are from your perspective?

Two things, really. First of all is the whole economic environment and what happens (indiscernible). I think that we in our forecast have put in some flattening of the yield curve. If the yield curve flattens much more than that or even in (indiscernible), then I think that is going put pressure on the margins clearly. So that is a risk.

The other thing -- overall, we don't see a rapid revenue growth. So I mean, the revenue growth we see next year is lower than what we saw this year, and this year was lower than what we have seen in the past. That makes for a very challenging environment because then if you don't get the revenue growth, you've got to really focus on the expenses. So that is what I mean by that. And if that revenue growth slows down even a tad from where we see it coming in, that puts all the more pressure on our expense growth.

Is there any contemplation you said about keeping expenses flat for further headcount reductions, or is this -- all the plans are already in place or actions taken?

I think you'll see some more coming through, but there has been upticks. I would say, if we can keep it flat, I'll be happy, the headcount.

Thank you.

Jackie Reeves, Ryan Beck.

Many of my questions have been answered. Could you give us some additional color, with respect to the deposit pricing by market and the competitive pressures that you're feeling out there?

Actually, the way I look at it, the Baltimore market is always more competitive than upstate New York, and that is true for two reasons. One is that it is an attractive growing market place, so you've got competitors all looking to compete in those markets. In upstate New York, we have a large share and the Hong Kong Shanghai Bank through -- has a large share too. So between the two of us, we really don't -- I mean, there's not much competition from outsiders.

In the Baltimore market, you have a lot of small banks coming in, putting up rates out there. You also have Bank of America in both Baltimore and now newly in upstate New York, and they tend to have some rate where they compete with us. So I would say at this page, given the level of interest rates, there is not much differentiation between the markets because the level the so low as it is that there's not much differentiation. But I think overall going forward into 2005, we expect the Baltimore, Maryland marketplace is probably going to be more competitive than upstate.

Also, on the line usage that you mentioned, how it is down on a linked-quarter basis, obviously up versus a year ago, could you give us some additional anecdotal information with respect to what this might -- might you understand from your customer behavior?

I do think we've drawn any conclusions, because it's just a quarter and we're not sure whether that is just these (indiscernible) people showing that their lines are still available at the end of the year. So it is hard to tell with one quarter. So, no, I don't think I could tell you anything more than that, Jackie.

Thank you.

Jack Micenko, Susquehanna Financial.

Most of my questions have been answered, but since I have you on the phone -- in light of the double-digit HELOC growth, have you taken any corrective steps recently to either tighten credit or adjust price or maybe change the geographic focus, or is that not even a concern for M&T at this point? Thanks.

No, I would say it's not a concern. We're very comfortable with the credit we're taking. The portfolio quality is excellent. Our average FICO scores are north of 750 on the originated HELOCs and we're very comfortable doing that. There are hardly any charge-offs in that portfolio (indiscernible). So we are very comfortable, Jack.

Thank you.

K.P. Embrecht (ph), MLP.

This is actually K.C. Amrick (ph). Just one clarification and then one question. Clarification is on -- what was Jackie talking about, that the commercial pipeline is up linked-quarter? I got that part. But the line usage is down? Is that correct?

Yes. I mentioned that the line usage was down a couple a percentage points, from third quarter to fourth quarter.

But the pipeline was up?

The pipeline was up.

Okay, that's interesting. Just a question I have -- a lot of people are talking about the (indiscernible) compression. One CEO of a bank kind of helped put our arms around it at dinner, and he said that when the 10.2 spread breaks 200 basis points, that's bad for banks; but when it breaks 150 basis points, that is when banks start missing earnings. And right now today, it's at 104. So I guess my question is -- when you give your margin guidance of 365 and 385 for the year, does it really depend on the duration that the yield curve is this flat? I mean, one quarter remixing isn't that big of a deal, but the longer it stays down kind of at 1 percent, is that when it really starts to get painful?

Yes, I think that's why it has to be sustained. We already announced (indiscernible) cost have a flattening of the yield curve by about 80 basis points. So I mean, we are taking it down to a pretty flat level already in our forecast. If it goes beyond that, that's going to cause us some pain in our margin for sure.

When you say 80 basis points, you mean an additional 80, so it is like the spread is 20 bits, or you mean 280 basis points?

No. The way I look at it is Fed funds to 10 year, which is different from what you are looking at (multiple speakers) 10 year. So we are taking Fed -- in actuality, we have fed funds going up 1 percent from January to December to a level of 325, but we have the 10-year going up only 20 basis points.

Okay.

So that's the flattening that we see of about 80 basis points.

Okay, thank you very much.

Jennifer Thompson, Oppenheimer.

Could you give us any more color on the sensitivity of the balance sheet asset liability sensitivity at the end of the quarter? And also, just the trend -- if you can give us the trend in the margin over the past couple of months?

Jennifer, the balance sheet positioning hasn't changed much. We don't take position. We try to limit the amount of variable in net interest income. So I would say we are pretty well hedged going into the year. We don't have any outside solutions one way or the other.

So pretty neutral right now?

Pretty neutral looking forward. The margin trend is -- has been down slightly quarter to quarter. It was down 3 basis points from the third quarter to 382. And again, the guidance that we gave was for 365 to 385. So I would expect the margin to decline going into next year.

Okay. And could you just give us the level of unrealized gains or losses in the held-for-sale portfolio at the end of the period?

I think it was a small number on -- $15 million is what I want to say, but I'm not sure. I'll get Don to call you back with the exact number. It was a small number -- 15 million in gains, or something like that.

Great, thank you.

Ken Usdin, Banc of America.

Two quick questions for you. First of all, deposits continue to grow maybe 5 percent linked-quarter annualized, but the deposit service charges line was down sequentially. I was wondering if you could just talk us through the dynamics of that?

Quarter-to-quarter, there's too much seasonal things to worry about. So I wouldn't focus on that, Ken, so much. I think you should expect that service charges would grow at the same level as deposits. The only exception to that is on the demand side, on the commercial demand side. As those balances have grown, the earnings credit that they earn goes up and the actual cash fees go down. So there's an inverse relationship between the deposit growth and the fee growth, only on the commercial side.

So you're just getting paid a different way?

Yes, through balances. If you look at the DDA line, I believe our DDA growth was around 8 percent. So that's pretty robust growth. And that kind of -- that puts pressure on the commercial side on the fees. Sorry.

Just to clarify, when you're talking about 365 to 385 for the margin, is that the full-year expectation, or does that also include where the quarterly kind of movements could go to?

Sitting here, the way I look at it is I expect the full-year margin to be somewhere in that range. But, clearly, if you look at a quarter -- as I said before, I find it very difficult to focus on it quarter by quarter because there's so much fluctuation that can happen in each quarter. But on an annual basis, we expect it to be in that range.

Okay, great. And then the last thing, just to follow on that one more point, is just that -- in that same light, then, I guess on a quarterly basis, you are not so -- is it possible that you do have downswings in absolute dollars of net interest income, based on the margin overcoming balance sheet growth, or do you expect that of the course of next year, that balance sheet growth should still overcome that?

Well, I would hope that we don't have any downward net interest income, but -- and we don't plan it to happen, but you know, it could (indiscernible).

Thanks very much.

Jerry Cronin (ph), Sandler O'Neill.

I was just wondering if you could disclose what the held-for-sale portfolio was at the end of the year?

The held-for-sale, or the available-for-sale?

The mortgage loans held for sale.

I think that pipeline, the mortgage held-for-sale, was about 790 million. If you give me a minute, I'll just look it up right here.

Sure, thank you.

The held for sale was -- residential was $790 million.

790 -- great, thank you very much.

At this time, I would like to turn the floor back over to Mr. Don MacLeod for any closing remarks.

Thank you, Maria. Again, I'd like to thank everyone for participating today. And as always, if any clarification of any of the items in the call or the news release is necessary, please call our Investor Relations Department at 716-842-5138. Thank you.

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