Axos Financial Inc (AX) 2011 Q2 法說會逐字稿

Good afternoon and welcome to BofI Holdings earnings conference call for the second quarter ended December 31, 2010. 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 then he will turn the call over to Mr. Micheletti, who will then provide a more detailed discussion of BofI's financial results. Finally, Mr. Garrabrants will make some closing remarks and open up the call 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 that management may take -- 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, among other things, the economic environment, particularly in the market areas in which BofI operates; competitive products and pricing; fiscal and monetary policies of the US government; changes in laws and government regulations affecting financial institutions, including regulatory fees and capital requirements; and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in prevailing interest rates; risks associated with the conduct of the Company's business over the Internet; credit risk management; asset liability and management of financial and securities markets; and the availability of and costs associated with sources of liquidity.

Examples of forward-looking statements include statements related 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 such as efficiency ratio, regulatory capital ratios and return on 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 US Securities and Exchange Commission. Any forward-looking statement as to the Company's future financial performance represents management's estimates as of February 3, 2011. BofI assumes no obligation to update these forward-looking statements in the future due to changing market conditions or otherwise.

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

Thank you. I'd like to welcome everyone to BofI Holding's second-quarter conference call for the fiscal year ending -- or I'm sorry, for the quarter ending December 31, 2010. I thank you for your interest in BofI Holdings and Bank of Internet USA.

Net income for the second quarter ended December 31, 2010 was $4.927 million compared to $5.548 million earned for the three months ended December 31, 2009. Earnings attributable to BofI common stockholders were $4.850 million or $0.45 per diluted share for the quarter ended December 31, 2010, compared to $5.375 million, or $0.61 per diluted share, for the quarter ended December 31, 2009. Excluding the after-tax impact of gains and losses associated with our securities portfolio, net income increased by 14.1% to $4.917 million for the quarter ended December 31, 2010, compared to $4.311 million of adjusted net income for the quarter ended December 31, 2009.

Our single-family mortgage Banking unit had another great quarter, reaching $1.8 million in gain on sale on a loan origination volume of $80 million, up 33% over the $60 million originated for the sale in the first quarter ended September 30, 2010.

From a loan production perspective in the quarter, the Single-family jumbo mortgage origination unit originated $53 million of portfolio jumbo loans, the multifamily unit originated $74 million in new mortgages, and the Wholesale Acquisition group purchased $32 million in new mortgages. Together, the three units originated or purchased $165.2 million in new mortgages in the second quarter of fiscal 2011.

Other highlights for the quarter include total assets reaching $1.660 billion at December 31, 2010, up $239 million compared to December 31, 2009. Total deposits reached $1.116 billion at December 31, 2010, up 15.3% compared to December 31, 2009.

Our efficiency ratio for the quarter ended December 31, 2010 was 38.8%, still strong after our operations growth. Our net interest margin was 3.72% for the quarter ended December 31, 2010, above the last quarter's margin of 3.55% and our current target of 3.5%.

Turning now to the development of our lending businesses, one of the most significant developments this quarter is the continued strong growth in originations and pipeline of our single-family jumbo and multi-family mortgage groups, followed by the culmination of a number of significant strategic efforts in those businesses that were concluded this month and this quarter and the prior quarter to solidify our growth trajectory.

On the portfolio Jumbo side of the house, the volume of portfolio Jumbo originations rose to $53 million in the December quarter from $30 million in the prior quarter. To give you a sense of how well that business is growing, on September 1, the portfolio of Jumbo mortgage origination pipeline was $57 million and resulted in $53 million of Jumbo originations for the quarter ended December 30. On January 1, the Jumbo pipeline was $70 million. At the close of business yesterday, only one month later, the Bank's Jumbo pipeline was $104 million, up approximately 50% from only one month before.

We have not compromised credit quality and have in fact tightened our lending requirements a bit from the prior quarter. The weighted average LTV of the single-family portfolio jumbo originations this quarter was 56% and the average FICO was 746.

Turning now to some significant business developments, the Bank signed two of the largest preferred lending cooperatives in the country and gained preferred relationships with these two lenders, Lenders One and Capital Markets Corporative. Lenders One is a cooperative of approximately 180 members, including 63 financial institutions and large mortgage bankers with a minimum net worth of $2.5 million that originated over $87 billion of conforming mortgage loans last year. Capital Markets Cooperative is another large cooperative that originated over $26 billion of conforming mortgages through their 50 members. This preferred lender relationship for Jumbo products was previously held by Thornburg Mortgage and the Bank has been fortunate to be able to establish a preferred lender relationship with both cooperatives. This relationship does not require us to take any loans or result in a delegated underwriting, nor do we intend to do so. But it does provide the (inaudible) of legitimacy on the Jumbo program with a group of very large customers and will provide us with significant marketing boost through a credible and well established marketing channel.

On the conforming gain on sale side, the Bank added a significant new distribution channel when it was chosen as a preferred lender by Cosco. The Cosco mortgage platform is in its early stages. Cosco has been tiptoeing into the market of their mortgage platform and introduced it this week with an e-mail to a certain target group of its members. This will be followed by an aggressive and successive advertising campaign, including ultimately a full-page spread in the Cosco Connection magazine with a large distribution to Cosco's over 46 million members.

While the short and long-term outlook for the portfolio Jumbo mortgage business is very good, due to seasonal factors, a spike in long-term interest rates, and a delay in ramping up the marketing sources such as Cosco, this coming quarter's conforming mortgage banking gain on sale revenue will be negatively impacted in comparison with the current quarter. As our Jumbo originations continue to pick up, we are finding strong investor interest in that product, and the sale of that product in the future will likely be a source of incremental gain-on-sale income. However, sale of Jumbo originations, at least this quarter, are not going to make up for the negative quarterly impact of reduced gain-on-sale revenue in the conforming mortgage business.

Our spread income will increase this current quarter, this coming quarter, in comparison with the quarter ended December 30, 2010, because of the nice growth in our earning assets that reached over $1.7 billion in this first week of the month of February.

Our multi-family business continues to hit its stride and has seen significant increases in its pipeline and production over the last quarters. In the quarter ended September 30, 2010, the multi-family group originated $27 million in loans. In the December quarter, the multi-family group originated $74 million in loans, a 174% increase over the prior quarter.

The current pipeline with money up is approximately $65 million. The weighted average LTV of the multifamily loans originated was 59% and the average debt service coverage was 1.48.

Our Wholesale group continues to be busy with transactions that are of high credit quality and strong profitability. That business will continue to be an important component of the Bank's asset generation capability but will shrink as a percentage of the business as more predictable origination platforms continue to grow.

We continue to build a foundation of our bank for not only the growth we are experiencing but the growth we are expecting to experience. I believe, from an executive management perspective, the current core team we now have in place will be capable of at least doubling the size of the Bank. Executive talent will of course need to be added for new revenue producing ventures, but the core leadership team in risk management, credit, internal audit and compliance is capable of protecting the Bank even as we grow significantly in size.

As a recent example of our investments in this area, in the December quarter, we split the role of Chief Credit Officer and Chief Risk Officer, hiring a highly experienced Chief Risk Officer. Our Chief Risk Officer was a former OCC examiner for over a decade before joining the entrepreneurial Silicon Valley Bank and worked as a head of commercial credit at Capital One Bank. He is a strong addition to our team and will assist the Bank in transition from the OTS to the OCC as the OTS is merged later this year.

We have borne significant additional costs associated with scaling our origination groups, but for the loans that have been placed in the portfolio, we've only begun to realize the benefit of the spread associated with income that those loans will generate. We've also borne significant cost of investment in risk management for structure that will allow us to comply with the increasing regulations and regulatory scrutiny that all banking institutions can be expected to be under in the foreseeable future.

Now, I'll turn the call over to Andy, who will provide additional details on the financial results.

Thanks Greg. I wanted to note that, in addition to our press release today, we filed our quarterly results with the SEC on Form 10-Q. They are both available online through EDGAR, or through our website at www.BofIHolding.com.

First, I will discuss our quarterly results on a year-over-year basis as well as second quarter ended December 31, 2010 versus the last quarter, which was the first quarter of the fiscal year ending September 30, 2010. During the quarter ended December 31, 2010, BofI earned $4.927 million, or $0.45 per diluted share, compared to $5.375 million or $0.61 per diluted share for the three months ended December 31, 2009. Excluding the after-tax impact of gains and losses associated with our securities, net income would have been $4.917 million for the quarter ended December 31, 2010, compared to $4.311 million year-over-year and compared to $5.068 million in adjusted net income for the last quarter, which ended September 30, 2010.

For the six months ended December 31, 2010, net income was $9.759 million compared to net income of $9.256 million for the six months ended December 31, 2009. Net income attributable to common stockholders was $9.605 million, or $0.89 per diluted share, compared to net income of $8.910 million, or $1.02 per diluted share, for the six months ended December 31, 2010 versus 2009.

Net interest income increased $1.147 million in the quarter ended December 31, 2010 due to a 17.8% increase in average earning assets primarily from loan originations and loan pool purchases. Our net interest margin decreased 30 basis points in the quarter ended December 31, 2010 compared to December 31, 2009. As the earning rates on the loans decreased 45 basis points, that was partially offset by decreases in our deposit rates and borrowings. Our rates on deposits and borrowings decreased 53 basis points.

Provisions for loan losses were $1.6 million for the quarter ended December 31, 2010, which was equal to the provision year-over-year and was equal to the provision last quarter.

Moving to non-interest income, the quarter ended December 31, 2010 was $1.927 million compared to $2.751 million year-over-year and compared to $2.122 million for our last quarter ended September 30, 2010. The non-interest income for the three months ended December 31, 2009 was primarily the result of gain-on-sale securities of $6.5 million, gains of $454,000 in our mortgage banking business, and an OTTI loss of $4.1 million. The increase in mortgage banking income was due to the increase in the origination volumes of loans held for sale, which moved from $31.1 million in the last fiscal year to $79.1 million in this quarter for this fiscal year.

Non-interest expense, or operating expense, which is comprised primarily of compensation, data processing, Internet expenses, occupancy, and other operating expenses, increased $1.748 million to $6.240 million for the second quarter of fiscal 2011 compared to $4.492 million for the three months ended December 31, 2009.

Total salaries, benefits, and stock-based compensation was $3.586 million for the quarter ended December 31, 2010, compared to $1.778 million for the quarter ended December 31, 2009. Of the increase in total compensation expense, 26% was attributable to mortgage origination commissions paid to employees. Another 26% was attributable to additional staffing in our mortgage lending units, and 48% related to other staffing. Included in that other staffing number is a one-time payment made in connection with the staff restructuring of $241,000. The bank staff increased from 64 to 140 full-time equivalents between December 31, 2009 and 2010.

Moving to Professional Services, which includes both accounting and legal fees, they increased $31,000 for the quarter ended December 31, 2010, compared to the quarter ended December 31, 2009. The increase in Professional Services was primarily due to legal fees for loan acquisition contracts and foreclosed assets.

Advertising and promotional expense increased $82,000 for the three-month period ended December 31, 2010, compared to December 31, 2009, due to increases in lead acquisitions for our single-family loan origination programs and increased advertising for our multifamily origination program. The costs and losses associated with the maintenance of our sale of our real estate-owned and repossessed vehicles decreased $543,000 in the three-month period ended December 31, 2010, compared to the three-month period ended in 2009. This was due to a reduction in the volume of REOs.

The cost of our FDIC and OTS standard regulatory charges increased $85,000 this quarter due to higher average deposit and borrowing balances for the current period. Other general and administrative expenses increased $143,000 for the three-month period ended December 31, 2010, compared to last year, by merely due to an increase in loan volumes, an increase in bank customers, and an increase in the number of employees.

Our efficiency ratio was 38.88% for the second quarter of 2011 compared to 28.56% recorded in the second quarter of 2010 and compared to 35% for the first quarter of fiscal 2011. The efficiency ratio is calculated by dividing our operating expenses by the sum of our net interest income and our non-interest income.

At December 31, 2010, our Tier 1 core capital ratio for the Bank was 8.1% with $51.5 million of capital in excess of the regulatory definition of well-capitalized.

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

Thank you very much for joining us this afternoon. That concludes our prepared remarks. Operator, can you move the -- open line for questions and we will take questions.

(Operator Instructions). Andrew Liesch, Sandler O'Neill and Partners.

Nice quarter. A couple of questions on the margin. It looked like funding costs declined quite a bit. I'm curious what -- like maybe a dollar volume, and like what sort of rate you have in higher-cost CDs that are rolling off this quarter.

Let me give you just a flavor of that. As we mentioned in our last couple of calls, we continue to have CDs repricing that allows us to expect generally our rate on deposits to come down. As of the next following month, for example, we are repricing our $13 million at 2.06%. That moves to almost $11 million at 2.32%, and then hits a high mark of $17 million in August of '11 at 2.35%. So, as we've noted, we still have a significant amount of term CDs that are rolling off in the 2% range, which can be replaced for rates significantly below 2%.

Yes, it looks like there's about 100 basis points right now on the stuff that's coming in August, and the $11 million you talked about as well.

I think that's about right.

Then on the other side of the balance sheet, it looks like the securities balances were lower but the yield was higher. What did you add during the quarter to boost that yield?

I think there were some repayment activities which helped the yield on some of the securities for the period, so that impacted it slightly. But overall, the securities growth has been somewhat flat across the rate band, and I don't necessarily expect that to be recurring all of the time.

Okay, thank you. Then one last question -- when was your most recent regulatory exam?

Our most recent regulatory exam is ongoing now.

All right, thanks so much. Really nice quarter, guys.

Marc Heilwell, Spectrum Advisory.

Hello. My question -- can you give us an idea, or is it included somewhere, of the states in which your mortgage portfolio is located?

Sure. Let me give you an idea. I think the best breakout is in our 10-K in the business section, but I'll give you a short synopsis of that area.

Yes (multiple speakers)

About -- this is just the year-end number. About 30% is in Southern California, 14% is in Northern California. This would include all of the property types, so single-family as well as multifamily, which are our two largest portfolios, in addition home-equity and a small amount of commercial. So all that blended together is that the next biggest state comes in or is Washington at around 9%, Texas at around 8%, Florida at 4%, Colorado at 3%, Oregon at 3%, Arizona at 3%, New York at 3%, and Illinois around 3%, so predominantly California but, frankly, spread out quite a bit across the country.

Are you going to begin to -- do you target states where you feel that the housing market is bottomed out, and you'd like to do some more writing there? Are you able to do that with your (multiple speakers)?

Yes, we have and we do. That occurs in a number of different ways -- through the wholesale business and the purchase business that we have done over the last number of years, particularly as institutions were being forced to liquidate their best quality loans, and we had an ability to pick through their portfolios. That clearly was a consideration that we took into account. In other instances, even in our core -- to the extent that we have a core market, we are located in San Diego, I'm not sure we really think of it that way. But we were out of the San Diego market in a very -- almost completely for many, many years. We have recently pushed back into that with the hiring of several multifamily salespeople and a jumbo originator as well in the San Diego market. So that would be an example of what I would say is, frankly, a market timing play related to where we think the San Diego market is, relative to where it was in '05 when the Bank exited.

My final question, which I don't imagine there would be too much interest in a detailed question -- detailed answer to this. But have you changed your direction? I know we had some money market declines -- some of our clients had money markets with you which we did not take commission on, by the way. So I see you had to go through the trouble of a separate contract. But has that program -- is that program going to be deemphasized? I get the sense that it didn't work out quite as well as you thought, or --

Yes, is this the BofI advisor program?

Yes.

No, it's not being deemphasized. We've had good success in that growth. We haven't devoted a ton of resources to it, but as part of our future growth, we do have a view of looking at those type of relationships from a broader perspective. The Cosco relationship fit in that category as utilizing affinities to act as distribution channels for our product. We are in negotiations right now with a number of very significant affinity groups that are quite large and will be useful distribution channels.

So we think the broker and the financial analyst, or I should say financial advisor on networks are still very much a part of our growth strategy to enhance our branchless distribution. We are investing in technology to make that program more seamless for the financial advisors, including -- it was funny. I was having a meeting the other day with the head of deposit operations, and we were talking about a customer service strategy to ensure we were able to accommodate both the financial planners and the customers when they call in exactly the right way, talking about what information to be exchanged and those sort of things. So it's not being deemphasized. It's continuing to grow. We expect continued success, and we have a number of new brokerages that look like they are interested in signing up. So we think it is going reasonably well.

Thank you.

Gregg Hillman, First Wilshire Securities Management.

Good afternoon gentlemen. Greg, it looks like you're on track to hit $2 billion in assets by fiscal year-end, June 30. Could you tell me how to think about asset growth from that point going forward? What are the key factors that would influence a speed up or slow down in the growth that you've recently been experiencing in asset growth?

Clearly, our ability to originate high-quality loans is the most significant factor, I would say. What I mean by that is, right now, we are keeping our credit standards at the levels that have been consistent with our current portfolio. So we are actually not changing the 53% average LTV despite the significant growth, which we are really pleased with.

One of the reasons why we are adding the type of distribution that we are related to the Capital Markets Cooperative and the Lenders One clients is that we believe that a wide net will allow us to continue to have a tight rein on credit.

So to answer your question directly, the only thing that would prevent us from having that growth that would go through the $2 billion mark would be a significant change in our ability to gain high credit quality assets.

Then the question would become one of all of the other ways that you go and do those things such as establishing additional relationships and the operational advantages you provide. But you obviously then would have to look at the price and the spread at which you are growing.

I am a firm believer that, given what's going on from a regulatory perspective and the amount of pressure that there is on banks to do everything from have at least part of an individual dedicated to vendor management, and the sort of things that are ongoing in the regulatory environment that size is an imperative, so I do believe we have to grow. I think we have the platform to do it. So I don't see why $2 billion would be a mark that would indicate any significant stopping point, and nor do I see it as something that's unachievable and going right through it.

So if your question was more capital-related, that's just something we need to model through, and that will be something that the Board and I will discuss as we continue to have asset growth and determine when and if capital is necessary.

Okay. Your whole bit about single-family originations, is your Internet platform for single-family originations, is it going to go down as a percentage of total single-family originations, or do you think you're going to be able to find a model to really grow that more rapidly than it's already grown?

Well, there is a real dichotomy that has gone on in the last month, or I'd say in the last two months. The single-family jumbo portfolio business, because of the customers and the addition of the nationwide sales force that I discussed last quarter -- and so to be really clear, last quarter, we had a couple of sales folks. They were mostly concentrated in California. We really went through and brought the rest of the team on, and put folks in key markets like New York and Boston. They are, this quarter, from a pipeline perspective, they are really beginning to show production. They are not anywhere near to be ramped up.

Then the Lenders One Cooperative, when you have a group that originated $86 billion in conforming mortgages and is looking for a home for a jumbo production, we are not concerned about production. In fact, we are actually exploring sale alternatives for that jumbo product because we believe that jumbo product is going to have a very strong uptake, given the service we are providing and the turn times and those sort of things. I think what -- so take that and compare and contrast that with the conforming gain on sale business which generated the significant increase in gain on sale income this quarter. That I am projecting to be down, given what is happening in that market.

Now, December is always a bad month to get people who are in no hurry to refinance or -- the home purchase market is not good in December, but it's more than that. What's happening is that there is a significant reduction in conforming volume industry-wide, and that is playing out in our business model right now.

Now, counteracting that will be the Cosco relationship and other relationships that we believe are a sustainable way of having strong growth in that model, but it's given just the timing of that, they are not going to be fully compensating for that this quarter. So, I just basically am giving an early preview that gain on sale income is not going to be as good as it was last quarter.

Okay. Finally, the whole area of loan loss reserves and write-offs -- do you think any other unexpected things will happen, such as in the RV portfolio, or do you think the RV situation has been contained, for example?

If I thought there would be unexpected things, then I would be expecting them. No, Gregg, I'm sorry. Did you buy any stock yet, Gregg? If you didn't buy stock, you only get to ask two questions.

No, look, I think the answer is, in that regard, that on our multifamily book for multifamily fundamentals seem to actually be improving significantly, particularly in California and the coastal areas, and not even coastal areas, frankly all around California. We've had a couple of large multifamily delinquencies. Most of them don't generate significant losses, given the demand for those assets. I think that obviously given the size of the portfolio and the relatively low delinquencies levels, if you have one additional delinquent loan, it can be somewhat of a surprise.

But if you look at our pipeline of delinquencies from a 30 and 60 -- 30, 60 days, they are down. They look controllable. We don't have good insight into anything that's happening there.

On the RV side, the RV side continues to have delinquencies that have to be written off every quarter. Those delinquencies are down, but I would expect that there is some default burnout associated with that portfolio. That portfolio is very sensitive to unemployment, and so to the extent that you would see an upturn in the economy, you would see an immediate upturn in that portfolio. It's the most credit sensitive portfolio we have. Obviously, we explore why these loans go delinquent, and the vast majority of these loans go delinquent within a number of months of people losing employment or having a spouse lose employment. So the employment situation affects that.

On the single-family side, for the loans we are originating now, given the LTVs and the drop in the market, I feel very good about those loans. They are very good credit quality, and so I am not concerned about that.

Then on the single-family side, we have not seen a large uptick in any of the legacy single-family delinquencies, but we also have struggled to clear those out despite our desire to do so, which involves continuing to work through servicing related issues there, some of which we have a difficult time controlling. So, I think things look pretty good. That wouldn't be my area of worry, if I had to rank them in all of the worries that I have. I am not worried about loan portfolio, significant loan portfolio or credit events. That's not my source of concern.

Thank you very much.

Edward Hemmelgarn, Shaker Investments.

A few questions. Greg, could you give a little bit more guidance on this -- your mortgage gain on sale for the March quarter? Are you talking about a 50% fall off? Are you talking about a 25%? What's -- I realize it's difficult to predict for the entirety of the quarter.

Right, it is difficult to predict for the entirety of the quarter. But I was talking with one of the large mortgage cooperatives, and they were willing to share their global -- because they run hedging for a lot of customers, and they were willing to share that their global pipeline from all of their investors, including their investors that focus on purchased business and all -- and field retail in all different distribution channels was down 58%. So given what we are doing from a Cosco perspective and a number of other things -- and I don't want to predict that it's down in some any particular number, but I do you think that number can give you something to just wrap your hands around the magnitude of the industry-wide drop that has occurred over the last number of months. Also, that's obviously just on the conforming side.

For us, we've got a jumbo business that is going gangbusters and we have people who want to buy those loans, and they want to buy them at nice premiums. So -- but that -- again, that's probably just for this quarter. It may not -- the timing may not work out and gel perfectly related to that gain on sale revenue.

Would you have to, with the jumbos, would you have to securitize them, or are you just going to sell individual loans?

The folks that we are in discussions with right now are willing to just buy whole loans without recourse, and we wouldn't have to go through a securitization structure. But obviously that is a step that, in the future, we will be looking at and working through the levels that are required there and the economics of that.

Right now, these are very attractive portfolio products for us, and we are obviously interested in building that recurring revenue associated with the portfolio. But I do believe that, based on what we are doing from a relationship perspective and what I see related to the demand and the customers, the number of customers that are coming to us and the desire for the product, I believe it definitely could exceed our portfolio appetite, and then we would have the opportunity to seek other avenues of distribution.

Could you talk a little bit more about your nonperforming loans? Those have been increasing at a faster rate really than what you've been originating. So when do you think you're going to see a peak out, or pick up in your ability to I guess get through the nonperforming aspects of these loans?

It's Andy. I think we are looking at, at this quarter end, two larger multifamilies which we are dealing with that combined add up to about $6 million.

[I saw that].

So that's a significant piece of what the nonperforming increase is comprised of. Both of those have been written down to fair value already. So that's the first point.

The second point is I don't see any large, big multifamilies like these coming down the delinquency pipe. So I think that's probably the quickest way to get to the point.

We had -- and we did liquidate the one loan. That was on the books at 640, whatever, after that. We got that was -- so that was subsequent to the quarter, but that was -- and that was a small loss associated with that incremental loss, not significant. We sold the note on that, so we didn't even have to go through the full foreclosure process. I think that when you -- we were, frankly , we were disappointed obviously that the two large loans were there. In one of those instances, the individual is stepping up to the plate and is providing -- okay, Andy's telling me we are going to wait on talking about these things, so we'll wait.

But anyway, with regard to those loans, we don't believe there will be significant additional loss associated with it. When you're looking at the nonperformers, it's a heckuva lot different to have $6 million of RVs rolling through the pipe than a couple of large income-producing properties that are close to actually servicing their debt just from their cash flows.

Is that the one in Missouri, is that the one you've talked about in the past?

No, that was gone. But I think that -- but no, that was -- we had one in Missouri a long time ago, but this is -- this was around last quarter. We may have mentioned it, but it hasn't been sticking around for -- I think we had another one in Missouri about two years ago.

Lastly then, Andy, you mentioned there was a couple of hundred thousand dollars of restructuring comp in the quarter?

Yes, that's our polite word for it, and that's all we're going to say about that.

That's a one-time --

Yes, it's one-time.

So do you think -- is that -- I know that you grew employees headcount somewhat in the quarter or so. Is the rate of growth in comp expense going to be much more minimized now because of the additional $200,000?

That has nothing to do with it, but in answer to your question, we don't expect that expense to recur because it was not related to growth. And then (multiple speakers)

I understand. What I meant was --

And then second, I do think that, I think that we have -- what we've really done and what I'm really excited about is as typical of what we've attempted to do, we've tried to buy assets at good values. One of the best values right now is people with really good experience. So, we really chocked our team full of folks who are going to be able to take this bank to a much higher level of growth. In some cases, we have opportunistically been able to bring people on board who will pay dividends in a lot of different ways, but those dividends will pay off over a long period of time. So I really believe we have the executive management team to double or triple the asset levels at the Bank.

Now, that doesn't mean that we won't need some further infrastructure investments, but we have -- just to give you a sense of where those additional infrastructure investments have gone, I previously served as Chief Executive Officer and Chief Operating Officer and basically really focused on obviously revenue generation opportunities, but also on working through a lot of the operations issues that arise as you grow a business. We've established an entire office of the COO with analysts who are making incredible progress on really core issues related to how we do things from an efficiency perspective. Those things really needed to be done, and they were absolutely essential not only from a regulatory perspective but also just from an efficiency perspective. But those folks are there, they are there. The projects they're working on, some of them have come into play but many of them are still in process. So if you go and you look at would we be able to truly implement, in the appropriate way, remote deposit capture, a business banking platform that is an online focus, and all the sort of things that we have planned without those guys, we really wouldn't have been able to do that. That's probably a good -- of that, as Andy broke the numbers down, he said, well, of 100%, you had roughly 20%, 28% that are in this direct commission cost and another 28% that are just directly related to actual productions of the loans. Then you've got another 48%. Probably about 20% of that is regulatory that were, frankly, suggestions related to it would be really great if you had an additional person here, like another information security officer. And then another group of that is really this operating officer role, which really allows the Bank to continue to improve its processes as we move forward.

As you know, when you're growing a business and you're moving from where we were, which was primarily a securities and loan purchase shop, to a group that now is having to originate their assets, there's a lot of operational elements that arise that you need to continually work on improving. So but those investments really have not come to full fruition yet. So I do expect -- I think you probably see a little bit of an uptick related some mid-quarter hires, but we really are done, from a risk and operational infrastructure hiring perspective, for a while.

Now -- but -- there is one -- but we have a couple of business units that are coming on board from a revenue perspective. Those are going to be generating a little bit of cost for the six-month period of time until it takes them to come up and running, but they will be very nice contributors quickly.

We are happy to see that you're growing the business. So anyways, thanks.

Joe Gladue, B. Riley & Co.

Actually, I guess I was going to ask just about that very topic you just had been talking about. Just like maybe a little reminder on -- or update on the addition of jumbo loan teams. I know you said you were adding some teams in New York and Boston. Wondered if you are still working on adding more there, and just a reminder about how long do you think those teams take to get up to full speed once they are at it.

Right. If you look at the growth that we are having in that pipeline and you look at it and you see that it grew 50% in a month from December 31 to where we are at February 2, I think I would say that we see that sort of continued ramp. So most of them are kind of there, but the most -- the best indication or early indication is approval packages. The approval packages that we are seeing are from very, very large mortgage bankers, and there's a lot of them. And so the approval packages are -- literally every month, they're equal to or greater to the existing set of customers that we have. So and with Lenders One and with CMC, we are really more worried about our ability to just make sure we are controlling the growth of that process.

So growth is not going to be an issue in that group. It's going to be about controlling it, controlling credit quality, making sure that our production capacity is not -- that we don't have a fall off in service, because one of the reasons why people are coming to us is we will turn a purchase transaction with an underwriting decision in a couple of days. And so that value proposition needs to be maintained. So the growth is very good there. We may end up selling some of that production, but the growth and demand are there.

Just maybe I'd ask you to give us another run through of the new Internet platform, and I guess what new features -- what it brings to the clients, and how that will help growth assets and revenue.

Absolutely. So one of the core complaints that we previously had, and I think it was a reasonable complaint, was that we did not allow linking of accounts on a regular basis for outbound and inbound transfers. There were a number of reasons for that mostly related to risk management and the inability of our old system to handle it well. That got us -- I think that was a significant criticism and a reasonable one, because other Internet-focused platforms have had that arrangement.

So what our new platform does is it allows for that linkage to occur immediately and quickly after two mechanisms. One mechanism is really slick, and that is that if you put your user name and password from your other institution in there, for many, many institutions, what it will do is it will simply reach out to your institution, check the tendency of that account and immediately approve the linkage to the transfer, verify that you are in fact transferring your money to your other account. So that's a huge benefit.

Another benefit is the account aggregation feature, which is a money management feature that is very slick. What it allows you to do is put all of your passwords from your credit cards, from other bank accounts, and it will create a monthly spending report for you, send you e-mail alerts related to when you've exceeded a particular budget category that you've set up in a certain manner. There's a lot of enhanced security features to it, so if someone attempts to, let's say, log on to a computer from a site that is not recognized, it will actually send an e-mail to your mobile device that will have a code for you to ensure additional security.

The other elements that are coming and the reason why the platform moved -- that we moved the platform as well is that the enhancements that were available on this platform are coming and are quite significant. So although we have done -- we've gone through the conversion so we won't have to do that again, we wanted to get the conversion done because then the significant upgrade that's going to be available in mid February is going to just really make the look and feel of that platform best in class. It's fine now, but it's really going to be good in the new upgrade.

The mobile banking feature of this platform is much better. The My Tech solution related to telephone capture of phones will be implemented in June. So, it will also allow for the [RDC] scanning objects and the ability to have those checks deposited remotely, which is another complaint, justifiably, that people have to mail checks to us.

The other feature of it that is absolutely fantastic and it's really differentiated -- and this will be out mid February or early March at the latest -- is a two-way merchant reward system. It's absolutely fantastic. It's really starting to dig into the power of what the Internet can provide in a banking environment. What it does is it analyzes the data associated with a -- this is obviously subject to their approval -- analyzes the data associated with the customer spend, and it targets -- so for example let's say someone spent money at Bed Bath & Beyond, and -- this company that is affiliated with the Internet banking platform has gone to Crate & Barrel or others and said if somebody is spending money at Bed Bath & Beyond, we will offer them 20% off if they use their BofI card at Crate & Barrel. So what it does is it creates a two-way market for merchants to be able to understand the analytics associated with a particular profile and then offer up targeted benefits that only can be achieved through the utilization of the BofI debit card, which obviously generates interchange revenue. So we think that's a really significant benefit to the platform.

It's funny. I have one of our executives here who I won't mention their name, but she does not bank with us. She has a bank that she likes. When she saw this platform, she said she was going to switch immediately, given that the savings associated with it are so significant. It really is fantastic. We can go to merchants and sign them up, if we decide to do this locally, we can sign merchants up for this platform and then allow them to offer up their discounts through the platform to the customer.

Just so I don't bore the pants off everyone else, I could go on and on.

The other component of it is that what we call selling behind the password, which is allowing us to target offerings based on behavioral data associated with a customer's activity from a marketing perspective, is also significantly enhanced with the marketing module associated with this platform as well. So I could go on and on, but the short answer is it's a lot. What it really will allow us to do is it will allow us to push much more relationship accounts, much more relationship checking through the utilization of the rewards programs that are associated with it, and through the platform which will close the gap related to check-cashing and things like that, that are currently things that I believe are impediments to people using us as their primary relationship checking account.

All right. Thank you.

Scott Hodgson, Midsouth Investor Fund.

Hi guys. Really most all of my questions have been answered, but while I have you on the line, are you seeing any particular strength, I guess geographically speaking, kind of piggy-backing on one of the earlier callers' questions about your geographic concentration. Is there anywhere that you're really sort of trying to focus in on other than obviously SoCal or Northern California?

You know, yes, with regard to multifamily, the property types -- the locations that have remained strong in the core urban areas of Seattle, San Francisco, good parts of Orange County and San Diego are still there. We are seeing a general turn in lower and mid mark -- mid-priced homes in southern Orange County, in what would typically be considered desirable areas of those communities, sort of coastal and semi coastal areas. But what we attempt to do is we are not really attempting to honestly guess the next 10% decline. We don't think we're that good. What we're trying to do is originate loans at 60 LTV or below. We are not going to be in areas like Nevada, obviously, or Florida, but we are going to be in good, strong areas and originate low LTV loans. So that -- they are areas that traditionally have strength because they have desire. They are desirable places to be and desirable places to live, and that's where we attempt to lend.

Got you. Keep up the good work. Thanks so much.

At this time, we have no further questions in the queue. I'll now turn things back over to Gregory Garrabrants for any additional or closing remarks.

Thank you all for attending the call, and hope you got what you needed out of it. We'll talk to you next quarter. Thank you.

Again, that does conclude today's conference call. Thank you for your participation.