SVB Financial Group (SIVB) 2002 Q4 法說會逐字稿

Good afternoon. Welcome to the Silicon Valley Bancshares conference call. All parties will be able to listen only in until the question and answer session of the conference. This call is being recorded for replay purposes at the request of Silicon Valley Bank. If anyone has any objections, you may disconnect at this time. I would like to turn the call over to your moderator. Ma'am, you may begin.

Thank you for joining our call. This is Lisa, investor relations manager for the bank. This presentation may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's last filed form 10-K filed March 19th, 2002. These documents contain and identify important risk factors that could cause the company's actual results to differ materially from those contained in our projections or other forward-looking statements. Now I'd like to turn the call over to our president and chief executive officer, Ken Wilcox.

Thank you. Hello and welcome. This is Ken Wilcox, CEO of Silicon Valley Bancshares. Looking back on 2002, I am inspired by our endurance in the face of the worst business downturn most of us have ever seen. The efforts of Silicon Valley Bancshares employees to focus and intensify their efforts allowed us to maintain a relatively steady course while all around us, companies were foundering or sinking. This past year, we've seen the continued free fall of interest rates and almost 75% drop in venture capital investment, and nearly nonexistent IPO activity this year. Despite this, we've added new clients, stabilized deposit balances and held steady on net interest margins. We've enjoyed record loan levels for several quarters, and have continued to grow this critical part of our business by 2% this quarter.

At the same time, we've maintained extremely high credit quality, slightly lowering non-performing loans to 1% of total gross loans. There is an old saying that what doesn't kill you makes you stronger. As challenging as recent quarters and years have been for the entire business community, I can say with confidence that Silicon Valley Bancshares is a better and more effective company today than it was three years ago. The relentless global economic downturn has driven us to refine our internal focus toward executing more effectively on those metrics within our control. As a result, we've become more enterprising and efficient in every aspect of our business.

One example of this is an intensified focus on expanding our success with life sciences and mature corporate technology clients. Our commercial banking group has already built impressive momentum with clients in these key areas, fueled by our long-standing commitment to entrepreneurialism and by our singular service-oriented approach. These unique aspects of the company's character have allowed us to gain market share as other banks have consolidated or dropped out of these challenging markets all together.

We're beginning to see the fruits of our diversification to meet the needs of companies at all stages. Our corporate technology clients have responded positively to expansion of our online and international banking services, and to the array of investment opportunities offered by SCB securities. Revenues from Alliant Partners, Silicon Valley Bancshares M and A subsidiary, were up this quarter, a shift that we see as part of a larger, though volatile trend. Our merchant bank continues to see better than industry average returns on pre-2000 vintage funds and has significant unculled (ph) capital in its newer funds. Our private bank is rolling out new products as we speak, and we're nearing the completion of our target product set for those clients.

I am happy to say that we've also been successful in fulfilling a key readership role with the appoint appointment of Larry Lopez as president of the private bank. This extended economic downturn has been a challenging one, and although we continue to see a leveling off of certain negative trends, we believe there are more challenges ahead. We expect 2003 to be very much like 2002 in terms of market conditions, interest rates, and momentum. In response, we are actively refining and improving our execution.

Deepening our client base and markets, where we have already established ourselves as a committed partner. Tightly controlling expenses, and diversifying service offerings to meet a broader range of client needs. At the heart of this activity will be Silicon Valley Bancshares' employees, whose hard work and commitment have enabled the company to grow and prosper, however modestly, in these most difficult times. Like many companies, we have been humbled by the length and the severity of the recession, and while we're inclined to stress our optimism and the proactive ways in which we're dealing with this difficult business climate, the fact is that we don't know any better than you do when conditions are going to improve.

While we're cautiously optimistic about 2003 and beyond, we're not counting on a market recovery in the near future. What we are counting on is the need to ensure that our client relationships and service offerings are the best they can possibly be. Our strategy is to forge ahead, and to do everything in our power to ensure modest growth regardless of the market uptick. While we're certainly -- while we'll certainly make the most of economic recovery when it finally comes, we're prepared for a long battle and ready to do what it takes to succeed in the current market. Thank you very much, and with that, I'd like to turn it over to Lauren Friedman, our CFO.

Thank you, Ken. Good afternoon. Fourth quarter results reflect many successes for Silicon Valley Bancshares, but there were also some disappointments. As we announced in our press release, fourth quarter net income was 28 cents per share, down 1 cent per share from the previous quarter. The good news is that on most of the items over which we have control, we performed well.

We set record high average loan balances for each of the last three quarters while our credit quality continues to Excel. We held our net interest margin reasonably steady despite the November fed interest race reduction and continued to hold deposits in the range of the previous four quarters. Our FX business continues to perform strongly, and we continue to bring in new clients. Unfortunately, non-interest expenses, including professional services, business development, data processing and equipment costs grew rapidly, indicating a need to implement further cost controls.

These expenses, coupled with the absence of the one-time tax reduction enjoyed in the third quarter, resulted in the quarter over quarter decrease in earnings. In September, we announced that our board of directors approved a $100 million share buyback program in addition to the $50 million program approved in March 2002. The March program is complete, and under the September program, we repurchased 3,276,000 shares for $59.7 million by the end of the fourth quarter. Virtually all of the repurchases in the fourth quarter were executed through an accelerated stock repurchase program.

This program enabled us to acquire a large amount of stock at one time. We have entered into fuller contracts under this program. We have an obligation to make open market purchases of stock for a five-year period of time, and use those shares to replace those sold to us by the counterparty. Timing and amount of those purchases are at our discretion, subject only to completing ratable amounts as of the end of each year of the contract.

As of the end of 2002, less than 700,000 shares remain subject to the forward contracts. Third quarter to fourth quarter average loan balances increased $31 million, to $1.84 billion. In addition to reporting the highest quarterly average loan balances in the history of our company, the period end balance at $2.1 billion represents the highest in our company's history. This continues to reflect our efforts to provide increasing array of products to larger clients. Fourth quarter net interest margin was 5.7%, down three basis points from the third quarter.

The ability to maintain margin despite the fed interest rate cut was due to a combination of lowering rates paid on interest earning deposits and increasing spreads over pricing indices on new business. However, the fed cut had a negative impact on the investment portfolio. Through continued active management of the portfolio, we managed to limit the yield decline to less than it otherwise would have been. The decline overall portfolio yield was 15 basis points. Average deposits increased modestly by about $152 million to $3.1 billion.

It appears that deposits continued to stabilize and the two-point nine to $3.2 billion range. As a further encouraging sign, period-end deposits increased about $341 million quarter over quarter. A portion of this is due to year-end client window dressing. Private equity securities investment write-downs in the fourth quarter had the worst showing of the year with $3.2 million gross and $1.4 million net. Bancshares incurred $2.1 million in securities write-downs in the third quarter, but net of minority interest, the impact on the company was only $300,000.

In addition, 92 new warrant contracts were collected in the fourth quarter, the same as in the third quarter. Revenues of Alliant partners, our investment banking subsidiary, were $3.5 million, up $2.3 million from last quarter. Alliant's pipeline continues to grow, and we expect their revenues to continue to be volatile, but an upward trend over the long term. Alliant closed 37 deals in 2002, which is only slightly below the record of 39 set in 2000. Non-interest expenses were up $1.8 million quarter over quarter. The primary reasons for the increase were higher professional services costs primarily for legal expenses and auditing and compliance fees, increased data processing costs associated with higher volumes of transactions, and increased equipment costs related to the deployment of new online systems.

These items were partially offset by a lower incentive compensation accrual. Management is seriously concerned about this increase in expenses and has implemented measures to reverse this trend. For example, we have established a committee of senior management that must approve any hiring and is looking for opportunities to improve staffing efficiency. We have tightened our expense policies and we have designated some existing staff to more carefully review our ongoing spending. Period-end private label client investments were approximately $8.5 billion, compared to $8.2 billion in the third quarter. The increase in period end balances is encouraging, as our efforts to attract greater funds have started to pay off.

However, average balances were down. This in combination with a shift to less profitable products resulted in quarter over quarter revenue from our private label client investment and suite products decreasing 7.7%. The bank enjoyed a good quarter and a good year in credit quality. At 1% of gross loans, non-performing loans were relatively flat in the quarter and for the year. The public software company that had accounted for $5 million of the non-performing loans in the third quarter paid down to less than $1 million. The remaining balance is expected to be collected from identified sources in the near term. Those charge-offs were $28 million for the year, and $5 million for the fourth quarter. Recoveries were $22 million for the year and $1 million for the quarter.

Recoveries during the year included collections from film loans charged off in 2000 and 2001. Exclusive of the film recoveries, net charge-offs in 2002 were consistent with the $21 million forecast at the beginning of the year. The loan loss reserve end of the year at $70.5 million compared to $72.4 million at the beginning of the year. The reserve represents 3.4% of gross loans and 345% of non-performing loans. The loan loss reserve is the mathematical derivation of our historical loss experience with very limited tolerance for professional judgment. The loan loss reserve ended rapidly in 1999 as a result of loan losses and the uncertainty with Y2K.

In the year 2000, the bank was forced to retain a large reserve as a result of much larger loan losses stemming from the film and health care portfolios. The ratio of loan loss reserve to annual gross charge-offs has grown from 1.16 times, 1.87 times, 2.52 times, in 2000, 2001, and 2002 respectively. Relatively speaking, the loan loss reserve has been growing, and Bancshares has one of the highest coverage levels in the industry. The January 9th, 2003 report of the commission on public and trust and private enterprise expressed concern about managing for short term earnings.

Consistent with these comments, a number of leading companies have made the decision to stop providing earnings guidance. These companies include Coke, Gillette, and Intel. Among banks, Zions (ph) -- have also announced this decision. We believe the pressure to meet guidance that strikes management from focusing on longer term objectives. Nevertheless, we think that providing some guidance for the short term gives our investors meaningful information about management's view of the near term, thus we have decided to give only quarterly earnings forecast going forward. We expect first quarter earnings per share to be between 20 cents and 24 cents.

We will try to provide more insight into our expectations of specific revenue and expense drivers. 2002 was a difficult one for Silicon Valley Bank, but it was difficult primarily because of the factors over which the bank has little control. Specifically interest rates remained at historical lows for the entire year and have trended lower. This has compressed our net interest margin. Funding levels for our client base have declined significantly, thus making deposits more difficult to capture. The stock market declined markedly, thus hurting valuations on equity investments and result at that point Alliant revenues.

Yet we continue to acquire new customers and have held deposit balances reasonably steady for five consecutive quarters. We have grown our loan portfolio to record levels. We have maintained excellent credit quality. We have taken numerous steps to improve the man management of many aspects of our business. We still have much to do. We need to be more vigilant in our expense control. We need to further refine our capital base to be more in line with current earnings, and we need to keep pursuing opportunities that present themselves. It is difficult to know what the future will bring, but I am confident that the team at Silicon Valley Bancshares will do everything in its power to take maximum advantage of the resources at our command.

Thank you. In addition to Ken and Lauren, we have Harry Kellogg joining us and Dave Jones, our chief credit officer, here to take any of your questions, so I'd like to open it up for questions.

If you would like to ask a question, please press star 1. All questions will be taken in the order they are received and you'll be announced by name when we're ready for your question. Our first question comes from Joe Warford (ph).

Thanks. Good afternoon, everyone. Lauren, I wondered if you could talk about where the margin came at the end of the quarter, December 31st, and what your expectations may be for the first quarter with the full impact of the recent rate cut.

Joe, I think that for the first quarter, we are expecting that -- to expect some margin pressure in the first quarter. We believe that we can mitigate a lot of it through continued growth of loan balances and, you know, shifting resources into more higher yielding assets, but we would expect to see -- you know, I'm just guessing, but on the order of a 10 basis point drop in the margin in the first quarter. With respect to the period end balances, at the end of 02, the margin was 5.27 in December.

5.27?

Mm-hmm.

Okay. And so was there anything unusual that would have affected that? I mean, if you're talking about maybe a 560 margin in the first quarter, how do you get up from a 5.27 level in the fourth quarter, or at the end of December?

Well, there is something that does affect us in the fourth quarter, and that is a huge amount of cash comes in that basically all we can do is put it in overnight money because it's going to go right back out, so it brings the margin down in December.

Okay. So it's not necessarily appropriate to just look at that point in time number at December 31 because of that window dressing?

I don't think so.

All right. Thanks. I'll let others ask questions.

Our next question comes from Brian Harvey.

Thank you. Can you talk about the loan growth that you've seen more recently? Can you talk about where it's coming from, later stage, or earlier stage, maybe with some numbers behind that? And would the later stage companies, can you talk about the average size in loans that you're looking to book and what sort of purposes they're for?

This is Ken, and I just wanted to say I normally would direct this question toward mark, probably, Mark Verissimo, but Mark is home this week sick, so I'm going to ask Dave Jones to respond to that.

Thank you, Brian. This is Dave Jones. In response to your question, loan growth is coming from our technology and life science niches. It is rather diverse. Amongst the technology and life science groups. In terms of the later stage and the average transaction, we are comfortable with long loan commitments in the 5 million, 10 million and $15 million range given that most of those loans will be secured by the accounts receivable and the strong repayment source that we have always enjoyed from accounts receivable lending.

Okay. One other unrelated question. Lauren, can you just talk about the tax rate? Is the rate that we're seeing here in the fourth quarter a good run rate or is there other tax treatments that you're working on right now to change that?

Brian, that's sort of a difficult question but I'll do my best. Everything else being equal, yes, I'd say that probably the fourth quarter rate is a good run rate, but we are always looking for good ways to take advantage of existing tax law where it gives us the ability to minimize what we legitimately owe the government. But where there are opportunities that the government has, we intend to take advantage of them, we will Tampa continue to look for those, but yes, I think that certainly absent our finding something, that the current run rate is reasonably good.

Okay. Thank you.

Our next question comes from Gary Townsend.

Good afternoon.

Good afternoon, Gary.

I guess just one question. Are you all currently under any type of regulatory letter? Are you having to operate in any way restricted by the bank regulators?

Not at all, Gary.

And with respect to -- as I remember in perhaps it was third quarter, you put in place a REIT with the objective of lowering tax rates. Is there an update on that?

The REIT is in place, and the -- this is Lauren again. The REIT is in place, and the REIT continues to function, and we had a tax savings of about $800,000 in 2002. The amount of the tax saving will vary, and actually as interest rates come down, that actually hurts us from a tax savings perspective. The higher the rates, the more effective the REIT is. So, you know, the REIT will continue and we expect to see that continuing on indefinitely.

You've talked about containing costs, and we've talked about this on the conference call before. I notice, again, FTEs have trended up to a new record. Can you give us some sense as to the approach that you'll be taking beyond just committees and things to actually get the expenses under control and possibly even bring them down?

Gary, Lauren again. First of all, in the FTE numbers, you need to be aware that Woodside Asset Management, an acquisition, of course, had an impact on the FTE numbers. But secondly, which I think more importantly, we have established a very senior level committee consisting of the director of human resources, Mark Verissimo, our chief strategy officer, and myself, and no one can hire anybody here at the bank without this committee's approval.

Further, our general philosophy is -- you know, and our charge as a committee is to literally go through the bank department by department and look at staffing levels, and identify areas where perhaps excess staffing exists, and to then rectify that excess staffing situation. So we expect that during the course of 2003, our head count excluding acquisitions or anything like that will go down.

Okay. You surprised me by the way -- by being able to lower your average cost of funding. Congratulations on that. I didn't think it would be possible.

Thank you.

Good day.

We have a question from Brock Vanderbilt.

Thanks very much. I'm kind of surprised at the disconnect here between the results which I think are quite good and the number of important respects and the guidance for the first quarter. Where does -- and you're guiding us toward modest margin compression. Where is the 6 or 8 cent air pocket in the earnings for Q1 coming from?

Brock, it's Lauren. The first quarter has a number of things that are going on that are different, and for one thing, we expect that the provision for loan losses in the first quarter will be somewhat higher than it was in the fourth quarter. But secondly, we think we're going to see an uptick in operations expenses before they go down, and specifically -- I can actually explain that to you.

It's more of an artifact of timing than it is a reality, and it has to do with compensation, it has to do with the way the company's 401(k) match works and we've changed the way the program works to simplify it at Silicon Valley Bank, but the impact of the change in the way the 401(k) match works has a disproportionate effect on the first quarter. Also, we are planning for higher levels of compensation accrual in 2003, and that will have a disproportionate effect on the first quarter as we are looking to grow earnings -- grow revenues in several of our business lines throughout the course of the year.

Okay. On the 401(k) issue, is that a Q1 trueing up, if you will, or will there be an ongoing impact to that?

It should happen every Q1. It isn't a trueing up. The switchover costs between the plan are inconsequential. But the way the match works is the larger part of the match occurs early on in the year rather than ratably (ph) throughout the year. So it's something you'll see every first quarter.

Okay. Thank you.

We have a question from Charlotte Chamberlain (ph).

Yes, good afternoon. Following on with the last question, is it reasonable to assume then, Lauren, that the 6-cent air pocket that the previous questioner asked about, that that should dissipate? Should we regard that as a one-time event? And also, with Alliant, it seems to me that the 3.6 million is somewhat less, and my recollection is that you were originally expecting, and then finally, this is the time of year when -- at least last year, when your annual exam finished and you got your exam report, and I was wondering if that was the same this year and if you've gotten your final exam report in and that's basically over for another 12 months. Thanks very much.

Hi, Charlotte. It's Lauren again. Let me try to answer those in the order that I can remember them. We have not received the exam report yet, but we have no indications there are any issues that have been -- that are, you know, material issues that are going to be in the exam report. As far as the -- trying to go from quarter to quarter next year, I don't want to try to predict the second quarter or the third quarter or the fourth quarter. That's exactly what we're trying to get away from. I do believe that first quarter is low by comparison to what we're expecting for what we're expecting for other quarter, so I think that's really about all I want to say about that.

Well, let me back up. The 6-cent air pocket, how much of that would you say is a one-time thing for the first quarter? And then, you know, we'll do the numbers as we see them, but how much of that is just -- do you think just a first quarter thing?

Well, the provision part of it is ongoing, so the provision is going to be higher every quarter in 2003 than it was in 2002 because we are not expecting an entertainment loan recovery, if it does, we'll be pleasantly surprised, but even if it happens, it won't be of the magnitude of what we had this year. So we would expect the provision to be higher each quarter than it was this year. The issue related to the 401(k) is a first quarter issue only. I'm sorry, Charlotte, but I don't remember your other question.

Let's see. You told us about the regulators --

I had some help here.

Oh, no, it was about Alliant.

You are correct in that we did forecast about I think 4 to $4.5 million for Alliant for the fourth quarter, and they were at about $3.5 million, so they were not up to what we had forecast. But they did have -- you know, Alliant in their defense had really almost a remarkable year when you look at what happened to the M and A business in general. The M and A business was off about 80%, and you look at Alliant, Alliant did almost as many deals as they've ever done in their history. And part of the good thing about Alliant is that they are -- they have referred business to the commercial bank, to the private bank, to the merchant bank, and the merchant bank, the private bank and the commercial bank have referred business to Alliant.

Well, then for Alliant, if we add up their contributions to revenue this year, it's roughly, what, about $5 million?

No, I think it's more like revenue, about $12 million.

Is that a reasonable run rate for next year, or --

We think that Alliant revenues will be higher in 2003.

Okay. All right. Thanks very much.

Thank you.

Our next question comes from Ed Nijarian (ph).

Good evening, everyone. Just a couple quick questions. Lauren, how should we be thinking about repurchases going forward? I know you sort of had that whole accelerated repurchase, but can you sort of put that in layman terms about how we might think about the share base going forward, either declining or staying steady? Secondly, are there any assumption of venture capital losses baked into your 20 to 24 cents? Thanks.

As far as -- yes, we are assuming some ongoing venture capital losses. We have no ability to, you know, tell you how much venture capital losses are going to be in any given quarter. Like anything else, we have to wait and see what happens. We go through a very rigorous process every single quarter of looking at our venture capital investments and evaluating them, and the results are what they are.

But looking at the broader economy, I think that it would be hard to say that we do not expect that there are continued losses in venture capital, and yes, indeed, we have some in our forecast for the first quarter. As far as the buyback is concerned, before we do additional stock repurchases, what we will do is finish covering the current ASR, but we have -- you know, it's largely covered already. We're down to 700,000 shares as of the end of the year, and I think we'll finish covering that reasonably soon.

Okay. So the share base doesn't go down any further until you finish covering that 700,000 that's left?

It could.

And then once you're done with that, then you're sort of clean to do more, I guess. Is that the way to look at it?

It could. You know, it is possible that we could -- there's nothing to prevent us from going out and, let's say, stopping covering on the ASR and just going out and doing open market purchases, or for that matter, entering into another ASR, you know, tomorrow and then covering them both over time. And we actually could do that. I think we're of a mind probably to finish covering this ASR and then make a decision as to how to proceed, but I wouldn't swear to that.

Okay. Thank you.

Our next question comes from Joe Warford (ph).

Hi. Dave, I was wondering if you can update us on the trends within the telecom portfolio and quantify kind of what the exposure is there, and then also just kind of going back to the provision question, it sounds like maybe you'll be just covering charge-offs going forward, and maybe the reserves can be draining down with growth in the portfolio. Is that fair to say?

Okay, Joe, this is Dave responding to your questions. In the December period, the outstanding debt in the telecom and wireless portfolios aggregated were $105 million. That would be down 5 to $10 million since the third quarter, so that portfolio continues to move in the right direction given the current industry standards. In terms of the provision, as you know, our allowance is determined by the historical loss. As charge-offs increase, then it will compel a higher level of allowance.

As charge-offs decrease, as they have over these past eight quarters, then it will be driving the reserve down. The possibility exists that as long as we continue the current trend of lower level charge-offs, that there could be further slight decreases in the allowance just as we experienced in 2002, when the allowance was drawn down by $1.9 million over the year. So depending upon the charge-off experience, maybe not a full one-to-one provision to net charge-off experience.

And are you still projecting charge-offs kind of around the 1% of loan level?

I was very happy with our results in 2002, which would be right about the 1% net of film recovery, so I would be pleased with that if we could achieve it.

Okay. Thanks very much.

Lee Capul (ph) you may ask your question.

Question was about the private label investment fees. You said that the balance of the private label fees went up this quarter but because the clients were invested in lower fee for you products, you earn less money from them. Can you explain maybe in a little more detail why that went down if you expect it to continue, or what was the driver of that going down?

Lee, it's Lauren again. Let me try to clarify the numbers a little bit, and I think Ken would probably have a comment on this as well. What happened with private label client investments is the average balances were down. The period-end balances were up. And actually what we saw during the course of the quarter was increasing balances. But starting from a relatively low base. And so the combination of lower balances and a shift to products that are less profitable for us is what caused the decline in profitability.

Now, what we expect in to see continue in this regard, first of all, you know, one quarter does not make a trend. So I'm a little bit leery of saying that balances are going to begin to grow. But there certainly is some evidence of that, and we have been putting in a lot of effort to try to make our balances grow, and we, of course, have set up the new broker/dealer subsidiary, SVB securities, that is actively soliciting business.

So not only did they grow, but we have reason to understand that we made an effort to grow them. But one of the things that we are doing is we are going after relatively larger clients for the private label client investments. They tend to my great toward better yielding products for them, which tend to be less profitable for us. Let me turn it over to Ken. I'll let him continue on with that.

That was a fine answer. Unless you have a further question in that regard. I was going to say pretty much exactly what Lauren had said, and that is very simply that there are a variety of different products, and those products that are available to those people with larger balances typically are higher yielding, which equates to -- for us to lower fees.

Thank you for the brief (ph) explanation.

We have a question from Campbell Cheney (ph).

Good afternoon. I have a question, Lauren, I think you're talking about taking some of the control of expenses and putting it into the senior management committee. Have you looked at consolidating some of your offices as part of that project, and if you aren't going to do that, can you give us some color about why not?

Let me answer that, if you would, please. Yes, we have looked at that, and we continue to look at that on a regular basis. And in fact, we have a pretty sophisticated profitability reporting system that enables us to tell with pretty close to absolute certainty exactly what the profit contribution of each one of the various offices is, and in point of fact, all of the offices are contributing in a significant way to profitability relative to their size. The offices are extremely inexpensive to run because they're all in leased facilities, and with the exception of a couple of markets, most of the lease facilities are relatively inexpensive. So the offices themselves are all very profitable.

Okay. Thank you.

Our next question comes from Casey Embrick (ph).

Thank you very much. Can you go ahead and update us on kind of what your outlook is for kind of VC investment levels for 2003?

I'm going to direct that question to Harry Kellogg, who's the head of our merchant bank which includes all of our venture capital-related activities.

Okay.

Thank you, Ken. Yeah, we're looking for VC funding this year to be somewhere in the 12 to $15 billion range. We don't have the numbers for the fourth quarter yet from most of our sources yet, but sort of the flash numbers there are somewhere in the $4.5 billion range, so for our planning purposes, we're forecasting somewhere between 12 and 15.

Okay. And I know you look -- gross share of that, but that's down from previous kind of expectations of 15 to 20, right?

Yes, it is.

Okay. Secondly, what happens to the margin, Lauren, if we get another rate cut, let's say 25?

Casey, you know, let's hope that doesn't happen, but we are doing everything in our power to maintain margin. Every time the fed cuts, it makes it more difficult, so I think the answer is, you know, it has to have a negative impact on our margin. I don't see, you know, how we can -- there are only so many things you can do to maintain margin as rates decline, and I think we've tried just about everything we can. Certainly if we can come up with something else, we will find it.

Okay. Thank you very much.

Our final question comes from Gary Townsend.

Hello again. David, Lauren, in part of the earlier presentation in explaining the air pocket 21% decline in earnings that are projected for the first quarter, there was going to be additional provisioning expense, and David, perhaps you could just expand on that somewhat. I'm just curious how we go from a relatively low provision to a higher one in the first quarter, what's causing that.

Gary this, is Dave respond pg. In terms of the fourth quarter activity, the provision was very minimal. Maybe in the ballpark of $1 million given that our model forced us to draw down the overall allowance. What we cannot predict with accuracy and certainty is what the model will drive for the first quarter until we have the loss experience for the first quarter in hand. So if we were to have a net charge-off experience in the four, five, maybe as high as $6 million range and the model didn't drive us lower in terms of the overall allowance, then we would have a 4, 5 or $6 million provision expense to maintain the allowance. So that's what it was that Lauren was speaking to.

And in the quarter just completed, there was about $4.3 million in charge-offs?

Yes, it was.

Net charge-offs? And what were the total charge-offs?

Gross --

And recoveries.

Gross charge-offs in the fourth quarter, if that is your question --

Yes.

-- were $5.4 million and recoveries in the fourth quarter were $1.1 million.

Thank you.

You're welcome.

That concludes today's conference. Thank you all for joining. If you would like to access a replay of today's conference, you can do so by dialing 1-888-562-5418. That replay will be available until February 16th, 2003 at 8:00 p.m. central time. Again, thank you all for joining. You may disconnect at this time.