Flagstar Bancorp, Inc. (NYSE:FBC) Q3 2011 Earnings Conference Call October 26, 2011 11:00 AM ET
Paul Borja – EVP and CFO
Joseph Campanelli – Chairman, President and CEO
Matthew Kerin – EVP and Managing Director
Jade Rahmani – KBW
Mark Steinberg – Dawson James
Julie Marsh [ph]
Jay Gohil [ph]
Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. I would now like to turn the call over to Paul Borja, Chief Financial Officer. Please go ahead.
Thank you. Good morning, everyone. I’d like to welcome you to our third quarter 2011 earnings call. My name is Paul Borja and I’m the Chief Financial Officer of Flagstar Bancorp.
Before we begin our comments, I’d 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, competitive pressures within the financial services industry and legislative or regulatory developments or 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 10-K and 10-Q, as well as the legal disclaimer on Page 2 of our earnings call slides that we have posted this morning on our Investor Relations page at flagstar.com.
With that, I’d like to now turn the call over to Joseph Campanelli, our Chairman and Chief Executive Officer.
Thank you, Paul, and good morning, everyone. I’d also like to welcome you to our 2011 third quarter earnings call.
Last night, we reported net loss to common share holders of $14.2 million or $0.03 a share. That was a significant improvement over our second quarter 2011 results and clearly marks progress on our path to sustainable profitability.
We were well positioned during the third quarter to capitalize on a robust banking business in an attractive industry environment, which were offset by the credit cost emanating from our legacy businesses.
This morning I’d like to begin providing you with some color on those credit costs. While we see them going over the next several quarters and what steps we’ve taken to mitigate ongoing losses on our legacy portfolio and while we’re confident we have enough capital to execute our strategy and return the company to sustainable profitability.
Then I’ll discuss the key financial highlights of our financial performance during the quarter before I turn the presentation over to Paul for a more detailed and in depth financial review. Paul and I along with the rest of the executive team will then be available to answer any questions you may have.
In total, credit costs for the third quarter were $11.7 million relatively flat from prior quarter. Virtually all of those costs relate to loans originate prior to 2009. We’ve spend a great deal of focus and attention on putting those costs behind us while growing and diversifying our core revenue streams. In fact, excluding credit costs before taxes, we earned $102. 5 million for the third quarter, which was the largest quarterly amount since the fourth quarter of 2009.
Year-to-date, we have generated $206 billion before taxes and credit costs. Our third quarter loan loss provision improved to $36.7 million as compared to $48.4 million in the prior quarter. The improvement was primarily attributable to a lower provision related to our residential first mortgage portfolio which has been in run-off since 2008. The decrease in residential provision reflected an improvement, an historical loss rates in our allowance model.
This improvement was consistent with the slowing pace of increase in our 90 plus day delinquent residential portfolio. The 90 plus day delinquent residential mortgages increased 341 million in the third quarter 2011 as compared to 286 million on a linked-quarter basis.
There are three points I’d like to make with respect to residential portfolio. First, we sold virtually our entire non-performing residential mortgage portfolio in the fourth quarter of 2010. At that time, we essentially started over for migration standpoint. One of the impacts in the sale was that it eliminated those loans that would have otherwise migrated due to foreclosure in the normal course. Now, nearly 12 months later, we are beginning to see non-performing residential mortgages migrate out of the 90 day bucket at a meaningful rate.
Second, the pace of increase in our 90 plus day delinquent residential first mortgages has been slowing since March 2011. But from December to March given the low starting level of 90 plus day mortgages following non-performing loan sale in the fourth quarter 2010, we saw a 66% increase in 90 plus residential first mortgages, which declined a 44% from March to June and then a 19% from June to September. Within the third quarter, the pace of increase slowed from 10% in July to 5% in August and 3.5% in September. You can see a graphical illustration of this trend on slide 17 – excuse me, on slide 15 of our earnings deck.
Third, a 30 and 60 day delinquent residential first mortgage levels have remained flat since June, indicating a lower level of inflows into those respective buckets. Looking at all the factors, we expect a 90 plus delinquency – residential mortgages to abate by mid 2012. We also believe that recently implemented initiatives will accelerate the resolution rate and improve the overall delinquency profile.
During the third quarter in addition to converting the state-of-the-art mortgage servicing platform, we continue to restructuring of our residential loss mitigation default servicing areas. We implemented a number of meaningful process changes and added a significant investment staff, which we’re confident we’ll have a meaningful impact on reducing credit costs in future quarters.
Turning to legacy, commercial real estate portfolio, we’ve now experienced a decline in the commercial real estate related provision for four straight quarters as we continue to aggressively write-down and work out that portfolio. Our balance of these legacy loans as of September 30, 2011 was roughly 1.3 billion down significantly from a high point of 1.8 billion at the end of December 2008.
We also sold 15.4 million in commercial real estate non-performing assets during the quarter for a small gain which reaffirms our mark on the portfolio. We expect to see continued improvements and a run-off of this portfolio, given the seasoned nature and the experienced team overseeing its resolution.
Secondary marketing reserve provision for the third quarter of 2011 increased to $39 million as compared to $21.4 million in the prior quarter and we increased our quarter and reserve to $85 million.
As always in a mortgage industry reported this quarter, the GSEs continue to be more aggressive in the number of loan files reviewed in their interpretation of representation and warranted claims. These claims continue to be focused on pre-2009 residential first mortgage loan originations. As originations in 2009 to ‘10, ‘11 have had virtually no repurchase activity which is directly attributable to increasingly robust underwriting guidelines. We’ve been underwriting loans for the claim performance record for 11 straight quarters. Slide 16 provides a breakout of the agency repurchase demands by quarter.
Asset resolution expense for the third quarter 2011 was $34.5 million as compared to $23.3 million in the second quarter of 2011. The increase was driven by higher expenses related to legacy residential first mortgage in Ginnie Mae repurchased portfolios. Asset resolution expense for residential first mortgage is $9.2 million in third quarter, up from $5.7 million in second quarter, reflecting continued weak housing market in extended foreclosure and resolution timelines.
Asset resolution expense related to the Ginnie Mae portfolio was $22.8 million in the third quarter 2011 as compared to $12.8 million in the second quarter 2011.
The linked-quarter increase was primarily driven by a higher level of one-time non-reimbursable expenses associated with the older loans coming through the pipeline to claims process. We believe we are now seeing the worst of the curtailment expenses come through.
As previously mentioned, we had completely restructured our servicing platform including new systems, enhanced leadership and implementation of accelerated loss mitigation strategies. Additionally, we’ve established a dedicated team to service early-stage Ginnie Mae delinquencies, which we are confident, will lead to a significant reduction in asset resolution expenses.
Turning to the mortgage origination business, our leading edge mortgage platform and positioning in a mortgage base allowed us to take advantage of low rates and in the uptick in refinanced volume. As some competitors are reassessing their commitment to the correspondent channel and with the recent HARP announcement, we believe we have an opportunity to continue to maintain or gain market share which will allow us to continue generate solid mortgage banking revenues over the coming quarters.
Gain on loan sale income was $103.9 million with the margin of 153 basis points for the third quarter 2011 as compared to $39.8 million for the margin of 91 basis points for the second quarter of 2011. We originated 6.9 billion of residential mortgage originations during the quarter, and saw our residential lock commitments claim to 13.1 billion, 105% increase quarter-over-quarter.
While the refinance activity expected to moderate from near record levels, the outlook for continued low rates for 2013 and it continues strong pull through of our inventory of locked applications lead us to believe there will be continued to be a healthy mortgage origination market to at least the first quarter 2012.
Further it’s too soon to tell the overall impact of the recently announced enhancements to the President’s Home Affordable Refinance Program, or HARP. Early details of the programs suggest that could be a significant catalyst for extended high levels of refinance activity. We will leave our extensive origination network and demonstrated success during refinance ways leaves us well positioned for any improvement or increase in housing finance market.
We’ve also been originating jumbo mortgages on a selective basis. Year-to-date we’ve origination approximately $194 million of jumbo mortgages, the majority of which we hold on our balance sheet. We continue to see jumbo’s as a promising opportunity to build a portfolio with attractive credit and profit fundamentals. These jumbo mortgages are high quality, well underwritten assets with average FICO scores of 768 and average loan to value ratios of 66%.
Third quarter bank net interest margin was 2.30, a 24% improvement from the prior quarter. The improvement was a result of continued meaningful loan growth as well as an increase in the average yield on interest earning assets and a decrease in our funding cost. A strong mortgage business together with our mortgage warehouse business in a success of our commercial banking efforts contributed to a 3.4% quarterly increase in average interest earning assets.
Additionally, our mortgage warehouse lending group continued to deepen its relationships with existing clients and selectively added new customers, largely with our residential mortgage origination business.
The strategies to accelerate the run-off of our legacy assets and liabilities and replace them with higher quality more profitable ones, is gaining momentum. The average yield on interest earning assets increased to 4.09% during the third quarter, up from 3.82% in the second quarter.
If I could point to the slide 7, you can see our overall cost of funds declined to 2.09 in the third quarter 2011 from 2.21 in the second quarter. Behind this result was a 13 basis point reduction in the cost of deposits as we continue to replace maturing high cost certificates of deposits with lower cost core deposits. Retail core deposits rose to $2.5 billion and that increased for seven consecutive quarters.
Efforts to attract new customers and cross sell existing customers are progressing well. We anticipate continued growth in the deposit size of our retail stores as we continue to broaden our reach of product offerings. Expanded features and functionality complement our best-in-class service levels as recognized by our two consecutive J.D. Power Awards.
Our overall retail deposits were flat versus September 30, 2010. There was a significant improvement in deposit mix leading to the improvement in cost of funds. Retail core deposits increased from the September 30, 2010 now by 34%, while retail certificates of deposits fell by 17%. This trend led to approximately a 60% improvement in our overall cost of funds from the third quarter 2010.
We also refinanced $1 billion of long-term FHLB advances towards the end of the third quarter in 2011, extending the maturities beyond 2013 and reducing our funding cost and those borrowings by 41 basis points. We expect that this will save approximately $14.1 million in interest expense annually beginning in the fourth quarter of 2011.
Looking at commercial banking, we continue to execute on a strategy we laid out early in 2011. Results so far had met or exceeded our expectations. During the recent quarter of 2011, we generated over $300 million in new core commercial loans consisting of new commercial real estate of $117 million which is predominately to multi-family properties, and commercial industrial loans of approximately $140 million. Additionally we have developed our commercial leased financing portfolio which had a balance of approximately $43 million at the end of September 30, 2011.
We are now well staffed and fully operational including our specialty lending group in both New England and Michigan markets with a seasoned management team and experienced relationship and group managers. The commercial and specialty lending loans originate to-date are well balanced between our New England and Michigan markets. The current pipeline continues to build nicely as anticipated with new commercial relationships that utilize many of our non-credit fee-based products and services.
New England and Michigan markets are once that we know and understand well and the associated revenues will contribute to a less volatile operating model and helps us move along our path to profitability. Over the past two years, we have invested heavily in our risk management and compliance infrastructure, balancing our market approach with disciplined underwriting and pricing.
Turing to retail banking, if I could point to slide 20, it shows our branch footprint in Michigan. As you can see, we have a significant presence in Southeast Michigan and a smaller presence in Western part of the State particularly in growth areas such Grand Rapids.
We have 113 branches in Michigan and are ranked number six in total deposits with approximately 4.43% of market share, which evidences significant opportunity to continue to grow business levels. We feel our continued increase in core deposits is the strong indicator of the healthy customer relationships above on which we have build further business and drive higher levels of profitability.
It’s typical of economic recoveries to be somewhat earlier and stronger for Michigan and for other regions of the country. That currently appears to be happening based on the information reported by the Michigan Department of Technology Management and Budget.
As we previously announced, during the third quarter, we’d enter into agreements to divest our retail franchises in Georgia and Indiana. We’ve made the strategic decision to focus our energy and capital on the Michigan market where we have most density, our best brand awareness and the opportunity to generate the highest returns. We remain committed to the Michigan market into our status as the largest bank headquarter in the State.
Before I turn the presentation over to Paul, I’d like to comment on capital and liquidity. We closed the quarter with continued strong capital levels with a Tier 1 ratio of 9.3% and a total risk based capital ratio of 17.64%. We have undertaken a number of stress test on our capital levels both at the bank and in our consolidated holding company basis and are comfortable with our capital position.
We continue to reallocate capital within the balance sheet support our – to support our transformation away from our legacy balance sheet to a super community banking model. We also ended third quarter with cash and cash equivalents equal to 6.6% of total assets not including our marketable securities.
Before I ask Paul to take us through the details of the financial results, I’d like to emphasize couple of points. First, as I’ve outlined in my comments, we continue to be aggressive in putting our legacy credit cost behind us. Second, we have demonstrated ability to generate significant earnings and have a sound business model and committed in experienced leadership team. We believe that these competencies will soon allow us to return to sustainable level of profitability and generate long-term value for our shareholders.
After Paul’s discussions, we’ll be happy to answer any questions.
Thank you, Joe. Good morning everyone. As Joe mentioned, we lost $14.2 million during the third quarter, which was an 81% improvement in operating results from the second quarter.
There are four key items we focused on during the quarter, improving net interest margin, leveraging our mortgage banking business, reducing and mitigating credit costs and controlling expenses. And we expect to continue to focus on these items in the fourth quarter.
Our third quarter 2011 bank net interest margin was 2.30%, up significantly from 1.86% of the second quarter. For the year, our bank net interest margin was 2.01%. The strength of our NIM was based upon the measured growth of our investment loan portfolio as well as improvements in our funding cost both in our deposit cost and FHLB advance costs.
During the fourth quarter, we expect to see a slight increase in our net interest margin and a level of average interest earning assets similar to that in the third quarter. While we expect a slightly lower volume of available for sale residential mortgage loans, we expect that this decline will be offset by new core commercial and industrial loans and our established warehouse lending business. As a result, we do not expect any significant increase in overall yield in earning assets.
However, we do expect to benefit from our continued focus on core deposit growth and from our September refinancing of our Federal Home Loan Bank Debt. The refinancing is expected to reduce our interest expense by $14.1 million annually as Joe mentioned. And so, should reduce our fourth quarter interest on our debt.
Assuming we’re able to meet our lending goals for the fourth quarter and mortgage volume industry wide does not decline that the level of non-performing loans are trouble that restructurings in our portfolio does not substantially increase and that the current low interest environment remains stable, we would expect that our net interest income will increase by approximately 10% above that of the third quarter as a result in the fourth quarter.
Our mortgage business contributed a significant amount of revenue during the third quarter due to the mortgage refinancing activity that began in earnest in August. This activity was prompted by the steep decline in mortgage rates, attractive decline in the 10-year treasury rate during the same period.
With our seasoned mortgage banking structure in nationwide network, during the third quarter 2011, we locked over $13 billion in mortgage loans and accounted for gain on sale of 153 basis points. With both the volume and margin increase, gain on loan sale income increased over 2.5 times as compared to the second quarter to $103.9 million.
For the fourth quarter, we do not expect that volume or margin remain at the high level of experience during the third quarter. However, we do expect that the refinance way will continue to at least the end of the year and we anticipate the gain on loan sale income for the fourth quarter to be closer to the midpoint of the range between gains realized in the second quarter and the third quarters of 2011.
Our estimate is based on a number of factors including that there are no significant increases or volatile movements in the current interest environment that could affect consumer demand or hedging costs that the operating environment for mortgage banking activity does not significantly change and that the expected trended mortgage origination industry wide for the fourth quarter does not decline.
Please also note as Joe mentioned, our estimate does not reflect any affect of the newly announced HARP programs as rules for that program not even expected to be publicly released until mid November. We hope to provide more guidance on our mortgage banking results later in the quarter after our renewable rules.
Our second biggest driver of mortgage banking revenue was our net servicing revenue which is a combination of income we earn, servicing loans and the net effect of the hedges on our mortgage servicing rights on our balance sheet. In total, our net loan administration income was $16.9 million for the third quarter, down from $30.5 million in the second quarter 2011.
Our goal is to earn a 6% return on the value of that asset and we’ve done a good job of that over the last eight quarters. We anticipate fourth quarter 2011 net servicing revenue to be at or near the level in the third quarter. This assumption is predicated on the interplay between the 10 year treasury and mortgage rates as well as the absence of significant volatility and the mortgage rates and interest rate herbs.
Turning to our legacy credit costs, Joe covered these well in sufficient detail so I’ll not spend too much time on them. Loan loss provision expense decreased to $36.7 million in the third quarter of 2011, consistent with the slowing pace of in-flows of our over 90-day delinquent residential mortgage loans. We anticipate the pace of increase to continue to slow down eventually abating on or before this first half of 2012.
Our assumptions do not take into account the process changes that Joe mentioned in which we are now putting in place. Early results of those efforts on stemming the growth of our 90-day loans have been encouraging. However, we are still in a preliminary stage and would not expect to determine the sustainability of these results until later in the quarter.
Based on the trend we do see with a level of over 90-day loans, we expect loan loss provision expense to continue to decline in the fourth quarter 2011. This assumes that the trend of unemployment and housing prices remains unchanged and thus a continuing decline in the trend of delinquencies. It also assumes that our historical loss rates, which we continually review for validity against current trends and historical experience, do not change significantly.
As Joe mentioned, secondary marketing reserve provision increased significantly from the prior quarter level. As with many of our peers, the key component in assessing the potential expense arising from this area is the activity of the GSEs.
Given the uncertainly and taking into account our historical losses, we increased our reserves during the third quarter. However, we’ll continue to evaluate our exposure in light of recent GSE activity.
Our asset resolution expense increased to $35 million. We anticipate the fourth quarter level to remain close to its current third quarter run rate. Both, our estimates for provision and our estimates for asset resolution expense do not reflect the benefit of the improvements we anticipate getting from the restructure of our mortgage servicing area that Joe discussed.
Lastly, non-interest expense excluding asset resolution is $116.2 million, under $16.2 million in third quarter 2011 as compared to $107.6 million in the second quarter. The increase from the prior quarter was reflective of increased commissions and salaries associated with the uptick in our mortgage business.
We anticipate fourth quarter 2011 non-interest expense to remain flat from the third quarter. This assumes that the FDIC assessment rate remains unchanged and the mortgage volumes remain at elevated levels.
With that, I’ll turn it back to Joe.
Okay. Thank you, Paul. Tracy, why don’t you open it up to question-and-answers?
(Operator Instructions). And your first question comes from Bose George with KBW. Your line is open.
Jade Rahmani – KBW
Hi, this is Jade Rahmani from KBW on for Bose. A couple of questions, have you seen any changes in behavior from the FHA in terms of reimbursing you for loans that they guarantee and any signs of them curtailing payments?
No, I think that we had some older GSC repurchases that higher level of curtailments that we’ve addressed the changing our servicing process but to-date I’m not aware of any denial of a claim of any loans we put back to them and it appears when you look at this, the flattening out of our GSC repurchase loans that claims are being processed in a normal rate we’d expect to see that position starts to decline.
Jade Rahmani – KBW
Okay. And that’s on the FHA.
Jade Rahmani – KBW
Okay. Secondly the MBA re-fi index has slowed over the last couple of weeks wondering if that’s consistent with trends you’re seeing in the market right now?
Yeah I’ll turn – before I ask Matt Kerin to give us his comments, because he is running our whole origination strategy, its slowing off a record grade. I mean obviously August, September, October was pretty much of a surge in refinancing activity I’d say it sort of moderated now from what was a fever [indiscernible] more to just a robust level.
Absolutely Joe, this is Matt Kerin. We obviously had a strong quarter end and the quarter began strong and got even stronger with after Bernanke’s announcement and the move in tenure. As everybody got the demand really jump started people slowed up pretty quickly in terms of their production capacity and then as rates backed up a little bit and went from a probably around 215 to 170 for a few days and there was a big feeding transient and it backs up a little bit, but we have seen a pretty steady flow and believe there is a lot of demand at a 220 tenure, so that we’re optimistic for the future.
Jade Rahmani – KBW
Okay. And then, finally, on gain on sale margin trends. The full quarter number relative to your mid quarter update seems to imply improvement in August. However, can you comment on how those margins have been holding up so far this quarter?
This is Matt Kerin, again. I guess what I would suggest you is in our strong refinanced market, the margins hold up very nicely.
Any progress on guidance that we would expect the combination of volumes in our gain on sale execution to be somewhere between in midpoints in third and fourth – second and third quarter.
Jade Rahmani – KBW
Okay. Thanks a lot.
Your next question comes from Mark Steinberg from Dawson James. Your line is open.
Mark Steinberg – Dawson James
Good morning. I had a question with regard to the New York Stock Exchange 1A [ph]. And my question is what immediate action is being taken now to keep the shares above $1?
We’re actually planning to return company in profitability. We’re not engaged in try and manipulate the price of stock and part of placed obviously.
Mark Steinberg – Dawson James
No, no, I didn’t mean to imply that. Please, don’t take it that way. But my question is something like a reverse split on the table what are you seeing?
Yeah. We believe executing our plan to get back to profitability will have the greatest impact on our market valuation.
Mark Steinberg – Dawson James
Okay. So may I…
We’ve started making money and I think the market will take care of our stock price.
Mark Steinberg – Dawson James
Okay. So may I assume at this point then that a reverse split is not on the table?
No, it’s not on a table.
Mark Steinberg – Dawson James
Okay. Thank you very much.
(Operator Instructions). Your next question comes from Julie Marsh from [indiscernible] your line is open.
Hi Good morning.
I was wondering if there was any certain activity and if there was any stronger activity in certain states as far as loan originations that you’re seeing?
I assume you’re referring to the residential?
I’m assume – yeah it’s the residential. I’m in California so I’m just curious.
This is Matt Kerin. I think there is an exhibit in the presentation it speaks to the origination activity on page 25 of the presentation which shows our originations.
Of the balances I’m sorry. But I think that consistent with what you’re reading from the industry data our originations are pretty much in line with what the national origination percentages are. You’ll see California which is obviously a very strong market, Florida which is a strong market largely off of the foreclosures that are going down there from a market valuation perspective.
Right okay. All right yeah my parents just bought a foreclosure actually in your, you did their loan and they were closed in three weeks and it was great.
Glad to hear that you had a great experience that’s what we try to do.
Yeah three weeks it was done, so they’re very happy. And thanks for answering my question.
(Operator Instructions). Your next question comes from John [indiscernible] from IMA your line is open.
Hello I’m calling from Europe. I’ve seen your presentation and some of the previous ones also in couple of quarters. I see that the Texas ratio on page four of your presentation nonperforming assets to Tier 1 Capital Plus General Reserves had [indiscernible] a little bit from 34.5 to 38.5 that’s one thing and on the other hand that I’ve read that you’re planning to invest in BRICs for new branches. Could you comments on that, is that somewhat too early given the situation, given the – okay, there is – I see that the losses are diminishing, but we are still not in profit, so why estimate – why thinking about investing in BRICs? And how much do you recon investing in those branches? Thank you.
Sorry, John. It’s Joe Campanelli. There is no major strategy to go out and accelerate at any type of the de novo branch strategy. It simply looking into the distribution channel we have in Southeast Michigan and looking for opportunities to reposition those as opportunities present themselves. It’s consistent with any type of retail strategy as leases mature as demographic shifts occur, you move locations, you relocate branches so you add selectively in markets. We feel you can get an accelerated return. That’s really just going back to traditional retail banking strategies. It takes a long time to go to the entire process, site selection all those types of things. So I wouldn’t anticipate to any large de novo or branch expansion. It’s more in the lines of looking for opportunities to round out the infrastructure now. You also seen that we’ve really focused our investment in the Greater Michigan marketplace as we contemplating are looking forward to closing on sell of our Indiana and Georgia branches. So hopefully that addresses your concern about any type of major fixed asset investment in today’s environment.
And if I could, this is Paul Borja on the Texas ratio question you asked as you see that the function of non-performing assets over our Capital Plus General Reserves our non-performing have increased as we discussed earlier with respect to over 90 days as those continue to season and we would expect the over 90s to abate in the near future near in their core Tier 1 rates or Texas ratio to decline. Nonetheless, we believe that at below 50% we have a rather strong Texas ratio and we’re going to continue to make improvements in that area.
(Operator Instructions). Your next question comes from Jay Gohil [ph] from Market [ph]. Your line is open.
Jay Gohil [ph]
Hi, thanks for the call. I was just trying to understand after the sale of the Indiana and Georgia branches the realized profit is going to be realized in the Q4 earnings. So just trying to do some kind of math, so you have that as a gain and lower interest because of the refinancing that was happening a lower SG&A, so is it fair enough to assume that the company might return to profitability next quarter if the mortgage origination stays at the same level?
Yes. And Jay you heard me talk about really focusing on strategies that are consistent sustainable. I think that the reallocation of capital is a good move for the company and a good move for shareholders and result in a profitable quarter. But long-term I think its still we’ve got taking and implementing all initiatives we talk about is really is going to be the catalyst for continued profitability’s as we move into 2012.
Jay Gohil [ph]
Got it. And lastly on the TARP, since you have closed to like $266 million under the TARP via preferred shares. So once you return to profitability I believe you need to show about three to four quarters of profits in order to regain or like repay the TARP and then gain the deferred tax assets?
Yes. There is somewhat separate in nature in a sense it is there is an accounting interpretation it’s not a bright line test. Clearly then you’d be looking at sustainability of that profit curve and not rely on a one-time event. So we would expect after several quarters of profitability that we’ve been looking at reversal of deferred tax asset loans was is significantly in larger than our liability or preferred shares from TARP. Paul, do you want to add?
Sure. September 30, our deferred tax asset was approximately $370 million. Our liability for the TARP preferred was about $257 million after sustained profitability especially when our auditors will expect to reverse the deferred tax asset thereby providing us with Tier 1 capital. And at that point, we’d the opportunity to repay the TARP preferred but not before hand.
Jay Gohil [ph]
Right. So is it fair enough to assume that both might occur at the same time and you might get a one-time gain of close to like $100 million?
Well I think you would expect that they would happen in series. I don’t think you would expect them to happen on the same quarter, but it would be a serial kind of structure because we would want to make sure that deferred tax asset as it is, put back in, is not only accounted for capital for the accounting side, but also from a regulatory side and there are certain regulatory rules that provide for a phasing an event over a couple of quarters at least.
Jay Gohil [ph]
Thanks. And sorry, finally on the asset sale is there anything else except Georgia and Indiana that you are looking forward in terms of selling?
As far as our overall franchise network, I believe we’re looking Georgia and Indiana and they have indicated that we intend to focus on our core banking areas in Michigan as well as the emerging northeast market.
Jay Gohil [ph]
There are no further questions at this time.
Okay. Thank you, Tracy, and thank you all for joining us this morning.
This concludes today’s conference. You may now disconnect.
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