Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

NetBank, Inc. (NTBK)

Q4 2006 Earnings Call

February 21, 2007 10:00 am ET

Executives

Rich Jeffers - IR

Steve Herbert - CEO

Jim Gross - CFO

Analysts

Annett Franke - Friedman Billings Ramsey

John Hecht - JMP Securities

Sam Caldwell - KBW

Christopher Marinac - FIG Partners

Gillian Vingen -

Dan Major - Rice Rinaldi Securities

Tom Doheny - Sandler O'Neill

Presentation

Operator

Good morning, good afternoon and welcome to today's teleconference. (Operator Instructions) I would like to now turn the meeting over to today's host, Mr. Rich Jeffers, NetBank’s Director of Investor Relations. Sir, you may begin.

Rich Jeffers

Thank you. Hello, everyone. As you know, the purpose of today's call is to discuss NetBank Inc.'s financial results for the fourth quarter of 2006. Please be aware our commentary or responses to questions may contain forward-looking statements. Forward-looking statements regarding the intent, belief, or current expectations of NetBank, Inc. or its officers can be identified by the use of forward-looking terms. Examples include may, will, should, believe, expect, anticipate, estimate, continue or any other comparable phrasing. Information concerning risk factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our SEC filings.

Along with this morning's press release, we posted additional financial information directly to our website. This quarterly data provides statistics and further detail on the company's financial performance by business segment. We may refer to this material during the course of this morning's discussion. The information can be found within the Investor Relations section of our website at www.netbankinc.com. There is a link titled financial data. We will take live questions following our summary of the results. Steve Herbert, our Chief Executive Officer, and Jim Gross, our Chief Finance Executive will lead today's call.

We will begin with Steve Herbert.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Steve Herbert

Thanks, Rich. And thanks for everybody that is on the call and has a continuing interest in the company and how we're doing. We will jump straight to the 2006 results. To the extent you've had some time to take a look at our press release, I think pretty much no matter how you slice those 2006 results, they make my point for me. Those 2006 results demanded radical change. When I stepped up as CEO, I was fully committed to executing the types of changes that we believe needed to be made, and we talked about that on the last conference call, in November.

At that time, and since then, we laid out all of the major elements of what I would describe as a pretty bold and/or radical turn-around plan, the objective of which, really, was to put the company, frankly, back on track. We've said all along that it was pretty difficult to see past what was a very bold plan with a lot of moving parts that we needed to execute through, and that once we were substantially done with it, we would be able to sit down and take some time and consider what is next, what else needs to be done.

The goals that I would set out for our conference call today are really fourfold. First of all, I want to update you on our progress on executing through the turnaround plan.

Second, we will have Jim get on the line and he is going to give you some color on the fourth quarter numbers. There is so much noise in it, his focus is going to be on helping you to separate out the restructuring and unusual charges so that you can get a better understanding of what the core results really look like for the continuing businesses.

Jim is also going to give you some visibility into our are short-term operating results, a translation of how the first quarter and the second quarter might be shaping up and they're looking better; but I got to be honest with you, they're not where they need to be and they're not looking like what we hoped they would look like.

So after Jim goes through those two things, I mean, it is all about what is next. So I will spend some time updating you on where we're at in that process as we substantially complete this turnaround plan and begin to think through what is next for the company.

So on the first point, one of our primary goals is to update you on our progress on that turnaround plan. So I'm going to do that. And I really want to make four primary points.

Point 1 is that when we talked to you in November, and since then what we've really focused on is a checklist of the tactical initiatives that we were undertaking, all around exiting unprofitable and underperforming businesses and refocusing on what we thought were our core opportunities to succeed in the banking and the prime mortgage businesses. We estimated a series of charges related to those transactions or restructuring activities. The actual expenses we incurred in connection with those exit transactions were pretty much what we thought they were going to be; they were right on track. The main point I want to make on point one is we've checked everything off that list. It is done. Subject to the ATM sale getting closed, everything on the list has been executed through, and all of the material charges are in the fourth quarter. We will begin to see some of the benefits from all of our hard work in the first quarter and would hope to see the full impact of it in the second quarter. So point 1 is we came to you in November and told you we were going to do something. Point 1 is, we did it.

Point 2 is we have to remember that it was a bold plan. And any bold and aggressive plan such as the one that I laid out for you that we've executed through always involves considerable risks. Certainly, we've talked about, as we've been out and about, that it is difficult to estimate the revenues and expenses of a business that is in a shutdown mode. That is an inexact science at best, so there is significant risk related to that. We have certainly highlighted uncertainties regarding loan repurchases and especially on the subprime side of our business. I've been around long enough to know that in this business you always need to expect the unexpected.

So point 2 is we checked it off the list. But in Q4, we were humbled by a few surprises. Sub prime repurchases exceeded any expectation that I could have ever thought was reasonable at September 30, with $26 million to $29 million of excess provisions. Certainly, I anticipated some risk of additional provisions, but that far exceeded the expectations I had when I signed up to be CEO. Those charges together, with the already significant restructuring charges that we plan to take, created a new deferred tax asset that had not existed before. We were required under GAAP to provide a provision against that net deferred tax asset of about $24 million.

We're not happy about those surprises, and those have some forward impact for us as we start now to look around at what is next. Our capital is less than what we expected. We have to reconsider new capital strategies now. Our future losses that we were anticipating in the first quarter and obviously trying to get back to about breakeven in the second quarter, they are not going to have any tax benefits with them so they are going to be larger than we would have expected before, increasing the pressure on our capital.

Besides, that unrealized potential tax benefit is pretty large, we really need to sit down and think about what strategies are available to us that can optimize and ensure the release and the realization of that asset, its pent-up value, we have to think long and hard about what we need to do to be sure that we are going to be able to put that money back in the bank some day. So that is point 2. Point 2 is a bold plan, lots of risks. We got some surprises. We have done what we said we are going to do, but we also got a few surprises along the way.

Point 3 is when we were out, we told you that most of what our plan contemplated was getting businesses to breakeven by exiting them, because they weren't core to what we were doing. We also mentioned that really key to our ability to execute through the turnaround plan was our ability to get to break even on our conforming third party mortgage channel by fixing it. I'm happy on one level to report that we've made some really great progress. We've got a lot of positives to report. We've been aggressive and we've been busy. We have replaced the old leadership, and we have appointed all new leadership. We've reorganized all the operating and underwriting functions out from under the sales group. They report directly to an individual I've known for 15 years that now reports directly to me. We've improved communications throughout the operations, and processes by consolidating four regional operating centers down into two, with all of the leadership in our central facility here in Columbia.

We believe that is going to lead to improved loan product quality going forward because we restructured our underwriting department. We have empowered them to turn loans down that we don't want to do and we have challenged them to enforce new underwriting and better quality underwriting standards. We believe that all of these cultural changes when they're combined with the deployment of some new fraud detection and prevention software is going to get our loan quality back to where it needs to be.

Surprisingly, our operating expenses have outperformed our expectations. They're running below what we had projected by a couple of hundred thousand dollars per month. I got to be honest with you, I could not be prouder of all that we've done and how fast we got it done, we have an absolutely great team in place. They have a common vision and the culture has been turned around 110% and we did it quickly.

But we're not out of the woods. We're not where we need to be. We're not even where we planned to be or where we hoped to be. There is a key negative that is still poses a significant concern from us. Since we started this process just 120 days ago, pretty well known the housing market has been slowing significantly. Throughout this process of change, our pipeline when we started was at $450 million for our third party conforming mortgage business and it is half of that today. The bottom line is the market has not been kind to us. It hasn't done us any favors. So we have a lot of positives, we've done everything that needs to be done, but the market is really challenging at this point for us and that is really point 3.

And point 4, we told you all along, just like going through a tunnel, we had a lot of work to do and once we were on the other side of the turnaround plan, we would be able to look around, and start thinking about what is next. We're doing that right now. We're not at a point in that process where our path is predetermined or absolutely clear. The setbacks that we've seen demand that we consider some new alternatives, so we are looking at a possible sale of our auto portfolio to release capital and we're very focused on what we need to do next to get the third-party conforming mortgage business to where it needs to be.

As we think about those next steps under point 4 here, we need to point out that some of those next steps may involve more charges. But if so, we just want to point out as well that those charges could be mitigated to some degree if we're able to close on the sale of the ATM business as planned. We currently estimate that the sale of that operation if closed is going to benefit tangible book value by about $18 million to $19 million.

So with that as a lead-in, hopefully I've done a fairly decent job of focusing on where we're at and the turnaround plan and leading into some of the issues that are focusing us on what is next. I will let Jim take over and walk you through the fourth quarter numbers and expectations for the first quarter.

Jim Gross

Thanks, Steve. I will first walk you through the unusual items that we reported in the fourth quarter. Next, I will give you a pro forma look at the results for the fourth quarter that should assist you in estimating our results from continuing operations in the future. Before I do that, though, there is one housekeeping item before I get started. As we stated in the press release, all of the financial figures that we are sharing today are preliminary and have not been audited. We only recently engaged Porter Keadle Moore to replace Ernst & Young as our external auditors. PKM is a certified public accounting firm based in Atlanta that specializes in auditing community banks including some SEC registered banks. Obviously, we are pleased to have resolved this issue, and we think our shareholders will be particularly happy with our choice given PKM's experience and reputation in banking.

We had four large unusual items or transactions I want to call to your attention. First, as Steve mentioned, we have substantially completed all of the initiatives set forth in our reorganization plan. We recorded shutdown and reorganization expenses of $21.3 million. This was just slightly below our estimated shutdown costs that we put forth 90 days ago. It relates to the sale of NetInsurance and Beacon, the shut down of Meritage Mortgage, and our QuickPost/PowerPost initiatives, the shutdown of our indirect auto-lending operation which is in process, and the reduction in executive and senior management ranks.

Second, the company shut down its nonconforming mortgage channel during the fourth quarter. As Steve mentioned, repurchase requests rose sharply in this channel following the announcement of the shutdown and accelerated further late in the quarter. Non-conforming purchases far surpassed the level that we anticipated. Repurchases for the quarter in the non-conforming channel were $50.3 million. This exceeds the aggregate of repurchases for the prior three quarters which themselves were each historically high.

Our inventory problem loans as a result grew to $82 million. We found that loans that were being put back to us more rapidly than in the past related to our announcement to exit the business. We also noticed that the market was heavily discounting our loans, again relating to our announcement to exit the business and that was not just for the non-performing loans but also for the current production.

So we decided to work through these problem loans and the existing inventory of current loans ourselves. We set aside a total $30.3 million of reserves in the non-conforming channel during the quarter, which we believe reflects the inherent risk in the remaining exposure there.

Third, we began marketing our ATM and merchant processing sales and servicing business, NetBank Payment Systems, late in the fourth quarter. Based on the bids we received in the first quarter, we decided to record an impairment adjustment of $9.7 million to reflect the underlying value inherent in the bids we received. A sale as Steve had mentioned, would convert approximately $18 million to $19 million of intangible assets into tangible net worth.

Fourth, as Steve mentioned, the company generated a significant deferred tax asset in the fourth quarter. We went from having a net current tax liability to a net deferred tax asset. This was unanticipated. It was due to the extremely high provision expense for the non-conforming loan repurchases as well as the substantial fourth quarter restructuring charges.

We recorded a reserve against the realizability of this asset of 23.4 million. Steve and I still believe that the company may be able to realize the value of these tax assets in the future as the company returns to profitability, or through other tax strategies. However, we believe the reserve in the quarter is required under GAAP given the company's present facts and circumstances.

Last quarter, I stated that fourth quarter was shaping up to be another transition quarter as we sold or shut down various non-core or underperforming operations. I would like to spend a few minutes walking through the noise and the numbers in order to assist you in understanding core operating results, especially those of our continued operations. I will also help you identify the other costs of loans sold or closed operations.

First, the Retail Banking segment recorded a loss of $5.3 million. Included in the determination of that loss was $2.5 million of shutdown and reorganization costs related primarily to exiting the Post initiative and our indirect auto-lending channels. The remaining costs of the QuickPost operation above and beyond the shutdown costs that are included in the fourth quarter results totaled $3.3 million. Finally, we estimate the expense savings related to shutdown of our indirect auto operations to run about $1.5 million per quarter. If you add all of those up, the pro forma results are a profit of $2 million.

Again, let me just reiterate or summarize that for you, you start with a pre-tax loss of $5.3 million, you add back the shutdown reorganization costs of $2.5 million, you add back the remainder of the QuickPost loss above and beyond the shutdown costs -- that was about $3.3 million -- and then we believe the elimination of DFS production will reduce expenses from fourth quarter levels by about $1.5 million. That should get to you a normalized amount for continuing operations of about $2 million. However, we do expect our Retail channel to continue to be adversely impacted by reduced leverage, again related to some of the surprises that affected capital in the fourth quarter.

Turning to the Financial Intermediary segment, the loss exclusive of discontinuing operations was $14.2 million. Included in that loss are close to $1 million of shutdown and reorg expenses, principally related to shutting down two of our regional operating centers and reducing some of our senior management ranks. Likewise, during the quarter we made some adjustments to accrued interest receivable that aggregated $3.1 million. That brings the loss to normalized operation to just over $10.1 million.

Turning next to the Transaction Processing segment, in total that segment lost $9.5 million. This segment includes our ATM merchant processing unit as well as our servicing factory. Included in the $9.5 million segment loss is the $9.7 million goodwill impairment adjustment that Steve and I mentioned earlier. If you normalize the loss for the impairment of intangible assets, our Transaction Processing segment actually earned $166,000. NetBank Payment Systems contributed $850,000 to the loss and the servicing factory had earnings of $1 million.

Turning now to servicing asset, last quarter we told you that one of the objectives of our servicing sales during the third quarter was to get combined results of the servicing asset and servicing factory to break even. You combine the results there, the loss was a $1.2 million loss, or $1 million earnings coming from servicing factory, and $2.2 million loss coming from the asset. During the quarter, we wrote the servicing asset down by $1.6 million, based upon a revision in our estimate of the delinquency path that the remaining servicing will take. If you exclude that adjustment, the combined servicing results were slightly positive.

Finally, the other corporate overhead costs for the quarter were $17.6 million. This figure includes $9.3 million in restructuring and shutdown costs related primarily to reducing our executive and senior management ranks.

The analyst estimates out there for the first quarter results range from $0.08 to $0.24. We guide you to a performance at the lower end of that range and believe there is still key downside risks related to completing the project of fixing our conforming wholesale correspondent operations and hopefully the market will get behind our backs on that in terms of economic conditions, and also we're going to continue to be affected by tax affecting our operating results until we return to profitability.

So with that all said, I will now turn it over to Steve for some closing comments.

Steve Herbert

All right. Thanks, Jim. I will close it fairly quickly. I mean, when I agreed to serve as a CEO on October 5th, I did so because I really thought two things were pretty clear to me. I really felt that there was a lot of intrinsic value inside the company and I really believed that we ran the risk of destroying that value all together if we did not take immediate actions.

Those actions and the path that we've taken involve making some very difficult decisions. We have shut down businesses, notwithstanding that some of them had once been quite successful and notwithstanding that some of them showed the potential for the future as we refocused on our core businesses. Let me tell you, it has been hard work. To give you some idea of the magnitude of the change, at one year ago, we had 2,589 employees. And after all of the hard work, we stand today with just 1,536 of them left on our payroll.

So the initiatives that we took, though, I've looked backwards, when you're sitting in a chair like this doing what we've been doing over the last 120 days, you wake up some mornings and you go, would I do anything any different? We have done, absolutely, I believe, exactly what needed to be done exactly when it needed to be done. The efforts were difficult. They came at a real cost to our investors. I don't want to minimize that. They came at a real cost to our employees. I just described what that cost was. But let me tell you the alternative would have been far worse.

Imagine for just a moment, if you will, where we would be as a company if we were still in the non-conforming mortgage business. After $50 million of repurchases and $26 million to $29 million of surprise reserves in that segment in the fourth quarter and all of the carnage that we're reading about in the news today, the charges that HSBC, New Century, among many others, thank God we're out of that business now.

Imagine, if you will that on top of that, we were still in our QuickPost operation losing $3 million a quarter, trying to prepare for a future far off into the distance. We had a $1.6 million MSR valuation adjustment in the quarter. Imagine, if you will, if the MSR portfolio was still six times the carrying value that we had today and that charge was six times what it was in the quarter.

So it may not be perfect where we're at right now, but it is relatively much better. We've done what needed to be done. The bottom line is, for all of the hard work that we've done, for all of the difficulty that we've endured, there is still more work that has to be done. We're not done.

We are considering now, we are looking at the pros and cons of the different directions that we can go, now that we're on the other side of that tunnel, now that we're on the other side of that reorganization effort. As we do that, this may, the process we are going through, may validate that our current direction is correct, for one business or another. Or it may lead us to consider another path, a better path, or a more obvious path.

I really am not in a position to provide you with specific answers right now. But I can assure you that as we're looking at those different options, and we will look at them aggressively and rapidly, we are going to seek the best balance for all of our stakeholders, customers and employees.

We are going to be as forthcoming as we can as we make decisions and as we choose new directions. If you don't believe me, I want to close with this one point. I think that as a management team we've demonstrated an absolute commitment and a total determination to do what needs to be done to make the tough calls when they need to be made. We're going to do the right thing for our stakeholders. We plan to continue to do the right thing for our stakeholders and we are going to do what needs to be done when it needs to be done in the days the lie ahead.

With that, I'll close and I will open it up for any questions. Thank you for your patience while we went through our prepared comments.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Annett Franke - Friedman Billings Ramsey.

Annett Franke - Friedman Billings Ramsey

A quick question on the guidance. You talk about the $0.08 to $0.24 of loss potentially at the higher end, coming in for 1Q. Is that a pure operating loss or should we expect to see some more charges that will impact 1Q07?

Steve Herbert

It is a pure operating loss. We don't expect any material additional charges related to the restructuring plan as we've already communicated it to The Street. We are looking at additional issues and alternatives and where do we go from here. The two things I pointed to in particular were we're considering a possible sale of our auto portfolio to release the capital that is allocated to it since our capital situation is different than we initially anticipated; and we also have to be 110% focused on getting our third party conforming mortgage business back to where it needs to be.

So as we work our way through those two particular issues and some other things that may arise as we think about what is next, there could be decisions that would involve additional charges that are not in that number. As soon as we know them, as soon as we have made those decisions, we will be back to The Street. We've been forthcoming. And we will remain that way. We will let you know what we can let you know, when we can let you know it.

Annett Franke - Friedman Billings Ramsey

Makes sense. Conforming mortgage channel or mortgage banking business, you are running your operating expenses at about 150 basis points right now. What kind of initiatives are you seeing there for the operating structure to come down? Also, it looked like the warehouse, it is the first time this year it actually turned negative. Any comments on that?

Steve Herbert

Well, I think on the warehouse spread being a bit on the negative side, we had an interest adjustment in the quarter of about $3.1 million that is nonrecurring in character. When you add that back, it should look considerably better. It is pretty flat to slightly negative, because a lot of production at this time is coming in, in some of the lower rate, teaser rate, ARM type products, and things of that character which are blending down the overall rates to below traditional warehouse rates.

On the expense front, expenses are below where we projected them to be, and we've consolidated that down, I'm not sure if the number you're looking at with 150 basis points includes maybe some of the nonrecurring charges. I believe that is a bit high for where we're running. But we do have some additional things on line that will drive that cost lower.

Operator

Our next question comes from John Hecht.

John Hecht - JMP Securities

With respect to the conforming channel, the conforming segment, can you break out the performance of the retail versus the third party channel during the quarter to give us a sense how those business lines are doing?

Steve Herbert

At a very high level, the retail channel basically broke even, made a small profit for the quarter, and your loss basically is focused in the third party conforming channel.

John Hecht - JMP Securities

And you mentioned as we sit today that the pipeline for the third party channel is approximately half of what it was in the previous months here?

Steve Herbert

At September 30, I believe we had a $450 million pipeline, and it is about half of that now. A lot of that would be attributable to normal seasonality, but some of it is probably also attributable to some of the changes that we made, and hopefully some of it is attributable to some of the loans that we had been buying back that we're not doing any more.

John Hecht - JMP Securities

Switching to the Servicing segment, the average UPB during the quarter was $3.5 billion, do you know the number for what the end of the quarter UPB was in that segment?

Jim Gross

It should be about 3.5 billion. It will not change very rapidly. I would say it is probably about 3.4 billion, maybe about $100 million in pre-paid or something.

John Hecht - JMP Securities

And given now the combination of the Servicing Factory and the Servicing Asset, as breakeven to modestly profitable business, and incorporating that you took an impairment of $1.5 billion related to revision of the delinquency estimates, I mean where do we sit now? I know this is somewhat forward-thinking, but in terms of where you've written that asset down and where potential additional impairments may be associated with that asset, given it is a much smaller asset base?

Jim Gross

It presents obviously less risks than it did when the MSR asset was five to six times the current size that it is. There is obviously one-sixth of the hedging costs, related to the asset, one-sixth of the risk of magnitude of modeling and other types of adjustments which are fairly common of the ownership of this particular asset. So we're relatively much better off than where we were before.

So that risk has been moderated significantly. You can see when you adjust out that $1.6 million item, we did basically break even to make a small profit. A $1.6 million adjustment is a lot more tolerable than one that would have been five to six times that size potentially.

John Hecht - JMP Securities

With respect to the potential sale of the auto portfolio, can you give us some details about that? One would be the size. The second would be the margin. The third would be is there any unamortized premium on that and where do you think bids are on that piece of paper today?

Jim Gross

We have about $400 million of auto paper on the books. I think if we executed a sale, it would not be at a profit. It would be at a loss. The loss would probably be somewhere between I don't know, something a bit north of $5 million probably based on today's market would be what we would guesstimate. But the release of capital, since it is a fully 100% risk weighted asset, would be closer to $40 million.

John Hecht - JMP Securities

Do you have any sense for what the margin is in that portfolio?

Jim Gross

When you say margin?

John Hecht - JMP Securities

Net interest margin.

Jim Gross

I don't, but we will have Matthew or somebody get back to you with it. I don't have the yield number sitting in front of me and the funding costs.

John Hecht - JMP Securities

Okay. Thanks very much, guys.

Operator

Thank you. And our next question comes from Sam Caldwell.

Sam Caldwell - KBW

My question relates to the CMC lease issue. Could you provide an update and maybe a broader question would be have you changed at all your outlook or how you're approaching those CMC leases, since you've taken over as CEO?

Steve Herbert

We really haven't changed anything on CMC. Nothing really is changed on CMC. There were some deadlines that were met, and some filings that were submitted into the MDL court in Ohio that positions the situation where the judge could make some important decisions. But the issue with this judge is will she make any important decisions. Her history at this juncture suggests that she doesn't feel any real time pressure with respect to this case, certainly not the level of time pressure that we feel.

To this point, there has been no change in our strategy. But great minds tend to think alike. I believe there may need to be a change in our strategy. We need action by the courts.

Sam Caldwell - KBW

Very good. Thank you.

Operator

Our next question comes from Christopher Marinac.

Christopher Marinac - FIG Partners

Steve, I wanted to ask about capital and just to refresh us all in terms of your capital position now, and as well as how they may look pro forma at the end of March.

Steve Herbert

Well, that is sort of a broad question. The major dimensions of what we're looking at as we go forward in the fourth quarter is you can see what the fourth quarter numbers are, the major dimensions or impacts would be item A, hopefully a closure on our ATM sale, and improving the tangible book value of the company, if not the GAAP reported capital, the tangible book value of the company would be improved by that.

Secondarily, we would expect to have operating losses during the first quarter. Jim has given you some direction on what we think the operating losses would look like, so you would need to come back and deduct those.

I've made reference to the fact that we may look at a sale of auto, which could involve some reported loss of tangible book value, but a release of risk-based capital. Something a bit north of $5 million probably to give you an order of magnitude of what that loss might look like.

Then also we've got to consider, we're looking around now at other alternatives and initiatives and issues that could result in some additional charges, but we're just not at a point where I would be able to describe what any or all of those might be or even if we will; we just don't know. We're not at a point where I could tell you so. You would have to leave an open item on the bottom of the page that says, okay, you're at X, minus operating loss, plus sale of the ATM business, minus question mark, question mark, minus the auto deal if you decide to do it.

Christopher Marinac - FIG Partners

Steve, there is still a limit to how many charges you can take before any more capital and I guess that is part of the spirit of my question. To the extent you can comment on that, that would be helpful.

Steve Herbert

Well, we are committed to remaining risk-based capital compliant or getting back to the 10% level. There is no guarantees in life at March 31, so that would impose some limit to the level of the types of charges that we could take, yes.

Christopher Marinac - FIG Partners

Very well. What do you think needs to change on the revenue side for performing mortgages and does the seasonality hurt you this quarter, but can it help you as April, May, June begin to happen?

Steve Herbert

If normal seasonality patterns prevail, we would expect obviously the pipeline to recover some or all of the ground, compared to where we were at September 30. And I think we have a great sales team in place that creates an opportunity for us to move beyond that in the days and weeks ahead. So the seasonality should be turning in our favor here in the next 30 days or so. But where we're at right now, we're not where we, as I said, we're not where we planned to be, and we're not where we need to be.

Christopher Marinac - FIG Partners

Steve, does that mean that operating breakeven in the second quarter is, that still a possibility or is that unlikely at this point?

Steve Herbert

It is still a possibility. It is too early really to tell. But from where the pipeline is at right now, you have a less of a good feeling about it than you would if your pipeline was still at $450 million like it was at September 30. You would be feeling better about it, with the seasonality coming back to you.

Christopher Marinac - FIG Partners

Thank you very much.

Operator

Thank you. Our next question comes from Gillian Vingen.

Gillian Vingen

I was just wondering if you could give us an idea for where you see the conforming gain on sale margin going in 2007, if it is going to continue to edge up or if it is going to remain under pressure? Thanks.

Jim Gross

The conforming mortgage channel has been under pressure for quite some time, and based on what we're currently seeing early on in 2007, we wouldn't expect it to get much better. We also have difficulty perceiving it getting too much worse either because it is pretty tight out there. There is just not a lot left for even the big guys to give.

You're seeing stress even at some of the largest originators, Countrywide's numbers aren't what they used to be. So basically all of the press is really revealing that things are getting tough for the industry. So I don't think there is much more money to get back on margin.

Gillian Vingen

Thank you.

Operator

Our next question comes from Dan Major.

Dan Major - Rice Rinaldi Securities

In your mid-February 8-K, you had mentioned that after the reorganization, you would contemplate longer-term strategic alternatives to drive shareholder value, I believe is how you put. I just wonder if you can elaborate on that and what type of timing would you be in a position to kind of review those strategic alternatives?

Steve Herbert

Well, there has been some press about that, and if I can quip a little bit, there is a reason you only pay a quarter for a newspaper, because you're not buying the truth, so some of the stories weren't as balanced as I would have liked to have seen them be.

To give you a more balanced perspective, there has been an awful lot of interest in the company and in all of the hard work that we've been doing in this turnaround plan, and it has been a feverish endeavor, and I think if we can pat ourselves on the back, we really don't have time to pause and do that, but we've done a lot of work in a short time and we've worked very hard to get it done.

So there has been a lot of interest in us and as we said all along our initial focus had to be on executing through the turnaround plan because I said in my talking points, my fundamental belief was there is a lot of intrinsic value here and if we didn't act and act quickly we were at risk of seeing it basically evaporate. So we needed to stay focused on executing through the turnaround plan and when we got to the other side of that, we were going to look around at some broader options.

So there is really nothing new in that statement other than it is now time, I think, for us to take that broader look at what our options are. There has been a lot of interest in the company and for us to take a little time to consider those other interested parties, and how things might come together if we were to pursue something like that.

It really should come as no surprise that as a company we can go it alone, and that is sort of what we're working on is to put the company in the best possible position to go it alone. But there might be a strategic merger or a partnership that might be a better alternative for us, or there could be an outright sale. I mean those are all options for us.

What we're really focusing on here in the short term is seeing what might be available to us, and really focusing on what is best for all of our stakeholders. That's a commitment that we have, is we're going to look at our options, now that we're at the other side of that tunnel and then consider where to go from here.

Dan Major - Rice Rinaldi Securities

Thanks.

Operator

Thank you, our next question comes from Tom Doheny.

Tom Doheny - Sandler O’Neill

You mentioned interested parties in the company. I'm curious what in particular, what segments of the company or if you can give some more description of what these interested parties are most drawn to in NetBank? Thanks.

Steve Herbert

The most valuable dimension of the company is the retail bank, and the Internet banking core competencies and franchises is, we've said when we've been on the road, we're a top 10 website and provider of that particular service on the Internet, with a core deposit base with substantial value. We have a highly profitability small-ticket equipment leasing operation and an absolutely solid to the bone retail conforming mortgage business, and then we have a third-party conforming mortgage business that we're working on getting back to breakeven, because it has incredible latent earnings power when the mortgage cycle turns back to it.

We got to figure out how to get that thing to around breakeven, so we can wait for that turnaround to come. But the real value is in the first three areas, as we sit here today, the potential value is probably in the fourth.

Tom Doheny - Sandler O’Neill

Thanks a lot.

Operator

Thank you. I show no further questions at this time, sir.

Steve Herbert

Well, we thank everybody for your continued interest in the company. We're going to keep working hard and doing what needs to be done and we're going to continue to keep you as informed as possible, and be as straight talking as we can, as we determine what is next for the company. We will let you know, so stay tuned. Thank you very much.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NetBank Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts