Axos Financial Inc (AX) 2011 Q4 法說會逐字稿

Good afternoon and welcome to BofI Holdings earnings conference call for the fourth quarter and fiscal year ended June 30, 2011. 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 for the fiscal year. He will then 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 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 and that 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 among other things 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 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 management, the 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 organizations, deposits and performance ratios such as efficiency ratio, regulatory capital ratios and return on equity. We would like to encourage all of 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 to the Company's future financial performance represents management's estimates as of August 10, 2011. 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. Please go ahead, sir.

Thank you. I'd like to welcome everyone to BofI Holdings fourth-quarter conference call for the fiscal year ended June 30, 2011. I thank you for your interest in BofI Holding and Bank of Internet USA.

Net income for the fourth quarter ended June 30, 2011 was $5,545,000 up 5.1% when compared to the $5,275,000 earned for the three months ended March 31, 2011 and up 18.1% when compared with the $4,697,000 earned for the fourth quarter of fiscal year 2010. Earnings attributable to BofI common stockholders were $5,467,000 or $0.50 per diluted share for the quarter ended June 30, 2011 compared to $0.48 per diluted share for the quarter ended March 31, 2011 and compared to $0.44 per diluted share for the quarter ended June 30, 2010.

Excluding the after-tax impact of net gains related to investment securities, core earnings for the 2011 fiscal year and for the fourth quarter ended June 30, 2011 increased $2 million and $0.8 million respectively compared to fiscal periods in 2010.

Other highlights of the fourth quarter include total assets reaching $1,940,000,000 at June 30, 2011, up $203 million from the March 31, 2011 quarter and up $519 million from the June 30, 2010 quarter. Return on equity reached 15.6% for the fourth quarter and was 15.17% for the entire 2011 fiscal year.

Total deposits reached $1,340,000,000 billion at June 30, 2011 up 38.4% compared to June 30, 2010. Our net interest margin was 3.69% for the quarter ended June 30, 2011.

Our loan origination units had another great quarter with $248 million in new mortgages originated in the fourth quarter. The single-family jumbo mortgage origination unit originated $135 million of portfolio jumbo loans, up from $74 million in the prior quarter. The multi-family unit originated $106 million of high quality apartment loans up from $75 million in the prior quarter.

The volume of jumbo portfolio originations rose to $135 million in the June quarter from $74 million in the March quarter and from $53 million in the December quarter, a growth rate of 82.4% over the prior quarter and 307% when annualized for the last six months of fiscal 2011. At the end of the quarter, the pipeline was $154 million. The credit quality of our jumbo production remains strong with an average loan to value ratio of 55% and an average FICO score of 722.

Our gain on sale mortgage origination business made $1,101,000 of revenue in the fourth quarter, up from $444,000 in the third quarter on a loan origination volume of $135 million, up 73% over the $78 million originated for sale in the third quarter ended March 31, 2011.

Our multi-family business has seen significant increases in its pipeline in production over the last several quarters. In the quarter ended September 30, 2010 the multi-family group originated $26 million in loans.

In the quarter ended June 30, 2011 the multi-family group originated $106 million in loans. The average LTV of the originated loans was 58% and the average debt service coverage ratio was 1.48. The current [money up] pipeline in the multi-family group is $108 million as of June 30, 2011.

Our capital markets group pipeline is strong with multiple transactions that are of high credit quality and strong profitability. The capital markets group closed $112 million of originations and pool purchases in fiscal 2011 at a weighted average coupon of 6.6% with fee income of approximately $400,000.

The capital markets group has increased its focus on the sale of loans and there's significant appetite for our loans among a variety of banks and other institutions. As I noted earlier, our non-performing assets were 99 basis points on total assets at the end of the quarter, down from 125 basis points at December 31, 2010.

Looking back over the last 12-month period, the bank has grown its loan portfolio by 71% as we've added $345 million of single-family and $329 million of multi-family loans. Despite this growth, the weighted average LTV of the loan book remains very stable.

Our single-family loan portfolio at June 30, 2010 had a weighted average LTV of 53.4%. At June 30, 2011 the weighted average LTV remained steady at 53.6%, only two-tenths of a 1% change.

At June 30, 2010 our multi-family portfolio's LTV was 52%. At June 30, 2011 our weighted average LTV was 54%, less than a 3% increase.

We added $262 million of new loans this quarter to our portfolio and after adding the $734 million of new loans year-to-date and after receiving $163 million in loan repayments, our weighted average LTV for the entire portfolio was still 53.8% at June 30, 2011. Given our consistent ability to originate assets and grow our balance sheet, we're continually assessing our capital needs and the market for a variety of capital options.

However in light of the recent market volatility, we will also be increasingly utilizing our ability to sell and participate assets in a profitable manner in order to effectively manage our capital ratios. We will continue to balance our desire to maintain strong capital ratios with shareholder return and dilution concerns.

With the current business model performing well, we are also focused on new business opportunities that will allow the bank to continue its strong performance. I will discuss two of these opportunities in more depth that we are pursuing today.

First, we've increased our focus on affinity groups for distribution of our deposit and lending products. To date on the deposit side, we have pursued affinity groups in a very narrow segment of the market, focusing on independent broker-dealers where we work with registered investment advisors to provide a tailored suite of banking and lending products through our BofI advisor platform.

That platform at the end of the June quarter passed the $100 million deposit mark. The technology on the BofI advisor platform allows the registered investment advisor to track their customers balances and financial transactions and produce consolidated statements and reporting.

In order to provide a stronger value proposition for a wider variety of affinity groups that are sensitive to promotion of their brand that may desire a tailored product set, we've developed and are currently piloting the technological infrastructure that enables us to white label an Internet banking platform with an affinity group's brand, message, colors and products.

The technology is to my knowledge unique in the industry in that it allows not only branding of a front-end website, consumer website, but also the entire enrollment and application process and all the features and functionality behind the password. The affinity group's brand is also placed on the debit card and the checks.

The customer acquisition strategy behind this white label technology is based on the recognition that many large organizations, large unions, retailers, nonprofits and corporations have a strong desire to keep their names in front of their customers and are willing to allow the bank access to their customer base to accomplish this objective. The white label technology has enabled us to engage in high-level conversations with large unions, retailers, multilevel marketers and other organizations with large sales forces that would like to wrap an attractive financial product offering around their brand. The bank is piloting the enhanced affinity platform with the World Travelers Association, a group with approximately 100,000 current members and a database of several hundred thousand other travel oriented customers.

We've also utilized the same affinity technology to soft launch a second core Internet banking brand UFB Direct, focusing on products that provide airline reward miles for everyday banking activity. The brand UFB Direct was previously a successful Internet banking brand with approximately $400 million of deposits and a loyal following focused on debit airline reward moderate miles products.

With the bank's ability to run multiple deposit brands, the bank has an enhanced opportunity to control the demographic it is targeting with a particular brand, the product feature set and the product pricing to optimize our funding structure. Continuing to focus on the deposit side from a new business perspective, the bank has also hired a team of experts in the pre-paid sponsor business.

We're already engaged in substantive and advanced discussions with some of the largest program managers in the country to add us as a sponsor bank. Although the business will take several quarters to make an impact, the fees generated and the low cost of funds associated with the deposits derived from this business make it a highly attractive business for a branchless bank. Additionally this prepaid team can assist the bank in the rollout of a bank product to capture the customers that did not qualify for our traditional checking account products.

As we diversify our funding sources, we continue to improve the core functionality of our Internet banking platform. We discussed the implementation of remote deposit capture for all consumers on the last conference call as well as the introduction of targeted merchant rewards.

This quarter we introduced our Popmoney feature which allows the transfer of funds to third parties that do not wish to share their bank account information with the person making the transfer but would like to utilize the speed and infrastructure of the ACH transfer process. Transfers can be made to cell phones and e-mail addresses.

On the single-family mortgage side, the bank has soft launched its warehouse lending business. Offering warehouse lines to our strongest wholesale and correspondent customers will solidify the bank's emerging leadership in the jumbo mortgage space because our platform provides to our knowledge the only vertically integrated product offering in the marketplace.

The warehouse lending division also makes us the partner of choice for large money fund managers and Wall Street institutions without a production arm to partner with us for sale of their product. We can generate retail production for them from a variety -- through our lending partners. We have a number of discussions ongoing related to these partnerships.

Finally, I would like to congratulate our employees and Board of Directors on a great year. Our hard work was rewarded with another top ranking in S&L's Best of the Biggest Thrifts where we ranked as the second best performing thrift in the country, up from third highest performance in 2009 and the fifth highest performance in 2008. Now I'll turn the call over to Andy who will provide additional details on our financial results.

Thanks, Greg. First I wanted to note that in addition to our press release, financial schedules were filed with the SEC on Form 8-K today and are available online through Edgar or through our website at bofiholding.com.

First I will discuss our quarterly results on a year-over-year basis as well as this quarter ended June 30, 2011 versus the third quarter ended March 31, 2011. And then I will briefly discuss the results for the year.

For the quarter ended June 30, 2011 net income totaled $5,545,000 up to 18.1% from the fourth quarter of fiscal 2010. Diluted earnings were $0.50 per share this quarter, up $0.06 or 11% compared to the fourth quarter of fiscal 2010. Net income increased 5.1% compared to the third quarter ended March 31, 2011 which was $5,275,000.

Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings would have been $5,213,000 for the quarter ended June 30, 2011 up 18.2% year over year from the $4,411,000 in core earnings for the fourth quarter of fiscal 2010 and up 17.1% with [$4,000,453] in core earnings for the last quarter ended March 31, 2011.

Net interest income increased $3.9 million during the fourth quarter ended June 30, 2011 compared to the fourth quarter of 2010 and increase $1.1 million compared to the third quarter ended March 2011. This was a result of increases in average interest earning assets and the average interest-bearing liabilities as well as a decrease in the cost of funds.

The net interest margin increased to 3.69%, up 6 basis points over the fourth quarter of 2010 and down 2 basis points when compared to the quarter ended March 2011. The cost of funds decreased to 2.13%, down 46 points over the fourth quarter in 2010 and down 12 basis points compared to the quarter ended March 2011.

Provisions for loan loss were $1,450,000 this quarter versus $925,000 in the fourth quarter of fiscal 2010 and $1,150,000 for the third quarter of fiscal 2011. The increase in our loan loss provisions this quarter reflects a larger increase in allowance requirements and an increase in our loan write-offs.

Non-interest income for the fourth quarter of fiscal 2011 was a gain of $2,020,000 compared to a gain of $899,000 in the fourth quarter of fiscal 2010 and compared to a gain of $1,924,000 for the third quarter of fiscal 2011. The growth in the fourth quarter of fiscal 2011 when compared to fiscal 2010 is primarily due to our increase in mortgage banking revenue of $855,000.

Non-interest expense or operating costs for the fourth quarter ended June 30, 2011 was $7,666,000, 59% higher than the [$4,809,000] in operating costs for the quarter ended June 2010 and higher than the $7,429,000 in operating costs for the third quarter of 2011. The increase in operating expense in the fourth quarter of 2011 compared to the same quarter in June 2010 was primarily the result of increased compensation expense related to additional staffing added during the year. The bank staff increased from 90 to 173 full-time equivalent employees between June 30, 2010 and 2011.

Professional services which include accounting and legal fees increased $261,000 for the quarter ended June 2011 compared to the quarter ended June 30, 2010. The increase in professional services were primarily due to legal fees for loan acquisition contracts and foreclosed assets.

Advertising and promotional expenses increased $283,000 for the three months ended June 30, 2011 compared to June 30, 2010 due to increases in lead acquisitions for our single-family loan origination programs and increased advertising for our multi-family origination program. An increase in regulatory fees of $202,000 was related to the growth in deposits. An increase of $189,000 in depreciation and amortization was due to the upgrade and the replacement of computer systems.

Also an increase in G&A costs of [$154,000] was due to increased costs associated with loan operations as well as telephones, supplies and other costs which were all partially offset by a decrease in expense related to the management of real estate owned and repossessed vehicles which decreased $334,000. Our efficiency ratio was 41.58% for the fourth quarter of 2011 compared to 35.97% for the fourth quarter of 2010 and compared to 43.12% for the third quarter of 2011. The efficiency ratio we've calculated by dividing our operating expense for the sum of our net interest income and non-interest income.

Now turning to our annual results, as Greg mentioned, net income for the fiscal year ended June 30, 2011 was $20,579,000 or $1.87 per diluted share compared to $21,128,000 or $2.22 per diluted share for the year ended June 30, 2010. Excluding the after-tax impact of net gains related to investment securities, core earnings for the 2011 fiscal year increased $2 million compared to fiscal 2010.

The increase in core earnings for 2010 fiscal year was driven by higher net interest income partially offset by an increase in non-interest expense or operating expenses. Net interest income increased 15.6% in fiscal 2011 compared to fiscal 2010 due primarily to loan originations and pool purchases which increased average interest earning assets in fiscal 2011 by 20.7%.

The average yield on assets for fiscal 2011 decreased to 5.82% compared to 6.47% in the last year ended June 2010. Offsetting this, the cost of funds for fiscal 2011 was 2.32%, down 51 basis points compared to our last year ended June 2010 as the average interest-bearing liabilities increased 20%.

The decrease was the result of a shift in our deposit mix towards CDs and increased short-term borrowings along with the maturing of higher rate borrowings and CDs during the years. Our net interest margin which was 3.67% for the fiscal 2011, down 16 basis points from the net interest margin of 3.83% posted for the fiscal year ended June 30, 2010.

Our provision for loan losses was $5,800,000 for fiscal 2011, about equal to the $5,775,000 provision for fiscal 2010. Charge-offs decreased in fiscal 2011, reducing the provision requirements, but overall loan portfolio growth increased provision requirements, making the net change minimal year over year.

Our operating expenses were $26,534,000 in fiscal 2011, up $9,251,000 or 53% compared to fiscal 2010. Approximately 77.3% of the increase in operating expenses year over year related to the increase in compensation expense for additional staffing. The balance of the increase in operating expense related professional services, occupancy, equipment and other general administrative costs offset by a decrease in REO expenses.

Shifting to the balance sheet, total assets increased to $1,940,000,000 up 36.5% from total assets of $1,421,000,000 at June 30, 2010. The increase in total assets was the result of originations and purchases of loans.

The assets growth since June 30, 2010 was funded by a net increase of deposits totaling $372.1 million, offset by net repayments of borrowings of $124.5 million. For fiscal 2011, stockholders equity increased $18 million to $147.8 million, up 13.9% from the $129.8 million at June 30, 2010.

The growth was primarily due to earnings of $20.6 million, stock compensation of $2.7 million and a comprehensive loss of $5 million. At June 30, 2011, our Tier 1 core capital ratio for the bank was 7.99% with $58.1 million of capital in excess of the regulatory definition of well capitalized.

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

Thanks, Andy. Operator, you can open the call for questions.

(Operator Instructions) Joe Gladue, B. Riley & Co.

Congratulations. I guess just wanted to start with I guess a question or two about the net interest margin. Now that the asset yields were down a little bit from the March quarter and particularly the loan yields were down, just wondering what's driving that. Are you just putting on -- the loans you're putting on, or are they lower than loans that are paying off? And I guess just what's driving that (multiple speakers)

Yes, that sums it up in quick terms.

Yes, that's pretty much right. We have been able to hold pricing reasonably well, but we have had to decrease the loan yields a little bit.

And so we're holding it pretty well. We are still from a modeling perspective getting a 15% match-funded ROE. But there definitely is downward pressure on loan yields in this rate environment.

Okay, and I guess in your prepared remarks, Greg, you talked about selling some assets or some of the originations. Just wondering if you could give us a better idea of how much -- is there any planned split of the originations you might sell or --? Just trying to get a clear idea here.

We have been out talking with a variety of partners this quarter to a much greater degree than we had previously. And so it would be premature for me to give you an exact split there, and it really depends on a combination of factors related to the pricing we receive and the terms and just looking at the entire picture of the origination volume. So it's a little premature for me to be able to give you numbers there.

Well, I'll ask lastly about employee compensation. Obviously still growing both due to I guess added staffing in to increase production. Other than increased loan production, is there a lot more growth we should be expecting in compensation expense?

I would say generally no with a caveat that we do have about $500 million -- or $500,000 of expenses that we are running for new businesses that are basically currently in the works and that are not currently producing income. So there may eat a little bit growth more growth associated with those.

But I would say the significant growth we've had over the last year will dramatically slow down. It already slowed down this quarter and it will slow down even more in subsequent quarters.

The production engine is largely built, so there would be no need for additional staff for us to continue to add assets at the pace that we've added assets this quarter. We also do not have any management positions open, and that was certainly not the case over the prior year where we significantly upgraded our management talent across the board and added to our risk management infrastructure and in a variety of other areas.

So I do not foresee -- I really do see a year of being able to put topline growth more to the bottom line than we were able to do as we retooled the business over the last 18 months. So I think that is going to be a very positive thing and I'm certainly looking forward to ensuring that that occurs.

Thanks, I will step back and let someone else have a shot.

Andrew Liesch, Sandler O'Neill and Partners.

Question on the banking service fees and other line. Looks like it has been much higher than in previous quarters. I am kind of curious what is driving that?

There was a small amount of gain on sale from a small group of loans, portfolio loans included in that that was around $200,000 that contributed to that.

We're seeing very strong premium bids for our loan production, and so those bids to the extent that we decide to hit some of those bids, obviously they can add significantly to income in a quarter. This was a very small trade. I think it was at $6 million (multiple speakers) It was a very small $7 million trade. But obviously you can see that even a small trade can generate a pretty significant gain.

So obviously we've been basically putting those loans on balance sheet and baking in the future net interest income growth. But obviously we can monetize those and the demand of the market is very significant right now.

Absolutely. And then perhaps you could talk a little bit on the prepaid debit card program you just mentioned, like when you think that might start affecting interest income?

Right, well, there's -- we're having some very good discussions right now that are in various stages. The program and the way it works requires that there's some transition associated with the customer base from the predecessor sponsor bank.

And so that by its nature requires some time. But I would say that the deposits and the low cost associated with those deposits which will allow us to grow arguably at higher net interest margin and certainly begin to cover the costs associated with the team, I think that you're going to start seeing those deposits come onto the books in December.

And then from a fee structure perspective, the fee structure depends on the group and the timing of that. I think that's probably more of a March quarter into the following calendar year event.

But it's a great time to be in that business, it's a specialized business. We're lucky to get the team that we did and the conversations we're having are really great.

So we're advancing along. We don't have definitive agreements yet though, so I want to be a little bit cautious about where that is. But there's a lot of demand and we are getting very good conversations with some of the best program managements managers in the country.

That's good to hear. I will step back. Thanks.

[Sean Brown], Keaton Capital.

Congratulations on the nice quarter. So yes, a quick follow-up on the prepaid initiative.

It's definitely an attractive segment for cheap deposits, generating some fees. Can you give some color maybe on the magnitude of anticipated startup costs here?

I would say that the way we are conducting the business is going to be I think lower than you've seen at some of the other institutions that have engaged in this activity simply because we are limiting our sponsorship to larger organizations. And just given the nature of our growth and our balance sheet and the way we're going to conduct the business, we believe we'll be able to run the business by concentrating on selected groups that will reduce the cost. So we do have -- I think it's probably on a run rate basis right now for the first six months, they'll probably be about -- I have -- let me just see here -- it looks like I think it's going to be about -- we have about $550,000 to $600,000 of costs associated with that in the next six months and we believe that that will be the last investment that we will have that will be beyond them starting to cover their expenses.

Jeremy Zhu, Wedbush Morgan.

The previous call, you said you were interested -- as far as interest sensitivity goes, if the interest rate goes up, that's actually better for you. Given the interest rate has gone down, does that mean it is worse for you (multiple speakers) last two weeks?

I think that it's been a while since we have been asset sensitive, probably several quarters. So I think that the impact of the interest rate going down -- let me -- interest rates in general going down, I will sort of give you some sense of those different impacts.

One positive impact is obviously associated with the gain on sale mortgage banking business. The pipeline there has exploded. Of course there is always the fight to keep your existing pipeline because then your existing pipeline or to the extent that we have deposit fees -- we have fees that stop them from walking away. But then with a certain segment, you will get some repricing.

But overall in general, the reduction in the interest rate environment is highly positive for the mortgage bank and that should drive significant revenue and generally allows mortgage bankers to swallow margin and that definitely is the case with us over the last number of weeks. It obviously allows us to borrow more cheaply and often it allows us to reduce our rates on deposit offerings which we've done over the last week as well.

We think those are all positive. On the negative side, clearly we have seen some of our competitors particularly on the multi-family side get fairly aggressive with rates.

So although we've been able to hold in our volume in a way that I would expect that our volume in the multi-channel mix side this quarter would be roughly equivalent to last quarter, it has cut into the rapid growth we are experiencing unless we decide to follow at least to some extent some of our competitors down. So the -- on the bond side it really -- I don't think there's a significant difference there related to -- there's a lot of fixed rate bonds, a lot of floating rate bonds to the extent they were floating rate, and we weren't depending on discounts to enhance yield, the differences are minimal. So that's really where I see that playing out roughly as far as the impact.

But more broadly, obviously I think that a lower interest rate environment is always beneficial in general for mortgage shops that focus on origination. So I think those -- the events are largely -- I think are largely beneficial for us but there's obviously some negatives on the loan repricing.

I guess do you -- what type of loans do you decided to sell and what type of loans do you decided to hold on your book? How do you make those decisions?

You know, we make those decisions -- really it's more related to what individuals are looking for and what I mean by that is the loans that we are originating we're very comfortable holding on our books. So what we're doing is we are looking -- and there may be particular banks because largely we're looking to sell to smaller banks -- and they may be be comfortable with a particular geographic area.

So if you're selling to a bank in Silicon Valley, they may want to look at loans in Silicon Valley and they'll pay a premium for those. What we're really doing is we're looking through a network of folks and then optimizing the premium that we receive based on different bids for the assets. We find that often the banks that we're selling to have specific desires and it's often related to the geography of the loan, but not always.

Last question. In the previous conference call, you mentioned the pay structure of a lot of your employees are on a variable basis, fairly low base and they eat what they kill type of structure. (multiple speakers) how much of your non-interest expense is variable versus fixed?

We do have those breakdowns in the board reports. I don't know if Andy -- if you've got that out there. But if you don't have it -- I think that the way to think about this and I will give you the breakdown and I'll give you the conceptual way to think about it and then I don't think we have that information readily available right here, but let me tell you the right way to think about that.

Obviously for salespeople, the vast majority of their compensation is variable. There are some that are commission only, some have minimal salaries. But they make the vast majority of their income from commissions.

Then there's a whole other set of individuals that have compensation structures that clearly have some bonus associated with them. But they also have -- let's say 80% of their compensation would come from a fixed salary but they are -- our production resources that are dependent upon the loan origination volume.

So by way of example, that would be closers, funders, loan processors. Obviously those individuals are variable in the sense that their production dictates the level of the individuals that you employ in a particular area.

And then you've got obviously the core set of executive team talent and other talent that you need regardless of the size of the enterprise and that obviously is another set. So when you're talking about those numbers, you have to consider it in those buckets and I think Andy has got some (multiple speakers)

I do have the number. You gave me some time to look it up.

For the quarter, a total of $1.9 million is a combination of what we described as variable and sales. So the salespeople are -- and that's about $1.1 million and about $800,000 is what we call variable.

So variable is processors, underwriters, people whose job expansion will depend upon volume and they have some compensation based on volume targets. But in general obviously they get added more as volume significantly increases or decreases. But that is the breakout for this quarter and I think that will give you good color.

Thank you. I'm always impressed by how you guys have all the numbers [in terms of] graphs and a full understanding of your own business. Thank you.

Jim Fowler, Harvest Capital.

I'm jumping between a couple of calls, so if these were answered and they will be in the transcript, just go ahead and say so; perfectly fine. I wanted to ask you real quick on a couple of different things.

The first is the mortgages that you are originating in this quarter I think from the press release about 248 million before investment. What -- if I look at bank rate, just kind of track that, I see interest rates between say [420 and 435]. What for the quarter or more approximate, more recently, what sort of rates are in your pipeline or what you closed in the second quarter or the fiscal (multiple speakers) quarter?

The loan rate would be roughly 5%. Those would be 5.1 ARMs. The multi-family rates are a little bit higher; in the 5.1, 5.2 range. And the reason -- and if you're looking at bank rate, largely -- I don't know if you're looking at 30 year or 10 year or whatever -- those obviously you have to look at jumbo loans.

You also have to look at loans that are basically focused in our niche. And our niche is a very different high-end niche that the customer or the lenders that you see on Bankrate not only would our customers not wish to do business with them, but they also wouldn't probably even understand the tax returns associated with the business people, the type of people we do business with.

So it's not unusual for us to have a 300-page tax return. someone with multiple business entities, foreign investments, those are the types of deals we're doing. I mean this is really the traditional Thornburg type of product which is just not cookie-cutter. And so, there's a variety of different rationales that result in us being able to get premium pricing.

One of them is 70% of our production is purchase and the service component makes a significant difference particularly for a broker or a correspondent who has a very important client who's used to getting their way and they really don't like to be told by GMAC that its' going to take 45 days to do a loan or be harassed about a guy with multiple millions of dollars of cash in a securities account to be asked where $20,000 came on his bank statement from eight months ago.

Those are just not -- they're frankly not relevant to the question of strong underwriting particularly in relationship to the fact that other lenders will go much higher on LTVs and they're certainly not real relevant to -- or they're certainly not helpful from a customer service perspective. So what we really have is we have a very strong niche in a unique purchase oriented product with excellent customer service and that allows us to command a premium.

So if I just -- you had about $406 million of residential first in your fiscal third-quarter Q. You added 250 -- I guess my point here is I see the 596 yield on the residential portfolio. We probably won't see that decline much if you can continue to hold this sort of 5 to 5.25 mortgage coupon. Is that fair?

Well, I think that if you know -- you will see -- at 596 you likely see some decline. I think where we end up getting higher yields is in the specialty area and that comes in a variety of different sources in a variety of different ways.

Look I think that the 596 portfolio yield will gradually creep down and I think it depends on obviously we are adding -- I think having a 5-ish, low 5-ish note rate on the portfolio at least in this current rate environment is something that will be great to be able to hold onto because it certainly is a much lower rate environment than those loans were originated into.

Great. When I look at your delinquencies, your total balances that are past due and your current reserves, you look extremely well reserved knowing that some of the fast -- the severities aren't going to be 100% obviously. How do I think about your provisioning from here forward? Could that come down a reasonable amount from where you had in this current quarter?

Yes, it's an interesting question. I think one of the interesting facts is that I was asked by one of these potential strategic partners to come up and they didn't want to see the loans we purchased in bulk. They just wanted to see loan delinquencies and pipeline delinquency on loans we've originated or bought on a flow basis and then loss rates over the history of the bank.

So on the single-family side, we sent them back a column of zeros that stretched all the way from the beginning of the bank until now. The bank has not actually not originated a single-family mortgage loan but actually has had a loss.

Now we have one that's in a delinquency pipeline which I think is likely to generate a slight loss. I think it's gonna be a short sale and might generate probably about a $150,000 loss.

But as of yet we haven't had that. And on the multi-family side for loans we've originated, we've also had one loss was it for a very small amount -- $47,000 or something. That's for the history of the bank.

So when you're looking at even the current delinquency pipeline, one of the things to think about is a lot of those loans -- we do have a large apartment loan that is delinquent. We bought it as a part of a pool of loans at $0.80 on the dollar.

So the portfolio is held at a significant discount and when you're looking at some of those other assets, you could make the argument as you are that provisions have an opportunity to come down. I think that -- what I would say that most likelihood where that will occur is this ever-elusive stabilization of the RV portfolio and so -- what's our provision on the RV portfolio?

8%.

8%. So we have 8% provision on the RV portfolio. Thankfully it's a small portfolio, very small. But that sometimes has driven a little bit of the provisioning and charge-offs.

So it's an interesting question. When you -- largely what we're doing is we're looking at a history that even through a pretty retching crisis is obviously very strong on the origination side.

We are originating loans at very low LTVs in a market that obviously has gone through significant repricing. And I guess the question is, what will losses be there? Will past be prologue? And you need to use some judgment associated with that.

So I guess my last question I think is probably more strategic and I hope it doesn't -- hope it's not too annoying. But -- so you have put in place this -- which has become a very nicely performing origination business, the returns for the overall balance sheet continue to be above your hurdle rates. But now on this call you've talked a bit about having to modify to a certain extent your strategy per se because of capital.

So I mean I guess I'm just wondering, you're a longtime executive on Wall Street and managing financial institutions. Now that you have essentially indicated that at some point in the future there's going to be a deal, I can't imagine it would be more than $25 million to $50 million.

I guess my question is this. Since that's kind of out there and essentially the investor now being conditioned if they want to own the stock, just wait for that transaction instead of just getting it over with because -- as far as I can see, the numbers should continue to do very well from here, driving the stock higher. Why don't we just get the deal out of the way, take that overhang out?

Your current holders can take their pro rata, get new shareholders etc. and just get on with producing the numbers and drive the stock higher. Why leave that out there now for an extended period?

That's certainly not an annoying question, I think it's a very good one. I think the answer is that we have a variety of capital options and for folks who are waiting to buy common in an offering, I think that will ultimately not be a fruitful wait.

I think that if as you saw with the share price today when people are focused on buying, it doesn't take much to move the share price significantly. So we have a variety of capital options.

Some of those -- we have a lot of folks who are interested in some form of strategic partnerships that are relevant not only on the sponsorship side, on the lending side. So I don't think we're very focused right now on common stock offerings.

I don't really foresee that we will be. I do think that there's a lot of options to look at other forms of capital to the extent they become necessary. But it's interesting right?

It does kind of result in this interesting Mexican standoff, right? I mean we can generate a lot of organic earnings and grow our balance sheet pretty nicely by simply selling assets at a high return.

Obviously if you're selling assets with a 200 basis point gain and you make [350] on those assets or [370] or whatnot, you can do the breakeven on that and obviously start arguing about capital efficiency. But I think that there's -- for folks who are interested in the common stock, I think it would be a mistake to think that there's going to be some below-market deal for common stock coming out shortly. I just don't see that happening.

Edward Hemmelgarn, Shaker Investments.

Just wanted to congratulate both of you on a fine year. Could you talk a little bit about the opportunities -- what are some of the opportunities for fee income with some of these branded deposit type relationships?

Right, well, on the sponsorship side, traditionally institutions which you sponsor are charged a per transaction fee, and those transaction fees vary and they're tiered based and they're relatively complex and they depend on the size and scope of the institution you're sponsoring and that clearly is a fee opportunity.

I would say that the affinity side really has the opportunity to allow the bank to generate deposits at a lower cost of average funds and also to generate loan customers. Because what you're doing really with these groups -- and some of them are quite large -- is you're basically integrating yourself into their marketing and sales functions.

And so by becoming their partners, you are able to generate customers through a different distribution channel. So I think that it's probably -- although there may be certainly on the prepaid sponsorship side and on the warehouse lending side, there's fee income associated with those, the white label product is really designed to drive distribution in a branchless environment so that you are able to extend what you're doing to a wide scope of people.

Obviously the Costco relationship is an example of that happening where we are validated as a lender by Costco and that makes significant difference for individuals just from a reach perspective. As you're able to use this -- there's all sorts of different reasons why different individuals want to do things.

We have had discussions with large groups that would like to pay people on accounts and they want to essentially although they're not legally able to do so, and essentially create such a significant incentive to use the account because they want to alleviate their administrative headaches associated with paying people and things like that. So there's a lot of different reasons why a group does this.

But I would say that from our perspective, it's more about reach and scope and getting to individuals that are the type of folks that we want to reach for some particular type of product on both the deposit and the lending side. And then you know clearly look, I think that maybe the fee income in certain areas -- if you end up in a demographic from a deposit perspective for whatever reason that utilizes their checking products differently than our customers do, then there will certainly be fee income opportunities on those checking products, but it would have to be driven by something like that.

There's obviously folks who -- our customers don't overdraft generally because they tend to have high balances and things like this. They qualify for overdraft lines of credit.

But you can imagine an organization or institution that had a different demographic profile and that might drive deposit fees. But this is really about an extension of the distribution channel in a branchless manner rather than specifically focused on fee generation.

You have an announcement on a very attractive demand deposit or checking account product. What kind of growth do you expect out of that?

The early traction has been very good. We have not really pushed out the full marketing campaign associated with that primarily because as a result of the rollout of the white label product and the second online brand, we have been testing our new enrollment system.

And so we wanted to make sure we don't blow it up. Frankly without even the advertising, the blogs picked it up and everything else and it is very attractive and it's growing nicely. So, I'm not willing to stick a number on that right now, but if you ask me next quarter, I'll definitely be happy to give you a better sense of that.

What percentage of your demand deposit customers use the online bill payment feature too?

You know, a good amount of our demand deposit customers do that. I have that data but I don't have it in front of me.

That's fine. Maybe we could talk about that more the next time too because I would think that adds to the stickiness of your customer base.

That's right. I think that -- and a lot of the things we've been doing on the deposit side from a product enhancement perspective have been designed to enhance that stickiness.

Obviously I would say the remote deposit capture feature is essential but even things like Popmoney are relevant to people because it just allows them easy mechanisms to transfer. A lot of banks don't have that.

So there's a lot of good features, the merchant reward features and others that we think will continue to drive growth there. I think the most important thing to realize related to checking account growth is that we are really pushing into a market where I think you will see people continually frustrated by what other banks are going to have to do to try to make up from a revenue perspective with fees and other things and that should drive people to us.

Okay, I see. Good. Could you talk a little bit about the -- what you have been able to do so far with developing a wholesaling or someone to buy and package your fixed-rate jumbo and super jumbo products?

That's a really great question. So, we are finding that the platform that we have developed on the jumbo side has become very attractive to some of the largest market players in the world frankly, and we have been having discussions with some of those players related to arrangements whereby we would manage certain -- in some cases their conduit operations for them or other things like that.

It's fairly -- what we're finding is there are more money funds and others coming out with fixed-rate jumbo products and we have one that actually is launching on Costco this week with one of the world's largest money fund managers. We're an approved seller of their product and that will be launching exclusively on Costco.

It will be a 15 and 30 year product on the jumbo side that will go out to the entire Costco platform shortly. We just got through some of the technical integration there.

So those discussions are ongoing. They're not done done. That particular one for us to sell that on a retail basis is done, and there's a lot of really great discussions going on there and there's a lot of needs.

So I think that that's going to become something that will become an important component of revenue for the bank over time because a lot of these large funds have huge mortgage investments that are running off rapidly. They don't have origination platforms and our ability -- our origination platform is very, very strong now.

It not only has all of the Thornburg customers, it's got all the folks who didn't have access to any jumbo products throughout the whole dearth of the whole period where there was an absolute dearth of any jumbo lenders. The arrangement with both of the large mortgage cooperatives and then with that, the rollout of the warehouse lending product really solidifies that.

So I think it's worth just taking a minute to explain why that's so important. So let's say you've got Wall Street firm X that's looking to sell fixed-rate product Y and they want it to be a retail origination.

So we have hundreds of customers that are signed up with the bank that we work with and many of them -- the strongest ones have warehouse product with us. We're not going to delegate underwriting but they can literally utilize that product, that product would be basically labeled as a product that the bank would have with an arrangement with this Wall Street seller.

We're actually able to offer that product up -- that investment, that customer, that mortgage banker can close that product on a retail basis only after prior approval of the bank. They don't get to order the appraisal, they don't get to dock income or anything else. But they do get to use our system that they can log onto; puts their logo on our document set, and they can close it on our warehouse line and we can sell that through.

And that's a huge value. It creates a set of retail originations. So those originations are not wholesale, they're retail for purposes of securitization.

And no one has that platform right now. And so we have a real head start there.

It's not that it can't be built by others, it's just that we have a significant head start. And we are out at the Capital Markets Cooperative Conference just this last week and you know we had multiple people there taking 30 minute meetings on the warehouse product. And you know my guys came back looking like they needed to take a vacation just because of how many folks were bombarding them with the desire to sign up. So I'm really enthusiastic about that.

That's also going to drive a lot of jumbo volume too. There's subtleties with why that happens.

But basically warehouse lenders have a very good insight into pipeline associated with where everything goes and all that sort of stuff. There's a lot of good that will come associated with the warehouse lending group's integration into the jumbo mortgage platform.

So we would seek expect to see a significant increase this year in the mortgage banking income?

Well, I think that over time, you know this'll take -- the warehouse lending side will take a couple quarters to get up and running but over time and if we are able to establish the relationships that are under discussion, then yes. If we are able to -- if we have somebody with billions of dollars of appetite for jumbo mortgages and we are flowing them through here, then we will be making some very nice income on those mortgages.

Gregg Hillman, First Wilshire Securities Management.

Just a question about branding the Internet bank name and whether you plan to try to become like a national Internet bank, something like Fidelity and Schwab is trying to get in that business and Ally. Are you going to spend any marketing resources to try to do that, to try to build your website and try to become a bank by itself and generate customers that way or over the Internet for that matter?

Right. Well, I think that's a great question. I understand what you're saying. Let me try to unpack it and then you can tell me if I've answered it appropriately.

I think that Ally and ING from our perspective waste a tremendous amount of money in attempt to reach people by establishing a brand in the sense that I don't really believe that people seek out Ally because they've seen a lot of commercials about them, at least to the extent they're spending money on that. We in fact -- I think we view the value proposition that we have a little bit differently and that is we should focus on the value proposition of the product and utilize low cost distribution channels.

And those low-cost distribution channels may happen to involve some measure of branding depending upon how effective that branding element is. But I am not an inclined at all to spend money on some national campaign or someone says well I can't tell you what [where my head of marketing is] I can't say exactly how many customers that generated. I can just tell you that it made you cool that the kids at school now -- you know my daughter is now -- everybody knows where I work. That is not in the cards at all.

I'll give you an example. We had a campaign that ran in San Diego on Fox 5 on American Idol and we spent -- they asked us to keep it confidential -- it was a very small amount of money and they ran this little short vignette on the bank and it was cost-effective.

I think that our view is that the Internet actually provides a way of democratizing branding in such a manner that if you actually know how to utilize it to attract customers, but that is less relevant. And by the launch of our second brand, it's focused on travel rewards.

We are actually looking more to segment the focus of the brand and the product of the brand so that we can actually utilize direct marketing sources whether that's obviously -- for example e-mail addresses associated with airline mile accounts obviously would be probably very interested in airline debit rewards much more so than trying to stick ads on national television. So I think that's what you asked, but if it's not, let me know.

No, no, I think that's a good response. And just one final question.

You had three areas of loans that you're generating with your operations -- jumbo, multi-family and single-family mortgages over the Internet. Are you going to develop another major category in addition to those three categories?

We are -- we have several -- so we also have a specialty lending business, and that specialty lending business does do other things. It does those things on an opportunistic basis, but there are segments within those.

I don't really like talking a lot about them because they tend to then attract competition. But these segments are things where we are able to get very strong collateral but we're often collateralizing other finance companies that are putting money in front of us.

So that really is a form of C&I lending and we have done a decent bit of that last year and we have a very robust pipeline this year. We also have a receivables factoring business that it is very high return and extremely low risk.

That factoring business, we're actually expanding the retail side of that. We've got about nine or 10 people that are associated with that expansion from wholesale to retail.

So we do have other specialty businesses. I would say that from a size perspective, I'm not confident that we'll find from a size perspective other businesses that can be able to compete just given the scope of the multi and single-family market.

I have a set of commercial guidelines on my desk and they have been on my desk for a little while. I think that if we did something there, it would have to be very strong markets close in to San Diego coastal areas.

I think the problem with going out and doing anything on the commercial side is that I truly believe that when we do an apartment loan, pretty much and most everywhere given the amount of time we spent on the apartment lending business, we know that product probably to be better than the local community banker and we have shown that with our history. I think when you start getting in the non-commercial, non-residential commercial, the retail offices and stuff, that local market knowledge starts to command a premium.

So then there has to be some mitigating way that you can make sure you don't get picked off. So I think that those are all things to consider. But we prefer probably outside those businesses, we have a lot of specialty opportunities and we really prefer those because we see them as a very good risk-reward profile.

Yes, and Greg, just one other thought. For your Internet single-family loans that you generate over the Internet, is it possible for affiliate relationship to vastly increase that pipeline and that loan origination for that segment?

The Costco arrangement is that, and the answer is absolutely. Part of what we're doing from the affiliate and affinity side is both -- the whole purpose of the white label banking brand, I talked about it from a deposit perspective, isn't only a deposit focused idea.

It also has strong applicability to the lending side as well. So we believe that there will be lots of opportunities for those sorts of affiliations.

We have a very senior salesperson who has been an affinity sales guy for about 25 years. He knows everybody.

So we're talking to some real big players and at some point in time -- it takes a while to go through this. We haven't been at this very long and we have had the technology done for even less time, at least fully implemented here.

So there are those opportunities. Costco is one of them but there are others that will be I think very cost effective ways of distributing product.

We have no other questions in the queue. I would like to turn it back to our presenters for any additional or closing remarks.

Thank you, everyone, I appreciate you listening and look forward to talking with you on our next conference call. Thank you.

That concludes today's call. Thank you all for your participation.