Axos Financial Inc (AX) 2012 Q2 法說會逐字稿

Good day, everyone. Welcome to the Bank of Internet, BofI Holding, Inc. conference call to discuss second-quarter results. Today's conference is being recorded.

At this time I would like to turn the conference over to your President and Chief Financial (sic) Officer, Gregory Garrabrants. Please go ahead, sir.

Thank you. Are you going to read the opening statements and disclosures there or not?

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

Before I turn the call over to them, please remember that this call -- in this call management remarks contain forward-looking statements which are subject to risks and uncertainties and that management may take 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 and among other things the economic environment, particularly in the market areas in which BofI operates; competitive products and pricing; physical 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 security markets; and the availability of the costs associated with sources of liquidity.

Examples of the 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 orientations, deposits and performance ratios such as efficiency ratio, regulatory capital of the risk and uncertainties related to these forward-looking statements that is contained in the Company's filings with the US Securities and Exchange Commission.

Any forward-looking statement as to the Company's future financial performance represents management estimates as of February 2, 2012. BofI assumes no obligation to update these forward-looking statements in the future due to the changing market conditions or otherwise.

With these cautionary statements it's my pleasure now to turn the conference over to Gregory Garrabrants.

Thank you. I would like to welcome everyone to BofI holdings second-quarter conference call for the quarter ended December 31, 2011. I thank you for your interest in BofI Holding and BofI Federal Bank.

Net income for the second quarter ended December 31, 2011, was $6.660 million, up 35.2% when compared to the $4.927 million earned for the second quarter of fiscal 2011 and up 1.9% when compared to the $6.533 million earned last quarter in the three months ended September 30, 2011.

Earnings attributable to BofI's common stockholders were $6.280 million, or $0.54 per diluted share, for the quarter ended December 31, 2011, compared to $0.45 per diluted share for the quarter ended December 31, 2010, and compared to $0.58 per diluted share for the quarter ended December 30, 2011. Excluding the after-tax impact of net gains related to investment securities, core earnings for the second quarter ended December 31, 2011, increased $1.911 million or 38.9% when compared to the quarter ended December 31, 2010. For the six months ended December 31, 2011, net income was $13.193 million, up 35.2% over the $9.759 million earned for the six months ended December 31, 2010.

Other highlights of the second quarter include total assets reached $2.224 billion at December 31, 2011, up $283 million compared to the June 30, 2011, quarter end and up $563 million from the December 31, 2010, quarter, an annualized percentage increase of 34%. This growth rate was lower than it could have been given that we decided to sell portfolio eligible single and multifamily loans of approximately $128 million over the prior six months. Without the sale of portfolio eligible loans the annualized growth rate of assets would have been 42% rather than 34%.

Our return on equity reached 15.9% for the second quarter. Total deposits reached $1.553 billion at December 31, 2010, up 39.1% compared to December 31, 2010. Our net interest margin was 3.6% for the quarter ended December 31, 2011.

Nonperforming assets at December 31, 2011, were 64 basis points, down from 80 basis points in the prior quarter. We raised gross proceeds of $13.8 million through the issuance of common stock at $16 per share, a 2.7% discount to the prior day's closing price.

Our loan units had another great quarter with $364 million in new loans originated in the second quarter. The $364 million of production consisted of the following -- $133 million of single-family agency eligible gain on sale production, $43 million of single-family non-agency gain on sale production, $79 million of single-family jumbo portfolio production, $52 million of multifamily non-agency gain on sale production, $26 million of multifamily portfolio production, and $31 million of C&I and specialty asset production.

Our gain on sale agency and non-agency mortgage origination business made $3 million of revenue in the second quarter of 2012 on $228 million of origination volume, up from $1.8 million of revenue on $79.7 million of origination volume in the second quarter of the 2011 fiscal year.

Generally, the holiday season takes a toll on originations in both the second half of our December quarter and the negative effect carries into January. Although we still had a seasonal decline this year relative to our growth projections, we had a good December quarter that carried over into a strong January. By way of example, our January 2012 single-family mortgage origination unit closed 187 units for $75 million of origination volume versus 54 units for $28.9 million of origination volume in the prior January.

Our mortgage loan pipeline remains strong with the single-family agency pipeline at $85.2 million, $139.5 million for the single-family jumbo group, and the multifamily pipeline of $64 million as of January 31, 2011.

We continue to remain highly focused on credit quality at the bank. For the quarter's originations the average FICO for the single-family agency eligible production was 782 with an average LTV of 57%. The average FICO for the single-family jumbo production was 740 with an average LTV of 57%. The average LTV for the originated multifamily loans was 57% and the average debt service coverage was 1.48.

At December 31, 2011, the weighted average LTV of our entire loan portfolio of real estate loans is 53%.

As I noted earlier, our nonperforming assets were 64 basis points of total assets at the end of the quarter, down from 80 basis points at September 30, 2011, and down from 99 basis points of total assets in the June 30, 2011, quarter. This quarter we reduced the dollar value of real estate owned and repossessed vehicles by 51% from $5.3 million to $2.6 million. We sold two multifamily OREOs, one with a book value of $1.9 million and one with a book value of $0.3 million, and we sold one single-family mortgage -- single-family REO with a book value of $0.2 million.

The bank is in a strong capital position with a pro forma Tier 1 core capital ratio of approximately 9% as of December 31, 2011, when we include the $17 million currently held at the Holding Company and available to contribute to the Bank. Given the Bank's organic earnings growth and the demand for our loan originations at high premiums from other institutions, the Bank is in a capital position that will allow us to grow its balance sheet without the need to tap the capital markets.

By way of example, assuming flat earnings over the next three quarters and a pro forma capital ratio of 8%, the Bank would be able to grow our earning assets over the next three quarters by approximately $537 million without the need for excess capital. Because we are finding greater demand for our loans at high premiums and our willingness to sell our loans, we believe that we will have the flexibility to continue to control when and if we tap the capital markets for additional equity, and we can determine over time what period we will use our existing balance sheet capacity.

We continue to make progress on our newer business lending and deposit initiatives. Our warehouse lending group continues to do well focusing on providing lines of credit to the most well-capitalized correspondent lenders in the country. Our Capital Markets group continues to find loan demand at attractive returns by lending to niche finance businesses.

Although the capital markets pipeline is inherently volatile based upon the size of the transactions, in the individualized nature of the negotiations we continue to see growth in many of our vertical niches on which we focus. Currently the pipeline of transactions with a reasonable likelihood of proceeding is well over $100 million.

In January, we launched the American Senior Association Banking Center, a white label banking platform for our largest affinity group, the American Senior Association and 60 Plus, a 12 million member organization. The American Senior Association is the second-largest senior citizens organization in the country, second only to AARP from a membership perspective. Next week we will begin marketing our deposit and lending products to the American Senior Association customer base.

The value proposition provided by our competitive product offering and the banking platform has generated significant interest from other large affinity groups. We believe this distribution platform is powerful and will continue to be a source of additional growth for the bank. We will be launching two additional affinity groups, the Second Amendment Foundation and the World Travelers Association, in the third quarter this fiscal year.

UFB Direct, our airline miles and reward checkings brand, recently passed through the $100 million mark in deposit volume in less than six months of operation. We have developed the majority of the infrastructure for the launch of our business banking group and are adding 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 in the third quarter of -- third calendar quarter of 2012.

The core functionality of our Internet banking platform continues to improve. This quarter we are testing our mobile cell phone and remote deposit capture application and last quarter we rolled out our iPhone and Android mobilephone applications to supplement our existing browser-based mobile banking functionality. With the addition of mobile remote deposit capture functionality and the mobile banking applications, our consumer functionality in all meaningful ways can compete directly with offerings from full-service branch-based banks.

With our great customer value proposition and our well-diversified branchless distribution strategy, we feel strongly that we will continue to be able to grow our deposit base commensurate with the significant asset growth opportunities available to us.

Now I will turn the call over 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, www.bofiholding.com. Second, I will discuss our quarterly results on a year-over-year basis, meaning fiscal 2012 versus fiscal 2011, as well as this quarter ended December 31, 2011, versus the first quarter ended September 30, 2011.

For the quarter ended December 31, 2011, net income totaled $6.660 million, up 35.2% from the second quarter of fiscal 2011. Diluted earnings were $0.54 per share this quarter, up $0.09 or 20% compared to the second quarter of fiscal 2011. Net income increased 1.9% compared to the first quarter ended September 30, 2011, which was $6.533 million.

Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings were $6.828 million for the quarter ended December 31, 2011, up 38.9% year over year from the $4.917 million of core earnings for the second quarter of fiscal 2011. And up from the $6.775 million in core earnings for last quarter ended September 30, 2011.

Net income was $13.193 million for the six months ended December 31, 2011, up 35.2% over $9.759 million earned for the six months ended December 31, 2010. Earnings attributable to BofI's common stockholders were $12.687 million, or $1.14 per diluted share, for the six months ended December 31, 2011, up 28.1% from the $9.605 million, or $0.89 per diluted share, for the six months ended December 31, 2010.

The reasons for increased earnings for the six months ended December 31, 2011, are similar to those identified this quarter, specifically increased net interest income and loan growth and increased noninterest income from growth in the volume of loans sold through the mortgage banking business.

Net interest income increased $5 million during the quarter ended December 31, 2011, compared to the second quarter of fiscal 2011 and increased $900,000 compared to the first quarter ended September 30, 2011. This was a result of increase in average interest earning assets and the average interest earning liabilities, as well as a decrease in the cost of funds.

The net interest margin was 3.60% this quarter compared to 3.65% last quarter and 3.72% in the second quarter of fiscal 2011. The cost of funds decrease to 1.96%, down 45 basis points over the second quarter of fiscal 2011 and down 10 basis points compared to the quarter ended in September 30, 2011.

Provisions for loan losses were $1.6 million this quarter and $1.6 million for the second quarter of last year. That is compared to $2.363 million for the first quarter of fiscal 2011. The loan loss provision was higher last quarter because higher -- because of higher charge-offs on single-family loans.

Noninterest income for the second quarter of fiscal 2011 was $2.986 million compared to $1.927 million in the second quarter of fiscal 2011 and compared to $4.570 million for the first quarter of fiscal 2012. Increased sales volumes resulting in higher mortgage banking gains are the primary reason for the variances between the quarters.

Moving now to operating costs or noninterest expense, for the second quarter ended December 31, 2011, operating costs were $9.204 million compared to $6.240 million in operating costs for the quarter ended December 2010 and $9.552 million in operating costs for the first quarter of 2012. The operating expense for the second quarter of fiscal 2012 decrease 3.6% to the first quarter of fiscal 2012 due to a decrease in REO expense. The increase in operating expense in the second quarter of 2012 compared to the second quarter of fiscal 2011 was primarily the result of increased staffing resulting in higher compensation and higher occupancy.

Our efficiency ratio was 41.70% for the second quarter of 2012 compared to 38.88% recorded in the second quarter of 2011 and compared to 41.99% for the first quarter of fiscal 2012. The efficiency ratio is calculated by dividing our operating expenses by the sum of our net interest income and our noninterest income.

Shifting now to the balance sheet, total assets increased to $2.223 billion, up 14.6% from total assets of $1.940 billion at June 30, 2011. The increase in total assets was the result of originations of loans. The asset growth since June 30, 2011, was primarily funded by a net increase in deposits totaling $212 million and an increase in borrowings of $22.5 million.

For December 2011 stockholders' equity increased $45.8 million to $193.6 million, up 31% from the $147.8 million at June 30, 2011. The growth was primarily due to the issuance of preferred stock of $19.5 million, the issuance of common stock of a net of $13.3 million, and our net income of $13.2 million. At December 31, 2011, our Tier 1 core capital ratio for the Bank was 8.27% with $72.9 million of capital in excess of the regulatory definition of well-capitalized.

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

Thank you. That concludes our prepared remarks. Operator, will you please move to the question-and-answer session. Thank you.

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

Hey guys, how are you? Nice quarter.

Thank you, Andrew.

Looking at your loan growth projections, the pipeline is still quite strong as it was in the last quarter and given that you have raised quite a bit of capital, especially with the preferred converts, you can grow into that. I don't think you need to raise anymore anytime soon.

So what are your loan growth expectations for this quarter, like similar to the last couple years? Obviously you could portfolio some; I am just curious where you are thinking.

Okay, just a couple of things. I mean one is that we have issued perpetual preferred stock so that capital is Tier 1 capital, highly supportive of growth, so there is no need for that to convert. That is irrelevant related to the growth projections from an asset perspective.

And also, like when you publish your report and you focus on just the capital at the Bank, you have to remember that we have -- I mean we kept most of the capital we raised at the holding company so far. So that makes a difference as well.

We have not given projections historically on loan volume growth and there is honestly a really simple reason why. And that is that we want to call them as we see them. I don't want to ever put undue pressure on any underwriter or anyone in the group to have to feel like they need to meet projections which were essentially arbitrary and I stated on a call.

Now that being said, I think that where the pipeline -- from where the pipeline sits I see that we should be able to continue on the pace that we had in the prior quarter. I don't see why that wouldn't occur. There may be a little falloff in the multifamily side given some competition we are feeling there, but the single-family side is picking up some of that slack. So I think that we can continue to see that.

And then with regard to the loans that we sell, that is obviously dependent upon pricing. Clearly, we are probably a little bit pickier about pricing now given that before we raised the $35 million of capital, we were very focused and, frankly, the stock market wasn't as good as it was. We were focused on ensuring that we could continue our origination engines and not have to raise capital in a bad market.

I think obviously that is done, so we obviously have much more flexibility to retain rather than sell now. So that will just depend on the bids that we get.

Right, right.

So I know that is a not very helpful answer for modeling; I apologize for that.

Well, no, it is helpful just to have some idea on how you are thinking about it, I think anyway.

And then flipping over to margin outlook, down a little bit. It looked like just because loan yields came down; everything else looked to be okay with the yield and rate side. So where are these new loans coming out, like the new ones that you are portfolioing, compared to what is rolling off?

Right. The single-family is coming in pretty much in line. Multifamily we had to lower our standard rate by about 15 bps and I expect some further reductions on the multifamily rates.

Now that being said, we have real opportunity to lower our cost of funds in a number of areas. We have, what is it, $86 million of 5% CDs rolling off in the next 12 months. I mean obviously when you have 5% CDs and you are renewing those CDs at less than 1%, $86 million of 5% money starts to make a pretty big difference, right? You could replace that with $500 million of 1% CDs.

So there are some things that are clearly there on the cost of funds side and so we do see, particularly on the multifamily side, there will be some compression on rates because the competition there is pretty intense. And we are seeing that a little bit more than we are seeing it on the single-family side.

Got you; as we heard from lots of other companies. Anyway, I will step back. Thanks so much.

(Operator Instructions) Gregg Hillman, First Wilshire Securities Management.

Hi, Andy. Hi, Greg. Could you talk about I guess four things? I guess, first, maybe the Costco relationship; second, the Wall Street firm that was supposed to buy the jumbos, where that is at; and then the last two things were the pre-paid -- the relationship with the pre-paid debit card issuer. And then I will remind you of the fourth one later.

Sure, okay. So the Costco relationship remains very strong. They took a bit of a hiatus from advertising. They didn't have any ads in the Costco Connection, which is that 45 million member magazine, really from the Thanksgiving period all the way through the new year. And they just started again focusing on advertising and as usual the next morning after that weekend we had hundreds of applications.

So that relationship is strong. It's going well. We continue to see it blossoming and expanding. We meet with them regularly. The relationship is in a good place and we feel strongly about that it's going well.

The Wall Street firm was a product that was a 30-year fixed rate jumbo product that we were, frankly, more excited about than we are now. Really the way it ended up is that they just -- they have been unable to compete with the pricing of other players. And so, although we have been signed up exclusively with them to do all their work, we have continued to struggle with them on pricing.

So they are one of the world's largest money fund managers. You would think they would have an appetite, but they seem very content to do very little volume.

So, candidly, so far the portfolio of products has continued to sell well. That product is out on Costco. It's one of the soul products that is out there for that massive membership base and it's just not doing well because of the pricing.

So I think -- and there is some other issues that we have been trying to work through with them. I think there are other opportunities though that are coming on there, so I think we are well set up to the extent that when non-agency product comes back from a conduit perspective we are working with three other players there to try to put some competitive pressure on this other firm. But it really -- it hasn't had the impact that we have hoped it would.

You know, on the sponsorship side, we always continue to look at those, look at them on a case-by-case basis. We have a lot of good discussions ongoing and we are pretty much under confidentiality agreements across the board there and so I feel like that is probably the best place to leave that.

But we do see opportunity there. Obviously, we are very cautious about thinking about how we work in that area. And so at different times there is different obstacles that arise in different relationships and we look at those carefully.

Do you remember the fourth one?

Yes, I do. It was I think on commercial. You were supposed to -- with the change in the federal law that allows banks to pay interest to commercial customers. Then can you tell us about your marketing effort in that area, whether you think you are going to be able to bring in a lot of deposits from commercial customers to checking accounts?

Yes, so we are -- we have been actively working through just all the technology on the business banking side. That is not an area that we have had a lot of accounts before in that. We have the good risk management team in place for that, and so where we are is we have all the technology on the back-office side. We still need to, and we are working through, the online account opening process because, frankly, it's a lot more complicated with the entities and that sort of thing.

So that business, as I have always said, really is going to be more really out much more where we are doing mass marketing in the third quarter of this calendar year. So we have accounts in place from relationships in the community that we are working through and making sure that everything is set up, so it's much more of a smaller activity now until we are very comfortable with it.

But the answer is yes. The demand is significant and you can imagine that the distribution channels that we utilize through ASA and Costco and things like that would be very interested in these sorts of accounts. So we think the demand is going to be very, very strong and it will make a real impact. But we would rather -- we need to do it properly and go through a staged process, and that is what we are doing.

Thanks, Greg.

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

I guess wanted to circle back to the loan originations. You did say last quarter that you might be originating more for sale and I guess you did that this quarter, but it was quite a significant shift from, I guess, loans originated for sale from being a quarter or so of originations to being about two-thirds this quarter.

Just wondering is that -- do you expect that relationship to continue or were there some factors driving more of the originations for sale this quarter?

Right. What we have more demand for our product at very high premiums than we can fulfill, so it really isn't a demand-related issue. It was really, frankly, more about ensuring that -- remember our capital raise and all those other sort of things? We just wanted to make sure that we are never beholden to the capital markets for funding.

And so we probably were a little bit more aggressive than we otherwise would be subsequent to sitting on a much larger capital base. So, obviously, it's easier to grow when you have got that cushion, and generally you set these trades months in advance and you commit to them. Once we commit to them, even if something goes very well, like stock market doing well and capital raise goes well, you generally don't want to change your mind about those things. You want to fulfill your obligation and keep on -- keep that relationship in a good place.

All right. I know it's still a small portion of deposits, but you did have some pretty nice percentage growth in the noninterest-bearing deposits. I guess can we look forward to more of that or what was driving the increase in the quarter?

Well, you know, I think that you can look forward to good growth in the demand deposit arena. Clearly, we are seeing -- we think it's a fundamental shift from a market perspective in our ability to attract checking accounts and I think that there is a series of reasons for that.

One is that our product has just simply gotten a lot better. As I have stated, with the mobile deposit capture, the purchase rewards, all the features that we now have on our accounts, the reward structure and those sorts of things, we really believe -- unlimited ATM -- we just have a very, very compelling product. And so we have very significant interest in that product.

So I think that that is there as something that is important. We are also focusing on it a lot more through cross-selling. Our customer service direct bankers are just much better trained than they were previously.

They are a real excited sales force now. So everybody who comes here for a CD is -- we know where they come from, so we are selling directly against the money center banks. So when they send us money from Wells, we know exactly what Wells offers and we are hitting them with a series of sales calls related to cross-selling checking accounts.

So we really believe that as a branchless bank we can achieve the relationship, checking account percentages that are, frankly, in excess of what branch-based banks have. I mean really we are not that far off right now. We believe we can achieve in excess of what they have by simply utilizing a strong direct marketing approach and utilizing our cost advantage to provide a better product.

And we are seeing -- the American Senior Association product is a highly checking account focused product. It is definitely the most attractive product on that suite and it's going to be going to 5,000 e-mail addresses every day for the next year. We think that we are going to get good traction there and our deposit base will continue to improve in its retention characteristics and also, ultimately, it's cost characteristics. Because we believe that as folks give us their direct deposit relationships and things like that that we will be able to lower the overall -- continue to lower the overall cost of our deposits.

So we are excited about that. It's a big initiative at the bank and it's a multipronged initiative that I think happens to coincide very nicely with what is happening in the overall market with regard to the general consumer unrest related to the larger banks.

I want to shift over to, I guess, asset quality question or two. There was a little bit of a jump in early-stage delinquencies in the quarter. Again, just looking for what is going on there.

Andy is going to give you the exact number, but we had a gentleman who -- I would call it more of a foot fault than anything else. So there was one large single-family loan that paid a little bit later than 30 days, but he got caught up in the quarter. He is now paid current. And then there was another multifamily loan that is similarly paid current.

So I think -- look, I think paying great attention to that 30-, 40-day bucket you are going to catch folks that sometimes through foot faults and -- I mean there was a couple, I don't know if it was this one in particular, in one case we sent the bill to his second home or whatever. We make loans to some fairly well-off individuals, and the statement got lost and then they missed the call and they were on vacation. So I honestly don't think, Andy (multiple speakers).

Yes, Joe, if -- and I put this on page 30 in the Q where I think you are looking. But if you factor out those loans, our total delinquency comes down to $137 million, which is very much in line with prior period. So it is really these one-off -- there is $4 million in the single-family and then $2 million in multifamily. And that is only three loans, all of which cured. So when you take those out, we are much more normal.

Yes, and I don't believe -- it's fair to say that those are not loans that are in distress or under water of any nature. So look, they didn't pay in 30 days, but there's not an issue with them, so --.

I guess lastly, I'll ask -- I guess last quarter you talked about the -- you had gotten the agreement with Countrywide. You've gotten back control of your nonaccrual loans and REOs. Just wondering how that's helping with the resolution efforts.

Yes, that's a very good question, maybe a little bit of a sore subject. So we did get an agreement with Countrywide. We went through the legal process and we all agreed, and everybody said this is what they were going to do. And then they said, well, we just have one final approval process and it's going to get done next week, and that's six weeks ago.

So we are now back to telling them, giving them deadlines and those sort of things. You know, we have a choice; we can declare them in breach of the servicing agreements, simply pull servicing. I've tried not to want to do that, but our very strong disposition effort that you're seeing is even stronger than you might think it is because we have control of relatively few of our REOs.

So there's not much on the multifamily side left that we can sell, and we need to get control back of those loans. And it's honestly not maliciousness; it's just that organization is so frozen by fear, lack of ability to make decisions. I mean it would be great to compete with them if I didn't have to actually deal with them in any business perspective.

So honestly, that's not done yet. I mean, they've told us it's done, they've told us that they've accepted it, but they have not get given us a final signed document. And we're putting significant pressure on them, but we are going to have to resolve this one way or the other. And we can declare them in breach, then servicing notices and pull servicing and let them come after us if they will, which I don't think they will. I just was hoping to do it in a more organized manner. But they're not cooperating in the way that I'd like them to.

Okay. Well, thank you. That's all I had.

Todd Walters, Catalyst Funds.

Thanks. I just wanted to hear a bit about your underwriting standards. You guys are certainly pretty conservative. Nonconforming asset ratio came down this quarter. To what extent, if anything, that limits your growth? Is there any thought to loosen those standards slightly to expand your potential market, perhaps increase your average rate on your earning assets? And if not, is that more a view on the economy or just a corporate policy that you don't see changing too much?

I don't really see it changing too much. You know, we are very comfortable with the way we underwrite. It has been very successful. We have to compete -- we try to compete in other ways from a credit perspective, and we also think that there are different ways to compete. So we have -- I think we have seen that specifically on the multifamily side, and that has been something that I haven't liked to see.

You have got Chase out there doing essentially no doc loans now on the multifamily side at 75% LTV. They are not asking for tax returns anymore. So anybody can make up an operating statement, and that certainly is lower than we are. You know, I mean and then it is also higher from an LTV perspective.

I think that there is probably a potential in very strong purchase money markets for a multifamily to go a little bit above where we are, and we might consider that on a selective basis. But in general, what we try to do is go the opposite way. What we try to do is we say, well, we have the credit quality that we do because we focus on loan-to-value ratio. And so we have a series of discounts to our pricing associated with the credit characteristics that we find valuable. So we just have much deeper discounts for lower LTV loans.

So even if you look at, let's say, the home-equity loan portfolio, that home-equity loan portfolio has performed incredibly well. And the reason why it has is because we went out broadly on the Internet nationwide, but we had the lowest rate for 40 LTV home-equity loans and below. And people said, well, how many people want a 40% home-equity loan; and it turns out in the whole country there is actually a reasonable number.

So I think that that is really more of our mechanism is that we have broad distribution and we have narrower products. But the combination of those things end up with a mix that we are comfortable with. And I think it is hard to argue with our growth. I think that we have grown well, and I just don't really think that is part of our DNA to really follow markets like that.

Great, thanks.

Edward Hemmelgarn, Shaker Investments.

Yes, hi, Greg. Just a couple of questions here. Can you talk a little bit more, I mean -- I might have missed some of these things; I got on the call a little late -- but just about where your relationship now stands with some of the prepaid debit card companies and the deposits from that?

You know, look, I think obviously we talk with those individuals and we have very good substantive discussions going on in a variety of different areas. It is difficult, given the relatively few number of players, to talk specifically about anything without -- and be more specific about particular transactions. So I am not going to do that.

Okay. I guess I am just trying to see if they are still moving along in the way you would like them to be moving along.

You know, in some cases, no; in some cases, yes.

Okay. I didn't -- did you talk about the mix? Again, I am just getting through all of this stuff here, but just the loan originations during the quarter?

Yes, we did. We went through the loan originations in the quarter. I will briefly go over the numbers again. We had $364 million of production, $133 million of single-family agency eligible gain on sale, $43 million of single-family non-agency gain on sale, $78 million of single-family jumbo, $52 million of non-agency gain on sale, $26 million of multifamily portfolio, and $30 million of C&I and specialty assets.

So it was a good quarter, and honestly December quarter is pretty rough because trying to engage a commercial borrower, particularly on the multifamily side for a refinance, between Thanksgiving and Christmas and asking them for tax returns and stuff like that is a rather unsuccessful proposition usually. But we were able to power through that. I think that really just indicates that when everybody gets back to business, that will be even better. So I thought that was pretty good.

And then I also mentioned that in January we had a nice -- I mentioned the single-family numbers. We had a very nice month in January on the single-family side, which is also typically a very historically low month from an origination perspective.

Okay. The non-agency loans held for sale, it moved up to $48 million. Is that jumbos?

Well, on the single-family side it is jumbos. On the multifamily side, it is multifamily apartment loans.

All right.

On the single-family, we call them non-agency. It is almost always a jumbo loan from a size perspective. Now theoretically, you know, you could have a loan that is lower in size -- it is not a jumbo -- that would be non-agency because it fails some other criteria from Fannie. It could be -- it is a condo with kitchen or something in the wrong place or whatever. They have a bunch of little things that they care about that may or may not be relevant from an actual credit perspective. So you could -- it is not 100% overlap between jumbo and non-agency single-family, but it is pretty close.

Okay. And then lastly, this is for Andy. What was the big increase in G&A expense during the quarter? Other general and administrative.

Well, in connected quarters G&A went down. So I think your --.

Other general -- didn't the (multiple speakers)

Oh, are you saying in other G&A?

Yes, other G&A, just the line item. (multiple speakers) It moved up from $764,000 to $1.2 million.

Yes. In general, it is mostly loan and loan process-related expenses that we incur. There was also some additional insurance and other elements that moved up a little bit. Overall, though, I don't think we expect that to drive up higher. It has been averaging around 19, 18 basis points. It came in at about 22 bps, so I would expect it to come down on an average basis in the next quarter.

Okay, all right. Thanks.

Andrew Liesch.

Thank you. Just two quick questions, guys. Along these same lines, what drove the increase in data processing costs, and should that come back down as well?

Yes, on the data processing costs, we are now having more costs associated with additional systems that are moved in here. There is a small amount that probably represents one-time, I am going to call it less than 100. But on an average basis, I would see that to be a little bit lower but certainly not fall back to last quarter's numbers.

One element that we have really focused on is really focused a lot on scalability of that infrastructure. So I think on the positive side, it is a $5 billion, $10 billion plus infrastructure now. On the negative side, it is a $5 billion, $10 billion plus cost.

So I think just some examples of some things we basically have, new co-location facilities that allow us to just have much better disaster recovery characteristics and a bunch of other things that are both regulatorily useful and also from a business perspective very useful. They're expenditures that I don't expect to have to go up as we grow, but they are things that are really the result of us taking really the next step across the board on our management team, in our infrastructure from an IT perspective, but also in the way we process and deal with data.

Our new data warehouse was expensive, but what it does do is it now has a centralized location for every piece of business intelligence that we need to really grow a business that is increasingly going to be focused on that big data component of being able to analyze consumer behaviors and direct marketing and sales approaches to that consumer.

So there is a lot of expense that has been put into an infrastructure that I think is really ready for growth. So I do believe -- I do truly believe we are going to start seeing some real economies there, particularly on the data processing side. We do have a move, though, in store as well, which will be overall positive because we have lowered our rent from where it is. But sometime in the July timeframe, we are going to be moving buildings.

So the data infrastructure that we have created was designed to allow movement of buildings easily. It was removal of everything from this facility into a hardened co-lo, dealing with a variety of different aspects of things. I think honestly that cost alone was almost $7,000, $8,000 a month extra. But it prevents us from having to build a co-location facility in our new building which more than saves it.

So there are some things like that going on. But I think the overall message is that we have spent a lot of the money for scalability, and so now we just have to go get the scale.

Right. And I know you have talked about the scalability, not only with your plans for infrastructure upgrades but also with the management that you have hired over the last -- I guess last year or the end of 2010. So I was just kind of curious if there were some one-time things.

But then my other question is have you had an exam with the -- safety and soundness exam with the OCC yet?

Our exam is scheduled for basically next month. So we have not had our OCC exam yet.

Got you. Thank you for taking my questions.

Gentlemen, we appear to have no further questions at this time.

Great, thank you.

That will conclude today's conference. Thank you all for joining us.