Satsuma Pharmaceuticals, Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good morning, everyone and welcome to the Sterling Financial Corporation Second Quarter 2013 Earnings Conference Call. Each of you will be on a listen-only mode for today’s presentation until the question-and-answer period at the end of the call. Instructions will be provided at the end of the prepared remarks for those who wish to ask any questions. This conference call is also being audio webcast and be accessed on Sterling’s website at www.sterlingfinancialcorporation.com. Today’s conference is being recorded for replay. Additionally, the replay will be available at Sterling’s website following the call. I would now like to turn the call over to Rich Arnold, Vice President of Finance at Sterling Bank. Rich, you may begin.

[Rich Arnold:]

Thank you. Good morning. Joining today’s call will be the following members of the management team at Sterling Financial Corporation, our President and Chief Executive Officer, Greg Seibly; and our Chief Financial Officer, Pat Rusnak. Additionally, we have some other team members available for the Q&A at the end of the call, President and Chief Operating Officer of Sterling Bank, Ezra Eckhardt; Vice Chairman, David DePillo; and Chief Credit Officer, Steve Hauschild. A supplemental slide deck, which will be referred to during the course of this morning’s call, is available on our website at www.sterlingfinancialcorporation.com. I would like to caution participants that during the course of today’s conference call, management may make statements that are not historical facts regarding events or future financial performance of the company that are forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act. We caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties. For a more detailed description of certain factors that may cause the company’s actual results to be materially different, we refer you to the sections entitled Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as filed with the Securities and Exchange Commission. We will now begin with remarks from Greg and follow with comments from Pat, and conclude by taking any questions you might have. Greg?

[Greg Seibly:]

Thanks, Rich, and thank you everyone for joining us today for Sterling’s second quarter 2013 earnings conference call. For the second quarter of 2013, Sterling reported net income of $27.8 million, or $0.44 a share. This compares to net income of $22.7 million, or $0.36 a share for the prior quarter and net income of $320.9 million, or $5.13 a share for the second quarter of 2012. I want to point out that our results in 2013 are on a fully taxed basis, when compared to the prior year period, which included an income tax benefit of $289 million associated with the release of the deferred tax asset valuation allowance. This quarter’s pre-tax earnings of $40.7 million were the highest in our 30-year history. Our second quarter results reflect a continued focus on our key operating objectives. Progress was made on each of these fronts during the quarter. I will touch briefly on these and Pat will review them in additional detail in his comments. First, we saw improvement in our deposit cost and mix. Deposit cost fell to 37 basis points in the second quarter. And our overall cost of funds decreased to 67 basis points. This marks the 26th consecutive quarter of funding cost reductions at the company. Second, de-risking and balance sheet improvement continued. All of our asset quality metrics continued to improve in the quarter. Our credit metrics are now in line with regional peers, which further validates that our legacy credit issues are behind us. We are seeing continued improvement in delinquencies and with 60-day plus delinquencies now below 1%, we believe our portfolio quality and monitoring are stronger than at any time in the company’s history. Third, we saw strong growth in loan balances and originations. During the second quarter, portfolio originations totaled $687 million, up over 50% compared to the same period a year ago. Annualized organic loan growth during the second quarter was 14%. This performance is directly attributable to our focus on origination and execution during the past three years, the continuing addition of quality bankers in all of our key markets and benefits both in terms of people and products associated with our recent M&A investments. Fourth, we contained operating expenses and improved efficiency. We stepped up our focus on non-interest expenses two years ago. And the results during the quarter reflect our progress in this area. During the quarter non-interest expenses were flat from the prior quarter and down $6 million or 7% compared to a year ago. Our efficiency ratio improved to 63%, down from 73% in the prior quarter. We will remain very vigilant in this area and continue to focus on driving positive operating leverage. And lastly, we continue to actively manage capital. Most importantly we are seeking to leverage capital through focused organic growth. We are making additional investments in hiring of experienced bankers in key markets and we expect that trend to continue. The benefits of these investments are reflected in improving origination levels we have seen over the past two years. During the quarter we also completed the acquisition of the Puget Sound operations of Boston Private Bank & Trust and announced the definitive agreement to acquire Commerce National Bank in the Orange County market. On the dividend front, we’ve remained active. We declared a special dividend of $0.35 during the quarter which was paid in July and we’ll be continuing the $0.20 regular cash dividend. And finally in just under a month, we will reach the third anniversary of the recapitalization. This will open up additional options as it relates to capital management that Pat will discuss in detail during his comments. Along with our Board we continue to vigilantly monitor capital at Sterling. As we have over the past year, we will continue to actively seek ways to return excess capital to our shareholders. I will now turn the call over to Pat, who will walk you through the second quarter results in additional detail.

[Pat Rusnak:]

Thanks Greg. Good morning. I will take a few minutes to go through the financials and we will open it up for questions. Let’s start first with the income statement. The tax equivalent net interest margin for the second quarter was 3.70% is up one basis point from our prior quarter, up 14 basis points in the same period in 2012. The margin expansion compared to year ago period was principally due to reduced deposit costs and structured repo pre-payments and contractual maturities. Stable margin combined with organic and acquired loan growth translated in to $3.5 million or 4.6% increase in net interest income over the prior quarter. Yield on earning assets for the second quarter of 2013 was 4.32%, unchanged from the prior quarter, down 20 basis points from the second quarter of 2012. Compared to prior quarter a decrease in the average loan yield of 5 basis points was partially offset by 2 basis point increase in the yield on MBS. With respect to loans approximately $639 million of loans re-priced down by an average of 19 basis points during the second quarter. This re-pricing activity was comparable to prior quarter during which $642 million of loans re-priced down by an average of 20 basis points. For the same period a year ago $510 million of loans were re-priced down by 49 basis points. The impact of acquired loan discount accretion increased by about $550,000 as compared to the prior quarter due to the loans added from the Boston Private and Borrego Springs acquisitions. This resulted in a favorable margin impact of approximately 2 basis points. Our Form 10-Q will include a table to show the expected acquired loan discount accretion for the remainder of 2013 and the next few years. The average cost of deposits for the second quarter was 37 basis points, down 2 basis points from the prior quarter and down 21 basis points from a year ago reflecting the improvement in the mix of deposits. No provision for loan losses was reported in the second quarter or the prior quarter while the provision was $4 million for the second quarter of last year. The reduced provisioning reflects the lower levels of delinquencies, non-performing loans and classified loans. At June 30, 2013, the total credit allowance stood at $151 million or 2.16% of loans compared to 2.43% at March 31, 2013 and 2.73% a year ago. Net charge offs for the second quarter of 2013 were $5 million or 29 basis points annualized as a percent of loans. The amount of net charge offs was comparable for both the prior quarter and the second quarter of last year. We do not expect that any provision expense will be recorded for the remainder of 2013. Non-interest income for the second quarter of 2013 was $42 million compared to $38 million for the prior quarter and $45 million for second quarter a year ago. Non-interest income for the prior quarter included a bargain purchase gain of $7.5 million on the Borrego Springs Bank acquisition. Fee and service charge revenue increased by $1.5 million or 11% over the prior quarter. Of this increase about $800,000 was for deposit account related fees representing growth of 8%. This increase was due to some changes in our service charges implemented during the second quarter and account growth from recent acquisitions. Other contributions to improvement in fee and service charge revenue included increases in loan fees of $477,000, or 35% mostly due to loan prepayment penalties and merchant and credit card fee of $163,000, or 17%. As expected, mortgage revenue rebounded from the first quarter levels despite the significant changes in longer term market interest rates in June. I will direct your attention to slide three in the supplemental deck for some additional information. The box at the top of the slide is our quarterly comparison of the components and mortgage banking operations revenue. Total mortgage revenue for the second quarter of 2013 was $23.2 million, an increase of $9.4 million, or 68% over the prior quarter. Origination sales activity revenue was $20.1 million, up $9 million, or 81%. Total mortgage banking activity, which is comprised of sold loans plus the change in warehouse, held-for-sale loans, and lock commitments was $799 million at the low end of our guidance range. The associated margin was 2.35%, 5 basis points below the bottom of our guidance range. The actual volume of closed mortgage loans for the second quarter was $800 million, an increase of 26% over the prior quarter. We also had higher loan servicing fees, which were up $1.4 million over the prior quarter. The favorable variance in loan servicing fees was principally due to a $2.8 million valuation reserve reversal. A similar reversal of $2.8 million was recognized in the prior quarter and a write-down of $1.1 million was recorded in the same period a year ago. The second quarter 2013 valuation reserve reversal was partially offset by a $1 million fair value adjustment on a $36 million pool of residential mortgage loans accounted for fair value. The residential servicing portfolio had a carrying value of 87 basis points as of June 30 with a valuation reserve of $2.4 million. The two boxes on the left of the slide provide some additional information. Top box shows the recent historical mortgage production of margins and the bottom box shows the historical purchase in refi composition. In the second quarter of 2013, purchase and refinance activity were about 50

[Greg Seibly:]

Thanks, Pat. Coming off of one of the best quarters in Sterling’s history, I believe that the second quarter results clearly demonstrate progress and momentum. I want to acknowledge our team members for their ongoing focus on our key objectives, their hard work, and dedication. I want to emphasize that we will continue to focus on our five key operating objectives. We believe that these objectives continue to provide the foundation, upon which we will sustain a strong earnings base. We’ll look forward to sharing additional developments on each of these funds with you next quarter. With that, Melissa, we are ready to take questions.

[Operator:]

Yes, sir. Thank you. (Operator Instructions) And your first question is from Jeff Rulis of D.A. Davidson. Your line is open.

[Jeff Rulis:]

Thanks. Good morning guys.

[Greg Seibly:]

Good morning, Jeff.

[Jeff Rulis:]

Given the strength in the loan growth and seeing that loan to deposit ratio continue to decline, any sort of concerns about funding sources, are you considering some other avenues there?

[Greg Seibly:]

Yes, Jeff, it’s Greg, I’ll take the beginning and Pat will add some detail. We are cognizant of it. I think when you look at loan to deposit ratios and loan to core deposit ratios that are getting up into 105 to 110 range, it’s something we have been focusing on. We are proactive there and have been for a couple of quarters. And clearly, when you look at some of the extension that we are doing into the California market, part of what we are looking at there is to hire deposit related teams, because part of the match off there is the great growth we have had in multifamily in the California market with a limited ability to attract deposits, because we haven’t had a depository branch in Southern California. And now with Borrego and CNB that will clearly be helpful. Deposits were a huge focus of our company in 2007, ‘08, and ‘09. And then more recently post the recap, we have really fired up the origination engines on the loan side and what we are focused on now is really bringing those two things back into balance, so we can have balanced growth moving forward. Pat, I don’t if you want…

[Pat Rusnak:]

I think that covers it.

[Jeff Rulis:]

Maybe a follow on for Pat on that, so then on the margin side, you guys have had some pretty good success lowering cost of funds, I guess is that tailwind perhaps slow if you’ve got to manage the deposit balances?

[Greg Seibly:]

Well, I think…

[Jeff Rulis:]

Further room to go on the funding cost.

[Pat Rusnak:]

There is some more room to go. I think we indicated in the – previously, we have CDs that are at a relatively high rate compared to current market rates for CDs, let me just check our earnings release here, Jeff we are at, for the quarter time deposit rate was - average rate was 1.19. So, we are going to have some benefit of just continued re-pricing on CDs, but it’s going to be diminishing over time and obviously we’re going to have to deal with the competitive market situation with gathering new deposits in Southern California. So, I think it’s short we – there’s some room to go from 37 basis points, but it’s not going to be falling at 5 or 10 basis points a quarter.

[Jeff Rulis:]

Got it. And then may be just one last one on kind of a housekeeping, do you have an updated kind of goodwill and CDI expectation for the Commerce transaction?

[Pat Rusnak:]

The Commerce one I think let me check with [Robert] [ph] I think it’s about less than $10 million.

[Jeff Rulis:]

Combined?

[Pat Rusnak:]

Yeah, less than – a little bit less than $10 million for the intangible.

[Jeff Rulis:]

Okay.

[Pat Rusnak:]

That’s just an estimate right now. Obviously, we have to get, it will depend on market rate to get all third-party valuations when the transaction closes, market rates can change between now and the fourth quarter, but that’s a rough estimate for now.

[Jeff Rulis:]

Got it. I won’t hold you to it. Thanks. That’s it.

[Greg Seibly:]

Thanks, Jeff.

[Operator:]

The next question is from Matthew Keating from Barclays.

[Matthew Keating:]

Yes, thank you. I’d like to ask a question obviously one of the newer corporate initiatives has been more active capital deployment. So, obviously you’ve done a lot of M&A as a way, I mean, relatively small deals and maybe you could talk about sort of how you are thinking about the acquisition landscape and whether you expect more of these types of deals as a tool of deploying some of your excess capital? Thanks.

[Pat Rusnak:]

This is Pat. We are actively looking at M&A opportunities obviously the things that we’ve gotten done so far are in a relatively small side in aggregate including Commerce National about $1.4 billion in total assets. If we’d waited around to find a single transaction with that much in assets we would be sitting here with no completed transactions and a less profitable company and a smaller balance sheet than we have today. So, I think that we have an opportunity to look at I think pretty much anything that becomes available in our key market areas Seattle, Portland, Bay Area and Southern California something the larger comes along and we would certainly have a high interest in it. I’m not seeing any – I’m not seeing any significant change in the level of activity since we had our call last quarter. I think it’s still relatively slow and most of the things that we are taking a look at on the smaller side.

[Matthew Keating:]

Thanks. It’s helpful. And then I guess on a mortgage business obviously you made I guess some progress in transitioning towards the higher percentage of purchase mortgage originations this quarter. Obviously, I guess that’s driven obviously by these rates moving up and refinance volumes declining in part, but it sounded like you are close, loan volumes were actually up on a linked quarter basis. So, I guess was like is seasonality a play there as well in the second quarter where people are buying more homes? And maybe you could just talk about that and what your expectations are for the purchase versus refi mix of your mortgage banking operations going forward.

[Pat Rusnak:]

Yeah, the – there is a seasonality factor, but there is also a case where we – the revenue we’ve recognize is based largely on the activity which when a loan is locked that’s the revenue, really the principle revenue recognition event for us so what you are seeing is a case where the level of the warehouse of locked – of closed loans and locked loans fell at the end of the quarter and a lot of what actually got closed was early in the quarter no longer a locked loan or in the warehouse. We are not giving a specific guidance but obviously the 50% portion of our activity originations for the second quarter is going to fall as a function of the 30-year rate being in the mid-4s instead of the mid-3s. As far as the ability to grow the purchase side, there is mixed information just in the last week about the outlook for housing, we are heading into I say the best time of year for activity which is the summer months heading into early fall so, I think we have a seasonality on our side at least looking out for the next quarter but our main view is that the refi party is over and that portion of the origination activity is not going to be replaced by purchase activity.

[Matthew Keating:]

Great, thanks for the color.

[Operator:]

Your next question is from Paul Miller, FBR. Your line is open.

[Paul Miller:]

Yeah. Thank you very much. Can you talk a little bit about I mean a lot of your loan growth which was pretty good this quarter came from the multi-family area. And there is some discussion out there, I know some banks talk about the multi-family especially in the [Pacific] [ph] Northwest being a little competitive, can you talk a little bit about what you are seeing competitive and do you think that’s still going to be a big driver in loan growth going forward?

[Greg Seibly:]

Hey Paul, it’s Greg. David do you want take that, do you want that question?

[David DePillo:]

Sure, thanks Greg. Paul yeah, I would say there is high level of competition, but if you look at the landscape you have Chase and Wells, which Chase predominantly with the highest market share than Wells Fargo. And then from a portfolio earnings standpoint, we are number three. So, although there is high level of competition given the bandwidth of what we have we are probably at about 50% to 75% of our current capacity, so we are picking and choosing what we want to compete on which is good. We are seeing other competitors come in the market but on a very small basis. So, as of this point I don’t see competition getting significantly more fierce than it has been over the last year. If anything – our volumes are up from prior year and we have got good momentum. So, pricing is holding up, we are getting some benefit from the move in the middle end of the curve. And I think a lot of the competitors are following us in pricing adjustments, but some aren’t. So, we feel pretty good about the space right now.

[Paul Miller:]

And have you guys – I know you guys are out there searching to do some acquisitions, are you able to bid away any lending teams or add more lenders to your platform over the last quarter or two?

[Greg Seibly:]

Yeah Paul, it’s Greg. We are seeing success. We are particularly seeing success in the California market. We had talked to people about publicly over the last quarter post to CNB announcement was that our intent there was to buy and then build around it. And I would say our view is and Dave can get a little bit more color if you would like to, but we’ve got active recruitment going on in that market in particular. We think we will have three to five platforms teams that we will build around the CNB acquisition between now and the end of the year and they are very high quality experienced bankers who have been in that market for a long, long time. So, clearly we think that the Sterling story is selling well in that market. And then when you look at some of our more core Pacific Northwest markets we are going through the same kind of focus in Portland, in Seattle, in our home market in Spokane and then in Bay Area as well. So, I think as the company continues to make progress and put the legacy issues behind it, this story become increasingly compelling particularly the people who are either at smaller community banks where they like some of the product capabilities or folks at larger institutions where maybe they want a place where they can make more of a meaningful impact on a smaller platform.

[Paul Miller:]

Is California the – is that where you want grow the most. I mean I know relative to the Pacific Northwest most of your loans up in Washington State, but is that where you really see the opportunity.

[Greg Seibly:]

No, I think that I think we see opportunities really across the footprint. I think when we look at the eastern portion of our franchise you see still a very large deposit opportunities for the company. We see more balanced kind of loan and deposit opportunities along I5 corridor. And frankly we are a bit agnostic around where on the I5 corridor whether its San Diego, Los Angeles, Orange County, Northern California Portland or Seattle, our view is that’s the highest growth profile within the Western markets. And our intent is to be active up and down in that corridor. And frankly I think we have – we take the following view. We have very high quality people with very high quality products chasing customers. And frankly what I think brings Southern California maybe Northern California up a bit because we have lower market share so we are growing from virtually nothing. And frankly it’s just – it’s a numbers game, right. There is just relatively more people there, so you maybe see more growth coming out of just the higher population centers. But our view is really I5 focus for asset deployment.

[Paul Miller:]

Okay, thanks a lot guys.

[Operator:]

The next question we have is from Jacque Chimera, KBW. Your line is open.

[Jacque Chimera:]

Hi, good morning every one.

[Greg Seibly:]

Good morning, Jacque.

[Jacque Chimera:]

I just wanted to clarify something in the prepared remarks. Pat, I think you had said that M&A charges were $2 million, was it $2 million or $2.3 million?

[Pat Rusnak:]

Hang on one second and I will confirm that.

[Jacque Chimera:]

And then also just another detail-oriented question that I will have as well as you look stuff up is that, did I hear right that the reduction in non-interest expenses in the quarter included a $2.1 million benefit from the recovery of past legal fees?

[Pat Rusnak:]

Yes, on the first one it was on the M&A $2.3 million, and the increase from the first quarter was $2 million because we were $3.3 million year-to-date.

[Jacque Chimera:]

Okay, okay.

[Pat Rusnak:]

It’s always up the increase was…

[Jacque Chimera:]

Okay.

[Pat Rusnak:]

Yes, so and then on the question about the recoveries, we had two items that were litigation matters that in the aggregate had a recovery, a reduction in non-interest expense for the quarter of $2.1 million.

[Jacque Chimera:]

Okay.

[Pat Rusnak:]

And then for the first quarter, we had a charge for a settlement of $1.5 million.

[Jacque Chimera:]

Yeah, I do remember that one, okay. And then my next question, it was going to be the quarter that I wasn’t going to ask you about multi-family sales, but then you may not mention, I am not sure whose remark that was in but the likelihood of increasing bulk loan sales next quarter, is that multi-family is it SBA or combination of both?

[Pat Rusnak:]

It will be in the dollar amounts probably mostly multi-family and we will continue to be selling the current production guaranteed portions for the government guaranteed loans. So, there will be continuing regular quarterly sales we expect for SBA and USDA. And then from time to time we will do multi-family, we have really not done any multi-family sales since last summer, so we expect to have an increase in that in the third and fourth quarters.

[Jacque Chimera:]

Okay. And the SBA production versus what Borrego is doing prior to being acquired by you and now that have higher lending capabilities and all that and your ability to apply it across your brand structure, are you seeing an increase in production from that?

[Pat Rusnak:]

I think that we are – we had, I think I slowdown or low kind of post acquisition and sometimes that occurs where just with the integration process, but things are I think getting ramped back up with that and we are seeing some improved pipeline in production more recently and that transaction closed in that Board. So, I think out of the gate it was a little slower than we had expected but things are picking up.

[Jacque Chimera:]

Okay. So as I understand it multi-family that will go into the portfolio that generation will flow, but you will get a pickup in fees from the gain on sale from that as well as just an ongoing increase in SBA production going forward?

[Pat Rusnak:]

Yes, just to clarify on the multi-family the sales we did a year ago were in a different time in a different place relative to market interest rates. I think our gains at that time were in the mid-2% range, whether or not we are able to get execution at that level or will remain to be – to remain to be seen I think we should be able to get some gains, but obviously we’ve had changes in rates, our market rates so the execution may not be as good. The secondary market gains for the government guarantee loans are still very high.

[Jacque Chimera:]

Okay. And then this one probably for Greg, just looking at the expenses control that happened in the quarter even excluding when they pick out merger items and then which essentially was offset by that legal reduction, is that something that there were anything else in the quarter or is it just a sustainable efficiency that we are seeing the improvement from?

[Greg Seibly:]

I think our view Jacque is and we are not providing specifics on this. We talked about publicly as we had 60% on the table we took that off the table. We’ve told people as our intent is to operate in the mid-60% efficiency ratio over time. If 63.1% was probably on the low end of where we think we’ll be what we’re – again I think what we’ve talked about in the past is what’s coming to the floor is the branch rationalization that we’ve done a lot of the work around vendor relationships, the reductions of OREO – recurring OREO expenses and more focus around alignment of compensation and production. And our view is that that will continue. And I think directionally we are very pleased with the quarter and whether or not we stay at 63%, we are now offering a forward view on other than our intent is to be in the low to mid-60s over the remainder of this year.

[Jacque Chimera:]

Okay, fair enough. And then just lastly was there anything that drove the movement of the close date for the CNB deal to 4Q from 3Q?

[Greg Seibly:]

Yes and I wish like it’s a – it is a short answer I’ll try to do my best to give that to you there. Commerce National Bank is a national bank without a holding company and it’s part of the transaction we will form a more merger subsidiary to do the transaction, we did that with Borrego, it’s typically done to do with what’s called a reverse triangular merger. In this instance, there is some rules very deep in the OCC rule of that limit how you can do a reverse triangular merger so our merger subsidiary we’ll need to be – in this case, we’ll need to be a national bank. It just took us a little longer to work through that aspect of the regulatory application process then we had with prior ones and this was again just we will – for a moment in time, things go as planned. Sterling Financial Corporation will be a multi-bank holding company. We’ll have a national bank subsidiary that will exist for purposes of completing that merger and then the next moment in time commerce will get merged into Sterling Savings Bank so was I think just to take a little bit longer and our expectations will be early in the fourth quarter in subject to final approvals in the customer closing conditions, but it looks like it just going to slip a little longer than we’d expected because of that I think kind of technicality with the – with Commerce National not having a holding company.

[Jacque Chimera:]

Okay, it sounds like a lot of really fun paperwork for you.

[Greg Seibly:]

Yes, I don’t think we’ll have – I don’t expect we’re going to have another one like this at least in the near-term.

[Jacque Chimera:]

Okay.

[Greg Seibly:]

We’ll know how it works

[Jacque Chimera:]

Yeah, all right, thank you very much for the call. I appreciated.

[Greg Seibly:]

Exactly.

[Operator:]

(Operator Instructions) The next question is from Dan Mazur from Harvest Capital. Your line is open.

[Dan Mazur:]

Good morning. Congrats on a solid quarter and thanks for taking my question. I wanted to ask a Pacific Northwest peer recently mentioned that intense competition for purchased mortgage volume had driven margins again on sale margins to half of that of refi recently and want today see if you are seeing that intense competition would be curious if you have a sense on the type of institution that’s driving that.

[Pat Rusnak:]

This is Pat. I can’t – I can’t say we could offer any common opinion on that work we just don’t – I’m not aware of making it from a individual institution competitive standpoint that created that situation like you described.

[Dan Mazur:]

Okay so is in general is historically purchased in refi volumes had similar margins for you guys.

[Pat Rusnak:]

Well, it depends on the refis – hot refis there is a lot of factors involved. Our margin it was 235 for the quarter again there is not a perfect apples-to-apples comparison of margins from one institution to the next, it can depend on the mix of how much government loans or FHA/VA are part of that production. We have a relatively low proportion of FHA/VA loans which obviously result in a lower margin so, again we – we are not going to be offer a lot more guidance other than we suspect there is going to be some discontinuing downward pressure which would likely indicate a margin below 235 for the third quarter?

[Dan Mazur:]

Okay. And I did want to ask about slide four and the deferred direct origination expense, last quarter you mentioned that you increased standard loan costs, is that what drove that up to $15 million and can you remind me is that a deferred cost or is that just sort of contract expense that’s offset somewhere else on the income statement?

[Pat Rusnak:]

Well, in this case here, this credit is reducing – with reducing salary expense. Depending on the type of loan, the offset is either something that is amortized against the loan yield over time. So, we would have a direct, deferred direct expense for a multifamily loan that goes in our portfolio. That’s something that is the offset to that is in loans on the balance sheet and then part of accretible yields. In the case of loans that are sold, it gets wrapped up into the like more residential mortgage loans, it gets wrapped up into the gain on sales. So, I think looking at this, this is we had very strong production activity both on residential and non-residential loans for the quarter. We did not have any significant other changes in our deferral process other than the volume of activity.

[Dan Mazur:]

Okay. So, your kind of mortgage banking revenue is a lot higher than what you showed on the income statement, and then it’s adjusted down for this deferral the contra expense or whatever if you want call it in the salaries, is that a way to think about it?

[Greg Seibly:]

Yes, I think that’s really the case. If you are having a case where you are putting – if you are reducing your compensation expense, if you had no deferral, you would have higher gain on sale. Yes, I think that short answer is this.

[Dan Mazur:]

Okay, okay. That’s fine. And just curious, did you know happen to know what roughly you are capitalizing servicing for kind of new origination or sales versus kind of where you have the portfolio, the servicing portfolio?

[Greg Seibly:]

We are in the 1% range for new production and it’s in the high 80s for the total portfolio. We can take a fairly conservative approach with booking and servicing asset.

[Dan Mazur:]

Okay, great. Thank you.

[Operator:]

(Operator Instructions)

[Greg Seibly:]

Any more questions, Melissa?

[Operator:]

No sir. I see no further questions.

[Greg Seibly:]

Okay, great. Thanks everybody for taking the time to join us in this morning’s call. We’ll talk to you next quarter. Have a great weekend.

[Operator:]

Thank you. And this does conclude today’s conference. All parties may disconnect.