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Edited Transcript of BOFI earnings conference call or presentation 25-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 BofI Holding Inc Earnings Call

SAN DIEGO Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of BofI Holding Inc earnings conference call or presentation Tuesday, April 25, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Micheletti

BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank

* Gregory Garrabrants

BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank

* Johnny Y. Lai

BofI Holding, Inc. - VP of Corporate Development & IR

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - Director, Equity Research

* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Edward Paul Hemmelgarn

Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Robert Hutcheson Ramsey

FBR Capital Markets & Co., Research Division - VP & Analyst

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the BofI Holding Inc. Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Johnny Lai, VP of Investor Relations. Thank you, sir. You may begin.

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Johnny Y. Lai, BofI Holding, Inc. - VP of Corporate Development & IR [2]

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Thanks, Sharon. Good afternoon, everyone. Thanks for your interest in BofI. Joining us today for BofI Holding Inc's. Third Quarter 2017 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 the financial and operational results for the 3 and 9 months ended March 31, 2017, and they will be available to answer questions after the prepared remarks.

Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and certain uncertainties. Therefore, the company claims a safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at bofiholding.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release.

At this time, I'd like to turn the call over to Greg for his opening remarks. Greg, the floor is yours.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [3]

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Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to BofI Holding's conference call for the third quarter of fiscal 2017 ended March 31, 2017. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for its third quarter ended March 31, 2017, up $40,994,000 up 14.1% when compared to the $35,914,000 earned in the third quarter ended March 31, 2016, and up 26.9% when compared to the $32,300,000 earned last quarter.

Earnings attributable to BofI's common stockholders were $40,917,000 or $0.63 per diluted share for the quarter ended March 31, 2017 compared to $0.56 per diluted share for the quarter ended March 31, 2016, and $0.50 per diluted share for the quarter ended December 31, 2016. Other highlights for the third quarter include, total assets reached $8.7 billion at March 31, 2017, up $0.5 billion compared to December 31, 2016, and up $1 billion from the third quarter in 2016.

Net interest margin increased 24 basis points from the prior quarter and 39 basis points in the third quarter of 2016 to 4.24%. Excluding the impact from H&R Block seasonal loan products and excess liquidity and our subordinated debt, net interest margin in the quarter ended March 31, 2017, would have been approximately 3.97%, at the high-end of our 3.8% to 4.0% annual net interest margin target.

Return on equity was 21.10% for the third quarter, well above our long-term target of 15% or better. The efficiency ratio was 31.73% for the third quarter of fiscal 2017 compared to 35.78% in the second quarter of fiscal 2017 and 31.66% for the third quarter of fiscal 2016.

Capital levels remain strong with Tier 1 leverage ratio of 9.11% at the bank and 9.47% at the holding company. Credit quality continues to be strong with 1 basis point of recoveries and only 39 basis points of nonperforming assets and total assets. Our lending businesses had another good quarter with $1.3 billion in gross loans originated in the third quarter. As a result, the bank achieved good quarterly loan growth as loan balances grew by approximately $209 million compared to December 31, 2016. Loan balance growth this quarter was reduced by the repayment of seasonal H&R Block loans of $59 million and a reduction in single-family agency warehouse facilities of $56 million, both items of which we do not expect to reoccur in their subsequent quarters. Through the first quarter of fiscal 2017, we have generated $986 million of net loan growth, a 16.3% increase over the comparable period in fiscal 2016. The primary drivers of our loan production consisted of $86 million of single-family agency eligible gain on sale production, $428 million of single-family jumbo portfolio production, $114 million of multifamily and commercial real estate portfolio production, $437 million of C&I production and $33 million of auto production.

We also funded approximately $277 million of Refund Advance loans through our partnership with H&R Block. These Refund Advance loans are reflected in a loan and lease purchases in our earnings press release and the 10-Q, and were not included in the $1.3 billion of loan originations I referenced earlier. We had another strong quarter in our C&I lending business, with ending balances increasing $154 million sequentially and $469 million year-over-year. Total C&I lending, including lender finance, commercial specialty real estate and equipment leasing accounted for approximately 19% of total loans outstanding at March 31, 2017, up from 15% sequentially.

Our lender finance business had $308 million of loan production and net loan growth of $124 million this quarter. Our commercial speciality real estate lending business originated $94 million of loans during the quarter for net loan portfolio growth of $20 million, a 5.5% increase in the 3 months ended March 31, 2017. Our equipment leasing business generated $34 million of loan production for the 3 months ended March 31, 2017, growing net loan balances by approximately $9.3 million from December 31, 2016, representing an annualized growth rate of 22.4%. We continue to see robust demand and strong growth opportunities across all our C&I business segments, and our C&I pipelines remain near all-time highs. Credit quality remains strong in our C&I business with no nonaccruals or accounts 90 days-plus delinquent at March 31, 2017. We have incurred no credit losses in our C&I loan portfolio since inception, and our credit quality in all segments of this group remains strong. Our C&I loans and lines have significant credit protection in the form of first lien positions on hard collateral. We actively monitor the borrower's financial health and the value of the underlying collateral to identify potential credit deterioration early.

Our multifamily and small balance commercial lending businesses also had a good quarter. Our multifamily and small balance commercial business originated $114 million for a net portfolio increase of $39 million and a 11% annualized increase in the entire portfolio. We took advantage of more rational pricing from key competitors in some of our multifamily markets and increased our rates on new multifamily loans, a total of between 25 to 50 basis points in late December and March of 2017. Demand in our single-family jumbo business remains healthy, as evidenced by the $428 million in production we had in this third fiscal quarter, with portfolio growth of $91 million. To start increasing rates by a total of 25 basis points over the last 2 rate increases, jumbo family loan pipeline and production remains strong. Our foreign national single-family lending program, which represents approximately 15% of our jumbo mortgage book, is in strong regulatory standing. We continue to offer loans at low loan-to-value to selected foreign national borrowers. This program has excellent credit performance without a single dollar of credit loss on a single-family foreign national loan in the bank's history. Single-family residential loans to foreign national borrowers cannot and are not reported separately on the bank's cover report, but rather as single-family residential loans as is appropriate.

The details of our third quarter 2017 originations are as follows. The average FICO for single-family agency eligible production was 753 with an average loan-to-value ratio of 66.5%. The average FICO of the single-family jumbo production was 708 with an average loan-to-value ratio of 61.6%. The average loan-to-value ratio of the originated multifamily loans was 56.7%, and the debt service coverage ratio was 1.39. The average LTV ratio of the originated small balance commercial real estate loans was 55.6% and the debt service coverage ratio was 1.47. The average FICO of the auto production was 775.

Our outlook for loan growth remains positive with $909 million of loans in the pipeline at March 31, 2017, consisting of $579 million of single-family jumbo loans, $89 million of single-family agency mortgages, $100 million of income property loans and $141 million of C&I loans. Our C&I loan pipeline is based on projected initial funding, which is often much lower than the average outstanding balance or aggregate line amount of the underlying credits.

Our loan portfolio credit quality remains very strong. Our strong credit discipline and low loan-to-value loans have resulted in consistently low credit losses and service and cost. Our lifetime loss in our originated single-family loan portfolio represents less than 3 basis points for loans originated. We remain disciplined in our multifamily credit underwriting and continue to originate loans at low loan-to-value ratios and attractive debt service coverages. We do not have risks hidden in the tails of our single and multifamily portfolios. At March 31, 2017, approximately 55% of our single-family loans were under 60% loan-to-value, 36% are between 60% and 70%, and 7% are between 71% and 75%, and 1% of our single-family loans have a loan-to-value ratio between 76% and 80%, and less than 1% have loan-to-value ratios greater than 80%. Approximately 63% of our multifamily loans are under 60% loan-to-value, 31% are between 60% and 70%, 5% are between 70% and 75%, and less than 1% of our multifamily loans have a loan-to-value ratio above 75%.

Asset quality remains strong and credit losses remain close to 0 with 1 basis point of net recoveries in the third quarter and 1 basis point of net charge-offs for the 9 months ended March 31, 2017. Total nonperforming assets as a percentage of total assets was 39 basis points, down from 43 basis points, December 31, 2016, and up from 31 basis points at March 31, 2016. The decrease since last quarter was primarily the result of improvements in nonperforming multifamily loans. As reflected in our historically low charge-off rates, a very small percentage of our nonperforming real estate loans result in a loss to the bank because we have a granular portfolio secured primarily by sufficient real estate collateral with readily ascertainable market values to ensure we receive repayment on the small number of loans that become nonperforming. Our loan loss reserves in nonperforming loans is 138.1%. The increase in our loan loss provision this quarter was driven almost entirely by reserves for Refund Advance loans, which has had credit losses below our projections.

At March 31, 2017, the weighted average loan-to-value of our entire portfolio of real estate loans was 57%. Given that these loan-to-value ratios use current amortized balance over origination date appraisals and a generally appreciating housing market, these historic loan-to-value ratios generally overstate the true loan-to-value ratio in the portfolio providing a further margin of collateral security. We continue to grow and diversify our deposit base across consumer and business banking verticals. Total deposits increased by $189 million, an annualized ratio of 11.4%. Checking and savings accounts grew at a faster pace of 22.7% annualized compared to the December 31, 2016 balances. Of the bank's overall deposit base at the end of this quarter, we have approximately 41% business in consumer checking, 25% money market accounts, 4% IRAs, 7% savings and 11% prepaid accounts. Time deposits or CDs have declined to 12% of total deposits and as we continue to increase checking, savings and money market deposits and reduce time deposits as a percentage of our funding, we are striving to reduce our deposit basis. We successfully kept our funding cost relatively flat over the past year, while growing our interest-bearing and noninterest-bearing demand deposit balances. Our average cost of interest -- noninterest and interest-bearing demand and the savings deposits was 59 basis points for the quarter ended March 31, 2017, down 2 basis points from 61 basis points from the quarter ended December 31, 2016, and up 7 basis points from 52 basis points for the quarter ended March 31, 2016. Our time deposits have an average cost of approximately 2.5% because they have an average duration of approximately 5.3 years compared to 4.1 years in the comparable period a year ago. Our balance sheet remains slightly asset sensitive given the relatively short duration of our real estate assets and our diverse base of consumer and commercial deposits, comprised primarily of core deposits. Following the rate hike by the Federal Reserve in December and March, we raised our single-family rates by a total of 25 basis points, while maintaining a strong pipeline and robust originations. We raised our multifamily rates following the December and March hikes by a total of between 25 to 50 basis points. Our C&I rates are generally floating, are very low duration and are generally adjusted when interest rates increase. Our C&I loans have on average higher loan yields and are growing more quickly than other loan categories, which has enhanced our average yield on newly booked loans. Although these higher rates -- these higher rate loans on single and multifamily take a while to enter the portfolio and impact average yields, loan yields adjusted for H&R Block seasonality increased 8 basis points from the last quarter. Following the rate hike by the Fed in March, we have seen selective instances where competitors have become more aggressive in their deposit repricing. We strive to offset potential future funding cost increases by changing our deposit mix, enhancing loan yields on existing loan categories and changing our loan mix so that we can maintain our net interest margin in the 3.8% to 4.0% range on an annual basis. We recently completed another successful tax season offering cobranded financial products through the H&R Block. As we previously mentioned, we added the Refund Advance product this year to our H&R Block product offering. We earn transaction base fees from Refund Transfer and Emerald Cards and interest income from Emerald Advance loans, Refund Advance loans, H&R Block franchise loans and Emerald Card deposits. Because of the uncertainties entering the tax season related to the impact from the IRS tax refund delays and changes in product offerings and marketing by H&R Block this year, we conservatively guided for total revenue and net income from the program management agreement to be roughly flat compared to the 2016 tax season.

Through March 31, 2017, season to date revenue and net income from our partnership with H&R Block exceeded last year's results driven by higher contributions from Refund Advance and Emerald Card.

Our Universal Digital Bank initiative includes 3 primary pillars. First, we are striving to own the entire customer facing technology stack in order to provide a best-in-class personalized user experience and have flexibility to quickly incorporate customer feedback and product innovation. Second, we are developing a broad-enough consumer lending and deposit product set to allow for profitable data-driven cross-selling and more efficient monetization of our customer acquisition cost. With our auto lending and consumer installment lending launch, we are making significant progress on expanding our consumer lending product sets. Third, we must continue developing our robust API microservices infrastructure that will enable us to partner with third parties for both customer acquisition and payment services. We have rolled out our in-house consumer online enrollment platform eliminating our need to pay a third party an application fee for each customer application. We've done extensive testing on various components of our new consumer online banking platform and plan to deploy the new software in one of our smaller brands later this year.

After completing the consumer online platform, we will expand the platform's capabilities to small business banking. We continue to expand our API toolkit and microservices architecture to allow us to integrate with third-party partners and application providers. We already have a number of successful implementations of our consumer enrollment API. By providing a seamless and integrated user experience and delivering personalized and targeted products and services to customers when they need and want a product, we believe we can increase the profitability and retention of new and existing customers. We began to offer our consumer installment lending product on a pilot basis in January of this year and have successfully originated more than $1 million of loans through the platform to date. Leveraging components of the software platform used to originate H&R Block franchise loans and adding a customer user interface and credit underwriting model, we were able to build our entire consumer lending platform internally. Borrowers can apply for $5,000 to $35,000 loans through our secure portal and receive funding within 1 to 2 business days after approval. We target prime borrowers with an established credit history and assets. We take additional steps to verify our borrowers employment, income and identity. While the production volumes are currently modest by design and will remain so for the foreseeable future as we test our credit models, we were pleased with the performance of the system and the loans we have funded so far.

Over time, this product will become one of several products and services within our Universal Digital Bank that will be offered to new and existing customers on a targeted basis and will increase average loan yields. The bank is very well positioned from a capital perspective for significant growth without the need to raise additional capital.

As a bank, our Tier 1 capital level is 9.11%. At the holding company, our Tier 1 core capital level was 9.47%. Additionally, our capital structure consists almost entirely of common equity and, therefore, allows for significant flexibility regarding what type of capital instruments other than common equity that we might decide to utilize to raise capital in the events that our asset growth rate outstretches our strong earnings and begins to reduce our excess capital levels. We have not yet deployed the proceeds of our last year's subordinated debt offering.

I'd like to thank the dedicated team of colleagues with whom I have the pleasure to work with every day. Your performance is reflected not only in our record quarterly earnings, but also in our credit performance, strong regulatory relations and our excellent compliance record. Thanks to your work, we recently received for the fifth year in a row, SNL's Financials Award as "The Best of the Biggest Thrifts." This award marks the eighth year in a row that BofI has ranked in the top 5 performing largest thrifts according to SNL. In 2016, BofI was also ranked by Bank Director magazine as the third highest-performing banker's thrift out of the 102 banks and thrifts traded on the NASDAQ OMX and the New York Stock Exchange with assets between $5 billion and $50 billion.

With respect to the ongoing short seller and captured media attacks, remember that the first short seller hit piece came out on March 19 of 2014. In the March 2014 quarter, the bank earned, on a split-adjusted basis, $0.25 per share for a total income of around $15 million. Had 50 basis points of nonperforming assets, total assets, 11 basis points of charge-offs in that quarter, and a net interest margin of 3.89%. That year, BofI received many awards for its best-in-class performance, including SNL's top ranking as 2014's highest-performing thrift in the country, based on efficiency, growth, return and credit quality.

So after 3 years of audited financials, 12 quarters of strong performance, 3 full OCC regulatory full scope exams, 3 OCC interim exams, 2 acquisition approvals and a recent OCC product approval for a Refund Advance loan that we offered this quarter and dozens of different disproven short thesis hurdle that the bank over -- in the last 3 years, our net income since that first short seller hit piece is 180% higher, moving from $15 million to $41 million. Earnings per share are 152% higher, from $0.25 to $0.63 per share. Nonperforming assets of total assets are down from 50 basis points to 39 basis points. Charge-offs are down from 11 basis point -- of charge-offs to 1 basis point in net recoveries and the net interest margin rose from 3.89% to 4.24% unadjusted and 3.97% adjusted this quarter. This excellent performance speaks to why we have been one of the top performing banks, if not the top performing bank, for such a long period of time.

Now I'll turn this call over to Andy, who'll provide additional details on our international results.

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [4]

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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 at bofiholding.com. Second, I will highlight a few areas rather than going through every individual financial line item. Please refer to our press release or 10-Q for additional details.

As Greg indicated earlier, BofI's net income for the third quarter ended March 31, 2017, was a record $40,994,000, up 14.1% when compared to the $35,914,000 earned in the third quarter ended March 31, 2016, and up 26.9% when compared to the $32.3 million earned last quarter. Earnings attributable to BofI's common stockholders were $40,917,000 or $0.63 per diluted share for the quarter ended March 31, 2017, compared to $0.56 per diluted share for the quarter ended March 31, 2016, and compared to $0.50 per diluted share for the quarter ended December 31, 2016. This quarter ended March 31, 2017 was the second income tax preparation season since the bank entered into its August 2015 long-term agreement with H&R Block Inc. to offer cobranded financial products to H&R Block customers. The increase in earnings this quarter compared to our last quarter ended December 31, 2016 was due in part to the H&R Block financial product revenue in the March quarter and the increase in assets this quarter was due in part to the income tax refunds from H&R Block customers causing a seasonal increase in the banks short-term liquid assets and in its deposits.

As Greg mentioned, new this year is the Refund Advance loan product. The bank purchased the Refund Advances at a discount during the quarter ended March 31, 2017, and accreted the discount into interest income as the loans were repaid. Of the $277 million in refund advances purchased during the quarter ended March 31, 2017, the current principal balance of the Refund Advance loans is approximately $3.4 million, reflecting the rapid paydown and the minimal exposure remaining on the bank’s balance sheet. The bank has reserved 100% of this remaining amount in its loan loss provision in the third quarter. The credit performance of the Refund Advance loans was better than expected, and BofI did not have to rely on the credit guarantees provided by H&R Block. However, BofI's charge-off rate next quarter will reflect whatever dollar amount of Refund Advance do not repay by June. And as I stated, we have reserved 100% of the remaining RA balances as of the end of this quarter.

For the quarter ended March 31, 2017, net interest margin was 4.24%, up 24 basis points from 4% in the quarter ended December 31, 2016, and up 39 basis points compared to the 3.85% in the quarter ended March 31, 2016. The net interest margin would have been 3.93% when excluding the average balances associated with the lower-yielding excess cash and the average balance and the yield earned on the Refund Advance and the other H&R Block loan-related products during the quarter, which consisted -- which is consistent with our strong net interest margins reported in previous quarters.

Our average loan yield, excluding the H&R Block temporary seasonal loan products, was 5.13% for the third quarter of fiscal 2017, up from 5.05% for the second quarter of fiscal 2017. Our efficiency ratio was 31.73% for the quarter ended March 31, 2017 and 35.13% for the 9 months ended March 31, 2017. As Greg mentioned, we are investing significantly in our future with increased staffing systems and software development. Even with the additional cost, we anticipate that we can keep our average efficiency ratio around 35% to 36% on an annual basis.

Shifting to the balance sheet, BofI also had strong balance sheet growth or even after excluding the seasonal assets and deposits from the H&R Block agreement. Asset growth, excluding the seasonal growth this quarter, was 12.5% year-over-year compared to March 31, 2016. Similarly, deposit growth this quarter was 11.8% year-over-year compared to March 31, 2016, after excluding the seasonal deposit growth. Stockholders' equity increased by $116.7 million or 17.1% to $800 million at March 31, 2017, up from $683.6 million at June 30, 2016. The increase was primarily the result of our net income for the 9 months ended March 31, 2017 of $102.2 million as well as divesting an issuance of RSUs, the exercise of stock options of $8.6 million and a $6.1 million unrealized gain in other comprehensive income. This was net of a tax -- net of tax and included a reduction of $0.2 million for dividends declared on our preferred stock. The bank is very well positioned from a capital perspective. The Tier 1 capital was 9.47% for the holding company and 9.11% for the bank at March 31, 2017.

With that, I'll turn the call back over to Johnny.

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Johnny Y. Lai, BofI Holding, Inc. - VP of Corporate Development & IR [5]

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Thanks, Andy. Sharon, we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bob Ramsey of FBR.

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Robert Hutcheson Ramsey, FBR Capital Markets & Co., Research Division - VP & Analyst [2]

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I wanted to talk a little bit more about Block of the anticipation loan. I guess, last year Blocks sort of narrowed your margin because of all the excess liquidity. This year, without additional product, you guys have gotten a nice boost of margin. Is it your expectation that, that basically all goes away next quarter? It sounds like the balances are almost all gone. And then sort of as we think about the seasonality of the Block business, would you expect another 30 basis point benefit next year in the March quarter as well?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [3]

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With respect to next quarter, yes that benefit will be essentially nonexistent. The balances are low enough now that they are de minimis from a standpoint of the impact they provide. And there's other seasonal products as well such as the franchise loans that are also at de minimis levels as well. So with respect to that -- with respect to next year, that's something that we are obviously talking with H&R Block about and I'm not ready really to discuss anything there yet. But we have a good partnership with them. They obviously have to make decisions about what products they are going to decide to offer, and I'm not going to preempt that decision, which they obviously have -- that -- obviously, they have right to make. So we think we have a good relationship with them, and we certainly would help to be a part of that. And I think that we were pleased with how it worked, I think. They were pleased with how it worked, and I think it was very successful.

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Robert Hutcheson Ramsey, FBR Capital Markets & Co., Research Division - VP & Analyst [4]

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Okay. And I guess when you all made the comment that losses on those loans have run below expectations, is that comment applicable to sort of what's happened over the last 3 weeks since quarter end on the [tail of] portfolio? Or is that what you experienced through the first quarter? Does that indicate that the reserve being fully reserved at this point is probably more than enough? Or I'm just trying to get a better sense on what that comment meant?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [5]

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Yes. So the reserve is more than enough, the $3.4 million number that was cited is roughly the current balance today. And so we have that plus more in our allowance. So we could lose every dollar at the 3.4% and not have an increase in our loan loss provisions next quarter.

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Robert Hutcheson Ramsey, FBR Capital Markets & Co., Research Division - VP & Analyst [6]

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Okay. Great. Got it. And then, maybe give us a little bit more of an update on the online consumer loan product. I know you gave a little information about originations and saying you guys are going to kind of take it slow. I noticed you are offering it now sort of direct to your customers through your website. Just kind of curious how you see that business growing, evolving over time, knowing that you said you take it slow, what is kind of the trajectory?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [7]

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Yes, slow for us on new products means slow. So we had about $1 million of originations to date. It's working very well. There has been -- there's good yields. We're seeing good borrowers come through. We like what we're seeing. There is certainly lots of opportunity to grow that, but we also need to make sure that our model gets tested over some period of time, has enough loans run through it before we really open that up. So it's really a longer-term initiative. I think it reflects what we've been able to do on the development side. That's obviously completely an in-house development, which is one of the, I think, many impressive things that the development team has built over time, which is going to help us in general as we move on this increasingly digital path that we have. And obviously over time, it will benefit our net interest margin. But we're going to really take it in a very controlled and measured way. You see the credit quality in everything we do. We've done a great job on the auto side from a credit quality perspective being thoughtful and efficient, but also controlled in how our rollout goes, and that's what we're going to do here too. So I'm not going to give you exact numbers, but it's not going to be material in this calendar year, but I would expect in the next calendar year it would start to really ramp up as long as our performance continues to be good.

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Robert Hutcheson Ramsey, FBR Capital Markets & Co., Research Division - VP & Analyst [8]

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And any thoughts around parted mix of existing BofI customers versus people that don't have any other products or relationships with you?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [9]

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Well, I think that the maximal change as we have our universal digital banking platform come up as the algorithm to determine whether that product is beneficial to a particular customer gets refined. And so if that refinement occurs, we should have much more, for example, credit card consolidation loans with customers as we were able to utilize our own internal data and the external data around the personalization engine better. Right now, this is more front facing and then there's marketing that's being done on a very targeted basis to small sets of internal customers. But the sophistication level as with the universal digital banking platform is all about, right, you've got have the product and then you've also got to have the personalization engine, you've got to have the delivery mechanism on the front end to be able to bring all that together, and that ultimately is what's going to come together.

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Operator [10]

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Our next question comes from Scott Valentin of Compass Point.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [11]

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Just with regard to the loan mix, C&I growth has been strong, RV growth is strong. Just wondering how you envision over time the portfolio mix changing and then, I guess, as a derivative of that, provision and allowance for loan losses, how you see that evolving over time.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [12]

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Well, I'll let Andy talk a little bit more about the allowance for loan loss. But from a mix perspective, we do think C&I will become a greater proportion of the loan balance over time. The opportunities there are very, very strong. We're turning away transactions that we simply just don't have the capacity for. So there's definitely a lot of business there, we like what we're seeing there. And so I think that, that will grow as a percentage of the balance. Consumer, obviously, because it's such a small part of our business right now, will continue to grow, but it will grow on a more measured fashion over time as we mature those platforms. With respect to the...

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [13]

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Sure, I mean, you're absolutely right. Over time, depending on mix, you should expect the loan loss allowance to increase as a percentage of total loans as the C&I portfolio grows.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [14]

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We've always had very good and strong loan loss allowances for our loans depending upon their loan-to-value ratio. For single-family loans that are typical bank with originated 80% loan-to-value, they have very high loan loss allowances. And obviously, when you have much lower loan-to-value ratios, you have lower loan loss allowances, which have been historically reflective -- or frankly, significantly greater than but certainly historically reflective of what we've had, which has been very low levels of loan loss.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [15]

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And then just on deposits, you mentioned that you're seeing some competitive pressure, I guess, from some competitors' raised pricing. I'm just wondering, in terms of deposit data, how you guys think about your deposit rates relative to online competitors and maybe even brick-and-mortar.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [16]

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Sure. So with respect to -- there really are several segments that we have. We've tried hard and I think we've done a reasonable job of having many segments of our deposit portfolio not be competitive with direct or online competitors, and then some of our products and deposits are more competitive. With respect to the first couple of rate increases, we've seen I would just call selective movement, a targeting by certain banks of certain customers and aggressively going after those customers because they believe those customers are profitable. We haven't seen wholesale repricing of deposits, but we have seen that sort of targeted repricing. Certainly, online competitors, most recently Union Bank with Pure Bank -- or PurePoint, is the most aggressive provider out there, which is interesting given, obviously, that it is Union Bank. But it's -- right now, it's still fairly one-off, and I think that we'll probably start to see more pressure on repricing as rates continue to go up. I think we've done a pretty reasonable job right now minimizing that impact. And certainly, that impact has been lower than what we've been able to do with our loan rates. And we haven't even begun to see the influence of raising our loan rates on multi- and single-family given that there's a locked pipeline, it takes some time for that locked pipeline to fund out, and then the newer loans are coming in at a higher rate. But we definitely expect to see deposit pressure over time as you get higher levels of rate increases. We've modeled in the 60 and higher range on betas even though we're not seeing any...

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [17]

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Yes, which is very conservative. We're seeing less than that. We're seeing more between 20 to 40 on a blended basis. But we've always modeled to make sure that we're prepared in terms of looking how we move loan rates in case we do have such a movement.

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Operator [18]

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Our next question comes from Brad Berning of Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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Just a couple of follow-ups on H&R Block. You made a comment about through the end of March quarter that the results had been better than last year. And I just wanted for you to clarify whether that was March quarter to March quarter or whether this year's March quarter versus the total last year is the first question on this. The follow-up is can you talk a little bit about the prepaid card part of it? And if there's any -- been any timing issues in pushing some of it from 1Q, [also to] the March quarter for you into the June quarter? How do you feel about the overall aggregate guidance for flat on a year-over-year basis? And just wondered if you could touch a little bit more in detail on that first, then I'll come back with another follow-up.

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [20]

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Yes. So the way we're measuring that is the March quarter over the March quarter is what we're looking at, so we were slightly better in the March quarter. As far as guidance going forward, we still stick with the guidance that we're going to continue to operate in that forecasted range for that. Bottom line is we've seen a little bit of shrinkage in RT, but we also saw some growth in Emerald Card, that was positive. So -- and then we added the RA on top of that. But the RA is done as Greg has mentioned, so that pretty much just leaves Emerald Card, which we don't expect to be a large mover next quarter.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [21]

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Yes. So basically the benefit we received is in this quarter, and we don't think there's going to be a benefit incremental over the prior year's comparable quarter and this quarter as a result of H&R Block.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [22]

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And then on the jumbo mortgage book, you guys had, had a couple quarters of some refinance activity being higher than what you would like to have seen. It looks like you got back to sequential growth this quarter. Can you talk about where you're at on prepayment levels then some of the activities that you've been trying to curb? And talk about how you're feeling about prepayment activity going into this quarter versus your production. And do you continue to expect to see growth kind of reaccelerate here now that you've -- it kind of seems like you're moving through some of that issue?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [23]

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Yes. I think that's a fair assessment. I do think we'll have single-family jumbo mortgage growth this quarter. We do have strong prepayment rates in our portfolio. They have declined some. But we have very strong borrowers with very low loan-to-value loans, and so they do have lots of opportunities for refinance. But I think the jumbo business is doing very well. The pipelines are very good. The pipelines have not been impacted by the rate increases we have. The housing market on the purchase side, there's incredible demand. The supply of homes is a little bit tight, but we're still seeing good volumes through that channel. So we feel pretty good about being able to have jumbo loan growth this next quarter from a portfolio perspective. I don't want to speculate on how much, but I do think that it's there. With respect to specific initiatives, there's a number of them doing a better job in portfolio retention, which I think we are doing. Using better data analytics has been a big part of that, extending some penalties associated with refinancing for some of our third-party partners and some other things. And just looking at some of that behavior has been helpful too. So in general, though, I think it was a good quarter for jumbo, and I think it's shaping up to be a decent one next quarter as well.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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So on the refi penalties you talked about, was that part of the contributor to the pickup in refi penalties this quarter was specifically to partners rather than specific loans or...

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [25]

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No. No. That was all on the C&I side. It's going to be the C&I and multifamily.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [26]

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No, that's more of a deterrent. And that's -- I don't want to overemphasize, that's not a huge part of it. I think the biggest part of it is doing better job on port retention. And also, it's a rate issue as well. In a couple of those quarters, rates were really scraping the bottom, and competitive rates have gone up so it's narrowed the refinance benefit in a lot of our book.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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Understood. And then one follow-up on the NIM a little bit. You talked about some of the competitive issues in the deposit side a little bit, but you talked about some of the yield side. Can you just kind of talk through any impact in your view as far as which side of the range -- you're at the high side of the range a little bit of your NIM -- kind of guidance over time? How are you feeling about the prospects on that in the near and intermediate term?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [28]

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I don't want to start getting -- I think the guidance is probably as much as I'd like to give. It's a little bit difficult to start parsing that around. But I think we have lots of tools and opportunities. I think the C&I pipelines and volumes are very, very good. And there's lots of opportunity there. It's an increasing part of the loan mix, and it has higher rates. Our ability to raise rate so far on our single- and multifamily has been -- they've been either followed by -- they've been followed by competitors sometimes to even a higher extent. Chase raised their multifamily loan rates by a lot more than we did. So there may even be some room there. So I think -- and then we have some of the higher rate products. Obviously, the consumer side is still pretty nascent but could be a contributor over time. It's just going to depend. I don't want to be overly prescriptive. But I think we have a lot of tools and, so far, it's worked out pretty well. And I think that we really believe that we can get into that 3.80% to 4% range. Obviously, we're going to work hard to do that. We can't promise it, but we'll work hard to do that. Keep it there the rest of the year.

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Operator [29]

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Our next question comes from Edward Hemmelgarn of Shaker Investments.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [30]

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What I was kind of wondering about was the -- to talk about, again, maybe about the loan growth because the pace has -- in terms of balances has certainly slowed down. And as your originations have kind of stayed about the same, and your prepayments -- the good news is your loans get repaid -- have increased. It's been kind of stuck in this, the range of originations, for about the last year now. Good levels, I mean but it's -- how do we be -- do you really think that the commercial and industrial that that's going to -- what are you doing there to take advantage of that? You said there are more opportunities there than what you can take advantage of now. I mean what have you done to allow yourself to take more advantage of -- to really increase that business?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [31]

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We've got a number of personnel additions that we're looking to make there. And we've got quite a few, I would say, new sponsor relationships that we're establishing that we're doing first deals for, and there's a lot of good dialogue related to the pipelines of what those deals look like going forward. So I'm very comfortable with that. I think our loan growth has been really where we want it to be. And if you look through the quarter, 16-ish percent for the year, I guided to mid-teens -- mid- to high-teens area, so maybe it's a couple -- 200 basis points below what that would look like. But I think it's been really good. I think, clearly, we want to make sure that we maintain our yields and margins, which I think are right. And we've obviously got to -- we're thinking about holistically how our growth works and making sure it's profitable. So I think that having that -- continuing to keep high credit standards and having that sort of loan growth is really pretty good. And so we're not really -- I'm not feeling like we need to accelerate that loan growth anymore, and I think it's in a pretty good place.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [32]

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No, no, no. I'm just thinking in terms of -- I mean they keep on growing at 15% to 20% a year, something -- you do it right, growing by that amount, just to keep growing that way. What about the consumer part? I mean is it -- what's your -- I know that it's become more of a focus, and you're starting to generate some loans and things like that. I mean what type of a mix do you think that kind of percentage of your loan portfolio do you think that can ultimately be?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [33]

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It's a little bit early to tell. I do believe that it's not something -- I think if you're looking 6 quarters out, look for that C&I side to get a lot bigger and look for continued growth in multi- and single-family. As you start to look out beyond that, you'll start to see that, like all the things that we do, all the new initiatives, those loans creep up and start to make up a portion of the loan book. It's very early for me to tell because, as you know, we've been very good at when we enter a new loan category, making sure that we do a very good job of having controlled losses and good credit quality. We want to really put that first. So look, there's a ton of opportunity there, but I want to make sure that we're ready for it. I don't want to go out and speculate what -- multiple years out, what that's going to look like. It's just too early for that.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [34]

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Do you think you'll have more of a -- I mean, as you kind of unveil your universal bank offering that, that should make a major difference in just how you go out and start targeting consumers? Or...

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [35]

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Sure. Yes, overall, the -- all the initiatives that we have related to what's going to happen with the universal digital bank, all the product offerings and the ability to have control of that, of the platform, to have a permanent product team there and then to be able to enhance the marketing that we have to push those products through we think is ultimately going to be a very, very powerful driver of significant growth. And what's interesting, I think, when I sit back and look, I feel so comfortable about where we are from a future perspective because we have been so conservative in growing these platforms and really making sure that we do have incredible credit performance. And if we were looking for average credit performance, our loan growth would be double or triple what it is. But we're not looking for that, we're looking for something much better, and we hold ourselves to much higher standards. So yes, I think we're in really good shape, we're investing a lot for the future, and I feel good about long-term growth prospects.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [36]

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And Andy, just one more question about the -- actually, there's 2 more questions. In terms of the -- how did the IRA program go?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [37]

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Yes, from a technological perspective, it went really well. It was one of our first API integrations into an industrial sort of scale processing platform, worked very well from that perspective. The take rates were below expectations. We're not going to give exact numbers on the accounts. We did open thousands of accounts, and they were -- and it was fine. But it wasn't -- it didn't have the consumer traction that we were expecting. But from a technological perspective, it worked very well.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [38]

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Do you think that that's something that you can probably increase with just more timely marketing, perhaps to the H&R Block providers?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [39]

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Yes. I mean, that will be something that we have to talk with them. We've not done a lot of work on sort of post-taxis and postmortem, but there's a lot of interesting things we're talking about, and there's a lot of ideas that we're working through. I think we've got a lot of great opportunities there. So we just have to work through what those are. And it's been a real push to get through tax season, and everything turned out really well for the tax season. And so we're going to, obviously, take a look at that stuff and talk with them about where we want to go with respect to different products and services and see where that takes us.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [40]

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Okay. And then, lastly, just a question for Andrew, but has the -- I appreciate your conservatism on the Emerald Advance or Refund Advance loans, fully reserving that now. But has the payments -- I mean, are the repayments of those loans pretty much stopped? Or are you still getting payments on the $3 million that you're...

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [41]

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Yes. No, we are getting payments on the amounts. And so we do expect some more payments between now and June. But as you can see, the lion's share has already happened.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [42]

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Yes. And so you would certainly expect to have some losses as...

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [43]

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There will absolutely be losses, and that was -- it's within expectations. And we just -- we know that they will, of course, be below 100% of the balance that we reserved for but where that sits -- I wouldn't expect -- I wouldn't count on some big recovery in the next quarter or something, a big reversal of loan loss. There'll be some reversal, but I wouldn't be putting a huge amount of reversal in your model for next quarter.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [44]

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No. I mean, I was just -- it sounded like -- I mean you really hadn't factored in much for that product, and it sounds like that was a very profitable product for you.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [45]

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Yes. Well, it worked out well.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [46]

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It worked out very well.

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Operator [47]

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Our next question comes from Andrew Liesch of Sandler O'Neill.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - Director, Equity Research [48]

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Andy, I think you provided what the average yield on the portfolio was, excluding Block. But do you know what the average deposit costs were, excluding Block, from this quarter compared to last?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [49]

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I don't have that number.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - Director, Equity Research [50]

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All right, I'll just follow up with you offline. And then the (inaudible) structured settlements, like just didn't sell much at all this quarter. Was that planned? Or -- and then what are your thoughts on selling more of them going forward?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [51]

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Yes. I would say that the market for originating that product is different today than it's been over the past. We're not seeing as many opportunities to originate and sell as we saw in the past. So I would expect that lower structured settlements -- sales are more of the future.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - Director, Equity Research [52]

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Got you. And then along that similar lines with the mortgage banking, presumably, that's going to be lower than it's been the last few years as well?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [53]

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I think we are looking for an improvement in mortgage banking next quarter given kind of where the numbers came out. It's clearly was a much smaller number than the quarter before. So we are looking forward to a better mortgage banking quarter coming up.

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Operator [54]

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Our next question comes from Austin Nicholas with Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [55]

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Maybe just on the loan pipeline. I think it was $909 million that was mentioned. Is that exclusive of the mortgage warehouse lines? And is there really any growth off the decline that we saw this quarter that could happen in that business? And maybe just how you think about the mortgage warehouse business going forward.

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [56]

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Sure. That does not include -- yes, so it is exclusive of that, the mortgage warehouse opportunities, that pipeline number does not include those opportunities. There are opportunities for increase in the number of customers in that business. We have very good levels of active negotiation going on. I think there was -- it was a pretty difficult quarter for a lot of independent mortgage bankers. There's industry layoffs happening and things like that. So there are declines in balances. Now that being said, I think we do have the ability to take share there because of the fact that we have a portfolio product that we can bundle with the agency product. And I think we have a good reputation in the market. I think we'll be able to continue to look for opportunities there. In any quarter, though, I don't expect that we'd have a reduction in balances like we did this quarter, though, and subsequent quarters. This is a relatively significant balance kind of as a result of that decline in mortgage banking activity.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [57]

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Got you. Okay. That's very helpful. And then maybe just on the Las Vegas office, maybe if you could provide some outlook for the growth in that office and then maybe how that might impact your tax rate over the next couple of years?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [58]

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Yes. So the office is being staffed. Individuals are being hired in that office that allow us to accommodate the goal of having a diverse employment base and also providing a lower cost location for individuals that would like to live in a location like that. With respect to the tax rate side, I think over time you gradually get to have some benefit as a result of that. I don't want to overstate what that benefit is, and I think that, clearly, any reduction in corporate tax rates that would be legislatively enacted would swamp what those are. But over time, obviously, when you have a diverse set of employees in a number of different states, those allocations start to have impact. But it's going to be a pretty extended time frame before that impact occurs. And so we'll -- you'll start -- you might see that, but I wouldn't be modeling that right now. It's just -- it's going to be too gradual and too small and occur over many, many years as we would shift employees there over time.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [59]

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Got you. That makes sense. Then maybe just my last question, what's the outlook for acquisitions? Any fee-based businesses or lending opportunities similar to what we saw with the Pac Wes Equipment Finance acquisition? Anything on the radar or anything -- are there opportunities to be had over the next year or so?

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Gregory Garrabrants, BofI Holding, Inc. - CEO, President, Director, CEO of Bofi Federal Bank and President of Bofi Federal Bank [60]

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Well, there certainly are opportunities. We regularly look at a variety of lending and deposit M&A opportunities, and we always have active pipelines. We're thoughtful on discriminate buyers. As you can see from the acquisitions we've made, we've done a very good job of getting very good prices for good value, and that's obviously an important goal of ours. So we don't want to overpay for anything, and that's something that we want to continue to focus on. But yes, we do see opportunities. I can't say that any one of them ends up working out. Many of them are competitive, some aren't as competitive, but we have an active M&A pipeline, and we're always focused on looking for opportunities that enhance our overall strategic plan.

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Operator [61]

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The final question comes from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [62]

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Andy, I wanted to ask just -- a follow-up just on the sort of sequential flows on H&R Block side. If memory serves, last year, the deposits had a little longer tail, kind of stuck around a little more into the fiscal fourth quarter. So is it reasonable to assume that occurs the same way this year and, in fact, the margin could be at the lower end of that range in the fiscal fourth quarter as a result of the excess liquidity not being offset by those higher-yielding loans?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [63]

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You're absolutely correct. We will still have some average excess liquidity. Obviously, less than the impact this quarter, but it still will have some negative impact on next quarter. And so I think, as Greg articulated, we've got a lot of good things going on in terms of loan pricing up, which has us very optimistic that we will be in that range and could be in the higher end of the range. But when you add the extra liquidity that will become, that would then pull us down a little bit and potentially be at the lower end of that range. So that's kind of why we've guided 3.80% to 4%, and you're right on it.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [64]

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Okay, great. And then on securities portfolio, obviously, the average balance in that portfolio this quarter, under $400 million. It's, by far, the lowest it's been as a percentage of your earning assets or total assets. Can you talk about how you think about that asset segment?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [65]

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Sure. I mean I think we've done a lot of work on it. As you'll see on a linked quarter basis, the average rate has actually come up on that portfolio. We divested ourselves of a lower-yielding product and have gotten rid of things like (inaudible) securities that needed to be sold, et cetera. So we continue to look for opportunities. I would say it's not going to grow as fast as loans at all, but we do think that it will be a positive contributor, and we will look to grow it.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [66]

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Okay. And then a final question from me. With regards to the accounting change and the impact that a lot of banks have had on the stock-based compensation, is that something that won't impact you all until fiscal 2018?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [67]

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Correct.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [68]

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And would that be in the fiscal first quarter or calendar first quarter of '18?

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Andrew J. Micheletti, BofI Holding, Inc. - CFO, Executive VP, CFO of Bofi Federal Bank and Executive VP of Bofi Federal Bank [69]

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Fiscal quarter. We think the impact will be very, very, very small.

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Operator [70]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Mr. Johnny Lai for closing remarks.

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Johnny Y. Lai, BofI Holding, Inc. - VP of Corporate Development & IR [71]

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Great. Thanks, everyone, for your interest. And if you have any follow-ups, please contact me. Take care, and we'll talk in 90 days.

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Operator [72]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.