Independent Bank Corp (Michigan) (IBCP) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Independent Bank Corporation fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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These forward-looking statements are based largely on this company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

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It is now my pleasure to introduce your host, Charles Van Loan, President and Chief Executive Officer of Independent Bank Corporation.

Good afternoon. We are pleased you could join us for our conference call to discuss fourth-quarter and full-year 2003 results.

Our fourth-quarter earnings totaled $9.3 million, or 47 cents per diluted share. This represents an 18 percent increase over fourth-quarter 2002 earnings per share of 40 cents.

Other measures of profitability were also strong with our return on average assets of 1.6 percent and our return on average equity at 23.4 percent.

On a full-year basis, our earnings were a record $37.6 million, or $1.87 per diluted share, up 30 percent over 2002.

Highlights for the quarter included increases in net interest income and fee income from deposits, as well as a return to positive figures related to our mortgage loan servicing operations. However, as expected, the mortgage loan refinance boom finally came to a halt, and gains on mortgage loan sales declined sharply.

Rob will go into greater details later in the call, but the combination of our Mepco acquisition and balance sheet growth continued to positively impact our operating results.

Year-over-year loan growth was quite healthy, with total portfolio loans up nearly 21 percent. About one-half of our loan growth was related to our addition of Mepco. But even excluding these operations, we still achieved 10 percent loan growth during the year in which the first six months were very tough because of the high level of refinance activity within our loan portfolio.

Although our level of nonperforming assets ticked up a little in the fourth quarter, loan quality remained solid with nonperforming loans at 12.7 million, or 0.76 percent of total portfolio loans. 2.3 million of this balance was comprised of a loan that is fully guaranteed under a federal program.

I would now like to turn the call over to Rob Shuster, our CFO, to provide greater detail on our fourth-quarter results and outlook for 2004. Rob?

Thank you, Chuck. Good afternoon, everyone. I will cover some details about the fourth quarter of 2003 and talk a little bit about our current outlook for '04.

Fourth-quarter 2003 cash equivalent net interest income was up 4.8 million, or nearly 22 percent, on a comparable quarterly basis and up 0.5 million or 2 percent on a linked-quarter basis. The comparative quarterly increase was due primarily to the Mepco acquisition, which added 143.3 million in average loans at a yield of 12.4 percent during the fourth quarter of '03.

Growth in commercial loans and investment securities also contributed to the $263 million rise in average interest-earning assets on a comparative quarterly basis.

Finally, our net yield was up 31 basis points to 5 percent in the fourth quarter of '03 compared to 4.69 percent in the fourth quarter of '02.

On a linked-quarter basis, average interest-earning assets actually declined by 4.5 million, or about 2/10 of 1 percent. This decline was primarily due to a sharp decrease in the average balance of loans held-for-sale from the third to the fourth quarters. The small decline in average interest-earning assets was offset by a 10 basis point increase in our net yield from 4.9 percent in the third quarter of '03 to 5 percent in the fourth quarter of '03.

Mepco accounted for 300,000 of the 500,000 in growth in tax equivalent net interest income on a linked-quarter basis, as the banks had to overcome an $81 million drop in the average balance of loans held-for-sale.

Gains on mortgage loan sales declined by 1.6 million on a comparative quarterly basis and by 3.4 million on a linked-quarter basis. In addition, fourth-quarter 2003 gains included an increase of 500,000 from a FASB 133-related adjustment.

Loan sales volume was 121 million in the fourth quarter of '03, compared to 251 million in the fourth quarter of '02 and 300 million in the third quarter of '03.

We originated 153 million of mortgage loans in the fourth quarter of 2003 with a 50-50 purchase refi mix. For all of 2003, we originated 1.12 billion of mortgage loans with a mix of 30 percent purchase and 70 percent refinance.

At December 31, 2003, we had 32.6 million of mortgage loans held-for-sale and another nearly $19 million of locked mortgage loan origination commitments. These figures would suggest a relatively slow start with respect to gains on mortgage loan sales in the first quarter of 2004, but these total gains likely (sic) to be less than one-half of the fourth quarter, 2003 total.

Just to give you some perspective, our pipeline at December 31, 2002, which would be both our loans held-for-sale and our locked mortgage loan origination commitments, totaled about 200 million, compared to about 51.1 million at December 31 of '03.

Although we have recently seen some uptick in mortgage loan application volumes, overall in 2004, we would anticipate loan sale gains to be down about 55 to 60 percent from our record 2003 level of 16.3 million.

Title insurance fees were down 350,000 on a comparative quarterly basis and by 524,000 on a linked-quarterly basis. These declines reflect, again, the downturn in mortgage loan origination volumes.

Real estate mortgage loan servicing resulted in $900,000 of income in the fourth quarter of 2003, compared to an expense of about 56,000 in the fourth quarter of '02. The fourth quarter of 2003 included a $500,000 recovery of valuation allowances from previously recorded impairment charges on capitalized mortgage servicing rights. At December 31, 2003, we were servicing 1.14 billion of mortgage loans for others on which we had capitalized $8.9 million of mortgage servicing rights.

Non-interest expenses totaled 21.5 million in the fourth quarter of '03, compared to 19 million in the fourth quarter of '02. The addition of Mepco accounted for 2.2 million of this 2.5 million comparative quarterly increase, or nearly 90 percent of the total increase.

On a linked-quarter basis, noninterest expenses actually declined by about 800,000, due primarily to the third quarter of 2003, including 983,000 of losses on the prepayment of borrowings.

Our provision for loan losses increased to 1.6 million in the fourth quarter of '03, compared to 700,000 in the fourth quarter of '02. The increase in the provision primarily reflects a rise in nonperforming loans, as well as an increase in the level of net charge-offs. As Chuck mentioned, nonperforming loans totaled 12.7 million, or 0.76 percent of total portfolio bonds at 12-31-03, compared to 10 million at 12-31-02 and 9 million at 9-30-03.

The increase in nonperforming loans primarily relates to two commercial real estate loans. First, a $2.9 million commercial real estate loan went into default in the fourth quarter. This loan is 80 percent guaranteed under a program administered by the United States Department of Agriculture. In the fourth quarter of '03, we charged off the unguaranteed portion of approximately 600,000, leaving a $2.3 million balance, which is fully guaranteed. We have already submitted an initial claim of 1.5 million to the USDA, which we expect to receive in the next two or three months. The remainder of the balance is expected to be received once the collateral liquidation process is complete.

The other commercial relationship which went into default in the fourth quarter had balances totaling approximately 1.3 million and is secured by several multi-family properties. This loan is in the process of vigorous collection and at the present time, we do not expect to incur any significant loss related to the resolution of this credit.

In summary, 2003 was an exceptional year for IBC. In addition to the record mortgage banking activity, we also had solid gains in tax equivalent net interest income and fee income on deposit accounts. Over the past three years, we have achieved earnings per share growth of 24 percent, 24 percent, and 30 percent, respectively. We expect our fundamentals to remain strong in 2004, with solid loan growth leading to an increase in tax equivalent net interest in cotton. However, filling the hole left by an expected 55 to 60 percent decline in gains on loan sales from 2003's record level of 16.3 million will be extremely difficult. As a result, we currently anticipate 2004 earnings to be relatively flat when compared to 2003.

I would now like to turn the call back over to Chuck for some closing comments.

Thanks, Rob. As Rob just said, we do anticipate that 2004 will be a difficult year for us and we do plan -- it looks like now, according to our plans, that we will be relatively flat.

However, if you look at the last five years -- the last four years -- and include 2004 with zero percent earnings per share growth, our five-year compound annual growth rate would still be 19.1 percent. I think, as Rob explained, we are looking at 2004 as a very strong performance year, but not one where we can overcome and exceed, based on the mortgage refi boom being pretty much dead, at least at this stage.

With that, I think we're ready to open up to questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Joe Stieven with Stifel Nicolaus.

Good afternoon, guys. This is John Rotus (ph). Nice quarter and nice year. Congratulations! I was just wondering if you can give a little update on Mepco, how things are going and I guess what your expectations are for '04 and '05 as far as loan growth and stuff. Because I know, originally, we talked about, out 12 to 18 months, loan portfolio could reach maybe 200 million or something, and if that is still on target.

Let me just go through a couple of items. We put in our press release their fourth quarter numbers, and you can see, in the fourth quarter, after-tax earnings were up to about $1 million, so we think they had a good, strong fourth quarter with good growth in their loan portfolio.

If you look at the time frame from when we started with the acquisition back in April of '03 to year-end, they grew their loan portfolio from about 100 million to nearly 150 million. So, we do feel confident, over the course of 2004, that Mepco would be able to achieve similar type of loan growth, which -- based on a full year -- would bring them north of 200 million by the time we close out 2004. So certainly, they've been a very strong engine for us. Our net interest margin pushed up to 5 percent. We haven't seen numbers like that for many years. A lot of that is they are growing their assets and even though their portfolio yield came down a little bit in the fourth quarter, they were just north of 13 percent I think in the third quarter; now, they are about 12.4 percent in the fourth quarter. They are adding, net, a lot of overall growth, so that's been a significant plus for us in terms of what they have been able to accomplish. So I think we still feel confident we are on track for a good, solid growth in that segment of our business in '04.

Thanks, guys. Nice quarter.

Brad Millsap (ph) with FTN Securities.

Good afternoon. I just wanted to kind of get a little more color on the margin. I noticed that, on a linked-quarter basis, that the (indiscernible) securities portfolio was up significantly. I was wondering if you were doing anything differently there or if you could offer any more color on kind of what your outlook is for the margin looking out into '04.

I think the jump in the yield on the security portfolio is a combination of a couple of different things, as we saw some acceleration in prepayments in the fourth quarter on some mortgage-related securities that had been purchased at a discount. So, that accelerated the discount accretion into earnings and pushed that yield up some. That would probably be the main driver of the yield jump.

Then, I think, in the third quarter, we had some acceleration of some premium amortization because of prepayments on some securities as well. So I think that yield change there reflects, to some degree, just some of the fluctuation in prepayment levels on some of the mortgage-backed securities in the portfolio, and whether we had purchased originally at a discount or a premium.

Then for the margin overall, do you think -- that this 5 percent margin is sustainable kind of over the next few quarters?

Well, you know, right now, as long as we stay on track with growth in the insurance premium finance segment, which is obviously at wider spreads, that's really been the engine that's been pushing the numeric spread higher.

On the bank side, actually, I was very pleased with what we saw a in the fourth quarter there. I mentioned it in my remarks. The banks had to overcome an $81 million drop in the linked-quarter basis in average loans held for sale. Those loans held-for-sale generally are at about a 4 percent spread, you know, because you are earning long-term mortgage rates and financing them relatively short. So, they had to overcome -- on a quarterly basis, that had about an $800,000 negative impact on their net interest income. The banks collectively actually posted about a $200,000 rise on a linked-quarter basis in their net interest income. So, I think there they did very well in that fourth quarter by being able to contribute positively to the growth in net interest income despite that decline in the average -- the balance of loans held-for-sale.

So looking ahead, you know, loans held-for-sale now are already at relatively low levels, and we are anticipating pretty good loan growth at the bank level as well as at Mepco. So we think the combination of those things should hold that margin up pretty well.

Okay, great. Thank you.

Terry Mcevoy with Oppenheimer & Company.

Good afternoon. A couple of questions -- Rob, I think, in past conference calls, you have actually been able to break out the mortgage business on a per-share basis. We can all look at the revenues, but is there any way you can help us calculate, on a per-share basis, how large that number was or how big the mortgage was for 2003?

Well, for 2003, I guess -- I mean, what I would suggest is the way to look at it is, for all of 2003, you have the 16.3 million in the gains. Those gains are net -- I had mentioned this in the past -- those gains are really net of direct origination costs, so if I just tax-effect those gains and divide them by our average shares outstanding, you're looking at a pretty sizable impact -- nearly 50 cents per share in total, relative to those gains.

Now, I would also point out that our real estate mortgage loan servicing was a negative 300,000 and we would expect that to be a positive number more in the area of -- over the course of a year -- 800,000 to 900,000 to the good, so you've probably to about a $1 million swing there. Again, if you tax-affected that, you'd be looking at a per-share impact of maybe 3 cents.

Then the one other thing to just recall -- when I take the mortgage banking operations of the 16.3 million and say it's 50 cents a share, that's all of our gains; that's not going to go to zero. The question is, at what level does that drop to in '04 in a non-refinance year? I had suggested in my comments that we are anticipating about a 55 to 60 percent drop in that number.

So I guess my point is, Terry, having said all of that, is (sic) those gains are really net of the direct origination costs. So, we don't anticipate a corresponding big drop in operating expenses because those gains already net the direct origination costs -- things like commissions we pay to our loan originators.

The real key on the Mortgage Banking side is there's nondirect origination costs, and those are what you have to root out if we are in a prolonged period when volume is going to be quite a bit lower. So hopefully, that kind of gives you some color on that.

What about the title insurance business, right around $3 million? Do you see a 50 to 60 percent drop in revenue there?

Yes, but the one thing to take into account with the title insurance, you're seeing their gross revenues and you're not seeing the expenses related to that operation.

Their net was just over a million this year.

Yes, so you're not going to get as big of a drop. Their costs -- you know, they are not netted against those revenues, so they'll be able to drive their costs down not dollar-for-dollar, commensurate with their volume, but we've already had some significant layoffs in that unit. You know, we added a lot of closers and other people in the high-volume area which have since been laid off. So while you're going to see maybe a 55, 60 percent drop in their volumes, the bottom-line impact is going to be quite a bit less than that. You know, the bottom-line impact is probably going to be more like in the range of 2 to 3 cents a share.

The tax rate fell a little bit below 25 percent in the fourth quarter. What type of tax rate should we be looking for in '04?

I think if you look at the year-to-date, the full year -- we had mentioned there was just a one-time benefit that rolled through for a penny per share in the fourth quarter; that's what dropped it. So, if you look at the full year, we are more like around 27.3, 27.5 percent. I think that's probably a pretty good level to use.

Most of that is coming from two areas. Our two primary income sources where you are generating that difference between our statutory rate and that effective rate would be our municipal securities and our bank-owned life insurance. Right now, we don't see any significant changes in those categories that are going to materially alter that effective tax rate. So right in that 27.5 range I think is a good run-rate.

One other question, if I could? The Mepco acquisitions seems to have really worked out well for you guys. As you look out over the next few years, do you see similar types of acquisitions, or should we be anticipating maybe some pure bank acquisitions? Or overall, what do you think your appetite for acquisitions will be?

Well, we are continuing to look in both areas at the moment. There have been some premium finance companies that have come up for sale. We haven't been successful in acquiring any at this stage but we will continue to look in that area. We think it's a very great synergy with our core banking business; we can get some real benefits, and (indiscernible) good benefits from their relationship with us.

In terms of banks, we continue to look. There does appear to be a little more activity going on now than there has been for the last several years. We're looking in both arenas.

Thank you for all the information.

Jon Arfstrom with RBC Capital Markets.

Good afternoon, guys. Just a follow-up question on servicing -- what do you think the quarterly run-rate is on that business? I know you said -- you talked about 800 to 900 for the full year. Can you just talk a little bit about what's behind those assumptions?

Yes. One is, when I state that, that sort of anticipates no further recovery on our impairment reserve. We have still got about 720,000 left in our impairment reserve, so that number could move around some. Right now -- I mean, what we do -- it assumes -- I'm going to say it's still a relatively short life for the portfolio, probably somewhere in the four to five year range. What we do is we look at our actual prepayment rates that we experience within our portfolio.

Then, in terms of looking at the valuation reserve, we are having an independent third party every quarter do an appraisal of our servicing portfolio. Whatever that appraisal comes out at is what will move around that impairment reserve.

The other component is obviously what level of revenues are being generated. Right now, our weighted average service fee is about 26 basis points. So, what my figure essentially takes into account is estimating that prepayment run-rate and then looking at what gross revenues we expect the portfolio to throw off.

I will say, in general, rates have come down a little bit. Even though it has not spurred any big pick-up in refinances, it does affect the valuation of our servicing portfolio and can impact us -- some of our assumptions in terms of prepayment. So, we think the 900 or so is a reasonably conservative outlook, given the specific characteristics of our portfolio.

It should be -- barring any big swings in interest rates, it should be fairly ratable over the year. In other words, there's not going to be big swings between the quarters unless there's swings in mortgage interest rates that are causing big variations in prepayment expectations.

That's helpful, Rob. I guess the other related question -- your real estate portfolio has grown over time and my guess is you are probably -- with the shift in mix to more adjustable-rate product -- my guess is your servicing portfolio could grow over time, over the year.

Yes. I think our total loan-servicing portfolio, both that we are servicing for us and servicing for investors, is likely to grow, because we are seeing (inaudible) a more purchase-oriented market, we are seeing more portfolio product versus just all 15 and 30-year, which we're going to be selling.

With respect to our servicing for investors, I think the key thing there is we are not (indiscernible) to retaining servicing or selling servicing; what we are continually doing is looking at what the market is paying for servicing, relative to how we are valuing it. Because servicing is an extraordinarily volatile asset in your balance sheet and if the market comes back around and starts paying a price for servicing higher than our internal modeling and valuation, we will start selling servicing or selling loan-servicing released (ph) again.

I go back to, I think, 2001 and maybe the early part of 2002, when we were getting multiples of better than six times the servicing rate for selling it. As we look back, it was an awfully good decision to sell that servicing back then because we probably refinanced a lot of those loans subsequently in the latter part of '02 and '03.

So you know, we are really -- it's hard for me to comment on the growth of the portfolio because it's going to be so dependent on what others are willing to pay us for that servicing.

That's fair. Then I guess the last question -- could you comment of bit on the buyback appetite?

Yes, we have a Board resolution that authorizes us to repurchase up to 750,000 shares. I think, for us, the decision to buy or not by is, I don't think, driven by valuation. We certainly think our stock is valued properly, and we would be a buyer of it. I think what will influence us more is what our alternative opportunities for the capital is. In other words, if we're getting good growth in loans, good growth at Mepco, and are able to leverage our capital to produce increasingly good earnings and earnings per share growth, or if some merger or acquisition opportunities come long, we may have to take the pedal off that because we're going to have to preserve capital to take advantage of those opportunities. So, that's really going to be the factors influencing our share repurchases in '04.

Rod Kackely (ph) with (indiscernible).

Thank you. Good afternoon. I'd like to turn the merger and acquisition question around and move away from your desire to acquire to your openness to be acquired. Do you see yourselves as a candidate for acquisition?

Sure do.

Would you be open to that?

We are always open to it; it's all a matter of price.

Have you been approached?

I really shouldn't say but nothing formal.

Could you give me some sense or your feeling about the West Michigan economy? I'm based in Grand Rapids, so of course, we in Greenville (ph) have the Electrolux pullout. We've had our share of bad news. What's your sense of what's going on?

Our asset base is about 50-50 between West Michigan and Eastern Michigan, so we see both sides of the state that way. Western Michigan in particular has had more challenges in this downturn than they have, at least in the last -- since the early '80s, I think.

The good industrial jobs, Steelcase (ph) and the like, have disappeared -- or a lot of than have -- and many of them won't be coming back, is our estimate. But on the other hand, a lot of smaller businesses have picked up those people. Prior to the tough times at the large companies, nobody seemed to hire anybody. We had unemployment rates in the 2 and 3 percent rate in this area and it was very difficult to hire someone.

Our experience, looking at the consumers, has been that it's tougher for them right now that it has been in most of the last 15 years. We see that in some of the delinquency rates on mortgages. But overall, I think West Michigan is still a very strong economy, well diversified -- probably better diversified now than it was at the beginning of this recession because of the downturn in some of the larger businesses in West Michigan.

The east side of the state has also had challenges, but one of the changes this time around I think that we didn't see so much in some earlier downturns is that, even though the auto companies were struggling over the last couple of years financially, they were still pumping out a lot of cars. So, a lot of our customers are the second and third tier suppliers. They were still making parts and hiring people until the economy didn't take quite the dive over there (sic) -- I think even as we saw in some areas of West Michigan.

Okay, thank you.

John Burquist (ph) with Sandler O'Neill.

Good afternoon, guys. Could you comment on the net charge-offs for the quarter? Obviously, 600,000 of that was related to that government loan you into but the remaining 1.3 million -- could you give some color on that? Also, maybe touch on the overall outlook for net nonperforming assets, or for asset quality overall, in 2004?

I could comment a little bit on our anticipation. We can always be surprised, but we do see the environment getting better rather than worse. Michigan has essentially lagged the rest of the country in recovery, but I would say that our planning, or our anticipation, would be for improving credit quality throughout the year. It's going to take awhile to work out of a couple of the large ones that recently have hit, but we don't anticipate any additional significant losses on either one of those.

Just a couple of follow-up comments to what Chuck said. Actually, I can foresee borrowing something else jumping out of the commercial side, as I've stated earlier. We've already filed an initial claim with the USDA on that, on the $1.23 million loan. As I stated earlier, that balance is the remaining balance that's fully guaranteed. We already wrote off the 600,000 there. So you know, we would obviously expect to see at least that $1.5 million drop relatively soon, once that initial claim gets processed through the USDA.

The other credit that popped in there for the 1.3 million has got four multifamily properties securing it but a number of those properties are up for sale and have purchase agreement on them, so we could foresee that working itself through fairly quickly, assuming those transactions move forward. If they don't, then we're going to have to go through the foreclosure process but right now, it appears that that customer has the opportunity to liquidate those properties and take us out of that credit. So that would kind of bring both of those back down.

Certainly -- we've actually, on the consumer and mortgage sides -- if you kind of follow of those numbers along for a period of time, those have been -- in terms of nonperforming -- have both been relatively well-behaved; there hasn't been any real significant jumps or problems.

In terms of the fourth-quarter charge-offs, really absent the 600,000, there wasn't any particular items that influenced the quarter. I mean, there was just a little bit higher across the board in terms of mortgage consumer -- nothing of any significance.

I will say, the banks tend to really -- as we move towards the end of the year -- kind of really work the portfolios. If they are in a position where they are uncertain regarding collectibility, they are going to be charging that loan off. So, part of it may just be working those portfolios, in terms of the charge-offs, very vigorously in the fourth quarter but there was nothing else of significant related to charge-offs in the quarter, other than the 600,000 that I already spoke to.

Okay, I thought that it might be some year-end clean-up. Thank you.

(OPERATOR INSTRUCTIONS). David Dusenberry (ph) with Dionus (ph) Capital.

I just want to make sure I heard some of the numbers correctly. You had said the pipeline at the end of '02 was 200 million?

Yes, at the end of December 31, 2002, the pipeline was about 200 million.

Now, at the end of this past year, it was 51, so one-quarter of that level?

Right, and the 51 was comprised of about 32, almost 33 million of loans held-for-sale and about 19 million of locked loan commitments. We have other mortgage loan commitments, but we don't really count them until they are locked in by the customer, so there may be several other commitments but like I said, we don't count them until they are locked in.

When do you recognize a gain on the sale of those loans?

We recognize the gain when the loan is actually funded in the secondary market. So, the reason I point out those numbers is, at the end of 2002, that 200 million would have effectively been sold in the first quarter of '03, so you'd have the gains associated with that in that first quarter of '03. Correspondingly, that 51 million at the end of '03 would roll into the first quarter of '04, and so I was trying to give some color regarding why the gains on loan sales in the first quarter are likely to be somewhat lower than what we've been seeing the last several quarters.

My only question is if the pipeline is one-quarter that of what it was at the end of last year and refis skyrocketed from that level at the end of '02, why is guidance for gain on sale of mortgage loans only down 50 to 60 percent? Are you selling servicing this year whereas you were not last year, or are you assuming wider gains on sale? Shouldn't we be looking for, like, 25 percent of the level you had?

No, I think what we are assuming is, historically, the -- and you've got to remember, back in 2002, at the tail end of 2002, we had the first of what I call the big refi boom. So, we had our first kind of wave of low interest rates at the tail end of 2002. So, that pipeline really built up at the end of 2002 and carried through probably to about -- January/February were real big months. Then we kind of got into a little bit of a lull for a couple of months. Then we had another sharp decline in rates in like the late April/May/June time period. That spurred probably the biggest refinance boom of the last couple of years. So that pipeline at '02 was somewhat elevated. That's one point.

The second point is, absent the refinance volume, this seasonally is our slowest time because we're just coming out of the holidays, there is a foot and a half of snow on the ground and it's 0 degrees, so there's just less activity on the purchase side. So, what we are really anticipating is a particularly weak quarter in the first quarter of '04 in terms of gains on loan sales, but then what we are anticipating is a buildup in some strengths, particularly in the purchase market, because we think rates will hold relatively steady. We are back down to sub-6 percent on 30-year, fixed-rate mortgages, so we do see better results in terms of loan sale volumes as we move out of the first quarter of '04.

We are also seeing some fall-out among some of our competitors, the mortgage companies that do not have the full spectrum of product; they are having a very difficult time. So, we are able to get more loans that are out there, as a percentage, and we're also able to hire some loan originators from those folks that, in the refi boom, were just not available. So we are adding staff in the mortgage and lending area right now -- in the sales side.

Lastly, and I mentioned this in my comments, which isn't just projected data (sic); as we've come out of the holiday period, we've seen an uptick as we've moved into January in our mortgage application volumes. So the fact that we had that lull during the holiday period, we're seeing now the activity start to spring back up in the mortgage area.

So if we were to hit that, say, 55 percent down in gain on sale number for the year, a lot of that will show up in the second half of the year, if it does?

We would say yes, in the second and third quarters. That would be historically what we've typically seen. As you move into the second quarter and through the third quarter, that's where the purchase market improves quite a bit. Because we are projecting less in refis, we are then more dependent on the purchase market and there's more seasonality in the purchase market. People are moving more and doing those things during the summer months, when school is out.

Then just tell me your assumptions for the margins on the game (ph), year-over-year.

Actually, we are projecting lower margins. We were up in the -- I think it's 180 period -- about 180 for 2003. We are anticipating about a 30 to 40 basis point drop in our margins.

The reason the margins are dropping is that, because of the volumes (inaudible) was experiencing last year, we had a lot of pricing power -- everybody did -- and all the business you could handle. There was no reason to cut your prices.

Gentlemen, there are no further questions at this time.

Just a final comment -- obviously, we've been very pleased with 2003 results. All of the measurements are off the charts, from our perspective. There are challenges for 2004, but we are ready to take them on. Thank you.

Thank you. This concludes today's teleconference. Thank you for your participation.