Flagstar Bancorp, Inc. Q2 2008 Earnings Call Transcript

| About: FBR & (FBRC)

Flagstar Bancorp, Inc. (NYSE:FBC)

Q2 2008 Earnings Call

July 18, 2008 11:00 am ET


Mark Hammond - Vice Chairman of the Board, President and Chief Executive Officer

Paul Borja - Chief Financial Officer and Executive Vice President

Thomas Hammond - Chairman


Annett Franke

Gary Gordon

Terry Mcevoy

Kevin Walt

Don Lamer

Bose George

Mike Nansky

A Shiller


Welcome to the Flagstar Bank Q2 2008 investor relations conference call. (Operator Instructions) At this time I would like to the call over to Mark Hammond, Chief Executive Officer.

Mark Hammond

Welcome to Flagstar’s second quarter earnings conference call. My name is Mark Hammond and I am the Chief Executive Officer of Flagstar.

Please note that we will be using a PowerPoint presentation during this call and we recommend that you refer to it as we reference it throughout the call. This presentation as well as our earnings press release that we issued last evening, which contains detailed financial tables, is posted on our website in the Investors Relations section at www.flagstar.com.

I am here today with Thomas Hammond, our Chairman of the Board and Paul Borja, our Chief Financial Officer. Tom will provide prepared remarks about our second quarter, and then I will update our drivers and provide an outlook for 2008 and 2009. Paul and I will then answer questions. Please note that we will be addressing the questions that we received by e-mail or questions that we have been frequently asked.

Before we get started, I would like to first direct your attention to the legal disclaimer on the second page in the presentation. The content of our call today will be governed by that language.

With that, I will turn the call over to our Chairman, Tom Hammond.

Thomas Hammond

Last evening we announced our financial results for the second quarter of 2008. In our previous earnings call we talked about the positive trends we were seeing in our gain on sale margin, our bank net interest margin and loan production.

We also talk about the credit and market related charges we were taking. Our result for the quarter evidence is both of these trends. The positive trends in out core business continued. On the credit side we are now seeing with some might call a second wave of the credit cycle. This includes credit charges which are more essentially with broad declining macro-economic conditions such as increase unemployment, rising gas and food prices and Federal Home price depreciation.

While the second wave, the credit cycle has had an impact on us. We were encourage, that even with taking significant credit and market related charges we still had a profitable quarter. Let’s turn to our earnings.

Please turn to page three of the presentation. During the quarter, we earned $15.7 million as compared to a loss of $10.6 million in the first quarter of 2008. Earnings per share for the quarter were $0.22 per share as compared to a loss of $0.17 per share in the first quarter.

Our second quarter earnings were positively affected by a strong gain on loan sales of $43.8 million and net loan administration income of $37.4 million. The increase in net loan administration income from the first quarter is the result of an increase mortgage servicing balance, slower prepayment stage and more effective hedging. However these strong fundamentals were partially offset by three significant credit and market related charges.

Those charges in total represent $70.4 million in pretax cost. Item one; during the second quarter we took a $43.8 million provision for loan loss, this increased our allowance for loan losses by $32.6 million to $154 million at June 30, 2008 from $121.4 million at March 31, 2007. Item two; earnings were also impacted by a $4.1 million mark-down on the value of residuals we hold from prior securitizations. These residuals are now valuated at $33.8 million at the end of the second quarter, a 53% decrease from the June 30, 2007 balance of $71.8 million.

Item number three; in the second quarter we transferred $670 million of loans from our available for sale portfolio to our investment portfolio, resolving in the $22.5 million write-down which had the effective of reducing our net gain on loans sales. Although expenses were 5% in the first quarter of 2008 this is largely due to the need to add FHA under-writers and higher additional credit collection and loss mitigation personal in the current environment.

Now let’s talk about some positives. Please turn the page four; gain on loan sale margin was 54 basis points for the second quarter of 2008 down from the historic high 89 basis points that we experience in the first quarter of 2008 and up from 49 basis point in the second quarter of 2007. For the year-to-date our gain on loan sale margin average 70 basis points. Keep in mind that gain on loan sale margin included a $22.5 million write-down in the value of the loans that we transferred from our available for sale portfolio to our investment portfolio.

These were not resent originations but rather 2007 originations that have seasoned in our AFS portfolio a result of the market disruptions that have affected the industry. The $22.5 million LOCOM adjustment resulted in a 28 basis point reduction in the gain on sale margin lowering the second quarter margin which would have been 82 basis point as opposed to 54 basis points.

Turning to page five, you see that our second quarter loan production was up slightly from the first levels. While overall industry mortgage applications declined, we continue to see strong agency loan production, which we attribute to our core competency as an agency loan aggregator, a high level of customer service, our technical logical advantages and parts to some competition exiting the Industry. According to industry sources we are now the ninth largest wholesale lender and the sixth largest FHA originator in the United States.

Turning to page six, you see that we originate $8.1 billion of residential first mortgages in the second quarter of 2008 as compared to $7.9 billion in the first quarter of 2008 and $7.2 billion in the second quarter of 2007.

Page seven, eight and nine provide our historical loan underwriting, lock and closing volume respectively. If we annualize the monthly trends, you see that each of three loan volume metrics decreased towards the end of the quarter, which was the result of the rising interest rate environment. Going forward we expect that loan production will continue to be strong although slightly lower than our original 2008 forecast in our previous outlook.

Should the housing bill be passed, it is estimated that the FHA could finance up to 400,000 additional loans to help homeowners. This can increase our loan production in the fourth quarter of 2008 and the first quarter of 2009. Another positive trend we experience was the improvement in net interest margin. For the second quarter our bank net interest margin increased to 189 basis points from 166 basis points in the first quarter of 2008 and from 143 basis points in the second quarter of 2007. Interest income decreased by a 4.9% from the first to the second quarter however, interest expense decreased by 10.8% resulting in the increase in net interest margin.

Now let’s turn to liquidity. We maintain a number of reliable sources of funding, most notably our retail deposit base, which is outlined on page 10. In the second quarter our retail deposits decreased to $5.0 billion from $5.2 billion in the first quarter of 2008. This decline was intentional and was executed as part of our business strategy to shrink our balance sheet. Majority of the decrease was with more expensive certificates of deposit. We were able to allow some of our more expensive CDs to run off while replacing them, which also contributed to the increase on our net interest margin.

If you just look at checking, savings and money market account you can see that these core deposit actually increased by 12% from the first quarter. Further more by eliminating some our higher costing CDs, we were able to lower our overall retail deposits funding cost by 48 basis points from 4.06% in March 31st, 2008 to 3.58% in June 30th, 2008.

During the quarter, we opened three new banking centers bring our total to 170 at June 30, 2008. Of those two were in Michigan and one in Georgia. We continue to track quality relationships in each of our markets. During the second quarter we opened a total of 3147 new checking savings and money market accounts. We still anticipate opening 13 new banking centers in 2008.

The number of new facilities in 2009 is under review, but any new facilities would be in our existing markets. In addition to our retail deposit base we have $7.5 billion line of credit with the Federal Home Loan Bank of which $1.8 billion remained available at June 30, 2008. We also have borrowing capacity at the Federal Reserve Discount Window as well as Federal Funds lines.

In June 30, 2008 we had $958 million of broker CDs, which made up above 13% of our total deposits. While we are not reliant on these deposits they can at times be an effective source of longer term funds particularly want two to five year durations are desired for interest rate matching.

Now, let’s about our assets, please turn to page 11. In the second quarter, we decreased our total assets by $1.3 billion from $15.9 billion at March 31, 2008 to $14.6 billion at June 30, 2008. In the last earnings call, we provided guidance that assets would shrink to between $14 and $14.5 billion by year end 2008.

We planned on ending this year at the lower end of these range. It is important to note that in achieving our balance sheet reduction we do not sell assets at distress prices. Instead we sold agency securities that were held on our balance sheet. Those securities were sold for a gain of $4.9 million in the quarter, which is reflected in our gain on securities available for sale line on the income statement.

Going forward, further balance sheet reduction will occur to existing loan runoff. As I mentioned we transfer $670 million in loans during the quarter from our available-for-sale portfolio to our investment portfolio. With that our investment portfolio increased to $9.1 billion and our available for sale portfolio decreased to $2.7 billion in June 30, 2008.

If you turn to page 12 to 14, you can see that both are available for sale and our held for investment portfolio’s have relatively high FICO scores with diversification in all fifty states. The held for investment portfolio has significantly lower loan-to-value ratios than our held for sale portfolio. The higher loan-to-value ratios in the portfolio are typically credit enhancement mortgage insurance. Now let’s talk about the securities available for sale portfolio, which consist of two types of assets.

First we have agency securities which are in the process of being sold. Second we have $795 million in non agency securities. Page 15 provides a description of those securities. These non agency securities have significant credit enhancements and would have to deteriorate substantially before we would incur any losses. Page 16, provides information on our real estate owned portfolio.

Now let’s further discuss asset quality, turning to page 17 you can see our key asset quality ratios. The second quarter provision for loan losses up $43.8 million reflects an increase in general and specific reserves. Charge-offs decreased to $11.2 million in the second quarter, from $16.9 million in the first quarter of 2008, although we are continuing to add reserve given the delinquency trends. In the second quarter we added significant reserve increasing our allowance for loan losses to $154 million at the end of the period.

We continue to closely monitor delinquency trends and loss mitigation patterns in the real estate owned portfolio. We believe that we are adequately reserved. We realized there is still risk of further credit deterioration in increase credit cost. It is difficult to predict how severe and long lasting the current economics slow down will be, but we are actively monitoring and planning for multiple scenarios. Charge-offs, net of recoveries were $8.2 million in the second quarter and were primarily due to residential first mortgage which witness charge-offs increasing by over 50% from the first quarter.

On the positive side, second quarter commercial real estate charges decreased to nearly zero and home equity loan and second mortgage charges, they remain rather flat. Looking forward we believe the charge-off levels have not reached their peak as they tend to lag delinquency trends. We have added 59 positions in collection work out and loss mitigation personals since the first of the year to help mitigate these future losses. We are continuing to add to this staffs. Page 18, provide some historical asset quality ratios from 2001 to the present.

Turning to page 19, you can see that while our 30 and 60 day delinquencies for our held-for-investment portfolio have remained relatively flat over the last four quarters, our 90 plus matured delinquencies continued to rise actually doubling from a year ago. We continue to make efforts to mitigate those delinquent loans to forbearance plans, repayment plans, loan modification, short sales and well appropriate refinances. We are aggressive in our collection and we pursue these loans where the borrower has the means to make the payments.

On page 20, we provide a summary of asset quality by loan type including the breakout of specific and general reserves. As you can see commercial real estate loans continue to have one of our highest 90-days plus delinquency trends. Turning to page 21, you can see delinquencies by loan type for 30, 60 and 90 day plus matured loans. We believe the rise of residential delinquencies for Flagstar, is presently the result of the general economic slowdown rather than relaxed credit standards.

Page 22 provides a summary of our non-performing loans, by both FICO score and LTV. As you can see, 26% of our non-performing loans have both a FICO score exceeding 700 and an LTV below 80%. We believe these were conservatively and responsibly underwritten loans with good FICO scores and low LTVs, but this shows that even these levels above our qualifications are subject to defaults in the current economic environment.

Page 23 and 24 provide a further description of our delinquent loans, by state and vintage. Turning to page 25, we provide a summary of our commercial real estate portfolio by a property type. As you can see, the residential development loans continue to be the worst performing property type in this portfolio. One positive thing to remember is that almost all of these loans have personal guarantees. In addition, majority of the borrowers in default have engaged the work out plans with us.

As you can see in the chart of page 25, of the $1.7 billion portfolio, our biggest concern is the $181 million in residential development loans, which have a 27% 90-day plus delinquency rate. However, we have present appraisals and our marked loans down to newer lower values for a residential development portfolio and have already taken specific reserves based up on the more recent upraised values. Page 26 and 27 provide further descriptions of our commercial real estate portfolio, both by state and vintage. Another positive is that the overall commercial delinquencies have remained flat over the last six months.

Now let’s turn to capital. As of June 30, 2008 we remained well capitalized under Bank Regulatory Capital Ratios of 6.7% core capital and 11.65% risk-based capital.

Last quarter, we noted that our business plan for 2008 calls for a target for regulatory capital to increase to exceed 6.5% for core capital and to 12% for total risk-based capital. We further noted that to reach these levels we would need to reduce the balance sheet, return to profitability and to possibly raise capital. We are pleased to report that during the second quarter we accomplished all three of these goals and that we are well on our way to reaching our target levels for the year.

Turning to page 28, you see that our current capital levels are within our historic norms and are higher that what we have targeted internally. At this time, we do not plan to pay a dividend to our common share holders until we see sustained profitability levels.

Before I turn this speech over to Mark I want to emphasis that we are fully aware of the challenges that lie ahead of us. We remain committed to continually strengthening our banking franchise and maintaining our focus and high quality residential mortgage industry and believe we are well-positioned to capitalize on opportunities that the changing market should present. We believe we have the management, experience and platform to take advantage of future opportunities. With that let me turn this over to Mark.

Mark Hammond

The slide on page 30 outlines our 2008 and our 2009 outlook with each of our key drivers. Please note that we’ve added net loan administration income as one of our key drivers.

Branch openings; as Tom mentioned we still plan to open 13 branches in 2008. Through the first two quarters of 2008 we’ve opened seven new branches. Our branch expansion for 2009 is currently under review.

Asset growth; through quality we’ve changed the driver for asset growth to target asset size; however they both reach the same end results. In our first quarter earnings call we announced we are shrinking the balance sheet. At the end of the second quarter, total assets were $14.6 billion. We plan to end the year with total assets between $14 billion and $14.2 billion with a decline resulting from loan write-offs. In 2009, we planned slight asset growth to total assets that may be between $14.3 billion and $14.5 billion.

Residential mortgage originations; we are lowering our estimate to residential mortgage originations from $33 billion to $38 billion down to $30 billion to $34 billion. Our loan volume metric trends suggest a slight decline in total production. However, July lock-in volume and underwriting volume has been rising. This is a conservative estimate and when the fleets fall again we could do more originations. In 2009 we plan for $32 billion to $36 billion in residential mortgage originations.

Loan sales; as we plan to sell virtually all of our production, loan sales have been lower to match originations at $30 billion to $34 billion. In 2009 we plan to sell the majority of our production with $30 billion to $34 billion in loan sales. About $2 billion in originations we’ve replaced anticipated runoffs on the balance sheet.

Gain on loan sale margin. We are lowering our gain on loan sale margin to 65 to 75 basis points from our previous outlook of 73 to 83 basis points. A second quarter gain on loan sale margin was 54 basis points. However, that included a negative 28 basis point mark, from moving loans from our available for sale portfolio to our investment portfolio. Without this mark, our gain on sale would have been 82 basis points. In 2009 we expect our gain on sale margin to remain at 65 to 75 basis points.

Net interest margin at the bank level; we are raising our bank net interest margin to 191 to 201 basis points from our previous outlook of 180 to 200 basis point. Our bank net interest margin has been trending up this year and our second quarter margin was 189 basis points. In 2009 we expect slightly higher bank net interest margin of a 195 to 205 basis points.

Retail deposit growth; we are lowering our outlook for retail deposit growth to minus 2% to plus 2% from the 2% to 6% range. As you know we are shrinking our balance sheet and therefore are able to allow some of our higher costing retail certificates of deposits to run off. We still plan to increase our core deposits primarily our checking and savings accounts. In 2009 we expect to resume retail deposit growth of plus 2% to 6%.

Mortgage servicing sales; we are maintaining our 2008 guidance on mortgage service right sales of $0 billion to $30 billion with no expected gain. We continue to be opportunistic sellers in mortgage servicing and do not anticipate any gains because we use the fair value method for mortgage servicing rights. In 2009 we again expect $0 billion to $30 billion with no gain. This decision to sell would be driven by strategic reasons to manage interest rate risk or regulatory capital.

Net loan administration income; we have added net loan administration income to our key drivers because it is a significant part of our continuing operations. With that we are anticipating $61 million to $71 million in net loan administration income for 2008. Keep in mind if we sell mortgage servicing right our net loan administration income will be reduced as the asset would be smaller. In 2009, we expect increased net loan administration income of between $105 million and $125 million absent any latter servicing sales.

Allowance to held for investment and loan charge-offs. Finding and maintaining our gains in loan charge-offs was $50 million to $70 million. For the first six months loan charge-offs were $28 million, which is below the mid point of our outlook range. However we anticipate higher charge-offs in the remaining of the year based on charge offs historically lagging increased delinquencies. In 2009 we’re expecting continuing deterioration between $85 million and $105 million in loan charge-offs.

Additionally, although we feel we have appropriate reserves given our historic experience and what we know now, for modeling purposes we are increasing our outlook for allowance for loan losses as a percentage of held to investment to between 211 and 221 basis points from our previous outlook for 151 to 161 basis points. Our current allowance for the loan loss as a percentage of held for investment is at 169 basis points. For 2009, we are modeling a further increase to allowance for loan losses as a percentage of held for investment to 266 to 276 basis points in 2009.

One point of clarification is I think we might have miss spoke earlier and mentioned that charge-offs for the quarter were $8.2 million, they were $11.2 million from a reduction from the first quarter. With that let me turn it over to CFO, Paul Borja for the questions-and-answer session.

Question-and-Answer Session

Paul Borja

As in the past we’re going to go through questions that have been e-mailed to us by various persons and then Mark and I will address the questions.

The first set of questions come from Annett Franke; first question, why did charge-offs slowdown during the quarter and when do you charge-off loans?

Mark Hammond

I’ll handle the first part of the question, maybe Paul you can handle the second part of the question. Charge-offs decreased during the quarter primarily because the first quarter we had one large commercial loan charge-off and relative to that quarter we are on a more normalize days. Also I think it’s important to mention that we write our assets down and we take specific reserves against the number of our assets. So, often this credit marks that occur on the assets before they get to the charge-off points.

I’ll also like to mention that we focus, mitigating our loss. We put a lot of effort and try to mitigate the potential and the standard charge-offs once we have a default situation. Now, I think it’s also important to note that there is a lag historically between delinquencies increasing and other credit metrics and then the eventual charge-offs, because different asset classes we charge loans up, different -- I’ll turn that over to you.

Paul Borja

As a general matter we charge-offs loans after 90 day delinquency, but only to the extent that the collateral is not sufficient to support the remaining asset value. So to Mark’s point as we have appraisals, we factor that into our overall charge-offs, as well as looking at the prior specific reserves.

The next question how much of residuals do you have remaining on your balance sheet?

Mark Hammond

We have residuals against four securitizations that we did a $33.8 million, which is a 53% bps decreased year-over-year and we’ve on the last year added no additional securitizations so it’s a static number.

Paul Borja

The next question; do you consider current reserve levels to be adequate?

As we previously mentioned, yes.

The next sets of questions are from Gary Gordon. First, was the low comp mark of $22 million for loans originated during Q2; what was it for loans originated during Q2 or for prior quarters?

The low comp mark was for loans originated in 2007.

The next question, the $54 million positive swing on loan servicing from Q1 to Q1, how did you get there, is it tied to the 17 basis points increase in MSR valuation or is it a write off?

We will not classify it as a write off. There is a number of factors that affected this. Number one, our mortgage servicing asset is a growing asset. Secondly, decreased payment speeds improved during the quarter which resulted in improved financial performance. The speeds decreased from 15.8% down to 13.1%, which was tied to an increase in interest rates and also a difficulty in refinancing in a tightening credit environment.

Also we had more effective hedging in the second quarter versus less effective hedging in the first quarter.

Next question is from Gary Gordon. Why are there 7% more non-loan office for employees over the course of Q2?

Okay, as Tom mentioned in his speech over the year, which was heavily rated in the second quarter we added 59 additional people in loss mitigation, collections and loan workout area. We’ve open three new bank branches and we’ve ramped up our FHA credit area as that channel has become a growing channel and improving percentage of the market share.

We are now as Tom mentioned are the sixth largest FHA originator, the FHA’s are slightly more, they were intensive in the origination processing and closing side and underwriting side and requires a specific set of experience and human resources so we’ve had to add resources on to handle the FHA and increase business.

Last question from Gary Gordon; why is there a 66% jump in consumer allowance over the course of Q2?

Okay we need to clarify that because as of now we are originating hardly any consumer loans, we are doing a very small portion of consumer loan originations out of our bank branches to support our 171 bank branches of a maximum a couple million a amount.

The jump I think you’re referring to is the transferred in which I think we’re going to talk about a little further in more detail, but we transferred loans and sold loans from our available for sale portfolio to our investment portfolio as long as we mention there were 2007 originations and there was a fair amount of seconds at home equity loans involved in that transfer. So I think that jump is more of an asset sale and looking at different class of the asset as accounting classes as opposed to an increase in production.

The next sets of questions are from Terry Mcevoy. The first one; comment on what type of loans and size of the portfolio of loans that was transferred from available for sale to held for investment loan portfolios that triggered the $22.5 million mark.

The transfer included $230 million of second mortgages $175 million of home equity lines of credit with a balance related to jumbo loans that we transferred.

Next question; was the decline in the number of loan officer and account execs a strategic decision.

Yes we added some new originators. We had some voluntary and some involuntary staff reductions. Our originators were commissioned and they have minimum performance standards and simply it’s a pretty darwinistic business and a difficult environment and some of the loan originators find it challenging to originate in these environment.

The next question from Terry; can you provide a breakdown by geography and product type of the $71 million of commercial loan growth during Q2?

Yes. This year we had significantly altered new commercial real estate loan production. At this point all we are doing is pretty much refinances of our existing portfolio as well as restructuring some existing loans. However, during Q2 we also had some clearing out of pipeline of older approvals earlier in the year since we pulled back in lending. So, I would anticipate a lot smaller volume levels are going forward. I also want to emphasize that there is no development loans in that portfolio and geographically that production was spread out over 10 states.

Next question is from Terry Mcevoy; can you provide more color on the $4.5 million net gain on securitizations and expectations for our future securitizations?

I believe you referring to the net gain on the sale of our securities, not securitizations and that’s related to our sale of the $776 million in securities from are available for sale portfolio as part of our overall balance sheet reduction strategy.

The next question from Terry; can you talk about the large growth in second mortgage loans now 3.2% of loans in the quarter?

Mark Hammond

Yes, once again that there was not growth, but that was a transfer and we’re not currently originating any significant volume of seconds or home equity loans. Also I have to go back to the future, but we need to emphasize we are not giving any future securitizations and have no plans to do any securitizations other than the Fanny, Freddie and Ginnie Mae agency securitizations that we’re doing at a pace of $2 billion to $3 billion amount.

Paul Borja

The next question from Terry; from the data you look at, are your loan delinquency trends better or worse than the industry for Q2?

From where we’re looking at it they’re near to slightly better in the industry trends. When you look at similar vintages, books, geographic breakdowns and credit metrics. One thing I think is important to remember, if you look at the percentages, we have a shrinking balance sheet and we’re not putting new loans on and those new loans generally haven’t seasoned into the default period, so given what's happening and not putting new loans on our books, peers who maybe putting loans on tend to inflate the percentages numbers.

When you look at the absolute numbers based on a vintage year and you look at the underlying and dig into an underlying metrics, we continue to outperform mostly the industry averages both in our investment portfolio and then also the metrics in our $45 billion of loan service for others; the Fanny and Freddie books we have continued to outperform other Fanny, Freddie and Ginnie Mae books.

The next question from Terry Mcevoy; why did you restate real estate owned for the past quarters was in the press release?

I’ll just touch on that briefly. We reduced the REO number for the federally insured loans, the Ginnie Mae loans which we had previously put in there. We look to that -- we look at them as really insurance receivables from the government that shouldn’t be included in REOs. We do repurchase Ginnie Mae loans out of the pools, we do it voluntarily. These are 100% insured loans. It’s a standard practice for cash management and we understand that this is consistent with practices of other institutions.

The next question is from A. Shiller. Please explain the loan administration item of non-interest income and the large fluctuations from quarter-to-quarter. What’s a good estimate for future quarters?

I believe we address that in an earlier question as the nature of loan administration income and also we refer you to page 15 for our outlook for loan administration item.

Our next question is from Kevin Walt; and if I could paraphrase, I saw a report that just Flagstar taxes ratio is 53%; is this correct?

Okay, no we don’t calculate the ratio at 53. We do not feel the ratios really a relevant ratio; however, we calculate it for the quarter at 39% for the way we calculate it. One of the problem in the taxes ratio is, the taxes ratio is a comparison of the bank’s non-performing assets to the total of its capital plus loans loss reserves, but that’s pretty simplistic and we do not feel that’s a very relative metric because there is not a clear cut standard amongst bank as to how different aspects those should be concluded.

For example, the restructured loans that are performing, should those be included in our performing assets or should reserves over and above your ALLL, like our secondary market reserves be included in the metric. So since there is no clear way, it’s a problematic metric because it’s hard to get apples-to-apples.

Also the taxes ratio has little relevance, when you look at it from bank-to-bank because the metric in itself doesn’t have any relevance cure rates and severity rates amongst the non-performing assets. The other non-performing assets that has zero cure rate and 100% severity clearly you’re going to need a lot more reserves and capital versus assets like ours that tend to have higher cure rate just looking at our charge-offs ratios don’t tend to have the severity of other banks potential assets and to draw a conclusion not understanding the severity and to our cure rates I think is problematic. So unfortunately the media in reporting taxes ratios isn’t appropriately, I think talking about relevant.

Clearly we don’t think you can look at any one ratio to look at an institutions health, but if you are we feel that regulatory capital ratios would be much more relevant a view of health and clearly with regulatory capital ratios that are at or above our historic norms.

Our next question is from Don Lamer. It would seem opening up new facilities is not a way to increase value; could you comment?

We have scaled back to somewhat earlier times in our facilities however we had real estate already purchased and contracts already pending. So we are building out the projects that are underway and projects that aren’t committed to currently under review. I think its also important to point out though that continuing to build our core bank branches is important to our long-term strategy, our ability to gain customers and our ability to ensure, that we have good strong funding sources, so continuing to expand relationships and bring customers to us is part of our strategy

The next question; I believe reinstating the dividend would be a positive step and help tremendously to restore investor support; could you comment?

Yes, at this time we are not reinstating the dividend; we hope to be able to in the future, but we are going to look to is see that we have sustainable quarterly operating income. We are also looking to add more certainty on the duration of the severity in the current economy downtown before that decision will be made.

The next questions are from Bose George. The first one; can you discuss the primary drivers of the change and the valuation of your MSR in second quarter ’08? Does this reflect a slowing outlook for prepayments and I believe Mark addressed that in an earlier question and answer.

The next question from Bose; can you discuss the accounting for the capital that you raised? Our analysis suggests book value per share closer to 960, but your book value per share was 1108?

Actually, we appreciate the question, we’ve looked at this again and our book value per share we’ve calculated should be about $10.42. Soon we will reflect the revised amount in our 10-Q that would be filed shortly. I do want to emphasis that this is a calculation issue only. It is no effect on earnings, no effect on any balance sheet items.

Next question from Bose; can you discuss the $22.5 million mark on loans transferred to your investment portfolio. Are these that were originated for sale and then retained for some reason?

Yes, these were -- the loans we’ve referred to earlier, they were 2007 originations which we choose to invest in.

The next question; can you provide some detail on the securities you sold in second quarter ’08? We assume that with the agency MBS and its look like it sold for carrying value.

Mark Hammond

Yes, those were the agency loans and we sold them for a gain at $4.8 million cash and that was a cash gain.

Paul Borja

Next question; curious why you would characterize MBS as level two and looking at liquidity, did you use market prices to mark them?

I think if you take a look at page 15 of the slides you can a listing of our current holdings.

Last question is from Mike Nansky. What’s your guidance for the current quarter ending September 30, ’08 and for the full-year ending December 31, 2008?

We don’t give guidance on earnings; however, if you take a look at page 30 of our slides, you will see our outlook drivers as we’ve updated through today.

That concludes our questions we’ve received. With that I’ll turn it back to Mark Hammond.

Mark Hammond

We would like to thank everyone and once again we are cautiously optimistic. We feel that the fundamentals of the organization are strong. We want to point to the continued good long production, to continued improvement and gain on sale, I mean for the year as well as the continued improvement in net interest margin, and clearly we are going to continue to manage credit costs.

We’re not putting a lot of loans on our balance sheet, so we’re dealing with the legacy portfolio that has been driven by marco economic concerns. We do feel that we are proper reserved and we feel that we are managing the situation; that we are not at the point where we can call bottom as far as in how the current economic environment is going to affect our portfolio, but we like to wish everyone a good weekend and thanks for listening in the call. Have a good day.

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