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First Niagara Financial Group Inc. (NASDAQ:FNFG)

Q4 2007 Earning Call

January 31, 2008 11:00 am ET

Executives

John Koelmel - President and CEO

Mike Harrington - CFO

Analysts

Jared Shaw - KBW

Tony Davis – Stifel Nicolaus

Matthew Kelley - Sterne, Agee

Rick Weiss - Janney Montgomery Scott

Tom Olando - Fox-Pitt Kelton

Joe Pavelich - Snyder Capital Management

Operator

Greetings ladies and gentlemen and welcome to the First Niagara Fourth Quarter Earnings Release. (Operator Instructions).

I would now like to turn the conference over to your host Mr. John Koelmel, President and Chief Executive Officer of First Niagara. Thank you, Mr. Koelmel, you may now begin.

John Koelmel

Thank you very much Jackie. Good morning everyone. With me on the call as usual is Mike Harrington, our Chief Financial Officer. Fourth quarter capped a very eventful year for us. The start of 2007 determines to transform our company and better position ourselves for longer term success. And we finished with a strong sense of both accomplishment as well as confidence.

Looking back on the year, we jump started our commercial banking franchise, which is a real competitive strength for us. We redeployed critical resources to that business unit and relentlessly withdraw cross sales. As a result, our C&I portfolio grew by over 20%, and just as importantly, business deposits rose by a healthy percentage as well.

We aggressively pushed our feed businesses, particularly risk and wealth management resulting in meaningful revenue growth in both businesses. In September, we reached agreement to acquire Great Lakes Bankcorp to boost our market share and profile in Western New York, bring us a highly compatible customer base, and benefit our bottom line immediately. Our transaction is progressing right on schedule, and will close in the middle of next month.

We regained our marketing legs with an aggressive promotional branding campaign which has made a big squash on our communities and has definitely brought in new customers. We got after our expense base by accelerating several of our performance improvement initiatives in the first half of the year ending 2007 with 5% lower staff levels and a reconfigured branch network. We've also successfully divested ourselves of a number of excess real estate properties.

And we've also been very attentive to our shareholders, our dividend is 8% higher than it was a year ago and over the past year we've repurchased 7 million share or about 7% of those outstanding. And most importantly overall, we have a very, very energized employee team that a terrific passion to creatively serve our customers and confidently move our company forward.

Let me comment more specifically on our fourth quarter. I would characterize our results as reasonably solid in light of the current environment. Our commercial portfolios continue their strong growth. While our credit started to remained stable and target exposures the client as anticipated. There is no question that revenues are constrained across the industry, and we're certainly not immune from that. But deposit competition is as fierce as ever, especially with the larger banks that have been significantly impacted by the credit and liquidity prices.

We've attempted to alleviate some of the margin pressure that results from that by accepting lower cost, external borrowings. Our long held credit discipline has enabled us to avoid the big charges and drama that has impacted many other banks. Non-performing assets actually declined in the quarter and our credit loss rate was only 22 basis points annualized.

Our decision to stay out of a subprime on all day's basis is obviously paying big dividend. While our recession will put some pressure on our portfolio, we are confident that our credit vigilance will continue to distinguish us on a relative basis. And Capital is King in periods of economic stress. And with regulatory capital over 10%, intangible over 8% we're obviously in an excellent position.

In summary, with this kind of environment we feel we are best served by not trying to chase earnings growth. We will continue to focus on a combination on more effectively delivering on our customer value proposition, while sustaining our focus on operating efficiency improvements, to optimize short-term earnings. We were all the while holding our franchise strength, continue to invest in our best opportunities for a longer term success, and look to seize on competitive advantages whenever prudent.

We are very confident that approach will enable us to make the most of our opportunities. And with all the progress we've made in 2007 and by carrying less baggage into the downturns and many others, we believe we are very well positioned to do just that.

Let me now turn it over to Mike for some more other details.

Mike Harrington

Thanks John and good morning. We are very encouraged to see continued positive momentum in the key areas of focus for us in 2007. Our Commercial Services group had a strong fourth quarter and finished the year on a high note, with annual loan and deposit growth in double digit territory. Our disciplined credit decision have spared up the larger problems populating their earnings reports than many other banks. And we continue to drive additional operating efficiencies across many of our businesses.

As we look ahead, the 2008 our solid credit profile, ample capita levels, and improved operating platform well positions us to take advantage of opportunities caused by the current environment.

Before I start my review, please note that all balances will be stated as quarterly averages, unless I indicate otherwise. Fourth quarter earnings per share was $0.27 compared to $0.21 for the previous quarter and $0.19 for the same period a year ago. That included a net gain $0.08 per share from non-recurring transactions, bringing core results to $0.19 per share. This compares to $0.21 per share for the last quarter and $0.21 for the same period year ago.

As I mentioned strong growth continued in our commercial loan portfolios as combined balances increased by $114 million or 16% annualized during the fourth quarter to $3.1 billion. Commercial loans now represent 54% of total loans at year-end. In particular C&I balances average over 22% above 2006 levels, and our commercial real estate portfolio exhibited solid growth in spite of a difficult market environment with strong production in the fourth quarter. Credit line usage was up over $123 million or 43% from the year-end 2006, and is another indication of a successful relationship building fostered by our commercial services area.

Turning to another priority loan portfolio, home equity balances sustained our growth trend in the fourth quarter and ended the year 12% above 2006 levels, and quality was not sacrificed as loans processed in 2007 had the same solid credit characteristics as the rest of the portfolio.

Finally, although residential mortgage loans originations total $57 million during the quarter, the portfolio declined, since $164 million of loans securitize at the end of the third quarter are now held in our securities portfolio to be used as collateral for municipal deposits and borrowers.

Looking at our funding activities, deposit balance were slightly lower from the link quarter primarily due to the sale of $149 million in deposits, and nine branches to Elmira Savings Bank and Legacy Bancorp in December.

We also continue to witness the migration of savings balances to money market accounts, as customers seek higher yielding instruments. At year-end, core savings stood at 14% of total deposits, down from 17% a year ago, while money market balance is upfront 29% of deposits.

The decline of $118 million in CD balance during the quarter reflects the decision on our part to replace these funds, with lower cost wholesale borrowings. As a result, borrowings rose by $97 million for the same time period. Municipal money market deposits grew by $134 million due to seasonal inflows from tax receipts received from our school district relationships. Compared to a year ago, municipal deposits increased by $125 million or 33%.

Specifically, one of our success stories has been our focused cross sale commercial deposits and our lending and insurance business line. This initiatives has helped drive new customer account growth and non-interest business check and deposits by over 7% in 2007.

Our commercial suite program also highlights our success in gathering commercial deposits, as balances grew by 54% from a year and our remote deposit capture service now has over 190 customers involved in using our services.

Turning to credit quality. As John noted, our overall loan portfolio continue to be free of any systemic weaknesses, and we continue to have no exposure to subprime or Alt-A loans. In fact, non-performing loans decreased by $1.1 million or 4% from the third quarter, and they represents only 49 basis points of total loans at period end as two larger commercial mortgage relationships were removed from non-accrual status.

Net charge-offs for the quarter increased by $1.1 million to $3.2 million or 22 basis points of average loans. Our coverage ratios remained solid with the allowance for credit losses at 123 basis points for total loans, more than five times the current quarter's annualized loss rate, and 250% of non-performing loan balances. Drilling down into some of our individual portfolios, our commercial real estate growth has been focused in the regions known well to us. With 96% of our loans outstanding originated within our New York state footprints.

As mentioned earlier, our home equity portfolio continues that have strong credit profile as we're in the first position on nearly 30% of the loans and hold the first mortgage on the majority of the rest. As further evidence, of credit quality, approximately three quarters of the home equities have effective score of above 700. In addition, there has been no significant change in delinquency or losses during 2007 for this portfolio.

Moving onto operating results. Net interest income was $0.5 million or 1% below last quarter as various indexed loan assets repriced more quickly than interest-bearing deposits in response to the Federal Reserves's interest rate cuts. The immediate impact we saw most in our commercial lending portfolio was a 58% C&I loans and 13% of commercial mortgages tied to the primary.

These decreases in asset yields are not matched by declines in funding cost due to the persistently high levels of deposit rates in the marketplace. We were able to mitigate this dynamic somewhat by substituting lower cost wholesale borrowings and moving or matching higher price CDs offered by our competition. The net results of these factors certainly reduced tax equivalent net interest margin by five basis points to 325 basis points for the fourth quarter and produce the full year margin of 333 basis points.

Operating non-interest income of $27.9 million for the current quarter was $1.8 million below last quarter's near record level due to continued industry-wide softening in insurance renewal rates and seasonal reductions in wealth management fees.

Overall 2007, operating non-interest income increased by 7% to $116 million or 34% of total revenue. This increase was led by growth in risk management services despite an 18% reduction in property and cash with the insurance premiums over the past 24 months.

Greater productivity drove both management fees higher, as revenue for financial consultant for 2007 increased by 31% from the previous year, also contributing to the year-over-year growth was $2.2 million or a 5% increase in activity based electronic banking, leasing and loan servicing fees. Reported non-interest income for the fourth quarter reflected two actions that were taken to help position us for greater longer terms earnings growth. The first is the recognition of a $21.6 million pretax gain from the completed sale of non-strategic branches to Elmira Savings Bank and Legacy Bancorp.

And the second was the sale of a $199 million securities and a subsequently replacement of these securities with higher yielding AAA rated investments. We incurred a $5.6 million loss in the sale of these securities where we are expecting immediate benefit in net interest income as a result of the reimbursement of the proceeds, which should enables us to earn back the loss in less than two years.

As for operating expenses, non-interest expense of $53.5 million for the quarter was 2.5% above last quarter, primarily due to ongoing marketing cost related to the most significant brand new campaign in our history, along with higher cost related to our self insured healthcare plan. These factors are partially offset by lower salary expense, due to a 5% reduction in the staff levels from a year ago, which was part of our performance improvement initiative to streamline operations and improved operating efficiencies.

Reported other non-interest expenses also included a $2.3 million loss related to a business customer writing checks on insufficient funds, attempting to satisfy the shortfall of funds drawn on another bank, and this checks later being dishonored.

Moving ahead, we continue to deploy capital intelligently, over the quarter and in a number of areas, we repurchased 815,000 share of the common stock during the fourth quarter. For all of 2007, we have repurchased 7 million shares or [1.7%] of outstanding shares. We also just declared a fourth quarter dividend of $0.14 per share, which was consisting with the prior quarter’s level and 8% above a year ago.

Intangible common equity ratio ended the year at 8.2% well above our target. While we expect to continue to return capital to our shareholders via our ongoing dividend and buyback programs, we also recognized that remaining will capitalize as prudent given the current economic environment and uncertainty in our industry.

In summary we view our fourth quarter’s performance as another solid move forward in our efforts drive improved performance throughout the company. Just like others in our industry, we continue to face economic and competitive challenges in our marketplace, although we are differentiating ourselves by sticking to a disciplined credit process, maintaining a strong capital position and improving our franchise value by focusing on our best and most profitable opportunities.

We are confident that these actions well position us to deliver sustainable long-term growth for the benefit of our shareholders.

Looking ahead to 2008, favorable trends seen recently include the easing competitive deposit pricing by some of our larger competitors, due to the dramatic actions by the Fed over the last few weeks, including yesterday's move to lower rates by another 50 basis points. Other aggressive actions by the Fed to inject short-term liquidity into the market have also helped. That said, these developments are very recent and the factors driving these actions and slowing economy, could have a dampening effect on both credit quality and loan growth.

In our projections, we have assumed that the Fed's would lower rates, however, we expect that competitive deposit pricing will persists and constrain the benefits of those decreases in the near term, due to the ongoing potential for market disruptions. Therefore on the margin front, we are forecasting a modest contraction in 2008 from levels reported in the fourth quarter of 2007. This is in addition to the effects of the acquisition of Great Lakes which is dilutive to our margins by 5 to 7 basis points.

From a balance sheet perspective, we expect to again see double-digit growth in our commercial loan portfolios and in light of the current environment and expansions of spreads on that product. And we are confident that we will continue to build our base with non-interest business checking in the coming year. We expect credit quality trends to remain consistent with fourth quarter levels and remain very comfortable with our current allowance position.

Non-interest income as a percentage of total revenue is expected to remain at current level, although growth in that category will be constrained somewhat by a continuing soft insurance market. And on the expense front, we remain committed to a disciplined approach. The benefit associated with our performance improving initiatives of 2007 have been realized and well position us to manage overall expense growth, while continuing to invest in our best and less profitable long-term opportunities.

One final note, as a result of the acquisition of Great Lakes, our effective tax rate is expected to increase from 33% in 2007 to mid-34% range in 2008. This is a result of the increase in our total assets and loosing a portion of REIT benefit from our state tax return.

With that, we'd like to now open it up and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from Jared Shaw of KBW.

Jared Shaw - KBW

Hi, good morning.

John Koelmel

Hey Jared

Mike Harrington

Good morning, Jared.

Jared Shaw - KBW

I'll have a few questions for you. The first on the credit side, the provision this quarter didn't match the charge-offs and as we saw most of your loan growth continues to be in the commercial and the consumer side. Was there anything special I guess about the quarter, was that larger loan charge-off, did that have a specific reserve associated with it or do you feel that the allowance, the general and allocate allowances is big enough here?

Mike Harrington

There is number of questions there, I mean we think the net charge-off activity in the quarter was fairly consistent with what we would expect on an ongoing basis, there's nothing unique or special, and one thing that we can point to Jared related to that net charge-off activity. And as we stated in the past, we're very comfortable with where we stand from an allowance perspective even, given the growth from a portfolio. So we are very comfortable with where we stand right now.

Jared Shaw - KBW

I guess so if you are things are likely to stay consistent on the charge-off side, and the provision side so we should expect to see the reserve for loans start to decline slightly over the next few quarters, or do you feel that you would like to maintain your reserve to loan ratio?

John Koelmel

Well we focused as you are going to say in the past Jared in terms of coverage ratio with some of the bigger picture, trends you know we've said all you guys were fallen out, really not to (inaudible) on locked up in provision and charge-offs. We just try to take a look at the total picture and think sitting on a coverage ratio of 250 and where we are, plus or minus 120 in terms of the total allowance. I think they get it very, very well in terms of what our credit exposure is or may be more relevant isn’t.

Jared Shaw - KBW

Okay. And then on the margin. With the big shift that you've had into money market accounts and then combined with the dramatic cut in hedge funds, I'm so surprised that you are not going to expect to see a little boost in margin from here given that when you reprise the money market, the whole entire portfolio switches as opposed to waiting for time deposits to roll out.

Mike Harrington

Well, we would expect that when we model it from a interest rate risk and asset liability standpoint. We would have expected, but what we haven't seen specially over the last quarter is the competition moving rates down in lockstep or as you would expect them to do it or as they have historically down when the Fed has lowered rate. So we are hesitant to commit to that at this point just because we haven't seen it, we haven't seen a decreases in the competitions rate, we haven't seen that manifest itself in the market place. So it's a big thing that it does, and I wouldn't disagree with your conclusion there but we are starting to see it, but we are still, it’s pretty early that changes just happen in the last 8 days, 9 days here and so we need to see that happen before we'd want to commit to it.

Jared Shaw - KBW

Okay. So that margin discussion was predicated on really the competitors not moving their deposits down or their deposit costs now?

Mike Harrington

Now we are trying to maintain the market share.

Jared Shaw - KBW

Okay.

Mike Harrington

So there is only so much we can do, and if you see what we did in a quarter is we did allow CDs to run out effectively and swapped out, swap that funding for wholesale funding. But there is also a balance we need to maintain in terms of just pure customer acquisition, customer growth to maintain a market share, and we'll try and walk a fine line right now between the two of those.

Jared Shaw - KBW

Okay, great. And then finally is there any risk of and I’m guessing there isn’t any risk of an impairment charge on goodwill from recent acquisitions?

Mike Harrignton

No.

Jared Shaw - KBW

Okay, thanks very much.

Mike Harrington

You’re welcome.

John Koelmel

Thank you.

Operator

Thank you. Our next quarter is coming from Tony Davis with Stifel Nicolaus.

Tony Davis – Stifel Nicolaus

Good morning John, and Mike.

John Koelmel

Hey Tony.

Tony Davis – Stifel Nicolaus

Just I'll put more color here. I wonder, if can you give us some details on the embedded rate duration of security sold and the initial yield duration on the reinvestment part of that and I am sorry Mike the immediate impact on margin?

Mike Harrington

What we sold, we sold, to give you a round numbers there we sold approximately a two year duration and bought something slightly north of three.

Tony Davis – Stifel Nicolaus

Okay.

Mike Harrignton

So, it might have extended a year or year past and that’s where we picked up a 140 basis points from that portfolio.

Tony Davis – Stifel Nicolaus

Okay.

Mike Harrignton

So what we sold and bought was about 140 basis points had a modest impact on our overall margins like $200 million of our total balance sheet.

Tony Davis – Stifel Nicolaus

Okay.

Mike Harrignton

So 1 or 2 basis points maybe in terms of total impact on four year effected basis.

Tony Davis – Stifel Nicolaus

Mike, what's the dollar amount or CD roll this year and average embedded coupon?

Mike Harrington

What was that Tony?

Tony Davis – Stifel Nicolaus

What’s the dollar amount of the CD book that's rolling this year and the average embedded coupon?

Mike Harrington

While most of our CD portfolio to average maturity is close to a year. So, the whole portfolio.

Tony Davis – Stifel Nicolaus

The whole thing.

Mike Harrington

Every year, and the average coupon's probably around 4.

Tony Davis – Stifel Nicolaus

Okay. It’s 439 for the quarter I think one.

Mike Harrington

Yes, the average maturity for, over the next year is probably exactly in the 450 range.

Tony Davis – Stifel Nicolaus

Okay.

Mike Harrington

I mean like you saw this quarter, we were down 11 basis points. We would expect that to continue to reprice downwards.

Tony Davis – Stifel Nicolaus

Yes. Have you completed the branch system review now or are there a few other locations perhaps left consolidated?

John Koelmel

We'll continue to look at it, Tony. We’ve moved on those but we think it was important to move on, but yes, we look at all of our business. We wanted to continue to prove, where we think we have the right opportunity or when I get that appropriate returns and make decision. So, you don’t expect anything eminent, on the other hand, don’t want to suggest, you won't see that type of action as we move forward.

Tony Davis – Stifel Nicolaus

Okay. Final question. Just the tone John of what your loan officers are saying out there, in terms of commercial borrower attitudes today versus say three, six months ago and kind of where you ended the year in terms of the combined C&I and CRE backlog?

John Koelmel

Attitudes frankly are very positive, very up. Backlog, pipelines are strong as ever and not even more so. We don’t really see and we've had this discussions all the time, one end they will acknowledge the realities of the broader based economic issues but across upstate, and certainly the markets that we're working and the niches we're chasing, opportunities are substantial and significant, and that's reflected in the pipeline that we've got, line utilization, and we'd like to trend very, very much.

Tony Davis – Stifel Nicolaus

Okay, thanks.

John Koelmel

Yeah, thank you.

Operator

Thank you. Our next question is coming from Matthew Kelley of Sterne, Agee.

John Koelmel

Hey, Matt.

Mike Harrington

Good morning.

Matthew Kelley - Sterne, Agee

Yeah, hi guys. Just on the margin guidance you provided there, basically you're saying that Great Lakes is going to bring it down to 5 to 7 basis points and expect contraction from that level. So contraction from the 3.08% to 3.1%?

Mike Harrington

Yes, modest.

Matthew Kelley - Sterne, Agee

Okay. And then, you know a lot of onetime items here on both the non-interest income and more probably the expense side. I mean, what should we be using for an expense run rate with Great Lakes baked in?

Mike Harrington

Where we are right now and what we reported on a core basis, if you strip out the 2.3 numbers not too far, we expect to be pretty diligent about managing expenses off that core number from the fourth quarter. We're going into the first quarter of the year, usually the first quarter of the year there is only just normal inflationary increases related to just the clock ticking sitting over and the calendar going from '07 to '08. So from a business planning standpoint we always deal with those issues, merit, heathcare, cost increases, so on and so forth. On a year-over-year basis, you know we really expect to keep our costs in Great Lakes in the 3% to 4% range tops from a year-over-year standpoint. And then Great Lakes has another 4% on top of that.

Matthew Kelley - Sterne, Agee

Okay.

John Koelmel

That helped.

Matthew Kelley - Sterne, Agee

Yeah. And on the branch issue there, I guess your point is that the business customer deposit relationship, the $2.3 million loss is there an insurance claim or is that some type of a fraud that you can go after somebody's loss suit, where any of that could come back at one point?

John Koelmel

All the above could be accurate. We are working as is best as we can and given some of the real time circumstances rather avoid any more discussion or commentary that we've given you. But we suggest your questions are all relevant.

Matthew Kelley - Sterne, Agee

Okay. And then last question, Great Lakes in terms of their asset quality during the quarter they had $3.4 million of NPAs at the end of the third quarter. Is there going to be a material change from that as you close it out and trying to think about where your pro forma NPAs and provision or reserves are going to be for the next quarter?

Mike Harrington

No we haven't talked to them. On a regular basis have seen a deterioration in our asset quality.

Matthew Kelley - Sterne, Agee

Okay

Mike Harrington

We don't expect -- I mean they frankly expect the asset quality to be very consistent with the asset quality we have in our portfolio right now.

Matthew Kelley - Sterne, Agee

Okay. So they are going to add about $3.5 million in NPAs and $3 million in reserves.

Mike Harrington

Yeah.

Matthew Kelley - Sterne, Agee

Okay, thank you very much.

Operator

Thank you. Our next question is coming from Rick Weiss of Janney Montgomery Scott

Rick Weiss - Janney Montgomery Scott

Good morning.

John Koelmel

Good morning, Rick

Rick Weiss - Janney Montgomery Scott

I guess two questions. When you are talking about the deposit in competition and that's preventing you from lowering your rates. I wonder if you could specify who those competitors are, and also if you could just talk a little bit about what you see regarding the M&A environment?

Mike Harrington

More specific competition in larger banks in our regions. I'd rather not get into which ones they are but the largest, frankly one of the larger players which has kept CD rates and money market rates about normal, but others have also contributed to that. So the rate, I mean just general statement is that, we see rates especially in the fourth quarter well in excess of wholesales rates, well in excess of LIBOR rates or more advanced rates. So that’s what you saw happen in the fourth quarter, and plus we just allowed certain deposits to flow out of their organization and replaced them with borrowers, so we just cannot justify that widespread.

Rick Weiss - Janney Montgomery Scott

Okay. That’s where the larger rather than, [despite] the 1000 cuts of a lot small institutions setting their pricing up there, is that correct?

John Koelmel

It's definitely been with the bigger guys.

Mike Harrington

They dominate the market here. Just one or two of them, right basically in the market there's so much market share they can really set the bar and we have to decided whether or not we are going to match that and some times we do match it depending on the circumstances, but as you can see we are also selective in that process.

John Koelmel

And as for your question on M&A, we are continuing as we always say, explore our options and opportunities, continue to believe they will present themselves overtime, and we’re always prepared and ready to evaluate and move if we think we’ve got situation and circumstance that will be of strategy benefit. The Great Lakes transaction definitely fits that amount to the extent that we can identify other opportunities, we will certainly continue to explore and investigate.

Rick Weiss - Janney Montgomery Scott

Okay, thank you.

Operator

(Operator Instructions)

Our next question is coming from [Tom Olando] of Fox-Pitt Kelton.

Tom Olando - Fox-Pitt Kelton

Good morning guys.

John Koelmel

Hey, Tom.

Tom Olando - Fox-Pitt Kelton

Just real quick as I missed the number when you guys were going through your prepared remarks. The percent of the home equity portfolio what were you guys holding the first?

Mike Harrington

30).

Tom Olando - Fox-Pitt Kelton

30, okay.

Mike Harrington

Well, we hold the -- no, 30% we are in the first position.

Tom Olando - Fox-Pitt Kelton

Okay. 30% of the total portfolio of home equity is actually at first.

Mike Harrington

Yes, its actually at first. And then we're in the first position on the majority of the rest, I know we didn’t give you the specifics.

Tom Olando - Fox-Pitt Kelton

Okay.

Mike Harrington

Remember, but its just majority of whatever's there.

Tom Olando - Fox-Pitt Kelton

I was distracted. And then just to make sure I have got this margin information right. You are expecting somewhere in the, call it, 3-10 range in the first quarter and then some slight compression from there on annual for the year?

Mike Harrington

No, we are expecting our Great Lakes will close in a few weeks, about half the quarter and then they are diluted by 7, 5 to 7 basis points.

Tom Olando - Fox-Pitt Kelton

Okay.

Mike Harrington

And then we expect a modest incremental additional decrease in our margins.

Tom Olando - Fox-Pitt Kelton

Okay.

Mike Harrington

They were hottest I mean, about a few basis points maximum. So, we’re closing 325 this quarter, so that’s what the math should be. So I wouldn’t expect it to be.

John Koelmel

And everybody over reacted.

Mike Harrington

Yes.

John Koelmel

The three in a quarter knock that down as Mike just said, the 320ish plus or minus because of Great Lakes and dependent on as we've said, some of the market realities, but the ramification is that our, we could have a few basis points movement off of that. So, we don’t see what's absolute guidance or absolute expectations as use of the term modest. But don’t want to suggest that we are expecting any dramatic either.

Tom Olando - Fox-Pitt Kelton

Okay. Terrific, I just want to make sure I heard the numbers right. Okay. Thank you.

Mike Harrington

Alright.

Operator

Thank you, our next question is coming from Joe Pavelich of Snyder Capital Management.

Joe Pavelich - Snyder Capital Management

Good morning, guys.

John Koelmel

Good morning, Joe.

Joe Pavelich - Snyder Capital Management

I have a quick question on the insurance segment, trying to get more granularity there and pin down your outlook for '08 and kind of beyond.

John Koelmel

And looking for in particular?

Tom Olando - Fox-Pitt Kelton

So revenues for start there and are you seeing

John Koelmel

It's a soft market, I expect that to continue on the P&C side. Flip side is that we've had good organic growth that's been able mute or relegate that. I expect that trend to continue into '08, have been a great business for us and we see continued upside there. So while the headwinds are expected to be sustained, I think we will clearly continue to outperform the market at large there. So, we are not backing up by any means but we're just acknowledging that the upside and growth potentials compromised by the continuing soft market.

Tom Olando - Fox-Pitt Kelton

Thanks.

Operator

Thank you. Our next question is coming from Matthew Kelley of Sterne, Agee.

John Koelmel

Matt you're back?

Matthew Kelley - Sterne, Agee

It's a quick follow-up --

John Koelmel

You are [writing] that model already?

Matthew Kelley - Sterne, Agee

Ploughing through. Mike, you have given couple of numbers earlier on the percentages C&I loans and CRE loans tied to the primary LIBOR. What were those again I missed those?

Mike Harrington

It's 56%. Give me a minutes. Keep going while we're looking for that.

Matthew Kelley - Sterne, Agee

I guess similar, no that's it for now.

Mike Harrington

It's 58% for C&I and 13% for CRE.

Matthew Kelley - Sterne, Agee

And that's tied to prime?

Mike Harrington

Those are prime based yes.

Matthew Kelley - Sterne, Agee

And what about other LIBOR short-term indices?

Mike Harrington

Majority of our stuff's tied to prime and we do have other, we do have loans that are also indexed.

Matthew Kelley - Sterne, Agee

Okay.

Mike Harrington

I don't have specifics on that.

Matthew Kelley - Sterne, Agee

And what is kind of the home equity breakdown between fixed

Mike Harrington

Home equity is all prime based.

Matthew Kelley - Sterne, Agee

Okay.

Mike Harrington

Now the whole portfolio, a lot of that portfolio is fixed.

Matthew Kelley - Sterne, Agee

Right.

Mike Harrington

But it does have a floating component and that’s what you saw, you saw the rate drop on our portfolio quarter-over-quarter, that's related to the floating component of that.

Matthew Kelley - Sterne, Agee

Okay. All right, thank you very much.

Operator

Thank you. Our next question is coming from Tony Davis of Stifel Nicolaus

Tony Davis - Stifel Nicolaus

Still ploughing through here with two guys.

John Koelmel

No problem

Tony Davis - Stifel Nicolaus

The two resolved NPAs, could you give us some sense or the size of the those? And then if Gary is not there, Mike maybe either one of you could talk a little bit about what you are seeing in terms of risk classification and grades migrations in the small business area?

Mike Harrington

Okay, yeah the NPAs between $2 million and $3 million.

Tony Davis - Stifel Nicolaus

Okay

Mike Harrington

So is the NPAs related to those two loans specifically. And then just in terms of loan grades, we really haven't seen, we seen a modest increase in the rating and so an increase to higher numbers or lower number. But when we talk about that, and I'm talking globally about hopeful for your right now.

Tony Davis - Stifel Nicolaus

Yeah.

Mike Harrington

I'm talking about that being below 2.5 and moving above 2.5. I mean when you talk about our grades, I mean that's a very, very strong grade. You know the average real solid past ratings of three. So we go one, two, three, four five are all past ratings and so talking about a very modest change in that.

Tony Davis - Stifel Nicolaus

Maybe another way to look at it, I mean what percentage of that C&I booked Mike is classified of course for us today versus six months ago?

Mike Harrington

Tom, I have to say there's been no migration in that, no change in that in terms of special mentioned watch, all those type of classifications that is very stable, very stable.

John Koelmel

We're just not seeing any real deterioration Tony.

Tony Davis - Stifel Nicolaus

Okay.

Mike Harrington

We can almost watch the credits come through the process, but globally overall the classified portfolios has been very stable.

Tony Davis - Stifel Nicolaus

Thanks.

Operator

Thank you. There are no further at this time. I would like to hand the floor back over to management for any closing comments.

John Koelmel

Hi, Jackie, thank you very much, appreciate everyone's time and attention and look forward to chatting again in another 90 days. Have a great day.

Mike Harrington

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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