Axos Financial Inc (AX) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to BofI Holding's Earnings Conference Call for the first quarter ended September 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 highlights for the quarter. 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 manager 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 Bofa operate -- BofI, impeditive products and pricing, fiscal and monetary policies of the US government, changes in law and government regulations effecting 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 security 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 in the impairment charges, loan originations, deposits, and performance ratios such as efficiency ratio, regulatory capital ratio, 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 as to the Company's financial -- future financial performance represents management's estimates as of November 8, 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 Holding's First Quarter Conference Call for the quarter ended September 30, 2011. I thank you for your interest in BofI Holding and BofI Federal Bank.

Net income for the fourth quarter ended September 30, 2011, was $6,533,000, up 17.8% when compared to the $5,545,000 earned last quarter in the three months ended June 30, 2011, and up 35.2% when compared to the $4,832,000 earned in the first quarter of fiscal 2011.

Earnings attributable to BofI common stockholders were $6,407,000 or $0.58 per diluted share for the quarter ended September 30, 2011, compared to $0.50 per diluted share for the quarter ended June 30, 2011, and compared to $0.45 per diluted share for the quarter ended September 30, 2010.

Excluding the after-tax impact of net gains related to investment securities, core earnings for the first quarter ended September 30, 2011, increased $1.7 million or 33.7% when compared to the quarter ended September 30, 2010.

Other highlights of the first quarter include total assets reaching $2,097,000,000 at September 30, 2011, up $157 million compared to June 30, 2011, and up $579 million from the comparable quarter ending September 30, 2010.

Return on equity reached 7.3% for the first quarter of 2011. Total deposits reached $1,495,000,000 at September 30th, up 50.7% compared to September 30, 2010. Our net interest margin was 3.65% for the quarter ended September 30, 2011. Non-performing assets were 80 basis points, down from 99 basis points in the prior quarter.

We closed on 12.8 million of our series B convertible preferred stock and an additional 8 million in the subsequent quarter for $20 million of total capital raise in the recent period, a nice execution in very choppy capital markets.

Our loan originations of the units had another great quarter with 343 million in new mortgage loans originated. Of the 343 million originated, 90.4 million were single-family agency-eligible jumbo production, 126 million of single-family jumbo production, 78.5 million of apartment loans, and 48.3 million of C&I and specialty asset loans.

Our mortgage loan pipeline remains strong with single-family agency pipe -- the single-family agency pipeline at 118 million, 102 million of jumbo single-family mortgage loan production, and a multi-family pipeline of approximately $84 million.

Our gain on sale agency mortgage business made $2.1 million of revenue in the first quarter of the 2012 fiscal year, up from $1.1 million in the fourth quarter on a loan origination volume of $90.4 million, which was up 68% over the $53.9 million originated for sale in the quarter ended June 30, 2011.

Our gain on sale in our non-agency jumbo and multi-family loans was $2.7 million resulting from a sale of $72.3 million of single-family jumbo and multi-family mortgage originations.

We continue to remain highly focused on credit quality at the bank. For the quarter's origination, the average FICO for the single-family agency-eligible production was 779 with an average LTV of 63%. The average FICO for single-family jumbo production was 736 with an average LTV of 57%, and the average LTV of the originated multi-family loans was 60.9% and a debt service coverage ratio was 153. At September 30, 2011, the weighted average LTV of our entire portfolio of real estate loans is 56.5%.

As I noted earlier, our non-performing assets were 80 basis points of assets at the end of the quarter, down from 125 basis points at December 30, 2010, 111 basis points at March 31, 2011, and 99 basis points of assets in the June 30, 2010 quarter.

We had a good quarter of moving real estate owned and repossessed vehicle inventory, reducing the dollar value of real estate owned and repossessed vehicles by 45% from $9.6 million to $5.3 million. Of the $5.3 million of real estate owned and repossessed vehicles at the end of the quarter, we sold subsequent to the quarter end our largest REO asset, a $2 million multi-family apartment for no additional write down.

We recently finalized our settlement with Countrywide, which will allow us by the end of December to gain control of 35% of our non-accrual loans and 35% of real estate owned if measured as of September 30, 2011.

As most of you are aware, the bank changed its name to BofI Federal Bank on October 1st to unify its direct to consumer division brands under an umbrella entity, to create a brand that would be utilized to validate the FDIC-insured nature of our affinity banking centers, and create a brand that will be more effective at drawing business banking customers.

And current with the bank's name change, we launched multiple new websites that not only improved the look and feel of our websites but also include a -- included a state-of-the-art content management system and analytics that allow us to better track marketing and behavioral analytics of our customers.

We have historically reached our customers through multiple brands, targeted specific products, or customer segments. Although Bank of Internet USA has always been our flagship consumer direct internet brand, we currently serve our consumer direct banking customers through multiple brands including UFB Direct, our multi-family lending customers through Apartment Bank, and the financial advisory community through BofI Advisors.

As a division of BofI Federal Bank, Bank of Internet USA will remain BofI Federal Bank's flagship consumer direct internet brand. BofI Federal Bank has adopted the new name and logo to unify its division brands under the umbrella entity. We believe the BofI Federal Bank brand and the logo will be appealing to small businesses as we roll out our small business banking effort.

While the single-, multi-family, and capital markets businesses are performing well, we continue to be focused on making good progress on our other growth initiatives. Our warehouse-lending group is now accepting applications, and we expect strong growth from that group over the next six months. 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 market place.

The warehouse lending division also makes us the partner of choice for large money managers and Wall Street institutions without a production arm to partner with in the sale of their product, and we have launched a partnership with one of the world's largest money fund managers to be their sole third-party lending conduit platform.

We signed several key affinity groups for our white label banking centers this quarter. In the quarter we signed the American Senior Association and 60+, a 12-million-member organization to an exclusive relationship to market our deposit products as well as the Second Amendment Foundation and the World Traveler's Association. Our second core internet banking brand, UFB Direct, focusing on products that provide airline reward miles for everyday banking activity surpassed $30 million in deposits in less than a few months after its launch.

Continuing our focus on the deposit side, the Bank has also hired a team of experts in the prepaid sponsor business. This business is engaging in some significant advanced discussions with 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 in the low cost to 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 capturing the customers that do not qualify for our checking account products by development of a turndown product.

We began accepting selected business accounts on a trial basis this quarter to ensure that our systems are scalable and our policies and procedures are in place prior to a more aggressive launch of our business bank in the first calendar quarter of 2012.

As we diversify our funding sources we continue to improve the core functionality of our internet banking platform. This quarter we will add mobile cell phone remote deposit capture and mobile iPhone and Android applications to our existing browser-based mobile banking functionality.

We discussed the implementation of remote deposit capture via scanners on prior conference calls. The introduction of targeted merchant rewards and our Popmoney feature, which allows for money transfers to third parties without having to share bank account information. These transfers can be made to cell phones and e-mail addresses.

With the addition of the mobile cell phone remote deposit capture and the mobile banking applications, our consumer functionality in all meaningful ways has no more gaps to fill. This functionality milestone could not have come at a better time with large banks abandoning free checking and more and more consumers looking for a convenient and high-valued alternative to their current bank.

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, our 10-Q was filed with the SEC today and is available online through Edgar or through our website bofiholding.com.

First I will discuss our quarterly results on a year-over-year basis, meaning fiscal 2012 versus fiscal 2011, as well as this quarter ended September 30, 2011, versus the fourth quarter ended June 30, 2011.

For the fourth quarter -- I'm sorry, for the quarter ended September 30, 2011, net income totaled $6,533,000, up 35.2% from -- from the first quarter of fiscal 2011. Diluted earnings were $0.58 per share this quarter, up $0.13 or 28.9% compared to the first quarter of fiscal 2010. Net income increased 17.8% compared to the fourth quarter ended June 30, 2011, which was $5,545,000.

As Greg noted earlier, return on equity was 17.3% for the quarter ended September 30, 2011. Excluding the after-tax impacts of gains and losses associated with our securities portfolio, core earnings would have been $6,775,000 for the quarter ended September 30, 2011, up 33.7% year-over-year from $5,068,000 in core earnings for the first quarter of fiscal 2011, and up 30% when compared to $5,213,000 in core earnings for the last quarter ended June 30, 2011.

Net interest income increased $5.5 million during the first quarter ended September 30, 2011, compared to the first quarter of fiscal 2011, and increased $1.8 million compared to the fourth quarter ended June 30, 2011. This was a result of increases in the average interest earning assets and average interest-bearing liabilities as well as a decrease in the cost of funds.

The net interest margin increased to 3.65%, up 10 basis points over the first quarter of fiscal 2011 and down 4 basis points compared to the quarter ended June 30, 2011. The cost of funds decreased to 2.06%, down 51 basis points over the first quarter of fiscal 2011 and down 7 basis points compared to the quarter ended June 30, 2011.

Provisions for loan loss for $2,363,000 this quarter versus $1,600,000 in the first quarter of fiscal 2011 and $1,450,000 for the fourth quarter of fiscal 2011. The increase in our loan loss provisions this quarter reflects higher charge-offs in single-family loans.

Non-interest income for the first quarter of fiscal 2011 was a gain of $4,570,000 compared to a gain of $2,122,000 in the first quarter of fiscal 2011 and compared to a gain of $2,020,000 for the fourth quarter of fiscal 2011. The growth in the first quarter comparing fiscal 2012 and 2011 is primarily due to the increase in mortgage banking of $3.4 million.

Non-interest-expense or operating costs for the fourth quarter ended June 30, 2011, was $9,552,000, 83% above the $5,199,000 in operating costs for the quarter ended September 2010 and 24.6% higher than the $7.7 million in operating costs for the fourth quarter of 2011. The increase in operating expense in the first quarter of fiscal 2012 compared to the same quarter ended in fiscal 2011 was primarily the result of the increased compensation expense related to additional staffing and increased REO expense.

The increase in operating expense for the first quarter of 2012 compared to last quarter ended June 2011 was primarily the result of ROE expenses. As Greg had noted earlier, two multi-families required a net write down of $1.1 million and are now sold.

Our efficiency ratio was 41.99% for the first quarter of 2012 compared to 35.14% recorded in the first quarter of 2011 and compared to 41.58% for the fourth 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.

Shifting to the balance sheet, total assets increased to $2,097,000,000, up 8.1% from total assets of $1,940,000,000 at June 30, 2011. The increase in total assets was the result of origination of loans. The asset growth since June 30, 2011, was primarily funded by a net increase in deposits totaling $153.8 million.

For September 2011 stockholders' equity increased $18.7 million to $166.5 million, up 12.7% from the $147.8 million at June 30, 2011. The growth was primarily due to net income of $6.5 million and the issuance of the preferred stock of $11.6 million.

At September 30, 2011, our tier-one core capital ratio for the bank was 8.08% with $64.8 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 all for joining us this afternoon. That concludes our prepared remarks. We will now move to the question-and-answer session. Operator?

Thank you. (Operator Instructions). We'll go first to Joe Gladue of B. Riley.

Hi, Greg and Andy.

Hey Joe, how you doing?

Congratulations. All right. Just wondering I guess on the loan originations with both the jumbos and the multi-family. Have we reached sort of a fairly steady pace of loan originations or do you think there's still more ramping up to come or I guess more -- as more of the sales guys get up to speed?

I think we've had -- we've reached some measure of a plateau relative to the rapid growth that we had in the previous quarters. What I would say is that we're still obviously working on increasing our loan productivity at the same time maintaining our rates.

We've been -- we've been counter -- we have not followed the market down on a lot of our rates, and so that has hurt our volume relative to the distribution network that we have. What I would say is that from our portfolio loan perspective we have the ability to increase our production, but that's going to depend on our needs as well.

Obviously our balance sheet growth is still moving very strongly, and despite the fact that we've raised capital we still are not happy with where our share price is, so we're going to balance all those things out, but obviously we could expand our production in a variety of ways and we have a number of methods of doing that.

By way of example, on our multi-family loan side, we've -- our direct to consumer call center is staffed with folks who are hitting the phones and going directly to borrowers. That's a relatively new initiative for us, and they're passing those leads off to experienced loan officers when that's required or otherwise, moving those loans right through to processing.

And that activity is just getting started, so there's a lot of channels that we're opening up that will continue to assist in growth. But I think the market has moved down on rate and we haven't followed them. And we feel pretty good about where we are because we've been able to maintain production and maintain the profitability of our loans.

Okay. And I was just wondering if you could give us a little bit of additional color on some of the specialty C&I and other loans that you -- that there was some growth in during the quarter, just a little more flavor on what type of loans those are.

Sure. Those loans are generally loans to finance companies that are backed by real estate assets. So as you know we're very focused on very high credit quality loans in the loans that we originate. But there are opportunities to get very well collateralized loans when you're working with finance companies that would probably be making loans to the consumer that we wouldn't otherwise make.

So by way of example, hard moneylender, $20 million of equity is making loans to guys who are buying REO properties, fixing and flipping them. They're making those loans at 65% loan to value to their value, and we're giving him a line of credit that is a 30% advance rate on the LTV of the properties bought at the REO, and those are backed by single-family loans in geographies that we're comfortable with.

So that would be an example of a specialty loan. So -- and I think they are mostly of that flavor. I'm not going to give away the store and tell you all the areas that we're looking at, but those are -- so that's the flavor. They're all very well collateralized and very well secured.

Sure. Okay. And just curious if you have any target or anything for what type of deposits you can get or funding from the prepaid business?

The potential is incredible actually and so it's going to be -- it's going to be about getting through and finalizing agreements but it's a very very large sum potentially from folks. I'm not ready to really talk about exact numbers because I think it's going to depend more on how much we can take and how much we're comfortable taking.

All right. Well thanks. I'll step back now.

And moving on we'll go to Andrew Liesch of Sandler O'Neill & Partners.

Hey guys. How are you?

Hey.

Good.

Curious if you could just talk on your outlook for more mortgage banking income in the fourth quarter. Is it stronger than it was in the third? Like what are you thinking there?

We have -- well let's break our mortgage banking income up into two primary categories, the agency side and the portfolio loan side, and obviously calling them portfolio loans, I just mean single-family jumbo and multi-family.

We have a variety -- we have a variety of interested buyers and transactions that are ongoing for the portfolio side. Those are obviously from a timing perspective always a little bit difficult to completely ascertain because they really are one-off transactions, but the interest levels are very high, they remain very high, and we expect to get a lot done this quarter in that area.

On the gain on sales side, it's still going very well. I expect to see good volume, a little bit of margin pullback because of some technical things that are going on in the market and some volatility, so I would say that I would expect more in line on that side to slightly down as opposed to dramatically up in the gain on sale mortgage banking side. But I wouldn't expect it to be dramatically down.

Okay. Thank you. And then I'm curious, even though you said it's going to get started more in the first quarter of next year, what type of commercial borrowers are you targeting? Like what sorts of industries are they in?

Well that's on -- on the commercial borrowers side, the C&I groups are really targeting finance companies, but from a commercial business deposits standpoint, we have a variety of niches that we feel are going to be attracted by the value proposition that we have.

One of the obvious ones is that we believe we can offer a companion operating account product to our multi-family customers as we originate loans to them. That would be something that's very easy to do, and with the abolition of Reg Q we can obviously offer them a product that takes advantage of our low cost structure to give them an attractive package as far as what that -- what those account features look like.

There's some other niches that we're targeting. I'd prefer to leave those to ourselves until we have success in them, and then I'll share them with the rest of the world. But there's -- we have a very specific business plan for how we're attacking business banking and we feel confident -- comfortable that it's going to be successful.

That's fair enough. Those are my questions. I'll step back. Thank you.

Thanks, Andrew.

We'll take our next question from Gregg Hillman, First Wilshire Securities Management.

Yes. Good afternoon gentlemen. Yes, Greg, you said so much stuff today it kind of makes my head spin. But I just wanted you to -- of the things that you mentioned such as affiliate marketing, warehouse line, computer platform, prepaid business, of all the things you mentioned today, can you order the top four things that are going to affect shareholder value for the shareholders in a five-year time period in the order of their importance?

Yes. I think that the short answer no. And the reason that that is -- that is the answer is that our approach to business development is that we take a targeted measured portfolio approach to our businesses so we don't invest early on until we see success of significant amount of money in any one business. And so I have my predilections about which ones will be more successful, but they're largely dependent on the environment.

And let me elaborate in just one simple capacity. So the warehouse lending business versus the prepaid business. That would depend very much from a warehouse lending perspective on what is the ultimate resolution of Fannie -- Fannie Mae. That warehouse lending business, if the securitization market returned, Wall Street conduits came back, could be the most important business we have and could make $25 million a year in three years easily.

It might also not be that. It might be something that simply facilitates the growth of our lending platform for our jumbo product, which is then sellable to a variety of community banks that don't have the ability to have a single-family lending group.

So we take a very targeted portfolio approach to our business ventures. We evaluate them quarterly and there's regular board reports, what we call our incubator group, and so that's how we run those businesses. So they'll either see success in gradual perspective and then they'll be given more investments or they'll be retargeted or killed if they are not successful in what they're doing.

Thanks very much.

Thank you.

We'll take our next question from Edward Hemmelgarn of Shaker Investments.

Yes, hi. Congratulations on a good quarter. Have you -- Greg, have you gotten or started offering the fixed rate 15- and 30-year jumbos, consumer jumbos?

Yes we have. It's about three weeks into the start of our launch of our 30- and 15-year fixed rate jumbo product, and we've been signing up our correspondents to do that. There's a separate agreement to do that, and it is out on a wholesale basis. And this is with that large money management firm in New York that we've been discussing -- well not we've been discussing, that I've talked about before.

And so it is -- we have some loans through there. Candidly right now the market has moved against their pricing and so right now they're not priced competitively as they need to be, and so we're setting up that product but the volume has not been exactly where I'd hoped it to be, and it's entirely, even at this very early stage, it's entirely related to their pricing.

So we're having discussions with them about wanting to get them more competitive, and that'll be able to get them more volume. And so that's where that is.

But it shows that we have the right platform to distribute these products, that we've got it set up, and we'll have some success but it needs to be at a more attractive price to have the success that we want it to have.

Are you finding ways or do you think you'll be able to find a way that you can get more timely reactions to market conditions? I mean --.

From them? You know, it's an interesting thing. I mean they have a large fund that they've set up to fill up, and they have some return targets for their investors. So that's really going to be a complex discussion related to whether or not they're able to -- where they're looking to decide how much volume they want versus where their pricing is. And they're going to have to figure out.

I think it's a good relationship for us to have, and I believe that it will be successful to some level, and it's on the Costco platform, and we are getting some business through them. It's just that it's not at the volume that I want it to be. And it's still early stages, but I think that if it goes for another couple of months and we're not seeing a very large ramp up then I think we're going to have to have that discussion about the pricing with them and try to make sure that they hopefully will be cooperative in that.

When you talk about targets, does that mean that they're likely that if rates would increase though they probably wouldn't be increasing their rates too much? Because I mean they've kind of -- you're saying that they've kind of set targets that they -- they're willing to be patient about until the rates move back up?

They have -- what they're outlet is is the way this fund is set up is that they're expecting a securitization exit so they've run it through a levels model that provides subordination and they've said they need to get return to the equity component of the securitization at these levels, and so I don't think absolute movements in rates are necessarily what's going to do it.

It really is a spread base model that involves figuring out what that return on that equity component is going to be and then pricing to that return at a certain subordination level. So it's really -- it's really about they're willing to accumulate jumbo product for securitization and they're hedging it out and they've just got to figure out how that's going to -- how that's going to work and get competitive.

And right now they're not as competitive with some of the other balance sheet lenders, and so it's a problem. But I'm excited about the prospect. They're obviously a very powerful and large fund and I think that they will make this work, and when they do we will help them with it.

Good. Second question, have you -- have you been able to sign any agreements with any of the -- I think you were talking to three major debit -- prepaid debit card companies. I mean have you --?

We -- yes, we have. We are talking with three large ones, and we have -- we are in substantive advanced discussions, but these are long complex processes, and so I would say they are all very much alive and we're working through them and it's just a matter of work.

And also there's been a lot of -- the pricing in this market is re-pricing, and we're obviously having to make sure that we get the right deals for us and for them, and so that just -- that just takes some time. But it's going very well.

Okay. When you talk about the pricing and re-pricing, I'm assuming that the price -- because there's such a surplus of deposits out there that the demand for their type of --.

Deposit is low.

Is decreasing. Yes.

It's decreasing and also -- and also candidly there are some irrational players in this business who inappropriately priced the product and were not fee oriented and also were not sufficiently compliance oriented, and we will be neither of those, and so that's a process that sometimes take time -- takes time to go through, but it ultimately will be successful.

Okay. Thanks.

And moving on we'll go to Jim Fowler of Harvest Capital.

Hey, Greg. Thanks for taking my questions.

Sure, Jim.

Just a couple of details. First, of your $4.7 million of salary expense in the quarter, approximately how much of that is fixed versus variable?

Yes, our fixed component gives $2.6 million, and that was $2.4 million last quarter. So the fixed came up just a little bit.

And do you think that that $2.6 million fixed is sufficient to ramp the -- meet your origination plans for the foreseeable future?

Yes, I think if we continue to grow at and originate at the levels that we're originating, it absolutely would. But a lot of what we're doing related to the various new businesses that we're bringing on, which we think are very important for our growth, involve adding overall robust compliance -- a robust compliance team and other things.

So for example, on the prepaid side, there's significant compliance cost that's associated with running that business, and we're adding people that are fixed expenses to doing that. So just -- if you just look at the single- and multi-family side alone and the C&I side, we really don't need any more people to continue to grow other than portfolio manager -- additions in the portfolio management side and those sorts of things.

But we are finding that some of the regulatory burdens are continuing to have interesting impacts. Just for example, the appraisal review management guidelines that are out require very detailed reviews of every appraisal. And so as we're expanding our sales operations on the non-agency side, that simply just increases the volume. And so we've found that we need to add folks in appraisal management, itself a function that was one that previously meant you basically made sure that your appraisers were doing a good job by making sure you selected them well on a panel, and now it means that every appraisal goes through an in-house review.

So there are things like that that are increasing costs, but I would say that I do believe that we have an inflection point related to the current businesses that we are going to be able to continue to grow without -- without a lot of new staff.

But there is -- you know we're doing a lot of different things too, the business banking, the warehouse lending, and all that, and so that's where the staff is coming from.

Good. And just to get the definitions right or further vernacular. When you say -- when you say mortgage banking, a gain on sale mortgage banking, is that your -- is that your single-family agency business you're referring to?

Well, I broke it up into two categories and I hope I was consistent in the utilization of the words. Agency gain on sales mortgage banking is in fact the sale of Fannie and Freddie, and then mortgage banking in the sense that we sell -- I also consider mortgage banking to sell single-family jumbo and multi-family loans to other institutions as well. I consider that mortgage banking too.

So in the quarter, if I go the numbers when you were going through your comments, you had $90 million, $90.4 million of the Fannie Freddie single-family that you sold for $2.1 million gain? Is that accurate?

Yes, that's correct.

Okay. And then -- an then I think you said that you had a single-family plus multi-family portfolio for $2.7 million. I guess my question is was that -- was that -- were those originations in the quarter or were there originations that you called from the portfolio previously originated that you just tactically sold in the quarter?

Well, their -- some of them, many of them were originations that were originated in the quarter and some were not. I mean, on balance obviously the multi-family portfolio and the single-family jumbo portfolio went up about $192 -- what's the exact number? They went up significantly.

So our -- obviously our balance sheet would have been larger if we did not sell those assets, and they were all portfolio-eligible assets.

And then, last question. In your warehouse lending business, have you -- how does one implement that in terms of the amount outstanding in any one period of time? Is it the amount of your -- I mean, what's the governor there to how much you could have outstanding to various wholesalers at any one point in time?

That's a great question, and so I'll give you -- I'll give you hopefully not more information than you want.

Technically if you use a reverse repurchase style agreement where you're actually purchasing the loans and so those loans are actually owned by you, then at least from a theoretical perspective you're not wedded to your loan-to-one borrow limit. That's not a perspective that we're going to try to push. We don't really need to do that.

But if there is a technical argument and one that I believe holds up relatively well that states that if you are in fact the owner of those loans and they meet your credit criteria during the time that there's an opportunity for the -- your borrower to repurchase your loans that you wouldn't be obligated under the loan-to-one borrow rules to keep within that -- within that limitation.

But what we have from a prudential perspective, and our perspective is that we're just going to stay within our prudential lending limit and focus on our loan-to-one borrower limitation in -- within an individual relationship.

I think it's much more important though to recognize that the way we're running the warehouse lending business is what reduces the risk. And so if it's a portfolio eligible loan that we will be underwriting all of those loans. There is no delegate underwriting for our portfolio eligible loans. So it's never as if we are not already satisfied with the loan and we're simply allowing the correspondent to draw docks on -- in his own name and then funding into escrow.

So there's really no increased risk associated with the portfolio funding. And then to the extent that they're funding loans that are not ultimately designed for an exit to our bank including the relationship with the large money fund manager or others, those guys are pre-clearing the funding and the takeout on those loans for us as well and confirming that they meet their underwriting standards. So we always have a takeout on the other side.

Now at some point in time if we felt the securitization market was back and we wanted to use our platform to warehouse loans for an ultimate securitization, then that would be something we could -- we could think about, but that's not the current plan until the market changes.

Okay. Thanks, Greg.

Sure.

We'll go next to Jeremy Zhu of Wedbush.

Hi guys. Thanks for the answers. And out of the $72 million loans you sold for $2.7 million gain, how did you decide what loan to sell and what loan to keep on your balance sheet?

We look at geographic concentrations, and we make sure that we don't end up with geographic concentrations that are greater than the internal board limits that we set, and that's really pretty much what we're doing.

I mean we basically underwrite all loans assuming that they are going to be on the balance sheet, and we basically are offering loans to individual banks and that really is almost a geographic preference as well. We find that a lot of banks are focused on certain geographies.

And so we happen to have concentrations in certain areas, and so -- frankly in Los Angeles we have some of our best relationships and most prolific originators there, and so we end up with concentrations there, and so we look to sell those loans.

And then for example in San Diego interestingly we're sometimes a little bit light on loans for a number of reasons, CRA and others, so we won't end up selling those loans. So it really -- that's really -- that's really the process.

So it's nothing to do with the quality of the loan or how much you can sell them for?

You know the -- we obviously, as I said, the quality of the loan -- these are all loans that are portfolio originated loans. They're all very good quality. And frankly you're not going to be able to sell poor quality loans to banks. That's not -- that's not going to happen.

The bankers obviously are individually underwriting these deals, and if they -- and if they sniff out a poor quality loan it's just simply not going to sell. So that would be an ineffective strategy.

Right. So if the rate goes up from here, would that ability for you to resell them for a gain diminish over time?

You know, it's sort of funny. I think that there is a -- it's interesting because we have certain buyers who will say well we want a spread of X over LIBOR and we'll come back and we'll say well great, then that loan should be priced at 107 now because LIBOR is down here. And they'll say well we didn't really mean that, right, we meant that there was some floor associated with LIBOR.

So I think in most cases there is a -- there is a set premium that we're looking for, and I think there's an understanding that although LIBOR may move around, banks funding cost doesn't really move around in that proportion. It just doesn't work that way.

So I think that as rates rose there would be an opportunity for rates to rise I'd say 75 let's say to 100 basis points on the five-year [suave] side without impacting our spread on the loans we sell. I think that if -- and it was the same way in reverse by the way. We were getting the same prices when rates were much -- were higher.

If you've got a movement above that I think you would see price compression, but frankly I mean we would just simply raise our rates with the rest of the market so that would be a very temporal sort of -- sort of issue.

Separate question I guess. Are yields higher loss this past quarter because the two multi-family -- how much loss were those two loans from the original loan amount? Essentially when you put them at our yield, how much did you mark down and assume that one point whatever, $1.1 million additional losses is from the further write down from our yield carrying cost?

Yes, that's a -- go ahead.

The majority of the write down was -- was that total amount of $1.1 million. So in one example we refreshed based on appraisal, and the appraisal just year-over-year had a very large difference. And so as a result we marked it down from that point.

But as we mentioned we've sold actually both of those. One was sold during the quarter, another one was sold in this quarter. So both of those are behind us.

Yes, they were Midwestern properties, and they just had substantial differences in their appraisals. I mean, everything is always marked down to the appraisal minus selling cost, and in this case the -- just the deterioration in cap rates in that area and then some problems endemic to that building ended up resulting in a higher loss.

And candidly, I'm not -- we're not really in the business of doing a great job of releasing buildings in the Midwest so I'm really focused on pushing REOs out, valuing them properly, and getting them gone. And as I said, the Countrywide deal that we were able to strike with them to get all our servicing back is also going to really help that because there's a lot that we can do there as well to just to really push down our non-performing assets even though they're certainly not high but standards of the industry.

Yes, that' very true. Okay. All right, thanks.

Sure.

(Operations Instructions). We have a follow-up from Joe Gladue of B. Riley.

Hi. Just wanted to ask a question about the net interest margin and I guess specifically on the asset yields. Would the mix of loans you're originating now, I mean do you expect to see further declines in the average asset yields?

Not significantly really, no. We're looking at -- we're not looking at any rate decreases on the single-family jumbo and anything that we would do on multi-family, if anything, would be very small, and it would be largely inconsequential.

Okay. All right. Thank you. That was it.

And we have a question follow-up from Edward Hemmelgarn with Shaker Investments.

Yes, Greg, one question about your -- the follow-up of $7 million. Did you say that's been fully subscribed already?

Yes. We have the cash in hand so in total the capital raise was $20 million that we got, and so we raised the -- the last $7 million was raised from a private investor that I [trust] and know and so --.

(Multiple speakers) seven and you just arrived at that offering because -- based upon on the demand that you had and that's -- it wasn't --?

No, I wouldn't really say that. I would actually say -- I mean it's funny how these things --. Sometimes you actually draw up business plans and they actually happen lo and behold, and we had -- we had a capital raise of $20 million planned in the business plan in December, and so we hit the numbers that we needed and that's -- that was what we wanted.

And so actually there is additional demand and we are -- frankly the market is -- the market sentiment is turned again and so now we have people again who are coming out of the woodwork looking for investments in the bank like we -- like we did before they all decided the world was ending two months ago.

So it was just -- it's just a matter of that's enough. You need to raise the right amount of capital but not too much because it can obviously be dilutive.

I agree. Then one other question is have you made any progress on your office space needs for I guess your --?

We currently have enough space where we are, but I have no comment on where we are on lease negotiations with anything. But we are actively engaged in a broad range of discussions and all I can say is I'll be glad when they're done.

All right. Great. Thanks.

Sure.

At this point there are no further questions. I'll turn it back over to Mr. Garrabrants for any closing remarks.

All right. Thank you everybody for your time, and I look forward to catching up with you next quarter. Thanks.

Once again ladies and gentlemen, that concludes our conference. Thank you all for your participation.