Axos Financial Inc (AX) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to BofI Holdings Conference Call for the second quarter ending December 31st, 2008. With us today are BofI's CEO, Gregory Garrabrants; and CFO Andrew Micheletti.

Today's call will have the following format -- Mr. Garrabrants will provide an overview of the highlights for the quarter and his achievements for the year. He will then turn over the call to Mr. Micheletti, who will provide a more detailed discussion of BofI's financial results. Finally, Mr. Garrabrants will make some closing remarks and open the call up to any questions you may have.

Before I turn the call over to them, please remember that in this call, management's remarks contain forward-looking statements which are subject to risks and uncertainties, but management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today, including risks and uncertainties related to -- the economic environment, particularly in the market areas in which the BofI operates; competitive products and pricing, fiscal and monetary policies of the US government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements; changes in prevailing interest rates, risks associated with the conduct of the Company's business over the Internet, credit risk management, asset liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

Examples of forward-looking statements include statements relating to BofI's anticipated or projected asset size, net interest income, net interest margin, projections of future delinquencies and impairment charges, loan originations, deposits and performance ratios, like efficiency and return of equity. We would like to encourage all our listeners to review a more detailed discussion of the risks and uncertainties related to these forward-looking statements that is contained in the Company's filings with the Securities and Exchange Commission.

Any forward-looking statement as to the Company's future financial performance represents management's estimates as of February 4th, 2009. BofI assumes no obligation to update these forward-looking statements in the future due to changing market conditions or otherwise.

With those cautionary statements, it is my pleasure to turn the call over to BofI's CEO, Gregory Garrabrants.

Thank you. Welcome to BofI Holding's Second Quarter Conference Call. Thank you for taking the time today to hear more about Bank of Internet USA.

I'd like to start this afternoon by reviewing our second quarter performance. BofI reported record earnings of $2,761,000 for its second quarter ended December 31st, 2008, exceeding by $981,000, or 55.%, the Company's previous quarterly net income record of $1,780,000 posted for the three months ended June 30, 2008. Compared to the three months ended December 31st, 2007, net income for this quarter increased $2,110,000.

Earnings attributable to the Company's common stockholders were $2,588,000, or $0.32 per diluted share for the current quarter, compared to $574,000, or $0.07 per diluted share for the quarter ended December 31st, 2007. For the six months ended December 31st, 2008, net income was $944,000, compared to $1,398,000 in net income for the six months ended December 31st, 2007.

The government's decision to put Fannie Mae into conservatorship during the first quarter ended September 30th, 2008 resulted in BofI realizing a one-time loss on the sale of its Fannie Mae preferred stock of $7,902,000, or $4,710,000 in after-tax income. Without the Fannie Mae preferred stock loss, the Company's net income for the six months ended December 31st, 2008 would have been $5,654,000.

Highlights for this quarter include net interest margin growing to 2.98% in the second quarter, up 164 basis points over the second quarter of 2007, and up 30 basis points compared to last quarter. Our efficiency ratio improved to 34.2%, compared to 64.0% for the second quarter of 2007.

Asset quality remained strong, with the principal balance of nonperforming loans equal to 0.61% of the loan portfolio and total nonperforming assets equal to 0.66% of total assets at December 31st, 2008. Our bank's capital position at December 31st, 2008 is strong, with 37.2% more Tier 1 capital than the amount required to be considered well-capitalized under government regulations.

In short, our strategy is working. The challenging environment is creating opportunities, and we've been doing well taking advantage of those opportunities. The power of our low-cost business model is evident in our best-in-class efficiency ratio. Our deposit franchise is strong, and we believe we will benefit from shifting sentiments that view bank deposit products as more secure investments.

Our recent improvements in our checking and savings account design and core process systems for deposits this year have started to bear strong results. Our new product design has increased the size of our average checking account. Our new deposit account system developed in-house this past year allows for automated underwriting of a deposit product at the time of application and funding of that account electronically. By funding more accounts per completed application, our marketing dollars are used more effectively.

By way of example -- on Monday of this week, we funded over 270 accounts, resulting in $8 million of deposit growth. This day's worth of our bank's performance would be a great quarter for a strong-performing bank branch in a good location.

Our account aggregation, spending reporting, inter-institutional, automated transfer features and remote deposit capture capabilities are important future developments that will enhance the attractiveness of our deposit operations, and are expected to be operational the beginning of the next calendar year.

On the asset side -- the Bank's Retail Lending Group has launched its [single-family first trustee] platform. It is operating as a gain-on-sale model that focuses on the efficiency of a self-service Internet platform that removes high-cost salespeople from the process. It will take awhile before this is a strong contributor to earnings, because we are building the capabilities in a measured way and perfecting our systems and processes. But we are well timed to take advantage of the ongoing refinance boom. Currently, the Bank has approximately $18 million of LOC loans in its first mortgage pipeline.

I believe our stock currently represents a tremendous value right now. With the financial markets in turmoil, it is more difficult to have analysts pick up additional bank stocks. And as a result, our stock is under-publicized. I believe that as we demonstrate a history of sustainable earnings performance, our share price will improve.

Now I'll turn the call over to Andy, who will provide additional details and our financial results for the quarter. Andy?

Thanks, Greg.

First I want to note that in addition to our press release, our Form 10-Q was filed with the SEC this morning. And both are available online through Edgar, or through our website at bofiholding.com.

I will discuss our second quarter results on a year-over-year basis, meaning the quarter ended December 2008 compared to the quarter ended December 2007; as well as a this quarter-versus-last quarter basis, meaning the 2nd quarter ended December 31, 2008 compared to the first quarter ended September 30, 2008.

For the three months ended December 31, 2008, we had net income of $2,761,000, compared to net income of $651,000 for the three months ended December 31, 2007. Net income attributable to common stockholders was $2,588,000, or $0.32 per diluted share; compared to $574,000, or $0.07 per diluted share for the three months ended December 31, 2008 and 2007 respectively.

For the six months ended December 31, 2008, we had net income of $944,000; compared to net income of $1,398,000 for the six months ended December 31, 2007. Net income attributable to common stockholders was $600,000, or $0.07 per diluted share; compared to $1,244,000, or $0.15 per diluted share, for the six months ended December 31, 2008 and 2007 respectively.

As Greg mentioned, excluding the one-time charge associated with our Fannie Mae investment, BofI would have reported net income of $5,654,000 for the six months ended December 31, 2008, compared to net income of $1,398,000 for the six months ended December 31, 2007.

Moving to net interest income -- net interest income increased 158.8% on a year-over-year basis and increased 12.8% compared to last quarter. The increase in net interest income year-over-year was generally due to growth in average earning assets, primarily in loans and mortgage-backed securities. The increase this quarter versus last quarter was due to an increase in the average loan balances from multifamily pool purchases and from loan originations.

Comparing average balances for the quarter, December 2008 compared to 2007, investment securities, primarily mortgage-backed securities, grew 11.4%, while the loan portfolio increased by 25.8%. Higher rates on purchased mortgage-backed securities, new loan pools and new loan originations increased the earning asset yield for the 2008 quarter by 80 basis points, compared with the same period in 2007.

The cost of interest-bearing liabilities decreased 92 basis points in the 2008 quarter compared to 2007, generally due to a 131-basis point drop in the average rate on FHLB advances and a 57-basis point drop in the cost of time deposits.

For the second quarter ended December 31, 2008, our net interest margin was 2.98%, up 134 basis points year-over-year -- up compared to the 134 basis points earned on a year-over-year basis, and up from 2.68% for the last quarter ended December [30], 2008.

Over the past year, the Bank has worked to improve its net interest margin by taking advantage of opportunities to purchase high-quality mortgage loans and non-agency mortgage securities at attractive yields, and by taking advantage of low US Treasury rates through increased short-term borrowings.

The average yield on earning assets grew from 5.84% for the quarter ended December 31, 2007 to 6.59% for last quarter and 6.64% for this quarter. The improved earning asset yield is due to growth in our non-agency mortgage-backed securities portfolio and our loan portfolio. The average cost of interest-bearing liabilities declined, from 4.82% for the quarter ended December 31, 2007 to 4.17% for our last quarter and 3.90% for this quarter. The decrease in the cost of funds is due to lower average deposit rates and increased short-term borrowings from the Federal Home Loan Bank of San Francisco.

Provisions for loan loss were $1,125,000 this quarter, versus $505,000 in the first quarter of fiscal 2009 and $264,000 for the fourth quarter of fiscal 2008. The Bank's -- that's fiscal 2007. The Bank's loan loss provisions are driven primarily by general reserves, which are increased and decreased with the Bank's loan portfolio, and also by the Bank's loss experience.

The increase in our loan loss provision year-over-year was primarily the result of general declining in housing values, growth in our loan portfolio and increased charge-offs of our RV loans. The $1.1 million loan loss provision this quarter was due to the loan portfolio growth and periodic adjustments required for our reserve levels based upon the loan class.

Non-interest income for the second quarter was a gain of $14,000, compared to a loss of $7,924,000 last quarter, and a gain of $333,000 for the second quarter last year. The loss last quarter in non-interest income was due to the $7.9 million loss from the sale of Fannie Mae preferred shares. In this quarter, we also recorded a fair value adjustment to our trading securities for a loss $168,000, compared to a loss of $177,000 last quarter.

Non-interest expense, or operating costs this quarter, were $3,008,000, compared to $2,477,000 in operating costs recorded last quarter and up 24.8% on a year-over-year basis. The increase year-over-year was primarily the result of adding our new CEO in the second quarter last year, higher stock-based compensation expense, higher fees for professional services, and higher loan expenses; all of which were partially offset by lower advertising costs.

Our efficiency ratio was 34.2% in the second quarter of fiscal 2009 compared to 64% in the same quarter last year and would have been 31.8% last quarter without the loss of the $7.9 million associated with the Fannie Mae preferred.

The efficiency ratio is calculated by dividing our operating expense by the sum of our net interest income and our non-interest income. This quarter improved due to the higher net interest income compared to the fourth quarter of fiscal 2008.

Shifting now to the balance sheet -- our total assets increased $26.3 million, or 2.2%, to $1,220,000,000 as of December 31, 2008, up from $1,194,000,000 at June 30, 2008. The increase in total assets was due to an increase in net loans of $10 million, an increase in loans held for sale of $2.9 million, an increase of $2.4 million in investment securities and an increase in other assets of $14.7 million.

Our liabilities increased a total of $27.9 million due largely to an increase in deposits of $61.8 million, offset by a decrease of $32 million in our borrowings. Stockholders' equity decreased $1.8 million to $81.3 million at December 31, 2008, compared to $83.1 million at June 30, 2008. The decrease was primarily the result of a combination of our net income for the six months of $944,000, additions to Treasury stock of $982,000, and a $2.1 million cumulative-effect adjustment for the adoption of FASB 159 for investments in trust-preferred collateralized debt.

At December 31, 2008, our Tier 1 core capital ratio for the Bank was 6.86%, with $22.7 million of capital in excess of the well-capitalized limit.

With that, I'll turn the call back over to Greg.

Thanks, Andy. And thank you all for joining us this afternoon. That concludes our prepared remarks. We will now move to the question-and-answer session. Operator, please open the line to questions.

(OPERATOR INSTRUCTIONS) Mitchell Sachs, Grand Slam.

Hey, guys, congratulations on your very fine quarter.

Oh, thanks, Mitch --

I may be asking a question that may be in the Q, because I didn't realize it had come out until you mentioned it on the call. So forgive me if I'm asking a question that's already in there. But getting into net interest margin right now, as it stands, either at the end of the quarter -- if you just ran it for this quarter -- or as of the end of January, where is that versus where it was for the average for last quarter?

Well, I think we have a number of dynamics happening. As you know, rates have been moving down for a bit, and moving up. So it's difficult to point it exactly as you go forward. But at 2.98% average for the three months ended December 31, we feel that that rate is generally representative of where we'd like to be in the next quarter. But rates are moving a lot, and it's going to be hard to necessarily see that that's going to be repeated all the time.

You know --

(inaudible) roll-off of CDs coming in the next quarter or two?

Well, we do see that. But we have -- there are definitely positives associated with that, but there are also headwinds. We still believe that the fiscal -- nature of the fiscal and monetary policy, that the government's been adopting over the longer term, may lead to inflationary pressure over time. We have a good portion of our security portfolio in floating-rate securities. That clearly adjusts. That being said, we've matched that off largely but not completely against significant short-term borrowing.

So it really depends on the balance of those flows. So we've recently reduced our checking and savings accounts rates as well. And so all those things play into effect, and we do have a significant amount of deposit re-pricing going on.

On the other side -- on our loans, we have a lot of seasoned loans. And five years ago, people were not paying a whole ton of attention to a five-year fixed 30-year apartment loan that had a margin of 250 over (inaudible) interest and cost of funds, because that loan would be refinanced. And now, the good thing is that loan's a very safe loan because it's amortized a lot. The bad thing, perhaps, is that that person's going to keep that loan.

So there's a lot of dynamics going on. And I think you'll clearly see sustained improvement. And it will drive earnings growth that is good. We're also growing as well. But I think it's difficult to predict with certainty that you'll see strong quarter-over-quarter growth there, until we actually are able to have more sustained asset growth, which will allow us to average into our higher-yielding assets that we're putting on now.

Okay.

And then, can you talk about share repurchase? I was trying to figure out exactly how many shares you repurchased so far. It looks like maybe 90,000-odd shares?

We do, [into the hat] --

It's a little bit more [than] that. In your Q, you'll be able to pull it right off your statement of changes. But it was -- 276,2000 shares were repurchased this quarter.

Do you have an idea of the average price, roughly?

Yes, I do. It is on page --

If it's in the Q, don't bother with it, I'll get it.

Yes, it's layered in at -- sum was at $4.76, $3.92 and $3.36.

Wow.

So between $3.36 and $4.76. The majority was actually at a $3.36 weighted average.

Nice job.

Well, it's interesting, right, because obviously, these sort of multiples don't necessarily make sense. But if you look at our net income, and you divide that net income into our market capitalization, at -- I don't know, what is it, 13 quarters for us to make our entire market cap? At some point, if this continues, and our book value continues to go up, and our stock price continues not to respond, it'll make sense to continue to do that. Because --

With a very high-return equity.

It's a good value, and it's a good return on equity. And obviously we want to grow the Bank, and that's important, too, so --

Sure.

-- we'll continue to look at that opportunistically. And also, it's a matter of protecting the stock in case you have shorts, or other people who are doing things they shouldn't be.

Sure.

Can you talk a little bit about nonperforming assets? Any change since year end?

Sure. I mean, our nonperforming assets, as we indicated, came out at 0.66% of total assets. The activity, as we look really over the quarter, was primarily two loans, both multifamily loans; one which is located in Cincinnati, another which is located in the Miami area.

On one of them, which is about $2.2 million -- that's the Cincinnati loan -- it's about 116 units. And it's significantly occupied. We are actually getting all of the cash flow from it. And it is nearly making its debt service payments based on our current cash flow. So we're actually very optimistic on that property that we will have no impairment, even if we have to foreclose and even if the foreclosure is prolonged.

On the Miami multifamily, which is about $1.1 million of carrying value -- that's about 20 units, a little smaller -- in that area, we actually were seeing really a more difficult situation. We took a $150,000 write-down already on that, even though it's in a past-due category, but not in a foreclosed category. But our expectations are that -- given the marketplace and given our LTV -- that our loss wouldn't be any worse than that $150,000. But it may take some time for us to actually resolve that loan.

What we're finding that's been interesting on some of the multifamily properties is -- to the extent that obviously the borrower is uncooperative, in the Cincinnati property, they frankly weren't. They didn't oppose the appointment of the receiver. The receiver was in within a week. The loan balance is nearly getting paid. It's -- about 90% of our payment is being made. And frankly, if we weren't paying the receiver, it would probably be close to 100. So that worked out well.

In the case of Florida, the gentleman is clearly trying to get a couple extra months' rent out of it and was not amenable to discussions related to moving that along in a more friendly manner.

But for example, on the Woods loan that we had in Missouri, we sold the -- well, the borrower actually sold the front building there for more than the appraised value and more than the carrying value that we had the front building on our books for. And that sale closed last week. But it's just -- it's taken awhile, and he's been stubborn. And now he has the back building up. It's significantly greater than our loan amount. So we have another hearing on that. But by declaring bankruptcy, he was able to prolong the process.

So those are really -- obviously, that's a significant bulk of the numbers that you see. But I think obviously, nonperforming asset doesn't tell the story. You also need to care about severity. And so that's what we're hoping to put some color around right now.

And loan-to-values -- where are you at now on average loan-to-value, do you think?

The averages are -- for single-family, 58.75%; multifamily, 53.28%, commercial, 51.86%, and home equity, on a combined basis, 58.11%. So -- and again, these are appraised values at origination, or they are values upon purchase based on utter independent appraisal information.

So that remains very similar, as you know, Mitch, with kind of our overall blend. On a blended basis, it's about 55%.

It's an improvement from, I think, the 60% I heard last time.

Yes. So, I think the point is that we have equity in a lot of our loans. That doesn't prevent people from going bad, but it does help give us certainty, or some ability to have comfort -- that even if we take the property, we'll be able to work our way out of it. And for those that we've done, we are seeing that our estimations are fair and good at this point.

Okay.

Last question, then I'll get back in line. The non-interest income -- could you talk just a little bit more about what the [ekinleand on] pipeline sort of means to us as shareholders --

Sure.

-- in terms of gain on sale, et cetera?

Yes, well --

Yes.

Let me give you the gain number just for this quarter. We made $54,000 for mortgage banking income. And that's a top-line number that doesn't include some costs. But that is just the start, really, of us getting going.

Right. I think that you can look at -- without -- and not -- we [don't] have too many borrowers on the phone listening in -- I'd say probably, you think about a point and a half of gain-on-sale income associated with the pipeline. But I don't expect anyone to get excited about that right now. And what we're doing is we're spending a lot of time working on getting the system up and running, and getting our marketing costs down, and building a platform. And so that has developed really over a relatively short timeframe. And we see that continuing to grow. So we're hopeful that we will be able to grow that into something meaningful, and we think we will.

In addition, what that group does for us is it allows us to build the optionality into our asset-generation platform, such that if wholesale opportunities become less attractive, we could again start the portfolio loans. And at some point in time -- although it's not now -- even the jumbo market may look attractive again. So obviously, it's a core business for thrift. Our technology that we're rolling out is pretty nifty and has some nice features associated with it -- automated underwriting, and allowing consumers to really get online rate quotes that are very accurate, and things like that.

So I think it will be a contributor. We're going to push to make it one. It's a focus of the Bank. But it's not quite going to be that big a contributor right now. But by the end of this calendar year, I think you'll see more from it.

Hey, great job, guys, I really appreciate it. I'll get back in line, thanks.

Edward Hemmelgarn, Shaker Investments.

Hi, Greg. (inaudible) And Mike, congratulations on a very good quarter, too.

Got a number of questions here. One, I guess I'll start off -- could you talk about your -- you had an increase in loan charge-offs on your recreational vehicle loans. Or I guess it was combined recreational vehicle and auto. Could you talk about that a little bit?

Sure. We currently have approximately five RVs in the 90-day-past-due category. That's really kind of where we stand, exactly today, on RVs. But that -- in 90-days-plus, in the category.

But the -- what we've been experiencing is that, as potentially the economy becomes softer here, we are seeing more, frankly, items like job loss, which can potentially come up. Sometimes it's not necessarily related to FICO and FICO bans. But our experience thus far is that the majority of our write-downs have resulted from the portion of the portfolio that was originated initially. We tightened up our standards significantly in 2008 and raised the ban. So we're still seeing that the majority are coming from that older vintage.

And so, I think as we look forward, we are hoping that the FICOs and the details of the prior past write-offs will kind of burn out and will be able to stabilize. But that is an area that we'll continue to focus on, as Greg has mentioned.

I think -- I don't think this will necessarily be more pessimistic than Andy's response -- I think that, look, we have to monitor that portfolio. And clearly, it's a direct exposure to a consumer that we have that's much more related to their ability to pay than any other of our portfolio investments or loans. Because it's -- although it is collateralized, in the sense it's backed by an RV, that collateral is really not sufficient to cover the value of the loan. So that obviously makes us vulnerable to people who have dual incomes and lose jobs, and decide they'd rather give up their RV than something else.

So I think we've got to monitor it. And we've put more loan losses against it, and --

I mean, we are now at approximately 1.5% of the entire portfolio, as far as a reserve. That's up from about 1% the end of last quarter. So we've increased the reserve 33%, even after the write-offs.

So -- and there was a write-off in there that was related to a fraud. But I'm not going to say that -- I think it is something we look at, and it's something that, candidly, when I came here, I basically shut off this product line for a reason. I'm not in love with it. I think it's not a great time in the economy to have it. But also, it's a small percentage of our assets, and not particularly -- and it's not as if it's performing badly in comparison to what other people are experiencing on their auto loan portfolio or credit cards, and those sort of things at all. But nevertheless, it's something we got to watch.

What percentage of the portfolio -- I mean, [it's about] $55.3 million -- what percentage of it is recreational vehicles? And is it all recreational vehicles, or --

It's almost all. There's a couple million of auto in there, but it's almost all RVs. The auto was really a side business that was mostly just direct, with people coming directly to us. Did it for no marketing costs, and the same group did it. So --

The other thing is that the weighted average size of the loan is relatively -- a lot of these are not the large busses that you see driving down the street; they're actually trailers. The weighted average funding amount is in the neighborhood of $50,000. So that's not a bunch of large RVs.

No, but my experience with these things is that they -- when they roll off the lot, they depreciate rather remarkably. And my guess is that in this sort of environment, the value that you can receive from an RV is pretty small.

Yes, I think -- and Edward, I think I have the perfect one for you. It's really a nice one. We'll sell it to you for a good price.

No, I think -- look, I think you're absolutely right. There's no doubt that when it rolls off the lot, it depreciates. And also -- in this environment, it's too early too tell -- we have been getting 60-ish kind of percent recoveries. And I think those are subject to pressure, because in an environment like this, people are going to be selling those things. So I think you're right about that.

What -- I'm just curious -- what kind of -- when you initially made those loans, what was the typical loan-to-actual purchase price?

The loan-to-purchase price are typically fairly large. There were down-payments associated with them. But the -- one part of that business is that often there's trade-ins associated with it. And so the loan-to-value on that portfolio is fairly high.

Okay. But you're not experiencing an inordinate amount of -- or, I guess, have you been seeing a much bigger default rate lately, or --

You know, we have been seeing an increase in delinquencies in that portfolio. I think it is manageable, given the size of it. But -- and that's why we increased our loan loss reserve in that area.

But again, as I mentioned, there are five loans that are 90 days past-due.

Yes (inaudible).

So it's not -- when we say increase, it's an increase for us. But again, at five loans on a $55 million portfolio, we want to put it in perspective.

(inaudible)

But you also charged off, though -- well, for the six months, $708,000.

That's correct.

That doesn't relate to those five -- does that relate to the five loans that are 90 days past-due, or --

No. No, those are something different.

Those were different loans?

No, you're going to have -- look, I mean, in an environment where people are -- where jobs are dropping at 500,000 a crack -- or as Nancy Pelosi said today, we're losing 50 million jobs a month. So I think you're -- it's a concern, right? You're going to have some -- there's going to be some people with RVs who lose their job. And I think that they're probably going to want to -- no matter if we encourage people to live in their RVs, they may still choose their house or car over their RV.

All right. Okay, couple of other questions here, before I get back in.

You indicated, Greg, that you talked about some issues, or some features that you expect to be able to offer. One of them, I think we've talked about in the past, was where customers will be able to scan their checks for deposits in. And you said that it would be available at the beginning of the next year. Is that next calendar, or next fiscal?

We think probably, to be safe, next calendar year. We're hopeful to do it a little bit sooner. Really, it's not a technological issue as much as the -- there's been regulatory scrutiny associated with this. They've issued some guidance associated with it. And also, we're also working on the right mechanisms of allowing [our] core processing system to actually automatically process holds, and figuring out a way to risk-segment customers. It's more risky, obviously, because that customer can go take that check and bring it somewhere else. And when they do that, then if they beat us to cashing it, then we're going to have a loss.

So we just have to be very thoughtful about that. I think that is an important feature. I know, since you and I have met personally, we've talked about this before -- I will tell you that that's an important thing. But our deposit operations are going absolutely gangbusters. We are seeing an absolute flight to quality. And we are seeing people flee big names, and saying things -- calling me and saying things like, I just can't trust Big Bank X anymore. I'm putting my money with you.

So we are seeing very robust deposit growth. Deposit growth isn't an issue for us. What is an issue is just -- it would be great to get more capital at reasonable prices, which -- that's not going to happen. So --

Can't have everything.

-- we're really doing very well on deposit side. Our -- everything, from the way the website looks to the process by which we're processing accounts, and the new features that allow us to get through the verification process automatically, has just been very, very good.

Can you talk -- you mentioned something in your initial comments about a statistic you had for deposit growth, or deposits you took in in one day, or --

Yes, we had 270 million accounts open on -- 270 accounts and $8 million of deposits come in just on Monday. And if you -- I don't know how much you focus on regular retail bank branches, but if they get four or five accounts a day, they're sort of jumping up and down that they've had a great day. And so our little group of six people not only service those -- the 35,000-plus accounts, but opened 270 accounts and [were] processed multiple hundreds more of applications. So that just goes to show you, $8 million deposit growth in one day is what's -- that's what's feasible, if we ever really had to turn it on to grow our asset and deposit base. So it's just a very, very powerful thing. And frankly, that would be a great quarter at a very high-performing bank branch, and we did it in a day.

Okay. Well, just one other question here -- one of the other statistics we had talked about was the percentage of people that were trying to open an account, or that were initially inquiring about that. You were focusing on improving that convert rate. Where does that stand now?

We -- I don't want to give you an exact number, because there's obviously lag times associated with the time when a deposit application comes in and when it's funded.

Sure.

But it is massively improved. It is improved -- it's one of the most dramatic improvements that I've ever seen, and I've consulted for a lot of big financial firms, the McKenzie and stuff. It's one of the most dramatic improvements I've ever seen from a process. It's incredibly good. It's reduced our marketing costs per account in an amazing way.

And it's just very, very exciting for us, because there was a -- it was candidly a myth that was believed around here, that a high percentage of the people who applied were frauds. And obviously, you do get frauds in Internet banking. But the percentages that were being implied previously about what was a fraud were simply not correct.

And by going through and analyzing that process, by changing the way we responded to customers -- I mean, in some respects, it's a simple issue -- this is one of the many changes, but we used to respond to customers -- we can't ID you; therefore, you've been turned down. If you'd like to forward further information, please do so. Well, now the letter says, Thank you. Welcome to the bank. Here's all the great things we can do for you. By the way, for your protection, if you could send in [a] letter specifically designating what we couldn't verify about you in this form -- and by the way, welcome aboard, and here's how you -- here's what we're doing for you. The response rates have been incredibly higher. I don't think that should be a surprise, but it's what you get when you actually provide a disciplined process-based approach to looking at management.

And so this management team has heard me say many, many times -- and managers here who want to survive and do well are very focused on their business processes. So we have Jack Henry out here today, and it's a -- they have a consulting group that discounts their fee against the core processing revenue. And they're going through all our processes, which we have diagrams for in detail about what we're doing manually -- everything from ticket processing that we think we should be able to enter into the system directly, and going through and looking for efficiency.

So we're never going to get there. But this bank's -- one of its core competitive advantages is -- has to be operating efficiency. And so we're going to push very hard for that. And in doing that, we find ways of improving our processes, and we've seen results from that. And so we've seen it on a lot of different metrics. For example, on our servicing side, the ability to increase the number of loan payments that were coming in electronically was very important. We did that, and it saves time and effort, because it allows those people to free up to board loans that we're buying through our wholesale loan program.

So we have this efficiency ratio for a reason. Thankfully, the government hasn't made us cancel our trip to Vegas, because we never had a trip to Vegas. But we're looking all across these areas, and we really push on, and we're seeing great results. We have more to go, but I'm pleased with how everybody's responded to what I feel like is a disciplined way of looking at our processes.

Okay, thanks. I'll get back in line and let somebody else ask some questions.

[Alan Coltonin], private investor.

Hello, Greg.

Hey, Alan, how you doing?

Good, great, great quarter. Fantastic.

[Thanks].

Listen, I just have a couple quick questions. One is on this remote deposit issue.

Sure.

Are you contemplating doing that for existing individual single depositors? Or are you contemplating more on the line of a small business or a commercial kind of relationship with the customer?

Well, it's a great question, Alan, and I know where you're going with that. Usually, this has been rolled out more frequently to businesses. We have -- one of the issues with us having business accounts is that there are regulations around how much we could pay -- or frankly, if we can pay -- interest on business accounts. Now there's sweeps, and maybe other ways to get around that. But one of the things that we've always had difficulty doing penetrating the business market is the fact that we can't use the advantage that we use in other places, by saying, Hey look, we'll pay you some interest on your checking account, and we're just as good as somebody else.

So the business account issue is a broader issue that has to involve us really thinking through how we're going to compete competitively there. So the answer -- the short answer to your question is that we're thinking about doing it for our existing customers. It's something that USAA does with their focus on military people, and whatnot. And we're trying to figure out how to do it in a way that's not going to get us burned.

Obviously, it's much easier to decide to send a check two places when you're just sending a copy and you're keeping the original.

Right.

So we just have to think through that. And there's ways around it, and people have dealt with it. There's ways of segmenting the customers from a risk perspective. And we also have to assess demand as well.

One of the things about us as an Internet bank -- and I think we need to keep this advantage -- is obviously, if you go to ING, they won't give you an ATM card, they won't give you checks. You're doing everything electronically or else, and they call it a checking account. I don't know. I think people should call them on that. No checks, no checking account.

Right.

Call it a EFT account.

So we're looking at that. And we're going to -- I think it will be an advantage for us. We just have to make sure we're not going to get hurt on it from a risk management perspective.

Okay, thank you.

And then, my second and final question was regarding these Treasury shares. You'd mentioned that you purchased 276,200, I believe, shares, I guess on the open market in Q2?

Yes.

How much more do you have in your authorization?

Well, the exact number is -- 319,291 is the exact number. And again, Alan, just -- I want to make sure you said that clearly. It was a total of 276,200 --

Right.

-- 276,200 shares were purchased.

I think that obviously, the Board would have -- we talk about this at the Board in depth, and there's a lot that goes into thinking about this. But obviously, we have more allocation available that's been subject to Board approval. And if we continue to see our stock trade at the levels where it is an incredible value, we will be buyers. Because we understand what the stock is worth. And I'd like to convince others of that, and I need to go do that.

But in the meantime, I'm going to make sure that we also take advantage of that as well, in the context of prudent capital building and reserve building, and -- or not reserve building, but prudent reserves, and looking at investment opportunities, and all the other things that are available to us to use our capital for.

All right. Great. Thanks, Greg.

Sure.

And Andy.

John Lucas, Wedbush.

Greg and Andy, congratulations on a wonderful quarter. I don't know what you do for an encore here.

Hopefully --

Thank you, John.

Thank you, John. Hopefully have a better quarter. But we'll remain cautiously optimistic in this economic environment.

Most of the other bank reports I've been reading of late are all in red ink.

Yes.

So we forget what you're doing compared to the industry. And I think one thing that has helped you is -- a lot of us don't understand -- is this correct that you do not have any construction loans?

No, we don't have any construction loans. And we have one land loan that is, I think, $80,000. I don't know, Andy, it's something -- whether it's $80,000 or $70,000, it doesn't matter, it's almost nothing. So that clearly has been extremely helpful.

I think that the prudent underwriting on the real estate side went throughout. That doesn't mean that there are not going to be loans that go bad and things that happen. Because we've had -- I don't know if it's a Four Sigma, Five or Six Sigma event. We've had that event. But that clearly has helped, not having construction, you're absolutely right. That's been just -- and the worst is yet to come for that, because interest reserves mask a lot of underperformance there.

And so that loan may not be paying. But as long as those interest reserves [that] get to be counted as current, and then all the sudden, when those reserves run out, boom, it looks bad. And that's really what's going to happen for a lot of folks. It's a tough situation.

Just to add that, John, just a note -- we have $30.2 million in commercial mortgages, which of course is another area where they're predicting large fallout. So that's out of our total portfolio of $653 million. $30 million is commercial mortgage. And again, I cited the LTVs -- still very, very low.

Yes. Thank you there.

And one last question -- could you speak -- we all hear all these comments about TARP. And how do you see that could affect you if you elected to receive TARP money, or if you don't?

I think -- so I'll answer that question a couple ways. One is that as I said, the regulators have recommended that we receive TARP. They basically, as you know -- you've read enough about it -- if they don't think that you're of sufficient asset quality and regulatory capital quality, they'll basically ask you not to submit, or pull back your application. That's -- we've been given strong regulatory support for it. And I think the question really becomes is it something that the Board and management think is the appropriate approach.

And obviously, there are trade-offs to it. One, I think, clear benefit is that the additional capital allows us to grow more. And we have a lot of good growth opportunities right now, the way we're structured. And that obviously would be helpful to earnings. I think the -- we've continued to watch the process evolve and watch the different restrictions that have been placed on recipients.

And one of the things that I find, from a philosophical perspective, bothersome is that this is being billed as a program for capital injection for healthy banks. And frankly, for us to give up 500,000 to 600,000 warrants at the price our stock is trading at, and pay 5% return, isn't all that bad for the government. Because I'm pretty darn certain they're going to get their money back. I've been buying stock when I can here, and I feel good about this. So I think they should, too.

The problem is that when you get out in the media, when you get out with politicians, they start talking about it being a bailout, and saying things like, Well, we're going to limit the top 25 people to not receiving incentive compensation. Well, assuming that I would be willing personally not to receive incentive compensation, the top 25 people in this company reach down to a mortgage salesperson who's making barely enough to feed himself out of his salary, and a bonus and commission on each loan he sells.

So are they exempting salespeople in the Final Federal Register Rule yet? And I know that they're saying well now they're not going to apply that rule to companies that don't get extraordinary help, and whatever else. I think my point is that there's a lot of political maneuvering going around. And the question is going to be how well that is thought through. And I'm not sure that it always is going to be well thought through.

So the Board has been very thoughtful. And I think the deliberations have been very good. I don't think -- there's not been a final decision reached about which way we'll go. And I think frankly, the ability to watch the developments is very helpful for making a good decision, because there's no contractual protection in this, as I've stated on prior calls. It literally has a section that states that they can change the rules for your capital at any time. And it doesn't say things like "except the rate of dividend that you shall pay." It doesn't say that. It just says we can change it at any time. So you really are placing yourself in the hands of the government, and hoping that they do the right thing.

So others have done it, others have turned it down. And we're still considering which way to go.

Thank you so much.

Mitchell Sachs: Mitchell Sachs, Grand Slam.

My question was going to be on the TARP. I guess just -- hear what you guys have to say, it sounds to me like you're leaning that if you were accepted that you might not actually take it.

Yes, I don't think -- look, I don't have a final decision. I don't think they -- there's scant reason for us not to get chosen. We got another -- we got this source-of-strength agreement from the OTS, which is another precursor to it, which is basically asking that -- making sure that we actually push the money down, and things like that. So I think that we are -- we're going to look at it carefully and see which way is the appropriate way to go. So I don't -- look, I don't have the -- they're a busy group there, and we're in no hurry. So I think we like our position where we are, of being able to see how the new administration deals with these issues, and see -- and try to get a sense of the level of rationality applied to these things.

And in some cases, just as a sidebar comment, when you look at -- so let's say that now B of A can't pay anyone. The government now has tens of billions of dollars investment in B of A, and they don't want to pay anybody over $500,000 to manage that investment. Well, the decisions that are made by an executive at B of A can evaporate hundreds of millions of dollars in an afternoon. I don't know whether or not you want the guy out playing golf, or messing around with his kids in a park, or working for a bonus or not -- well, actually, I do know. Right?

And so, some of these things aren't exactly smart that they're doing. And so we just have to wait and see how many other ones there are.

Okay. Thanks very much, I appreciate it.

Edward Hemmelgarn, Shaker Investments.

Okay, great.

Well, I'm just -- when you got an indication from the government about TARP, how large of an investment were they talking about?

Well, I mean, it can be 3% of risk-weighted capital. So depending on what quarter they're using, we're talking about $15 million, $16 million, $17 million, something around there. So that's what it is. And in return for that, you obviously -- you get that capital. In return, you don't pay dividends, you don't repurchase shares, you don't do a bunch of other things. What other operational limitations, we'll see. And so there's that return.

Okay.

Couple of other questions -- one, did you re-up in the Federal Reserve Discount Window loan?

You know, we didn't. We replaced it with our deposit growth, which has really been going very strong. That's a decision that I think -- obviously, you always -- banks take three sources of risk -- credit, liquidity and interest rate. Frankly, we have an incredible, large amount of capacity at the discount window, hundreds of millions of dollars, which -- we have tested each of those lines of collateral. And they're clearly comfortable with giving us those lines. But that's obviously a very nice, profitable way of getting -- of funding your liabilities.

And so, will we use that again? We might, it's something we look at in the whole mix of thinking about how we manage our margins and our liquidity risk.

(inaudible) given the fact that you can borrow for so cheaply right now from the discount window --

Yes.

-- is it just that you felt that an ability to generate good, long-term deposit customers was more important than getting a lower rate out of the discount window?

I think that's right. And also, you got to think about the timing of how you grow your assets and liabilities, right?

Yes.

Particularly if you're looking at loan purchases of some size, and those sort of things, you've got to fund those. The discount window's a great way to do that, because obviously it can happen immediately. And deposit growth, unless you want it to pay a higher rate, occurs better over time.

So those are the type of trade-offs you're making. And obviously, if you're looking for every maximum basis point, every quarter -- and we obviously want to make money, but we're also thinking about things over multiple quarters, and thinking about building the franchise as well.

Okay, just two more questions, then.

One, you've gotten a number of options, I notice, that expire in like 1.1 years or something.

Yes.

What's the outlook on those? Do you expect them to get exercised, or --

You know, I'm new here, relatively, as you know. And so I don't hold those options. I'm sure that obviously the individual holders of those options will be thinking about what they're going to do. And so I'm sure those discussions will be had, and eventually we'll get into those. But it's just been something that's so far out that frankly there hasn't been a lot of discussion on it.

So I don't --

I only ask it, because it was actually a fairly near-term event. I mean, it's -- I noticed, when I was looking at your options schedule, it was --

Yes. No, it was. If they expire in a year and a half, or a year -- it was 1.1 years, something like that?

-- years, yes, yes. (inaudible)

It's a weighted average. So yes, it's a weighted average. So there -- look, I think we'll -- I think that -- look, I really can't speak for people who -- individual owners of those options. So I don't really have much else to say on that.

Okay.

And one more question, then -- I had another question. Oh, loan purchasing activity -- in the past, you've talked about [is] the favorable environment out there for you to go out and buy loans from other financial institutions. What -- can you talk about that environment again, or --

Sure. It's great. There's a lot of opportunity. I wish we had more capital, because there's a lot of opportunities there that obviously -- we obviously get current appraisals and current values on everything. So some of the backups in asset prices are shocking, but we're just pleased we don't own those loans, as we find how shocking they are.

So that continues. We continue to look at ways of putting structure around large loan purchase, in the sense that when you're achieving large discounts, the ability to utilize that discount as a form of credit enhancement is something that we're continuing to look at and work on technologies associated with that. It's not always the easiest thing, but it's certainly -- to put a very obvious point on it, you buy two loans at $0.70 and $1.00; one goes bad, you still have a bad loan. Right?

Oh, yes. Yes.

Even though you've had multiple millions of discounts potentially embedded in the balance sheet to be realized over the timeframe in which that loan has amortized up.

So we continue to look at those things. But the opportunities are there. We're building the origination businesses because we're looking at those as gain-on-sale revenue, but also because again, we want to have the option. But we don't -- if anything, it looks like this wholesale opportunity is accelerating. So we're not seeing any falloff.

Well, [in terms of -- yes, on that], can you give me, just lastly, some idea of what your expectations may be for this mortgage -- your origination business? I mean, you did -- I realize you probably weren't profitable in the last quarter, only with $54,000 in revenue. But where -- if you look out, say, fourth quarter -- or December quarter of '09 --

Right.

-- what kind of origination volume would you like to be getting to, to make you feel like it's a good business for you?

I think in the fourth quarter of '09, I'd like to have $100 million a quarter of originations. I think what we have is -- and I don't think that's unachievable. What we've been doing is -- the way we're trying to do these originations, directly over the Internet, really keep -- have salespeople do high volume at low cost, is try and do something different. Our salespeople are paid in a very different manner than mortgage salespeople were traditionally paid. We're getting our leads in a different manner.

So what we have to do is -- right now, our systems are not set up for that in the right way. So we have -- to do what we need to do, we need to have very good processes, and our processes aren't there yet. So adding 15 or 20 more mortgage salespeople and another 20 processors, we have to make sure that we actually have all the metrics and the compensation programs designed, in place. So it fully takes into account the cost of leads all the way through the process, and all those sort of things.

And so, it's -- that's a work in progress. We have a set of folks who are working very hard on that. And I think that we're going to prove out that concept. And then, once the concept is proven out, I think there's significant opportunity to scale the business. But we want to make sure that we're scaling something profitable. And that's a precursor to putting a lot of bodies behind it.

All right. Appreciate it. Thanks.

And that concludes our question-and-answer session. I'd like to turn the Conference back to Mr. Garrabrants.

All right. Thank you, everyone. I appreciate the time and look forward to speaking next quarter.

And that concludes today's Conference. We thank you for your participation and hope you have a wonderful day.