Axos Financial Inc (AX) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to BofI Holdings, Inc.'s First Quarter Fiscal 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions.

(Operator Instructions)

This conference is being recorded today, Tuesday, November 5, 2013. Now I would like to turn the conference over to Mr. Mark McPartland from MZ Group. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. Joining us today for BofI Holding, Inc.'s First Quarter 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 first quarter, and they will be available for answers to your questions after the prepared presentation.

Now before we begin, I'd like to remind our listeners that on the call today, prepared remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional statements in response to your questions. Therefore the company claims 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.

This call, again, is being webcast and there will be an audio replay available on the -- that you can find on the Company's Investor Relations website located at bofiholding.com. All the details of this call were provided in the conference call announcement and in the earnings press release earlier this morning.

At this time, I'd like to turn the call over to Mr. Greg Garrabrants, who will provide opening remarks. Greg, the call is yours.

Thank you, Mark. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to BofI Holdings conference call for the first quarter of fiscal 2014 ended September 30, 2013. I thank you for your interest in BofI Holdings and BofI Federal Bank.

BofI announced record net income for its first quarter ended September 30, 2013 of $12,182,000 up 35.5% when compared to the $8,989,000 earned in the first quarter ended September 30, 2012, and up 9.4% when compared to the $11,132,000 earned last quarter.

Earnings attributable to BofI's common stockholders were $12,104,000, or $0.85 per diluted share for the quarter ended September 30, 2013, compared to $0.78 per diluted share for the quarter ended June 30, 2013, and $0.67 per diluted share for the quarter ended September 30, 2012.

Excluding the after tax impact of net gains related to investment securities, core earnings for the first quarter ended September 30, 2013 increased 31.4% when compared to the quarter ended September 30, 2012.

Other highlights for the first quarter include total assets reached $3,284,000,000 at September 30, 2013 up $193 million compared to June 30, 2013, and up $667 million from the first quarter in fiscal 2013. Return on equity reached 17.73% for the first quarter. Total deposits reached $2,193,000,000 up $101 million compared to June 30, 2013.

Our loan units had another great quarter with $658 million in gross loans originated in the quarter. The $658 million of production consisted of $99 million of single-family agency-eligible gain-on-sale production; $13 million of single-family agency-eligible (sic -- non-agency-eligible) gain-on sale production; $244 million of single-family jumbo portfolio production; $50 million of multi-family non-agency-eligible gain-on-sale production; $75 million of multi-family portfolio production; and $178 million of C&I and specialty asset production. Our warehouse lending division originated $458 million of single-family production in the first quarter.

Despite a market that was generally a bit choppier for many of our competitors, the bank originated $641 million in the single-family, multi-family, and C&I lending groups, an increase of over $100 million over the linked quarter, despite a drop in the single-family agency gain-on-sale production.

I'm particularly pleased with our C&I lending business producing $142 million of production in the first quarter, almost double the number produced last quarter. The bank achieved good quarterly loan growth, growing the loan balances by 8% over the link quarter, and at a 32% annualized rate.

The excellent performance of our single-family jumbo, multi-family lending, C&I lending, and specialty finance groups, resulted in $258 million of net loan growth, an 11% increase over the prior quarter, and a 44% increase on an annualized basis.

However, this strong performance was offset by a reduction in the single-family agency and warehouse lending groups, ending of quarter balances that fell by $88 million, reducing the $258 million of growth in the single-family jumbo, multi-family, C&I, and specialty finance business to a net of $170 million of net growth. Still a respectable 32% annualized growth, but lower than the 44% annualized growth rate that would have been achieved without the one-time balance reductions in warehouse and agency pipelines.

Although the bank does not expect to grow its balance sheet by those higher percentages, this product can be sold to generate fee revenue in the future.

Although there may be small adjustments, both positive and negative to the single-family agency held-for-sale pipeline, and the warehouse lending pipelines, it is very unlikely that a reduction in those pipelines of $88 million in one quarter will reoccur. In fact, the warehouse lending group has a robust pipeline of new applications, and the single-family agency pipeline has risen from the end of September quarter until the end of October.

Single-family agency gain-on-sale revenue is particularly impacted by any pipeline adjustments, given that the pipeline is marked-to-market at the end of the quarter.

Our lending pipelines as of October 30, 2013 are at record levels with $425 million of jumbo loans, $154 million of multi-family loans, and $167 million of C&I loans fortifying the likelihood that the bank can continue to enjoy robust asset growth.

Because the bank sells its agency mortgage loans, and both sells and retains its single-family jumbo, multi-family, and specialty finance production, the bank has the ability to sell our jumbo single-family and multi-family loan production to offset any potential decline in agency mortgage banking income with mortgage banking income from other sources.

By way of example, the bank typically sells its multi-family loans in the secondary market in the 104 plus price range. If the bank decided to sell, the incremental multi-family production generated from the June 2013 to the September 2013 quarter, this would generate an additional $2.5 million in mortgage banking revenue in the quarter.

Additionally, these sales are generally much more profitable than agency gain-on-sale business. The net profit after all costs, including marketing, overhead allocations, and income tax for multi-family loans is approximately 100 basis points higher than agency production.

We are very bullish about loan volumes in our business generally. We are particularly bullish about the jumbo mortgage business because we believe that multiple regulatory and competitive factors provide strong tailwinds to our business.

Despite the occasional sporadic deal, the securitization market is not an effective alternative to balance sheet lending at this time. The enhanced capital requirements at larger banks are driving many of them to exit businesses and reprice loans, and many potential competitors are discouraged by the wave of complex regulations specifically related to the qualified mortgage rules coming into effect this January that are not well-correlated to the risk on individual loans.

The coming qualified mortgage rules fail to specify any particular loan-to-value ratio, and the income guidelines that were essentially copied from FHA guidelines are not well tailored to the unique and complex financial situations of high-end jumbo borrowers.

For this quarter, our non-interest income continued to show the diversity of our platform. This quarter our non-interest income, excluding securities and mortgage prepayment penalties is $6 million, consisting of $800,000 of mortgage banking income from single-family agency-eligible mortgage loans; $500,000 of mortgage banking income from single-family jumbo mortgage loans; $700,000 of mortgage banking income from multi-family mortgage loans; $3.1 million of income from the sale of structured settlements and other loans; $600,000 of prepaid fees; and $300,000 of other fees.

We are pleased with the increase in the credit quality at the bank. Our non-performing assets as a percentage of total assets are down from 82 basis points at the end of the September 2012 quarter to 55 basis points at the end of the quarter ended September 2013.

We are often seeing gain on the sale of our RAOs versus our portfolio marks on the relatively few non-performing assets we have, given the significant recovery in the housing market. Into the second quarter of our fiscal year that trend appears to be continuing. We continue to remain focused on credit quality at the bank, and have not sacrificed credit quality to increase originations. Combining the last two quarters, the bank has had no net charge offs, a trend not seen since 2007.

The low level of charge offs and favorable asset quality trends this quarter resulted in loan loss provisions of $0.5 million, down from $1.5 million last quarter.

For the first fiscal quarter's originations, the average FICO for single-family agency-eligible production was 769 with an average loan-to-value ratio of 64%. The average FICO for the single-family jumbo production was 725 with an average LTV of 61%. The average loan-to-value ratio of the originated multi-family loans was 59%, and a debt-service coverage ratio was 1.58 times coverage. At September 30, 2013, the weighted average LTV of our entire portfolio of real estate loans was 55%.

In the prepaid area, we have several programs that are in the process of implementation, which will further increase our fee income and generate low-cost deposits. Our deposit and other fee income outside of the prepaid area has also grown substantially over the fiscal year, and our pipeline of transactions with either finalized contracts or contracts in negotiations have the potential to significantly increase non-interest income.

We began originating structured settlement for sale last quarter, and ramped up sales this quarter, generating $3.1 million from the sale of structured settlements and other loans. We have significant opportunities to increase our income from the sale of structured settlements if we desire.

We continue to make progress in growing and enhancing our deposit franchise. Our goal is to increase our share of transaction accounts, and develop deeper customer relationships. We have made strong progress on changing the mix of our deposits to become more transaction focused.

From December 2011 to September 2013, we grew our checking account balances by 554%, our money market balances by 140%, while our certificate of deposit balances decreased by 43%. Transaction accounts now make up 61% of our deposit base, up from only 42% from a year ago, and have resulted in good growth in our interchange and other deposit fee income.

Our business banking group had over $467 million of total deposits at the end of the quarter, up from $314 million in the prior quarter ended June 30, 2013, and we reached approximately $0.5 billion of deposits in business banking this month. The business bank has about 2,000 accounts with 65% of balances comprised of checking accounts. We continue to foresee robust growth in our business deposit balances. Including the growth of both consumer and business checking, we have grown our checking account balances by over 51% this fiscal year.

We closed the Principal Bank transaction this quarter, which added approximately $173 million to deposits, and 8,400 accounts from Principal Bank, including over 7,000 checking accounts. The weighted average deposit cost of the transactional accounts is 43 basis points, and the weighted average total deposit cost is approximately 57 basis points. We paid no premium for these deposits and we assume them at par value.

Although our efficiency ratio isn't quite where we think it can be, or when our newer businesses and infrastructure investments reach scale, we feel very good about the cost management initiative we had undertaken over the past six months. This was not an initiative to downsize our employee base in any respect, and we continue to invest in our people. But want to ensure that we have best-in-class management of our expenses.

The impact of this initiative was evident in the reduction of our non-interest expense of $840,000 over the link quarter, despite robust asset growth. We have not accomplished this reduction by reducing our focus on scaling our operations, and we continue to invest in our people, processes, and our scalability.

We continue also to invest in our operational and risk management infrastructure to ensure that we are adequately prepared for the growth that we expect to achieve in the next fiscal year. We continue to make investments in our people, systems, and processes to ensure that we will appropriately manage our risk, and remain on sound regulatory footing as we enjoy the continued success of what we believe is the right business banking model for the future.

Now, I'll turn the call over to Andy, who will provide additional details on our financial results.

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today. It is available on line through EDGAR, or through our website, bofiholding.com. Second, I will discuss our quarterly results on a year-over-year basis, meaning fiscal 2014 versus fiscal 2013, as well as this quarter ended September 30, 2013 versus the fourth quarter ended June 30, 2013.

For the quarter ended September 30, 2013, net income totaled $12,182,000, up 35.5% from the first quarter of fiscal 2013. Diluted earnings per share was $0.85 per share this quarter, up $0.18, or 26.9% compared to the first quarter of fiscal 2013. Net income increased 9.4% compared to the fourth quarter ended June 30, 2013.

Excluding the after tax impact of gains and losses associated with our securities portfolio, core earnings were $12,025,000 for the quarter ended September 30, 2013, up 31.4% year-over-year from the $9,150,000 of core earnings for the first quarter of fiscal 2013, and about flat with the $12,046,000 in core earnings for the last quarter ended June 30, 2013.

Net interest income increased $5,625,000 during the first quarter ended September 30, 2013, compared to the first quarter of fiscal 2013, and increased $105,000 compared to the fourth quarter ended June 30, 2013. This was a result of increases in average interest-earnings assets and the average interest-bearing liabilities, as well as a decrease in the cost of funds.

The net interest margin was 3.86% this quarter, compared to 3.70% in the first quarter of fiscal 2013. The cost of funds decreased to 1.26%, down 26 basis points over the first quarter of fiscal 2013, and down 4 basis points compared to the quarter ended June 30, 2013.

Provisions for loan losses were $500,000 this quarter, compared to $2,550,000 for the first quarter of last fiscal year, and compared to $1,500,000 for the fourth quarter ended June 30, 2013. The decrease was the result of significantly lower charge offs, which decreased by approximately $1.9 million this quarter, compared to the first quarter of fiscal 2013. The benefit of the decrease in charge offs was partially offset by additional provisions needed for growth in the loan portfolio.

Non-interest income for the first quarter of fiscal 2014 was $6,976,000 compared to $6,761,000 in the first quarter of fiscal 2013, and compared to $7,866,000 for the fourth quarter ended June 30, 2013. The decline from the fourth quarter was primarily the result of declines in mortgage banking revenue. This decline in mortgage banking revenue was primarily offset by sales of structured settlements.

Non-interest expense, or operating costs for the first quarter ended September 30, 2013 was $14,514,000, compared to $11,532,000 in operating costs in the first quarter of fiscal 2013, and compared to $15,353,000 in operating costs for the fourth quarter of 2013.

For the quarter and prior period of fiscal 2013, salaries and compensation was up $1,413,000 related to additional staffing added since September 30, 2012, and an increase in professional services of $762,000. Data processing and internet expenses increased $614,000, and depreciation and amortization expense increased $384,000. These increases are primarily due to growth of the bank's lending and deposit operations.

Our efficiency ratio was 41.37% for the first quarter of fiscal 2013, compared to 39.43% in the first quarter of fiscal 2013, and compared to 42.8% for the fourth quarter of fiscal 2014. The efficiency ratio is calculated by dividing our operating expenses by the sum of our net interest income, and our non-interest income.

Shifting to the balance sheet, our total assets increased $193.4 million, or 6.3% to $3.2 billion as of September 30, 2013, up from $3,091,000,000 at June 30, 2013. The increase in total assets was primarily due to an increase of $176.1 million in loans held for investment.

Total liabilities increased by a total of $179.1 million, primarily due to an increase in deposits of $101 million, in addition to an increase in borrowings of $65.6 million.

Stockholder's equity increased by $14.4 million, or 5.4%, to $282.6 million at September 30, 2013, up from $268.3 million at June 30, 2013. The increase was primarily the result of our net income for the three months ended September 2013, which was $12.2 million, as well as vesting an issuance of RSUs, and exercise of options, which increase equity $1.6 million, as well as $0.8 million unrealized gain in other comprehensive income.

At September 30, 2013, our Tier 1 core capital ratio for the bank was 8.5% with $115.4 million of capital in excess of the regulatory definition of well-capitalized.

With that, I will turn the call back over to Greg.

Thanks, Andy. Operator, if you would open the call for questions, we'll take questions now.

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

Hi, good afternoon. Thank you for taking my questions.

I'm fine, Hugh. How are you?

Good, good. A little tired from the early plane ride. Just, I guess, I wanted to start off, I guess, with a question from the prepaid sponsorship programs. It seems like from the language in the press release where you guys talk about the exciting pipeline of stuff that is either under contract or in advanced discussions, is that -- the way I'm reading that is kind of that aside from the things that have already been announced, that you potentially have something that is under contract that has yet to be announced on that program. Is that correct?

Yes, that's correct. We have several programs, one particularly large one, with one of the biggest payroll card providers that we're in the process of implementing now. We haven't seen any fees from that yet. I think that it's likely we could see some fees in the second quarter from it of the fiscal year, but more likely would be the third quarter of this fiscal year.

And then we have advanced discussions with some very attractive large programs where contracts are popping back and forth and we'll see how that goes. But those are -- they take a while to get done, and they take a while to board, and there's integrations, technological and a lot of policy and procedure type work that has to go along with each one.

But the good part about those relationships is that they tend to be sticky. They're good for both the fee and deposit income, and they're -- and we are getting good traction with very brand name programs. I'm not prepared to tell you specifically which ones those are, but -- for competitive reasons, but yes. You're basic assertion is correct.

Okay. And as I think about kind of the costs involved with that, from what I understand is a high level of fixed costs, and so as you win these awards the variable costs that are associated with that should be more modest. Is that correct?

I agree with that completely, yes. I mean, although there is -- the level of the regulatory expectations surrounding those programs has definitely increased. But nevertheless there is a -- we still, that's still very much an incubator business for us, and we're investing a lot in the infrastructure side. And so the contribution margin from those should be very good.

Yes. And I understand that the H&R Block sponsorship program is kind of back in play for people to kind of go after and bid on -- obviously, I'm not looking for color on that, but with that particular transaction, if that were to be awarded to you at some point, is that more of a benefit for the 2015 tax filing season, or would there be any potential benefit in calendar '14?

I don't think it would be appropriate to comment on particular programs or program names, or those sorts of things, or speculate about impacts of things like that.

Okay. Okay, I understand. Looking at kind of the loan situation, with the information you gave us on the pipeline, it looks like there was a tremendous jump in the jumbo loan pipeline relative to the figures you guys gave as of July 25. Can you just provide us an insight in what you're kind of seeing with that particular product, and how the competitive landscape is shaping up?

Yes, you're correct about that. The way the competitive landscape is really shaping up is that the securitization market for 30-year fixed rate jumbos, although you know there's a recent article that one came out or whatever, it's effectively dead. The industry is in near, I think it's having a very hard time trying to figure out what to do with the QM rules, and understand how to deal with that issue.

The QM rules are, for those of you who aren't that familiar with them, they basically have taken FHA guidelines, which were designed for, I think, very standard type of borrowers, generally. Borrowers that had very high loan-to-value ratios, but very fixed situations, and rigid income structures.

So to people working at a company with some small bonuses and really no capital gains or other investment income, and so people are really trying to figure out how to apply those to jumbo loans. We think we've done that.

The other thing is that we've just gotten so much better from a data perspective with a lot of operational improvements that we've made. We've been able to get our products on the dashboards of such a greater number of loan officers and customers. And the customer base just continues to expand there, and our reputation continues to grow, and the folks that are running that business have done a really good job of getting out name out.

So, this is really just -- it's a lot of blocking and tackling about getting better, expanding the sales force. The other thing that they've done, is we have an outside sales force. They've also started an inside sales force with a very, I'd say, rigid protocol around follow ups, contacts, based on a CRM system that's linked to some data initiatives that we're doing, and things like that. And so, it's the market is very good, but also the execution around to bringing in the deals has been good, too.

It's lending, we're reading more about relaxing the credit standards, and kind of a creeping back of the 5% loan-to-value lending. Can you talk about what you're seeing there, and how that could play a factor in your ability to kind of continue to originate in that category?

I don't see anything of that kind at all. In fact, actually what's happened now with regard to these rules, has some significant benefits to us, and one disadvantage that I don't like. But in general, they're very good. And so what happens is that on January 1, these rules, the ATR rules, they're basically -- there's an ATR rule and QM rules, and it basically goes through and says you can't make no doc loans anymore. If you make interest-only loans, there's a variety of issues that can arise, and those sorts of things.

And effectively, what they've done, is they've, in my opinion, they've solidified our ability to continue to do the prudent originations that we have, and not allowed other institutions to come in and basically mess up this business by sort of racing to the bottom on credit. Because you can't any more do a -- it is illegal now to do a state-of-income loan. Doesn't matter if the loan is 30% loan-to-value ratio, you can't do it. And we never did that. We've always done full documentation loans.

I don't believe in low documentation, and no documentation loans. From my perspective, I want to see everything. If we're making a judgment and a trade off about a particular aspect of something, that's fine. But we can do that with the holistic picture, and have that picture documented.

So, I don't think it's that way at all. In fact I think actually what's happening is that the securitization market is still very tight, so those loans have to come through very clean. They're unable to digest any sort of differences that would arise, or any sort of complexity related to any borrower situation. And so, that -- it's actually the opposite. It's actually making balance sheet lending in the single-family mortgage arena. I think it's the best time in a long time.

And then you couple that with the reduction in loan limit potentials, and a variety of other factors that are around, and we feel really very good about that business.

Okay.

The one thing that's not great, is they effectively banned prepayment penalties. And I'm not -- we'd have a prepayment penalty on everything, generally, it was a one-year [soft]. It's not the end of the world, but it's sort of an intrusion that makes no sense. It's done really by a person who didn't understand option theory, right. So you end up having a little bit more -- harder time dealing with some of the optionality on some of the portfolio, because you don't have a prepay. We only had one for a year, though, so.

I guess prepayment penalties heading into the rising rate environment shouldn't be the worst thing in the world losing. The other question I had was with regards to there seemed to be a bit of a disparity on the end of period versus the average loan sequential growth, where it was more modest on the average balance sheet relative to the end of period. Was there anything in particular that was happening during the quarter where originations kind of got a little bit more back end loaded, or were some of the loan sales you were doing kind of more front end loaded?

I think there was some of that, some of the latter, but the biggest aspect was, was that we really -- we had a number of initiatives that we were putting in place that were really coming into bear around the June time frame. As those initiatives were coming forward, the pipelines were building, particularly in businesses like multi-family that have a long pipeline.

So, the tendency is that you get significant lag. So we ended up -- and then the C&I business is also growing rapidly as well, and so that growth just wasn't steady throughout the quarter, and ended up coming in mostly at the end. I think the good part of that is it really loads interest income for the next quarter, because it's a significant difference between the average balance and the ending balance, which is going to allow us to really have a nice top in interest income for the next quarter.

Right. Okay. Thank you very much. Very helpful.

We'll go next to Andrew Liesch, Sandler O'Neill & Partners.

Hi, guys.

Hi, Andrew.

Hi, Andrew.

So, looking at prepaid debit card fees. It looked like they were $830,000 in the last quarter, $600,000 this quarter. Is there any seasonality with the payroll cards?

Yes, there's some seasonality, and then there's -- there is. There's some movement there. It really is just some variations in that activity. But again -- look there's going to be some movement there. There's a great pipeline, but we just have to get those deals on board and get them going.

And then, just other parts of that banking service fees on other lines. I means it looks like it was down a total of $1.2 million or so. Would that mean that other C&I fees and things like that, other like C&I loan fees those were down as well? It just seems like a pretty steep drop.

Yes, those were basically related to some fairly large prepayment penalties that we had, or fees that we were able to book in the prior quarter related to some of the C&I lending. So that was what that was related to. The credits tend to be large, and in some cases, some of the credits are warehouse lines to the extent that somebody is able to, or desires to, repay those. Sometimes it triggers decent size prepayment penalty fees.

We're collecting a lot of fees, but obviously when we're collecting our upfront fees, we're amortizing it over the life of the loan. So we're not taking that in right away. So generally the type of fees you see there would be prepayment.

Okay. The -- flipping to the loan sale side, so it looked like the sales of, I guess, gain-of-sales of all three types declined pretty significantly this quarter. But I'm curious, did the jumbo and the multi-family sales is that driven by the ability to sell them in the market, demand in the market, or is it just your decision to keep on the portfolio like those two portfolios (inaudible).

No, it's definitely not driven by the market demand. There's very robust market demand for the loans at very good premiums, and these are just decisions that we make. We look at a variety of factors, we look at geographic and credit concentrations. We look at interest rate risk profiles, and we look at capital needs, and decide whether we'd like to generate the capital organically through earnings, whether we'd -- and how we're balancing out individual portfolios. So it's really -- those are really just decisions that we make.

Okay. And then on the agency side, seemed like that dropped a lot as well from, I think it was $3.2 million in the prior quarter. Are volumes, I imagine it's mostly refi, but are these volumes from Costco really drying up, and how does that look coming into the winter months?

Yes, the -- what happens with agency volume is that the pipeline is marked at the end of the quarter. So even if you're originating a decent bit, and you look at what the origination revenue would be, that revenue was pulled forward by what the pipeline -- by marking the pipeline to market in the prior quarter.

So, even if you have an okay origination, which I thought originations were obviously like the rest of the initiative they weren't very good, but what happens in that quarter is once it stabilizes, where you have a mark on that pipeline, as long as that pipeline stays steady, let's just say it was at $70 million at the end of the quarter, and it stays at $70 million, you'll be able to get the revenue generated from that entire amount of originations that occurred, assuming originations and loans that are sold are equal, because the pipeline at the end of the quarter is the same.

When you have a pipeline decrease, which is what we had this quarter, you don't get the origination revenue that you otherwise would have had, because you have to offset that origination revenue by the decrease in the pipeline. So the nature of the way that those are accounted for generated the result. So we will see stabilization there. That business is really -- I wouldn't expect it to be great, next quarter.

We have some very interesting things we're working on that are potentially very significant. They're related to some partnerships that we think would drive a lot of volume. But I'm not sure that those would be in place. I think it's relatively certain that they wouldn't be in place for this current quarter, the second quarter of the fiscal year.

So, it was a -- the other element that we're looking at is what's happening in the industry right now is an adjustment process that usually occurs. And what happens is, the weaker competitors price themselves to the point where they're almost pricing the loans at losses. And they're also engaging in marketing spending and other activities that -- to sustain themselves. And so what happens is the profitability in the industry gets pretty low for a while. And we're kind of going through that now, and capacity is exiting quite a bit.

And so I expect that that will get better, as we speak. But we're also not -- I've directed the gentleman who runs that group, I don't really want to chase business for business' sake. We have only so many people, and frankly, as we look at our business lines and the ability to grow, and grow infrastructure appropriately, when there's other more profitable things to do, I want to do that.

That group will stay and I think we'll be able to get it moving forward, but I don't think this quarter, the second quarter, is going to be that great, either. But I think the thing to consider is that, as I said in my prepared remarks, we make 100 more basis points on selling a multi-family loan, maybe even a little bit more, than we do on an agency loan. And so, if you look at the increase in multi-family production from June to September, and then you decide -- let's say we decided to sell that, it's much more profitable for us than having that agency mortgage banking volume there now.

Look, I'd obviously like to have that back, because then we would have been able to grow earnings, instead of 35%, it would have been 55%. But that's something we'll have to go through and work our way through this in the next quarters.

Right. Thank you, Greg. That's very helpful.

Sure.

We'll go next to Julianna Balicka with KBW.

Good afternoon.

Hi, Julianna.

Hi, how are you?

Good.

I have a couple more questions. There's been some good ones already asked. But in terms of the structured settlement loan sales, could you kind of talk -- I know it's was added last quarter as a sale, and then it's kind of been ramped up this quarter clearly. Could you talk about the run rate you're thinking about? How much more gains you have left, and what you have on your books right, or how much are you originating to refresh that pipeline?

Sure. So, in the fourth quarter we originated $19 million and sold $3.8 million. This quarter we originated 16 and sold 23. The -- we decided to spend -- when we were looking at our interest rate risk, one of the things that the structured settlements do is they do increase interest rate risk, because they tend to be the longest duration asset we have.

So, we really didn't want to lock long borrowings in the quarter based on where rates were, and we felt comfortable that they were going to come in a little bit. So, the decision of whether, of what assets we decide to monetize in any one quarter, is as I said, a decision that is something that we make looking at a variety of factors.

So, we sold a little bit more than we originated in this quarter, but not much. And we didn't sell really much multi-family, and that was a decision just made based on credit concentrations and those sorts of things. What the mix is, we look at that on a regular basis and can adjust it. But if we -- the short answer is if we wanted to generate steadily forever $2.5 million of gains in structured settlements, it wouldn't be a problem.

But I don't know we're going to do that, that just -- we look at these things on a regular basis and from a variety of factors.

So, between the different kind of loans that you could mark in any given quarter, and it's not a very [strategy] thinking about, I guess, just kind of thinking about a run rate of $2 million to $3 million in gains from some kind of loan sales, would be a reasonable expectation?

Yes, I think that that's a reasonable expectation. And one of the things -- one of the issues that is really positive is obviously is the size of the jumbo pipeline right now, we need to continue to look at that, and look at our concentration there as well. I mean I don't want to get ahead of ourselves. We generally feel very good about the credit quality of our jumbo loans, but that pipeline is on its way to $0.5 billion. So that's also something we have to think about too.

You have to obviously there's three legs of the stool in banking, and deposits and loans and all that stuff has got to come along together. So, we always -- there's those aspects of thinking about just size of balance sheet, and those sorts of things.

And then in terms of your loan-to-deposit ratio, and just the loan-to-deposit balance [that has run], it starting to creep up a little bit, so how are you thinking about that given your strong long growth trajectories, and some of the deposit initiatives that you have in the pipeline? Is there a trigger point where it gets a little too high, or I mean, how are you managing that?

Well, we don't particularly target a loan-to-deposit ratio. What we do is we obviously have to worry about interest rate risk and liquidity, and that is determined in a number of different ways. Obviously, the interest rate risk, we continue to look at that. And we could obviously utilize deposits in order to lower interest rate risk, if those deposits have the right characteristics. But we also think that the utilization of long-term borrowing is also a very appropriate way to fund loans, given that the loans that we originate are available for FHLB borrowing.

But that being said, obviously, it's always a balance and we have to continue to ensure that we raise appropriate deposits in order to continue to grow the balance sheet. So, it's going to be a little bit of both. But I don't -- I'm not a fan of the loan-to-deposits and securities to borrowing, because there's all sorts of things that you can do in there that don't make those ratios make sense.

So, we look, as I said, we look at the liquidity aspects of what we're doing, and we also look at the interest rate risk, and that's how we manage that.

So, from the way that you look at it, from where you stand right now kind of thinking about your long growth rate going forward, it's in an 8% linked quarter on an annualized, could that then continue at the current pace, or are you going to have to do something to decelerate it and/or change some other aspect like on the liability side, or at this point in time --

I think a 25% and 30% loan growth rate is highly sustainable from a deposit structure perspective, and we feel comfortable we can do that. I mean, quite candidly, what we've been trying to do is to dramatically improve our deposit mix, and I think we've done a really good job with that. We obviously have the ability to raise our deposits, essentially, at will. I think the question is is, then you have to convert and take those deposits and create the deposit characteristics that you'd like to have there.

And so, when I look at where we are from a business banking perspective, and the rapid growth, I feel really good about that, and I feel really good about what we're doing on the checking side. But we have some interesting initiatives that can enhance deposits, and I'd like to make sure that those are fully played out. I think the typical high-yield savings strategy is a highly effective one. One that we know how to do well, and certainly, given our loan rates, we can maintain our net interest margin effectively, utilizing a high-yield savings and CD strategy. But I'm continually working to do that less.

Now, I don't think it's bad if we do, and if you look at the Hudson Citys and those sorts of things, they've been very effective at that. I just don't really think consumer CDs are attractive in comparison with wholesale CDs, because the wholesale CDs have no ability to be broken. They provide better interest rate characteristics and they are lower yields in general.

So, we've basically stayed away from the funding strategy of utilizing high-yield savings accounts and CDs, and growing our deposits, focusing very much on transactional accounts. Now, and that's resulted in dramatic shift in the mix. At some point, we may use some of those techniques to raise deposits, and I don't think there's anything wrong with it. We can do it in a safe and sound manner. But we definitely have the ability to do it.

Understood. And then in terms of the re-mix that we saw this quarter, there was a nice decline in the jumbos, is there any other upcoming maturities in your CD book that we can think about as potentially, intentionally running off in the near term?

[Oh what Andy meant] with CDs. We did have a very nice, what was it $30 million of that repo go --

When you look forward next 12 months, we've got $75 million of the repo running off at a rate of 4.23%. So, we're finally at the end of those long duration borrowings, but again $75 million out of the repo line, again, this is repo not CD. But nonetheless, it's obviously very, very strong.

Yes, it was a 4 something percent rate. Andy's as I said, I don't know if I said this, if you remember before I said, Andy's goal was to have his career outlive those borrowings, and some all intents and purposes, it appears that actually is going to occur. Nobody laughs at my jokes. But it's really good, right. It's obviously a $75 million at 4 something percent is nice to get rid of, right?

Very good. And then switching gears just for a second, and then I'll step back. In terms of the cost management initiative you referenced in your prepared remarks, the benefit was already seen. Is there any more legs to that benefit that we can think about for the next couple quarters?

Yes, I think so. Yes, absolutely. But I would say that, more broadly, what the benefit of the structure that we created there is that we can manage our growth in a manner that will allow us to invest in the right things in the right way. And so, whenever you grow, obviously there's elements of that growth sometimes that are sometimes small, sometimes larger, that you need to ensure you have the appropriate controls around.

And so, the process that we've set up with a very strong vendor management system, which is something that the regulators are very keen on, but also has a great ability to be utilized to reduce cost, a specific method of negotiating with vendors, a very clear lines of accountability for P&Ls through dashboarding. And then through regular reviews of those expenses and processes and making them transparent and then going through the negotiation processes with vendors. I think it's really just good business practice.

I wouldn't say we were a little bit sloppy, because I think we still are doing better than most, but we're really trying to raise that to a world-class level so we can continue to grow, and do it effectively, and not waste money.

So I do think that, I think that there will be benefits that you'll continue to see, whether or not we'll see declines in non-interest expense, quarter-over-quarter when we're growing at a 25%, 30% growth rate, I can't -- I don't know if that's going to be the case, but what you will have is, hopefully, the ultimate goal, right, is to bend that curve down, and to get a declining efficiency ratio. And also really to make sure that there's so many opportunities out there, and they're so big, and they're so important. And sometimes, you have to make sure that you don't skimp on people who can go get those opportunities, or people who can ensure that you've maintained good regulatory relations as well. So, we just want to spend money on the right stuff, and that helps us do that.

Very good. Well, thank you very much for taking my questions.

Thank you.

(Operator Instructions). We'll go next to Jim Fowler with Harvest Capital.

Hello, Greg, how are you?

Hi, Jim, how are you doing?

Doing well, thank you. I've just a couple of details. I'm sorry if you might have mentioned this, jumping between a couple of calls. The agency mortgage rate to borrowers is pretty observable, but the jumbo rate is not. Any sense of where you're pricing jumbo, your jumbo hybrid versus an agency hybrid, please?

Yes, our jumbo pricing on our net loan rate tend to be in like the mid-4 to the low-5 ranges on super jumbos. And it depends, there's -- it's a fairly complex rate sheet. But it's a definite -- there's rates in the 3s for purchase business below certain loan-to-value ratios. And then there's rates in the 5s for certain types of borrowers, and those sorts of things. So there's risk-based pricing that's utilized in that line of business.

As you think about it, and then you can circle back, but as you think about it for this upcoming quarter and the pipeline, I mean is there a number, sort of a weighted average coupon, or mortgage rate you might have us think about for modeling purposes?

Yes, I think like on 4.75ish or maybe even a little bit higher than that, that sort of range. But that's conservative.

Yes, that's perfectly fine. I wanted to ask you a real quick question on the structured settlements. So, I'm just doing the math. It looks like the fourth quarter premium was about 22 points. The first quarter was about 13 points. Is there anything between those 2 sales, the amounts that sold in each quarter that's different? It looks like if I just do bond math, it's kind of a mid-teens coupon you're selling, but I can't tell between, because the difference -- there's such a large difference in the premium between the two quarters.

Yes, well, one of the differences is we sold some pretty long duration, and we had a small amount. So we were able to basically -- the first, the fourth quarter was to really push a long duration asset out. That was the goal. We had some deals that we did that were pretty far out. And so, when you do a little bigger sale, you're going to get a bigger max. And so the weighted average life is going to be different.

And then also there -- so that's one difference. The other difference was that the actual rate on the sale. The coupon rate that we're originating, really, isn't that sensitive to the underlying market rate. In fact, I'd say it would be not bold to say it's insensitive to that market rate, but yet the premium isn't insensitive to that market rate. So the date of the sale, the market had moved from a benchmark rate perspective, and that's part of the difference as well. And those two differences account for the difference in premium.

Fair enough. And this has been a two quarter program, I mean, to date so far. So if I just look at the difference between what you originated and what you sold these past two quarters, the difference will be what remains in the portfolio to be sold?

Oh, no. Oh, no, no, no, no, no, no, no, no. We've, no, we have a total of $91 million, $91 million at the end of September. No, we've been, this is an asset class we've been in now for 6 years. And we like it because it's super safe. We've liked the duration generally, but -- we've also -- with a call to hold this, although we funded it with matched borrowings generally has been right. But at some point, obviously, rate movements do create sensitivity there. So we just need to think about balancing it out. And that was what I was talking about from an interest rate with perspective.

Whether you -- because the weighted average lives there more like 10 years, and weighted average lives on multi-family hybrid during the 3 range, so it's just a very different decision when you're thinking about your portfolio risks, and how you're going to deal with each of those asset classes.

And last question, if I might. You mentioned under QM you can't get prepayment penalties, and no one can get prepayment penalties on residential. I'm assuming you can still get prepayment penalties under your multi-family.

Oh, yes, absolutely. And that's actually an essential characteristic of why we can sell those loans and in the 104 plus range, and there's no regulation there. It's a purely single-family regulation as you stated.

Good. Enjoy your evening with the group, and good meeting tomorrow.

Thanks, nice talking with you, Jim.

And at this time, we have no other questions.

Okay, well great. Well, thank you very much, and appreciate the time and we'll talk to you all next quarter. Thank you.

This does conclude the conference. We thank you for your participation.