Paul Borja - Executive Vice President, Chief Financial Officer
Joseph Campanelli – Chairman, President and Chief Executive Officer
Matthew Kerin - Executive Vice President, Managing Director, Mortgage Banking and Warehouse
Mike Maher – Executive Vice President, Chief Accounting Officer
Bose George – KBW
Jay Gohil - Market Group
Flagstar Bancorp, Inc. (FBC) Q22012 Earnings Call July 18, 2012 11:00 AM ET
Good day and welcome to the Flagstar Bancorp second quarter earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Paul Borja, CFO. Please go ahead, sir.
Thank you and good morning, everyone. I would like to welcome to our second quarter 2012 earnings call. My name is Paul Borja and I am the Chief Financial Officer of Flagstar Bank.
Before we begin our comment, I would like to remind you that the presentation today may contain forward looking statements regarding both our financial condition and our financial results. These statements involve certain risks that may cause actual results in the future to be different from our current expectations. These factors include among other things, changes in economic conditions, changes in interest rates and competitive pressures within the financial services industry as well as legislative or regulatory requirements that may affect our businesses.
For additional factors, we urge you to review the press release we issued last night. Our SEC documents, such as our most recently filed Form 10-K and Form 10-Q as well as the legal disclaimer on page two of our earnings call slides that we have posted on our investor relations page at flagstar.com this morning.
During the call, we may also discuss non-GAAP measures regarding our financial performance. A reconciliation of these measures to like-GAAP measures is provided in a table to our press release which was issued last night as well in the appendix to our earnings call slides.
With that, I would like to now turn the call over to Joseph Campanelli, our Chairman and chief Executive Officer.
Thank you, Paul, and good morning, everyone. I would also like to welcome everyone to our second quarter in 2012 earnings call.
As usual, I would like to begin today with some general comments on the second quarter. After I finish my comments, I will turn it back over to Paul who will take us to a more detailed financial review including our outlook for the third quarter. Afterwards, Paul and I along with the rest of the executive team will be available to answer any questions you may have.
I am extremely pleased to report that Flagstar Bank has returned to profitability, both for the second quarter and on a year-to-date basis consistent with the guidance we provided early in the year.
This is a significant milestone along the path of our transformation. So it’s important that I take a moment to thank our leadership team and all the more than 3,000 employees whose hard work and dedication have helped us achieve this important accomplishment. I would also like to thank all of our customers, business partners and investors that continue to support us.
Our results this quarter, which I will get into in a moment, reflects significant time, effort and commitment over the past several years, but I want to stress we recognize we still have a lot of work ahead of us. In fact, in many ways, we are still in the early phase of our transformation. Now that we have returned to profitability we will continue to execute on our business plan becoming a more diversified super-community bank, focused on key markets and businesses that we know and understand while continuing as a national leader in the residential mortgage business.
We have identified opportunities in our core businesses in mortgage to drive sustainable profitability and continue to invest in product development and risk and compliance infrastructure. Our relentless focus on eliminating inefficiencies and redundancies is a necessary part of our daily activities given the industry wide pressure on margins, lower consumer transaction fees and higher regulatory costs as Dodd-Frank becomes fully implemented.
We fully believe the strong risk management and compliance functions of our core competency is necessary for any successful company. Finally, we continue to implement lasting innovative ways to better serve our customers, all with the overriding goal of generating value for our shareholders.
Last night, we reported second quarter net income of $86 million or $0.15 per share. Through the first six months to 2012 we have earned $77.3 million or $0.13 per share. Our second quarter net income was one of the most profitable quarters in the history of our 25 years.
Our quarterly net income also contributed to an increase in our Tier 1 capital ratio to 9.07% and total risk based capital ratio in excess of 17%. On an annualized basis, second quarter return on average assets was 2.37% and return on average equity was in excess of 31%.Book vale also increased by nearly 11% to $1.65 per share as compared to $1.49 per share in the prior quarter. We continue to maintain a deferred tax asset allowance of approximately $348.7 million or $0.62 per share which consistent with GAAP is not included in our $1.65 book value per share.
Our second quarter results reflect the strong earnings power of our mortgage banking business with second quarter gain on loan sale income of $212 million or 166 basis points. Second quarter residential first mortgage originations were $12.5 billion and residential first mortgage rate locks remains strong at $17.5 billion.
If you would turn to slide seven of our earnings presentation, second quarter residential first mortgage originations increased by 12% from the strong first quarter level and by 170% from the same period a year ago. Similarly, gain on loan sale income increased by 4% from the prior quarter and by more than four folds from the same period a year ago.
The increase in gain on loan sale income reflected wider gross margins and higher volumes principally due to a favorable refinancing environment including the early success of the HARP II program. Major initiatives implemented over the past year to align our origination strategy in channels and reengineer our underwriting and servicing platforms have begun to drive significant returns in gains.
Looking forward, we see a significant opportunity to selectively expand our customer relationships and then increase our mortgage share as well as to position ourselves for a future return to a larger purchase market. We continue to participate in our HARP 2.0 program actively working to help keep borrowers in their homes throughout the country.
Through the first six months of 2012, we have helped more than 4,200 borrowers to reduce their mortgage rates by an average of approximately 195 basis points. Refinancing under the HARP program comprised approximately 15% of our total residential first mortgage originations during the second quarter, which we expect to maintain throughout the duration of the program.
Even as we take advantage of the current mortgage refinance waive we continue to position ourselves for diversified revenue growth and diversification through our commercial banking and specialty teams and the new commercial relationships they bring to Flagstar Bank, increased treasury and cash management fee revenues, the growth of core retail deposits and loans generated out of our 11 community banking offices and the addition of new home lending centers and lenders to capitalize an inevitable shift to a more robust purchase market.
Turning to commercial banking, our commercial and specialty teams are steadily adding new business relationships consistent with our strategic plan. During the second quarter, we originated approximately $197 million in new commercial relationships and continued to build a meaning commercial deposit base and recurring stream of fee income.
We remain focused on continuing to build a high quality diversified base portfolio of small businesses and commercial customers. Our commercial customer acquisition strategy is to find creative financing solutions in assisting company’s growth opportunities in Michigan and in New England markets.
Turning to personal financial services, we were consistent in our goal of growing core deposits and shifting our funding mix away from more expensive and less sticky funding sources. During the quarter, retail core deposits increased by 2.7% from the prior quarter and the retail core deposit ratio improved to 48.6% at June 30, 2012.
Wholesale broker deposits are being intentionally run off as immature are being replaced with retail core deposits. During the quarter, we closed two underperforming banking centers bringing our total to 111 at June 30. We plan to open three new banking centers, two of which are planned for the city of Detroit. As the largest financial institution headquartered in Michigan we are committed to helping foster the economic revitalization of the city.
This improvement in core deposits led to a reduction in the overall cost of funds. Second quarter cost of funds was 1.72% compared to 1.76% in the prior quarter. Overall cost of funds has improved for a number of consecutive quarters. However we believe that the current level is close to hitting its straw.
Most of our efforts to earn net interest margin going forward we focused on changes in our asset mix. Second quarter bank net interest margin was 2.37% compared to 2.41% of prior quarter, a very slight compression of the margin and one that was less expensive than many of our peers. We are currently asset sensitive and consistent with declining interest rate environment yields in our interest earning assets decreased at a marginally greater rate than the improvement in our cost of funds.
Turning to slide 17. Our second quarter results were also reflective of a 40% reduction in total credit related cost from the prior quarter. This reduction was driven a linked quarter decrease in each of the bank’s three primary credit costs, the provision for loan losses, representation and warranty reserve change in estimate and the asset resolution expense. While credit cost declined, reserve levels for the allowance for loan losses and representation on warranty reserve were increased quarter-over-quarter.
Second quarter provision for loan losses was $58.4 million as compared to $114.7 million in the prior quarter. The decrease was driven by two key items.
First, turning to slide 18, the allowance to loan losses increased to $287 million or approximately 67% of non-performing loans at June 30, 2012, as compared to $280 million or approximately 69% of non-performing loans at March 31, 2012. This increase was driven primarily by an increase in TDRs and an increase in historical loss rates which are updated quarterly, partially offset by decreasing allowance related to our commercial loan portfolio reflecting continued success in reducing the legacy of commercial real estate portfolio.
Since the beginning of the year, the commercial real estate legacy portfolio was reduced from approximately $970 million to $747 million, a $223 million or 23% reduction year-tor-date.
As I have discussed in the last two calls, we continue to experience increased TDRs or troubled debt restructurings as a result of our aggressive efforts to increase the number of loan modifications and other loss mitigation activities. As shown in slide 19, the overall level of TDRs has increased significantly over the last two quarters. As you can see from the chart, nearly 81% of total TDRs are classified as performing loans. Although they continue to perform, we hold a higher reserve against them which is what rolled the increase in allowance from prior quarter.
In the long term, we believe that helping borrowers who have the desire and capacity to remain in their homes provides a win-win solution for the home owner and investor and supports the stabilization of the overall housing market.
Second, looking at slide 20, provision for loan losses in the second quarter reflect net charge-offs of $52.4 million as compared to $151.7 million for the first quarter of 2012. The decline from prior quarter related primarily to reduction in residential first mortgage charge-offs reflecting the heightened level taken in the first quarter of 2012 and from the write-offs of the related Specific Valuation Allowances.
Our loan modification efforts combined with selective portfolio sales, loan principle repayments and non-retention strategies such as short sales and deeds in lieu’s have contributed to a meaningful decline in the balance of our two largest legacy assets which we consider internally to be the residential first and second mortgage held-for-investment portfolios and the legacy portion of our commercial real estate held-for-investment portfolio, both of these portfolios, were for the most part, originated prior to the end of 2008.
Looking at slide 21, you can see that those two loan portfolios have decreased substantially since 2009. At the same time, we continue to see improvements in our consumer credit quality with overall delinquent residential first mortgage loans decreasing for the third consecutive quarter. Since their peak levels after the bulk sale in late 2010, total delinquent residential first mortgage loans have decreased by 27%.
Total non-performing residential first mortgage loans which are 90 or more days past due also decreased by 6.5% from the prior quarter. Residential first mortgage loans past due 30 to 59 days and 60 to 89 days also decreased by 5.5% and 37.3% respectively.
Non-performing commercial real estate loans in the legacy portfolio increased by $45.8 million from the prior quarter. Approximately half of the increase is related to a letter of credit which we converted to a loan in the process of working out. The remainder of the increase was attributable to several fully-reserved larger loans. These are loans that are current under payments that we downgraded it to non-accrual status and therefore categorized as non-performing loans and have been individually evaluated for impairment in accordance with Generally Accepted Accounting Principles.
The ratio of non-performing assets of Tier 1 capital in allowance for loan losses, commonly referred to as the Texas ratio, also improved slightly, to approximately 34% at June 30, 2012, efforts to focus to reduce the level of classified assets. Second quarter representation and warranty reserve and change in estimate also decreased by $40.5 million from the prior quarter.
I would point you to slide 23. You see that our representation and warranty reserve increased to $161 million as compared to $142 million in prior quarter. This increase is attributable to an increase in loan repurchase demand from the GSEs, As you can see from the top left portion of the slide, partially offset by an improvement in the demand repurchase rates as you can see from the bottom right hand portion of the slide.
Lastly, the second quarter asset resolution expense decreased in the prior quarter by $15.9 million. This decrease is primarily attributable to reduction in anticipated claims related expenses, reduction in foreclosure cost and increased recoveries due to stabilizing real estate values. Servicing enhancements implemented over the past year along with investments in technology and human resources are beginning to drive a mature reduction in asset quality expenses.
To recap, I would like to emphasize two points before heading it over to Paul.
First, we continue to capitalize on a strong mortgage banking presence and prudently grow our commercial and personal banking businesses driving growth and our pre-provisioned net revenues.
Second, investment and loss mitigation and strategies in place to reduce credit costs are now delivering significant results.
I would like to now turn it over to Paul.
Thank you, Joe. Good morning, everyone. Our net income for the second quarter $86 million or $0.145 per share reflects the continued strong core revenue generation capability of the company and a substantial reduction during the quarter in credit costs. We have, in prior calls, focused on three key areas of our operating results, revenue generation, expense management and credit costs.
From our revenue generation perspective, our second quarter results rose from increases in the gain on sales of residential mortgage loans and on our net interest income before provision for loan losses. At the same time, we continue to earn income from our mortgage servicing rights at a level above our internal target although at a slightly lower level than the prior quarter.
The first component, net interest income increased to $7.5 million from $74.7 million in the first quarter. At the same time, the bank’s net interest margin declined slightly to 2.37% from 2.41% of the first quarter.
On a company wide basis, the yield of our interest earning assets declined by 9 basis points, primarily on our mortgage loans held for sale which are short term assets and thus more sensitive to interest rate movements. Also during the second quarter, the cost of our liabilities declined by four basis points and so the spread earned on our assets decline to 2.08%. The overall decline in yields and rates reflects a lower interest rate environment during the second quarter. For instance, the 10-year U.S. treasury rate declined 55 basis points from the end of first quarter to the end of the second quarter.
The overall average balance of our interest earning assets however increased during the second quarter offsetting the effect of the lower spread on net interest income. This increase was primarily in mortgage loans available for sale reflecting the higher level of closings during the quarter.
The increase was offset in part by the decline in the average balance of mortgage loans held for investment as loans refinance contributing to the decline in interest income for that asset. With these and other changes in average balances and yields, the bank’s interest income remained unchanged for the second quarter at $123 million.
As in the first quarter, we were successful during the second quarter in continuing to reduce our funding costs. Our retail funding cost declined to 98 basis points from 1.06% in the first quarter and down from 1.34% in the second quarter of last year as we continue to focus on the growth of our core deposit base.
The decline in our retail funding cost during the second quarter of 2012 was attributable primarily to the lower rate structure for our retail certificates of deposits which we placed to maturing higher cost retail certificates of deposits and the wholesale certificates of deposits in our funding structure.
Overall total funding cost for the second quarter declined to 1.72% from 1.76% in the first quarter and from 2.21% in the second quarter of last year. As such, our funding cost for the second quarter of 2012 declined to $47.4 million from $48.2 million in the first quarter.
For the third quarter of 2012, we would expect our net interest income to be slightly below the level of the second quarter with net interest rates lower but with a slight increase in average interest earning assets. We expect such increase to arise from the continued growth in mortgage production during the quarter thereby increase in the level of available for sale residential mortgage loans and warehouse loans. We would expect this increase in average balances to only partially offset the decline in net interest rates thereby slightly lowering our net interest margin for the third quarter.
Our ability to meet this estimate of net interest income for the third quarter of 2012 depends upon a number of factors including the continuing ability to generate and maintain higher average balances of available for sale mortgage loans, our continued ability to invest excess funds in assets of similar yields, the absence of a sudden and significant increase in the general interest rate environment during the quarter and no substantial increases in non-performing and non-accrual loans.
The bank’s mortgage business during the second quarter generated $230 million in gain on loan sales which was higher than that of the first quarter as the bank continued to originate loans through re-financings of residential mortgage loans including participation in the HARP II programs.
For the first two quarters of 2012, the bank’s total gain on loan sales was $418 million exceeding the gain on loan sales for all of 2011. The gain on loan sales for the second quarter of 2012 reflects the strong growth in overall production volume arising from both overall industry volume as well as increase in market share.
During the second quarter, we experienced growth in both our loan locks and our sales. Based on recent reports of competitors exiting certain channels in the mortgage business we continue to believe that we will remain well position to maintain and perhaps increase our overall industry market share during 2012.
For the third quarter 2012, we expect that our loan locks and loan originations will be slightly above that of second quarter and that we will sell substantially all of our loan originations. However, depending upon the seasonal market conditions and types of loans that we lock and originate we believe that our margin levels could be slightly below that of our second quarter margin more than offsetting the gain on loan sale benefit of the increased production.
Accordingly, and based on preliminary July results, it would be reasonable to expect that our gain on loan sale income for the third quarter of 2012 could be at or slightly below that of the first quarter of 2012.
Our estimate is based on a number of factors including that there are no significant increases or volatile movements in the current interest rate environment that could affect consumer demand or hedging cost, that the operating environment for mortgage banking activity does not significantly change, that the bank’s ongoing relationships with its investors, primarily the GSEs, remains consistent with past practices involving loan sales, escrow accounts and loan servicing, that the expected trend in mortgage originations industry wide for the third quarter does not decline beyond current industry projections and that there are no regulatory or other legal impediments to our full participation in mortgage banking.
Another driver of mortgage banking revenue is our net servicing revenue which is a combination of income we earned from servicing loans and the net effect of the hedges on the mortgage servicing rights on our balance sheet. In total, our net loan administration income was $29 million for the second quarter of 2012, a decrease from $33 million in the first quarter of 2012.
Our mortgage servicing asset increased during the second quarter to $639 million from $597 million at the end of the first quarter due in large part to our high levels of loan production during the second quarter. At June 30, 2012, the asset reflected approximately $76 billion of underlying loans we are servicing for others primarily to GSEs. Our goal has been to earn a 6% annualized return on the value of that asset.
For the third quarter of 2012, we expect that net servicing revenue will be approximately three fourths of the amount earned during the second quarter. Our estimate assumes there remains a close and positive correlation between rate movement of the 10-year treasury and residential mortgage rates as well as the absence of significant volatility in mortgage rates and interest rate curbs.
Non interest expense, excluding asset resolution was $149 million in the second quarter of 2012 as compared to $152 million in the first quarter of 2012. For the second quarter, non interest expense reflected slightly lower compensation expense but also included higher commission expense due to the higher level of loan originations during the quarter. Our general and administrative expenses also decreased reflecting lower fees for professional consulting firms.
For the third quarter of 2012, we expect that our non interest expense will be flat or slightly below that of the second quarter level. This assumes that the FDIC assessment rate remains unchanged, that our mortgage volumes remain at levels experienced during the first quarter, that upcoming regulations of governmental directives do not require changes in service levels or business operations and that our legal, consulting and professional expenses remain constant.
Turning to our credit costs, Joe briefly discussed our loan loss provision and our provision for the representation and warranty reserve as well as asset resolution. Loan loss provision expense declined to $58 million for the second quarter as compared to $150 million for the first quarter. At the same time we continue to build our reserve increasing it to $287 million at June 20, 2012 from $281 million at March 31, 2012.
You may recall that during the first quarter we undertook several enhancements to our loan loss methodology. We also eliminated our Specific Valuation Allowance for 180 day and over loans by charging it off during the first quarter. During the second quarter, these enhancements were already in place so there were no further Specific Valuation Allowance charge offs for those types of loans.
Also during the second quarter, we continued our loss mitigation activities to keep borrowers in their homes by modifying their loans or by allowing them to sell their homes for less than the loan value which is a process referred to as short sales. For those modified loans which we refer to as troubled debt restructurings or TDRs, the loss rate on our model is higher than loans which are performing because of the perceived increase in the default rate of already modified loans that would eventually lead to a loss.
Similarly short sales, while beneficial to consumers, are generally affected at a loss to the bank. We include this loss experienced in the overall loss rate applied to our total performing loan portfolio. During the second quarter, our TDR balance increased and we would expect that trend to continue for the foreseeable future. This change in the composition of the loan portfolio from non-modified loans to modified loans increases the overall risk to the portfolio and thus increases the amount we reserve against the total portfolio.
At the same time, we note that our loan balances in the 30 days, 60 day and 90 day past due categories for residential mortgage loans have all declined and that the 30 day and 60 day past due loan category for commercial loan have also declined. We continue to expect that the loss mitigation efforts we are undertaking should reduce overtime our over 90 day delinquent residential mortgages during 2012.
At this time, we anticipate that the provision for loan losses for the third quarter of 2012 should be approximately equal to that of the amount in the second quarter. This estimate assumes among other things that current trends of unemployment and housing prices remain unchanged and that the growth rates of TDRs and short sales remain constant. It also assumes that the loss rates we apply against our different portfolios do not change significantly based on our experience with our own portfolio, different segmentation or due to the effect of various macroeconomic or other factors.
We refined our methodology for estimating the representation and warranty reserve as well during the first quarter. This included incorporating more recent data to loan filed request from the GSEs which we believe is a more appropriate indicator of the nature and extent in any possible repurchases.
For the second quarter, we increased our reserves to $161 million to reflect, among other things, an increase in the pending loan file requests, an increase in severity rate decline and recovery rate. Our provision for the quarter related to the changes in estimate for our reserve was $46 million and reflected a lower level of net charge-offs during the second quarter as compared to that of the first quarter.
For the third quarter of 2012, we would anticipate that our provision expense in this area would be 10% to 20% above that of the second quarter which would still be well below the level of the first quarter as we continue to work through the loan demand pipeline. Our estimate assumes there are no significant changes in the current practices or patterns of the GSEs and that the levels of loan file requests, loss severity rate and recovery rate remain unchanged.
Asset resolution expense declined to $21 million from $37 million in the first quarter. For the third quarter of 2012, we anticipate that the level of asset resolution expense will be approximately 20% to 30% higher than the second quarter but still well below the level of the first quarter as we continue to engage in loss mitigation activities and also continue our processing of the repurchase government insured loans.
With that, I will turn it back to Joe.
Thank you, Paul. We would like to now open it up to any questions that you may have on the phone.
[Operator Instructions] We will take our first question from Bose George at KBW. Your line is open.
Bose George – KBW
Good morning and congratulation on getting back to profitability. I had a couple of questions. First, I just wanted to clarify, when you guided to 3Q mortgage banking income being closer to 1Q, are you referring to the dollar amount of gain on sale income?
Bose George – KBW
Okay, great, and then switching to mortgage capacity. As the applications keep increasing, I am wondering, do you have capacity to increase volumes or do you feel like the industry stretches out to three or five way as opposed to seeing pickups in volumes from here?
Yes, over the past several years, we have invested significantly in a lot of reengineering and processes related to the underwriting and turn times in the mortgage business and our servicing capacity to really position ourselves to where our current rates. We are monitoring turn times and those types of things to keep volume at a steady flow. Maybe Matt, you can really add a little color.
Obviously, to Joe’s part, we have invested pretty significantly in the infrastructure and we have got a pretty broad distribution network as I am sure you are aware with roughly, 1,000 active correspondents and probably 1,600 active brokers. So I do believe we are well positioned.
We have invested in the infrastructure and technology and I think we were pretty well positioned with even the stress on turn times in today’s environment because of the high volumes, especially with some of the volatility as the 10-year moves around and it is not necessarily correlating to MBS like it has historically but we are pretty optimistic for the future in terms of how we are positioned and we will continue to seek solutions for staffing and making sure that the quality of the portfolios that are being brought in on a lend and leave alone basis are where we want it to be from, such as in a risk perspective.
Bose George – KBW
In terms of the turn times, what is the timeline to close now versus be it a couple of months ago?
Well, they are up slightly and then we have different turn time targets depending on whether its purchase or cash or re-file or the like but we are consistently we get it down and the we get spikes in volume and you grow to that but running probably about on average 20 days.
Bose George – KBW
Okay, great, and then actually, a quick question on the rep and warranty. There was some increase in the newer vintage stuff, the 2008, then 2009 to 2012 and I was wondering what was driving that? Has there been any change in the GSE behavior on the newer stuff?
This is Mike Maher, how are you?
Fine, how are you?
Good. Yes, see, there was a spike in the second quarter in terms of 2009 to 2012 vintages that has not translated into increased actual repurchase demands. They pulled files and are reviewing them. I wouldn’t describe that however as a meaningful change in practice. We have more greater transparency with the GSEs and they continue to focus their primary efforts on the older, more problematic vintages of ’08 and prior.
[Operator Instructions] We have a question from (inaudible) from Caspian. Your line is open.
I had a question on your valuation allowance. Now that you have hit profitability, what are your plans for potential actions regarding gradually unwinding the operational allowance if you are filing under that?
This is Paul Borja. You are referring, I think, to the valuation allowances associated with our deferred tax asset?
The DTA, yes.
This is our first quarter of profitability. We expect, as we discussed in prior conference calls, once we reach this to be in discussion with our auditors to talk about how many quarters of profitability are appropriate before we would think about reversing that. So we are looking down, that’s in the pipe and we haven’t come to a conclusion on that yet.
Would that be like a gradual unwinding or you are thinking about waiting x number of quarters and then fully unwinding that?
Generally, from a timeline perspective, what we have seen it is anywhere between four and 12 quarters and we when we have seen it, generally that’s been a one time unwinding similar to what some non bank companies have done in the past. There has been some discussion to gradual but generally it’s a one time unwinding into book equity and then a gradual unwinding into regulatory capital.
[Operator Instructions] We will take our next question from Jay Gohil from Market Group. Your line is open.
Jay Gohil - Market Group
A question on Basel III capital ratio if you have it handy?
Jay Gohil - Market Group
Would you guys have the number for Basel III?
For Basel, from our perspective, we take a look at the NPRs as others are and we continue to go through it. I think that we certainly have done an informal analysis of that but we are still going through a very detailed analysis to see how it affects the different pieces, especially as it affects our business but we are not at the point yet where we are ready to publish different numbers or different estimates.
Jay Gohil - Market Group
Just a follow up question to Bose, regarding the ‘09 to ‘12 vintages, like Mike said, GSEs are reviewing them. In terms of reserve that you are building up, is it at a similar level as ‘06 to ‘08 vintages?
By no means are they in line with the ’05 to ’08 vintages. The vast, vast majority of file pool request by the GSEs and ultimately demand for repurchases have been virtually confined to that '05 and '08 vintages, and importantly, the vast majority of the '09 to '12 demand that represent the spike in the chart essentially are a review of performing loans by the GSEs and in our opinion would result in a very insignificant amount of repurchase demands ultimately.
Jay Gohil - Market Group
Right, so should I read it as you are reserving very small amount or minimal for the '09 to '12 vintages right now?
We continue to reserve an appropriate amount on vintages of '09 through '012 in relation to the volume of loans sold to the GSEs, essentially about 8 basis points on loan sold to Fannie or Freddie. The vast majority of our reserves therefore are still aligned with the '05 to '08 vintages.
Jay Gohil - Market Group
Got it, and just a follow-up to the DTA question. So in terms of restarting the dividends under the TARP program, would it also follow when you start taking DTAs or can you start repaying dividends earlier?
I think from the perspective of the DTA valuation allowance and dividends, those are going to be disconnected items. There was going to be two separate items. We're going to certainly take a look at our profitability as we go forward and make decisions at that time.
Jay Gohil - Market Group
So, could you start repaying dividends before the rate goes higher to 9%?
I think it's one, where it's possible, but we would want to make sure that we have discussions with the board and with our regulators before doing so.
Jay Gohil - Market Group
Got it, and just a final question in terms of the recent press release on Mr. Patterson. So should I read it as things are fine and that's the reason he has switched out of the board position?
Yes. We view it as well, we totally appreciate, and in fact, Mark's contribution and I have a, not only a strong personal view of Mark, and professionally he was part of the recruiting effort to bring myself and many of my team members here. We look it at as an orderly transition, Peter Schultz be recommended as director to replace Mark. He's been with MatlinPatterson since 2002. He's been actively involved in new investment with Flagstar and provides for a very orderly smooth transition.
So as much as I'll miss meeting Mark on our monthly board meetings, I'm sure I'll stay in close contact with him and his role with MatlinPatterson. So, from the management perspective, we kind of view it as a non-event. Any other further comment I guess you would have to ask him or their firm personally or directly.
Jay Gohil - Market Group
Thank you, and congrats on a great quarter.
Thank you very much. It's been a while.
[Operator Instructions] It appears we have no further questions at this time.
Well, I would like to thank everyone who has joined us on today's call for their support of the company through this transition period and look forward to talking about our third quarter call in a couple of months. So thank you all. Have a great day.
This concludes today's teleconference. You may now disconnect and enjoy your day.