H & R Block Inc (HRB) 2012 Q2 法說會逐字稿

Good afternoon.

My name is Kristin and I will be your conference operator today.

At this time I would like to welcome everyone to the H&R Block second-quarter 2011 earnings 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) At this time I'd like to turn the call over to our host, Mr.

Derek Drysdale, Director of Investor Relations.

Please go ahead.

Thank you, Kristin.

Good afternoon, everyone and thank you for joining us today.

Bill Cobb, our President and CEO, and Jeff Brown, our CFO will review our second-quarter results.

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

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.

As a result our actual outcomes and results could differ materially.

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2011 and our other SEC filings.

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

With that I will now turn the call over to Bill.

Thanks, Derek.

Good afternoon, everyone.

Next tax season is quickly approaching and we believe we've developed the right strategy for continued market share growth in tax season 2012 and beyond.

Today's announcement by Intuit that it now needs live chat tax advisors to grow Turbo Tax validates our confidence in the assisted tax business.

We look forward to sharing our plans and outlook with you next Thursday at our investor conference in New York City.

We hope all of you can make it.

Today's call will be centered on our second-quarter results.

Earlier we announced a net loss from continuing operations of $0.41 per share.

As we shift our focus to growing clients and market share in our core tax business, we've taken significant steps to dispose of non-core assets such as RSM McGladry, and Express Tax.

While this has lead to one-time charges in each of the past two quarters, we're essentially clearing the decks for long term earnings growth and higher margins.

On an adjusted non-GAAP basis, our second-quarter net loss was essentially flat to last year and Jeff will provide more details on this later in the call.

In more recent developments, I am very pleased to announce that we closed on the sale of RSM yesterday.

Jeff will walk you through the details of the transaction but the key take away is that the final terms and conditions were consistent to those previously announced in August.

I'd like to wish our friends at McGladry the very best.

For 12 years they were our partners and worked by our sides.

I'm confident that these outstanding professionals will prosper in the years ahead.

Another exciting development this past quarter was our renewed partnership with Wal-Mart, the largest retailer in the country.

We will operate in approximately 300 offices this year and while this does not materially impact our fiscal 2012 results, we certainly hope to grow this partnership in the coming years.

Now before I turn the call over to Jeff, I'd like to take a moment to address Sand Canyon, our discontinued mortgage subsidiary.

Sand Canyon saw increased third party activity last quarter.

In light of this activity, I believe it was prudent of them to increase the reserve for estimated losses on rep and warrant related claims.

It's important to note that as a sub-prime originator, Sand Canyon's reps and warranties were more limited than would be typical of Alt-A or prime originations and because Sand Canyon is no longer in the business of originating or servicing loans, it is under no pressure to maintain any ongoing mortgage relationships.

This means Sand Canyon has and will continue to review each claim on a loan by loan basis, and will only pay valid claims.

I want to emphasize three main points.

First, the additional provision announced today does not change how we think about Sand Canyon's exposure to rep and warrant related claims.

This is a critical point I hope all of you hear.

Whether or not claim activity remains at elevated levels in the near future, we believe Sand Canyon's financial position is sufficient to satisfy all valid claims.

Second, Sand Canyon is a separate legal entity from H&R Block.

We believe our legal position is very strong in any potential corporate vail piercing arguments.

In other words, what happens at Sand Canyon stays at Sand Canyon.

We're confident that H&R Block's future will not be impacted by rep and warrant claims of Sand Canyon.

And finally, none of this activity changes how we think about capital allocation.

In fact I'm pleased that we're able to take advantage of the market volatility this past quarter to repurchase and retire more than 4% of outstanding shares at an average price of $13.61 per share.

I'll now turn the call over to Jeff.

As part of his remarks Jeff will spend a good deal of time discussing Sand Canyon.

We want you to be crystal clear on Sand Canyon's history, how we view them and how we're managing the situation.

So now let's turn the call over to Jeff.

Thanks, Bill.

Today, we announced a per share loss from continuing operations of $0.41 for the quarter.

This compares to a per share loss of $0.36 a year ago.

Our loss increased primarily due to charges in the current quarter and adjusting for those charges, our non-GAAP net loss from continuing operations of $115 million or $0.38 per share was essentially flat to our adjusted loss a year ago.

Primarily due to results from our Australian tax operations, revenues in our tax services segment grew 9% for the quarter to $121 million.

The segment incurred an off-season pre-tax loss of $174 million compared to a loss of $154 million a year ago.

Losses increased primarily due to a charge of approximately $9 million in connection with the decision to discontinue Express Tax and an $8 million increase in litigation costs.

Turning to discontinued operations, reported results now reflect both Sand Canyon and RSM McGladrey.

Let me start by reviewing the details of yesterday's closing on the sale of RSM.

We will receive total proceeds of approximately $575 million.

That includes closing cash proceeds of $487 million, a note in the principal amount of $54 million, and approximately $34 million of cash which we expect to receive by calendar year-end.

M&P also assumed substantially all liabilities of the RSM business, including contingent payments and lease obligations.

As Bill mentioned, the final terms and conditions are consistent with those previously announced in August.

Differences from the previously announced purchase price of $610 million are the result of cash of approximately $35 million transferred by RSM to H&R Block prior to closing.

In addition, the sale will trigger account distributions of approximately $80 million to RSM employees who were participants in an H&R Block sponsored deferred compensation plan.

Now let me touch on second-quarter results and discontinued operations.

We reported a net loss of $19 million compared with net income of $2 million a year ago.

Current quarter results include a $20 million pre-tax charge at Sand Canyon related to its reserve increase for estimated losses on contingent loan repurchase obligations.

As Bill mentioned, we saw an increase in claim activity at Sand Canyon this quarter.

Before I discuss the details about that claim activity and the related reserve increase, let me take a moment to review some historical context about the reps and warrants Sand Canyon provided in connection with loans it originated.

As a reminder, Sand Canyon did not guarantee loan performance or underlying credit losses.

Rather, its loan related obligations pertain to valid claims for breaches of reps and warranties, typically an alleged failure to adhere to its stated underwriting guidelines.

Asserted claims are reviewed by Sand Canyon on a loan by loan basis, including a file by file review of loan origination documents.

Invalid claims are rejected and claims Sand Canyon determines to be valid are satisfied.

Because its underwriting standards were routinely adhered to and because it has completely exited the business, Sand Canyon has not been motivated to grant policy adjustments or to seek negotiated settlements.

Resolution of claims through a loan by loan review process have served Sand Canyon well and is the approach it expects to continue.

As a true sub-prime originator, Sand Canyon's underwriting guidelines were typically broader than those of a prime originator.

For example, many of its originations were stated income loans that did not require the originator to take any action to validate income levels provided by the borrower.

In addition, it's important to remember that parties asserting claims must demonstrate causation.

In other words, Sand Canyon has no obligation unless there was an actual breach of a rep and warranty and that breach materially and adversely affected the interest of an investor.

Demonstrating claimed validity and causation of a material and adverse effect can be difficult.

Since May 2008, Sand Canyon has reviewed claims on approximately 4,000 loans in the aggregate principal amount of $772 million.

Of the claims it has reviewed, Sand Canyon has found about 85% to be invalid.

Over that period, total incurred losses on valid claims were about $70 million.

With that context, I'll now review second-quarter claim activity.

During the quarter, Sand Canyon completed a review of claims in the principal amount of $61 million and incurred losses on those claims totaled $3 million.

New claims for alleged breaches of reps and warranties in the principal amount of $483 million were received in the quarter.

The nature of those claims and the loans to which they relate including loan vintage, loan performance characteristics, and alleged breaches of representations and warranties is consistent with claims received in prior periods.

Second-quarter activity included claims asserted by private label securitization trustees on behalf of bondholders of approximately $385 million.

Additionally, claims totaling $85 million were asserted by monoline insurers and approximately $14 million of claims were the result of either rescission of mortgage insurance or asserted by other counterparties.

All new claims were from loans originated in calendar years 2006 and 2007.

Because Sand Canyon generally has up to 120 days to respond to claims, there are typically open claims at the end of any quarter for which review is pending.

Total claims under review at October 31 totaled $537 million.

Sand Canyon reserves for contingent losses it determines are estimable and probable to occur by assessing loan repurchase and indemnification obligations on both known claims and projections of future claims.

After assessing observed third party activity during the quarter, Sand Canyon recorded an increase to its reserve of $20 million and the reserve at October 31 now stands at $143 million.

At October 31, Sand Canyon had equity of approximately $287 million in addition to its reserve.

Were losses ever to exceed reserved amounts, those losses would be charged against the remaining equity of Sand Canyon.

We continue to believe Sand Canyon's financial position is sufficient to satisfy all valid claims.

I agree with Bill's earlier statement.

This recent activity does not change how we think about Sand Canyon's ultimate exposure to loss from rep and warrant related claims.

Approximately 90% of claims received to date have related to originations during the 2006 and 2007 calendar years, loans that were originated about five to six years ago.

We assume future claim activity will relate to loans originated during these two years.

We also believe that the longer a loan performs prior to default, the less likely the default resulted from a rep and warranty breach and instead was more likely a result of external factors.

Our historical claim data supports that belief.

Based on claim activity to date, we have observed that valid claims relate almost exclusively to loans that became delinquent within the first 24 months following origination.

Of the loans that Sand Canyon originated in calendar years 2006 and 2007, $9 billion became delinquent in the first 24 months.

However, just because a loan experiences an early default does not necessarily mean there is any breach of a rep and warranty.

Bondholders and other market participants understood and assumed the risk for credit losses of the securities they purchased backed by sub-prime loans originated by Sand Canyon.

We believe that a significant portion of the current level of losses in mortgage loans originated by Sand Canyon is the result of external factors and not necessarily a defect of the loan and origination.

These include unprecedented declines in home prices, historic high levels of unemployment and other macroeconomic factors.

Finally, let me provide a reminder about corporate separateness.

Since its acquisition by H&R Block in 1997, Sand Canyon has been and continues to be operated as a separate legal entity.

In addition Sand Canyon never paid any dividends to H&R Block.

While we won't speculate what might happen in the event of a lawsuit or Sand Canyon bankruptcy, there have been no cases to date in which an H&R Block entity was held liable for the acts of Sand Canyon.

We have no reason to believe that a court would disregard the legal separateness of Sand Canyon and H&R Block or the interests of H&R Block's shareholders and creditors.

With that, I'll turn the call over to Bill for closing remarks.

Thanks, Jeff.

I realize that was a lot of detail, but we believe it's important to demonstrate why we're very confident in H&R Block's legal position and why we believe Sand Canyon's exposure is well managed.

Now, as I look at our core business, we've shed underperforming non-core assets which negatively impacted our margins and took some of our focus away from what we do best, taxes.

Today, my team and I are squarely focused on growing share and you will see that at next week's investor conference.

I'm optimistic that we are well positioned to build upon last year's momentum and I'm confident that the strategy we'll share with you next week will drive sustainable long-term growth and proved shareholder returns.

With that, we'll move to questions.

As a reminder, we would like to limit questions today to matters pertaining to these quarterly results and save questions about long-term strategy, capital allocation, and the coming tax season for next week's investor conference.

Operator, we're now ready for questions.

(Operator Instructions) Scott Schneeberger, Oppenheimer.

I guess kind of broadly at a high level, Bill, the decision to do this earnings announcement a week earlier than the Investor Day, I get a sense now of everything we've heard but could you talk about that decision and go into depth of separateness of messages you want to send?

Thanks.

Sure, Scott.

I wanted to, we had the close of RSM, we had Sand Canyon, we had a lot of stuff going on here.

I want to focus next week on strategy and what -- we're not going to spend time on Sand Canyon next week.

We're not going to spend time on RSM.

You'll see we'll have five presenters; it will be myself, Robert Turtledove, Phil Mazzini, Jason Houseworth, and Jeff and we will go through how we view the business going forward, so really sorry to take up an extra hour of your time but we thought it was important to get these issues laid out and move forward on where we're headed in the long-term.

Okay, thanks.

A couple more on this release.

The decision to move $20 million as opposed to perhaps the remaining I think there's an incremental $287 million of equity balance in Sand Canyon, just could you give us a feel for the thought process on why not just the whole thing or why just this little amount here?

It's exactly what you think is going to be the estimateable probable losses at the time?

You may want to let Jeff take that.

Yes, Scott.

That's really what it is.

We of course are bound by accounting rules and by GAAP and this was a case of Sand Canyon looking at the activity that occurred this quarter, assessing losses that it believes are both probable and estimable and as a result of its analysis this quarter, it determined that a reserve increase of $20 million was appropriate.

Okay, thanks.

A clarification question, again just focusing on the quarter.

I think there's a lot that will come next week, but the $80 million distribution to RSM employees, could you explain to us how that will impact financials?

Thanks.

Yes.

So I don't have a lot of color beyond what's in the release.

There were a number of RSM employees who were participants in this particular plan.

The sale will trigger distribution of participant funds to those employees.

It will really be a reduction of cash on our balance sheet and a long-term liability.

Okay, thanks, and one more if I can just sneak it in.

You had increased revenue it sounds like it's predominantly from the international business but even ex out the two one-time items, fairly flattish on the profitability.

Anything interesting you're doing in the tax segment in this particular quarter?

Thanks.

I don't think so.

I mean Australia had a very good tax season.

We're very pleased with their results but I don't think, Jeff, there's anything of note.

No, I think Scott, outside of a strong season and Australia, the rest of the business is --we're in the middle of our off-season so really not much to report.

Okay, and I'm sorry one more to sneak in.

RSM, the litigation, were the litigation costs in the quarter just RSM or anything else worth noting?

Thanks, I'm done.

Beginning this quarter, Scott, RSM has reported in discontinued operations and so the charges that we referenced were all continuing operations charges in our tax segment.

Okay, any color or?

We had a $9 million charge on the decision to discontinue Express Tax and $8 million is just an increase in litigation reserves.

And that's pre-tax.

And those are both pre-tax.

Pre-tax.

And anymore color on the litigation reserves?

Nope.

Standard kinds of matters.

Standard kind of reserve increase.

And I think, Scott just I'd just add one more piece of color.

Part of what I'm trying to do this year is to go through a lot of these issues and we had some stuff to clean up and that's what we're trying to do.

Great.

Thanks for taking all these questions.

I appreciate it.

Michael Millman, Millman Research.

Thank you, several questions but on that last, so the litigation reserve set up for Tax Act litigation (inaudible).

Mike, we're having a little trouble hearing you.

I think you asked whether part of the litigation reserve had to do with Tax Act.

It actually had nothing to do with Tax Act.

Those costs for the appeal were borne by Tax Act, so that wasn't part of it at all.

I see.

Could you tell us what your share repurchase was?

Mike, if you have a headset on, we're having trouble.

You're cutting out.

Hello?

Thank you.

Is that better?

Much better.

You diagnosed the problem.

Could you tell us what your repurchases if any were during November?

I don't believe, it was actually there were none because I think we can answer this can't we because it was after the quarter and before we released so Mike we weren't actually able to purchase.

Once the quarter ends we're in a blackout window, so we were not able to do anything in November.

Okay, thank you for that.

You talked about Intuit, and I guess a couple things.

They indicate that or they claim that most of their growth is coming from what they call assisted or retail.

You've shown some statistics suggesting that the ratios haven't changed but part of your argument I understand for the Tax Act was in fact that the market was the same for assisted and for do-it-yourself.

Could you talk a little bit more about where you see the growth of online or digital coming from?

Well, you probably read this same article I did.

It says right here in the article, the company meaning Intuit said it can no longer count on generating growth from those who filed manually, so I think they believe that they have to go after the assisted business.

We'll talk about this in general and in very specific terms next week but it's not a claim.

It's a fact that 60% of the market for the last 10 years has been assisted and about 40% has been do-it-yourself and we don't see that changing.

Okay.

You talked about Wal-Mart.

In the past you've said that the Wal-Mart business was virtually profitless, or your lowest profit.

Why the renewed interest in Wal-Mart?

I can't speak to what was said in the past, Jeff.

I don't know if there was anything that you can reference.

I think what, I think Phil will spend some time talking about this next week but specific to Wal-Mart, I think once the exclusivity with Jackson Hewitt when Wal-Mart indicated to us that that was not their strategy going forward, we felt it was important to renew a relationship with the country's largest retailer, where it's more limited.

It is a client growth opportunity which is our number one priority and we're going to see how it goes over the next couple of years with Wal-Mart, so I can't comment on what was said in the past but I'm excited about the client growth opportunity that Wal-Mart presents.

Is Wal-Mart, it sounded like you used kiosks so are we talking about getting more involved in maybe virtual systems of tax preparation maybe using smartphones as well and also Susan Erlich was involved with building up K-Mart's in-store financial.

Is there any relationship here with that?

So with regard to virtual and the like, I think what we're going to see and I'll let Phil talk about this more next week, we're looking at a traditional what we do best which is assist people with tax preparation and as far as Susan goes, we're fortunate to have an executive of her caliber join our Company which she did last week.

She will be in New York next week and I look forward to great things from Susan.

Great.

Thank you.

Kartik Mehta, Northcoast Research.

A question on just the putbacks and Jeff I wanted to find out was this one specific party that had the $383 million or the largest portion of the putback, or was it a number of parties?

Kartik, for a variety of reasons, including just don't believe that it's very relevant, we generally don't disclose individual counterparties, so there were a few counterparties involved and we provided some breakout as to what portion of the claims came from bondholders, what portion of the claims came from monoline insurers and the like but I don't think we'll probably talk about any specific counterparties.

Were the counterparties, were these new counterparties, Jeff or were they counterparties that had putback mortgages in the past?

So there were a few counterparties involved, many of them were some of the same names that we had seen before, Kartik, not really any new counterparties to speak of.

And then Jeff, I understand the cash part of the balance sheet when RSM has been divested.

Is there anything on the liability side that's going to happen that could be significant that's going to impact it?

For RSM?

Yes, well now that RSM has been sold and divested I understand you'll get the cash and that you have an increase in cash but I'm wondering is there anything on the liability side that has changed much because of that?

Aside from the fact that the liabilities associated with that business come off of our balance sheet, really no changes.

And I think the agreement we struck was a very fair one.

We wanted to have a clean deal.

It was one of the critical elements I think both sides wanted, so essentially as of yesterday, those liabilities have now headed the way of M&P.

And Jeff, what's the impact to their corporate expense line now that RSM is gone?

Is there much, if any?

No, Kartik.

They really ran for the most part independently.

There was a little bit of support provided by H&R Block but not anything material.

And then just finally, Bill, H&R Block has offered free tax advice if you buy the premium product and I'm wondering, can you talk about what your experience has been with users using that particular service to get an idea of how successful you've been in advertising that and getting people to use that?

I'm going to defer until next week, Kartik.

I think Jason will talk about some of the marketing horsepower we have on that, so I'm going to kick that one to next week.

All right.

Well thank you very much.

I appreciate it.

Mike Turner, Compass Point.

Most of my questions have all been answered.

Just is there any slight change to your tax rate?

I know you'd forecasted around 39% and now with RSM gone it looks closer to 40%.

Is that sort of what we think about going forward?

Mike, the little bit of an uptick you've seen in our tax rate is mostly related to Company owned life insurance, not associated with RSM, and it's subject to gains and losses really based on market movements.

The gains and losses are not tax deductible and so in cases where we have losses, we won't have the ability to record a tax benefit which is what we've seen so far through the first six months and it can sometimes cause our tax rate to go up.

It's difficult to say whether that's a trend that we can expect through the whole year, that can fluctuate from quarter to quarter.

Okay, thanks, and also just back listening earlier, the litigation charge, is that, I don't know if you can say related to the wage an hour class action suit that I know in the K, you kind of at least gave a ballpark estimate of what the range of the potential losses could be.

Yes, it actually, the $8 million litigation charge relates to a couple of different cases and really, no significant amount associated with any individual case.

Okay, thanks.

That's all I had.

Sloan Bohlen, Goldman Sachs.

I apologize if Jeff touched on this in his prepared remarks but around the reserve increase on the rep and warranty at Sand Canyon, can you talk a little bit specifically about where that third party claim activity is coming from?

And then in the context of that question, can you maybe talk a little bit about how much visibility you have to that claim activity?

Sure.

Sloan, I did mention in my prepared remarks that of the total claims, $385 million of those claims came through securitization trustees on behalf of bondholders and $84 million were from monoline insurers and the remaining balance or about $15 million were the result of either MI rescissions or smaller claims from other counterparties.

So let me jump in here for a second, Jeff because Kartik asked and Sloan has now asked and obviously we're trying to be transparent here but let me go back to what I think is potentially the core issue.

As putback claims come in, this is about loan files.

This is about an individual loan and as we've said, the way we're approaching this, the way Sand Canyon is approaching this is it doesn't matter really who puts it back.

It's about the loan that was granted to person A at that particular time and whether or not principally Sand Canyon followed underwriting standards.

So I think that the characterization whether where the putback came from is while interesting is really not the core issue because the way we evaluate any putback is on a loan file by loan file basis and whether or not the disclosures that Sand Canyon made at the time were appropriately followed, and so that's principally what we're looking at and as Jeff mentioned in his remarks, we've got a fair amount of history on this and so while characterizing where I think that's appropriate for us to do that but again, it comes down to that $200,000 individual loan or mortgage that was given out and whether or not there's a valid claim from the counterparty.

Jeff, I don't know if you want to add anything to that?

Nope.

That's a very good point, Bill.

I'm glad you added it.

Very good.

Okay, and I guess I appreciate the color.

The real question wasn't about how the process or the finger pointing works but just whether there was anything incremental about whether the special servicers or whomever are getting their act together and whether you felt there was something that changed in the quarter with regard to the pace of the process.

I mean, the putbacks went up but if you look at what we reviewed in quarter the $61 million worth of putbacks, the loss that we, that Sand Canyon had to incur on that was $3 million so of what was reviewed, there's nothing that has changed.

Okay.

All right.

Thank you, guys.

Vishnu Lekraj, Morningstar.

Evening, guys.

Just back on Sand Canyon, I'm sorry to harp on this point but I want to understand exactly what we're dealing with here in terms of the number of outstanding loans.

I think last year, you mentioned there's about $27 billion left in the '06, '07 vintages, of those there's about $9.2 billion that defaulted within the first 24 months.

Are these claims from the 9.2 billion still?

The new claims, as we mentioned in the prepared remarks were all from the 2006 and 2007 vintages.

The $9 billion that you're referencing comes from those vintage years but it's really the balance that defaulted in the first 24 months.

Right.

So of the claims we received in the quarter, they were all from those vintage years, some of it would be part of the $9 billion because it would have been loans that defaulted in the first 24 months but some of it would have been loans that performed for a longer period of time.

So some of them were loans that were defaulted maybe after or hadn't defaulted or actually defaulted after the first 24 months?

Yes, and that's not unusual.

That's been consistent with the claim activity we've seen in the past and our experience with claims that involve loans that have performed for a period longer than 24 months is that the validity rate on those claims dropped sharply.

Right, so the rate on the claims that we are seeing now on these loans, are they deviating at all up or down from what you've seen in the past?

We wouldn't expect that to be the case but the vast majority of these loans hadn't been reviewed yet by Sand Canyon at the end of October and so we'll have a better understanding of validity rate once they've reviewed each of the individual loans but our expectation is, is that validity rates in the past will continue to be validity rates in the future.

So the new loans that are receiving claims today, you haven't necessarily reviewed them yet; correct?

That's correct, and I think in fact in my prepared remarks I mentioned that we had a little over $500 million of loans at the end of the quarter that were still pending review.

So the increase in the reserve is all just all encompass everything.

The increase in reserves is the increase in the number of claims you received, total dollar amount?

Yes, it's Sand Canyon's view about claim volume that caused it to record an increase in the reserve.

And making sure that the reserve is sufficient at this point in time really up until today I think in terms of accounting rules, right, Jeff?

And there's nothing to do with the increase in claim rate or loss rate at all?

Absolutely correct.

Okay, thank you.

Michael Millman, Millman Research.

Can you hear me now?

Yes, go ahead, Mike.

Is your word final on the putbacks when you deny a claim?

Do they come back?

Do they go to court?

Or they just accept it?

Our experience, Mike, in the three and a half years since we've exited the business is that the vast majority of claims that we reject, we don't ever hear about again.

There have been instances where counterparties might reassert a claim after we've rejected it but that's generally not the case.

Okay, so you don't expect that to change, and you now have $500 million to review in the next less than four months, so you need to bring in different people, do you need to use a different process?

Go ahead, Jeff.

Yes, we don't see any issue as it relates to Sand Canyon's ability to review that claim volume within the timelines that it has to complete its review.

And we have very experienced people at Sand Canyon who handle these, the process that Sand Canyon follows is very solid and they're able to bring on sufficient staff to go through the loan files so we don't anticipate any issue.

Finally, the increase in reserve is based upon accounting rules.

Stepping back, would it have been prudent if not for the rules to put off for some different reserve or no reserve?

Mike, we have to follow rules, so we don't get to think about what you just asked.

Yes, the rules are the rules.

We think the reserve is adequate at October 31 under the accounting rules we have to follow.

Okay.

Are those accounting rules the same that would be followed by all organizations?

Yes.

Thank you.

And Mr.

Drysdale do you have any closing remarks?

I do, thank you, Kristin.

I just want to thank you all for joining us today.

We look forward to seeing you at next week's investor conference, and in the meantime, if you have any questions please call us.

Thank you.

Thank you, everyone.

Thank you.

This does conclude today's conference call.

You may now disconnect.