HomeStreet Inc (HMST) 2012 Q3 法說會逐字稿

Welcome to the HomeStreet third quarter earnings call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Mark Mason, President and CEO. Please go ahead.

Hello, and thank you for joining us today for our third quarter 2012 earnings call. I will begin with a few highlights from the quarter, followed by a more detailed discussion of our results; after which, I'd be happy to take your questions. With me today, I have Cory Stewart, our Chief Accounting Officer; Darrell van Amen, our Treasurer and Chief Investment Officer; and Jay Iseman, our Chief Credit Officer will help me later when we take your questions.

Before we begin, I'd like to remind you are that our third quarter earnings release is available on our website at IR.HomeStreet.com. In addition, a recording will be available at the same address approximately one hour after this call. I'd like to point out that I may make forward-looking statements during today's call. Any statement that isn't a description of historical fact is probably forward-looking, and these statements are subject to many risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including our 2011 annual report on Form 10-K and our various quarterly reports on Form 10-Q. Additionally, information on any non-GAAP financial measures referenced in today's call, including a reconciliation of those measures to GAAP measures, may also be found in our SEC filings and in the earnings release available on our website.

I'd like to begin by sharing a few highlights from the quarter. HomeStreet reported record net income of $21.3 million or $2.90 per diluted share for the third quarter, compared to net income of $18 million or $2.43 per diluted share for the second quarter. Our annualized return on average common shareholders' equity was 37% in the quarter, up from approximately 35% last quarter, and annualized for the year-to-date our return on average equity was 40% for the first nine months of this year. Our annualized return on average assets was 350 basis points for the quarter, up from just over 300 basis points in the prior quarter. Pretax income was $33 million, an increase of 55% over the prior quarter, and 112% increase over the third quarter of last year.

Third quarter financial results were driven by record mortgage volume and mortgage banking earnings, and our year-to-date net income as of September 30 was $58.4 million, compared to $9.1 million for the first nine months of fiscal 2011. During the third quarter, we originated single-family mortgages for resale totaling $1.37 billion, a 28% increase over the second quarter, and a 186% increase compared to the third quarter of 2011. Interest rate lock commitments were $1.3 billion in the quarter, slightly higher than last quarter.

Total assets increased $83 million to $2.51 billion in the third quarter. Loans held for investment increased $33 million, the first quarterly increase since 2008. Transaction and savings deposits rose to $1.03 billion, an increase of $75 million or 8% over the prior quarter. Our net interest margin grew to 3.08% in the third quarter, compared to 2.83% in the second quarter of this year, and 2.38% in the third quarter of 2011. Non-performing assets declined to $55 million or 2.2% of total assets, down from 3% of total assets at the end of the second quarter. Our bank regulatory capital ratios continue to increase. Our ending Tier 1 leverage ratio was 10.8%, and our total risk-based capital ratio was 17.9% at quarter end.

In the quarter, our headcount grew to 998 full-time equivalent employees, up from 613 at the beginning of the year. While the majority of this increase is due to 123% increase in our single-family mortgage origination personnel, we have also been hiring lending personnel in our other business lending units, including commercial real estate and business banking. We also continue to build our back office and infrastructure to support our growth. On October 25, we announced a two-for-one forward split of HomeStreet's common stock, effective November 5, 2012.

Now I'd like to discuss our results for the quarter in more detail. Strong performance in our mortgage banking business continues to be the most substantial driver of our earnings, a factor of both growth in volume and historically wide secondary market margins. Reduction in productive capacity in the industry continues to produce significantly higher margins and volume for the remaining originators such as HomeStreet. Our volume has benefited from expanding our retail presence in several markets, and from continued strong demand for both purchase and refinance loans. Our loan volume and market share continue to grow as a result of our successful recruiting of high-quality lending personnel in all of our markets. It is particularly gratifying to have so many high volume producers and talented underwriters and processing personnel leave large national and regional originators to join HomeStreet.

Continuing low interest rates have positively impacted both purchase and refinance volume, while refinance volume also continues to be supported by the Agency's modified Home Affordable Refinance Program or HARP 2.0. 17% of our total production for the quarter was from the HARP 2.0 program, and we continue to be very successful at recapturing our own refinances. We had a recapture rate of more than 66% of our servicing portfolio prepayments in the third quarter. Additionally, we're seeing a modest rise in purchase mortgage volume which represented 37% of single-family closed loans this quarter, a 2% increase over last quarter, and 5% over the first quarter of 2012.

Last quarter we announced that we had become the number two residential lender by volume of single-family mortgages in the five-county Puget Sound area of Washington as well as in Spokane and Clark Counties. We maintain that standing in the third quarter in the Puget Sound area and Spokane County, and moved into the number one spot by volume in Clark County. We also gained market share in the Portland market, ranking third by mortgage volume in the Pacific Northwest's second largest market. These rankings are based on our combined production with Windermere Mortgage Services, our affiliate, which represented approximately 20% of our single-family production in the third quarter.

Net gain on mortgage loan origination and sales activities was $64 million this quarter, an increase of $19 million or 42% over last quarter. Secondary margins remained extraordinarily high, increasing to 3.72% from 2.54% in the prior quarter. And originated mortgage servicing rights as a percent of loans sold were valued at 1.14% for the quarter.

Mortgage servicing income was $506,000 for the quarter, down $6.6 million or 93% from the second quarter. The decrease for the quarter represents a decrease in sensitivity to interest rates for our mortgage servicing rights, which has enabled us to substantially reduce the notional amount of hedging derivatives needed as well as a flatter yield curve. These changes have had the effect of reducing net gain from derivatives hedging, MSRs, through reductions in the carry or yield on such instruments.

Our portfolio of loans service for others increased to $8.9 billion in the third quarter, compared to $8.3 billion at the end of the prior quarter. At quarter end, the value of our single-family mortgage servicing rights represented 91 basis points on the outstanding principal balance of loans serviced for others, and delinquencies remained low at 2.2% at quarter end, among the lowest in the industry.

A little about credit quality -- non-performing assets declined by $18 million to $55 million or 2.2% of total assets at quarter end, compared to 3.04% of total assets at the end of last quarter. Most significant was a net reduction in other real estate owned, which decreased by nearly $24 million to end the quarter at $17 million. This decrease was due primarily to the sale of our largest property, a commercial land development property that was transferred to OREO in the second quarter, which we sold at a gain of $2.3 million. This gain was offset by writedowns in other OREO properties and other OREO expenses during the quarter.

Classified assets decreased $35 million in the quarter to $102 million or 4.1% of total assets. Non-accrual loans were $38 million or 2.94% of total loans, up from $33 million at June 30, 2012. And loan delinquencies were $96 million or 7.4% of total loans, up from $84 million in the prior quarter. These increases generally reflect an increase in single-family mortgage non-accruals. This uptick in single family delinquencies reflects in part the suspension and refiling of a group of single-family loan foreclosures resulting from recent developments in state foreclosure law, and we expect this recent uptick to fall again as we work through this pool of defaults.

We recorded a loan loss provision of $5.5 million in the third quarter, up from $2 million in the prior quarter, and in line with net charge-offs of $5 million. We continue to focus on bringing down the cost of our interest-bearing liabilities, by reducing higher-cost time deposits and replacing them with lower-cost transaction and savings deposit accounts. In the quarter, total deposits grew 4% to $1.98 billion, up from $1.9 billion in the second quarter. Transaction and saving accounts deposits grew by $75 million, while time deposits decreased $71 million. Transaction and savings deposits now make up 52% of our total deposits, up from 50% in the second quarter. As a result of changes in composition, average cost of deposits declined to 78 basis points from 95 basis points last quarter.

And we are now executing on our plan to increase our branch density. We recently announced the opening of our new Lynnwood, Washington, branch which opened on October 15; and a new Seattle branch in the Fremont neighborhood, which will open later this year.

Net interest income was $16.3 million, an increase of 11% over the second quarter, reflecting an increase in earning assets and continued improvement in asset yields and funding rates. Asset yields improved due to higher yields on investments, construction and land portfolio loans, and C&I portfolio loans; offset by lower yields on single-family loans held for sale. Our average cost of funds decreased 12 basis points, primarily due to lower yields on Federal Home Loan Bank advances as we shifted to shorter-term borrowings in the third quarter.

Total average interest-earning assets increased from the second quarter due to higher mortgage production volume and a higher average balance of loans held for sale. And as I mentioned earlier, our net interest margin increased 25 basis points to 3.08% from 2.83% in the second quarter. As we have discussed previously, absent changes in the macro interest rate environment, we anticipate that our net interest margin will continue to gradually improve through next year, in part due to the continued repricing, rolling off, or conversion of scheduled maturities of time deposits.

Non-interest income was $68 million, an increase of almost $13 million or 23% over the second quarter. This was primarily due to a $19 million increase in net gain on mortgage loan origination and sales activities, reflecting an increase in single-family mortgage production volume and gain on sale margins, offset by a decrease in mortgage servicing income. Non-interest expense was $46 million, down $1 million or 2% from last quarter, reflecting a decrease of almost $6 million in OREO expense, offset by over $3 million more in salaries and related expenses resulting from a 9% quarter-over-quarter increase in headcount and higher commissions from higher single-family mortgage loan origination volume. Despite the increase in non-interest expense, our operating efficiency ratio declined in the third quarter to just under 54% from 58% last quarter.

The Company's tax expense was $11.8 million for the quarter, as compared to $3.4 million in the prior quarter. Our year-to-date income tax expense of $13.4 million reflects our current forecast of pretax income for the year, the full reversal of the valuation allowance on net deferred tax assets existing at the beginning of this year. We expect our effective tax rate to be approximately 35% next year.

I'd now like to make a few brief comments on the local economy, after which we'd be happy to take your questions. Our core market area of Puget Sound continues to see a rise in job creation, home sales, housing prices, and housing starts. However, similar to much of the country, the unemployment rate has been slow to improve. The region added 48,000 private sector jobs from July 2011 to July 2012, with the manufacturing, wholesale, and retail sectors creating the most jobs, as the region continues to enjoy strong hiring on the part of Boeing and Amazon. Private sector wages have increased 11% in the last five years in Seattle, with the highest wage growth experienced in the tech sector. Not surprisingly, Seattle was recently identified as the top market out of the 20 largest US metropolitan areas for Generation Y workers, based on strong wage growth and a large number of tech firms.

Puget Sound region is now showing consistent signs of a housing recovery. Median home prices were up approximately 7%, and home sales increased 15% in the third quarter as compared to the prior year. Home construction is rebounding in response to the increasing demand for homes and low available inventory, with a sharp rise in housing starts in the Puget Sound, Portland, and Boise, Idaho regions. In the Portland metro market, home sales are up 18% for the first nine months of the year, compared to the same period in 2011, and the median home price is up 4%. And Portland is now rated as the fifth best market in the country for construction employment gains, with a 10% increase year-over-year.

The multifamily market continues to strengthen. Portland and Seattle have some of the nation's lowest apartment vacancy rates, at approximately 3.7% in Portland and 3% in nearly every Seattle sub-market, compared to a national vacancy rate of 4.6% in the third quarter. In the Puget Sound region, the industrial market is the strongest it's been since 2008, with a 6.3% vacancy rate at the end of the third quarter, down more than 1% since the end of 2011. Seattle, the largest metro area in the Puget Sound region, has the lowest industrial vacancy rate at 3.6%. Despite all of these indications of a recovery in process, business lending is still sluggish in our markets, as many businesses are waiting for stronger signs of recovery to invest. As a result, tight competition for those loans continues.

Though our earnings today are concentrated in mortgage banking, we are focused on aggressively growing our traditional banking businesses. Our strong mortgage and banking earnings have enabled us to accelerate our investment in these businesses, opening branches and hiring lending personnel at a faster pace than might otherwise be possible.

I would like to thank you for your patience and attention during my remarks today. I'd be happy to take your questions at this time.

(Operator Instructions)

Paul Miller, FFBR.

On the origination side, did you add any additional lenders? I know you were talking about last quarter bringing on some more MetLife guys. I know that you were able to bring a lot of them on, but you were talking about bringing more on. So did you increase your production facilities?

On the single family side, we continue to hire. You may remember when we first brought on the initial group of lending personnel from MetLife Home Loans, at about 170 in total, we said that, that was not 100% of their Pacific Northwest group. It was about 85%, I would say. Since that time, the total has grown to approximately 200 or more, and those individuals that had left to join other firms have mostly changed their mind and moved on to HomeStreet. But in addition to that, we've been constantly bringing on new recruits from all of the major lenders in our market. Every couple of weeks, we have a new orientation group for lenders that is comprised of somewhere between 6 and 10 new hires. And so we have probably hired a total of 70 or more beyond that, a combination of lenders, underwriters, and fulfillment personnel. In addition to that, though, in our regular lending groups, commercial real estate, business banking, and residential construction, we continue to recruit and hire as well.

Have you been able to -- one of the -- when the money was raised about a year ago was to increase the bank, and I know this -- the mortgage bank has done very, very well, but have you been able to attract decent lenders since that, outside of the mortgage side?

We have. The press that we've received and the results since the IPO have helped reestablish our name as a not only a going concern, but a vibrant bank and strong competitor in our region. And we still find many lenders that are frustrated by systems that take a long time to get a credit decision out of, or make it hard for them to serve their customers, and so we continue to identify people that would like to join a locally based institution that provides better customer service. And so we continue to recruit and continue to have some reasonable success.

And then on the -- and then how has the pipeline been so far? There's been some talk about things slowing down, gain on sale margins coming in. We've been through roughly four weeks into the new quarter. Has the new quarter remained as vibrant as the third quarter?

It's still strong. Application volume was a little softer this month coming into the quarter, but not by a lot. Since we still have a growing group of originators building their pipeline, our volume has remained, at least to this point in the quarter, consistent with last quarter. So we're looking to, at least in the near-term and not sure I could look all the way through the quarter yet, but at least in the near-term, volume at these levels.

What about the profitability, gain on sale?

Like other folks that you've heard from in the market, we eventually expect profitability to diminish, but we don't see signs of that yet, generally.

Great quarter.

Tim Coffey, FIG Partners.

I want to -- quickly want to talk about nuts and bolts question. What were your performing TDRs in the quarter?

Bear with me a minute and I'll find a number. I thought we had that in the back of the release.

Yes, you have total TDRs, but I wasn't aware if that included non-accruing TDRs.

I don't have that at my fingertips, I would say this -- and I can get back to you on it -- that we generally don't have performance issues with TDRs in the commercial portfolio. I can't think of one as I sit here. Our non-performing TDRs would be in the single family portfolio, but I can get back to you on the total.

Okay. Yes, I'll follow back up with you later. You don't talk about -- you don't give the number for the fallout rate per quarter, but I'm wondering if you can talk about the trends that you're seeing in terms of the fallout rate.

The loan fallout rate in the pipeline?

Yes, on the mortgage production.

It's been pretty consistent. We see it mostly when rates are moving down. When rates move up, we see very little fallout, as you would expect. But when you see rates moving down quickly, that's when you see fallout and re-locks that generally cost us money. Rates have been pretty stable the last 30 to 45 days, and so we're not seeing much fallout.

Okay. The previous questioner was asking about loan sale margins going forward. If we could just talk about this quarter, they seem to be up for anybody, any organization that's originating mortgages right now. Is there something fundamentally going on within the mortgage market that you see in these higher loan sale margins?

It's a combination of conditions. The macro themes continue of both consolidation and deconsolidation, so we think productive capacity is actually still decreasing. As hard as we and other lenders are working to increase our productive capacity, there's literally a personnel constraint today in that all of these positions, whether it be loan officers, underwriters, processors, are far more technical than they used to be. And in the case of loan officers, they now have to be licensed, they go through background checks, and they have to be virtual underwriters today to know the loan programs to be effective at marketing and sales. So there's a lot of training, there's a fair amount of experience involved, and, let's face it, we're all getting older. We actually have people retiring out of this business at a certain pace.

So the number -- the absolute number of people who can process loans in the United States, I wouldn't say it's absolutely fixed, the possibility to grow it very quickly is limited. And all of us originators, who are thankfully buried in loan applications, are struggling to increase our productive capacity. And as rates fell last quarter after the Federal Reserve extended its asset purchase program, well, that spurred another refinancing small bubble or extended the current one, and we're struggling to keep up. So that decrease in rates that you saw really didn't get passed through to borrowers. It strengthened our secondary market margins, as other lenders were unwilling to generally reduce rates. And so as long as that condition continues, we would expect to see margins similarly strong.

Okay. You don't discuss what the compensation is -- the variable compensation is for the mortgage production staff, but by my calculations it appears to have declined again this quarter. Is the outlook on mortgage banking compensation starting to slow down? Is it starting to normalize or do you continue seeing it decline?

And you're talking about compensation to loan officers and originators, Tim?

Right, yes.

You have to look at our mix to understand it. Remember part of our mix is -- about 20% of our volume comes through our affiliate, Windermere Mortgage Services, and of course we don't have any loan commissions in our financial statements related to that volume. Two, we have volume that doesn't come through the typical retail channel. We have affinity programs and other programs where the originators are paid on a different basis other than commissions. And so to the extent that, that's a larger or lesser part of our originations during the quarter, that will change the way our aggregate commissions look in relation to direct originations. As a direct answer, I would say no, loan officer commissions have not come down. And in fact as more -- as we hire more high volume producers who will originate higher up the variable commission scale, for those -- for that average, our commissions expense has actually gone up over the last nine months. I'm not sure we see it continuing to go up at that pace, but at an average originator basis who's on a straight -- or virtually straight commission schedule, that commission has actually gone up a little.

Okay. Turning to the loans held for investment, obviously you guys had a good quarter in that department. What -- can you talk a little bit more about the pipeline going into the fourth quarter?

Well, its strengthening. We are in start-up mode in those areas, with the exception of single family originations. We've been originating those, some of that production on balance sheet for a little over a year. But in the other lending areas, commercial real estate, C&I, and residential construction, those programs are really just getting back on their feet again, with the hiring of new loan officers and reapproaching the market. We have a reasonably sized portfolio -- I mean, pipeline. I wish it were larger, but I also wish our pull-through was better, but because of competition, we are not seeing the pull-through on opportunities we'd like. And so we're not yet getting the balance growth on the pace that I would like to see. We're going to remedy that by hiring more people and more marketing and getting more people to know that we're back in the market. In answer to a prior question on non-performing TDRs, that number for the end of the third quarter is approximately $18 million of total TDRs of $117 million or about 15% of TDRs.

This is Jay Iseman. If I could add, construction and land development, $5.8 million, that's an A/B note structure, and that has to be there until performance which we expect shortly.

Okay, great. Thanks, Jay. Mark, back to the loans held for investment, on the -- what you're bringing onto the portfolio, are those yields different than the average yield on the loan port for average loans?

They are almost in all cases, but not always in the wrong direction. Ironically, as an example, on residential construction, which is going to have a much smaller place on our balance sheet, as a consequence of so much of the legacy loans being the remaining loans on non-accrual status, new loans on at new rates our yield has actually gone up in construction. On the single family line, however, yields are decreasing. Generally as we originate new loans, they are being originated at yields that are below historical yields, business banking as well. Term loans, like most institutions today, are paying off at yields higher than new loans are being made, and competition for revolving lines is very high. And so new loans in the C&I area, whether they be term or revolving, are generally being put on as that lower rates.

Okay. So overall, more compression than loan yields is pretty much what we're looking at?

Slightly. In total, we think we're going to do relatively well. If you put all of that together, and we don't think over the next few quarters that our asset yields are going to fall materially. Cost of funds will, but we don't see our asset yields decreasing, and we may actually increase them as a consequence of strong yields on -- stronger yields on securities and mortgage loans held for sale in relation to prior periods.

Okay. If I could go back to the mortgage portfolio through the MSRs in the quarter and going forward really, can you give us any thoughts on how to think about some of the hedging activity, and how that might impact MSRs?

Yes, we had a big change in servicing income this quarter. You could see it's -- we've had a significant change in the risk or the sensitivity of our servicing assets to changes in interest rates. And as we have refinanced so much of our portfolio and driven down the average interest rate, you can see in our disclosure, we've added a few lines this period to our mortgage servicing rights disclosure. Weighted average note rate in the single family portfolio of loan serviced for others is down to 4.52%. What we don't show you there, though, is that the average life is about 30 months now in that portfolio. And given that much lower interest rate, the very short average life, the sensitivity to -- near-term sensitivity to rising or falling rates is much lower than it was. Well, that's allowed us or forced us, frankly, to lower the amount, the absolute volume of hedging derivatives of swaps and TBAs that we use to hedge that.

That's a good-bad story. It's great, because it means our risk to fluctuations in interest rates from a valuation standpoint is far lower than it used to be. The bad part is we actually earned money hedging those instruments because we're long to them at a yield, and when we decrease the volume, that decreases our power -- our ability to earn on those assets to offset the natural decay which you see disclosed here, and it lowers our servicing income. As an example, our decay last quarter, that natural amortization was about $5.4 million last quarter, up $1.4 million from the prior quarter. And as our servicing portfolio grows, that number is going to continue to grow until prepayment speeds start to lengthen out. And so you see the dual impact of rising decay or amortization of a growing servicing portfolio diminishing offset by gains or earnings on hedging derivatives had a pretty significant net effect this quarter. And we think for the near-term, that's what folks should expect, is a much smaller servicing number.

Now, you see the cash servicing fees continue to grow. This quarter they were approximately $7.2 million actual cash received. That's up from $6.7 million the prior quarter. That's a pretty significant increase in one quarter, and we expect, if we stay on this same pace, originations versus prepayments, for that to continue. The negative is all of this hedging activity and the positive effect of carry from those instruments is decreased.

Okay, that helps. And then, given that -- can you -- do you have any updates on the regulatory front, given that you're checking all the boxes on capital, earnings, and credit quality?

Sure. We hope to announce soon the results of our recent annual safety and soundness examinations. We had them actually the past three weeks here, both at the bank level from the FDIC, and the Washington Department of Financial Institutions, and our first full safety and soundness examination from the Federal Reserve, which now regulates our holding company. Based upon the preliminary conclusions that were shared with us at the exit meetings with those regulators, we're very happy with the results. We believe they're very happy with our progress, and we hope to announce the results of those examinations when they're finalized within -- sometime within the remainder of this quarter.

(Operator Instructions)

Mark Patterson, NWQ.

Wanted to follow up a little bit on that MSR hedge strategy, some of the changes you might be making there. As I kind of looked at this, I see it kind of taking off some of the downside protection in the lower rate environment, and more, I don't know, call it catastrophic protection. If treasury rates fall below 1%, we'll have a new issue to deal with. So is it -- I know you guys haven't really focused on the macro hedge, although some of your comments answering the previous question was -- mentioned the benefit of the origination gains offset in MSR pain, but are you really thinking of this as more catastrophic going forward, and just trying to maybe possibly position for the benefit of higher rates?

We have never introduced strategy into our hedging. We're pretty good mortgage originators, but we're lousy forecasters of interest rates. And so we have kept a balanced hedge position on, and that served us well to this point. It felt better when we had more hedge on and we were earning more to offset the decay, but the results have always been quite good if you're simply thinking of it as a hedge and not an opportunity center. If rates fall, we're very flat in what the net outcome of changes in the hedge -- in our -- the servicing assets in our hedges are. Interestingly, the way our hedge is built, if there were to be any type of spike in rates, we would have something of a windfall, absent some spread change or other significant difference in our assumptions, dramatically so the farther out.

Now, of course, that's the very lowest probability end of the tail of probabilities, but in the near-term anyway, but we're very well positioned. The cost of that or the volume of instruments that it takes to do that, are significantly less, less than 50% relatively of what they were a quarter to two quarters ago. And we're not quite ready to consider posturing for any benefit for rising rates. We don't see the catalyst, and I'm not sure we would really take any steps to position the hedge in that direction.

Okay. So it's not positioning for benefiting from rising rates, but it's positioning to reflect the changes in the existing servicing portfolio right now to where the hedge doesn't detract as much in a stable to slightly lower rate environment?

That's fair enough. I would agree with that, yes.

Okay. Last question for you, another follow-up from one of your previous questions. And you probably wouldn't have expected this type of question just a couple of quarters past your recount, but your capital generation is significantly up based on your balance sheet growth right now. Most of these ratios are up close to a 100 basis points just this quarter over quarter. I'm wondering what your thoughts are? I know you mentioned the exams that you're completing right now or have just completed, but wondering what your thoughts are on excess capital deployment. And I know that you've been -- I know you've acknowledged at least that parts of the mortgage business is over-earning, or I'll call it over-earning at this point. And that you are continuing to invest in both the mortgage business and your traditional banking business, but do you have any thoughts on what you're going to do with this capital generation?

That's been actually a popular question surprisingly recently. We hoped first to take a little pressure off by starting a dividend next year. Our Board of Directors has discussed the potential for reinstating a dividend at the point that we are regulatory able to. Today, we still have a cease and desist order in place at the holding company and an MOU at the bank that requires pre-approval. While that doesn't prevent dividends today, as a practical matter, it makes it much more complicated to consider instating a regular dividend. We have had discussions with our regulators about the potential at the point at which these pieces of extraordinary supervision may be removed. We hope that these extraordinary supervision instruments will be removed as a consequence of positive conclusion of our recent examinations, but until we -- until they finish their process and we get formal notice of that, we can't be sure, but we are planning for that outcome. And should that occur, we plan to ask our Board of Directors to initiate a regular dividend next quarter. Stay tuned I guess, on that point.

With respect to larger issues, though, we do anticipate utilizing our capital to grow the business. In part, hopefully to support potential acquisitions. And realistically, until the regulators conclude on the new capital standards as outlined in the current Basel III base proposal, we're not really sure how much capital we need to carry. We will have to carry more than other similarly sized institutions as a consequence of our trust preferred securities and higher than average level of mortgage servicing rights, but until that's concluded, we're not quite sure what we need either.

Okay. So we'll stay tuned on that one then. That's all I got, Mark. Thanks for all your efforts and your team too. It's been great.

At this time, we show no further questions. Would you like to make any closing remarks?

We'd just like to say to our investors again thank you for your confidence in us, particularly those that have been with us since our IPO earlier this year. Thank you. Appreciate it. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.