PacWest Bancorp (PACW) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the CapitalSource fourth quarter and year-end 2003 earnings conference call. This call is being recorded. At this time for opening remarks, I will now turn the call over to the Finance Director, Mr. Tony Skarupa. Please go ahead.

Thank you and good evening. Joining us today are John Delaney, Chairman and Chief Executive Officer of CapitalSource; Jason Fish, our President; and Tom Fink, our Chief Financial Officer.

Before I turn the call over to John Delaney, I want to inform you that this call is being webcast simultaneously on the Investor Relations section of our website www.CapitalSource.com. Furthermore, a recording of the call will be available on the web site beginning at a approximately 8:30 PM Eastern Time, and our press release and web site provide details on accessing the archived call.

Also, before we begin, I need to inform you that statements on this earnings call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements, including statements regarding future financial and operating results, involve risks, uncertainties, and contingencies, many of which are beyond CapitalSource's control, and which may cause actual results to differ materially from anticipated results. More detailed information about these risk factors can be found on our registration statement as filed with the Securities and Exchange Commission on Form S-1 on January 23, 2004. CapitalSource is under no obligation to, and we expressly disclaim any such obligation to, update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise.

Now I would like to turn the call over to CapitalSource's Chairman and Chief Executive Officer, John Delaney.

Thank you, Tony, and good evening, everyone. We appreciate you carving out time to join us this evening.

I am pleased to report that our earnings for the fourth quarter were 25 cents per share, or $29.6 million. Adjusted for taxes for prior periods, this was an approximately 500 percent increase in pro forma net income from the fourth quarter of 2002 and a 26 percent increase from our third quarter in 2003.

These results, which we view as very strong, are driven by a combination of certain positive developments in our business and the underlying core strengths of the company, including the following four items that I'll touch upon -- first, uncompromising credit standards and a commitment to disciplined, bottoms-up credit works. We had no charge-offs in the fourth quarter, and we took a smaller specific reserve provision than we did from the third quarter. Both of these are indicators that the underlying portfolio credit quality is currently very good. General reserves increased in line with our normal methodology, which takes into consideration mix of business and changes in the loan ratings. In addition, loans 60 days past due also decreased as a percentage of the portfolio.

Second, strong asset growth. We ended the fourth quarter with over 2.4 billion of funded loans, a $430 million increase from the amount we ended the third quarter. All three business groups had asset growth above plan, which reflects their strong market position. In the quarter, we added a total of 47 new loans.

Third, strong yields. Core yields stayed strong in the fourth quarter. In fact, they were up slightly over the third quarter, although the fees driven by prepayments were down from the third quarter. These strong core yields together with the no charge-offs again reflects the company's ability to generate very strong risk-adjusted returns.

And finally, we had a $12.6 million pretax gain on the sale of our interest in MedCap. As most of you know, this number has moved around a bit. We reported that the gain was 10.8 million in our last quarter's earnings release, and then reported that it was closer to 14 million in our Q (ph). Now that the transaction is closed, we have the final number, which is 12.6 million.

During the quarter, our costs were also higher than we anticipated, mostly under the category of what we'll call one-time items. And Tom Fink will go deeper on these issues in a minute. But to highlight, our cost of funds spiked due to a change in accounting policies relating to the recognition of fees on our bond transactions. This is a one-time catch-up that will not affect future periods. Operating expense also came in higher than we had planned. Again, certain one-time costs that Tom will drill down on in a few minutes contributed to higher operating expenses than we expect to see the future. This quarter, we're therefore -- to our minds, particularly strong when you consider the effect of these one-time items.

Now let me touch on some of the highlights from our three business groups. I'll start with Corporate Finance. Corporate Finance enjoyed strong asset growth, ending the year at 972 million in funded loan assets. We continue to see good opportunities in Corporate Finance, which as most of you know is our business where we principally provide senior debt to finance middle-market leveraged buyouts. Two trends are worth noting in this business. First, LBO volume appears to be up, which should create more deal flow for us across 2004. Second, competition has also increased in a part of this business. Fortunately, we are seeing most of this competition in what we would consider larger credits that were never really part of our core market. Across 2003, we had the opportunity to finance some deals that were larger than what we would consider core, primarily because of the overall lack of liquidity in this market.

We plan on defending and feel quite confident that we can be successful -- our market leadership position in financing smaller leveraged buyouts. This is a part of the market where we see less competition. And we expect this to continue. It's a part of the market that requires both a different focus than what most of the larger financial institutions are pursuing and a different fundamentals set of skills.

Our next business I will touch on is Healthcare Finance. It was another good quarter for the Healthcare group, which ended the year at 657 million in assets. By any measure, we feel our Healthcare group is the market leader. Just to give you a sense of the overall volume in Healthcare, the team looked at 824 deals in 2003, submitted term sheets on 309 transactions, performed onsite due diligence on about 150 deals, and we closed about 74 deals. We think this type of volume is reflective of the group's -- that the group has achieved deep market penetration and their growing reputation as a team of lenders that has particular insight and skill with respect to the needs of healthcare companies. Early signs show that 2004 is developing another good year for Healthcare team.

And finally, Structured Finance -- Structured Finance finished very strong in 2003, ending the year at 788 million in funded loans. Like Healthcare, 2004 is shaping up nicely for the Structured Finance group. As most of you know, Structured Finance has two lending activities -- lender and rediscount finance, a part of their business that focuses principally on financing smaller lenders, and their real estate effort.

The lender and rediscount effort has become a market leader, and is positioned for good core growth, as well as considering some modest-sized portfolio acquisitions -- all under the category of tuck-in acquisitions. Real estate remains the part of Structured Finance that could provide upside relative to our current projections. We think the team has good market presence on the real estate side. They simply need time for some of the new, more competitive products we are rolling out to gain traction.

Let me now touch on three aspects of the company that are particularly important to the continued success of the enterprise -- Our long-term economic goal, our positioning or strategy, and finally, credit.

Our long-term economic goal is to manage our business to achieve a return on invested capital, which we measure on a pretax basis, in excess of 25 percent regardless of economic conditions. Over time, if we can maintain strong portfolio yields, limit credit losses, manage operating expenses, and grow into leverage of 4-to-1 (ph) we will achieve this goal. We think the market opportunity clearly exists for us to grow into this kind of leverage, and we think our ability to finance the business at this leverage is very doable.

Let me touch on strategy. It's our view -- and this could change over time -- that the most direct way of achieving our long-term economic goal is through lending platforms that originate loans that have superior risk-adjusted returns. In general, this goal is achieved if the lending platforms target inefficiencies in the debt markets; are leaders in their respective markets; are staffed with experienced professionals that work in a productive, supportive environment; deliver a superior product to the customer; execute efficiently against their strategy; and maintain a strong and disciplined credit culture.

We believe all three of our groups are firmly on plan with respect to these criteria. In almost all instances, the groups do one of two things to win business. Either they execute more quickly and efficiently than the competition, or they deliver a more creative and flexible solution. You could call this the original Path DS (ph). Both of these attributes are very valuable to our customers and will continue to distinguish our business over time from the more commodity-oriented, bureaucratic competitors that we face.

And finally, regarding credit, which is really the dominant risk in our business, we manage this risk through strict financial controls through an elaborate series of checks and balances in the credit process and through the creation of a culture of transparency. We remain of the view that our business model, with its emphasis on capital analytics, delivers a superior credit outcome. And our results here today are another example of this.

Before I turn the call over to Tom Fink, I want to provide some very general guidance for 2004. Based on an extremely deliberate budget process that Tom and his team just concluded, we feel very comfortable with the analyst expectations regarding earnings per share for 2004. We believe that if we continue to execute against our business plan that our long-term -- and by this, we mean measured across five years -- growth rate is 25 percent. Now, I'll turn the call over to Tom.

Thanks, John. Our earnings were released this afternoon after the market closed, so I trust everyone has had a chance to see the press release. It's available on the Investor Relations section of our web site.

The fourth quarter was a very good quarter for CapitalSource, particularly if you consider the unusual increases in operating expenses and cost of funds that John alluded to earlier. The simple message of the quarter is that we remain on target with respect to our business plan. We are executing well. Asset growth was strong, as was yield. Credit quality remains excellent. The company had significant other income, including a very nice gain coming from our investment portfolio. We completed a very successful term debt offering. And other than the increases in cost of funds and operating expenses, which we think were unusual or one-time, the business is performing as or better than expected.

Accordingly, we're reporting quarterly and full-year results better than analysts' estimates. Part of this better-than-expected result was due to the MedCap gain being larger than we initially disclosed in our last call. However, part was also due to better-than-expected performance in our core lending business.

Net income for the quarter was 29.6 million, 26 percent higher than last year's pro forma net income. EPS was 25 cents per fully diluted share, up 19 percent from last year's pro forma EPS on a 7 percent higher average diluted share count, due to the company's IPO, which occurred during the third quarter. Return on assets was just over 5 percent for the fourth quarter, and return on equity was 13.8 percent, both up strongly from the prior quarter. For the full year, pro forma pre income taxes, net income was 82.1 million, or 77 cents per fully diluted share. Pro forma return on assets was 4.34 percent for the year. And return on equity was 12.37 percent.

Now let's take a few minutes to review the drivers of these very positive results. And as we do, I will try to give some guidance as to what we expect to see in 2004. First, we had very strong net originations this quarter to top off a very big good year in terms of asset growth. Gross loans were up $430 million in the quarter. And we ended the year with a loan balance of just over 2.4 billion. This was ahead of plan.

Generally, our message in guidance has been that we expect to see year-over-year loan growth in the $1 to $1.2 billion range. We did better than that, obviously, in 2003, with 1.3 billion in net originations. But going forward in 2004, we're still very comfortable with the $1 to $1.2 billion range guidance for net growth in loans. However, as we discussed during last quarter's call, the level of net originations is one of the lumpy areas of our business, and we saw that to the good this quarter. Therefore, we anticipate that there could be swings in the level of net growth from month to month and even quarter to quarter.

Next, I want to talk about yield, which was very strong again this past quarter. In the fourth quarter, yield on average earning assets was 11.75 percent, down 35 basis points from the prior quarter -- however, still very strong and in line with our expectation. As discussed in last quarter's call, third quarter results benefited in part from relatively high fee income related to prepayments of loans in the portfolio -- that is, high fees as a percentage of the amount prepaid, not necessarily higher loan prepayments.

We generally expect to see some level of prepayments in every quarter, and we saw some in the fourth quarter, as well. However, the absolute level of fees was lower in the third quarter and the enhancement to yield from prepayments was therefore less. We gave some details around that in the press release. Prepayment-related fee income contributed 76 basis points to yield this quarter versus 115 basis points in the third quarter. Net of the prepayment effect, yield was up slightly this quarter at 10.99 percent versus 10.95 percent last quarter.

As with originations, prepayments, and therefore to some extent yield, are one of the lumpy areas that are difficult to forecast. So I won't give any specific guidance with respect to yield, except to say that we expect it to trend lower in 2004, in part because we forecast only a modest level of prepayment-related fee income that is lower than we experienced this quarter. And we expect to see some reduction in our coupon income.

Leverage was up this quarter, as expected. And we ended the year with a debt-to-equity ratio of 1.93 times. Although up slightly, our leverage is modest. And we fully expect it to grow further as our loan portfolio grows. As indicated in the press release, the higher leverage brings with it greater interest expense, and the mathematical result of this will be lower net interest margin as leverage increases. We expect the debt-to-equity ratio to exceed 2 times in the first quarter of 2004, and be close to 3 times by the year end. And as we had discussed before, our objective is to manage the business closer (ph) to a 4 times debt-to-equity ratio.

As mentioned up front, cost of funds blipped (ph) up this quarter to 3.44 percent, which we view as an unusual or one-time occurrence. During the quarter, we changed the method we used to amortize deferred financing fees for our term debt securitizations to better reflect the effects of prepayment in the underlying loans. This change in method resulted in additional interest expense of 2.1 million dollars as a one-time catch-up of deferred financing fee amortization. Partially offsetting this was an approximately $900,000 reclass of certain payments for interest rate swaps made in prior quarters from interest expense to gain or loss derivatives, which is down in other income.

The net effect of these two changes in methodology is a one-time increase in interest expense of 1.2 million and a decrease in other income or expense of 900,000. Had these two methodologies been consistently applied during 2003, our cost of funds would have been 3.10 percent for the fourth quarter versus 3.11 percent for the third quarter. This trend ash the revised statistics also is reflective of what was a generally stable short-term interest rate environment across the quarters.

So with lower yield, higher cost of funds, and more leverage, net interest margin was down this quarter by 49 percent, as (ph) expected, to 9.61 percent. Looking ahead, our model anticipates the net interest margin will continue to float down during 2001 to the high 8 percent. This is a product of anticipated higher leverage, and therefore, interest expense, lower yields, and an expectation of higher short-term interest rates.

Operating expense is another area I'd like to take a minute to explain. Operating expense as a percent of average total assets were up in the quarter to 3.77 percent. This is a bit of a disappointment, in that we would like to have shown good, steady progress towards our goal of 2 percent operating expenses over assets. But a number of different things contributed to this increase, including higher compensation, expenses, and higher professional fees related to loan activity. Several of these items in this quarter were unusual or one-time in nature, including a $603,000 noncash charge due to the acceleration of vesting of options for a deceased employee. But the main message I want to emphasize is that we are not changing our basic directional guidance, and we expect operating expenses to decline in future periods as a percentage of average assets.

In other words, we will resume our progress towards lower operating expenses as a percentage of assets, and in particular toward the goal of 2 percent. However, we're probably a couple quarters behind the pace we originally thought we'd be on. For the full year 2004, we now expect operating expenses to be in the 3 to 3 and a quarter percent area. We expect to hit the 2 percent line probably in the end of 2005, early 2006, versus the mid-to-late 2005 we initially thought.

Another obvious highlight of our performance this quarter was $12.6 million pretax gain on the sale of our equity interest in MedCap, which accounted for most of the 16.3 million in other income. This gain certainly helped our results, but particularly when you consider what I just discussed about operating expenses and cost of funds, the result in our core lending business were strong even without the gain.

Specifically, excluding the equity gain, net income was $21.8 million, or 18 cents per diluted share. This is 2 cents per share better than the guidance we gave for the fourth quarter during our last call.

Equity interest overall remained a relatively small part of our activity, totaling about $40 million compared to our $2.4 billion (ph) loan portfolio. However, as I've said before, from time to time we do expect to see gains resulting from these investments. That is, after all, why we make them. But at this point in our growth, it's just hard to predict when they will occur and how much they will be.

In terms of other things important to the business, I'd like to note that credit quality remains excellent. CapitalSource had no charge-offs the quarter, and all statistics we published were improved from last quarter. Our provision was lowered due to the smaller amounts of specific reserves being taken in the fourth quarter, and allowance for loan loss as a percent of loans was slightly lower. And loans 60 or more days delinquent shrunk as a percent of the portfolio. However, we do expect credit losses at some point in the business.

Also on the funding side, it's worth a minute to talk about the term debt financing we closed last quarter. By just about any measure, it was the most successful to date. At $500 million, it was the largest term debt offering, and there was great demand for our paper in the market. The pricing on this financing was the best we had seen. And we achieved higher leverage in this transaction through the sale of a BBB-rated tranche for the first time.

Obtaining that higher leverage, which on the most recent financing equated to a debt-to-equity ratio of 6.4 times, is important for us in hitting our ROE charts (ph). However, the most important development was the structure used in the financing, which makes it possible for the favorable leverage and low cost of capital to remain outstanding for the full term of the financing. This structure is called a pro rata pay structure, and our first three term debt offerings use sequential phase structures, which had been delevering as the underlying loans prepay.

I hope that's not getting too technical, but basically, I wanted to convey that this was our most efficient term debt financing. And we walked away from it with an even greater confidence in our funding strategy for the business.

So, to sum up -- the fourth quarter was very good. CapitalSource's fully diluted GAAP EPS for the quarter was 25 cents per share. And after adjusting to exclude the realized gain in our equity portfolio, EPS was 18 cents, even with the higher operating expenses and cost of funds that I discussed. We're very pleased with these results, as they were 2 cents better than the guidance we gave for the quarter.

In terms of future guidance, I've already discussed what we expect in terms of loan growth, leverage, net interest margin and operating expenses. So let me just repeat what John said earlier, which is that we're very comfortable with the analyst estimates for the full-year 2004.

And with that, I'll turn the call back to John.

Thanks, Tom. Well, I have nothing else to add. I think we said everything -- probably said everything twice. So I will open it up for questions.

(OPERATOR INSTRUCTIONS) Joshua Steiner (ph), Lehman Brothers.

Hi, this is Josh Steiner in for Bruce Harting at Lehman Brothers. It looks like your cost of funds was fairly flat in the fourth quarter over the third quarter after adjusting for the changes in methodology. Could you give us a sense of how much the term debt securitization completed during the fourth quarter should benefit your overall funding costs in '04, given its lower relative spread compared with your past financings, and whether you think it might be possible that we could expect to see commensurate, ongoing improvements in the funding costs of your incremental financings?

Rather than answer that specific question, Josh -- because there are so many things that go into that -- I think your basically conclusion is correct, that the more financings we do of the type that we just completed and continue to see the favorable pricing that we saw in this last financing, we should expect our cost of funds to go down over time -- absent, of course, any change in interest rates.

And then the other thing that always comes into cost of funds is what happens when we see prepayment to the (ph) loans, which basically accelerates the amortization of deferred fees. We saw that this quarter, a lot of that was obviously catch up due to the change in method, but going forward, we see prepayments -- you know, we would see some increase to cost of funds for that. But we'd also have additional income late prepayment as well.

Thank you. And then could you compare the average loan size added during the quarter with the average loan size of the existing portfolio at the start of the quarter? Would you expect that, going forward, that average loan size would increase? And if so, could we get some idea of how you think that might impact margins or profitability?

Well, I think -- I don't think we have a specific view as to how the average loan size will affect the profitability. Obviously, if the average loan size goes up, you'd argue the business can be more efficient. But there's other factors that I think influence the (technical difficulty) business as much.

In terms of the quarter-over-quarter numbers, we have -- the average loan size for the -- let me go back (technical difficulty) -- at the end of the year, it was -- for the end of the fourth quarter, that is -- $5.8 million. It was $5.4 million at the end of the September quarter, and $5.6 million at the end of the June quarter. So I would say the movements in the average loan size are, at this point, fairly inconsequential. The fact that it did go up reflects that some of the loans were larger that closed. But anecdotally, I don't feel like it's changed that dramatically quarter over quarter.

And then just one more question -- could you give us a sense of your target leverage ratio by year-end '04, and maybe thereafter -- you know, where you kind of envision capping out at?

I think what I said in my remarks earlier -- that we expect to be around 3 times -- approaching 3 times at the end of the year.

Joel Houck, Wachovia Bank.

Could you talk a little bit about the loan growth in the quarter being above plan? Is there seasonal aspects to one or all of your businesses? Or is this opportunistic growth in the fourth quarter, because you did mention you expect the 1 to 1.2 billion to kind of be the go-forward rate?

And then in the corporate finance business, if you could talk a little bit about the cash flow leverage that you're kind of seeing on the marginal deal?

Okay, the first question is -- I assume you're asking our view on growth for the '04, Joel? Is that what you're getting at?

Well, no, what I'm really trying to drive -- to get at here, John, is -- you mentioned that growth for '04 is going to be back kind of to the target rate of 1 billion, 1.2 billion. And I'm just trying to see is Q4 -- is there a seasonal aspects to some of your businesses? Or is this kind of opportunistic growth, given -- you know, maybe you got good pricing on certain deals --?

Well, I don't think -- there really isn't any seasonal aspect that we've been able to detect to the business. I think we have a view that first and fourth quarters can be more active for corporate finance than the second and third quarter. But I don't think we have any data to really support that at this point. That's more kind of our gut. So I would conclude that there's no particular seasonality to the business.

I think -- you know, opportunistic growth was one way of describing it. I mean, I think our view is we'll grow the business as fast as we can, provided we see good opportunities and we can underwrite them with our credit process, which as you know, is pretty detailed and deliberate. And the business is lumpy, as Tom indicated. And you know, some quarters, we'll be above plan. Some quarters will be closer to plan. But in terms of seasonality, there's really no significant seasonality.

And the second question was leverage multiples in the Corporate Finance group. We're definitely seeing leverage multiples trend up. But we're seeing that most significantly on the larger deals. Again, we tend to almost bifurcate the market into two businesses -- leveraged buyouts, where the financing that the senior lender is providing is greater than 20 million, and leveraged buyouts where the financing that senior lender is providing is less than 20 million -- in other words, a small deal part of the market. We've not seen as much of a movement of leverage multiples in the smaller deal part of the market. We have seen and uptick in leverage multiples on the larger deal side of the market. And we also see more deals getting done with mezzanine financing, so the total debt is higher. So those are probably the two observations we'd make about leverage trends, is that for larger deals, we have seen leverage move up and we have seen more mezzanine in the capital structures, the (ph) total debt is higher -- two things that on a relative basis you'd say are negative for people who finance larger deals. What we consider our core business, which is the smaller leverage buyouts, we have not seen a very significant movement in leverage multiples.

Moshe Orenbuch, Credit Suisse First Boston.

I was wondering -- I think you had (ph) some pretty good growth in the real estate business, and you made some reference to having strong opportunities there based on some new products. I was wondering if you could expand on that a little bit, tell us what those new products are?

We actually have had -- if I made the observation that we had good growth in real estate business, I didn't mean (ph) to make that observation historically, because the fourth quarter was not dominated by growth in real estate. But we are -- I think we view there being some upside in our plan for '04 if real estate kicks in. And what I mean by that -- we've looked at the business pretty hard. And we started to roll out a more -- a product that has slightly more conservative leverage and (ph) would be rolled out at lower rates. And we think it would be an attractive product in the market. It'll take some time for us to start being recognized as having this type of product.

And so I think if we get traction on that product, we could have upside in the numbers that we kind of advise for '04. And I was more just highlighting that as one area that we think could do better in '04 than it did in '03. In fact, '03 wasn't a particularly good year for real estate relative to the other businesses. The team executed some very good transactions and they did good credit work on the deals. But from a growth perspective, they didn't grow at the rate that Mike Szwajkowski, who runs that business, had wanted them to growth in '03.

So the '03 and the fourth quarter growth was not at all dominated by real estate. But we're thinking that in '04, if some of these new products get some traction, we could have kind of above-planned growth in part due to that.

(OPERATOR INSTRUCTIONS) Bob Napoli, U.S. Piper Jaffray.

A bigger-picture question, then a follow-up on more near-term. And your target leverage ratio, John, is 4-to-1, as you mentioned, and pretax ROE of 25 percent on that 4-to-1 leverage. If you look at some of the other commercial finance companies -- CIT, for example -- I understand they're a different business mix, but 9-to-1 leverage. Looking long-term, do you think 4-to-1 is the right leverage for your business mix? Or do you think that as you get support from credit rating agencies, etc. -- you know, corporate ratings -- that some higher leverage between where the 4-to-1 and CIT is would be proper?

That's actually a very good question, Bob. You know, the more we -- as we go kind of deeper into our ability to finance the business from both a securitization perspective and then to the extent we get a credit rating, I think we have a view that we could certainly leverage this business higher than 4-to-1. And our last securitization transaction is a good example of that. And Tom went through some of the details on that. It's a (ph) fairly high leverage. And leverage will stay out there across the life of the transaction. So I think most people would view our leverage targets as relatively conservative.

So the answer to your question is we do think we could leverage the business higher than that. The asset quality merits that. But when we look out in the near-term, we see that as a very realistic level for a couple of reasons. Number one, after while, the kind of capital that we're generating in the business actually makes it quite hard to leverage the business much greater than that in the near-term. And we also think it's prudent to run the business at leverage below what we could obtain, because from time to time there are these disruptions in the capital market. And you want to have a margin of safety or a cushion in your balance sheet. And I think we've always taken the view that we don't want to run the business at maximum leverage and leave some room in the event that we need it for some reason.

So I think the answer is we can run the business at higher than 4-to-1 leverage. If you were to ask us and really push us, I think we would certainly conclude that. I don't think we need that -- kind of get into that debate for awhile, because when we take our model, unless we start growing the business a lot faster -- see, the real variable in how we leverage the business is the rate of growth. Because if we grow the business at 1.2 billion (ph) kind of per year net origination target, the returns or the retained income really doesn't allow us to grow the business much higher than that. If the rate of growth accelerates -- as it did, say, in the fourth quarter -- if that were to continue, then we'd have to probably have to leverage higher than that, because the effect of the retained earnings would not kind of delever the business the way it is in kind of the base-case model. (multiple speakers) No, go ahead -- I'm sorry, Bob.

I just wanted to follow-up. When you look at -- you talked about your billion to 1.2 billion to right now as a growth goal. First of all, where do you see the best opportunities in '04? And then does that goal include portfolio acquisitions, because from time to time, you have found opportunistic portfolio acquisitions? And I wondered if that goal includes portfolio acquisitions --?

Yes, I would say not of any significance. In our Structured Finance group, Mike Szwajkowski's team has from time to time made a few portfolio acquisitions. And he believes that to be part of his core business -- small kind of tuck-in portfolio acquisitions. So embedded in our number -- inherently, there is some small portfolio acquisitions, but not anything material. And I tend to think that we will remain focused on organic growth, and to the extent we have portfolio acquisitions, they would be small tuck-in acquisitions and nothing that material. So anything that would be kind of worth mentioning, if you will, would be upside to those 1.2 billion numbers -- $1.2 billion number.

As far as growth in '04, I guess -- I mean, you mentioned the real estate -- but is anything outside of the core businesses, which all seem to be performing well -- does anything stand out in particular as an area that is very hot and attractive for growth over the next year?

Yes, you know, when you break our business down, it really breaks down into really five areas, you know -- Corporate Finance, which is senior debt-to-leverage buyout. That's really the main product in Corporate Finance. In Healthcare, there's a receivables product and a real estate product. And in Structured Finance, there's a lender re-discount product and real estate product.

I think -- the 2003 report card gets very high marks for all the products except real estate -- and again, I'm not trying to say the real estate team didn't do a good job. It's just that they didn't originate kind of ahead of plan, whereas the other four products, if you will, all originated ahead of plan. And I think going into '04, we see -- you know, the early signs are positive. For the same four products that did well in '03, we see them continuing to do well in '04. And I think real estate we're hoping can get back on plan, if you will, in '04 with some of the tweaks we've made to the product.

So I think the growth story in '04 will be pretty similar to what was in '03 in terms of mix of business. If any group were to -- if I were to kind of say that the two aspects of the business that are kind of hotter than the others right now, I'd have to say Healthcare in general looks strong. And I would say the lender and re-discount effort within Structured Finance looks very good.

(OPERATOR INSTRUCTIONS) Josh Steiner, Lehman Brothers.

Hi, just one quick follow-up. And I guess it has to do, actually, with the earlier question. Could you talk about going forward what you see happening to the relative mix of the portfolio? In other words, do you see longer-term growth rate differentials between, say, Healthcare, Structured Finance? And then, if there are differences, are there any differences between the relative profitabilities in those groups? In other words, if -- let's say Healthcare grows faster than the other groups and that were more profitable, would that make the overall enterprise better off or worse off?

You know, I tend to think that over time, Structured Finance, which is the largest of the three businesses -- I'm sorry, Corporate Finance, which is the largest of the three businesses -- I tend to think the other two businesses will catch up a little bit, because I think corporate finance is more -- is the kind of business where you -- out of every five-year cycle, you have three to three-and-a-half good years and one-and-a-half to two years you're a little more on the sidelines. And I think that's just inherent in being a disciplined cash flow lender. You have to look at the market. You have to realize that multiples do move up, and the business becomes particularly dangerous at higher multiples.

I think Healthcare and Structured Finance are much more consistent growers. And I would tend to think that we're coming off a period of time where corporate finance has enjoyed some good years. So that would lead me to the conclusion that over time, Healthcare and Structured Finance will catch up to Corporate Finance on a relative basis. So that would be my bet as to what will happen across the next year or two.

In terms of profitability, the businesses surprisingly really match up very well from a profitability standpoint. They get there differently. Deals tend to be fairly high in Corporate Finance. Credit provisions, if you will, tend to be higher in Corporate Finance. And Operating Expenses tend to be higher in Corporate Finance. And when you compare that to Healthcare, where the yields are high, the credit provisions are lower, but the operating expenses are higher, you get to a pretty similar result. And in Structured Finance, the yields are lower, the credit provisions are somewhere in the middle, and it's the most efficient business. So all three businesses get us to a very similar profitability level. So I don't think the profitability of the business will change that dramatically as the mix of business changes for the reason I just said.

And also, while I think the mix of business will change slightly, it's not going to be very dramatic. I think all three of these businesses have a lot of legs in them. And I think they'll all grow. I just think two of the businesses kind of have more consistent growth rate, and the third business kind of has more, as I say, three to three-and-a-half years on out of every five years.

And at this point, do you see any new opportunities for additional business groups? Or you're pretty okay with the status quo?

You know, I think the three business groups, as I said, have very good growth opportunities. And I think (technical difficulty) to what we're going to look to do is -- each of the groups have some ideas within their businesses of things they want to do to round out their product offerings. For example, we're looking at equipment finance and Healthcare or something that could tuck in nicely with the other businesses, etc.

And so, I tend to think -- to the extent we have new initiatives, it will go within one of the three businesses. And I think from a management risk perspective, that's the right way to do it, because in all three of the businesses, we have leadership that we trust to protect the balance sheet. And we'd want new initiatives to come under them, as opposed to saying, I'm kind of stand-along (ph) businesses. To the extent they became large, one of them could lead to a fourth business. But I tend to think new things will come in within one of the three businesses. And if they prove to be significant on their own and perhaps merit their own focus as a separate group, then we'd create the fourth business group that way. That's a long way of saying that we don't see a fourth business group for awhile -- which I should have started with.

At this time, we have no further questions. I would like to turn the conference back to Mr. Skarupa for any additional or closing remarks.

We would just like to thank you all for participating in the call. Thank you very much.

Ladies and gentlemen, this does conclude today's discussion. We thank everybody for their participation. You may disconnect at this time.