H & R Block Inc (HRB) 2011 Q1 法說會逐字稿

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(Operator Instructions).

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(Operator Instructions).

At this time, we would like to welcome everyone to today's web event titled H&R Block Q1 Earnings Call.

At this time, it is my pleasure to turn the floor over to Mr.

Derek Drysdale.

Mr.

Drysdale, you have the floor.

Good afternoon, everyone.

And thank you for joining us to discuss our fiscal 2011 first quarter results.

Presenting on the call today are Alan Bennett, President and CEO, and Jeff Brown, our Controller and Interim Chief Financial Officer.

Other members of our senior management team will also be available during the Q&A session.

I'd like to remind everyone that today's remarks will include forward-looking statements, as defined under the Securities Exchange Act of 1934.

Such statements are those relating to matters that are not historical facts, and such statements are based on current information, and management's expectation as of this date, and are not guarantees of future performance.

Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict, and as a result, actual outcomes and results could differ materially.

Please see the risk factors included in our most recent periodic reports and other filings with the Securities and Exchange Commission.

H&R Block undertakes no obligation to publicly update such risk factors or forward-looking statements.

After our prepared remarks, we will open the call up to Q&A.

We ask that you limit your query to one initial question, and then one related follow-up, if needed.

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

Thank you, Derek.

And thanks to all of you who have joined us on the call today.

Earlier today, we reported our first quarter net loss from continuing operations improved to $0.36 per share prior to a $0.04 per share charge for severance costs related to our recent restructuring.

These results were generally in line with our expectations, but they don't tell too much, given the seasonality of our businesses, and the fact that we make almost all of our earnings during the last four months of the fiscal year.

However, our results do reflect some progress in reducing embedded costs from our Company, and I believe with the right people in place we can accomplish much more in the future.

Jeff will go through the details of our quarterly results later on the call.

One area that appears to be causing concerns in the market is the issue of contingent loan repurchase obligations arising out of our former mortgage business, an area where we are receiving several questions from investors, and that seems to be subject to some speculation that is not based on fact.

Before Jeff provides that detail, I would just note that we made no change to our aggregate reserve this quarter.

Recent market speculation regarding potential losses does not relate back to any facts that we have observed.

We have not seen any adverse change in our level of claim payments.

In fact, since we established a reserve of $243 million in the Spring of 2008, we have not added to our aggregate reserves.

Of course, it is always difficult to prove the absence of a negative, and ultimately time will resolve this issue.

The bottom line is that we believe our financial reserves here are adequate.

Now, I would like to make a few opening comments regarding H&R Block in terms of our overall positioning.

As most of you know, I served as interim CEO in 2007 and 2008.

My prior role here was primarily to reposition the Company by shedding our subprime mortgage origination and servicing business, as well as our brokerage operations.

Both of these businesses were losing money, were heavy users of cash, and were non-core to our primary business of taxes.

With the sale of these operations, we were also able to reduce our overall debt, and restore our balance sheet to very healthy levels.

Since that time, I have served on the Board of Directors, so I have a good understanding of our current situation, and the work that's needed to change the trajectory of our recent client losses.

I chose to return as President and CEO in this permanent role because I believe in the future of this Company, our clients, and our associates.

We have a very strong balance sheet, and consistently generate significant free cash flow.

We are fortunate to have one of the highest brand awareness scores in the world, and our biggest asset continues to be our more than 100,000 highly trained tax preparers, who collectively reflect the highest quality standards of expertise and professionalism.

I am optimistic about our Company, and our prospects for increasing revenue and earnings in the future.

In July and August, I have spent a significant amount of time in the field with our franchisees and our field associates.

I have had the opportunity to reacquaint myself with many of our talented, experienced leaders, as well as meet some of our new recruits.

And I am pleased, but not satisfied, with the progress we are making in preparation for the upcoming tax season, as we have much more to do to be fully ready.

Since our June earnings call, and my arrival in July, there have been several new and impactful developments on the regulatory front.

Let me update on you these recent developments.

As most of you know, last month the IRS announced it will no longer provide the debt indicator to tax preparation firms and financial institutions.

We are very concerned about this decision because the debt indicator is an important underwriting tool that lenders use to determine whether there are any liens against a taxpayer's refund.

By eliminating this tool, lenders will be hampered in determining appropriate credit worthiness, causing lower approval rates, higher credit risk, and higher costs for our most vulnerable taxpayers.

In addition, the IRS does not provide direct realtime access to the debt indicator for taxpayers, but we hope they will move quickly towards creating realtime 24/7 access for taxpayers to their own financial information.

We believe that every American should have the right to access the information regarding their IRS credit status 24/7.

This isn't a privilege in our view, but a right of citizens to their own information.

This move by the IRS will not eliminate client's demand for financial products, but most all of the eight million consumers with financial products in tax season 2010 will only learn of the IRS decision when they visit our offices this tax season.

And learn they cannot qualify for credit, as they have in the past, or their amounts of credit are less, and in any case likely more costly.

In many cases, consumers may opt for other, less optimal financial products.

The IRS actions with regard to the debt indicator will not prevent H&R Block from offering financial products to serve the needs of our clients.

While the structure and cost of the products may change, we believe the decision on whether to use a financial product, and if so, what type, should be a choice for our clients to make.

As previously announced, we estimate that this decision will reduce our fiscal 2011 earnings per share by about $0.05.

At a high level, this is principally due to a product shift, and assumes no change in client volumes or potential share gains or losses from or to competitors.

In addition, the IRS has enacted new requirements and regulation for most paid tax preparers, starting with a registration requirement for this tax season.

We believe this change is good for both the industry and taxpayers, as it will lead to more accurate tax returns.

While the benefits from this new regulation will likely not come until fiscal 2012 and beyond, when many of these new requirements will be fully implemented and enforced, H&R Block's tax preparers have historically met or exceeded these requirements for years.

We are strongly urging the IRS to enforce these new requirements immediately, so that the benefits will justify tax preparer's costs in year one.

Over time, we believe we have a substantial opportunity to attract even more independent tax preparers to the H&R Block family, particularly those who may be looking for strong training and infrastructure support to meet these new requirements, or those who are worried about settlement product availability.

Our pipeline of qualified franchisees continues to grow as a result of these issues, and we have stepped up our franchising efforts to supplement our new client growth initiatives.

We also continue to sell certain tax offices that we believe can be better operated by franchisees.

During the first quarter, we sold 127 offices, and we expect to sell approximately 150 additional offices before the tax season begins.

Gains on the sale of these offices have been deferred, and will most likely be realized in the fourth quarter.

And the rationale for this activity is not around profits today, but rather around location considerations, and long-term growth optimization.

Turning to the market environment, we know this year will be another challenging year for the tax preparation industry.

Unemployment continues to be extremely high in general, and disproportionately high in our early season core client base.

Our internal plan assumes a slight decline in IRS filings this year, given the sustained high level of unemployment.

For us to be successful, we must attract new clients by improving our execution against a few impactful initiatives, which leverage our strength.

Over the past two tax seasons, we have experienced a loss of approximately two million retail tax clients.

Nearly two-thirds of our client losses have occurred during the early season in January and February, primarily among lower income clients who tend also to take a financial settlement product.

While aggregate tax revenues and earnings growth are more important for the long run than the raw number of clients, it is clear that this level of client loss over a short two-year period is unacceptable, and needs to be addressed now.

And given our client retention to the brand is in the 70% range, this means we must be successful in attracting significant numbers of new clients to H&R Block just to stay even.

So we intend to fight hard to stem the client loss, and to rebuild client counts across the income spectrum to provide a better platform for long-term revenue and profit growth.

As we prepare for the upcoming tax season, on the retail side of the business we're placing an emphasis on the following.

Driving further improvements in our office readiness and client service initiatives, marketing our settlement products using more focused and compelling marketing to drive increased traffic in our retail offices and improve our value proposition, aligning incentives to focus on client count and profitability, and increasing the number of clients who utilize the Emerald Prepaid debit card.

As you may recall, a key component of our tax season 2010 plan was to focus on office readiness.

Our goal was to significantly improve the client service experience, and the overall environment in our offices.

For tax season 2011, we will build on our front desk coverage investment from last year, by having more associates who are better qualified, and with coverage hours more aligned to key office activities.

In 2010, this investment improved our walkout rate by one-third, and we think we can improve on that again this year.

We also upgraded the look and feel of many of our offices, and launched a flagship office in New York.

While we don't believe office decoration is as important as the quality of advice clients receive from their tax professional, we will continue to upgrade selective offices as we move toward this tax season.

Additionally, we worked last year to move 800,000 clients to our stronger tax professionals, those that retained clients at higher rates.

By better matching client needs with tax professional skill sets, we expect to see, and in fact did see, increases in client satisfaction.

Here again, we believe we can improve our initial steps in this area.

Together, these initiatives led to a 130 basis point increase in client retention to the brand, which is encouraging given that this metric steadily declined for a number of years.

We expect increased client satisfaction to translate into further retention and referral gains in 2011.

In the settlement product space, we did not capitalize on the opportunity that was created last year when some of our competitors' funding was limited.

Simply put, we were late in getting our message out last year, and we didn't direct enough of our marketing resources to take advantage of this opportunity.

Given the elimination of the debt indicator, we anticipate continued disruption in the settlement market space, as well as confusion with consumers.

We are working hard to improve our performance in this critical piece of our business, and we believe this area may present an opportunity for us to recapture some market share in the first half of this tax season.

It is also becoming clear that our Emerald Prepaid debit card program is an increasingly valuable asset.

Our Emerald program had approximately 2.5 million users last year, and over $8 billion in annual deposits.

Currently the card is being used by less than 20% of our retail tax clients, primarily as an inexpensive way to facilitate tax refunds.

However, the Emerald card gives clients who do not have a traditional bank account an opportunity to handle their personal financial transfers, and basic banking needs.

We believe we have opportunities to expand the card's usage, and related revenues.

Market valuations for companies that compete in this space are generally at market multiples far exceeding that of H&R Block's, which makes our program even more interesting.

We will be putting more effort into expanding our Emerald card program in the future, as a business in its own right, and we will begin providing more visibility into this program in next year's volume releases, so that you will be able to track our progress.

Another key area that I am focusing on is leveraging our strong brand with more focused and compelling marketing, to drive increased traffic into our retail locations, and improve our value proposition.

Frankly, last year's message was not compelling enough, and we did not execute well in any case.

So, this is an area where we need to make significant improvement.

What you will see this tax season, within both our retail and digital channels, are clear messages, and reasons why taxpayers should choose H&R Block for their tax preparation needs.

While our marketing plan is nearly complete, including our pricing strategy, we will refrain from going into further details of those plans for competitive reasons.

But I am very encouraged by our direction and our progress.

I am also focused on ensuring that we have complete alignment of responsibility, accountability, measurement, and reward throughout our workforce.

I recently aligned our field incentives to focus on client counts for our leadership closest to the office, and closest to the client, as this is the metric they can most influence.

For P&L owners, incentives are more balanced between profits, and client count.

To achieve long-term profitable growth, we must also improve our performance within the digital category, and we regard this as a strategic imperative for 2011.

Last season, our marketing efforts led to a 25% increase in our website visits, but our capture or conversion rate declined, which led to only 4% growth in our online clients.

Our research shows that our website was overly complicated, and difficult to navigate, and was the primary obstacle in converting visitors to customers.

We committed to upgrade, and make our website more clear and customer friendly, and we are well along in that effort.

We believe our new design will facilitate client navigation, and improve our conversion rates this tax season.

Within the digital category, the heavy promotion of Free has resonated particularly well over the last two tax seasons, given the difficult economic environment.

Last year, 55% of our online paid clients started their return in the Free product, and Free drove 49% of new online clients.

We will be using this Free message more aggressively in the upcoming season to drive new clients.

And consistent with my operating philosophy, we will run our digital business as a separate business unit with full P&L responsibility this tax season.

This segment is important, and we need the proper alignment again of people, targets, accountability, resources, and measurement to compete and succeed.

In RSM McGladrey, our revenues declined last year due to the combination of weak economic conditions that impacted the accounting and consulting industry, as well as the one-time impacts of the restructuring of our strategic relationship with McGladrey and Pullen.

In particular, with our renewed relationship with M&P, we expect RSM to get back both top and bottom line growth in fiscal 2011.

In July, RSM McGladrey acquired the Boston-based accounting firm Caturano and Company.

This acquisition is expected to add $30 million to our fiscal 2011 revenues, and to be neither accretive nor dilutive to earnings in the first year.

Caturano and Company is a very well respected player in the Boston market with significant market share.

This acquisition will complement RSM McGladrey's national footprint with good market depth in the northeast.

Longer term, we believe there will be other opportunities to increase our market share in targeted markets through acquisition and/or internal growth.

With that, I'd like to turn the call over to Jeff to discuss our first quarter results.

Thanks, Alan.

As mentioned, our first quarter adjusted net loss from continuing operations of $0.36 per share was a $0.03 improvement to the prior year.

After severance charges, our net loss in continuing operations was $0.40 per share.

Our consolidated net loss was $131 million, approximately $3 million better than the prior year, and revenues were essentially flat at $275 million.

In our tax services segment, revenues grew by more than 4% to $92 million, primarily due to an increase in off-season tax return volume, some of which was driven by an extended filing season in several New England states, as well as higher royalties driven by our expanding franchisee network.

Our pretax loss for the segment of nearly $175 million, was slightly unfavorable to the prior year.

Absent a $19 million severance charge, total expenses fell by nearly $13 million, or approximately 5%.

These savings were achieved primarily through the closing of certain underperforming retail tax office locations, and staff reductions during the first quarter.

In business services, RSM McGladrey's revenues fell 1.6% to $175 million.

The segment recorded a pretax loss of $400,000, compared to pretax income of $1.3 million a year ago.

In corporate, our pretax loss improved to $32 million compared to a loss of $40 million in the prior period.

Lower losses were due to reduced loss provisions on mortgage loans held for investment, as well as gains on residual interest assets.

As you know, we hold a static pool of mortgage loans on balance sheet at our bank.

Our principle balance of mortgage loans continues to decrease, and it decreased by approximately $32 million during the quarter to $563 million at quarter-end.

Net loans at quarter-end included $320 million previously originated by our discontinued mortgage business.

We continue to see delinquency and loss severity rates level off, and our quarterly loan loss provision of $8 million was down approximately $6 million compared to the prior year.

Our allowance for loan loss was $88 million or 13.7% of outstanding principle at July 31, compared to $92 million or 11.6% a year ago.

As Alan mentioned, we have received a number of questions recently regarding loan repurchase obligations of our former mortgage business.

As a result, we wanted to provide some additional details on this matter.

This business originated its last mortgage loan in January of 2008, and sold its servicing operations in April of 2008, establishing a loan repurchase reserve of $243 million at that time.

At this quarter-end, $188 million of that repurchase reserve remains.

At the time we exited the mortgage servicing business, the outstanding principle balance of previously originated mortgage loans was around $50 billion.

That portfolio has declined roughly 34% since that time to a balance of $33 billion at June 30, 2010, due to pay offs, principle payments, and liquidations.

Of the $33 billion, $15 billion represents mortgages originated prior to 2006, with the balance representing loans originated in 2006 and 2007.

We believe the likelihood of a repurchase claim declines as loans become more seasoned.

Approximately two-thirds of the outstanding portfolio, or $22 billion, represent loans which were sold to third parties through whole loan trades.

The remaining $11 billion of the portfolio relates to securitized mortgages rather than whole loan sales.

Unlike many of our -- many of the largest mortgage lenders, we had only minimal direct loan sales to GSEs, approximately $500 million in the aggregate, or only roughly 1% of the total portfolio.

Since April 2008, the date of our exit from that business, cumulative repurchase claims received have totaled $686 million in unpaid principle balance.

After completing a loan by loan review of claims, totaling $557 million, we have incurred losses aggregating approximately $55 million over that time.

Claims currently under review at July 31 total approximately $136 million in unpaid principle balance.

This claim activity, and the associated losses, remains within our reserved expectations, and we continue to review related reserves as adequate.

Turning now to our financial position, we ended the quarter with $1.1 billion of cash, and $1.1 billion of debt.

Stockholder's equity at quarter-end was just over $1 billion dollars.

During the quarter, we repurchased and retired 15.5 million shares at a cost of $236 million, and ended the quarter with 308.5 million shares outstanding.

We now have approximately $1.4 billion of remaining share repurchase authorization, and remain committed to returning substantially all of our net income to shareholders, through either dividends or share repurchases.

Our effective tax rate for continuing operations during the first quarter was 38.4%, and we continue to expect our full year tax rate will approximate 39%.

Within all of our businesses, focused cost discipline remains an important part of our ongoing business objectives.

Cost discipline benefits our clients, and allows us the flexibility to invest strategically where we see opportunity.

We are on track to achieve targeted cost savings of $100 million to $150 million by the end of our 2012 fiscal year.

And significant steps toward that target were achieved in this quarter through our previously announced reductions in staff, and office footprint.

Excluding severance costs, our consolidated operating expenses for the quarter declined by about $26 million.

These savings are a result of both our cost reduction efforts, as well as declining loss provisions for our mortgage loan portfolio.

Given our client growth focus this year, we expect to reinvest a significant portion of the current year savings into key growth initiatives.

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

Thanks, Jeff.

I'd also like to thank Jeff for the great work he's doing as our Interim Chief Financial Officer.

Jeff has been with H&R Block since 2002, and he understands the business very well, so we're in good hands.

Jim Ash is currently serving as Interim General Counsel, and I've had a lot of experience working with Jim when I was interim CEO, and I'm very pleased with his contributions as well.

I would like to address some of my organizational decisions.

This week, I selected Phil Mazzini to be our President of Retail Tax.

Phil has a strong background in senior executive positions, both domestically and internationally in P&L roles.

For the past six years he has been with H&R Block as a Managing Director, Senior Vice President of Operations, and President of our Eastern US area.

I spent a significant amount of time with him over the past two months, and I know that he shares my operating philosophy of placing more direct accountability with talented individuals, but accompanied by more direct and less shared resources in a full P&L setting to drive balance results.

As a Company, we have migrated too far away from this model, and towards less direct accountability and responsibility.

This will change.

I'm also extremely pleased with the recent additions of Bill Cobb and Bruce Rohde to our Board of Directors.

Bill has a proven record of creating shareholder value in the digital arena, as demonstrated by his eight year performance at eBay, and Bruce is a highly talented former CEO of ConAgra Foods.

Both Bill and Bruce have many years of high level executive experience with major companies.

I expect that each of them will make an immediate contribution to the Company, and be very helpful resources for me as we step up the intensity of our focus on revenue and profit growth.

In closing, today's difficult economic environment has presented challenges for the entire industry, and the IRS decision to eliminate the debt indicator will also create its challenges.

But I am optimistic about our position.

Our size and financial strength, combined with our talented people in a continued cost conscious culture, will allow us to sustain the industry headwinds, make the right strategic choices to balance both short and long-term profitable growth, and return free cash flow to shareholders in the form of dividends and share count reduction.

At the end of the day, our performance will largely hinge on how well we execute.

We have incredible talent in our tax offices, and in the organizations that support them.

I'm confident that this great Company will emerge stronger than ever in the years ahead.

With that, I'd like to open the call to questions.

(Operator Instructions) And our first question will come from Scott Schneeberger.

Thanks.

Good evening.

I guess I'd like to start out asking it looks like the loan loss reserve in the Option One legacy business was little changed in the current quarter, as you just mentioned.

I think not changed at all.

Could you just speak to this current quarter and why so small?

And then secondly, you're not seeing it yet, but if you were to see an increase in putbacks, what would it take or what would you need to see to trigger an increase in your reserve or some other action on your part?

And what might that be?

Thank you.

So, Scott, this is Jeff.

As you pointed out, we had no increase in our reserve during the quarter.

And really just to re-emphasize the point that Alan made in his opening remarks, we've really not increased that reserve in the 27-month period since we exited the business.

So, I think that's just an important point to note.

And really the activity that we have had since we have exited the business is a decline of $55 million from an initial reserve of $243 million to current reserve of $188 million, and that's really just been a reflection of claims that we've received and reviewed and concluded that we've had some obligation under our breached representation or warranty to pay a loss.

It's difficult sometimes because claims don't tend to come in on any kind of a normal trend line.

They tend to be lumpy, if you will, and so, from quarter to quarter I think it's difficult to look at activity and draw any conclusions from that.

I think I would tell you that of the $55 million of loss payments we made during that period, about two-thirds of it was in the first half of that period and a third in the second half of the period.

So, we've seen some level of decline in claim activity, but I don't know that that's necessarily going to be indicative of the future.

But we certainly feel, I think as you and I have discussed before that time tends to be our ally.

As far as predicting what might cause a change in the future, that's obviously a difficult thing for us to do.

It would be based on a variety of factors that are just difficult for me to really predict at this point.

Our next question will come from Michael Millman.

Thank you.

Sorry to maybe follow up and maybe a fine point on it.

What we were hearing was that in this current quarter there was a pickup in mortgages put to you, maybe if you can discuss that a bit?

Also, is there any circle or fence around your ultimate potential liability from mortgages?

Did you receive the information request -- subpoena from FHFA is what they've put out?

And is there any way to put this all behind you by re-insuring your risk?

So, Mike, make sure I keep on track.

I think there were four questions embedded in there.

So, make sure I don't miss any.

I think you started by referencing to a significant increase in claim activity during the quarter, and I'm not sure where you see that.

So, we discussed that since we've exited the business, we've had again over that a little over a two-year period we've had total claims of about $700 million in principle balance, and really have not seen anything this quarter or in recent quarters that would indicate to us that it was unusual activity or an increasing trend line.

So, you might have to clarify for me what you're looking at, but I would just tell you we haven't really seen any activity in this quarter that's unusual.

Basically, word on the street and the big increase in your CDS?

Yes, I really can't comment as to speculation on the street.

I can really only tell you the factual claims that we see.

And then as to how we can -- I think you had two related questions around how we can limit the liability in any way or is it -- is there a potential that we can cut it off through re-insuring it?

On the reinsurance side of it, it is not something we've explored in detail, although my speculation would be that there might not be many parties who would be interested in the liability or that the price involved to us might not necessarily be attractive.

But I can't tell you that we've really explored that in a detailed way.

Then I think Jim Ash, if you're on the line and able to take or respond to Mike's other question, I'll let you provide input on the question around the subpoena.

Yes.

Thanks.

The group at Sand Canyon gets requests for information in formal ways and informal ways all the time, and we can't comment on any particular kind of request or claim that we might get.

All the information that we have is used in the analysis of the repurchase reserve.

We continue to believe that is adequate.

We continue to cooperate with third parties whenever they request information about the loans that Sand Canyon originated and sold.

If you'd received a subpoena, would you have to report it?

We report all material elements of claims and litigation in our filings and you would look for the answer there.

Thank you.

I have a housekeeping question on your share repurchase.

You say $235 million of share repurchase, but you show $164 million in the cash flow statement.

And maybe you can talk about what you bought in August considering what's happened to the price?

Yes.

So I might have to take offline, Mike, the cash flow question.

Our total repurchases for the quarter were 15.5 million shares.

Those share repurchases were really all conducted in the latter part of July.

We did have some balance right at the very end of July where the share repurchase traded at not cash close, so we had some cash transaction that carried over into August.

But it was 15.5 million shares really all in the end of July at a total cost of $236 million.

Can you say what you purchased in August?

Yes.

It's really just that first quarter share repurchase of 15.5 million.

We really entered a quiet period, Mike, given that it was a quarter end.

Terrific.

I will get back in line.

Thank you very much.

Our next question will come from Bill Carcache.

Good evening.

I have a couple of follow-up questions here relating to the putback issue.

The question that was just asked about whether you've received a subpoena, if you did, whether you would have to report it?

And the answer was that you report everything material and we'd have to look for, it sounded like a public filing.

So, to clarify the answer to that question, so, if you had received a subpoena, and essentially the outcome of the subpoena was uncertain, but you simply -- there were people -- there were questions that needed to be answered, is that something that you would need to disclose?

And then related to that, there was, earlier in the year, actually was earlier I believe around the July timeframe that there were 64 subpoenas regarding private label mortgage-backed securities that were issued by FHFA as conservator for Fannie and Freddie, can you let us know whether you were a recipient of one of those 64 subpoenas?

This is Jim Ash again.

I think that was actually the subpoena that was referred to earlier, so that was the response that I gave.

We really can't speculate as to what some future event or communication would be in terms of its materiality.

What we can say is, in the event we receive information or a request for information and we believe that, that is material, we will disclose it on the appropriate current basis.

Sitting here today not knowing exactly what we might get in the future, can't make a judgment about its materiality or the legal issue as to whether it would require a disclosure.

Right.

But from some of the comments made earlier, it sounded like the incremental disclosures that you provided tonight was that was it at June 30, $33 billion of outstanding principle balance that -- of that corresponds with the $188 million repurchase reserve, is that right?

Yes.

What we're trying to frame for you is the total portfolio of unpaid principle balance that's outstanding, that would have some level of representation and warranty attached to it.

Now, that obviously can change from transaction to transaction as to the nature of representations and warranties, but it's really trying to give you a sense of the total amount of unpaid principle balance.

Right.

And that's extremely helpful and down from -- it was $50 billion before, so down to $33 billion now.

That's extremely helpful to know.

But why I think the question about the subpoena is extremely important and I don't feel like we've gotten an answer to it yet, is because it basically tells us that somebody's sniffing around and asking questions, and that could be something that kick starts or gives rise to this putback issue that we haven't really seen pick up yet.

And so to the extent whether you could clearly answer whether you received a subpoena, it would be very helpful to us.

I think that we will take that under advisement.

We appreciate that.

Okay.

Thank you very much.

Our next question will come from Vance Edelson.

Hi.

Thanks, this is [Vickram] in for Vance.

Just a quick clarification, sorry to harp on this issue, but you mentioned that you'd received 700 million in claims so far.

And if I'm correct, actual cash payments toward those claims are about $118 million, also $140 million over the last three years.

Does that sound correct?

The 700 million is correct.

That's the total gross principle balance of claims that we've received during that period.

And the payments made to third parties over the last few years are roughly 141?

No.

Over that entire period, just a little over two years now since we exited the business, we've incurred losses and it would generally be either in the form of an indemnification payment to a third party, a cash payment, or in some cases, we might repurchase a loan.

And in that case, our loss would be the difference between the principle balance and the liquidated collateral value, and that amount is $55 million in losses.

And it's really what the difference between the initial reserve we had of $243 million and the quarter end reserve of $188 million.

So, I just wanted to be clear.

I think at the end of the year you present a slide which shows the repurchases, the reps and warranty repurchases every year and in FY '08 it was 82, in FY '09, 44, in FY '10 it was 15.

Yes.

Isn't that -- those are related to -- those are payments made for to third parties?

Those are cash payment.

And then the only following onto the statement that I just made, that would include loss payments in the form of an indemnification payment to a third party or it might include a payment to repurchase a loan.

Okay.

And in the case of the latter, that would not necessarily represent our loss.

Right.

Right.

No.

I understand the loss.

I'm just talking about the actual cash payment, whether it is an indemnification for the loss or a repurchase for the loan.

Yes.

Okay.

And just a quick follow-up, so I understand the $33 billion is a current balance and obviously, you said some of it, if there's any claim it could relate to either repurchase of the loan or indemnification for loss.

Is there some -- could you give us a little more break out in terms of the payments made so far?

Roughly what have just been for losses, was actually repurchase of loans?

I probably don't have that in front of me.

It's perhaps data that I could find and provide offline.

Okay.

Okay.

Sure.

And just one last follow-up to that.

You said so far as a remaining review there are about $136 million in claims, right.

Yes.

And so, I'm assuming the balance has been either dealt with in the form of a payment or you've decided that there's no merit to it.

That's correct, and of course the $136 million might represent 700 or 800 loans.

Sure.

And when we review a claim, it's on a loan by loan basis.

So, at any quarter end, the amount might vary.

But we would generally have some amount at any quarter end that's still under review just because of the time involved in reviewing a claim.

Okay.

And just lastly, would you know year-over-year or quarter-over-quarter roughly how the claims have increased?

Is it low single digits, is it high, how have they trended?

I'd probably default to the comment I made earlier.

I think on a quarter-to-quarter basis it is not a good trend line to look at.

I'm not even certain that we can look at the last two plus years as a relevant trend line.

But I would tell you that over that two plus years, it was about $700 million of claims, about two-thirds of that happened in the first half of that period and a third has happened in the second half.

Our next question will come from Scott Schneeberger

Thanks.

I will change it up for a moment, but probably come back to this subject.

Alan, getting you involved here.

What do you think timing with regard to bringing on a permanent CFO, a permanent Chief Legal, and then I see that Phil Mazzini running retail.

Would there be someone heading digital?

Just a lot of top executive decisions.

Specifically concerned about the timing on that.

Okay.

Here's how I think of that, Scott.

I think it's a great question.

I am addressing these I think in the order of need to the organization.

And I'm trying to -- I've been here two months.

I'm trying to put my fingerprints on these.

I need specific people that have my operating philosophy and will support the Company in the way I want.

So, as I look at that, the most important position for me is the one closest to the customers, the one that will help me drive operations through the organization.

So clearly Phil was the one that was the most, I'd say groundbreaking more and important for me.

And that was, as you know, just done this week, and I couldn't be happier with Phil.

Phil's got a terrific background for me.

He's had lots of P&L roles.

He has been a country manager where he was responsible for all P&L for an entire country.

He was a product manager under the old kind of GE methodology where he's responsible for the P&L and the marketing of the products he brings to market and the associated costs, and he's got great leadership skills.

That's a whole and maybe one of four names you mentioned.

But it's more than 25%, I think, of where I need to be.

The next two functions let me talk about together, and that's CFO and General Counsel.

In both circumstances, those are jobs that are certainly very important, but their roles right now that are, what I would say 100% covered with Jeff and with Jim Ash.

Both of those folks were with me last time I was here, and I've really have been blessed with great CFOs last time I was here and this.

Jeff in his interim role and Jim in his interim role are both fully-functioning.

I feel really under no rush to fill those spots, I'm being very methodical, and I'm not really going to provide a timeframe for that other than to say that there's nothing not being done right now in those areas.

The digital area is, I would say, my second most important area to fill.

It's an active search.

I think the most important thing I can say with respect to digital is in the digital space it's important to us.

We have grown, but not to the market empire years.

We've done lots of work with respect to product.

And we feel we've got parity there where we didn't before.

We've got lots of strategic assets in that area that we think we can use to win.

But the most important thing is that we're going to run that business as a separate business unit.

And what all that thing connotates, it's not going to be off sides of people's desks.

We're going to move it within this building to a separate part of the building.

It'll be run with all of the resources and all of the P&L under one management, and that will give us opportunities to get a lot more costs out, be quicker to market, more direct marketing, et cetera, et cetera.

Specifically, to the head, we are active in a search.

I would expect that in the very near term we'll have something to say about that.

All right.

Thanks.

If I could follow up with just a couple other questions.

Hopping back to the loans, and I'll ask them quick and step aside.

On the outstanding, I think the $33 billion, could you please speak to -- with as much granularity as possible, who is holding those loans currently?

And then as a follow-up to that, of you mentioned, and I forget what it was right now, the $136 million just talked about, that's what you see as principle balance in the pipeline right now of claims.

Is there any delay between I guess Wilbur Ross holds the servicing portfolio, do they receive these rep and warrants and then is there a delay coming to you?

If you could just speak to the process of timing of how these come through, how long it takes to make the decision and then what -- just is it one quarter, two quarters, if you can give us granularity on that, too?

Thanks very much.

Scott, I'm not going to be able to offer lots of granularity I don't think to the first question.

Of the $33 billion, as we mentioned, two-thirds of that or $22 billion were loans that we transferred through whole loan sale trades.

The balance would be loans that our former mortgage business transferred through securitizations, and that's really the granularity that I'd be able to provide to you.

As to the second question and this will be a little bit redundant with what I said before, but the $134 million of claims we wouldn't view as unusual.

We will have some balance of claims that are still in process and under review at each quarter end.

By contract, we when we receive a claim from a third party, we, by contract, generally have a fixed amount of time that we are allotted to review the claim and respond either deny or accept the claim and make a payment.

I'm just going to give you a range off the top of my head.

But I think that's generally like a 90 to 120 day contract period that we're obligated to follow.

So the claims aren't around forever, but they'll generally be around for 90 or 120 day period.

(Operator Instructions) Our next question will come from Michael Millman.

Thank you.

To keep beating this not dead horse yet, could cause a claim -- you've denied a claim, does that mean it's dead?

Or could it come back?

And could some of that other $100 billion of mortgages that have gone, could they resurrect foreclosures (inaudible)?

And sort of related, can you talk about any of the suits that are around from AG's regarding predatory lending?

(inaudible)

So, Jim, I am going to let you take the predatory lending in a second.

Mike, I would say could -- so I think your first question was if a claim is brought to us, we've reviewed it, denied it as not a valid claim, could it come back to us?

Certainly, I think that's a possibility that not anything that we would control, but certainly a third party could reassert a claim that we had previously denied.

I think the important thing that I would point out is that our obligation is only as it relates to valid breaches of representations and warranties.

The burden of proof on whether there has been a breach is on the counter party.

And so, although a counter party could theoretically reassert a claim, they need to prove to us that there's a valid breach of rep or warranty.

As to your other question, I think that theoretically that's possible.

We think that declining principle balance in the portfolio is indicative of reduced risk.

We think time is our ally, but you're right, there certainly could be a loan that has been liquidated and wouldn't be reflected in that unpaid principle balance, but could still be subject to a claim of a third party.

Right.

This is Jim.

I'll take the state AG issue.

Sand Canyon has litigation with respect to the Massachusetts AG that's discussed in our filings, and that discussion is up to date and accurate.

If there are other material investigations or claims under way, they'd also be reflected in those filings.

Ladies and gentlemen, that is all the time that we have today for questions.

I will now turn the call back over to Mr.

Drysdale for closing remarks.

Thank you, everyone, for joining us today.

If you have any further follow-up calls, please give me a call in Investor Relations.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation.

You may now disconnect.