美國合眾銀行 (USB) 2002 Q3 法說會逐字稿

Welcome to U.S.

Bancorp's third quarter 2002 earnings conference call.

Following a review of the results by David Moffett, U.S.

Bancorp's Vice Chairman and Chief Financial Officer, there will be a question and answer session.

To ask a question, press the one on your touch-tone phone and press the pound key to withdraw.

This call will be recorded and available for replay beginning today at 6:00 p.m. eastern through Tuesday, October 22nd at 12:00 midnight eastern time.

Now I will turn the conference call over to Matt, Senior Vice President of Investor Relations.

Good afternoon and thanks for joining us today.

If you have not yet received air copy copy of our earnings release, it is available under the financial and news release section of our website at www.usbank.com.

Before we begin, I'd like to remind you about the forward-looking statements we're going to be making today during the conference call.

They're subject to risk and uncertainty, factors that could change our current forward-looking assumptions are detailed in the press release.

Now I will turn it remember to David.

Welcome.

This is David Moffett, vice Chairman and Chief Financial Officer of U.S. Bancorp.

Today we recorded third quarter operating earnings of 47 cents per share on a diluted basis, up 45 cents a share in the second quarter of 2002 and one cent better than the First Call consensus estimates.

We remain confident with full year diluted earnings per share of $1.84.

During the quarter, we recognized approximately $118 million in mortgage servicing rights impairment due to the low-rate environment.

Offsetting the impairment charge, which we book as intangible amortization expense or investment portfolio gains of $119 million.

This is consistent with our past practice of using security gains to offset mortgage servicing right impairment.

Excluding the gains and MSR impairment, third quarter preprovision operating income grew 1.1% from the second quarter of 2002 as total revenue grew 2.8% and non-interest expense grew 1.2% this was the second straight quarter of double-digit annualized link quarter revenue growth.

Excluding portfolio gains, the business lines achieved the following link quarter gross rates in revenue.

Payment services increased revenue 8.6% in the third quarter and 6.9% in the second quarter.

Consumer banking increased revenue 5.8% in the third quarter and 6.2% in the second quarter while wholesale banking increased revenue 4.8% in the third quarter and-- 9% in the second quarter.

Reflecting recent declines and market valuations and asset management saw revenue declines of 2.2% in the third quarter but grew revenue 2% in the second quarter.

And reflecting weak investment banking activity, Capital Markets saw revenue decline 15.9% in the third quarter after growing 11.3% in the second quarter.

These business line growth rates result made consolidated annualized link quarter revenue growth, excluding the investment portfolio gain of 11% in the third quarter and 19.4% in the 2nd Quarter.

Net interest income increased 3.1% or 12.5% annualized primarily due to earning asset growth driven by higher levels of investment securities and retail loans, partially offset by lower commercial loan balances.

The net interest margin increased two basis points from the second quarter of 2002 to 4.61%.

This is primarily driven by high levels of non-interest bearing deposits, offset by higher investment portfolio balances at lower spreads.

We expect the net interest margin to decline modestly in the fourth quarter, due primarily to declining yields on the investment portfolio.

Excluding the investment portfolio gains, third quarter non-interest income increased 2.3% or 9.3% annualized in the second quarter of 2002.

Despite a $44 million decline in market-sensitive revenues.

Again, excluding the investment portfolio gains, consumer banking fee revenue increased 13.7%, driven by mortgage banking revenue and deposit service charges.

The payment services fee revenue increased 8.8% as all four operating units, card services, corporate payment services, Nova and transaction services grew revenue in the quarter.

Wholesale banking grew non-interest income by 5.4%, driven by cash management fees.

Private client trust and asset management saw fee revenue fall 3.3% as trust and investment management fees declined $9 million due to lower markets valuations and seasonal tax preparation fees, offset by net account growth, which netted $5 million in fees during the quarter.

Fee revenue in Capital Markets fell 19.4%, primarily due to weak banking revenues.

Third quarter non-interest expense, excluding the impact of mortgage servicing rights impairment increased 1.2% or 5% annualized over the second quarter of 2002.

Of the approximate $18 million increase, $10 million was related to a change in the expected long-term rate of return on the company's assets.

We have reduced the expected long-term rate of return for 2002 plan year 100 basis points to 10.9.

Assumptions for the 2003 plan year are currently under review and while we anticipate metering our 100% allocation to equities, a further reduction in the expected long-term rate of return is likely.

The remainder of the increase and expense is spread throughout numerous categories, including marketing, legal, communication and occupancy expense.

Retail loan growth remained strong as average balances for the third quarter increased an annualized 10.5% from the second quarter of 2002, due to continued growth in home equity, retail leasing and installment.

Average commercial and commercial real estate loans declined from the second quarter of 2002 while loans in the conduit declined $603 million.

Third quarter 2002 average increased an annualized 23% from the second quarter of 2002, reflecting the rate environment as well as successful deposit initiatives.

Savings now and money market accounts increased 3.2% during the quarter.

High rate time deposits less than $100,000 continued to be replaced with lower cost wholesale funding.

As we indicate made last quarter's conference call, non-performing assets increased $197 million during the quarter due to communications, cable, manufacturing and highly leveraged enterprise value exposures.

Non-performing assets of September 30th, 2002, were $1.3 billion or 116 basis points of loans.

We continue to remain cautious regarding the economy, with the manufacturing sector remained a particular concern.

We expect non-performing assets to remain under pressure over the near-term, but view the outlook to be manageable within the context of our earnings power.

Net chargeoffs totaled $329 million or 1.14% of average loans in the quarter.

Essentially unchanged from the last two quarters.

Retail net chargeoffs declined for the third consecutive quarter and delinquencies remain stable.

Commercial leasing net charge-offs declined 34% in the quarter, reflecting improvement in the trucking sector and improved collection efforts.

These improvements were offset by higher net chargeoffs on commercial and commercial real estate loans as weak business conditions continue in the manufacturing sector and the economy in general.

Assuming no further deterioration in the economy, we expect net chargeoffs to remain at current levels until the economy gains strength.

Again, we stretch as being very manageable within the con of our earnings power.

Our asset cover ratios remain strong at 204% at September 30th.

At for credit losses to period loans at September 30th was 2.12%.

Our capital ratios remain strong, as well.

We are comfortably above the minimum regulatory targets with a tier 1 capital ratio of 8.1% and total capital ratio of 12.6%.

The tangible capital ratio ended the quarter at 6.1%.

In addition, our profitability measures remain at the top of our peer group with an operating ROA of 2.8%.

An operating ROA of 20.8%.

The company booked approximately $70 million of pre-tax merger and restructuring expense in the third quarter of 2002. $58.2 million related to the first U.S.

Bancorp merger, 7.7 for the integration of Nova and 5.7 for other smaller acquisitions.

We expect $88 million of restructuring expense in the fourth quarter related to the integration of Firstar and U.S. Bank.

That will be the last of it.

No expense in 2003 related to the Firstar merger.

We will have expense related to other, smaller acquisitions, but the numbers won't be as material going forward.

Finally, let me update on the integration of Firstar U.S.

Bank one last time.

We are done.

The most remarkable aspect of the integration is it was unremarkable.

Our employees made a great job making sure the acquisition had no impact on our customers.

That's what we did.

What does it mean now that we're done?

We will list a few things.

We have one deposit system.

We have one technology platform.

We have common business application systems.

We have one branch automation systems.

We have one financial system, one set of credit policies, one set of underwriting standards.

One audit and risk management process.

Common business models.

Common product sets.

Common pricing models and now we have one brand.

And we have one objective, which is to consistently grow high quality earnings.

We have a tremendous franchise in high growth excellent distribution and unique mix of businesses.

With the integration behind us, we will use your advantage in the five-star service to achieve these objectives through organic revenue growth and increased operating leverage.

This concludes my prepared comments.

I will now take questions from institutional investors and analysts.

We will take your first question from Judah Kraushaar with Merrill Lynch.

Go ahead.

Hi, David, how are you?

Hi.

A couple of thing I wanted to explore.

The pickup on low-cost deposits on a link quarter basis, looking at DDAs and MMDA sars, looks like you're an liesing at 11% growth rate.

Is in any seasonal distortions in here, versus how much you're attributing to the conversions being done?

And can you comment on the expectations for the next year in the growth there?

Thank you, Judah.

First of all, we have -- I think we state made our last conference call that beginning in April we really began to focus basically long-term what our deposit growth rate and initiatives should be.

As we talked a lot before, a lot of the time we spent focusing on the integration.

We had a number of initiatives in both consumer banking and commercial banking.

Number one, we decided to raise our pricing targets in selected markets, both on the consumer side.

We introduced a number of new products into selected markets in the checking area.

Number three, we've had a tremendous campaign in the government services, particularly the municipal deposit area, where we've had great success with local, state municipalities.

Our expectation is that we have to grow deposits.

And in order to be a viable regional bank, you to continue to grow core deposits.

I will tell you, our focus has been and continues to be on the core checking account because we believe from that checking account comes all other services and as you know, our branches are designed to sell multiple products across the range of different products, but the deposit is key.

We will and we do expect to have deposit growth next year, we have plans in place to substantially fund marketing, advertising incentive and pricing campaigns throughout all the markets.

We have a standard set of products and we're now ready to begin to roll those out across the common brand system.

Is there seasonality to it?

Not really.

The second quarter usually has fairly good seasonality related to our government processing business, but I think what we're seeing this quarter is growth as a result of the commercial initiatives, particularly commercial initiatives.

And somewhat due to the rate environment.

Companies are building cash flow, liquidating receivables and conserving cash.

I think it is partly the environment, as well.

To what extent you're trying to integrate non-deposit type services such as brokerage or asset management services and, you know, if we ever get a rebound in equity markets, can you talk about your confidence of getting lots of hooks into your retail customers here on the deposits?

Judah, you know our platform in the branch system is a multi-product distribution center based in -- in a branch.

It ranges from deposit products, installment products, mortgages.

We also have attached to the retail branch system a whole retail brokerage system that sells primarily packaged product like mutual funds and annuities.

We also have small business bankers who market small business products and services, including merchant services in the local markets.

So, the system is designed to bring all the products and resources to bear into the branch and the branch is essentially divided among people with specific product knowledge and their goal is to basically grow the operating income of that branch and all those products at the same time.

So, the system is essentially set.

The business model for the branch system, whether it be in the metropolitan market or the community bank market srkts essentially all established and ready to go.

We're rolling out the model now.

I think you're seeing the benefit of that both this quarter and last quarter.

One last number question.

In the release, core revenue growth year-over-year of 7.4%, that's without acquisitions and mortgage servicing writedowns.

What would be the comparable number year-over-year?

Year-over-year?

Let me get that.

Year-over-year -- expense growth year-over-year on a core basis excluding all the acquisitions would have been .9%.

And operating leverage, any way you cut it?

Yeah, that's exactly right.

Next question?

Once again, if you would like to ask a question, press the 1 on your touch-tone phone.

To withdraw a question, press the pound key.

Once again, if you would like to ask a question, press the 1 on your touch-tone phone.

One moment while we wait our next question.

We will take you next question from the site of Mike with T. Rowe Price.

Go ahead.

Good afternoon, David.

Two quick questions, the first on the increase in non-performers.

The big jump in commercial, I mean you guys cite Adelphia essentially in your release.

Can you give us a feel for how much that added to the increase?

And the second question is you said a couple of times that credit was manageable in the context of the Company's earnings power, are you referring to earnings estimates on the street?

Something different?

I don't think we cited Adelphia, but I think it is known that we have credits at subsidiaries that total about $39 million, both in subsidiaries, but we don't have direct exposure to Adelphia, the parent.

But let me talk about the earnings power.

I think this quarter and last quarter, in our mind, demonstrate the fact that we have and we're gaining tremendous operating leverage and synergies out of this company.

And what we're seeing is if you -- if -- even if you had higher non-performers, as an example.

And let's say those higher non-performers translated to slightly higher chargeoffs, within context text of our earnings, we can manage the earnings and still meet our estimates.

As you know, we've talked about our -- our goal in the company is to grow earnings per share at a growth rate of 10%-plus over the next five years or on an annual rate.

We're assuming -- our assumption still is today the economy will grow between 2 and 3% next year.

What we're essentially saying is recognizing the part of this business, you're going have chargeoffs and you're going to have non-performing assets.

And the question is can you grow through that and do you have the mix of business in order to sustain that and grow that through those kinds of times?

I think what we're saying is we do and we feel dhaift we do and despite the fact the economy is weak and we have particular concerns and we have and we've shared those with you, regarding the manufacturing sector.

And our view is that we're still very cautious.

Right.

Raeltsing it is too early to talk about 2003, but taking your comments with regard to the 4th Quarter, would you say you're comfortable with the 48-cent estimate that's out there on the street right now?

Yes, we are.

Definitely.

Thank you.

Thanks, Mike.

We will take your next question from the site of John with UBS Warburg.

Go ahead.

Hi, David.

Hi, John.

Question on the delinquency ratios that you produced.

Commercial has quite a pickup.

Is that captured in the NPA rise as well?

Yes, it is.

It definitely is.

I mean one is the main determinement of the MPA is really the risk rating, but incumbent in the risk rating and our trends of delinquency, yes, exactly.

Almost all of that rise in delinquency is also already reflected in the MPAs?

That's correct.

Can you update us on your exposure to the airline industry?

Sure, let me get it for you real quick.

Right now, at this point in time, we have approximately $669 million of commitments to the airline sector.

We have approximately $601 million outstanding and now supported by aircraft, ie leasing, we have commitments of $489 million and outstandings of $421 million at the present time.

And is that concentrating, David, or reasonably well dispersed among carriers?

It is pretty well dispersed, clearly our largest is really northwest airlines.

One it is largely because we also have a merchant banking or a processing for their tickets, which creates credit exposure, but that's currently the biggest.

It is pretty well spread out between most or all of the regional carriers in one form or fashion.

Okay, thanks very much, David.

Next we have a question from the side of Mark Lynch with Wellington Management.

Go ahead.

Hello, very good.

Looks like you have the guys selling hard there.

We do, thank you, Mark.

My question was about the margin.

There's mention of interest recoveries, I wonder how much it added to the margin in the quarter?

This quarter it was about 1 basis point, Mark.

That's about the difference.

I know we've been relatively bearish on the margin, quite frankly and I think we've state that he did we still think that we're going have some decline in the margin.

I think the thing that's really been quite reassuring is that we continue to have strong growth in deposits, obviously we're building equity, that has an impact on it.

And also, as we stated, loan yields and loan pricing has definitely improved across-the-board.

That's also helped us.

Over time.

Again, we -- we believe the margin will decline in the 4th Quarter.

I know we've stated multiple times we felt like this decline was going to happen.

Again, a thing we can point to I think in the 4th Quarter is just a lot of our investment now is -- portfolio now is floating and I'm sure we will have lower yields largely because of the floating nature of it.

Okay.

Thank you.

Thanks, Mark.

We will take your next question from the site of Ross Emory with Hilliard Lyonnes, going ahead.

Regarding non-performing assets, I hoped you could give me a definition of highly leveraged findings and why it is a good business to be in?

Well, tat's -- it's been known by a lot of different names.

Highly leveraged transaction, that's essentially lending to a company where the major source of repayment is entirely cash flow.

Another way of saying that is the asset security or the security with regard to assets and pledging assets for a secondary source of repayment, they're short of the total commitment.

So,you're essentially, what we call relying, on the enterprise value or the cash flow of a company.

And quite frankly, there are a fair amount of lending, really across the country, with regard to cash flow lending and where the assets didn't -- didn't quite secure the entire credit.

That's what it means.

It's been known as leveraged lending, enterprise value lending,.

It is not a sector-specific, it is across multiple kinds of industries.

It could be a little bit of manufacturing, a little bit of cable, a little bit of telecom, technology and so on.

But it is really the old enterprised value or leverage lending business that banks have been in for quite a long time.

That's the new term for it.

Okay.

Thanks.

We will take our next question from the site of Steven Warden with Loomis.

Go ahead.

Hi, David.

Hi, Steve.

I had a couple of questions, the first is on your comment regarding the pension assumption.

I miss that he did number way was the expense impact of the decline in the quarter?

The expense decline was $10 million in the current quarter.

There will be another $10 million in the fourth quarter and then that would translate to an decisional $20 million next year.

Now, as I did state, we are reviewing the 2003 assumptions for the pension plan.

I am sure that we will begin -- we will reduce it but I will also say that we will continue to maintain an all-equities portfolio.

We still believe that's the right way to invest and meet a long-term liability which we believe the pension is.

But if you -- if you lowered the pension assumption on the long-term rate of return on the assets by 100 basis points, by 1%, it's only about $20 million a year.

So, with the $10 million hit this quarter retroactive, like did you change the assumption for the entire year?

Yes, exactly right.

The entire year would be $20 million -- we lowered it for the entire year 2002.

And that total cost was $20 million, incurred in the third and fourth quarter.

I got you.

And on the MSR, where -- what is the service value now -- on a stand-alone basis and as a percentage of the servicing portfolio?

All right, the servicing asset today is approximately $609 million, okay?

Now, when you -- when you calculate that, we calculate it as a function of mortgages served for -- service for others.

A lot of people capitalize that -- or report that number based on entire servicing.

And the reason we don't do that is because we think the true representation is not what you service for yourself but what you service for others.

If you did that calculation and that mortgage service for others is approximately $39 million, you get a rate of 155, which I think on the surface seems high.

But keep in mind that 40% of our servicing is government, versus the industry of about 25%.

And the Ginny Mae servicing has higher servicing fees and longer average lives than the normal servicing piece.

And second, if you take out leader, which is almost entirely government servicing, it drops that rate down to 140.

One thing in talking about the subjects, one thing we observed is number one, many servicers -- servicing entities will securitize their excess servicing or IO and reclassify it in the investment portfolio, thus reducing the size of their servicing asset.

The calculation actually looks lower.

It will have less volatility, but will also have the impact of reducing the equity account because it is in the equity portfolio versus the servicing.

That's one thing.

Another thing is other than looking at it versus service for others versus total servicing is we've looked at a number of surveys conducted by different companies and our servicing, our capitalization is right in line with all others, but I think you have to look at what's service for others, you have to look at the mix of business and you have to look at if anybody has secure the servicing in the form of an IO and where they carry that.

All right, thank you.

Again, if you would like to ask a question, press the 1 on your touch-tone phone.

We will take our next question from the site of Fred Cummings with McDonald Investments, go ahead.

Good afternoon, David.

Hi, Fred.

David, can you comment on what impacted the national share credit review have on the increase and non-performing loans this quarter?

Yeah, Fred, of our increase, approximately 87% was related to the national shared credit exam.

Let me give you a couple of sort of factual pieces of information.

Number one, when you look at national shared credit program,total, if you just look at the adversely-related credits, which is really the classified and special mention, U.S. bank, in the examination year from 2001 to 2002, spelled 15%.

The adversely related in the two categories.

The nation, overall program, increased 34%.

So, ours was down.

The second fact is if you look at our national shared credits, the adversely-related segment of it, which is the special segment of classified, rented for our portfolio, 10.8%.

The national share program is 12.6%.

So, we actually have lower adversely-rated credits than the nation.

If you take a closer look at it, our classified as a percentage is 6.6 -- 6.2%, the national program is 8.4%.

So, yes, the increase is largely attributable to that exam.

Quite frankly, that was the case I think in most all banks and quite frankly on -- if you compare us -- again, relative to national, we're really in better shape and directionally we've had improvements versus the overall group.

And David, when you quote this 10.8% number; that for the credit for which you were the lead manager?

No, it's even different.

If you break that 10.8% down, for the ones we aided in, the number is 7.7%.

For those that are non-aided by us, it is 11%.

Okay.

So, the ones we underwrote, it is a much lower number.

Okay.

And I had a second question, with respect to loan growth, you said you were seeing some signs of some growth in large corporate.

Can you comment -- you know, what's going on in even small business and middle market or even across the franchise?

Are there any state or cities in which you're seeing some healthy loan demand on the corporate side?

Well, let me start off generalized with both of those.

In the small business area, Fred, particularly, our small business loans are growing double-digit.

And it has been for a number of quarters.

So, we're really please we did that.

That also reflects the in fact one in the old Firstar markets, we had a program ongoing for a long time and then we, of course, restructured small business in the old west and we're also taking that model and improving our outstandings and our growth.

But in addition to that, you remember that we also are one of the largest SBA lenders as well.

So, we're getting growth there.

In the middle market side, we're beginning to see signs of improvement and again it's largely in the west.

I can , for instance, California, Nevada, Seattle and those markets are definitely improving.

It is a little still slower in the midwest.

In the large corporate side, we're seeing some improvement.

It is too early to say whether this is a trend or not.

But we are seeing antidotal signs of improvement there.

That may be for a quarter, when you get a nice surge in borrowing, for instance in commercial leasing.

A lot of the activity occurs in the third and fourth quarter.

So, that's usually a positive.

But I think it is too early to say that we're going to get any sustained growth on the commercial side, but we're hopeful.

Again, I think our comments are that we're very cautious and we've had a lot of concern regarding overall economic activity.

We don't think this is a double-dip scenario.

We think we will have fairly good growth into 2003.

But we're cautious. -- but we are beginning to see signs of improvement.

Okay.

All right.

Thanks, David.

Next we have a question from the site of Adam Compton with KBW.

Hi, going back to the mortgage servicing asset, did you say what the average coupon was on the portfolio?

Yes, $6.95.

Thank you.

Is that including the Ginny Mae stuff?

That includes Ginny Mae.

Thank you.

Next we have a question from the site of Charlie Ackerman.

Please go ahead.

Hi, guys.

Hi, Charlie.

Two quick questions, on your MSR, if rates stay where they are today, will you need another writedown next quarter or did this quarter take care of it?

We value it at the end of the quarter, so -- it's too early to say.

We don't -- if we do have a little bit of impairment it's not going to be a lot.

We don't expect much at all and we're expecting sort of a shift up in the yield curve, which we've had.

So, again, we don't expect.

We think we've pretty much covered it this quarter, but we can't predict rates and we're fairly -- we've got a fairly systematic methodology that we go through and if there's going to be impairment, we go through the valuation model and we will know, but it is too early to tell.

But I don't think we're going to have a lot.

If we do, it won't be a lot at all.

Okay, and just on share repurchases, I saw you guys didn't do much this quarter.

I know you have two acquisitions coming up next quarter.

Right.

When do you think we will see you active in the market again?

Well...I mean you're right, the capital we managed to 6.1% tangible or 6% tangible which we did meet this quarter.

We believe with the closing of the bay view acquisition that will occur this quarter as well as the corporate trust business with state street, we would expect for that ratio to go back down to the sort of 575 level and by the end of the first quarter we should be back above that 6%.

At the point in time we get back to the 6% and obviously we will address the share repurchase.

We have an authorization of $100 million.

We've only used $5 million of that authorization.

So, we will look very hard at initiating that buyback program after that 1st Quarter.

Okay, thanks a lot.

We will take our next question from the site of John Park.

Please go ahead.

Yeah.

Can you give us a quick update on your acquisition of bay view capital deposits?

I know you had several months to mull over this acquisition.

Are you still comfortable with what you've seen and have there been any erosion of the deposit base that you're aware?

First of all, we're -- we've already received OCC approval and the bay view shareholders have also approved.

As far as we're concerned, we will close very shortly.

No, we have not seen any deterioration at all.

It's been an incentive built into the acquisition that they have to maintain the account base and -- to the extent they grow the account base and deposits will be to their benefit.

But, no, we've seen really we think it is a great branch system.

We think they have great managers, both at the branch level and overseeing the different product groups and I think we're going to bring a lot to that market and a lot to those branches with a whole bunch of new products that they just have not had.

So, I think they're very excited about it and they've been working hard to retain their customers and quite frankly working hard to begin to be familiar with U.S.

Bancorp and what we do and then I think they're very excited to deliver to their customers now products.

So, we're very -- very excited about it.

Now that you've gotten the OCC approval, are you simply waiting for the 15-day clock to expire at this point?

Yeah, we are.

And again, as we said, we said we will close the 4th Quarter, but I think at this time we will probably close the 1st of November.

Okay.

But, you know, we will see.

That's what we expect at this point.

Okay.

Thank you.

We will take our next question from Gamma Avil.

Go ahead.

Hi, David.

Hi.

Can you give us an update on the lawsuits with Philadelphia on the lease -- [ inaudible ]

There are a couple of things we don't comment on.

One is mergers and acquisitions and any litigation we have.

We just won't cover that or discuss that at all.

All right.

Well, how about -- I understand that Philly no longer underwrites the business, the policy, are you having trouble placing the new capacity?

No, we have not.

That hasn't been an issue.

We're still covered and we still -- you may not know it, but we also use multiple carriers.

Uh-huh.

What type of price increases are you seeing in this line of business?

What kind of what?

Price increases on the --

I can't really comment on that.

It's not -- it's not materially operation of the business at all.

All right, thanks.

We will take our next question from the site of Jason Goldberg with Lehman Brothers, go ahead.

Thank you.

Good afternoon.

Hi, Jason.

Was it a pretty big jump up in the securities portfolio?

Talk about how you're managing that segment of the balance sheet?

Yeah, we have two considerations.

One is obviously you've seen a fairly significant reduction in the commercial loan book and essentially that's there to offset that decline.

The second thing that we consider is our interest rate risk position and our goal is to be very neutral with regard to rates.

Hence, we've been selling a fair amount of fixed rate securities.

That's really one of the reasons for our -- our expectation our margin will be lower in the fourth Quarter.

But our goal is essentially to maintain it at a constant level until such time that the commercial lending book begins to grow at which point in time we will essential use those proceeds to fund the commercial loan growth.

That's -- we're sort of waiting for that to come.

We know it will.

It is just a matter of time.

So, our goal is just to simply keep it relatively flat at the 3rd Quarter levels and then continue to use that cash flow to fund loan growth.

That's essentially what we're doing.

Good, thank you.

Uh-huh.

We will take our final question from the site of Brad Buscher with Banker's America Capital.

Go ahead.

Great job, David, we're real pleased.

Thank you, Brad.

We wanted clarification on the airline exposure.

The numbers I wrote down, you had a $669 million in aggregate and I wasn't sure if the other number you gave us for the lease financing backed up by planes themselves was included in the number or it was in addition to?

Let me restate it.

Total airline exposure, that's both secured and unsecured, okay?

Would be $669 million in commitments.

Of outstandings of 601.

So, the actual outstandings are low eer.

If you break just the total airline exposure, 420 of that are actual loans and 249 are actually leases.

Now, if you said -- if you asked the question, when he, what is exactly supported by the aircraft, directly?

That commitment would be $489 million with current outstandings of $421 million.

Of that, $262 million would be loans and 228 would be leases.

Is the way -- sort of two categories, one supported by aircraft and one is just outright exposure to airlines, including the piece supported by aircraft.

That's helpful, David, thank you.

Again, congratulations to you guys.

Thank you very much.

Appreciate it.

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