First Financial Bancorp (FFBC) 2003 Q4 法說會逐字稿

Welcome to the Irwin Financial Corporation Announces the 2003 Fourth Quarter and Annual Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the call over to Mr. Greg Ehlinger, Senior Vice President and Chief Financial Officer.

Good afternoon everyone. In making our presentation today and in the course of answering your questions, we will be making statements that are forward-looking. Statements of our plans, initiatives, expectations, objectives, strategies, improvements, estimates, expected results, beliefs, and similar expressions identify forward-looking information. These statements are not guarantees of future performance or events, and our actual accomplishments of the plans we're about to discuss with you today involve certain risks and uncertainties that are difficult to predict. Therefore, actual future events may differ materially from what we discuss here today. For an explanation of the factors that may affect our future results, we refer you to our MD&A and our SEC filings, and the factors described in our written press release.

I will turn the call over to Will briefly for an overview of the quarter, and then I will provide some details after that.

Thanks, Greg. I would like to start by reiterating the key points we made in our press release.

Given the rise in interest rates in the fourth quarter, we've posted solid results. As many of you know, our strategy is to balance the impact of changes in interest rates and economic conditions on our mortgage banking production with investments in mortgage servicing rights and our credit portfolios. These investments usually respond in an opposite and complementary manner. The fourth quarter results once again demonstrated how this strategy works.

Fourth quarter net earnings at the Mortgage bank fell $16.5 million year-over-year, which reflects the decline in new mortgage production, mitigated by our write-up after hedging costs in our mortgage servicing rights. The net impacts of mortgage banking on the consolidated bottom-line was then partially offset by gains in our commercial banking and leasing lines of business. Consolidated net income for the fourth quarter was $16.7 million, or 56 cents per diluted share, compared to net income of 27.2 million, or 92 cents per diluted share in the fourth quarter of 2002 -- a quarter that benefited from abnormally high mortgage demand.

In our presentations to investors, we have often noted that our balanced revenue strategy works over the long term, not necessarily on a time frame as short as one quarter. Adjustments to declines in mortgage demand as significant as the industry experienced in the fourth quarter take longer than 90 days. For this reason, we believe full year comparisons are more meaningful.

For 2003 we earned $72.8 million, or $2.45 per share, compared with $53.3 million, or $1.89 in 2002, an annual increase in earnings per share of 30 percent. And our earnings came in above our guidance of at least $2.25 per share. Over the cycle, our strategy has, and we believe, will continue to meet our long-term financial targets. Our capital ratios are strong, and with an ROE of 18.4 percent, we have our goals for return on equity.

Finally, we are pleased with the continuing improvements in credit quality of our home equity and commercial finance credit portfolios. This is what gives us confidence that assuming no major change in the direction of the economy from consensus forecasts, we will be able to increase earnings again in 2004 in spite of the end of the recent (indiscernible) boom in first mortgages.

I will now turn the call over to Greg for a more detailed review of the quarter.

Consolidated net revenues decreased 9 percent in the fourth quarter to $130 million, as Will noted, principally reflecting the rising mortgage interest rate environment and slowing mortgage banking originations. Noninterest expense rose $5 million, or 5 percent, year-over-year, reflecting growth in our credit retained portfolios.

Our loan and lease portfolio totaled $3.2 billion at year end, up 1 percent from the end of the third quarter and up 12 percent from the end of 2002. Core deposits rose at an annualized rate of 17 percent during the fourth quarter, although total deposits of $2.9 billion as of December 31 did decline $100 million, or 4 percent, as compared to the end of the third quarter -- again, reflecting a decline in mortgage related refinanced escrow deposits.

We had $432 million, or $15.36 per share in common shareholder's equity at year and, a year-over-year per share increase of 18 percent. Our total risk-based capital at the end of the year was 15.1 percent compared with 14.8 percent at the end of September. Consolidated nonperforming assets were $52 million, or 1.05 percent of total assets at year and, up from 44 million, or .86 percent of total assets at September.

The largest increase in nonperforming assets, as we noted in the press release, was in our commercial banking lending portfolio, where 2 credits totaling $8 million were added to the nonperforming status at year and. We believe that we are adequately reserved for both loans. Our on-balance-sheet allowance for loan and lease losses totaled $64 million as of year end, unchanged from the end of September. Net charge-offs for the fourth quarter were 10 million, up $1 million from the third quarter, with delinquencies (indiscernible) declined in three of our four credit reporting segments.

I will now turn to detail by segment, starting with mortgage banking, where we earned net income of $10 million compared with net income of $17 million a year earlier. The decrease was principally due to lower loan closings and shipments. Net income for the year totaled $78 million compared to $45 million in 2002. Loan originations totaled $2.9 billion during the quarter, a year-over-year decline of $1.6 billion, or 36 percent -- again, reflecting lower levels of mortgage refinancing. Refinances accounted for 51 percent of production compared with 73 percent in both the third quarter of '03 and the fourth quarter of '02.

Our first mortgage servicing portfolio totaled $29.6 billion at December 31, and we are carrying the first mortgage servicing asset on our balance sheet at $348 million, or 117 basis points of the underlying portfolio loan balance, compared to a weighted average servicing fee of 33 basis points. We recorded $23 million of recovery in the value of our first mortgage servicing asset, net of derivative gains and losses, compared with net impairment expense of $12 million during the same period a year ago. Gross recovery in the quarter was $46 million and derivative losses totaled $23 million.

Let's turn to the commercial banking line of business, where we earned $5 million in the fourth quarter, an increase of $700,000, or 15 percent, from a year earlier. The increase principally reflects year-over-year growth of $2 million in net interest income, and a $1 million reduction in the provision for loan and lease losses. Net income for the year totaled $22 million compared to $16 million in 2002.

Our commercial banking loan portfolio was $2 billion at the end of year, and that compared with $1.8 million at the end of December of '02 -- a 9 percent year-over-year change. It was unchanged from the end of the third quarter. Included in fourth quarter net income was a $1.5 million provision for loan and lease losses -- a year-over-year decrease of $1.2 million -- reflecting an improved overall outlook for our commercial loan portfolio.

As I noted, charge-offs totaled $1.5 million during the fourth quarter, or 30 basis points of average loans on an annualized basis, compared with an annualized rate of 20 basis points during the third quarter. Reflecting our improving credit outlook, we ended the quarter with delinquencies in the commercial portfolio totaling 34 basis points at year end, down from 72 basis points at the end of September. Another encouraging trend is at the continued decline in our internal watch list, and this came down approximately 50 percent during the course of the year.

Our home equity lending business earned $1.4 million during the fourth quarter, compared to income of $8 million in the fourth quarter of '02 and income of $2.6 billion in the third quarter of '03. The decline in quarterly -- quarter-over-quarter income was principally the result of reduced levels of loan sales relative to originations. Sales were equivalent to 48 percent of current period production during the fourth quarter of '03, compared with levels of 94 percent and 81 percent during the fourth quarter of '02 and the third quarter of '03, respectively.

Net loss for the year totaled $20 million compared to income of 1 million in '02. As we explained six months ago, this is principally reflecting credit related expenses that we took during the first half of 2003. Loan originations for the fourth quarter totaled $288 million, a 10 percent increase, compared with originations of $262 million a year earlier and $268 million in the third quarter.

Compared to our fourth quarter originations of 288 million, we sold $138 million of (indiscernible) loans during the sale for a net gain on sale of $8 million, compared with sales of $218 million and net gains of a like amount in the third quarter of 2003. As we've noted in the past, our loan sales relative to production and our net gains on those sales reflect a variety of factors; among them, secondary market demand, product mix between (indiscernible) and (indiscernible), and cost factors among our various channels.

Our managed home equity portfolio totaled $1.5 billion at year end compared with $1.8 billion a year earlier, and was largely unchanged on a sequential quarter basis. $900 million of this managed portfolio is (technical difficulty) balance sheet. Capitalized residual assets were $71 million as of December 31, compared with $78 million at the end of September and $157 million a year earlier. Annualized charge-offs in the residual portfolio in the fourth quarter were 7.18 percent of the portfolio, compared with 8.19 percent assumed in our September 30 residual valuation models. As a result, there was no net credit-related impairment for the residuals during the fourth quarter.

On our on-balance sheet portfolio, net charge-offs totaled 3.03 percent on an annualized basis, compared with our allowance for loan and lease losses of 29 million, or 4.22 percent of outstanding loans and lines. And in an encouraging sign, 30 day and greater delinquency ratio for the on-balance sheet portfolio declined on a sequential quarter basis to 2.91 percent, down from 3.29 percent as of September 30th.

Our commercial finance line of business earned $2 million during the fourth quarter compared to the breakeven performance a year earlier. Portfolio growth, improvements in credit quality, and a reduced tax provision accounted for the bulk of the year-over-year change. Net income for the year totaled $2 million compared to $100,000 loss in 2002. Net interest income of $7 million during the fourth quarter was a 2.7 million, or 64 percent, year-over-year increase. And our loan and lease fundings in this line of business totaled $87 million in the quarter, compared to $63 million in the fourth quarter a year ago. Our portfolio now stands at $463 million, a sequential quarter increase of $40 million. Credit performance for our commercial portfolio has improved, with 30 day and greater delinquencies of 87 basis points at year end, compared to rates of 110 basis points and 100 basis points at the end of the third quarter of '03 and December of '02, respectively. Our allowance for loan lease losses for this line of business totaled $11 million, or 2.47 percent of outstanding loans and leases, compared with annualized charge-offs during the quarter of 119 basis points.

And finally, Irwin Ventures lost $300,000 during the fourth quarter compared with breakeven performance a year earlier. The loss in the current period reflects portfolio evaluation adjustments. And our portfolio had a carrying value of $3.5 million dollars at year end, down 500,000 from September 30th. For the year we lost $1.7 million compared to a loss of 2.7 in '02.

In summary, given the rise in interest rates in the fourth quarter, we posted solid results in a quarter that demonstrated how our balanced revenue strategy works. And we believe that if credit quality continues to improve, our credit reserve expenses will decline in 2004, and that this decline, along with continued balance sheet growth, will allow us to increase earnings.

Just to correct a slip of the tongue, it was a loss of 2.5 million in Ventures in 2002, not 2.7.

Thank you, Will.

We would like to open the call to questions now.

Thank you, sir. (OPERATOR INSTRUCTIONS). Terry Mcevoy, Oppenheimer & Co.

Just a couple of questions, if I could. I was wondering if you have an estimate for your total mortgage loan originations for 2004? And with rates coming down recently, have you noticed a pickup in volume over the last few weeks? Thank you.

Now that we for over a year now have had the three major production channels in our business that are commonly used in the mortgage banking business -- retail, wholesale, correspondent -- our share of market numbers seem to have more similarity to overall industry statistics than what we might have seen in the past. And it is our expectation that our total production in '04 will decline in line with what the MBA (ph) and Fanny or Freddie are predicting. We would help to expand our market share slightly in each one of our channels, but you can probably look at the year-over-year decline in those national estimates, apply our share of market in the fourth quarter to those numbers, and we, at least, believe that we will get a small share of market increase due to some sales and channel expansion. Reflecting upon that same answer, we do tend to see short-term changes in production that are similar to what you will have seen in the national statistics over the last couple of weeks. So as you have seen the refi index go up over the last couple of weeks, we've seen similar changes in our production.

Bill Roy (ph), JAM (ph) Partners.

Can you tell me what percentage of loans sold were sold with servicing retained?

In the first mortgage business?

The total loans in the mortgage banking operation?

Essentially, initially we sell all of our conventional and government production with servicing retained. We do some wholesale on a minor basis. In the jumbo area, we sell most of that --

It was immaterial in the fourth quarter, so essentially 100 percent of our first mortgage sales were servicing-retained. (indiscernible) -- let me just expand on our answer. In the second mortgage business we have a small origination (indiscernible) first mortgage loans; those we sell on a service-released basis. In the fourth quarter of our $290 million of production, about $30 million of that production was first mortgage loans. And we sell those on a service-released basis.

Great. And what was the total amortization of the MSR in the quarter? I have it --

About $29 million.

Okay, that's about what I have. And was any of that impairment, or was that normal amortization?

No, that was normal amortization. We had an impairment reverse due to the 20, 25 basis point increase in rates, on a gross basis of about $46 million. We gave up about 23 of that due to hedging activities.

Okay. But that didn't run through the P&L?

(multiple speakers)

-- but it doesn't through amortization on the -- that 29 million figure we just gave you.

The part that doesn't run through the P&L, we made reference in our press release in the mortgage banking segment section, about other than temporary impairment charge that we took, and that was $38 million -- (multiple speakers). That has the effect of reducing both the gross unamortized original cost basis, and the valuation reserve against that cost basis, but it didn't change the net carrying value. So it doesn't run through -- that part doesn't run through the P&L.

Right. (indiscernible) amortization, based upon my calculation, you booked servicing on current originations during the quarter at about a 2.7 percent cap rate, which equates to about an 8.8 servicing multiple, which was twice the cap rate you were using the first half of '03. Can you talk about the accounting involved at arriving at such -- or what appears to be such a high cap rate?

You need to go back and look at the formula again. It wasn't capitalized at that high of a rate. Our cap rates for government products -- depending on whether it is FHA, VA, 30 year or 15 year, sold through the FHLB system or not -- is around 200 basis points for conventional. Again, with all of those factors taken into account, (indiscernible) about 115 basis points. So it may just be a formulaic issue.

Maybe I can get to you after the call, but the formula I am using is just taking the beginning MSR, less the $29 million of amortization, backing out what your left with, the 348 million in MSR -- which is essentially what you book on current originations or loans that are sold with servicing retained -- and you get 2.66 percent.

We will walk through the math in our Q.

I would appreciate that. And can you elaborate just quickly on the gain on sale in home equity? It shot up to 5.6 percent from 3.7 percent in the prior quarter. Talk about kind of what -- ?

As I talked about in the call a few minutes ago, there's a variety of factors that affect that. Obviously, secondary market demand is a big one; mix of first and second loans is a big one. We sold, on a relative percentage basis, about half as much first mortgage loans this time than we did in recent quarters. It depends on whether we are selling (indiscernible) or (indiscernible) into the market, premiums are different. It depends on our cost allocations, and the cost allocations are both as we review our estimates for originating cost allocations, but also through channel. So it depends on whether the product came in through a correspondent or a broker or a retail channel, as to what that cost allocation ought to be. I think that the -- as Will talked about with regard to our earnings, I think like a lot of things in our P&L, looking at the annual number will give you directionally some good information about what we would expect to see over time.

(indiscernible) the annual numbers and not the fourth quarter?

I think the annual numbers are probably more representative, just as a lot of stuff is with our income.

Just one last question on home equity. The loan loss provision for the on-balance sheet portion dropped by 50 percent at 5 million, yet your charge-offs increase by a little bit over $1 million.

Our charge-offs are a factor of essentially previous delinquencies rolling through the system. And our methodology did not change during the quarter. We have a defined (indiscernible) rate base methodology for provisioning and allowance adequacy for our on-balance sheet portfolio. And you're seeing some reflection of a decrease in trend in delinquencies and a decrease in trend in serious delinquencies.

But to the extent that charge-offs continue to rise, would we expect to see the loan loss provision continue to go down, and thereby draw down the overall allowance for loan losses in the on-balance sheet?

If we hold the mix of products static in the portfolio, yes. What is happening is the portfolio over time is that we have a greater and greater percentage of product on the on-balance sheet portfolio that we originated subsequent to our significant underwriting changes we made in November of '02. And the reserve requirements for that portfolio will be less over time than the product that we had originated prior to November of '02, (indiscernible) put on-balance sheet.

And real quickly, last quarter you used, I believe it was about a 7.9 percent charge-off assumption on the IO (ph); do you know, is that still the same in the fourth quarter?

Our loss expectation is for the residual during the fourth quarter, we spelled out in the press release, was about 8.2 percent. And that's against the (technical difficulty) performance we had in the fourth quarter of 7.2 percent.

Right. At what point would you, if -- do you leave a buffer there, or if charge-offs or losses went to 8.2 percent, do you impair it? How do you view the overall (multiple speakers)

If it went to our model assumptions, we wouldn't impair it. If we believed that there was a trend significantly above our modeled assumptions, we would impair it. And if we believed there was a trend significantly below our modeled assumptions, we would look at an impairment reversal.

Thank you.

But again, just to be clear, if charge-offs go up from the 7.19 or 7.18 in 4Q, to a level that is commensurate with our model (technical difficulty) let's assume that they are in the 8 handle for the first quarter, that doesn't lead to impairment because it would be right on top of our expectations. Even though charge-offs would up.

Or in other words, the residual modeling does not include a static estimate of losses; it builds in a seasoning forecast and our expectation of how losses will trend over time. So if we come off the trend, rather than if it changes from quarter-to-quarter.

Thank you.

Let's give somebody else some time.

Fred Cummings, McDonald Investments.

Will, you talk about earnings being up '04 versus '03. In that assumption, do you assume any gains on (indiscernible) of servicing rights?

We are looking at a forecasted interest rate environment that we derive from published forecasts of, in essence, consensus. We don't try to make our own special interest rate forecasts. So if those interest rate forecasts prove out, we will end up writing up our mortgage servicing rights to some degree, and that element is included in our expectations. Of course if interest rates don't rise, then the commensurate impact that we are assuming on our mortgage production in a negative way is not likely to happen either.

From a planning standpoint, as Will noted, we expect an interest rate rise, based on what third parties are telling us. Whether we take advantage of that rise in terms of capturing servicing value through the P&L or through bulk servicing sales, is really an ongoing and short-term-based decision that we decide in concert with discussions with the secondary market, in terms of relative demand for the product.

I have another question. Will, you mentioned right-sizing expenses for the mortgage business. I'm just trying to get some guidance as to how we should be modeling your expenses in that business. Assuming volumes stay around these levels, how much more room do you have to cut cost? And I don't know if we should be thinking about it in terms of an expense to revenue number, expenses to originations -- if you can give us some -- a feel for how we should be thinking about that?

I can't give you a specific ratio that we are targeting. The difficulty in any down market for adjusting your production expense stream to the new reality is figuring out exactly where the new reality is going to settle out. We have been reducing costs and we have been reducing the number of people employed in our various production channels. As interest rates move around, of course, you can sometimes get a pickup in demand in the short-term basis that causes you to postpone further reductions until you see how that plays out. And we are sort out in that environment right now.

But from a short-term modeling standpoint, it is a difficult question to answer. I think there's three basic tenants, at least, that I can think of. One is, we have long talked about our long-term earnings goals that apply to each one of our -- and return goals that apply to each one of our Businesses. Number two, we don't pay for market share, and what we do is we try to right-size that given expected short-term demand. And as Will talked about, it's a challenge in a market where rates have gone up as much as they have in the last six months, and now they have come back down a little bit. But our ultimate goal as operators of the business, not necessarily modelers of the business, is to make sure that we've got our staff working at a high percentage of utilization. And you tie that back to our long-term earnings goal; that's the way we manage the business on a monthly basis.

One last question, Greg. Just curious, in terms of how you guys allocate capital to the various business lines. Obviously, a mortgage business has a huge return on equity. Can you talk about what, based on how you internally allocate capital, what the returns would be for the commercial banking business? And when we look at the home equity business, knowing that you lost money for the full year, longer-term, what is the profitability potential of that business line?

That's a long and complicated question that we spend a lot of time talking about. That was actually the subject of our morning meeting this morning. The short answer is we think we are in segments of the banking business that are relatively higher growth rate and higher margin, and therefore higher return businesses. We allocate our capital today using a mix of methodologies that have a least-common-denominator, in terms of the (indiscernible) one approach by the regulators. We supplement that using some capital markets-based models that we have received from, essentially, sort of a rating agency approach. And we are paying a lot of attention to what is going on with the Bosul (ph) 2 work, and are spending a fair amount of resources putting into place what we call an economic capital model that will mirror the better parts of the Bosul 2 process. In that allocation, that last one, where we're allocating capital on a real economic basis, the mortgage banking returns aren't quite as strong as they might look like on a regulatory capital basis, because of the heavier allocation of capital to MSRs. The commercial bank returns, frankly, don't change much, but they increase a little bit under an economic capital versus a regulatory capital basis. And with regard to ongoing sustainability of the home equity business, obviously, we have credit-related issues that make for not useful return calculations. But as we run -- as we run our current production through that economic capital model, we get returns that are commensurate with what you would see as very good banking returns.

That's helpful, Greg. Thanks.

Joe Stieven, Stifel Nicolaus.

A couple of follow-ups. Will or Greg, your commercial finance business actually made money this quarter, which I guess for the first three quarters of last year was sort of breakeven. Is this (indiscernible) number one, turned the corner for you guys? That's question number one. Question number two is on your residual, your 71 million, will you break out what is the credit enhanced versus the noncredit enhanced? That's question two. Question three is, your capital levels are now at pretty high levels for you guys. Just discuss what you plan to do with the new-found levels of capitals. That's it. Thanks.

On the commercial finance side, what we were real pleased about this quarter was all of our product delivery channels came through the way we expected them to. The longer history, Joe, you noted that we have had a bumpy road. The bumpy road has come from a now exited product delivered domestically in the lease portfolio; it was broker-sourced. And that is where our problems have come. Because it was the original platform and product of the Company, its portfolio dominated the results for the last year and a half in terms of credit quality. But if you look at the look in the Q where we separate out the different product channels, the Canadian vendor-based portfolio and now the U.S. vendor-based portfolio, and particularly our U.S. franchise-based portfolio -- those all have been meeting our expectations. Franchise, in fact, exceeding it handsomely. So what happened this quarter is we think we have, at least -- actually more than this quarter, we think we see a good trend in our domestic lease portfolio. And we think now, all three product channels are moving along the way we want them to. So we are pleased with that. There was -- you didn't ask about this, I don't think, in your question, but we did have an unusually low provision in that line of business this quarter. Notwithstanding that, if we --

Provision for taxes.

Provision for taxes -- sorry -- not losses. If you sort of normalize that provision, which we would expect to be the ongoing situation, we still would be pleased with the level profitability. It would have been coming in at about 1.3 million of profitability for the quarter. So things are certainly looking the right direction in that line of business.

Your second question was on CEIOs. We've got total residuals now of slightly over $70 million. The credit enhancing portion of those where it is a PV of yet to be collected cash, is about $12 million, so 12 70 is -- the non-CEIO portion, therefore, is about $58 million. And Will may want to amplify my comments on capital. But frankly, on the capital level, we think this is exactly where you want to be as the economy starts to pull out of a recession. And we hope for everybody's sake that we start to see growth in the economy, which would lead to portfolio credit growth -- credit-retained portfolio growth for us. And we think that our capital level is right where it needs to be to be able to support that growth.

Loan demand in the commercial banking sector has been somewhat tepid across the country, but also in our markets. And we're hoping as the economy gathers steam, that is a particular area where we could begin to grow substantially again. And we are pleased to have the capital to support that growth.

Will, in the fourth quarter you guys -- did you prepay a trust preferred out there? Were there any original expenses that you had to expense for that, still?

Yes, we refinanced a trust preferred. We redeemed one and issued another, which will create a substantial savings in the interest cost over time. In the fourth quarter we had to write off about 1.5 million of origination costs that had been capitalized with the TPS we redeemed, and were unamortized.

Frank Fargasee (ph), (indiscernible) Managers.

In your comments regarding the commercial banking sector, you were suggesting that commercial banking will be one of the drivers offsetting the softness in the mortgage area in 2004. In the fourth quarter you had loan volume basically unchanged from the third quarter, and you had margin erosion from -- on a linked quarter basis. Where do you see the drive coming in the commercial banking area? Will it be more from a reduction, a further reduction in the loan loss provision, or do you expect a pickup in loan demand, given the fact that you operate in the market that is probably less likely to have an economic improvement relative to other sectors of the country?

First of all, I would like to remind you that our commercial banking line of business, in addition to operating in Indiana and Michigan -- which is what I assume you were referring to -- (indiscernible) characterize us also operates in Phoenix, Salt Lake City, Las Vegas, parts of the country that are actually growing above the average nationally. So we are not -- we are not a Midwest-only bank, and we are looking forward to (indiscernible) loan demand in a number of the markets that we serve in commercially.

Specifically, I think the two areas that you focused on in the fourth quarter were, obviously, disappointments to us, but they are areas where we think we will see improvements in 2004; Will's comment about loan expansion in markets not only in the Midwest, but also in the inter-mountain states. Margin was hit in the fourth quarter, frankly, because from a funding standpoint, we have been working diligently over the last several years to build our deposit base. That has left us with, in a slow growth, loan growth environment, essentially a deposit overhang relative to our immediate ability to put them to use earning assets. And to our Fed funds position, it's been a little bit stronger than what we would normally run it at. And lastly, no, we probably won't see a significant decline in provisions that would be meaningful enough to be the basis for earnings growth. But we certainly down see it running at the $2 million-plus level relative to portfolio that we saw in recent quarters.

The other point I would make is that in our home equity line of business, in the first half of the year we swallowed about $50 million of impairment charges as we remodeled our future expectations of losses and their effect on residuals. We now have got several quarters under our belt of those credit losses coming in right on top out what we were forecasting, so we didn't have additional impairment. And we'll get a substantial pickup next year in income from avoiding that impairment, as long as our loss forecasts continue to track, or our actual losses continue to track with what we have got built into the residual evaluations.

As a follow-up, could you give us a little bit more detail on the two commercial loans where you had problems in the fourth quarter?

One is in the Midwestern region, another one is in the West. They are not in the same industry. We have workout plans on both of them. They have been on the watch list and been actively managed for some time, and we think we are adequately reserved for each.

And reserved for some time, which is why we didn't flow more through the provision this quarter for those.

(OPERATOR INSTRUCTIONS).

Thank you very much. And thank you, everybody, for your participation. And we look forward to chatting with you at the end of the first quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. You may all disconnect at this time. Thank you for participating.