Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding's First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, November 8, 2012. 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's first quarter financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants; and Chief Financial Officer and Executive Vice President, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the first quarter and they will be available for answers -- questions and answers after the prepared presentation. Now before we begin, I'd like to remind our listeners that on this call, prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for the forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of BofI Holdings 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 filings on Form 10-K, 10-Q and 8-K with the SEC. For those who are unable to listen to the entire call today, there will be an audio replay that will be available, and the call is also being webcast so you can log in via the Internet to review at a later time. All details were provided on the conference call announcement and in the press release that was put out earlier today. You may also might find more information on the company's website located at bofiholding.com. With that taken care of, I'd like to turn the call over to Mr. Greg Garrabrants, who'll provide opening remarks. Greg, the floor is yours.

Thank you, Mark. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to BofI Holding's conference call for the first quarter ended September 30, 2012. I thank you for your interest in BofI Holdings and BofI Federal Bank. BofI announced record net income for its first quarter ended September 30, 2012, of $8,989,000, up 4.95% when compared to the $8,565,000 earned last quarter and up 37.59% when compared to the $6,533,000 earned in the first quarter of 2012. Earnings attributable to BofI's common stockholders were $8,912,000 or $0.67 per diluted share for the quarter ended September 30, 2012, compared to $0.64 per diluted share for the quarter ended June 30, 2012, and $0.58 per diluted share for the quarter ended September 30, 2011. Excluding the after tax impact of net gains related to investment securities, core earnings for the first quarter ended September 30, 2012, increased $2,379,000 or 35.14% when compared to the quarter ended September 30, 2011. Other highlights of the quarter include total assets reached $2,617,000,000 at September 30, 2012, up $230 million when compared to the June 30, 2012, quarter and up $520 million from the first quarter in 2012. Return on equity reached 18.5% for the quarter. Our net interest margin was 3.7% for the quarter ended September 30, 2012, a 5 basis point improvement over the quarter ended September 30, 2011. Total deposits reached $1.85 billion, up from $1.6 billion in the prior year's length quarter. Our Loan Origination unit had another great quarter with $723.6 million in gross loans originated in the fourth quarter. The $723.6 million of production consisted of $190 million of single family agency eligible gain on sale production, $27 million of single family nonagency eligible gain on sale production, $140 million of single family Jumbo…

Thanks, Greg. First, I want to note that in addition to our press release, our 10-Q was filed with the SEC today and is available on -- through EDGAR or through our website at 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 September 30, 2012, versus the fourth quarter ended June 30, 2012. For the quarter ended September 30, 2012, net income totaled $8,989,000, up 37.6% from the first quarter of fiscal 2012. Diluted earnings per share were $0.67, up $0.09 or 15.52% compared to the first quarter of fiscal 2012. Net income increased 5% compared to the fourth quarter ended June 30, 2012. Excluding the after tax impact of gains and losses associated with our securities portfolio, core earnings were $9,150,000 for the quarter ended September 30, 2012, up 35.1% year-over-year from the $6,771,000 of core earnings for the first quarter of fiscal 2012, and up from $8,817,000 in core earnings for the last quarter ended June 30, 2012. Net income increased -- net interest income increased $4,308,000 during the first quarter ended September 30, 2012 compared to the first quarter of fiscal 2012, an increase $895,000 compared to the fourth quarter ended June 30, 2012. This is a result of the increases in the average interest-earning assets and average interest-bearing liabilities, as well as a decrease in the cost of funds. The net interest margin was 3.70% this quarter compared to 3.65% in the first quarter of fiscal 2012. The cost of funds decreased to 152 basis points, down 54 basis points over the first quarter of fiscal 2012 and down 10 basis points compared to the quarter ended June 30, 2012. Provisions for loan loss were $2,550,000 this quarter and $2,363,000…

Thanks, everyone. Operator, if you can open up the conference line and we'll start to take questions. Thank you.

[Operator Instructions]

Joe Gladue from B. Riley. Just like to ask a question about the deposit generation during the quarter. I guess there's been a lot of concern among some investors about the high proportion of CD funding and looks like you made great progress on that this quarter. Just wondering if you could talk about the potential for continuing that progress and increasing the proportion of core deposits funding the loans, and whether there were any big chunks that might not be of growth this quarter that might not be repeated?

Well we have an increasingly broad diversity of Deposit businesses. And I think that when you look in conjunction with the progress that we've made in the direct-to-consumer side on increasing the proportion of checking accounts and money market accounts, the progress in the Business Banking side after only 4 months of having $100 million of deposits and the work we put on the BIN sponsorship side and the relationship with NetSpend and several others that are in progress and although those do take time, I feel pretty good about our ability to continue to make our deposit base much more diversified and more -- have a more significant proportion of our deposits be in the those categories. So I think that you're going to continue to see the direct-to-consumer CD percentages shrink. And you'll continue to see other diversification that we've built grow. I think the Business Banking side is going to be -- continue to be a great opportunity for us.

Don Worthington with Raymond James. Any guidance on the margin outlook, opportunities to lower the cost of funds either with maturing FHLB advances or just the change in the deposit mix?

Right. One of the elements that we have been doing is in certain instances, when we end up growing deposits rapidly, there are instances we offer bonus, teaser rates and things like that. I think you saw a little bit of an impact of that this quarter. I do think that we have great opportunity on the BIN sponsorship side, given that those deposits come over essentially at a 0 cost now come over in significant chunks. I'll let Andy talk about any CD runoff or other FHLB runoff that might exist. I think we may not have all that much headwind there, but I'll let Andy talk about that.

Sure. Well let me give you a couple of examples. In December, we have $4 million of borrowings running off at 3.51%, and then in January, we have $20 million in borrowings running off at 3.514%. Those, the borrowing side is wide open, as well as October, we have $5 million re-pricing from a 4% rate. So we're finally now reaching the point where we're rolling off some of the high-cost borrowings which have averaged around 4%. And I expect that to string out for the balance. At this point, per quarter, the amounts aren't necessarily huge, but in the end, the aggregate totals are good for the longer period of time.

And I think on the asset side, we have had good success maintaining our loan yields and at some of the specialty businesses, particularly the C&I specialty business, start to contribute a little bit more. The Specialty Finance businesses continue to ramp up volume. Although those volumes are not huge in relationship to the single and multifamily side, they do add significant margin in the aggregate. So we feel reasonably good about being able to maintain our margin. Although, there's no doubt that we see continued pressure from -- on loan yields in certain categories as we find other banks, frankly, a little less disciplined about pricing and than we are.

Greg, it's Edward Hemmelgarn. I have 2 questions. The first is, what percentage of your Jumbo and super Jumbo loans were now opting for the fixed 30-year rate or fixed 15-year rate now that you got that facility available? And then second is, can you talk a little bit about the security measures that you take to -- you are an Internet bank? And why -- what gives you confidence that you don't have any issues there?

Sure. Let me take the security question first and I'll have Andy work to get you the exact numbers. I've gotten an estimate, but he can get those exact numbers. So with regard to thinking about security of accounts and making sure that they're not compromised, we actually utilize Intuit as our third-party provider of consumer banking services in that layer, that interaction between the core system and the consumer. And they're really good and state-of-the-art with regard to that protection. So -- in fact, just recently as this month, they did an enhanced security rollout where they went through and they looked at the complexity of all consumer passwords. And if the complexity of the passwords were not sufficient, they required that every customer who had an insufficiently complex password change their password. They also have very strong multifactor authentication. What that multifactor authentication does is it cookies your computer and if the computer is not recognized, it requires a second authentication beyond the password to require you to log in. So that might mean a text message to your cellphone, a call to your home phone or another mechanism by which you checks. And if your password is compromised and has an attempt to log in by an unrecognized computer, that's also going to catch that. Finally, there's a number of other items that help and so obviously, you want to catch fraud on the front end. Somebody comes in and does something. The other element is after someone does something, you want to catch it right away. So the second that somebody adds a payee, for example, on our bill payment software, that bill payee is going to show up in the email of our customer. Though somebody is coming in and they put an individual in…

Yes, that's an estimate of the pipeline on things.

So, Ed, just to be clear, on the 30-year fixed to Jumbo product that we're doing, we're originating that for sale, as you know, whereas most of the other 5 1 Jumbos are being originated in the portfolio. So if you look at how much loans were originating for sale, we originated $255 million of loans originated for sale for this quarter.

Yes, but that's not -- and the question that -- so I'm pretty sure and Brian could clarify, I think we've got about I'd say it's probably about in this quarter on, from a Jumbo origination perspective, recognizing that that's ramping up a lot. I think it was about 30% to 35% of total Jumbo production. So that would include the pro [ph] portfolio and the 30-year gain on sale product.

This is Andrew Liesch with Sandler O'Neill. Can you discuss your agreement with NetSpend a little more? Sounds like it won't be ramping up until the second quarter of next year, but what do you think could generate for deposits, say, a year from now? And do you have a target of like what percentage of the deposits you'd like it to be eventually?

So we entered into an agreement with NetSpend as one of their sponsor banks as they've announced several months ago. We're excited to be a partner with them. We think they're a great and innovative company and a very well-run group. They have several divisions, one of which is a division that provides pay cards to individuals and then they have their broader NetSpend product. And we are engaged actively with both divisions and both transfers of existing accounts. And they're interested in bringing new partnerships that they form with us to issue through them. I'm a little bit hesitant to give numbers as to how much they're going to bring over and what it would be. I would say at the very, very low end, in the $30 million, $40 million range. In the higher end, it could be bigger and that would be, let's say, at the -- let's call at the end of this fiscal year. We have other partnerships that we're in discussion with. These things do take time. They require transfers. They are long-term contracts. And so where we are confident over time, and I know you're trying to figure out what to put in the model and I'm not going to be very helpful there, is that we will have more relationships. Those relationships will add to our deposit base in a very positive way from a cost of funds perspective. But it's a little difficult for me to tell you exactly. There is a decent size BIN transfer going on of all their pay card accounts that I think should occur in the first calendar quarter. And that's about 60,000 accounts. And then from there, obviously, we need to perform for them and do a good job and that'll -- and then hopefully, that will continue to build based on our performance for them.

We'll take our next question from Greg Cole with Sidoti & Company.

Just first question, with the mortgage banking, I guess, how confident are you that spreads can remain pretty much where they are over the next year or so?

I think that it's a bit of a difficult question in the sense that, that the market, the spreads right now are clearly good. However, we have a lot of opportunity to increase our spread through some strategic initiatives that we're taking. One of those initiatives that we're looking at is the retention of servicing rights. The other is MBS swap. Right now, we sell through the cash window. There's typically a 25 basis point pickup for taking securities back and also the price that we're getting right now for mortgage servicing rights. We look at it. It's almost a 20% unlevered yield that we're selling unmortgaged servicing rights into right now, multiple 1.5 turns or less. So we are looking at both of those opportunities as a way to expand our spread. How quickly we get there? I think we'll get there. And with on the security side, maybe 2 or 3 quarters. And on the servicing side, hopefully, 2 quarters. And so I am hopeful that to the extent there is any compression of margins in that area, it will be made up of by those 2 initiatives which are substantive and then on an aggregate basis, by an increase in volume from the expansion that we're planning in the mortgage banking group. So on balance, mortgage banking is a very efficient user of capital, generates a high ROE. We intend to expand it so hopefully, those things will occur. And furthermore, we're selling a lot of our production through aggregators right now. We are now a Fannie Mae-approved seller servicer. And so with an outlet for our servicing rights, we can cut out the middleman, which is obviously where Wells is making most of their money and they're clearly making that money by just intermediating between us and Fannie. We're going to work to cut them out and take some of that margin back. So it's hard for me to know and mortgage banking margins do move around, but you're certainly correct that they are good right now.

Okay. And I guess, the large sequential increase, is there -- is it solely spread and just increased volume that's helping that out? Or is there something else that goes in that?

No. Right now, it's a lot of volume and spread both and -- but significant volume. And so that -- there's no impact right now in any significant way from direct selling to Fannie or from retention of mortgage servicing rights or from any security swap opportunities. So those are all incremental to what this quarter provided us.

Okay and with the mortgage warehousing, do you have -- I guess do you have a rough idea of what the people you're lending to, what their mix of refi verse purchase is?

We were -- that's a good question and I should have a better answer for you, but I have an anecdotal answer and we'll start to work on that number. Most of the shops that we're dealing with are significantly purchase-focused and they tend to be realtor-based, and many of them are entirely purchase-focused. So we also have an inherent limiter on the ability to do a lot of refi because we have imitations in the line on how much HARP-HAMP-type loans that can be put on the line. And typically, if you're a big refi shop, then you're having a lot of HARP and HAMP loans. We're limiting those on the lines. So we are -- we don't have exact numbers there but we do have views and there's many of the clients who are really realtor- and purchase-focused. And so that is a -- that is obviously a question that could arise as that could create cyclicality in that business.

Okay. And my last question, can you speak a little bit about competition out there? Are you seeing a substantial increase over the past 3 months or so?

I would say not over this last 3 months. I think that the most competitive segment of our business remains the multifamily business. I think that business is stable for us, and we've been able to mostly maintain yield although we have had to drop those not this quarter but in some prior quarters. But we're still getting great premiums for those loans that we're selling. And I think I see the competition starting to level out there where I don't see any creep, really, in guidelines anymore or in rate reductions. So I think that's good. Outside that area, I think our businesses are still doing very well and I think, yes, the biggest thing for us is being able to do what we do safely. We just moved into our new building. And our old building, we had not a single space left. We had people sitting in the hallways, on temporary tables, makes it a little bit difficult to grow in that environment and distracting. We completed that move. Obviously, it's a big deal logistically to get that done. We did that now and so I feel comfortable that we can focus on continuing to grow the business without those sort of distractions. So I would say that the biggest impediment to us growing has been just a capacity issue with regard to space.

[Operator Instructions] We'll hear next from Gregg Hillman with the First Wilshire Securities Management.

Andy, on the last conference call, you talked about I believe a commercial checking account that was going to have shock and awe, I believe it was BofI Federal Bank. Has that product been introduced?

Yes, with the Business Banking group is up and running. It has about $100 million of deposits in it now. We have a wide variety of commercial checking accounts with full cash management capabilities. And Gregg, if you want to move your account, I'll hook you up with the right person but you should move it immediately. It will be better value and we'll cut your fees by at least 30%. For you, 35%.

Okay. And in the other rewards checking account, you had a press release a couple of days ago, I take it that's a consumer product. Is that just going to be marketed with affiliates or are you going to push that as a standalone consumer website?

It is marketed right now on a standalone basis through the consumer website and it will also be marketed through the appropriate affiliates. Clearly, different affiliates need different kinds of products and one of the things that we're excited about is our introduction of our NetBank second-chance brand, allows us to extend the distribution to affiliates that would be more appropriate for that product. So obviously, the Costco customer demographic, it would be very appropriate for the highest and best-value product whereas maybe a relationship with a sub-prime lender would be more appropriate for NetBank. And so those represent product sets that will ultimately end up crossing brands. In others words, what that means is if you get Bank of Internet turns down about 40% of its checking account customers right now, we hope to reduce that to 5%. There will be a turndown product that will shoot right from bank to customers that get turned down by Bank of Internet right into a product that replicates NetBank. And so I think in both cases, the Rewards Checking product is definitely out there. Candidly, we haven't spent money on advertising the Rewards Checking account product at any measure whatsoever. The organic traffic generated by the incredible press that product has gotten. Candidly, it was one of the best things we ever did there to release that we didn't have overdraft fees. That was something we didn't have, but by releasing it, we got right up some CNN Money, an incredible press. And so we're really having an organically driven growth in our checking accounts right now that isn't really driven by high level of spending on paper, click or display advertisements or some form of other Internet-based advertisements. We really don't do that right now that much because we don't like the fallout that we get. But we are looking forward to testing campaigns now that -- once we have a great integration of the second-chance product to catch the fallout from the more -- the leading Rewards Checking product.

And Greg, is your Rewards Checking product the only Internet checking product available through Costco or Costco Connection or they have others available to their customers?

Well, yes. We do not have -- that is not -- our affiliation relationship with Costco is on the mortgage side. What happens is, obviously, Costco advertises the mortgage and the mortgage platform in -- they have 65 million members. What ends up happening is we see spikes in our traffic when they do advertisements, things like that. That traffic, that brings them to our site. Our site has other products on it. We do not have a direct relationship for checking like we do with other affinities with Costco. So they are not officially sponsoring right now any checking accounts with anyone. They have -- they're doing some auto loans. They're doing some first mortgages. They're doing boat and RV loans, and that's pretty much it right now.

Okay. And they're doing the Jumbo fix, too?

Well, yes. We are, as I said we're a Jumbo lender for them. Yes, but there are other lenders on that platform. Now candidly, we actually allow those other lenders to sell our products, but the fact is they're also on there -- we're certainly selling Jumbo mortgages there. Although, that's not the primary source of Jumbo mortgages.

And then finally, Greg, you said you're going to retain the rights to do servicing rights on the mortgages. Do you have that back office right now to service all of your mortgages?

We currently have -- we have a servicing portfolio of about $1 billion of servicing. And we have an operation that does that. Obviously, if we expand that operation, we would have to add incremental personnel in accordance with our staffing models to have more -- to have a vast increase in loans. My rationale for looking at this servicing business is severalfold, but the largest rationale is that servicing rights are trading at 1.5x multiples in an environment like this. Typically, from a rate perspective, they would be trading in the 4 and 4.5 range. The unlevered yields are incredible and there is a real concern that banks will be disappearing from this market due to some regulatory issues related to Basel III and others. So we just think that there's an opportunity there. But we are not -- that is an initiative for us. We're going through our procedures and working with Fannie on that. There are some operational elements that we have to get through over the next several quarters in order to be able to do that. So we have a servicing group, but we're not quite ready to retain GSE servicing quite yet.

[Operator Instructions] It appears that there are no further questions at this time.

Okay. Thank you, all, very much for listening to us. We appreciate it, and we'll talk to you next quarter.

Bye. Thank you.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.