Axos Financial, Inc. (AX) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding's Fourth Quarter and Year-End 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 9, 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 Inc.'s Fourth Quarter and Year-End 2012 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on financial and operational results for the fourth quarter and year-end 2012. And they will be available for 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 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 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 filings, Form 10-K, 10-Q and 8-K with the SEC. For those of you 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 to give all [ph] via the Internet to review the call at a later time. All details were provided on the conference call announcement and in the press release earlier today. You may also find more information on the company's website located at www.bofiholding.com. At this time, I'd like to turn the call over to 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 fourth quarter ended June 30, 2012. I thank you for your interest in BofI Holdings and BofI Federal Bank. BofI announced record net income for its fourth quarter ended June 30, 2012 of $8,565,000, up 54.5% when compared to the $5,545,000 earned for the fourth quarter of fiscal 2011, and up 11% when compared to the $7,718,000 earned in the quarter ended March 31, 2012. Earnings attributable to BofI's common stockholders were $8,187,000 or $0.64 per diluted share for the quarter ended June 30, 2012, compared to $0.50 per diluted share for the quarter ended June 30, 2011, and $0.58 per diluted share for the quarter ended March 31, 2012. Excluding the after-tax impact of net gains related to investment securities, core earnings for the fourth quarter ended June 30, 2012, increased $3,604,000 or 69% when compared to the quarter ended June 30, 2011. For the year ended June 30, 2012, net income was $29,476,000, up 43.2% over the $20,579,000 earned for the year ended June 30, 2011. Other highlights for the fourth quarter include: return on equity reached 17.8% for the fourth quarter ended June 30, 2012. Our net interest margin was 3.8% for the quarter ended June 30, 2012, an 8 basis point improvement over the prior quarter. Our loan origination unit had another great quarter with $370 million in loan originations in the fourth quarter. The $370 million of production consisted of $107 million of single-family agency-eligible gain on sale production, $10 million of single-family non-agency eligible gain on sale production, $125 million of single-family Jumbo portfolio production, $46 million of multifamily non-agency eligible gain on sale production, $41 million of multifamily portfolio production and $42 million of C&I and specialty assets. Total loan originations for the quarter ended June 30, 2012, reached $1,397,000,000, an increase of 69% over the year ended June 30, 2011, originations of $826 million. Total assets reached $2,387,000,000 at June 30, 2012, up $447 million, compared to June 30, 2011, an increase of 23%. This growth rate was lower than it could've been because we decided to sell portfolio-eligible single and multifamily loans of $216 million compared to the year ended June 30, 2011. Without the sale of portfolio-eligible loans, the annualized growth rate of assets would've been 34% rather than 23%. Our loan pipeline remains strong. As of today, the single-family agency-eligible gain on sale pipeline is approximately $120 million. The single-family portfolio and -- the single-family Jumbo portfolio and non-agency eligible gain on sale pipeline is $190 million, and the multifamily loan pipeline is $97 million. Given the bank's organic earnings and additional capital of the holding company available for contribution at the bank, the bank remains in a capital position that will allow us to continue to grow our balance sheet without the need to tap the capital markets. Because we are finding greater loan demand for our loans at higher premiums and our willingness to sell loans, we believe that we all have the flexibility to continue to control when and if we tap the capital markets for additional equity and determine over what time period we will use our balance sheet capacity. We continue to remain highly focused on credit quality at the bank. For the quarter's originations, the average FICO for the single-family agency-eligible production was 780 with an average LTV of 60%. The average FICO for the single-family Jumbo production was 734 with an average LTV of 58%. The average loan-to-value ratio of the originated multifamily loans was 63%, and the debt service coverage ratio was 1.6. At June 30, 2012, the weighted average LTV of our entire portfolio real estate loans was 54%. We made good progress this year on improving the quality of our deposit base with 43% of our deposits consisting of checking and savings accounts up from 26% at the end of fiscal 2011. We opened approximately 3,000 new consumer checking accounts this year, most of them in our rewards checking product that requires certain behaviors designed to increase account longevity in order to reach the maximum benefits available from the account. We accomplished our checking and savings account growth with very minimal advertising cost and primarily by marketing to our existing customer base. We see a significant change in the competitive landscape for consumer banking with regard to our ability to attract checking deposits as other banks increase fees or make other product changes that further distinguish their product from ours. Additionally, the primary challenge with the utilization of our consumer checking account, the depositing of checks through the mail, has now been removed with an easy-to-use mobile application for remote check deposit capture. This feature has only been available at the bank for approximately 3 months of our 2012 fiscal year. I believe that we are just beginning to see consumers ramp up the adoption curve for mobile remote deposit capture and understand its significant benefits. As our own customers become more familiar with remote deposit capture, I believe they will be more comfortable migrating a greater share of their business to us. And as branch-based customers become familiar with this technology, they will further erode the consumers' dependence upon the branch, enhancing their willingness to switch to a full service, branchless banking product with better product features and rates. By some estimates, almost 80% of consumer branch visits are for depositing of checks. Our business banking group reached $30 million of deposits this week. Our business banking group is new, but gaining traction. Since May 1, we opened 127 business accounts without spending a single dollar on advertising. These accounts primarily came from our website traffic and a very small outbound call-center effort. We will look to aggressively expand that business in the next fiscal year as our early efforts have met a very enthusiastic reception in the marketplace. We recently bolstered our team in the C&I and Capital Markets group with the hiring of 2 senior executives with over 20 years of experience in syndicated lending and in specialty C&I lending. Our Capital Markets group continues to find loan demand at attractive returns by lending to niche finance businesses. We continue to see growth in many of our niche verticals. We also have a strong demand from institutions interested in purchasing our loans. These additions to the executive team will lead to nice growth in our C&I and Capital Markets business next year. Our warehouse lending group's launch has been well received, and we have approximately $16 million of active credit lines and have letters of interest issued with preliminary credit approvals for an additional $180 million. Warehouse lines take about 60 days to package and approve, given the extensive due diligence required and the time it takes for lenders to ship production to our credit lines. This group began to contribute to asset growth and fee income growth in the fourth quarter of this fiscal year and will contribute much more significantly in the new fiscal year with total outstandings on the warehouse facility of approximately $20 million as of 7/31/2012. Finally, I'd like thank my colleagues at the bank for the extraordinary effort that they gave in order to grow our business and make this fiscal year a success. The culture we've developed at the bank is something to be proud of. And obviously, without the extraordinary dedication and work ethic of our team, we would have not been one of the best-performing banks this year. Now, I'll turn the call over to Andy, who will provide additional details on our financial results.

Thanks, Greg. First, I want 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 at bofiholding.com. Second, I will discuss our quarterly results on a year-over-year basis, meaning fiscal 2012 versus fiscal 2011, as well as of this quarter ended June 30, 2012 versus the third quarter ended March 31, 2012. Then, I will briefly discuss the results for the year. For the quarter ended June 30, 2012, net income totaled $8,565,000, up 54.5% from the fourth quarter of fiscal 2011. Diluted earnings were $0.64 per share this quarter, up $0.14 or 28% compared to the fourth quarter of fiscal 2011. Net income increased 11% compared to the third quarter ended March 31, 2012. Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings were $8,817,000 for the quarter ended June 30, 2012, up 69.1% year-over-year from the $5,213,000 in core earnings for the fourth quarter of fiscal 2011, and up from $8,256,000 in core earnings for our last quarter ended March 31, 2012. Net interest income increased $5,175,000 during the fourth quarter ended June 30, 2012, compared to the fourth quarter of fiscal 2011 and increased $1,255,000 compared to the third quarter ended March 31, 2012. This increase was a result of the increase in average interest-earning assets and average interest-bearing liabilities as well as a decrease in the cost of funds. The net interest margin was 3.80% this quarter compared to 3.69% in the fourth quarter of fiscal 2011 and compared to 3.72% for the third quarter of fiscal 2012. The cost of funds decreased to 162 basis points, down 51 basis points over the fourth quarter of fiscal 2011 and down 18 basis points compared to the quarter ended March 31, 2012. Provisions for loan losses were $2,100,000 this quarter and $1,450,000 for the fourth quarter of fiscal 2011 and $2 million for the third quarter ended March 31, 2012. Growth of the loan portfolio in fiscal 2012 required an increase in the loan loss provisions. Now shifting to noninterest income, noninterest income for the fourth quarter of fiscal 2012 was $4,958,000 compared to $2,020,000 in the fourth quarter of fiscal 2011 and $3,856,000 for the third quarter of fiscal 2012. Increased sales volume resulting in higher mortgage banking gains are the primary reasons for the variances between the quarters. Noninterest expense or operating costs for the fourth quarter ended June 30, 2012, were $10,012,000 compared to $7,666,000 in operating costs for the quarter ended June 30, 2011 and compared to $9,190,000 in operating costs for the third quarter of 2012. The increase was mainly a result of increase in compensation expense of $1,103,000 related to additional staffing added during the year; also, an increase in advertising expense of $418,000 and increased data processing expenses of $312,000. There is also increase in other operating expense categories due to costs associated with both the increase in volume and additional employees. Our efficiency ratio was 37.71% for the fourth quarter of 2012 compared to 41.58% recorded in the fourth quarter of 2011 and compared to 37.99% for the third quarter of fiscal 2012. The efficiency ratio is calculated by dividing our operating expenses by the sum of our net interest income and our noninterest income. Now, turning to our annual results. As Greg mentioned, net income was $29,476,000 for the year ended June 30, 2012, up 43.2% over the $20,579,000 earned for the year ended June 30, 2011. Earnings attributable to BofI's common stockholders were $28,205,000 or $2.33 per diluted share for the year ended June 30, 2012, up 24% from the $20,270,000 or $1.87 per diluted share for the year ended June 30, 2011. Core earnings were $30,677,000 for the year ended June 30, 2012, up 56.1% year-over-year from the $19,658,000 in core earnings for fiscal 2011. Net interest income increased $20,675,000 during the year ended June 30, 2012, compared to the year ended June 30, 2011. This increase was a result of an increase in average interest-earning assets and average interest-bearing liabilities as well as a decrease in the cost of funds. The net interest margin was 300 -- 3.70% this year, compared to 3.67% for fiscal 2011. The cost of funds decreased to 1.85%, down 47 basis points over fiscal 2011. Provisions for loan losses were $8,063,000 this year compared to $5,800,000 for fiscal year ended June 30, 2011. Growth in the loan portfolio in fiscal 2012 required an increase in loan loss provisions, and the allowance for loan loss to total loans held for investment held steady at about 55 basis points at June 30, 2012, compared to 56 basis points at June 30, 2011. Noninterest income for the fiscal year 2012 was $16,370,000 compared to $7,993,000 in fiscal 2011. Increased sales volume resulting in higher mortgage banking gains are the primary reason for the variances between the years. Noninterest expense or operating costs for the fiscal year ended June 30, 2012, was $37,958,000 compared to $26,534,000 in operating costs for the year ended June 30, 2011. The increase is mainly a result of increase in compensation expense of $5,815,000. This was related to additional staffing added during the year; also, an increase in advertising expense of $1,678,000 and an increase in data processing expense of $1,268,000. There are also increases in other operating expense carries due to costs associated with the increasing loan and deposit volume as well as the additional staffing levels. Shifting now to the balance sheet. Our total assets increased $446.7 million or 23% to $2,386,000,000 as of June 30, 2012, up from $1,940,000,000 at June 30, 2011. The loan portfolio increased a net $395.5 million, primarily from portfolio loan originations of $732.8 million, less principal repayments of $278.2 million. Loans held for sale increased $59.1 million, and investment securities decreased $38.3 million as principal repayments exceeded new security investments. Total liabilities increased by $387.9 million or 21.6% to $2,180.2 million at June 30, 2012, up from $1,792,000,000 at June 30, 2011. The increase in total liabilities resulted primarily from growth in demand, savings and time deposits of $2 million -- $274 million and growth in Federal Home Loan Bank borrowings of $117 million. Stockholders' equity increased $58.8 million or 39.8% to $206.6 million at June 30, 2012, up from $147.8 million at June 30, 2011. The increase was primarily the result of $29.5 million in net income for the fiscal year and the net issuance of preferred stock during the year of $19.5 million, the net issuance of common stock of $13.3 million. At June 30, 2012, our Tier 1 core capital ratio for the bank was 8.62% with $86.5 million of capital in excess of the regulatory well-capitalized definition. With that, I'll turn it back over to Greg.

Thanks, Andy. And with that, Mark, if you could open it up for questions, we'll be happy to take those at this time.

[Operator Instructions] And our first question comes from Joe Gladue with B. Riley.

Let me, I guess, start with the net interest margin. Had a nice further decline in the cost of funds. Just wondering what your thoughts are on the possibilities of further declines there in the next quarter or 2?

Okay, Joe. This is Andy. I'll give you a little bit of color about our CD repricing and some borrowing repricing. At June 30, we have $101 million of CDs at 3.39%. Of that amount, 42%, or about 42%, of it is amortizing off at an average rate of 5%. So we expect 42% to come off with an average of 5% in the CDs. On the repo borrowings, we have over the next 12 months $10 million coming off at 3.64% and then a $65 million coming off the year after that at 4.34%. So you can see we still have plenty of 4s and 5s that we're winding down in both our CDs and our borrowings.

And kind of sticking with -- well, I guess, looking at the deposits a little bit. Loan-to-deposit ratio, I guess, is -- continued declines -- up somewhere around 107% now. Just wondering how high you can go with that, and does that, at some point, become a constraint on loan growth?

I don't think that we have a specific target there or that becomes a constraint on loan growth. I think we've got the ability to raise the deposits that we need, and we've got a number of initiatives that are really working well in that arena with regard to the business banking and some other things, so I'm not concerned about that. I think the key element of -- the way I look at loan-to-deposit ratio is I look at it from an interest rate risk perspective and making sure that we're well matched and ensuring that we don't have significant mismatches and duration that would cause concern. So I don't think that, that is really something that we would -- that we would allow to slow asset growth to the extent that we felt it was a cause for concern. I mean, candidly, we can put a lot more advertising money into the deposit side. And what we've been really focused on is gaining traction and the type of deposits we want this year with all kinds of initiatives. And so, obviously, we haven't focused on CDs really at all or anything like that, so I don't really view that as anything that would stop us from growing.

Okay, fair enough. Let me ask a couple of questions about some of the cost items. It looked like there was some increases in professional fees in the fourth quarter versus the third quarter. Is any of that just normal variability, or is that something that's going to be, I guess, higher going forward?

Yes -- no. It's -- the majority of it is a couple of items in professional services associated with outside audit and tax -- income tax preparation, that was a little lumpy to the tune of about $40,000, $50,000 when you look year-over-year, so -- or quarter-over-quarter. So that's part of it. I wouldn't expect that to recur at that level.

Okay. All right. And I just want to ask a little bit about the competitive environment for, I guess, both the Jumbo mortgage side and warehouse lending. I've seen, in the last quarter or 2, a number of banks getting either back into them or trying to enter those markets for the first time. Clearly, you have a lower cost structure than them, but just wondering if the competitive environment is affecting pricing at all or -- just get your thoughts on it.

We -- so on the -- on just in general on the loan side on the single-family side, we continue to see -- we continue to have the ability to generate the production we want at the levels that we currently price loans. And we've been focused on instead improving the way we touch customers, enhancing the customer base and really focusing on other elements besides pricing. I think we are doing that on the multifamily side as well, which has allowed us to hold pricing reasonably well there. Although I would say that, that group has been most impacted by the competitive environment, although they've kind of rebounded and they're continuing to do well. And frankly, they're just a little bit behind in doing some of the other things from a business perspective that I needed them to get going on. And when they did, they had -- they no longer had to rely on rate cutting as the mechanism of getting business, which was starting to become a bit of a habit. And then with regard to the warehouse lending side, this whole thing that keeps that business from growing at the margins that we'd feel good about is that we are space constrained in our current location with literally white desks in the lobby now with people sitting with the computers because we're within a month of moving to our new location. So that group is burdened with only the paperwork, and nothing is getting in the way of the growth from a competitive perspective. We have a very good understanding of that customer base. We have an incredibly large customer base in comparison with that, and our reputation is very strong. So the ability for another competitor to come in and work with customers of ours who have known and trusted us for a long time with their loans is not, I think, is a very different and difficult proposition. You have to remember as well that obviously we have a number of proprietary products that we're allowing those customers to bank with us. So we're not only just offering a warehouse line that is commoditized for agency product, we're offering it for our own product as well, in addition to agency product and through some of the relationships that we have with other lenders for particular products that they might not otherwise have access to. So it's not only warehouse line, it's also a mechanism for allowing these customers to get access to proprietary product.

And our next question comes from Andrew Liesch with Sandler O'Neill and Partners.

The $4.5 million in the gain on sale of loans, how much of that was agency and how much of that would've been portfolio eligible?

Yes, it was approximately 2.1 was portfolio eligible, so that leaves about 2.4 for agency.

So just -- for the agency, it seems like it was down a little bit from the last quarter, I would actually have expected it to be higher. Can you maybe discuss your outlook? I mean, the pipeline seems pretty strong going...

The outlook is very good. And the -- I actually, I don't know, maybe can compare it to that. I thought it was roughly flat, but candidly, we're suffering from space and capacity constraints in the growth of that business. And that's another area where we would be able to increase and substantially enhance revenue. And the only thing that's stopping it is not the ability to utilize our marketing sources to increase the demand, it's rather than the ability that this physically fulfill the demand. So we're moving in the next month or 2. And that space constraint, although we got a great deal on our building, we probably are a little behind in that. And so it's -- that has become a bit of an issue just -- the physical capacity issue to grow that business more, but there is a lot of growth available.

Got you. And then all the agency sales, were those all from Costco?

No, they're not all from Costco, but a significant component are. Partially, that's the result of us looking to make sure that we take care of our largest customer and to the extent that we have variability in our ability to lower our marketing expense in other areas. We've been taking advantage of that because of the capacity constraints. But that, at the same time, is obviously not ideal because what it does is it leaves a lot of money on the table. So if we can fix the capacity issues, then we can allow the business to grow in a little bit more diversified way.

And we'll go next with James Wong [ph] with Wedbush.

It's actually Jeremy Zhu from Wedbush. Quick question on the mortgage origination. What percent of that is refi versus new home purchases?

On the Jumbo side, it's about 75% purchase. And on the agency side, it is probably about the same amount or a little bit higher on the refi side. So it really depends on what part you're talking about.

Got you. It's a little higher than 75% on the...

I think so. I don't have the number in front of me, but that would be consistent with about where it is.

Got you. And so you guys, looking forward, what other business lines are, you think, are sort of low-hanging fruit, and what are some of the next opportunities besides mortgage business?

Well, we think that the mortgage business is actually going to continue to be a fantastic business for a long period of time, and we'll talk about the answer to your questions directly with regard to that. But that's going to be a fantastic business for a long time for variety of reasons, and mainly, because the structural characteristics of -- with the way the mortgage business is set up now, relies on what at least I hope from a political perspective is an unsustainable structure, and that is obviously you have a fully government-owned entity guaranteeing most of the mortgages in the country. And so even small movements in the characteristics of loans that they're willing to accept, will dramatically increase the need for balance sheet capacity at banks. So there's a lot of subtlety those in statements related to the increases in G fees and a variety of things that are going on in the mortgage business. But our distribution platform allows -- we have a very wide distribution from a marketing perspective. We have much lower cost and a more competitive structure to be able to deliver loans. So even in the event that we have a decline in refinance volume, there's lots of marketing ways and opportunities to go out and enhance the product in a manner that will allow us to continue to capture business. And you see that in the way we've structured the Jumbo business from a purchase perspective, focusing on speed of service and things like that, allows you to do that. So there's a lot of -- there's a lot of opportunity there. Obviously, in the ancillary businesses on the warehouse lending side, in those areas, we see opportunities, and we think that will continue to be there. So on the multifamily side, we still think that is a great business, to the extent that there was -- there were opportunities in small, balanced commercial and certain selected markets that obviously could be something, although I don't think from a credit perspective it's the right time to do that. But our recent hires on the C&I lending side and the expansion of that business, I see that as a nice growth engine from an asset perspective. The specialty niches that we're developing are very, I think, they're very good credit quality and very nice yields. And so we're going to be putting significant effort into that as well. From a fee income perspective, I think, frankly, with the evolution of Regulation Q and businesses being very hungry for good deals on their business accounts, there is an incredible opportunity in that market because it really has not been subject to the competitive pressure that, frankly, that we can put on it. So I see a lot of both opportunity both for fee and for reasonable cost deposits there. So our -- the opportunities there are really all around. It's just kind of making sure that we select the right ones and have the capacity from a management perspective and even from a physical state perspective to go get them.

Yes. And I think a couple of calls ago, you've mentioned you guys are getting to the pre-card business. Have you...

Yes, they -- we were looking at, and we have a team that is looking at both credit and BIN sponsorship for prepaid card providers. We have a relationship up and running that is generating some nice fee income there and more than covering off the cost of the group. We have quite a few relationships in process. I would say that, that business is -- has been hurt by the current individuals in that business, negotiating contracts that are not sufficiently protective and thoughtful. So we've had a bit of difficulty with folks having to get through some of the contractual issues as they get recalibrated for a more what I would consider a thoughtful way of doing contracts with -- for those groups and truly protecting the bank appropriately from the risks. So I think that, that will be a good business for us, but it's going to be in my time when they capitulate as to the way that contracts should be structured, and that is non-negotiable. So we've had a couple that have fallen away as the result of that. And frankly, subsequent events that have occurred in those institutions have further solidified the correctness of my decision to proceed with caution in those particular cases.

And from Grand Slam, we'll go next to Mitchell Sacks.

I wanted to understand a little bit more. So I understand the cost of funding side, you've got some opportunities in terms of the CDs and the repos. Can you talk a little bit, too, in terms of the impact of some of the new businesses that you're looking at, the warehouse lending, and doing the business deposits and C&I in terms of how you think that impacts NIM over the coming years?

Right. I think on the warehouse lending side, it's -- I would say it's broadly supportive of NIM. And roughly, the way to think about that is that is a note rate financing, so there's no positive or negative carry in relationship to the time frame between when the loans are boarded and when the loans are sold to a government-sponsored entity, if that's where they're going, or to one of our conduit relationships, if that's where they're going. But what I think is good about that is they're very short duration, highly liquid lines of credit that are obviously from a duration perspective quite short, so you can match those off against reasonably short cost of funds. And so I think that they're broadly supportive of NIM. I'd say the specialty and C&I lending businesses and what we're doing in those areas are expansive of NIM and the questions quite expansive to the extent that they can become more significant contributors. And the question is, is they tend to be a little bit, from a volume, perspective less in size. Although with the addition of the executives that I mentioned, they are really quite experienced individuals, and they're going to be able to bring that group to really another level and I think increase the max overall, which I do think will be enhancive to yields. With regard to the other side of the equation, on the deposit cost side, obviously, our deposit costs could be significantly lower if we weren't growing so rapidly. I think you take any bank and you push them to grow deposits the way we are, and obviously, they're going to end up with a little higher deposit cost. So I think that, that -- the deposit costs, over the longer term, if we decide that we don't see loan growth out there, we could probably immediately enhance that quite significantly on the consumer side and every other area. I think the question of growing as fast as we would like to grow and gathering those deposits, we're going to put a lot of effort into a number of different deposit initiatives, some of them I'm not going to disclose fully here but are quite unique and interesting, and I'll call them incubator efforts, and some very unique ways of marketing deposits. I think those will be potentially -- any one of those have the opportunity for a large home run, but they may not occur. And then on the business checking side, there's a lot of opportunity for fee income. The issue is, is that you have to make sure that you're taking that business and appropriately considering all of its costs. So we -- I believe that there will be fee income generated from that business. And I also believe that over time it will create a -- it'll continue to enhance the quality of the deposit base and reduce its costs, although the initial push in that market is going to be one of shock and awe. And so it will still decrease our overall deposit cost, but relative to what we could do if we only beat the competition by a little bit. We're going to go beat them by a lot, and we're going -- then we're going to get what we want. And I think the capacity issue is going to be what governs that. But again, over time, they all allow us to have the levers that we can use to reduce our cost of funds.

And our next question comes from Edward Hemmelgarn with Shaker Investments.

Yes, I just have a few questions. Greg, can you talk a little bit about your new relationship, I think, with originating or with selling Jumbo mortgages into?

Oh, yes, sure, the Crédit Suisse arrangement, yes. So about -- it was about 8 months ago that we were very -- we were excited, and I talked a little bit about our relationship with BlackRock. I was pleased that they had thought of us in looking for someone to really help them distribute their product, and particularly, that we were the one, only one approved to do that through third parties at the time. Unfortunately, their profits was one that was riddled with problems, and we are very well known in the industry as a very efficient provider of answers and service. And so because we didn't have delegated authority to underwrite those loans, we were at the mercy of a variety of byzantine structures that caused actually a lot of problems, both at -- from even top-scale customer complains to folks who were wondering how is it possible that they submit a loan through 1 door and it turns in 2 days in another door, so problematic. And I think -- so what we're able to do is we have a new relationship with CSFB, and it's -- I'm very excited about it. It's already starting to go well, and the customers are very much liking the process. It's a much more streamlined process with, frankly, folks who are, I think, more serious about actually doing something on the securitization side. So I think all of that is very positive, and I think what you'll see is that will contribute -- it'll be one of the contributors to an enhancement to gain on sale income because it simply means that we now have a 30-year Jumbo product that we can sell on the Jumbo's mortgage side, where we only were really looking at ARM products before because we are portfolio-ing them or selling them for portfolio to other institutions.

Were you -- do you have underwriting authority on this one, this relationship?

Yes, we do.

Okay. Are you intending to do 15-year fixed rate mortgages, too? Or just 30?

They do have a 15-year product, and we have pushed that product out.

Okay. So basically it'll be for doing 30- and 15-year Jumbo fixed rate products. That's what...

Yes, that's correct. And what the attempt is, is to enhance our product suite to allow us to have a broader max instead of just a shorter duration product, which fits the interest rate risk profile, which the bank desires to keep.

What -- how much do you think not having that product was holding you back in the Jumbo side?

It's hard to tell. I mean, I think based on what we've done over the last number of years, it's hard to say we were held back by much. But I think we also just recently added a significant set of relationships from one of our large competitors who exited the market after a merger. And so many of those customers, I think, might be strong contenders for this product. I mean, I think obviously, we're seeing it hasn't been up very long. We're seeing very nice demand for it. Obviously, credit -- credit criteria is reasonably tight, but we're still able to approve a lot of those loans, and I think it'll be a nice addition. So is it going to add $1 million a quarter in 1 quarter -- in another quarter probably to gain on sale -- the business? I think that might be a little bit aggressive. And -- but I think that there will be a continued and steady growth. And it's difficult for me to project exactly, but I am seeing much better feedback on that product based on, frankly, it’s pricing and based on the delivery that we're now able to provide.

You were -- you have been selling Jumbo mortgages to other financial institutions that are buying them more on a loan-by-loan basis. Was all of that adjustable rate mortgage for a shorter duration?

Yes.

All right. So how many -- when you move -- finally move to your new location, which appears to be taking longer than you would originally thought, or...

Well, it's not really the case. It's not -- there's no -- there's really no delays in construction. What -- I probably -- we basically had a -- I think what I really ended up being is we took a little bit longer to negotiate the lease and we had a building that we thought we're going to move into, and then something much more desirable came along, and we waited about 6 weeks to get that done. And in retrospect, it was absolutely fantastic deal that really existed for an incredibly short time in the market because, frankly, we've kind of gone back to them and said, "Okay, can we get the same deal on more space in the building?" And they've said, "Well, it's actually x plus 25% now." So it was a great deal, and it's a great space. I think everybody is excited about it. And we've just -- we've outgrown ourselves here, and it's become a painful time trying to find -- put people on conference rooms and hook up lines and wires running on the floor and stuff to be able to service the demand we have. But I think of all the problems that you can have, it's one that's actually fairly easily defined and easy to fix, so, yes. But it's moving along. We have our punch list inspection for one of the floors, and we're going to stage the move, and that's happening this Friday. So I think it's moving along well.

Okay. How much additional space, I mean, will you have, or at least in terms of people, will you be able to locate?

I'd say about 60 to 70.

[indiscernible] What's the additional cost going to be, Andy, on a quarterly basis?

Yes, it's not going to be that huge because our rate actually technically went down from where we are today.

Technically, if I may add, on a full-service growth basis, it went down quite a bit.

Right, down.

Per foot.

Per foot.

[indiscernible]

Right. Now, under GAAP, you have to take the -- all the bumps and smooth them out, which is -- which causes that to be up. So I wouldn't expect rent to increase but equal to the percentage of the increase in the square feet roughly on a flat basis.

And with regard to your professional services estimate where you had some of the bumps, I wouldn't be surprised that there are some bumps just from moving and some other stuff that will really be flowing through the expenses in next quarter. I don't expect anything to be significant, but there's going to be -- there will be extra expenses moving. There just always is, but it's not going to be something that is significant or I think going to impact the company in any significant way.

Okay. And, Andy, in the past, you've talked about you're trying to do some things to reduce your tax rate. Could you talk about any progress?

Well, sure. I think one of the simplest things for us ultimately is, as we grow, we look at potentially filing in other states. Why? Because there -- California tax rate is 10.8%. So to the extent your growth allows you to allocate to a different state, you do get a pick up there. We really don't have an exact number of how that -- we'll be able to achieve the full benefit -- full benefits on that, but it would be a process that would be helpful as we grow.

And certainly, while we'll try to do that, I wouldn't be putting that in the top 35 reasons to invest in the company.

What do you think the rate is going to be, or what do you expect the rate will be for the current fiscal year then or for the year end in June 30, 2013?

Yes, we're running around 40, a little over 40.

That is a safe assumption.

Yes, I mean, I wouldn't bake into your assumptions, any -- I mean, we're going to obviously try to do that, but I wouldn't -- frankly, there's I think -- is there a tax increase planned in California, or that -- there's that -- the penalty on the financial institution is going to stay the same, right?

My understanding is it's still the same.

But in any of that -- I mean, look, we obviously have looked at that carefully. And outside substantive changes in how we operate, which means moving people to other countries or moving people to other states, none of which is justifiable based on the disruption or the cost savings and none of which we have present intentions to do or future intentions to do. It's not going to be significant.

And we'll go next to Terry McEvoy with Oppenheimer.

I guess getting back to the expense issue, expenses year-over-year up about 30%, 31%. How should we think about the growth rate of expenses going forward? You talked about the pipeline being down a little bit quarter-over-quarter. Does that help you? And then I believe you just said the move into some larger spaces is really kind of neutral for -- from an expense perspective?

Yes, I would say targeting a 35% expense ratio is a reasonable way to think about it. Obviously, we've been a bit lower on the last quarter and -- but I think the 35% is reasonable. So I would not think that the thesis should be to get much below there now. Now, I think that over time, there is an upside case that after we get our business banking going and all the new business initiatives that are incubating here, which obviously have an expense, there will be that upside. But I think it's safe to try to look at 35% as something that makes sense. I would say that a very significant portion of our business expense is variable and commission expense, so there is an inherent governor on costs as to the extent that we would have any decline or reduction in production or other financial benefits from our employees that there is a pretty systemic reduction there. And then also, the executives have a big component of their pay in bonus, which obviously would also have that adjustment, much of it automatic and much of it done by me. But I think in general, I think 35% is the way to think about it, and then I'm pretty confident that, that's a reasonable estimate going forward.

And just one other question on my list. The $30 million of business interest checking, have you been able to track where that business is coming from? And is it individuals who have a relationship already with the company that see that it's now available. It's right on your website, in the bottom left-hand corner? Or is it, I would say, more organic or natural growth where it is a first time customer to the company?

I'd say -- I don't -- I ask that same question. It's obviously, really, I mean, this group, although we've had 2 people on sort of the technological side, even the rollout of just getting things going has really been very, very recent. I think we're seeing -- we are definitely seeing some of our customers say, "It's about time you offer business banking." And then there are others that are coming for the site based on referrals and that sort of thing. We haven't put out a single email marketing it to our existing customer base yet. And that would be a typical way that we would obviously introduce that to our customer base and through all the direct marketing channels that we have. So we've been holding that back. We've been holding it back through from the affinity side and everything else, mainly because we don't have the capacity to do any more right now. So from that flavor or perspective, when we get into -- when we get into our new location and we've got the first floor there with the deposit operations, I think we'll be -- we'll feel a little bit more comfortable experimenting with a variety of different marketing techniques to expand that. I guess I think we're -- from a capacity perspective right now, we're, frankly, we're having a little bit of trouble dealing with the applications we're just getting through the site.

[Operator Instructions] And we'll go next to Greg Cole with Sidoti & Company.

Just with the move into the new location and the hiring of 67 additional -- 60 to 70 additional people, how long do you expect that to take?

Well, we don't have a target for hiring 60 or 70 additional people. The way we think about -- there's 2 questions embedded in that. One is, when are we getting into our new space. And the second question would be, by when would we hire 70 people. And so with regard to the first question, we will -- we have -- we are paying for this building through October 31. And I will personally be carrying desks out of here rather paying a extra day of rent. So that will certainly be the case that we'll be out by then. The move is planned for about 6 weekends, with just a group of people going over time just to make sure there's no disruption. And that will start, I think, in the first, I think it's aimed for the last week of August, the first week of September, the first folks will move. So that's with regard to that time. With regard to the aspect of hiring, in each case, every hire obviously have to justify itself. So, for example, on the mortgage side, to the extent that we're looking at a second team of individuals, that team would be hired only to fulfill immediate demand from lead sources to immediately originate loans. So it's not as if each hire has to be justified and they're justified obviously not by, "Gee, now we have a desk for him." So with regard to what the plans are to get to 70 and have to think about these things, I mean, I will tell you that we are -- we continue to look for space and sometimes in less expensive locations than where we are, less expensive than where we are now able to get based on where we are to be ready for future growth. But I can't tell you exactly when we're going to hire 70 people. I mean, that has to be highly dependent upon what they're actually going to do.

Okay. But for the amount of processing that you have to do now, I mean, you've been talking about capacity constraints. And I mean, is that something that instantly you have the amount people when you move in and it's like it's a physical constraint? Or is it -- do you need to hire 5 people, and it'll take a month for that to happen and then you should see a bump up in the pipeline and origination growth?

Yes, I would say what that month is. I'd say it would be the latter, but I'd say a month is too short. I mean, obviously, recruiting -- I think, look, we have the desire to double our gain on sales team. How long that takes and then what does it take to get the back office there? I think definitely a month is way, way too short. Maybe 4 to 5 months might be more appropriate, and obviously, those -- that won't occur all in one time. But it's -- we have a particularly high standard when we're looking for people. We're looking for people who get the culture, who fit in and who are incredibly hard workers. And so all those things together, recruiting takes time and it takes time to do it right. So we're not -- I'd rather take time to hire than do bad hires. So, yes, a month is definitely way too short, a quarter is probably on the -- on -- still on the aggressive side and push it out a little bit more and you're probably getting reasonable.

Okay. And with the $100 million in CDs that you have maturing over -- or, I guess, it's 42% of that is maturing over the next year, can you give any insights into when that will happen? Is a lot of it front-loaded, backloaded?

Sure, let me give you the numbers. July is $7 million. August is $19 million. September is $12 million. The next 4 months are about $0.5 million. And then the rest -- to get you the $42 million is in March, April and May. So a decent portion of it is in the first quarter.

Okay, that's very helpful. And then with the Crédit Suisse deal, just because -- I mean, they're doing so much volume and it's, I guess, a guaranteed purchaser, does that speed up how long it takes to go through your pipeline and for -- how long you can -- how long it takes to handle one of these transactions?

Well, I would say that our pipeline speed on the gain on sale is pretty fast, and I would think that -- the key that matters to the customer is the decision. They want to know if they're going to be able to do something or not. And if the answer is, no, a quick no is extremely helpful. And then not -- when you condition a loan and then not reconditioning it subsequent to the time that they submit all that paperwork, and I think that, that -- doing that process and having that done well is something that I think we've done pretty -- a very good job at. I don't really -- I think that -- so what the differences is that, when I was -- the difference I was talking about is if you'd go to another lender and you're trying to figure out if your Jumbo loan is going to get approved, I mean, I could go through the variety of horror stories that exist out there, but they are substantive and they're really problematic for people who are trying to buy houses, which is why one of the reasons our purchase business is so high as a percentage. I think you might -- so in other words, I don't think you're going to say, "Well, we're going to deliver a loan faster than 30 days through -- at the closing to CSFB." What we will do is we'll now be able to give them and answer, a customer an answer, incredibly quickly and control the process in a way that doesn't have someone from Costco calling me, asking why we're always -- we're so good on one product and so bad on another. And I think that, that is a very significant benefit for us.

And we'll go next to Gregg Hillman with First Wilshire Securities Management.

Yes, first of all, Greg, when you say gain on sale, is Jumbo loan originations included on that?

Well, there are -- so now with -- the way to think about that is -- the way we're dividing it is a couple of fold. One is that if it's agency eligible, then it clearly is gain on sale. Now, if it's through a -- if we don't originate it with the possibility that it could be in the portfolio, it is also gain on sale. We also sell a proportion of our portfolio loans, which we're calling non-agency gain on sale. Now, the fact is, is what we're having with the CSFB side is we're going to have 2 types of non-agency gain on sale loans, one will be portfolio-eligible gain on sale, the other will not be portfolio eligible. The sole differentiating factor between those 2 will be the duration. So we're not going -- we would not keep 15- and 30-year fixed-rate loans. We will keep 5/1 ARMs on the portfolio. So that -- there's -- we'll see if we feel like it's necessary based on volumes to break that number out, but what we've done for you is to break out the difference between what are -- what portfolio loans we sell and what ones we don't, so...

Okay. That's clear. And then for the Jumbo, for the quarter ending June 30, what percentage of those did you sell versus keep?

It was a very small percentage. We only sold about $10 million of -- through -- to some smaller banks on the non-agency side. And the CSFB deal wasn't really -- wasn't even done then, so there were no sales. I'm almost -- that's the case. There are no sales on -- in that product for the fourth quarter. So you'll see clearly that number will go up, and as currently classified, it will include the CFSB loans in the next quarter.

And what's the CFAB (sic) [CSFB] loans were they?

CSFB, they are a new 15- and 30-year Jumbo fixed rate products.

With Crédit...

Remember -- yes, Crédit Suisse. It's their product, yes, that we're selling.

Okay. And in terms of market share for Jumbo in the United States, do you have any idea what your market share is for selling Jumbo loans to mortgage brokers?

No, I don't know. I mean, I think it's a very, very small market share. And we also know it's a very small share of the overall pie. So there's no -- it's funny, I had somebody asked me the other day, they said, "Well, what percentage of the checking account base do you have that would be interested in an online checking account?" And I thought that question was an interesting intellectual exercise, but one that was wholly irrelevant to whether or not we can grow our business. And I honestly think I don't really know. I suppose we could compute it. But all I'll say is that there is incredible opportunity with all sorts of -- despite the size of our network, all sorts of people we haven't touched, the network is growing all the time. And people are very excited about the combination of having a warehouse line and a product that they can get a good turnaround time on without embarrassing themselves. And so I think that, that is a very potent proposition. And remember, if they get that warehouse line, even though we're doing a full underwrite, we're controlling the whole process. We're making sure credit is in the right place. The appraisal is being ordered through our appraisal management system. That individual is being -- or that company is being given the opportunity to have their name on our documents and then have -- and maintain that relationship in a manner that they might not otherwise be able to do. So I think there's a lot of value there, and we see that we can continue to grow it.

And then, Greg, what would be the selling proposition for your warehouse line products that you're offering to mortgage brokers? How would you differentiate it?

Right. Well, one way is that we have products, which are unique to us that we allow the customer to bank on our line. So by doing that, the customer has the ability to have the prestige and ability to close a large Jumbo loan that they wouldn't otherwise be able to have. In many cases, they may have a line that would approve our loan, but they might not. And so they might have to simply put that loan, bring that loan to us on a wholesale basis, not close it in their name. It allows them to close that loan in their name. Now, they also have access to the CFSB product, which they likely, although not -- the vast majority would not have the ability to have access to that product because CFSB is not interested in building a big network. They want a very small network with large volume customers, and so we're acting as an aggregator for them. The other is that the process is very good, and we can do that quickly for them. And then finally, frankly, it's -- there's a lot of relationships here that have been built on trust over time related to the people that are here and to what's been going on. I mean, whether it's through Thornburg or through the other relationships that exists. Those relationships are based on a trust that we understand how to do this business. And so that's a pretty significant thing. And so I think the proof is in the pudding. There's -- the issue with getting this done is just getting the right people to get through the application side. It's a severely complex and arduous process, and there's a lot of diligence that has to go on with the company, and it just time-consuming big, thick credit memorandums and a lot of work. But there's a lot of opportunity there.

So, Greg, what will be the constraints to getting back the size where Thornburg was?

Well I think our credit profile is much tighter than that credit profile. So, I mean, we're obviously -- we've really taken down the loan-to-value ratios that we are willing to do on larger loans quite, quite significantly. I think they're highly appropriate. From our perspective, obviously, reasonable growth that, that is consistent with infrastructure build and is consistent with maximizing shareholder value to our existing shareholders is much more important than some arbitrary number. So we obviously -- we've chosen to create a very broad funnel of which few loans go through. And that is the way that we maintain our quality.

Okay, that's great. And then finally, just what's your increase in fee income? Are you less -- are you going to less capital-intensive or less capital-restrained going forward because your fee income is going to be increasing more and more? And I take it there's not a big capital requirement to do gain on sale?

Yes, the capital -- right, the ROE for gain on sale business is incredibly high, and because it doesn't require a consistent leverage -- [indiscernible] amount of capital to sell loans that, that does allow you to enhance your organic earnings and therefore raise less capital for a -- balance sheet growth than you otherwise might. So my point on the capital side is that, obviously, we have the ability, because there's a lot of demand for our loans, to sell those loans. So to the extent that we don't like where our stock price is or we don't want to raise capital, we obviously can adjust the mix[ph] there and allow ourselves to grow or to continue to originate without having to raise capital. Now that being said, obviously, we kind of -- I have mixed emotions about selling loans that we do because I feel like they're very high quality, and I generally would like to obtain the benefit of the net interest income over time as opposed to allowing someone else to do that. But it is definitely a mechanism of making sure that we are able to grow and not be a victim of a potential capital market issue.

And at this time, there are no further questions in the queue. Mr. McPartland, I'll turn the call back to you, sir.

Greg, did you have any closing comments you'd like to make?

No. Thank you all for the questions. I thought they were very good, and we'll talk to you next quarter, and I appreciate your interest.

And, ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

Thank you.