Axos Financial Inc (AX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding, Inc. fourth quarter fiscal 2013 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the call will be opened for questions. (Operator Instructions).

This conference is being recorded today, Wednesday, August 7th, 2013.

I would now like to turn the conference over to Mark McPartland from MZ Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Joining us today for BofI Holding, Inc.'s fourth quarter financial results conference call are the Company's President and Chief Executive Officer, Greg Garrabrants, and the Executive Vice President and Chief Financial Officer Andy Micheletti.

Greg and Andy will review the comments -- review and provide comments on the financial and operational results for the fourth quarter, and they will be available to answer your questions after the prepared remarks. Now, before we begin, I would like to remind our listeners that on this call today prepared remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional statements in response to your questions.

Therefore, the Company claims Safe Harbor protection from the forward-looking statements that are contained in the Private Securities and Litigation Reform Act of 1995. Forward-looking statements related to the business of BofI Holding, Inc. and its subsidiaries can be identified by common use forward-looking terminology, and those statements involve unknown risks and uncertainties, including all business related risks that are more detailed in the Company's Form 10-K, 10-Q and 8-K filings with the SEC.

This call is being webcast and there will be an audio replay available on the Company's Investor Relations website located at bofiholdings.com. All the details of this call were provided in the conference call announcement and in press -- earnings press release earlier today. With that taken care of, I would like to turn the call over to Greg Garrabrants, who will provide opening remarks. Greg, the call is yours.

Thank you, Mark. Good afternoon everyone, and thank you for joining us. I would like to welcome everyone to BofI Holding'sconference call for the fourth and fiscal year ended June 30, 2013. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for the fourth quarter ended June 30, 2013, of $11,132,000, up 30% when compared to the $8,565,000earned for the fourth quarter of fiscal 2012, and up 7% when compared to the $10,402,000 earned in the quarter ended March 21, 2013.

Earnings attributable to BofI's common stockholders were $11,055,000 or $0.78 per diluted share for the quarter ended June 30, 2013, compared to $0.64 perdiluted share for the quarter ended June 30, 2012, and $0.74 per diluted share for the quarter ended March 31st, 2013. Excluding the after-tax impact of net gains and losses related to investment securities, core earnings for the fourth quarter ended June 30, 2013, increased $3,229,000, or 36.6%when compared to the quarter ended June 30, 2012, for a diluted earnings-per-share for the fourth fiscal quarter of $0.85 per share.

For the June 30, 2013, net income was $40,291,000, up 36.7% over the $29,476,000 earned for the year ended June 30, 2012. Other highlights for the fourth quarter include return on equity reaching 16.96% for the fourth quarter ended June 30, 2013. Our net interest margin was 3.89% for the quarter ended June 30, 2013, a 15 basis points improvement over the prior quarter. We originated a $547 million of loans in the fourth quarter. The $547 million of production consisted of $156 million of single-family agency eligible gain on sales production.

$81 million of single-family, non-agency eligible gain on sale production, $141 million of single-family jumbo portfolio production, $64 million of real estate secured lender financed portfolio production, $19 million of multi-family non-agency eligible gain on sales production. $43 million of multi-family portfolio production and $44 million of C&I and specialty asset production. Total originations for the year ended June 30, 2013, reached $2,141,000,000, an increase of 53.2% over the year ended June 30, 2012, origination of $1,398,000,000.

Total assets reached $3,091,000,000 at June 30, 2013, up $704 million compared to June 30, 2012, an increase of 29.5%. Our loan pipeline remains strong. The single-family agency eligible gain on sale pipeline is $73 million, the single-family jumbo portfolio and non-agency eligible on sale pipeline is $266 million, and the multi-family loan pipeline is $129 million. Our C&I lending business is generating a growing pipeline that is gaining significant traction in its target segments.

The pipeline of accepted LOIs in the C&I business as of July 25th was $120 million, an increase in the $84 million at the end of the fourth fiscal quarter, with approximately $31 million of healthcare asset transactions. To put these loan pipeline numbers in context, they are significantly higher than they were in the December quarter, and have even risen substantially since the end of the fiscal year. Multi-family's pipeline was as low as $66 million in December of 2012. Within six after some management and operational changes in the multi-family group the pipeline has nearly doubled to over $129 million.

We have also seen a robust increase in our single-family jumbo pipeline in only one month from $204 million on June 30, 2013, to the end of July with a pipeline of $266 million. This is the result of enhanced marketing and sales, but also the result of our competitors adjusting their loan rates higher to be more in line with the bank's loan rates as a result of rising rates in the overall marketplace. We continue to remain highly focused on credit quality at the bank, and have not sacrificed credit quality to increase originations.

For the fourth fiscal quarter's originations the average FICO for single-family agency eligible production was 775 with an average LTV of 61%. The average FICO for the single-family jumbo production was 744, with and average LTV of 63%. The average LTV of the originated multi-family loans was 61%, and a death service coverage was 152 basis points, or 1.52%

At June 30, 2012, the weighted average LTV of our entire portfolio of real estate loans is 55%. We have been able to diversify our non-interest income with significant growth outside of the single-family agency mortgage banking arena. This quarter our non-interest income, excluding securities and mortgage pre-payment penalties, is $8,870,000 consisting of $3.2 million of fee income from single-family agency eligible mortgages, $1.2 million of fee income from single-family jumbo mortgage loans, $1.4 million of fee income frommulti-family mortgage loans, $853,000 from the sale of structured settlements originated for sale, $842,000 of prepaid card fees and $1.4 million of deposit, C&I and other fees.

We have grown our prepaid card fees from approximately $90,000 in the third fiscal quarter of this year to $884,000 in our fourth fiscal quarter. We have several programs that are in the process of implementation, which will further increase our fee income and generate zero cost deposits. Our deposit in other fee income, outside of prepaid, has also grown substantially over the fiscal year from $342,000 in the prior fiscal year's June quarter to $1.3 million in this fiscal year's June quarter.

We also began originating structured settlements for sale this quarter, and have conducted our first sale generating $853,000 of C revenue. We have significant opportunity to increase our fee income from the sale of structured settlements if we desire. We continue to make progress in growing and enhancing our deposits franchise. Our goal is to increase our share of transaction accounts and develop deeper customer relationships. We have made strong progress on changing the (inaudible) of deposits become more transaction focused.

From December 2011 to June 2013, we grew our checking account balances by 332%, our money market balances by 94%, while our certificate of deposit balance has decreased by 31%. Transaction accounts now make up 51% of our deposit base, up from only 31% from a year-ago, and have resulted in significantly enhanced and interchange in other deposit fee income. Our Business Banking group has over $340 million of total deposits, up from $185 million in the prior quarter ended March 31st, 2013.

The business bank has about 1700 accounts with 59% of the balance coming from checking accounts. We continue to foresee robust growth in our Business Banking deposits. Included in the growth of both consumer and business checking accounts, we have grown our checking account balances by over 228% this fiscal year. We will be augmenting our deposit base with approximately $200 million of deposits, and 10,000 accounts from our acquisition of principal banks non-trust deposits, including 500,000 checking accounts.

The weighted average deposit cost of the transactional accounts are 42 basis points and the weighted average total deposit cost is approximately 53 basis points. We paid no premium for these deposits and will be assuming them at par value. We continue to make great progress in enhancing and building our operational and risk management infrastructure to ensure that we are adequately preparing for the growth that we effect to achieve in the next fiscal year.

We continue to make investments in our people systems and processes to ensure that we are appropriately managing our risk and remaining on sound regulatory footing as we enjoy the continued success of what we believe is the right business banking model for the future. Now, I will 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 8-K was filed with the SEC today, and is available online through EDGAR or through our website, bofiholding.com. Second, I will discuss our quarterly results, on a year-over-year basis meaning fiscal 2013 versus fiscal 2012, as well as this quarter ended June 30, 2013 versus the third quarter ended March 31, 2013. Then I will briefly discuss the results for the fiscal year.

For the quarter ended June 30, 2013, net income totalled $11,132,000, up 30% from the fourth quarter of fiscal 2012. Diluted earnings were $0.78 per share this quarter, up $0.14 or 21.9% compared to the fourth quarter of fiscal 2012.

Net income increased 7% compared to the third March 31, 2013. Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings were $12,046,000 for the quarter ended June 30, 2013, up 36.6% year-over-year from the $8,817,000 of core earnings for the fourth quarter of fiscal 2012, and up from $10,199,000 in core earnings for the last quarter ended March 31, 2013.

Net interest income increased $6,415,000 during the fourth quarter ended June 30, 2013 compared to the fourth quarter of fiscal 2012, and increased $1,803,000 compared to the third March 31, 2013. This was a result of increases in average interest earning assets, increases in average interest bearing liabilities, as well as a decrease in the cost of funds and an increase in our earning asset yield.

The net interest margin was 3.89% this quarter compared to 3.80% in the fourth quarter of fiscal 2012, and compared to 3.74% in the third quarter of fiscal 2013.

The cost of funds decreased to 130 basis points, down 32 basis points from the fourth quarter of fiscal 2012, and down 2 basis points compared to the quarter ended March 31, 2013. Provisions for loan losses were $1,500,000 this quarter, $2,100,000 in the fourth quarter of last fiscal year, and $1,550,000 for the third quarter ended March 31, 2013.

The decrease for this quarter was the result of lower charge-offs, partially offset by additional provisions needed for growth in the loan portfolio. Non-interest income for the fourth quarter of fiscal 2013 was $7,866,000 compared to $4,958,000 in the fourth quarter of fiscal 2012, and $6,834,000 for the third quarter of fiscal 2013.

Year-over-year increased sales volumes resulting in higher mortgage banking gains were the primary reasons for the variance. Compared to the third quarter ended March 31, 2013, the increase is the result of additional fee income and other gains on sales.

Non-interest expense or operating costs for the fourth quarter ended June 30, 2013, were $15,353,000 compared to $10,012,000 in operating costs for the quarter ended June 30, 2012, and compared to $13,921,000 in operating costs for the third quarter of fiscal 2013. The increase was mainly a result of an increase in compensation expense of $2,656,000 related to additional staffing added during the year, an increase in professional services of $356,000, advertising and promotional expense increased $303,000, occupancy and equipment expense increased $276,000, and an increase in data processing expense was $229,000.

Other general and administrative expenses increased $1.27 million. These increases are primarily due to the growth of the bank's lending and deposit operations. Our efficiency ratio was 42.8% for the fourth quarter of 2013 compared to 37.7% compared to the fourth quarter of 2012, and compared to 42.1% for the third quarter of fiscal 2013.

The efficiency ratio was calculated by dividing our operating expense by the sum of our net interest income and our non-interest income. Now turning to annual results, as Greg mentioned, net income was $40,291,000 for the year ended June 30, 2013, up 36.7% over the $29,476,000 earned for the year ended June 30, 2012. Earnings attributable to BofI's common holders were $39,456,000, or $2.89 per diluted share for the year ended June 30, 2013, up 39.9% from the $28,205,000, or $2.33 per diluted share for the year ended June 30, 2012.

Core earnings are $41,481,000 for the year ended June 30, 2013, up 35.2% year-over-year from the $30,677,000 of core earnings for the fiscal year ended 2012. Net interest income increased $22,440,000 during the year ended June 30, 2013, compared to fiscal 2012. This was a result of increases in average interest earnings assets, and average interest-bearing liabilities, as well as a decrease in the cost of funds.

The net interest margin was 3.79% this year compared to 3.70% in fiscal 2012. The cost of funds decreased to 1.39%, down 46 basis points over fiscal 2012. Provisions for loan losses were $7,550,000 this year compared to $8,063,000 for fiscal year ended June 30, 2012.

The decrease was the result of lower charge-offs, partially offset by additional provisions needed for growth in the loan portfolio. Non-interest income for the fiscal year ended June 30, 2013, was $27,710,000 compared to $16,370,000 in fiscal 2012. Increased sales volumes resulted in higher mortgage banking gains is the primary reason for the variance year-over-year.

Non-interest expense or operating costs for the fiscal year ended June 30, 2013, was $53,587,000 compared to $37,958,000 in operating costs for the year ended June 30, 2012. The increase was mainly a result of increasing compensation expense of $8,535,000 related to additional staffing added during the year, an increase in advertising expenses of $1,381,000, an increase in professional services of $1,318,000 and increases in other operating expense categories, generally due to the costs with increased -- of increased account volumes and additional employees.

Shifting to the balance sheet, our total assets increased $703.9 million, or 29.5% to $3,090,800,000 as of June 30, 2013, up from $2,386,000,000 at June 30, 2012. The loan portfolio increased to net $536.4 million, primarily from portfolio loan originations of $1,054,000,000 less principal repayments and other adjustments of $518.2 million.

Investment securities decreased $14.6 million as principal repayments exceeded new security investments. Total liabilities increased by $642.3 million, or 29.5%, to $2.8 billion at June 30, 2013, up from$2,180,000,000 at June 30, 2012.

The increase in total liabilities resulted primarily from the growth in demand, savings and time deposits of $4,000,700 and -- $476.9 million, and growth in federal home loan borrowings of $168.4 million. Stockholders' equity increased $61.6 million, or 29.8%, to $268.3 million at June 30, 2013, up from $206.6 million at June 30, 2012.

The increase was primarily the result of $40.3 million in net income for the fiscal year, the issuance of convertible series C preferred stock of $18.5 million and the sale of common stock through our ATM offering of $6.8 million. At June 30, 2013, our tier one core capital ratio for the bank was 8.63% with $112.8 million of capital in excess of the regulatory definition of well-capitalized. With that I will turn it over back to Greg.

Thanks, Andy. And, Mark, if you could open up for questions, that would be great.

(Operator Instructions). We'll take our first question from Hugh Miller with Sidoti.

Hello. Good afternoon.

Hello, Hugh.

How are you?

Great.

Great. So, I guess I had a couple of questions, first, on the non-interest revenue. You know, I apologize if you guys commented on it. I didn't catch it, but the $2 million, or just over $2 million in banking service fees and other income, obviously, up quite notably from quarter to quarter. What's the primary driver of that? Is that a lot of like NetBank account fees and things like that, or what's driving that?

It's Business Banking, it's NetBank account fees. It's also fees from -- there are a set of fees that are charged on the C&I loan book associated with monitoring and other things, but those are the primary sources of those fees.

Okay. And then I guess it's, you know, can you talk about the adoption you're seeing right now in the NetBank product, and how we should be thinking about the potential for growth in fees for that type of product going forward?

Well, what I can say is that we've really enhanced the delivery program, quite recently for the product. And what I mean by that is, previously, when someone was turned down from bank of Internet, they were simply turned down, and then our outbound call center would pick up that lead and then entreat them to reapply to NetBank, which is, obviously, a much lower success rate than you would have if you had an automated turndown feature, such that it happens all-in-one -- at one time. We've rolled out, this week, actually, the platform that allows that turndown process to occur. So we expect that there will be significantly enhanced adoption rates, because we still have a turndown ratio in the 55% to 60% range on our checking accounts.

So that's going to really be significantly boosting the NetBank side of things. So, you know, that's -- it's really difficult for me to forecast exactly where that will go. We think it that with the broader opportunity from a funnel perspective that a vast majority, or a wider range of additional marketing opportunities presents themselves that were previously not profitable for us because of the way that the turndown ratios were working. So, clearly, as we need deposits, and as we need additional fee income, the opportunities are there to do that. There's also some roll out of the partnerships that we've been doing on the NetBank side, as well, for distribution of cards, and we'll just have to see how those go. I'm not really prepared to give a forecast right now.

Sure. Sure, but as I think about kind of that $2.2 million of fees in June quarter, and obviously, it's several different products, but that is a reasonable run rate as we think about, you know, 2,000 -- or fiscal 2014?

Yes. It's certainly not going to go down from my perspective. I mean I would think that there's opportunity for growth, and we'll have to just see how well we execute for -- for how much growth, but I think it should be a steady number.

Okay. Okay. Great. And then you commented also on structured settlement fees and an initiative there. You know, if you could just provide a little bit more color on exactly what that is. You know, me being newer to the story, I just want to get back up to speed on that.

Sure. No problem. So we have a business that originates and factors structured settlement and lottery payments, and we have a variety of sources that purchase those payments. And we've expanded our sales force a bit. We, typically, portfolio those, but given the increase in expansion of the sales team, and the enhanced productivity of that sales team, we've decided to originate certain of those products for sale. And they tend to have a very high margins when they're sold, not only because of their credit quality, but also because of their long duration, relatively long duration. So that you get a significant premium for those products, and so that was our first sale this quarter and it was about $850,000. It was a very small amount, though.

Okay. Great. I appreciate the color there. And I guess a couple of questions on the lending side. Can you talk about, you know, you guys mentioned that the jumbo loan pipeline. How should we be thinking about that in terms of, you know, adjustable rates to fixed rate split, and are you seeing more demand for adjustable rate mortgages, now, with kind of this deepening of the yield curve?

Yes. So, I would think about the -- that $266 million as almost entirely 5/1 arms, and very little bit of it being 30-year fixed rate product. It's -- there's been a very significant change not only from the rising rates, but also from some spread increases in the non-agency securitization market. That's benefited the bank's portfolio product. We believe there's some other subtleties going on there. We also think that with the focus -- we have a vast network of loan originators, and their focus is definitely turned away from the refinance side. And so the vast majority of that business is purchase business, and we just see a lot more purchase business, a lot more 5/1, very little 30-year fixed rate product in the jumbo pipeline. Also, A real boost to our production, partially as a result of us getting much more competitive, not based on us cutting fees or doing anything with credit. Just based on what our competitors are having to do with their rates.

Right.

So, it's safe to say that some of the cut throat lending competition that you've seen in the past has kind of abated a bit with some of the developments in the in the yield curve?

Yes. Yes. I think that they're just adjusting their rates, ever so much, and that we weren't really -- we've never really priced off LIBOR, because, frankly, we don't fund off LIBOR, so we always price to a spread, and so when we see the other lenders adjust based on, you know, LIBOR increases, that's obviously helpful for us.

Okay. And so it's safe to then say with the mix being primarily arms and not fixed rate, that we should see a re-emergence of loan portfolio growth in the September quarter, and you guys will be hanging on to a good portion of this production that you do end up, you know, originating.

Yes, I think we will hang on to a good portion of the production. We do expect loan production to increase. We also believe, although we'll have to wait and see if this bears out, that we'll see a little bit less run off than we have in the past, because higher rates would would be able to prevent some run off. And, you know, it's not only on the jumbo single-family side that we're seeing growth in the portfolio pipeline, but alsowith multi-family growing so rapidly that was really -- jumbo has been more steady for us, although, it's at and all-time high. But the multi-family side was really suffering a couple of quarters ago, and that's really gone through a complete turnaround, now. You know, certainly, competitors' rates are up significantly in that area, but making we've also had some real operational changes that are making a big difference. So, we're optimistic about our loan portfolio growth based on those pipeline number.

Great. And then I guess the last question within the lending side for me is as we look at the growth that your seeing in the C&I pipeline, as of July, you how, much of that is really a function of the healthcare team kind of starting to get more up to speed, or is that more of a process for -- from the other C&I lending products that you have?

It's both. The healthcare side is a longer burn process just because, obviously, there's some systems setup that's going on. It's a relatively new group. Their is coming along very nicely. The yields in that business are very good, although the loan side tends to be smaller and there is fee income that's associated with those loans. So there's $31 million of healthcare asset bank transactions in that pipe; that's up from zero. There as lot -- that's on an accepted LOIN basis with we get fees and basically the -- a work fee to start, so that's where that is.

But there's a lot of interest, and a lot of discussions going, on that make us feel very positive about that. You know, those deals, they're -- they tend to be less certain at different times, because there's a lot of work to do in the underwriting, and so they're a little bit less mechanical than single and multi-family. And so it's harder for us to put a typical closing rate on those, because they're relatively new for us. But we do feel good and we do see -- we also see increased activity in the single-family and multi-family back leverage lender finance pipe, as well. So things are really look up all across the board on the lending pipeline side.

Got you. Okay. Appreciate that. And then just a question or two on the deposit side, one of which being as we think about kind of the changes in potential deposit costs over the longer-term going forward, you know, you take a look at some of the rates that you have offered at the bank on your CDs. What's the average duration of the CDs that were issued during the June quarter, rough sense there? I'm just trying to get a sense of -- are you guys considering looking at longer-term CDs to kind of fund things and look them in, or are you still -- what are your thoughts there?

Well, we've historically locked 10 year brokered CDs, because we felt like they had the best interest rate characteristics. Obviously, with a brokered CD you only have a death put. I think many banks make a mistake by funding with long-term retail CDs, because very rarely do the prepayment penalties adequately cover significant [operating] shocks. So, we have a significant proportion of 10 year CDs that we've been adding over the last several years, and we've been able to add those at what we felt were very attractive rates. With the spike up in rates, we haven't been that focused on that. I feel like that opportunity was a little bit past.

We also focus on extension through our borrowings with the FHLB. I don't really believe that retail CDs are an effective way to generate a liability extension, and instead what we've been focusing on is development of our transactional accounts and our Business Banking relationships. And we believe that they have longevity associated with -- that they will stay with us,, that there's stickiness there and that that's a good way to increase our deposit stickiness and liability profile rather than try to lock 24 months or five year retail CDs. I think that's a very ineffective way to do things. Even though we have strong penalty fees associated with prepaid -- early withdrawals, they still are difficult in the market to be useful for -- from a duration perspective.

Very interesting point. Yes. And then the last question I had was just with regards to the handful of deposit relationships that you've signed at this point, you know, do you anticipate that the principal bank deal, followed by the net spend deal,, you will kind of gain some momentum in your ability to kind of go out there and potentially sign additional deals? I mean has this helped you in the discussions you've been having with other potential relationships?

Well, yes. On the prepaid card side and the principal dealers, as I know you know, are kind of different sort of deals, although they do have -- there's some commonality there. We've had an incredibly good market reception on the prepaid side. We've been welcomed with open arms by all the largest players, and really have had the opportunity to pick and choose who we work with. And partially, our view is that business is a business that has regulatory sensitivity, and what that means is you have to be very thoughtful and cautious about how you grow it.

So we've taken an approach that is measured in what we think is thoughtful to that, picking very high-quality partners that have very good compliance standards, and very good internal resources, to manage the various assorted things that they're required to manage and that we're required to oversee. And so while we have a great pipeline there, you know, we're just executing that pipeline, and there's a lot more opportunity out there in the future. So we turn down a lot of deals right now, and as we continue to grow that group, and it gets its continued footing, and it gets larger and larger, then we'll probably take on more transactions.

But we're comfortable with the pace that we're going now, and with what we have in the pipeline, that not only will we get great growth on the deposit side from there and on the fee income side, but we will be able to it in a safe way that's thoughtful about the risks. The principal side deal, you know, there's, obviously, a lot of banks out there who are affiliated with companies that, for a variety of very thoughtful and good reasons, don't want to become bank holding companies. I think that opportunity may be on the tail end. Clearly, the principal transaction is a good one and we're looking to establish a relationship just on the affinity side with them so we can market accounts to their employees, and we'll see if it's going to be something for their customers.

Right now, that's probably not on the table given that they're going to try to keep a trust bank, but I do think that there are opportunities for us out there in variety of different ways. We're looking at a number of them. You know, it's --there are early stages, but there are potential opportunities out there for us. There are banks that have lending platforms that are interesting, that have relatively branch lights structures, and have at least either the efficiency or the ability to become more efficient if they adopt our methodologies and practices, and so we'll look at those. We're not close to anything there, but we will look and be -- opportunistically see things that make sense.

Thanks. I appreciate all of the color there and I apologize, for bombarding you with all the questions.

No problem.

Thanks, Hugh.

Nice talking with you again.

We'll take our next Julianna Balicka with KBW.

Good afternoon.

Good afternoon, Julianna.

Excellent results.

Thank you.

I wanted to ask a few follow-up questions, please. Could you expand a little bit more on the securities loss this quarter? How much of that was related to your CRA bonds that we should be pulling out from your regular ongoing security transactions?

Yes. So what we -- we did not -- we were looking at -- we bought some CRA bonds, you know, frankly the timing of that purchase was partially related to the timing of the regulatory exam. The unfortunate part about that was that was also during a time when -- we've been very, very good about avoiding any kind of agency mortgage bond purchases that had any duration, but we really kind of needed to do that, and we kind of got caught up a little bit in there and so there's some unrealized loss. We did not sell those securities, though, so they're realized loss in the securities which related to the non-agency portfolio.

Correct.

And it was really the reversal of the no TTI charge that became a realized loss.

Right. So you, Julianna you can look at our statement of changes in stockholders equity, and look at the change this quarter over last quarter. All of those securities were set up as available for sale. So the mark did go through equity, but did not go through the income statement. So it -- and you can see the net result is really a couple of million bucks, net debt for the entire portfolio. So not a significant impact at all.

Which includes munies and everything else.

Everything else. Yes, the CRA purchases.

Very good. And then could you elaborate a little bit -- in your discussion a little bit to previous questions about deposit pricing, and your asset sensitivity into rising interest rates. How will you be able to keep your spread when short-term rates start to rise in terms of pricing after your deposits or how, much buffer do you have there before you have to do anything?

Right. So you know, Andy they were running some models, recently. I'll let Andy describe some of those models, but I will just give you a broader theoretical way to think about it, and then he can get into some of the numbers. I will give you a framework to think about, I guess. And that is that right now, because of the rapid growth of our deposit base, we typically have been a higher rate payer than other institutions, and often there is a significant current gap between what we pay our customers and what other banks offer.

So because in order for them to switch and want to be a part of those other those other institutions, those other institutions have to raise their deposit rates, significantly, and -- in order to create that competition. So that gap is, I don't know, 80 basis points, maybe, in many cases. So, it's -- so you would have to see a very significant industry repricing of deposits. We're not seeing that. In fact, we're seeing exactly the opposite. Our ability to attract deposits in, at least, the current rate environment and after the changes is exactly the same as where it is.

We, frankly, still see opportunities to lower our cost of funds if we were growing at a slower rate, or were not growing at all, we would have the opportunity to reduce those cost of funds, immediately and significantly, but it's hard to say what that kind of -- how aggressive you need to be to grow at 30%, 35% a year, but the -- yes. There's a lot of opportunity for other banks to reprice deposits prior to us feeling extensive pressure, and we have the same lock-in a fact that other institutions do, as well. We provide very good customer service on the business and consumer side. For someone to leave us it's not only about a rate. There's all the typical things that prevent someone from switching easily once they're a part of your customer base.

So I think it's a pretty significant repricing you need to see for deposits on the bank side. You know, the other argument could be made that for certain sorts of deposits, and I think this is true for all banks, are they're more sensitive perhaps to money market interest rates, and some people are looking for liquid cash balances and they would be interested in switching to money market rates. So there, again, you're talk about an 80 basis points to 100 basis points move in money market rates for that even comparability to exist, and then for some sort of switching to need to occur you would need some sort of incentive for that. So that incentive would be added on top of the disparity that we're already paying.

So, I don't think that's imminent. What's good about rising rates is we look a couple years back, or maybe more than that now, three years back, we used to target our spread of 4% spread on multi-family loans and we had the lowest rate in the industry. That changed as the yield curve flattened, and as five year benchmark rates became very compressed. We do see that portfolio popping back, and we see that having an immediate positive impact for the bank. Andy, you did some work on some numbers.

Yes. So in looking at a net interest income variance, going forward with a 12-month assumption, and again, this is the standard assumption without any growth built in, with just the concept that you're going to backfill at the same repricing rates as scheduled. The first year actually is slightly positive for us with a positive $4 million. When you go two years out, it does flip to negative, slightly negative, around $5 million negative, in the net interest income for the entire year.

What kind of shock is that?

200 basis points shock.

Parallel up.

Parallel up. And so what's really happening with us is when you look at this 50% mix, now, of checking and savings compared to CDs, you know, the constant repricing of the CDs, and majority of the CDs that we have left, are actually longer-term CDs. We're not seeing instant CD repricing that's causing a severe negative impact. Instead, we're looking at a -- lags on adoption of rate increase on transaction accounts, which are much more favorable when you model them forward. Also, on the asset side, remember, we are 5/1, and 5/1 product, the one characteristic about it is it still tends to pre-pay at a decent rate. And so when you look at those pre-pays, even modeling with rates up a slowing down, that's still a decent number that causes us to reprice. We also have securities which are floaters. So, you know, looking at a raw number basis, we don't see a sudden shock as being a large, large impact on our net interest income.

Very good. That makes sense. Thanks for the color. And then final question, and I will step back. And just kind of you alluded to that with your CD mix still being 50% CDs.

When you kind of -- given all the moving parts and the large chunks of growth that are coming in and various increments, such your current pending transaction, when you think about yourself two to three years out, what percentage of your CDs would you like to see, excuse me, what percentage of your deposits would you like to see CDs kind of settle out at.

That's a really good question. We would like it to be lower, and I think several years out, if we could get into the 35%, you know,% range, I think that would be a good goal. You know, at some point in time would -- my believe that retail CDs are poor liability extension tools change potentially. That would also make a difference if it actually were, you know, were better, but we've had such an increase in our collateral, from and FHLB perspective. We've have so much additional collateral and their extension opportunities on the liability side are so much better.

They can come with parametric symmetry options, so many other things that just make them more useful. We don't get a lot of good customer value from CDs. We find that our savings account holders are very willing to open checking accounts, and even do loans with us and things, and the CD holders have just been less valuable. So really I -- we really, frankly, they're just there and they have money, and so there's not a lot of real value there from our perspective. And so we'll continue to push on the Business Banking side, and continue to push that, and continue to push prepaid and all these other things, continue to push NetBank, and our advisor business, which all of those we feel like add more value and CDs will settle out where they settle out.

Very good. Thank you very much.

Thank you.

We'll take our next Andrew Liesch with Sandler O'Neill.

Hey. Good afternoon, guys.

How are you in.

Good. How are you doing?

Great Thanks.

Just thinking about the sale of these structured settlement loans, I mean they --

Yes.

As you said, they provide a good yield and relatively long duration. Why not just keep them?

You know, we are keeping a lot of them, and we're continuing to grow so, you know, we're talking about a very relatively small number. And I think the duration side of it is part of the answer. You always want to manage that, and not increase concentration too much. We just had a real nice pop in the sales side and we -- I think from a general philosophical perspective, I know the way I think about this is that we like to have the opportunity to have exits for all of our products. It allows us to balance credit risk; it allows us to balance other things.

For example, one of the elements is that we sell and don't put any life contingent payments in the portfolio, and so we have an arrangement to do that. And those, I don't-- are not portfolio eligible from our credit box because we don't like the risk. So that would be an example of the type of ways that you can manage risk in these products by having exits. And I think that that's a overall good philosophy to have, and so, obviously, the ability to think about where you put -- where you put loans on a portfolio to generate interest income, or where you generate fee income is a complex decision based on what you want to do with capital and earnings and all those sort of things.

Okay. Then just a couple expense questions. Just look at the professional fee item and data processing cost. Just looked like they're up a bit from the quarter and -- or the fourth calendar quarter of last year. Do those stem from just higher -- more account balances as being a larger company?

Partially. You know, I think that there are elements as we continue to do different things. You know, the setup of the healthcare business generated a reasonably large legal bill, and there's a lot of legal expenses in there at different times. Sometimes, they're just one-time items that we went through all our regulatory exams, and they were [wiz banging questions back and forth about this legal issue and that legal issue, and people are picking up the phone to call lawyers and things like that, and I think the big thing that I take-away from looking at our expense side is we went through a very comprehensive review of that.

We have a very active initiative in to set up all sort of different cost management practices, to ensure that certain items don't get out of hand and it's you know, candidly, it's pretty easy to generate very significant legal costs. For example by picking up the phone and asking an aggressive attorney to draft a document and coming back later and finding you spent $50,000, which is -- or in this case $75,000. And so those sort of things shouldn't be happening, and those are things that you need to aggressively get control over it. So we have a legal accident that does a very good job of managing costs, has a thoughtful way of interacting with attorneys, and so some of those areas we just have to work on. We really tightened up our expense reporting as we grow. You know, there's been some folks who have maybe not understood that this place needs to really be focused on cost.

And so when I went to the last KBW conference, I took the shuttle in, and I'm going to send around a picture showing I took the $19 shuttle in from JFK in New York to keep people focused on those. But we really --we are on it. We're looking at it carefully. Some of it is endemic to some of the structural shifts in the deposit mix. Obviously, when you have more people doing bill pay, more people doing all the sticky things that we're doing. Business accounts, obviously, have a lot more setup. They have folks doing wires and is this like that, and there's -- whenever you are continually working through processes, you find processes that can be optimized, can be enhanced and sometimes those enhancements result in immediate cost but they're helpful for scalability of the business.

And we're never shy about taking those costs on to enhance the scalability and long-term benefit to the business, not onlyfrom a regulatory perspective but also just from a process scalability perspective. So you know we've spent -- we developed entirely a multi-family origination system this year. We're implementing a more automated account opening system for Business Banking deposits, and there's a number of enhancements that are going on there to prevent manual work from occurring in a lot of business account openings. So, we're always looking for scalability, and there's just -- there's a lot going on, and sometimes there's costs that you really need to look at and be careful with, and we're really focused on that and doing that so.

One of the costs -- we are -- we did switch auditors, and we have a small overlap in auditors' fees, but next year we're locked in at a 20% lower rate, for example, than where we were in the prior fiscal year. So those are examples of things where we're getting our hands around, making sure that certainly, the next year has good controls on it.

Right. Yes. We had a -- the one of the regulators' comments was that they wanted enhanced focus on a vendor management person, who is specifically dead indicated it vendor management, and so we're utilizing that to really work through a very thoughtful PSM process. And so that vendor management person will only be doing regulatory items. They will be actually working through a very thoughtful purchase supply management program, which we think will help keep costs under control, too.

Thank you. Just one quick question on the principal deal. Is that slated to close in your second quarter?

Yes. That's right.

Okay.

The first quarter.

Well, yes. That's right. It is likely that it would be at the end of the first fiscal quarter, but it could pop over into the second.

So around September 30th, October 1st, something like that.

Yes. Something like that. That's right. It will be around that time.

Great. Thank you.

Thank you.

Thanks.

We'll take our next question from Don Worthington with Raymond James.

Good afternoon. Following up a little bit on Andrew's questions on the expenses. Were you able to carve-out what you would consider to be one-time items in the quarter?

What do you think, Andy?

I would say in other general and administrative expenses there's about $200,000 that's in there that represents what I would describe as system setup costs that likely will be one-time costs, as far as that is concerned. You know, within -- as just one item.

Yes. I think there's some of that in the other G&A, but a big part of what we've been doing is, obviously, our C&I business has a lot of new folks in there. Some of those folks are expensive, and they're generating transactions; they're generating deals, but they haven't really put enough assets on the books to fully contribute there. There's also -- there's different operating leverage in some different segments. The multi-family side, we didn't see the production team -- the production -- the pipeline has doubled. We don't need to add another single body there. So there was significant slack capacity that I held through the quarter knowing that we would be able to increase productivity in that group.

So, I think there's a number of things that really will continue to drive us to being able to, over at least some intermediate term, remain a 40% efficiency ratio. We think if -- we think the business could run at 35% over the longer-term, once -- from -- if you took out the newer and developing businesses. I don't think that's the right thing to do, but if you did that, I think we could get there. But we really want to be around 40%, and we've got to continue to push and work to that.

But it's -- there's -- every year the regulators come back, and they have helpful suggestions on ways to spend money. And those, generally, are things that are worth doing, and things that we do. So we're building a good infrastructure for growth here, and if everything that we're doing, from enhanced BSA people in the compliance side. And things like that are making us, you know, better suited to being able to be a bigger bank, and get through the scrutiny that comes with that which is not insignificant.

Okay. Thanks. And then I think you mentioned last quarter you were kind of getting your feet wet on loan servicing. Do you have any update on what you're thinking there?

What's the amount of help with servicing retainer lease, Andy?

Nothing significant. (Inaudible).

So what we've done is we've hired a very senior executive on the loan servicing side. He's going through and making sure that we're really ready to go. We didn't feel like we were 100% ready, and so we needed some enhancements to leadership there. And so we think that's a good investment in the future opportunity to grow that business. We don't have a lot of -- we didn't decide to do a lot of retained sales this quarter.

Okay. Okay. And then I guess, lastly, where you kind of see the warehouse line business going?

Yes. You know, we do have a lot of good prospects on the warehouse lending side. Clearly, that business is challenged in the sense that it is pushing to steal market share in a shrinking market. And so we've had to deal with some of that, but overall they've done a very good job. Because we have a natural customer base, and we have some competitive advantages in that business, we do see continued applications. And we expect to be able to grow it, and, you know, we're not the lowest rate out there, but we do have a great service, and we do have proprietary products that we think are good. But every now and then I will tell you, we do look through.

We had one line and the gentleman had -- the business had an incredibly good net worth, and he decided to take a heck of a lot of it out, all of a sudden in one month, and was asking for a significant line increase. And we decided to shut it down. So, you know, you will run into some of that behavior in certain mortgage environments, and you just have to really watch and. So the most important thing is even though the lines are secured by government receivables, so technically, or theoretically I should say, it shouldn't make a difference. It's a little bit more of and appeal battle. There's some headwinds there, but it's holding in well and there's a lot of applications coming through in the pipe.

So, we have one sales guy there and he's doing a great job, you know, mining our base and bringing things in. So we feel good. We're going going to -- is it as we would like it to be as expansive as we'd would like it to be, or in a different market? No. But after the consolidation occurs, we think that it will stabilize and we will be able to continue to grow it.

Okay. All right. Thank you.

We'll take our Daniel Oxman with Jacobs Asset Management.

How's it going?

Hey Daniel.

Hi. Two quick questions. Gain of cell margin, can you just describe the gain and sell margins for the various origination lines of business?

Yes. We've said, publicly, before we have some arrangements with Costco and some others that preclude us from disclosing certain items, but basically the multi-family line is a -- generally in the 104 plus range, 104, 50.

10450.

104125, sometimes it gets a little bit higher, but maybe a little bit lower but that's -- that's generally where it is. You know, portfolio arm jumbo is in the mid 103's, you know, the single-family agency side, you know, we've never been particularly specific with that. It's, you know, it goes up and down. Sometimes, in ways you wouldn't expect and, you know, that's -- we have some limitations on what we can talk about given some of our arrangements.

Sure. That's helpful. And then maybe provide a little bit more detail on the structured settlement product. You know, it's a new business line for you, so what kind of originations did you do this quarter? How many loan officers, origination officers and where do you see that ramping up kind of in the next couple quarters?

Well, it's not a new business for us. We've been doing it for almost five years, now. So, it's a relatively small and nichey sort of business, but we've been at it for five years. You know, we had the -- there was $22 million of originations this quarter. That's about $4 million of sales, amortization of about two for a balance change of about 17, you know, I'm not going to make predictions about where we go. We're looking to add more sales people. There's a retail and wholesale component to that. To There's some moving parts in there, but we continue to -- to look to grow it, and think we can.

Okay of the great. And then just a final question on your ATM. You know, you had and 8.5% leverage ratio in this quarter, and you have $14 million of cash at the Holdco. How do we -- how should we view your ATM for next couple quarters? Are you trying to manage to kind of a 8.5% leverage ratio, or are you looking to take advantage of the higher share price and potentially issue more shares here?

Yes. You know, we've said, publicly, that we have a 8% target leverage ratio level that we have in our capital planning that we share with our regulators and the fed and that sort of thing. You know, obviously, they always say they like it to be higher, and regardless of what it is they would say they should like it to be higher. You know, I think that, obviously, we're making a lot of money. And we have to have the asset growth to be able to utilize that capital, and so that balance is something we'll continually monitor and look at.

We don't issue equity for the sake of equity, and, obviously, thinking about the forms of capital that you issue, you know, based on what share prices, whether it's preferred or [common], and those sort of things. I think share price does come into play to our some extentYou know, the ATM is out there, and it's available. Clearly, we have good access to capital, and the limitation that we have is we want to find good quality assets that are really thoughtful from a credit perspective. And So if we can get those, get them on the books, then we'll need more equity, and, if not, then we'll rely on our organic earnings growth.

Great. Thank you.

Thank you.

Will take our next question from Edward Hemmelgarn with Shaker Investments.

Hi Greg and Andy. Just a couple questions. One, you know, Greg, overall, it seems to be the only limiter to your growth, right now, is -- I mean sense your deposit growth you've really gotten a lot of sources there, and your cost of capital is very low. It's just your ability to grow loans. You indicated that you felt the pipeline was a lot better now, and you would expect to be able to generate better loans for retention. Do you think you can -- is this the type of -- or the number of sources that you've got now that you can grow it at -- your loan holdings net of attrition 25% to 30% a year?

You know, I'd like to be able to it that, and I think that's a goal that we would like to achieve. And, you know, then it's a about doing it. So that would be something that I think is very important. I agree with you that is the limiting factor on growth, and we want to make sure that we're doing things right from a credit perspective. And we'll -- we, obviously, are out working hard to get those things done on the loan side, adding working on our new businesses and making sure that we can have diverse sources of assets. And that, obviously, has to generate that kind of future growth. And I think it is possible. I'm not saying it's guaranteed, but I think it is possible.

Okay. Do you think -- I mean you talk about you talk about you could have a better efficiency ratio, but one of the things that you have done has proved to be very beneficial to the growth of the Company is as you have continued to make investments in new businesses each year. I'm assuming that's going to continue to be a policy that you'll advocate as long as you're there.

Yes. That's right. (Inaudible).

(Inaudible) for future growth opportunities.

Right. Exactly. I think that you can be penny wise and pound foolish with these things.

Right.

The best -- the most costly things, you know, I don't know which one it is, not planning for the future or regulatory mistakes, but right. Either one is not good, and either one can take a lot more out of you then staffing your compliance and risk functions appropriately, spending money on systems and processes and things like that. So we recognize that, but at the same time those expenditures have to be properly targeted. But to your question, you know, yes, we have done, I think, a very, very good job of being able to work into businesses and diversify ourselves within our culture.

And I think that that is a very -- sometimes, when people go out and they buy lending businesses and those sort of things, they find that very difficult to do. And we've been able to inculcate people in our process [orientating], and cost sensitive and credit conscious culture, and I think that that's been a real strength of the bank and I don't -- I think we need to continue to do that, and ultimately people, obviously, are cost but they're also the most significant assets, so you have to balance those things out.

Okay. Good. Two more questions. Andy, what do you think the tax rate is going to be for the coming year?

Well, we've hovered in the 40.8% rate, maybe a hair higher this quarter. I don't see that dramatically, you know, increasing at all, or decreasing. I think 40% is a proxy is where we are for now.

Okay.

Andy says he's got a line on some Hawaiian tax credits he want to go checkout.

(Inaudible) Hawaii in tax credits.

But Ed, you should appreciate a higher tax rate given your political orientation.

Come on. I'm the one that's avoiding California.

You're right. You're right.

At least I could operate in a state that has a lower tax rate. And then lastly, who is the -- your new auditors.

BDO Seidman. So, they're a bigger firm. A firm with more California-based resources, and they, you know, committed to really providing those resources to us and they were also cheaper, too.

Well, congratulations. Okay. Thanks for a good quarter.

Thank you.

And at this time I would like to turn the call over to Greg Garrabrants for closing remarks.

Well, thank you everyone for your time, and for your attention and we'll look forward to talking with you next quarter. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.