First Financial Bancorp (FFBC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Irwin Financial fourth quarter results 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. Will Miller. Mr. Miller, you may begin.

Thank you. Good afternoon and thank you for joining us. I'm joined today by Greg Ehlinger, our CFO, and Jody Littrell, our Controller.

Before we start with our presentation, I want to make you aware of important cautionary disclosures in connection with the forward-looking statements we will be making on this call. The cautionary disclosures are in our written earnings press release today and in our recent SEC filing.

Results in the fourth quarter were mixed, with some bright spots and some areas where we continue to be challenged. Irwin Union Bank's earnings, while down slightly after-tax from the third quarter, when we had an unusually low tax provision, were up 2% pretax from the third quarter. Although fourth quarter earnings were below those of last year, earnings for the year set a new record in this segment.

Irwin Commercial Finance is doing very well, setting a new record for both quarterly and annual income. Net interest income in these two commercial segments continues to grow nicely, reflecting broad base portfolio growth. Margins remain strong, despite the yield curve inversion, as we continue our focus on less price sensitive niches within our small business customers who value our service intensive approach.

The commercial loan and lease portfolio grew at a 13% annualized rate in both the fourth quarter and for the entire year of 2006. We anticipate a continuation of this good growth in 2007, reflecting our recent branch openings and product line expansion. The commercial portfolios now account for approximately 75% of our total loan and lease portfolio.

Credit quality remains strong in the commercial segment. Delinquencies and charge-offs have been low for some time now and our reserves are healthy.

In the home equity segment, we're making gradual improvement, although seeing that progress through to the bottom line has been slower than we'd hoped. With Jocelyn Martin-Leano and the other members of the Management team for this segment, we've taken a number of actions in 2006, that while costly in the short-term, are important to restoring the long-term strength of this business.

In April, we restructured our direct to consumer channel in order to dramatically change its cost structure and pull-through rates. At the same time, we focused our intention on increasing production in our more profitable broker and correspondent channels.

In the slowing mortgage market, we've been swimming against the tide in making these changes, but the trends continue in the right direction, as broker and correspondent production is increasing, helping to offset the decline in direct-to-consumer volumes.

We've made good strides in the expansion of high loan to value first mortgages in our product set as well. This should allow us to better leverage our infrastructure.

Credit costs have increased in Irwin Home Equity's portfolio, primarily due to a combination of portfolio seasoning, product mix and an upturn in delinquencies. The increase in charge-offs in this segment comes after an extended period where losses have been well below our long-term expectations. We have been expecting this upturn in charge-offs and have been increasing our provisions in anticipation of its impact over the last several quarters.

Bottom line results in this segment have been disappointing, however, we believe we have largely achieved our targeted objectives in repositioning and restructuring the Company for future growth. If we can achieve our volume goals, we expect Irwin Home Equity to be a meaningful contributor in 2007.

We believe the environment in the coming year should be favorable for the products Irwin Home Equity offers.

Finally, during the fourth quarter and in the first portion of January, we substantially completed the disposition and transfer of the remaining assets of our conforming conventional first mortgage segment operations. The bulk of the fourth quarter activity involved preparation for and transfer of mortgage servicing rights and related operations.

In summary, while we've seen improvement in our consolidated results, they are still not back to the level we believe we can achieve. We continue to think the decision we made to focus our resources in capital into growing our commercial lines of business, as well as the restructuring we've undertaken at our home equity line of business, will result in renewed growth and improved consolidated results in 2007.

We continue to make good progress in our multi-step process of reducing the volatility of our earnings, while moving our capital and resources into growing and more predictable segments of the banking business.

I'd now like to turn the call over to Greg Ehlinger, who will discuss our financial results in more detail.

Good afternoon. Net income from continuing operations for the fourth quarter was $10.6 million or $0.35 per diluted share, up from $0.30 per share in the third quarter of 2006 and $0.32 per share a year earlier. For the year, our net income from continuing operations totaled $37 million or $1.25 per share and our return on equity from continuing operations was 8.1% for the quarter and 7.1% for the year.

Combining these results with the operations and disposal costs of Irwin Mortgage, the corporation had consolidated net income of $4.9 million or $0.16 per share in the fourth quarter and net income of $1.7 million or $0.05 per share for the year.

Consolidated net revenues for continuing operations, those in commercial banking, commercial finance and home equity, increased on both a sequential quarter and year-over-year basis, reflecting increases in both net interest income and non-interest revenues.

Our consolidated loan and lease portfolio was $5.2 billion as of year-end. This is up 17% from the year earlier, reflecting growth in each segment. Mortgage loans held for sale totaled $238, up from $176 million at the end of September.

At the end of the year, deposits totaled $3.6 billion, down from $3.8 billion at the end of the third quarter and $3.9 billion a year ago. With the sale of the conforming conventional first mortgage company, we've been restructuring the composition of our funding base to shift away from escrow deposits, public funds and other wholesale sources of funding and toward a higher proportion of core deposits. Reflecting the competitive environment in 2006, core deposits grew only 2% to $2.3 billion.

At the end of the year, we had approximately $325 million in deposits associated with the mortgage-servicing portfolio of our discontinued operations. These deposits were transferred in early January. This funding source has been replaced by other core deposits and wholesale funding sources.

We had $531 million or $17.30 per share in common shareholders equity as of December 31. At year-end our tier-1 leverage ratio and total risk-based capital ratio were 11.5% and 13.4% respectively, compared to 10.8% and 13.5% as of September 30.

We noted two fourth quarter capital transactions in our earnings release. First, during the fourth quarter we refinanced $30 million of trust preferred securities, taking a pretax charge of $800,000 or $0.02 a share to write-off unamortized debt issuance costs.

We also issued $15 million of floating rate non-cumulative perpetual preferred stock. This capital is tier-1 eligible with a 5-year non-call period, but is callable at par thereafter at our option. We believe this relatively low-cost permanent tier-1 capital was an important addition to our long-term capital structure for our future expansion.

During the quarter, our Board authorized Management to begin the share repurchase program after the sale of Irwin Mortgage. We began those repurchases late in the fourth quarter, after the majority of the contingencies of the mortgage sale were completed. And during the quarter we repurchased $3 million of common stock or approximately 140,000 shares. We anticipate being in the market for additional share repurchases during the first quarter with the pace of repurchases being balanced by the relative attractiveness of our shares on a price-to-book basis, with the need to support our growth in attractive markets.

Nonperforming assets were $58 million or .93% of total assets as of year-end. This is up from $52 million or .87% at the end of September. The majority of the increase in nonperforming assets was in the discontinued Irwin Mortgage operation and the bulk of the increase there is on-balance sheet and reserved for as real estate owned properties.

Our allowance for loan and lease losses totaled $74 million at year-end, up $15 million year-over-year and up $4 million from the end of the third quarter.

The ratio of on-balance sheet allowance for loan and lease losses to nonperforming loans and leases was 199% at year-end compared to 213% at the end of September. Our consolidated loan and lease provision from continuing operations totaled $9.9 million in the fourth quarter, up from $9.1 million in the third quarter of 2006, reflecting loan growth and the increase in nonperforming assets.

I will now turn to some detail by segment, beginning with the Commercial Banking segment, which earned net income of $8 million, a decrease of 3% from the third quarter, due to increased operating expenses and a return to a more normalized tax rate after a one-time adjustment in the third quarter.

Pretax net income increased modestly on a sequential quarter basis. For the year, our net income was $30.9 million, a 12.7% increase, which was, as Will mentioned, a record for the segment.

While competitive conditions continue to be challenging, our Western market expansions over the past year have enabled us to grow the portfolio without taking undue risks. Loans outstanding at the end of the year were $2.9 billion, an 8% annual increase.

Net interest margin was 4.24% in the fourth quarter, down modestly from 4.27% during the third quarter. With the balance sheet of this segment fairly well deployed in the loan portfolio, we expect to continue to see this level of net interest margin in the segment for the near future.

Credit quality continues to be a strength. 30-day and greater delinquencies were 0.13% compared to 0.12% at the end of September. Our provision for loan and lease losses of $1.3 million compared favorably to net charge-offs of $700,000 during the fourth quarter.

Annualized charge-offs declined to 0.9% in the fourth quarter and totaled 0.12% for the year, unchanged from 2005. Nonperforming assets increased modestly to $19 million from $17 million in the previous quarter, reflecting modest deterioration in some Midwestern markets. None of these new nonperforming assets were large. Over the course of the year, nonperforming assets declined $8 million or 31%.

Our Commercial Finance line of business earned net income of $3.5 million in the fourth quarter, up from $3.3 million in the third quarter. For the year, net income totaled $12.6 million, a 70% increase, and as you've heard, a record for the segment. The segment's loan and lease portfolio now totals $1.1 billion, a 29% increase over the past year.

Net interest income totaled $12.3 million, up $3.1 million or 34% over 2005 and a $1.9 million sequential quarter increase. We had strong funding in the fourth quarter. Originations totaled $164 million during the quarter, compared to $147 million in the third quarter. For the year, originations totaled $595 million, a $144 million or 32% annual increase.

Our loan and lease loss provision in the segment totaled $2.1 million during the quarter, up from $1.6 million in the prior quarter. Charge-offs decreased to $900,000 from $1.2 million in the third quarter. Charge-offs totaled 0.4% of the average loan and lease portfolio for the year, down from 0.69% in 2005. And 30-day and greater delinquencies totaled 0.6% at December 31, up slightly from 0.57% at the end of September.

Our Home Equity lending business earned $1.2 million during the fourth quarter, compared to a loss of $300,000 in the prior quarter. For the year, net income totaled $1.5 million compared to $2.3 million in 2005.

Loan originations totaled $254 million in the quarter, unchanged from the third quarter. Increased production in the broker and correspondent channels helped offset decline in the direct-to-consumer and other channels.

Delinquencies increased modestly on a quarter-over-quarter basis. 30-day and greater delinquencies for the on-balance sheet portfolio increased to 3.54%, up from 3.49% at September 30.

Our loan loss provision increased to $6.5 million from $5.9 million in the third quarter, reflecting a decision to increase the allowance for loan and lease losses in light of weakening housing markets and elevated credit losses during the fourth quarter.

Net charge-offs in the quarter were $6.4 million compared to $3.5 million in the third quarter, largely reflecting product seasoning and mix changes. While elevated, as Will mentioned, charge-offs remain in the range consistent with our long-term expectations.

Also included in results from continuing operations was a loss of $2 million for the parent and other consolidating operations, compared to a loss of $2.1 million in the third quarter. For the year, these entities loss $7.6 million compared to a loss of $800,000 in 2005.

The current period decline was the result of reduced internal cost recoveries on allocated capital, increased debt issuance cost from the early redemption of the capital securities I discussed, risk management and compliance consulting costs and a return to a more normalized effective tax rate.

The discontinued operations related to our conventional Mortgage Banking segment recorded a quarterly after-tax loss of $5.7 million, reflecting staff and other operating costs, as well as increases in reserves for future repurchases of loans. With the substantial completion of the sale of the segment's activities, but with certain remaining obligations in the segment, we expect a small loss from discontinued operations in 2007.

In summary, our commercial lines of business produced record earnings in 2006. They continue to make good progress in balancing the cost of investment in market development against growth in revenues and net income. The commercial loan and lease portfolios grew solidly in 2006 and we expect a continuation of this growth in 2007 and credit quality remains strong in the commercial segment.

We have experienced improvement in Home Equity, although slower than anticipated. We believe our focus on increasing production in our broker and correspondent channels is the right decision to restore strength to this segment.

We've seen an improvement in our consolidated results, but they are still not back to the level we believe we can achieve. The decisions we made in 2006 to focus on our profitable commercial line and to restructure our Home Equity business will result in renewed growth and improved consolidated results in 2007.

Hilda, we'd like to open the call to questions now.

[OPERATOR INSTRUCTIONS] David Konrad from KBW.

I have a couple of questions on the Home Equity business line. First one is net servicing income was around $4.1 million. It looks like a pretty big jump, link quarter, I guess, and year-over-year relative to my expectations. Is that based on the incentive servicing fees and maybe if you can provide some sort of outlook to that category?

David, thank you for that question. We have talked in previous quarters that that line item is going to be fairly volatile, given the accounting for the incentive servicing fees on a cash basis. I think the run rate that we discussed in the past is closer to $2 to $2.5 million. There was a fair amount of cash released out of the center servicing fees this quarter so that number was elevated due to that.

We also adjusted our amortization speed of the servicing asset down this quarter to reduce the overall amortization rate for the year, to get the net servicing asset valuation back to a valuation that's appropriate, given the prepay speeds that we've seen in actual cash flows.

So the run rate should be closer to $2 to $2.5 million. We saw an elevated rate this quarter.

Okay, great. Thank you. And a couple of other questions, the first one regarding credit. With charge-offs in the $6 million range, it sounds like that's still within your comfort level. Is that a range we should think about in '07? It sounds like that's kind of the new level for this.

While we don't predict the specific dollar amounts to charge-offs, we have said that the charge-offs, in terms of where our business model is and how we intend to make money going forward has been unusually low and that this is coming back more into the range of what we would expect in the long-term. We don't quantify it.

Okay. Last question and I'll let someone else jump in. Just the secondary market for the Home Equity loans, it looks like gain on sale margins were a little bit challenging like last quarter and I don't think you sold as much as historically. So I just wonder if you could give me color on what you're seeing in the secondary market?

Right. So, we didn't sell very much this quarter--$68 or $69 million. The gain on sale, actually, was a little bit richer than what the net number in the P&L shows up to be. David, as you know, there are several things that run through the gain on sale line. You've got the gross sale of the loans. You've got to write-off any capitalized expenses you had associated with those loans. Those actually, we've begun to see some--I think we mentioned in the third quarter even, stabilization in the pricing in the secondary market. So those actually were pretty good.

We had some derivative gains run through there as well. The thing that netted that gain on sale number down to a relatively low level was some of our charge-offs ran through the mark-to-market on the gain on sale. So of that $6.5 million of charge-offs, we had during the quarter, we had about $2 million that was in our classification of held for sale. So that, unfortunately, gets blurred in the GAAP reporting. But that $2 million pretty much offset the derivative gain and secondary market margin we had on the underlying loan sales.

Brian Hagler from Kennedy Capital.

One clarifying question and I can't remember if this was before you got into your segment comments, Greg, but you mentioned the MPA increase was mostly in discontinued business?

That's right, Brian. We had about a $5 million-dollar increase in MPAs and they largely came from the owe to Irwin Mortgage segment. And the bulk of that increase in MPAs were in real estate owned REO properties.

And as you know, when you bring an REO asset onto your balance sheet, you're marking it down to what you think you're going to realize. So in effect, it doesn't have the same impact on provisions that an MPA of a different type might.

Right. And you said you had already had some reserves set against that, is that right?

Right.

And I guess my other question kind of piggybacks on one of David's. And that is, charge-offs in the home equity segment, you comment every quarter that they continue to kind of be in your anticipated range and I know you don't give forward-looking guidance, but can you just give us maybe a sense of what the low end--and obviously, the low end is probably what we've seen in the last year, but kind of what the high end of that range might be in kind of a normalized environment? What would cause you to basically say that now this is running a little bit ahead of what we expected?

If we got up on the north side of 2.5, we'd say that they'd be running more than we're anticipating. The numbers that we've seen in recent quarters, frankly, were at the low end of the range. Our Chief Credit Officer has been promising us that higher losses were coming and we're just now starting to see it. And that's why we carry, you know, I think at the end of our third quarter, our reserve for loans was probably about 240-245 basis point range. And in the third quarter, our annualized charge-off rate I think was [down to] 1% and I think Jim would say that that is considerably lower than what we would expect the run rate to be.

So the run rate, I'd say, is sort of in the 1.5 to 2.5 range and within that bound, I think we feel comfortable about our reserve levels and the underlying characteristics of the underwriting system in the loans that we're [reporting].

I think one of the things you sort of point out is to remind folks that we've been reporting on the credit quality of our--the credit characteristics, as determined by--or as judged by FIFO scores and disposable income in our queue for a number of quarters. You can see in there that the credit quality of the paper is represented by FIFO scores that are about 700 and disposable income levels that are about [$6,500]. We also should point out, there's very little concentration in non-owner occupied, second home, three to four-unit home financing in our portfolio. In aggregate, those three categories are less than one-half of 1% of our entire portfolio.

So, while some of the national trends in those product lines are starting to kick up and to become alarming, I think we're comfortable thinking about credit costs in the plus or minus 2% range, because we don't have a large concentration in that product type and we've also shown folks in the past the geographic concentration. We tended to shy away from the Coastal properties as well.

Okay. And earlier in your comments did you mention--you were talking about some of the changes in that unit. You mentioned something about the LTV. I don't know if you guys recently have kind of gone upstream with that? I didn't catch that.

No, the changes in that segment that we were talking about had mostly to do with the channel. We had been producing in three different channels; direct-to-consumer, wholesale and correspondent. And last April, we concluded that the cost structure of our direct-to-consumer channel was too high and made it not profitable to us to originate loans the way we were doing it.

So we restructured it. We still have some direct-to-consumer originations, but it's in a pretty different form and with a much lower cost structure now. And the mix is shifting quite a bit towards broker and correspondent. That's what we were referring to.

Okay. I assume part of that exercise was adding new brokers and correspondents?

Yes, we have been adding new brokers and correspondents. And frankly, also culling some of the less active ones that we used to have relationships with, but we haven't been doing as much business with. So, the overall number may not have been moving substantially, but we're shifting towards a higher penetration within the folks we have agreements with.

I should say one other thing. We have introduced some new products, like 110% first mortgage that has a bit higher LTV, but from a credit point of view, it's not substantially different--actually, it's a little better than the 125 product that we have been doing that was the second that we based it on.

Edward Hemmelgarn from Shaker Investments.

I just have a couple of questions. First, on the escrow deposits in the first mortgage loan servicing portfolio, what was the interest rate you paid on those?

The rate on the escrow was pretty close to 0. It was dictated by state requirements that varied by state. The number that I kept in my head over the years for reference, given the national platform we had, was about 25 basis points.

Did the excess profits from those low-cost deposits remain with the mortgage servicing business?

Yes. It was in that segment.

So, that proper was part of the wash with the--?

The margins in our other segments are not reflective of the low-cost escrows. That was part of the reported results of the old Irwin Mortgage Center.

Okay. You received about, what, 260 million for the sale of that business?

For the servicing assets, right.

Is that one of the--is the bulk of that going to serve, or has it gone to serve as a substitute in the rest of your business for the low-cost deposits that you had with the escrow?

Part of the replacement of the escrows came from the cash received. We've also stepped-up our home loan bank funding and some of our public fund funding.

Okay. Can you talk a little bit about your commercial banking branch growth outlook for 2007?

Sure. We just, in the fourth quarter, entered two new markets; Reno and Albuquerque. And as has been the case when we've gotten into new markets in the past, we believe we recruited a great local team of experienced bankers from those markets, with deep history in serving the small business customer groups within each of those communities. And each time we do this, of course, we have some early period expense drag from opening an office that doesn't yet have a balance sheet, but it provides robust growth for us going forward.

Those are the two new markets we've just entered.

And if your question was forward-looking into 2007, we've talked before about the fact we've got sort of a profile list of mid to large-size metropolitan markets where some certain characteristics are common, M&A activity, broad-based economic growth and have tried to pursue a people-led strategy of finding those folks that are fed-up with the acquisition changes, don't want to go the de novo route. Our internal capacity to absorb a number of new offices is somewhere between two and four a year, kind of balancing our financial and systems and people resources. But when we get those isn't something that we can map out on the calendar.

So we'll talk about Albuquerque and Reno. Those came to us because we had been working to see what kind of interest there was in those markets for a number of quarters and it came together in the late third quarter that we were able to pull together teams in those markets. We are still looking for other expansion markets, but whether those happen in '07 or they happen in '08 will really be dictated not by really sort of the financial consideration of wanting to add assets at a particular time, but more driven by when we're able to pull the team together that we want.

Okay. What's your tax rate that you're looking forward to having in '07?

Probably about 38%.

Okay. Is it then as reasonable as if you used--since the cash that you received is going to replace some low-cost funding--or the escrow deposits that you lost--the cash will add about $2 million a quarter in income, approximately? Given the fact that you were losing money on your mortgage business and if so, in effect, you're getting $260 million of actual--?

I should have given you a fuller answer on the $260 million. One thing to remember when you have mortgage servicing assets, the tax bill follows the cash flow on that, so we built up over time, a pretty considerable--about $100 million deferred tax liability. So you'll need to shrink your mathematics by about 40% and then your numbers would be right, because that cash would then be available as replacement funding for the escrow deposits.

So, in effect you only got--are you saying then your net results were only about $160 million?

That's right.

[Steven Guillen] from Stifel Nicolaus.

Commercial finance and net interest margin had a pretty nice pop in the quarter. If you could provide some color on were there some particular deals that were priced very attractively or was it just kind of across the board?

It was really a combination of two things. One was a geography and classification thing, where we started moving and recognizing prepayment receipts into the margin to align it with the practices around the rest of the corporation. And then the second one is the sustainable one and it comes from an ongoing push that we've had with our sales force, especially in the small ticket portion of that business to focus on margins and to pay attention to that balance between volume and margin and have now incentive commission type of systems that support that focus on margin as well.

The cross trend in that is that more and more of that portfolio is in the franchise portion of the business and the margin there is a little bit lighter than in the small ticket side. But the increase that you saw quarter-to-quarter and throughout the year really came from a focus on margin in our small ticket side of the business.

Okay. And one other item under commercial plans. There was a fairly substantial drop in other income.

Yes, that's that geography--.

The movement of the prepayment penalty.

Okay. And under home equity, the severance expense, I'm just wondering if there was any severance expense in the quarter or if the cost that you're currently seeing there are kind of a good number going forward?

All of the severance cost we have related to downsizing the direct-to-consumer was in prior quarters. We did have a cost in the fourth quarter when we got to the point of subletting some of the space that the retail organization had been using in the past. So that was a one-time cost.

It is offset in the P&L to some degree, both in timing and dollars, by the change in the amortization speed that we had on the MSRs that I discussed in response to Dave Konrad's question. So if you wash those two out, and accepting that there's some other noise in the rate, the run rate is a pretty good representation of where we are today.

Okay. And just some bookkeeping items. Consolidated number for the net interest margin and earning assets? Do you have those on hand?

Net interest margin of 4.86. That compares to 4.8 in the third quarter and I don't have in the same file the earning assets, but if we get it before the end of the call, we'll let you know.

Okay. And just two more quick questions. Deposit costs, with regard to your funding costs, are current deposit costs pretty close to current market rates or are there likely to be some increases over the next couple of quarters or so?

Steven, the current cost structure, absent the movement on the escrows, is a good run rate deposit.

Okay. And just one question about what you're seeing out West with a couple of the new branches. Are you seeing some growth in the deposits from those Western banks that you recently opened? And also, one follow-on question to that is, are you seeing deposit costs significantly better than the Midwest? We've seen that from a number of the banks and what you expect?

To be honest, I don't have in my head whether deposit costs or loan yields are the source of it, but the spreads out West are considerably better than they are in the Midwest. I just don't know which side of the equation it is. But part of the traction of moving into some of the Western markets for us over the past several years has been a pattern sustained over several years of higher spreads in the West.

The two latest markets, Reno and Albuquerque, are too early to answer your question on deposit growth. They've just gotten started. But, in general, with the markets we've opened in the last several years, frankly, it depends. Some of the markets have been quite strong in deposit growth and others have had greater loan growth than deposit growth.

So, looking at some specific markets, Sacramento and Costa Mesa are relatively new markets for us. They didn't have, on a consolidated basis, really sort of needle-moving improvements over the year, but it's all incremental growth to us. So, Costa Mesa is a market we entered in late 2005 and it's now on the map with regard to our total deposits. Sacramento opened a little bit earlier than that, but likewise, is adding at a $20 million rate in each one of those markets to our total deposits. So it's going from nothing to $20 million, not moving the needle on the consolidated basis, but going the right direction.

Steven, on the net interest margin question, it was 4.86 for the fourth quarter and that's based upon average interest earning assets of 5.7 billion in the fourth quarter.

Edward Hemmelgarn from Shaker Investments.

You mentioned in the past how your target for return on equity is about 12 to 13%. Do you have any idea or timetable of when you think you might be able to get back to that level of ROE?

We haven't offered a specific forecast. What we've said is that we are very conscious of the fact that we are below our targets now. We look forward to an improvement in '07 and in the long-term, we think we can get back to them. But we're not putting a specific timeframe on it.

Ross Demmerle from Hilliard Lyons.

With regards to your share buyback, you bought some shares back this quarter, but it looked like average shares still increased from the third quarter. I guess my question is, going forward, if we assume you purchase back about, I guess, $47 million worth of stock, is that going to be a net reduction in shares, or are we going to start to see more shares added from options or however else they're being put on the balance sheet?

We didn't start the repurchases until we saw the clear signs that most of our contingencies around the sales of mortgage bank were taken care of. And so, in the fourth quarter we didn't get started until the month of December and then with trading windows didn't trade past the end of the month and haven't traded in January. We expect to be back in the market here when the window opens up.

You made reference to $47 million. It's unlikely that we will use the entire Board authorization in 2007, or frankly, the majority of it. The Board authorized that amount in August of last year. Subsequent to that, we've opened up some new markets in the Western states that we think will be attractive. We continue to get good loan growth. And probably most importantly, and the reason why the Board asked us to wait until the contingencies of the mortgage sale were taken care of, it cost us about $20 million more to get out of the mortgage bank than what we knew it would cost us when the Board set up their authorization in August.

As we go forward, we will do more shares in this first quarter and then throughout the quarter and for the rest of the year we'll pay attention to the degree to which our capital ratio and loan growth that drives the capital ratio is above our policy target of 12.5% capital and we'll switch it on faster or slower as we see that loan growth, understanding that our shares are still relatively cheap on a peer basis and price-to-book basis.

So we're going to look at that on a quarterly basis and balance both the desire to get the money back in the shareholders' hands with a knowledge that we've made investments in markets for what we think are good long-term return reasons and we're not going to shortchange that growth in the short-run.

I think the important thing is, we said all along, that in announcing an authorization we didn't put a specific timeframe on when it was and that we would gate it according to the asset growth we see. As we sit here in January, I think we'll be more aggressive in the first quarter than we were in the fourth, but I also don't think you should be calculating $47 million in any specific amount of time.

Okay. I guess as an analyst, if I'm out there telling investors that your stock looks cheap on a price-to-book basis, but the Company doesn't necessarily see that, because they're not buying back the stock--.

Well, we are buying back the stock.

We may not be buying back the stock as fast as you want us to, but we are buying back the stock.

Okay.

We've had a lot of experience in the past with the frictional cost of raising additional capital to support growth and we have to balance that for our shareholders and all our stakeholders. And that's a long-term consideration that I understand doesn't always lineup with quarter-by-quarter short-term pressures.

Well, it's been a couple of years as far as pressure goes, particularly return on equity. I mean, I think shareholders have been pretty patient here. For what it's worth.

That's a very fair point. I think that we think that the underlying return on equity results for the last two years have come about due to some restructuring that we've done in the business. And that's backwards-looking.

We've done that restructuring so that we can refocus the Company on a more stable predictable earning stream in the three segments we're in today and it's for that earning stream that we need to make this judgment as to whether we buy shares back at $22.00 or whether we have the capital to support the growth.

Because we've taken a lot of effort to attract and retain very good managers and salespeople. Our experience from the early part of the decade is, when they get traction on the production of assets, you need the capital. And when you need the capital, it's not the time to go out and raise it.

So, we absolutely understand that our stock's been stuck here for way too long, but we're trying to balance the desire to get some money back in the hands of shareholders who have been patient with us, with doing what we think is appropriate for those shareholders who understand what we see as the market opportunities and our desire to assess for the future.

Okay. I appreciate your comments.

And we yours. Thank you.

[OPERATOR INSTRUCTIONS] Edward Hemmelgarn.

I guess just as a follow-on to the question that Ross had about the share buybacks and also my question about the return on equity, typically, shouldn't the consideration really be not whether you're returning money to shareholders, but rather you can generate a higher return on equity for shareholders from buying back stock or your lowest return marginal asset that you've got?

So if you're going with the desire to have an average return on equity of 12.5% or 12 to 13% or something, that means you've got some that are way above that and some that are below that. But shouldn't the question be, can we get a better return by buying back stock or from our lowest marginal asset that we're adding to the balance sheet or that we currently have on the balance sheet?

I think that's a theoretically appropriate way to look at it. I think you can get different answers, depending on how you run the analysis over what timeframe you look at it and also over what frictional cost you assume in terms of moving capital in and out of the Company into the external shareholders' hands.

The frictional costs can be high and it depends on whether you're talking about within the next several years or whether you're talking about the next several quarters. And so we're trying to make the best judgments we can. I mean, as you know, Ed, the Management team here, when we talk about shareholders, represent a larger shareholder group than any other group. So we're very keenly aware of these issues.

I'm well aware of that. You and the rest of the Management team have a very very large percentage of the ownership. I'm just trying to think of ways to increasing--you know, there seems to be a big gap. If you just do a quickly calculation to get an ROE of 12.5% you'd have to have income in the range of $55 million of net income or higher. That's a pretty big gap from where you're at right now.

That's absolutely right, Ed, and we don't mean to diminish that. We think that the bulk of our shortfall in 2006 came from the continuing operations, came from the home equity segment. And part of the way we tried to address that in 2006 cost money. It cost money not just in current year P&L, but cost money in opportunity cost as we're trying to restructure both our channels and our product offerings. And we think that what you're proposing is not misaligned with our goals for 2007. Getting a good market rate return on equity in 2007 is absolutely our goal.

All Will did earlier was just tell you we don't share our budgets with you.

I understand that. I gathered that. But basically what you're saying is you're looking forward to significantly improved results in '07 from the home equity division.

Yes, we are.

At this moment, we don't show further questions. Thank you.

We appreciate everybody's attendance today and we appreciate the questions and frankly, we appreciate points of view and that adds to our mix of consideration as we think about these questions with our Board. We appreciate everybody's participation and we'll talk to you again at the end of April, when we report our first quarter results.

Thank you.

Thank you ladies and gentlemen, this concludes your conference call. You may now disconnect.