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H&R Block (NYSE:HRB)

Q1 2013 Earnings Call

September 05, 2012 4:30 pm ET

Executives

Derek Drysdale - Director of Investor Relations

William C. Cobb - Chief Executive Officer, President, Director and Member of Finance Committee

Gregory J. Macfarlane - Chief Financial Officer

Analysts

Thomas Allen - Morgan Stanley, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Michael Millman - Millman Research Associates

Amanda Rae Lynam - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon. My name is Kenisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Derek Drysdale, Vice President of Investor Relations, sir, you may begin.

Derek Drysdale

Thank you, Kenisha. Good afternoon, everyone, and thank you for joining us to discuss our fiscal first quarter results. On the call with me today are Bill Cobb, our President and CEO; and Greg Macfarlane, our CFO.

In conjunction with this call, we have posted today's press release and slide presentation on the Investor Relations website at hrblock.com.

Some of the figures that we'll discuss today are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the schedule attached to our press release and in the appendix of today's slide presentation. Unless otherwise stated, please note that all growth rates discussed today refer to the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012.

Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. And as a result, our actual outcomes and results could differ materially.

You can learn more about these risks in our Form 10-K for fiscal 2012 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

With that, I'll now turn the call over to Bill.

William C. Cobb

Thank you, Derek, and thanks to everyone for joining us on the call. I hope all of you had a great Labor Day weekend.

During the second half of fiscal 2012, we completed a thorough review of our organization and made some very difficult decisions to reduce our cost structure and to drive efficiency. While our off-season results typically don't offer a lot of insight into our performance for the year given the seasonality of our business and that most of our revenues and earnings are generated in our fiscal fourth quarter, I'm pleased by the impact our cost-reduction initiatives have had to date.

On an adjusted basis, our net loss from continuing operations improved by 6% to $105 million, primarily due to reduced operating costs. Greg will take you through our results later on the call, but this quarter's key takeaway is that we continue to believe our cost-reduction initiatives will add $85 million to $100 million of pretax earnings in fiscal 2013, leading to earnings and margin expansion.

In addition to these initiatives, we've had several recent and positive developments. First, several weeks ago, we announced a new $1.5 billion 5-year committed line of credit agreement. The new agreement provides us significant financial flexibility and more closely aligns to our business needs. The prior agreements' net worth covenant and clean down requirements have been replaced in the new agreement with leverage and interest coverage tests, which better align with a consumer services company like ours.

We also recently announced a significant milestone in the company's history. Our 200th consecutive quarterly dividend will be paid on October 1 to shareholders of record on September 14. Since Henry and Richard Bloch took the company public 50 years ago, the resiliency and consistency of our business has allowed us to generate substantial free cash flow, and that has enabled us to continue this dividend streak. Since 1962, H&R Block has paid a total of $3.5 billion in dividends. This is a strong testament to our business, and I am proud to be affiliated with a company that has a long tradition of returning capital to shareholders. We expect to deliver appropriate returns of capital to shareholders for many years to come.

Next, I'm pleased to announce today that we've entered into a new partnership with Sears, which we believe will be slightly accretive to fiscal 2013 earnings. Under the new agreement, we've elected to reduce the number of Sears locations in which we operate in to focus on 112 of our best performing Sears locations. The agreement also allows us to open seasonal offices in other Sears locations throughout the country during peak tax season.

In the Sears locations where we'll no longer operate, we believe we'll retain the vast majority of our clients based on our historical experience. In fact, since 2008, we've exited more than 200 Sears locations and we've retained nearly 75% of the clients served in these locations.

To put this in perspective, our retention of all Sears clients last year was 76%. So we do not expect this agreement will have a material impact on the number of returns we prepare going forward.

That said, we're very pleased to maintain our long-standing relationship with Sears, and we believe the new agreement benefits both parties and our clients.

We also recently completed our first tax season in both India and Brazil. Our primary objective was to establish a presence in both of these markets, and our preliminary results are encouraging. While India and Brazil won't move the needle on our operating results or materially impact our capital allocation in the near future, both remain long-term growth plays. In the coming months, we'll continue to review our businesses in both markets and plan to make prudent investments focused on profitable and sustainable growth.

And finally, representation and warranty-related claim activity at Sand Canyon declined significantly during the first quarter, although we expect claim activity will continue to vary considerably from quarter-to-quarter as related statute of limitations continue to expire. The accrual for representation and warranty-related liabilities remained essentially unchanged at $129 million.

Turning to our core business, we're working very hard on our plans for successful tax seasons in fiscal 2013 and beyond. It's been a really busy summer, and I'm pleased with the progress we're making. We still have a lot of work to do, but I'm confident that we'll take advantage of the opportunities that lie ahead. For competitive reasons, I won't provide details now. But I look forward to seeing many of you at our Investor Conference in New York on December 6, and we'll share our plans with you at that time.

With that, I'll now turn the call over to Greg to discuss our financial results.

Gregory J. Macfarlane

Thanks, Bill, and good afternoon, everybody. Earlier today, we reported our adjusted net loss from continuing operations improved by 6% to $105 million, primarily due to reduction in labor, occupancy and other expenses driven by our cost-reduction initiatives.

Our GAAP net loss per share from continuing operations of $0.38 was negatively impacted by $0.03 due to fewer shares outstanding in the current year and $0.01 by discrete adjustment to income tax reserves.

We remain on pace with our cost-reduction targets, which we expect will add $85 million to $100 million of pretax earnings in fiscal 2013. Given the seasonality of our business, most of the savings we expect to realize from these initiatives will be back-end loaded during our fiscal third and fourth quarters. We expect approximately 2/3 of the savings to come from lower labor and occupancy costs, with the remainder coming from other expense categories. The total savings in fiscal 2013 should be relatively evenly distributed between cost of services and SG&A.

It's important to note that the total pretax savings of $85 million to $100 million excludes any potential impact of variable expense growth, we should be reasonably inline with revenue growth. Ultimately, we believe we're well positioned to expand earnings and margins in fiscal 2013. We'll continue to update you on these cost-initiatives throughout the year.

Turning to our segment results. Tax Services revenues were down 1% to $90 million. Last year, the Canadian tax season was extended by 2 extra days, which contributed $4 million of additional revenue in the first quarter of fiscal 2012. The segment's adjusted pretax loss improved by $9 million or 6% to $144 million, primarily due to reduction in labor, occupancy costs and other expenses driven by our cost initiatives.

In Corporate, our pretax loss improved by 9% to $28 million. Corporate operating expenses declined by approximately $6 million or 14%, primarily due to our cost-reduction initiatives and lower loss provisions in mortgage loans held for investment at H&R Block Bank. Corporate revenues declined $3 million, due in part to lower interest income from H&R Block Bank's shrinking mortgage loan portfolio.

As we look at our overall financial position, our balance sheet and liquidity remains strong. As of July 31, total unrestricted cash was $940 million and total outstanding debt was $1 billion. Reductions in cash from the prior quarter principally reflect our normal off-season operating cash requirement and the repurchase of 21.3 million shares at an aggregate price of $350 million or $14.82 per share.

At July 31, 2012, 271 million shares were outstanding compared to 306 million shares outstanding at July 31, 2011.

Our first quarter effective tax rate of 37.6% was down 300 basis points to the prior year. The lower effective tax rate was primarily driven by discrete adjustments to income tax reserves. Excluding discrete tax items, we continue to expect our effective tax rate from continuing operations will be approximately 39% in fiscal 2013.

Turning to discontinued operations, which include last year's results of RSM McGladrey, as well Sand Canyon, our first quarter net loss of $2 million improved by $54 million, largely due to a noncash impairment charge recorded in the prior year in connection with the sale of RSM.

Sand Canyon received new claims for alleged breaches of representation and warranties in the principal amount of $142 million during the first quarter. Sand Canyon completed review of prior claims during the quarter with an approximate principal balance of $527 million. At quarter end, total claims of $260 million remained under review.

Sand Canyon had equity of $265 million at July 31 and it's accrual for representation of warranty-related liabilities remained essentially unchanged at $129 million. Before I conclude, I'd like to thank all of you who took time to meet with us during our road shows earlier this summer. It was a pleasure getting to know many of you, and I look forward to spending more time with you in the future and continuing our dialogue.

During my first 90 days on the job, I focused most of my attention on our strategic plan, reviewing our capital structure and assessing each of our businesses to identify ways we can grow and create value. One of my first priorities was to finalize our new committed line of credit agreement. We were very pleased with the terms of our new agreement, and importantly, we delivered on our promise to have these negotiations completed this summer. We believe this agreement provides all the financial flexibility a consumer services company such as ours needs and further demonstrates the confidence our banking partners have in our business.

With the CLOC negotiations behind us, we are now working to refinance our $600 million notes maturing in January. As many of you are aware, there is very strong demand for the depth of company such as ours. H&R Block is a well-known, seasoned issuer with ready access to the market, and we are currently in detailed discussions with banks to complete refinancing by year end.

And finally, I know many of you are interested learning more about our capital structure. At this point, it would be premature for us to provide any detail as we're continuing to review the appropriate structure. We plan on sharing more details with you in December.

I'll now turn the call back over to Bill for closing remarks.

William C. Cobb

Thanks, Greg. In conclusion, I'm very pleased with the progress we've made so far this year. We're on pace to achieve our cost-reduction targets, and we're finalizing our plans for the upcoming tax season. As next tax season quickly approaches, we continue to like our competitive position. We look forward to sharing our plans and outlook with you at our investor conference in New York on December 6.

With that, we're now ready for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Michael Millman with Millman Research -- I'm sorry, that question is from Thomas Allen with Morgan Stanley.

Thomas Allen - Morgan Stanley, Research Division

So one of your competitors talked about outsourcing their prepaid debit card business because possibility was worse than expected because of new regulations. Can you just talk about the Emerald Card? And how new regulations are impacting kind of your earnings there?

William C. Cobb

How the regulations are affecting our earnings, is that the question?

Thomas Allen - Morgan Stanley, Research Division

Yes, on the Emerald Card.

William C. Cobb

Well, I'll let -- I think, Greg, I'll just say something and then I'll let you participate. We are very committed to the Emerald Card. We think it's a great source of growth for us. We think it's a great service to our clients. We are one of the largest issuers in the country of general purpose reloadable cards. We issued almost 3 million last year, loaded almost $10 billion in deposits. So we are very committed to not only continuing to grow Emerald Cards, but managing it very appropriately. And then I'll turn it over to you, Greg, in terms of any earnings impact.

Gregory J. Macfarlane

Yes. I mean, our view is that we're -- I mean, currently we have a very successful program, I mean, at the top 3 programs in terms of the number of cards issued. And if you look at the amount of money that's loaded onto that, it's quite a substantial program. And as we develop our detailed plan here for this upcoming tax year, we're very bullish on the opportunity that, that program represents for us. Specific to regulations, I mean, we're obviously very aware of the things we need to be in compliance with, and we always use that as a starting point. But our goal is to deliver a product to our clients that meets their needs, and we always try to do better than that. And our current products, in terms of the rate structure, the fee structure, disclosures, have -- it's actually award-winning from many of the consumer groups that we've sort of showed it to. So I guess, I'm not specifically worried the regulatory issues that maybe our competitors are facing. But from our perspective, we think it's a great program and we feel really good about our position.

Thomas Allen - Morgan Stanley, Research Division

So you wouldn't expect any decline in margins in that business next year?

Gregory J. Macfarlane

No, no. We're not really giving forward-looking forecast at this point in time...

William C. Cobb

In order we break out margin by line item like that. But I wouldn't anticipate in any -- anything. But like I said, we'll be -- give a fuller review of our entire plans in December.

Thomas Allen - Morgan Stanley, Research Division

Okay. I think -- can you give us the losses associated with the Sand Canyon claims reviewed this quarter? I think you used to in the past, I just didn't see it this quarter.

Gregory J. Macfarlane

So in the quarter, the validity rate was up 4.5%. We, as you well know, we review each put-back on a loan-by-loan basis. We are under our contract. Our contract, I should say, have a prescribed time in which to do that, and we're always diligent about doing that. And then once we've sort of reviewed that, the claim, which gives us validity rate, we then figure out the actual payment date, how much that is. And so is there more that you're looking for?

Thomas Allen - Morgan Stanley, Research Division

No. Yes, I mean, just the 4.5% validity rate's fine. I was looking for a number, but that's fine. And then just in terms of I know you said you're going to give more color on the capital allocation strategy in December. But can you just -- I mean can you say have you bought back any stock quarter-to-date? And just from modeling reasons, should we not expect any buyback, since maybe you've renegotiated the January 13 maturity?

William C. Cobb

So the year-to-date, we bought back $315 million worth of stock. It's about -- I think it's 21.3 million shares specifically. And then with regard to going forward, we are not going to get into when and how much we're going to purchase. Obviously, we have an authorization from our board. And obviously, during my time here, we bought back almost 12% of the shares of the stock. So I'd rather you judge us by our actions. But we're not going to commit to any time frame or say when we are or aren't going to look at stock buybacks. As you know we're continuing to protect the dividend as we have for the last 50 years.

Operator

And your next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

I'll bulk [ph] around the horn a little bit. On the tax front, with the Sears reduction, could you guys give us perspective how many Sears stores you had been in? And then outside just across retailers, remind us where you are with Walmart and who else you may have relationships with. And then finally on this question, just your long-term strategy of dealing with retailers.

William C. Cobb

Yes. I'll take Walmart first. Walmart last year, we're in about 250 stores. And while we're not ready to disclose the exact number that -- we're in discussions with Walmart right now, we will have an increase in those number of locations for fiscal '13. With regard to Sears, we're in about 500 Sears locations last year. We will be in 112 Sears stores. They were our highest volume, highest profitability stores. We will continue to maintain a presence there. We also have the opportunity in under 100 mall locations to also have a presence there. So they're in some ways additive. We're working on leases and the like. But like I said with regard to our ability to retain clients, which ultimately it is about client retention, we're confident that we've done this before and we know how to do that. And in effect, we're able to save money by reducing our footprint. And yet the win-win for us, in addition to the partnership with Sears, is that we're able to reduce costs in some of our less profitable stores, yet keep our best and brightest.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. Going to just capital structure, as I break you guys in the tax capital structure and put-back capital structure. The credit facility versus commercial paper, can you give us just what your preference is to use during this off-season and compare and contrast this year as to how soon you might tap into working capital borrowing in this off-season?

Gregory J. Macfarlane

So I think between the lines, are you sort of saying congratulations on getting the CLOC renewed? Scott, was that right? I think I heard that, but...

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

That's implied. Nice job.

Gregory J. Macfarlane

Yes. I mean I do want to spend a minute on that, because it was a lot of work. It's a big number. A lot people here at H&R Block work quite hard to get there, and that was really the first step for us. And so I don't want to lose sight of that because the CLOC historically has been our backup liquidity source. And getting that taken care of at, I think, very favorable rates, and there's lots of details in the disclosure so you can read through that, was a big accomplishment. And it was also during the time line, which we outlined pretty much consistently, which I think is also worth noting. Specific to utilization commercial paper, that has been the traditional source of primary liquidity during the slow season. The slow season is typically 3, 4 months of the year. That's generally speaking kind of what we look at for the next season. In terms of maybe ultimately between the lines going forward, that's all tied up in how we may kind of go forward with our capital structure solution, which as I said before, we're not really prepared to get into right now. We'll share more details with you in December on that.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. And just I want to touch on the validity, again, on mortgage put backs. It's a very low number, the 4.5%. Could you just give us a feel for how that's trended over the past few quarters, years? And just speak to the most recent batch coming in. I mean, I know you haven't looked at it, but any additional color you care to share. That's an open question.

William C. Cobb

Yes, Scott, In terms of the new batch, I mean, if you're referring to the $142 million that came in, in the first quarter of new put-backs, we don't comment on that in quarter. Our validity rated 4.5% has continued to decline over time. The 4.5% validity rate is pretty consistent with the last few quarters. I don't have the chart in front of me right now. But that's in line with what we've been seeing over the last 3 or 4 quarters. So that would be a more consistent pattern right now.

Operator

And your next question comes from the line of Mike Turner with Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Just a follow-up, I don't know, Bill or Greg, just on the financial products, I know one of your competitor will be more aggressively advertising around product. Is there any new products that you might have this year to come back at or other new products? And then also on the Emerald Card, I know in the past there were some thoughts maybe to expand the usage of that, to get clients to use that outside of tax season. Could there be a greater push to find other avenues in retailers? Are there any themes there or plans to develop those products?

William C. Cobb

So let me take those, and, Greg, if you want to join in. With regard to the competitors with RALs, et cetera, we anticipate that some of them may offer RALs through nonbank lenders to the extent that they offer RALs, any competitors, we think they're going to be only on a limited basis and through a narrow segment of consumers. So we don't look for this to be a big initiative. I mean, obviously, we'll continue to evaluate the market, respond to our clients' needs. But at this point, I would anticipate a similar season that -- relatively low impact from RALs. With regard to Emerald Card, stay tuned. But I think we do have Susan Ehrlich and her team in financial services are hard at work at driving, not only increased number of cards, but increased card usage. So I wouldn't comment specifically on retailer partnerships. But look for us, that will be a stated objective of ours to increase that.

Gregory J. Macfarlane

And the best way for you to kind of get a real, sort of live -- a real-time example to what functional rarity of card is to get one for yourself and all your friends and family too, please. But you'll -- and there already have been over the summer some enhancements to that product, and that's just the beginning of a very methodical plan that Susan and the team have developed. And we look forward to sharing that with more detail in December.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Great. And another question that probably comes up all the time that I'll -- or every year you probably get asked. Is there any ability to relook at your offices and maybe try and find some cost saves on a seasonal basis? Or is that -- I know it's hard to close them in the off-season and -- or at least shut them down and find other usage for them. But is that something that you beat that dead horse? And -- or are there -- is there a new playbook that you're willing to brush off?

William C. Cobb

I mean, the footprint is something that we look at on a continuous basis. That narrow reports into Greg's group. And so we will not only look at are we sized appropriately with our 10,000-plus touch points in the retail business. We're very pleased with the mix we have between company and our partners, our franchisees. So at this point, it's one of those things where we decided to reduce by about 200 branches this year. We decided to take the initiative with Sears. We're actually expanding in Walmart. So it's something that's very dynamic in a process that we looked at. We're looking really to just optimize on a continuous basis, whether we would do anything unseasonal, et cetera. I wouldn't say we have any plans in place for that. But obviously; anything's on the table. And great thing about having somebody like Greg here is he brings some fresh eyes to a very experienced team that looks at it. So we're having a good dialogue on that. But I think it's consistent with what we've been doing. I don't know if you have anything to add.

Gregory J. Macfarlane

After 90 days, I guess the only major conclusion I've got is the word optimize, that Bill uses the right word. I don't think it's the right thing for the company to dramatically move one direction or another. They've got a great retail footprint. They have a very good understanding of the economics behind that and for us to bring more rigor and more analysis to that's probably what we're focused on. But to me, that's just results in more optimization than any substantial changes.'s

Operator

[Operator Instructions] And you do have a question from the line of Michael Millman with Millman Research.

Michael Millman - Millman Research Associates

I guess starting from the back. I think in the past, here we said that Walmart was the least profitable tax-preparation business. Maybe you could talk a little bit about why that may change. Secondly, can you give us some ideas as to why -- or what your ideas have been as to why the free RAC didn't work last year? Competition, was it poorly done? Market doesn't care? Other reasons? And thirdly, historically, your processes always taught us that when they're -- you can show optimism in the season by increased losses in the first quarter. And it looks like in fact your first quarter, when you make all the adjustments, was kind of flattish, maybe was down, but certainly the loss wasn't higher.

William C. Cobb

So let me take the free RAC. I think just to be clear on free RAC, it was a success in the sense that we've got a lot more Emerald Cards into people's hands. We've got a lot more deposits on the free RAC. I don't think it was a financial success because it was really an attachment product. It wasn't a traffic-driving product -- is in simple form why we believe we shouldn't repeat it. But it did have some benefits and it also gave us a competitive entry during the last year of RALs. As far as losses in Q1, Greg?

Gregory J. Macfarlane

Yes. So obviously, Mike, I can't comment historically what the management team was communicating. It's not a word, the details. But our first quarter, we gave you kind of the quick variance. But the one thing I was watching for very carefully was did we, in terms of the actual numbers, see the benefits of project when they come through. So when we look at line item by line item, national expense account by national expense account, headcount, costs, computation of benefits, the real estate footprint, some of the IT costs, did we actually see it come through, and we did. And that's why we reinforced the $85 million to $100 million is we know at a macro level, at the project management level, it's executing. We also can see it in the financial. So you get that benefit because we shared that plan with you before. I think part of -- implicit, I would guess in your comment is the ramping up of investment, getting ready for the next season. I would say that my kind of observation is that there was a very specific plan that we've got that we're working through coming out of last tax season. We spent a lot of the summer talking in detail what that looks like. We're now executing that. I mean, we're not giving any guidance here, but we feel really pretty good about going into season about a lot of things that's under way, and we'll share more details with you in December.

Michael Millman - Millman Research Associates

Okay. And there was also the Walmart question.

William C. Cobb

Could you repeat the Walmart question, Mike? I'm sorry.

Michael Millman - Millman Research Associates

In the past you've said that the Walmart business was your least profitable business, the least profitable tax business. But maybe you can talk about what kind of things you may be doing to increase the profit? Or is there some other reasons to be in it? Promotion, for example.

William C. Cobb

Yes. I think the biggest reason why we want to expand this year was we found it as a great source of new clients for us last year, and that's really what our focus would be. I think we manage our expenses very well. We don't disclose specific channel profitability. But I think that you can look at our expansion with Walmart as really a drive to pick up a growth in new clients. So that would be, to me, the strategic rationale for the expansion of Walmart.

Operator

And your next question comes from the line of Amanda Lynam with Goldman Sachs.

Amanda Rae Lynam - Goldman Sachs Group Inc., Research Division

I was just hoping that you could give us a reminder on what exactly you believe the statute of limitations to be that is affecting the Sand Canyon loans to give us some perspective on how those '05, '06, '07 vintages might be affected? Is it 5, 6, 7 years? And then just going back to the validity rate just 1 more time, I think historically that validity rate had been as high as I want to say in the teens percentage range. And so what is the driver of the decline in the validity rate? Is it simply that you are seeing claims that you don't believe were as strong as those that were submitted earlier in the cycle? And if that is the case, is that due to behavior on the trustee side? Or just any color would be helpful from that end.

William C. Cobb

Okay. I'll take a shot at it, and then, Greg, if you want to add anything. So first of all, with regard to statute of limitations, the stated answer is for a contractual claim to enforce a rep and warranty obligation is generally 6 years. It can be shorter depending on the law of the state where the event occurs. Sand Canyon believes that the limitation period runs from the applicable closing date of the sale loan. So unless -- and frankly, there's limited case law on this issue. But generally, in our conversations and that Sand Canyon has had with counterparties, it's generally believed that 6 years is the proper way to look at this. With regard to validity rate, I believe the first put-back back in 2008 was the highest validity rate at 15%. That validity rate has come down over the last 4.5 years to where it's generally been the last few quarters, as I said earlier, in the 4%, 4.5% range. Now Sand Canyon does not comment on why we think because again back to what Greg said earlier, Sand Canyon's approach is Sand Canyon no longer originates mortgages, Sand Canyon no longer services mortgages. So if there are valid or a belief that there are valid claims, then each, we'll -- we, Sand Canyon will review loan file by loan file, and make a determination. There's not a stated objective. It's done on a loan-file-by-loan-file basis. And obviously, we report out from Sand Canyon what the validity rate happens to be, and it has been in that range. Speculation as to why the quality has declined in terms of valid put-back claims, I probably wouldn't speculate at this point because as I said it will go, if you will, $150,000 mortgage at a time and see what the particular issue is there. I don't know if you have anything to add, Greg.

Gregory J. Macfarlane

No.

Operator

And there are no further questions at this time.

Derek Drysdale

All right. Everyone, thank you for joining us. We appreciate your time, and please follow-up with us, Investor Relations, if you have any follow-up questions. Thank you. Have a good night.

Gregory J. Macfarlane

Bye-bye.

Operator

This does conclude today's conference call. You may now disconnect.

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