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'd like to turn the conference over to your President and Chief Financial Officer (sic) [Chief Executive 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's remarks and source 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 (sic) [fiscal] and monetary policies of the U.S. 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 risks and uncertainties related to these forward-looking statements that is contained in the company's filings with the U.S. Securities and Exchange Commission. Any forward-looking statement as to the company's future financial performance represents management's 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'd like to welcome everyone to BofI Holding's 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 $6,660,000, up 35.2% when compared to the $4,927,000 earned for the second quarter of fiscal 2011 and up 1.9% when compared to the $6,533,000 earned last quarter in the 3 months ended September 30, 2011. Earnings attributable to BofI's common stockholders were $6,280,000 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 $1,911,000 or 38.9% when compared to the quarter ended December 31, 2010. For the 6 months ended December 31, 2011, net income was $13,193,000, up 35.2% over the $9,759,000 earned for the 6 months ended December 31, 2010. Other highlights for the second quarter include: total assets reached $2,224,000,000 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 6 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 $1,553,000,000 at December 31, 2010, up 39.1% compared to…

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website, bofiholding.com. 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 $6,660,000, 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 $6,533,000. Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings were $6,828,000 for the quarter ended December 31, 2011, up 38.9% year-over-year from the $4,917,000 of core earnings for the second quarter of fiscal 2011 and up from the $6,775,000 in core earnings for last quarter ended September 30, 2011. Net income was $13,193,000 for the 6 months ended December 31, 2011, up 35.2% over $9,759,000 earned for the 6 months ended December 31, 2010. Earnings attributable to BofI's common stockholders were $12,687,000 or $1.14 per diluted share for the 6 months ended December 31, 2011, up 28.1% from the $9,605,000 or $0.89 per diluted share for the 6 months ended December 31, 2010 The reasons for increased earnings for the 6 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,…

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

[Operator Instructions] We'll go first to Andrew Liesch with Sandler O'Neill & Partners.

Looking at your loan growth projection, is the pipeline still quite strong as it was in the last quarter? And given that you have your various -- quite a bit of capital especially in the preferred converts, so you can grow into that. I don't think you need to raise any more anytime soon. So what are your loan growth expectations for this quarter? Like, similar to last couple of years? Obviously you can portfolio some, I'm just curious where you're thinking.

Yes. Well, okay. There's a couple of things. I mean, one is that we have issued perpetual preferred stocks. So that capital is Tier 1 capital, highly supportive of growth. So there's no need for that to convert it. That's 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's honestly, a really simple reason why and that is that we want to call them as we see them. And 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 the 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're 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's obviously dependent upon pricing. And we -- clearly, we're 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 can continue our origination engines and not have to raise capital in a bad market. I think obviously that's 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. So that's not a very helpful answer for modeling, I apologize for that.

No. It is helpful just to have some idea on how you're thinking about it, I think anyway. And then flipping over to margin outlook, down a little bit. Looks like just because loan yield just came down, everything else to be okay with yield and rate side. But -- so where are these new loans coming out, the new ones at your portfolio when compared to what's 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. And obviously, when you have 5% CDs and you're 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 there 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're seeing that a little bit more than we're seeing it on the single-family side.

Got you, and as we heard from lots of other companies.

[Operator Instructions] We'll go next to Gregg Hillman with First Wilshire Securities Management.

Could you talk about, I guess, 4 things? I guess first maybe with the Costco relationship. Second, the Wall Street firm that were supposed to buy the Jumbos, where that's at? And then the last 2 things were the prepay -- relationship with the prepay debit card issuer? And then I'll remind you 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've been unable to compete with the pricing of other players. And so although we've been signed up exclusively with them to do all their work, we've continued to struggle with them on pricing. So they are one of the world's largest money fund managers. You'd think they have an appetite, but they seem very content to do very little volume. So candidly, so far we have a portfolio of product has continued to sell well. That product is out on Costco. It's one of the sole products that's out there for that massive membership base, and it's just not doing well because of the pricing. So I think -- and there's some other issues that we've 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 a non-agency product comes back from a conduit perspective, we are working with 3 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've hoped it would. 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're pretty much under confidentiality agreements across the board there. And so I feel like that's probably the best place to leave that, but we do see opportunity there. Obviously, we're very cautious about thinking about how we work in that in that area. And so at different times, there is different obstacles that arise and 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, it allows banks to pay interest to commercial customers. And then can you tell us about your marketing effort in that area? Where do you think you're going to be able to bring in a lot of deposits from commercial customers and checking accounts?

Yes, so we are -- we've been actively working through this through all the technology on the business banking side. That's not an area that we've 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 evolved the technology on the back office side. We still need to -- and we're 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've always said, really is going to be more really out much more. We're doing mass marketing, i.e. in the third quarter of this calendar year. So we have accounts in place from relationships in the community that we're working through and making sure that everything is set up. So it's much more of a smaller activity now until we're very comfortable with it. But the answer is yes. The demand is significant, and you can imagine that the distribution channels that we utilized 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'd rather -- we need to do it properly and go through a stage process, and that's what we're doing.

[Operator Instructions] And we appear to have no further questions at this time. Actually, we do have a couple more questions that have just come in. We'll go next to Joe Gladue with B. Riley & Co.

I guess I wanted to circle back to the loan originations. Just, you did say last quarter that you might be originating more for sale, and I guess you did that this quarter. But there was quite a significant shift from, I guess, loans originated for sale from being 1/4 or so of originations to being about 2/3 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. Well, 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're never beholden to the capital markets for a 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've got that cushion. And so -- and generally, you've set these trades months in advance and you commit to them. And 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.

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

Well, I think that we can look forward to good growth in the demand deposit arena. Clearly, we're 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've stated, with the mobile deposit capture, the purchase rewards, all the features that we now have on our accounts, the rewards structure and those sort of things; they're just there. We really believe on unlimited ATM members. We just have a very, very compelling product, and so we have very significant interest in that product. So I think that that's there as something that's important. We're 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're a really excited sales force now. So everybody who comes here for a CD is -- we know where they come from. So we're selling directly against the money center banks. So when they send us money from Wells, we know exactly what Wells offers and we're hitting them with a series of sales calls related to our cross-selling checking account. So we really believe that as a branchless bank, we can achieve the relationship, checking account percentages that are, frankly, in excess of what a branch-based bank have. I mean, we're really -- we're 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 that. The American Seniors Association product is a highly checking account-focused product. It is definitely the most attractive product on that suite, and it will be going to 5,000 email addresses every day for the next year. And we think that we're 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'll be able to lower the overall -- continue to lower the overall cost of our deposits. So we're excited about that. It's a big initiative at the bank at it's a multipronged initiative that I think happens to coincide very nicely with what's happening in the overall market with regard to the general consumer unrest related to the larger banks.

Right. Let's shift over to, I guess, asset quality question or 2. There was a bit of a jump in early stage delinquencies in the quarter. Again, just looking for what's going on there?

Yes, Andy's going to give the exact number. But we had a gentleman who I would call more of a foot fault than anything else. And 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's now paid current, and then there was another multifamily loan that's similarly paid current. So I think -- look, I think paying great attention to the said 30-, 40-day bucket, you're going to catch folks that sometimes do foot faults. And I mean, there was a couple of -- 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. The statement got lost, and then they missed the call, they're on vacation, I mean. So I don't think -- honestly don't think, Andy, I mean [indiscernible].

Yes, Joe, and I put this on Page 30 in the Q, where I think you're looking. But if you factor out those loans, our total delinquency comes down to 137, which is very much in line with prior periods. So it's really these one-off. There is $4 million in the single-family and then $2 million in multifamily, and that's only 3 loans, all of which secured. So when you take those out, we're much more normal.

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

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

That's a very good question, maybe a little bit of a sore subject. So we did get an agreement with Countrywide. They -- 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 be done next week." And that's 6 weeks ago. So we are now back to telling them, giving them deadlines and those sort of things. We have a choice. We can declare them in breach of the servicing agreement, simply pull servicing. I've tried not to want to do that. But the -- 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. And so honestly, that's not done yet. I mean they're -- they've told us it's done. They've told us that they've accepted it, but they have not yet given us a final signed document. And we're putting significant pressure on them, but we're 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 was just hoping they'd do it in a more organized manner. But they really have -- they're not cooperating in the way that I'd like them to.

We'll go next to Todd Walters with Catalyst.

I just wanted to hear a bit about your underwriting standards. You guys are certainly pretty conservative. Nonperforming asset ratio came down this quarter. To what extent, if anything, that limits your growth? Is there any thoughts to loosen those standards slightly to expand your potential market, perhaps increase your average rate and your earning assets? And if not, is that more to do 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. We're very comfortable with the way we underwrite. It's been very successful. We have to compete in other -- 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 seen -- I think we've seen that specifically on the multifamily side, and that has been something that I haven't liked to see. You've got Chase out there doing essentially no doc loans now on the multifamily side at 75% LTV. They're not asking for tax returns anymore, so anybody can make up an operating statement. And that certainly is lower than we are, I mean, and then it's also higher from an LTV perspective. I think that there's probably a potential in very strong purchase money markets for 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. And 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, and so we just have much deeper discounts for lower LTV loans. And 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 am I going to want to do a 40% home equity loan?" It turns out in the whole country, there's actually a reasonable number. So I think that that's really more of our mechanism is that we have broad distribution, and we have narrower products. But those -- the combination of those things end up with the mix that we're comfortable with. And I think it's hard to argue with our growth. I think that we've grown well. And yes, I just don't really think that's part of our DNA to really follow markets like that.

We'll go next to Edward Hemmelgarn with Shaker Investments.

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 your -- where your relationship now stands with some of the prepaid debit card companies, the deposits?

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

Okay. I guess I'm just trying to say that they're still moving along in the -- where you would like them to be moving along?

In some cases no, in some cases yes.

Okay. All right. I didn't -- did you talk about the mix again? I'm just getting through all the stuff here, but just the loan originations during the quarter?

Yes, we did. We went through the loan originations in the quarter. I'll 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 refinanced 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 there's -- 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 had mentioned the single-family numbers. We had a nice -- very nice month in January on the single-family side, which is also typically a very historically low month from an origination perspective.

Okay. Is the -- the non-agency loans held for sale, is that -- you had it did move up to $48 million. Is it Jumbos or...

Well, on the single-family side, it's Jumbos. On the multifamily side, it's multifamily apartment lots.

Okay. Well, I mean [indiscernible].

Yes, on the single-family we call them non-agency. It's almost always a Jumbo loan from a size perspective. Now theoretically, you could have a loan that is lower in size. It's not a Jumbo. It would be non-agency because it's failed some other criteria from Fannie, right? It could be if the condo with a 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's not 100% overlap between Jumbo and non-agency single-family, but it's pretty close.

Okay. And then lastly, this is for Andy. Could you -- kind of what was the big increase in G&A expense during the quarter, other general administrative?

Well, in connected quarters, G&A went down. Yes, so I think you're...

No, the general [indiscernible].

Oh, are you saying other G&A.

Yes, other G&A, just that line item? Just it moved from $754,000 to $1.2 million.

Yes, I mean in general, it's 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. And overall though, I don't think we expect that to drive up higher. It's 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.

We'll go back to Andrew Liesch.

Just 2 quick questions guys, some on the 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 of that, that probably represents onetime. I'm going to call it less than $100,000. But on an average basis, I would see that to be a little bit lower, and certainly not fall back to last quarter's number.

Yes, one element that we've really focused on is really focused a lot on scalability of that infrastructure. But I think on the positive side, it's $5 billion, $10 billion plus infrastructure now. On the negative side, it's a $5 billion, $10 billion cost. So I think just some examples of some things. We basically have new collocation 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. There are 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 our -- in the way we process and deal with data. Our new data warehouse is expensive. But what it does do is it now is 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's a lot of expense that's been put into in infrastructure that I think is really ready for growth. So I do believe -- do truly believe we're 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 is -- which will be overall positive because we've lowered our rent from where it is. But sometime in the July time frame, we're going to be moving buildings. And so the data infrastructure that we've created was designed to allow movement of buildings easily. It was for removal of everything from this facility into a hard and colo, dealing with a variety of different aspects of things. I think honestly, that cost alone was -- is almost $7,000, $8,000 a month extra. But it prevents us from having to build a colocation facility in our new building, which more than saves. And so there's some things like that going on. But I think the overall message is that we spent a lot of the money for scalability, and so now we just have to go get the scale.

Right. And I know you've talked about the scalability not only with your plans for infrastructure upgrades, but also with the management that you've hired over the last, I guess, last year or end of 2010. So yes, I'm just kind of curious if there were some onetime things. But -- then my other question is, have you had an exam with the [indiscernible] exam with the OCC yet?

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

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

Great. Thank you. Okay.

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