Axos Financial Inc (AX) 2014 Q4 法說會逐字稿

Good afternoon and welcome to the BofI Holding, Inc.'s earnings conference call for the quarter ended June 30, 2014.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding, Inc.'s fourth-quarter fiscal 2014 earnings conference call. (Operator Instructions) This conference is being recorded today, Thursday, August 7, 2014.

Now I would like to turn the conference over to Johnny Lai from MZ Group. Please go ahead, sir.

Great. Thank you and good afternoon, everyone. Joining us today for BofI Holding, Inc.'s fourth-quarter financial results conference call with 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 the operational results for the fourth quarter ended June 30, 2014, and they will be available to answer questions after the prepared presentation.

Now before we begin, I would like to remind our listeners that on this call prepared remarks may contain forward-looking statements that are subject to risk and uncertainties, and that management may make additional statements in response to your questions. Therefore, the Company claims protection from the Safe Harbor for the forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of BofI Holding, 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 on Forms 10-K, 10-Q, and 8-K with the SEC.

The call is being webcast and there will be an audio replay available on the Company's Investor Relations website located at www.BofIHolding.com. All of the details of this call were provided on the conference call announcement in the press release today.

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

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I would like to welcome everyone to BofI Holding's conference call for the fourth quarter and fiscal year ended June 30, 2014. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced record net income for its fourth quarter ended June 30, 2014, of $16 million, up 43.8% when compared to the $11.1 million earned in the fourth quarter, June 30, 2013, and up 9.6% when compared to the $14,600,000 earned last quarter. Earnings attributable to BofI's common stockholders were $15.9 million or $1.09 per diluted share for the quarter ended June 30, 2014, compared to $0.78 per diluted share for the quarter ended June 30, 2013, and $1.00 per diluted share for the quarter ended March 31, 2014. Excluding the after-tax impact of net gains related to investment securities, core earnings for the fourth quarter ended June 30, 2014, increased $4.1 million or 33.7% when compared to the quarter ended June 30, 2013.

For the year ended June 30, 2014, net income was approximately $56 million, up 38.9% over the $40.3 million earned for the quarter ended June 30, 2013. Other highlights for the fourth quarter include: total assets reached $4.4 billion at June 30, 2014, up $1.3 billion compared to June 30, 2013; return on equity reached 18.14% for the fourth quarter.

Our net interest margin was 4.02% for the quarter ended June 30, 2014, a 13 basis point increase over the third quarter ended March 31, 2014, and a 13 basis point improvement over the fourth quarter ended June 30, 2013. Total deposits reached $3 billion, up by approximately $950 million compared to June 30, 2013.

Our lending groups had another great quarter, with $942 million in gross loans originated in the fourth quarter. As a result, the Bank achieved good quarterly loan growth, growing loan balances by 13.9% over the linked quarter and at a 55.6% annualized rate. The excellent performance of our lending groups resulted in $431 million of net loan growth.

The $942 million of production consisted of: $71 million of single-family agency-eligible gain-on-sale production; $9 million of single-family nonagency-eligible gain-on-sale production; $363 million of single-family jumbo portfolio production; $21 million of single-family jumbo gain-on-sale production; $67 million of multifamily nonagency gain-on-sale production; $81 million of multifamily portfolio production; and $330 million of C&I and specialty asset production.

Total originations for the year ended June 30, 2014, reached $3.1 billion, an increase of 41.3% over the year ended June 30, 2013, originations of $2.1 billion. Total assets reach $4.4 billion at June 30, 2014, up $1.3 billion compared to June 30, 2013, an increase of 42.5%.

As of August 1, 2014, the lending pipeline remains robust for the single-family pipeline of $405 million, $124 million of multifamily loans, and $258 million of C&I loans. We remain highly focused on credit quality at the Bank and have not sacrificed credit quality to increase originations nor loosened our underwriting standards to gain volume.

For the fourth fiscal quarter originations, the average FICO for single-family agency-eligible production was 768 with an average LTV of 65%. The average FICO for the single-family jumbo production was 716 with an average LTV of 59%.

The average LTV of the originated multifamily loans was 61% and the debt service coverage was 1.41% -- 1.41. At June 30, 2014, the weighted average LTV of our entire portfolio was 55%.

In our single-family portfolio, we continue to originate only full documentation, high credit quality, low loan-to-value, jumbo single-family mortgages and have not reduced our loan rates for these products. Instead, we focused on increasing the scale and efficiency of our sales and marketing efforts and focused on turnaround time to cater to an increasingly purchase-oriented marketplace.

With our C&I yields coming in at higher rates than our single and multifamily loans, we believe that we can continue to grow our portfolio at similar yields in this coming year as we have in the prior year and maintain our conservative credit guidelines.

I am sometimes asked if I see increased competition in our lending areas. The answer is that we have faced robust competition in our lending areas for several years. In fact, I believe we can continue to pull further away from our competition as we continue to refine our systems for processing loans efficiently, enhancing the accuracy of our propensity models to allow us to better target clients with a greater likelihood of purchasing, and adopting more sophisticated CRM tools to assure our sales teams are working efficiently.

We have spent significant time and effort to develop our multifamily lending system and fully convert all commercial real estate production to that system. We have established an enterprisewide CRM that, when fully implemented, will allow our lending and deposit teams to better cross-sell to our customers and better manage our people to enhance productivity.

The result of these efforts are partially present in this year's results, but there is substantially more growth to be achieved from leveraging these investments in the coming years. We have scalable systems that we can leverage across our lending platforms for further growth.

For this quarter, our noninterest income continued to show the diversity of our platform. This quarter our noninterest income, excluding securities and mortgage prepayment penalties, is $4.5 million, consisting of: $1.4 million of mortgage banking income from single-family agency-eligible mortgage loans; $400,000 of mortgage banking income from single-family jumbo mortgage loans; $900,000 of mortgage banking income from multifamily mortgage loans; $600,000 from the sale of structured settlements and other loans; and $1.2 million from prepaid card and other fees. We continue to enhance our sources of fee income by increasing our loan production available-for-sale, increasing fees on our cash management accounts and interchange income on deposit accounts, and increasing our prepaid fee income.

Because a couple of banks that partner with prepaid card providers have received regulatory orders for compliance and Bank Secrecy Act related issues, we have received a few questions related to how our strategy compares to other program managers, and whether similar concerns exist at our Bank. We have a different core philosophy to the way we run our prepaid sponsorship business compared to that of our competitors.

Our prepaid sponsorship business has been built methodically over the past 3 years with a philosophy to work only with the largest program managers, that have a sophisticated understanding of the operational and regulatory risk management processes required to run a successful and compliant prepaid card business. By partnering with only a small number of companies committed to investments in people, systems, and processes, we ensure that our prepaid card business is profitable and compliant.

We have made significant investments in our overall compliance infrastructure over the past several quarters, including BSA and AML compliance. We believe that we are on the same page with our regulators about their expectations.

Each bank that works with prepaid program managers has a different level of existing BSA demands, based upon the number of programs, program types, and level of partner sophistication. We conduct extensive due diligence on every program prior to signing an agreement and turn down all programs that do not meet our stringent standards. We have no regulatory limitations on our prepaid or other third-party businesses.

We announced two agreements with H&R Block in April: the acquisition of approximately $500 million of IRA and prepaid deposits from H&R Block Bank; and a program management agreement to provide three financial products that H&R Block Bank currently offers -- refund transfers, Emerald Advance loans, and Emerald prepaid cards. We mentioned that the projected annual revenue from the program management agreement is estimated to be between $26 million and $28 million.

We believe the strategic and financial benefits from this relationship with H&R Block are extremely attractive. Although we are awaiting regulatory approval, we believe that we will be able to close this transaction in time to perform the services for H&R Block before the tax season. Of course, neither the potential approval nor timing of the transaction is known with certainty.

We are pleased with the increase in the credit quality at the Bank. Our nonperforming assets as a percentage of total assets are down from 0.66 basis points at the end of the June 2013 quarter to 46 basis points at the end of the quarter ended June 2014.

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. Transaction accounts now make up 66% of our deposit base, up from only 37% from a year ago.

The Bank's deposit base as at the end of June 30 quarter is approximately 74% checking and savings, prior to the acquisition of H&R Block Bank. On a pro forma basis, assuming the H&R Block deposits were added to the deposit mix as of the end of June 2014 quarter, our transaction accounts would equal 87% of our deposit base and reduce our average cost of deposits by 10 basis points.

Of the 26% of our deposits that are CDs, over 24% have durations over 5 years or more.

Our business banking group had over $1.4 billion of deposits at the end of the quarter, up from $1.1 billion of deposits in the prior quarter ended March 31, 2014. The business bank has over 2,800 accounts, with 84% of balances comprised of checking accounts. We continue to foresee robust growth in our business deposit balances.

Including growth of both consumer and business checking, we have grown our checking account balances by approximately 330% this fiscal year. We offer a strong value proposition to our consumer and business bank deposit customers that does not rest on any single attribute. Because we are able to provide customer service that is equal to or superior to what branch-based bank competitors offer, the average longevity of our deposit customers is very comparable to that of our peers, and in many cases extends beyond that.

We achieved a 34.87% efficiency ratio this quarter despite ongoing investments in technology, personnel, and compliance infrastructure to support our growth in existing and new businesses. Our ability to maintain an efficient and scalable cost structure is a function of our culture of continuous operational improvement and ongoing cost management initiatives that we have undertaken at the Bank.

Now I will 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 8-K filed with the SEC today is available online through EDGAR or through our website at BofIHolding.com. This also includes unaudited financial schedules.

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 June 30, 2014, versus the third quarter ended March 31, 2014. Then I will briefly discuss the results for the fiscal year.

For the quarter ended June 30, 2014, net income totaled $16,010,000, up 43.8% from the fourth quarter of fiscal 2013. Diluted earnings were $1.09 per share this quarter, up $0.31 or 39.7% compared to the fourth quarter of fiscal 2013.

Net income increased 9.6% compared to the third quarter ended March 31, 2014. Excluding the after-tax impacts of gains and losses associated with our securities portfolio, core earnings were $16,111,000 for the quarter ended June 30, 2014, up 33.7% year-over-year from the $12,046,000 of core earnings for the fourth quarter of fiscal 2013, and up from the $15 million in core earnings for the last quarter ended March 31, 2014.

Net interest income increased $12,491,000 during the fourth quarter ended June 30, 2014, compared to the fourth quarter of fiscal 2013; and it increased $4,833,000 compared to the third quarter ended March 31, 2014. This is a result of increases in average interest-earning assets and average interest-bearing liabilities as well as a decrease in cost of funds.

The net interest margin was 4.02% this quarter, compared to 3.89% in the fourth quarter of fiscal 2013 and the same 3.89% in the third quarter of fiscal 2014. The cost of funds decreased to 109 basis points, down 21 basis points from the fourth quarter of fiscal 2013, and down 9 basis points compared to the quarter ended March 31, 2014.

Provisions for loan losses were $2,250,000, $1,500,000 for the fourth quarter of last fiscal year, and $1,600,000 for the third quarter ended March 31, 2014. The increase this quarter was a result of the strong growth in the loan portfolio.

Noninterest income for the fourth quarter of fiscal 2014 was $4,723,000, compared to $7,866,000 in the fourth quarter of fiscal 2013, and compared to $5,212,000 for the third quarter of fiscal 2014. Lower agency mortgage refinancing volumes resulted in decreased mortgage banking gains in fiscal 2014 compared to fiscal 2013. Compared to the third quarter ended March 31, 2014, the decrease is primarily the result of reductions in other gains on sales.

Noninterest expense or operating costs for the fourth quarter ended June 30, 2014, was $15,766,000, compared to $15,353,000 in operating costs for the quarter ended June 30, 2013, and compared to $14,347,000 in operating costs for the third quarter of 2014. The year-over-year increase was mainly a result of an increase in compensation expense of $733,000 related to additional staffing added during the year.

Also, an increase in professional services was $69,000; advertising and promotional expense increased $97,000; occupancy and equipment expense increased $56,000; and an increase in data processing of expense of $474,000 was all partially offset by a decrease in other general and sdministrative expenses of $1 million. These increases are all primarily due to the growth of the Bank's lending and deposit operations.

Our efficiency ratio was 34.87% for the fourth quarter of 2014, compared to 42.8% recorded in the fourth quarter of 2013, and compared to 35.10% for the third quarter of fiscal 2014. The efficiency ratio is calculated by dividing our operating expenses by the sum of our net interest income and our noninterest income.

Now turning to our annual results, as Greg mentioned, net income was $55,956,000 for the year ended June 30, 2014, up 38.9% over the $40,291,000 earned for the year ended June 30, 2013. Earnings attributable to BofI's common stockholders were $55,647,000 or $3.85 per diluted share for the year ended June 30, 2014, up 41% from the $39,456,000 or $2.89 per diluted share recorded for the year ended June 30, 2013. Core earnings were $56,930,000 for the year ended June 30, 2014, up 37.2% year-over-year from the $41.48 million core earnings for fiscal 2013.

Net interest income increased $35,469,000 during the year ended June 30, 2014, compared to fiscal 2013. This was a result of increases in average interest-earning assets and average interest-bearing liabilities as well as a decrease in the cost of funds.

The net interest margin was 3.95% this year, compared to 3.79% in fiscal 2013. The cost of funds decreased to 1.17%, down 22 basis points from fiscal 2013.

Provisions for loan losses were $5,350,000 this year, compared to $7,550,000 for fiscal year ended June 30, 2013. The decrease was the result of lower charge-offs, partially offset by additional provisions needed for growth in the loan portfolio.

Noninterest income for the fiscal year ended June 30, 2014, was $22,455,000, compared to $27,710,000 in fiscal 2013. Decreases in sales of agency loans resulted in lower mortgage banking gains, and that is the primary reason for the variance year-over-year.

Noninterest expense or operating costs for the fiscal year ended June 30, 2014, were $59,933,000 compared to $53,587,000 in operating costs for the year ended June 30, 2013. The increase was mainly the result of: an increase in compensation expense of $3,366,000 related to additional staffing added during the year; an increase in data processing and Internet expense of $2.6 million; an increase in professional services of $1,890,000. All of those increases were partially offset by a decrease in other general and administrative expenses of $1,922,000.

Shifting to the balance sheet, our total assets increased $1.3 billion or 42.5% to $4.403 billion as of June 30, 2014, up from $3.090 billion at June 30, 2013. The loan portfolio increased a net of $1.275 billion, primarily from loan portfolio originations of $2.3 billion, less principal repayments and other adjustments of $1.022 billion.

Total liabilities increased by $1.2 billion or 42.9% to $4.032 billion at June 30, 2014, up from $2.8 billion at June 30, 2013. The increase in total liabilities resulted primarily from the growth of demand and savings deposits of $1.2 billion and growth in FHLB borrowings of $319 million, partially offset by a decrease in time deposits of $268 million and a decrease of $65 million in securities sold under agreements to repurchase.

Stockholders equity increased by $102.5 million or 38.2% to $370.8 million at June 30, 2014, up from $268.3 million at June 30, 2013. The increase was primarily the result of $56 million in net income for the fiscal year, and the sale of common stock through our ATM offering of a net $41.6 million.

At June 30, 2014, our Tier 1 core capital ratio for the Bank was 8.66%, with $161.6 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. I appreciate that. Operator, if you can open the line to questions, that would be appreciated.

(Operator Instructions) Hugh Miller, Sidoti.

Hi, good afternoon. I guess starting off, you guys gave some commentary with regards to the H&R Block transaction; all going according to plan. I think you guys mentioned that you anticipate that it would close prior to the tax season.

Can you just remind us again when that tax season starts? I believe that would indicate the Fall, but I just wanted to make sure.

Well, there is some time frame before the Fall that we would require for integration, so that is really the statement that we feel comfortable making. And I think the regulators understand that time frame.

That doesn't mean that the transaction is approved. It is still going through that process, and it is subject to a potential that it doesn't. But we believe, based on the information that we have now, that we will be able to have that occur.

But it would be -- let's put it this way -- I think it would have to be in the fourth quarter of the calendar year in order to enable us to do those things. Because there are system and process changes that have to be made in advance in order for H&R Block to stand it up.

Okay, so some time in the fourth calendar quarter is when you are anticipating a close.

We would hope that would be the case, and that is our best information.

Okay. As I take a look at the sequential rise in warehouse loans in the quarter, can you just talk to us about the seasonal aspect of that? What are the yields on those loans? How should we be thinking about that on a go-forward basis?

Sure. I will have Andy give you a little bit more color on the yield side. But just like our own mortgage banking, the pipelines and originations have increased 51% quarter-over-quarter. For us, we went from $47 million to $71 million.

Our customers are also experiencing a rebound. We have good demand for that product and quite a few new lines in the pipeline.

It can tend to have some cyclicality. I don't think -- I think that cyclicality is really more -- it is partially based on the selling season, which has come through a bit. And won't -- it will go into probably a little bit more of a downturn from the purchase side.

But we are seeing good of volumes in our own business on the agency side and good volumes in our customers' business, and there is a really nice pipeline. We have some products that make our warehouse lines unique, and we are able to charge a little bit more for those products.

So it tends to be the case that, if it is a specialty jumbo-type product where we either have relationships that are proprietary or we may be buying some of those lines ourselves off the lines, that would tend to have a higher rate of interest than just simply straight through agency.

Rate-wise, Hugh, we are seeing it bounce between 4.2% and 4%. Last quarter it was 4.06% on a weighted average basis.

That is not including fees, though, right?

Right. That is not.

We get fees for loans, so when you -- we look at that as an all-in yield. And the all-in yield is higher because there are fees associated with the processing of every loan.

Okay. As we think about some of the pipeline increase in C&I, I wasn't sure if that was pure C&I, or C&I and other, including the warehouse on the pipeline side. If we take a look at just the increase in C&I loans, in and of itself, was it just a bit more modest? I think up 4% or so on a sequential basis.

I was wondering what you guys are seeing there. Is it just a function of now you're seeing those originations come through in July and August? Or was it just more of a categorization thing, where in the pipeline you were including other things outside of pure C&I?

No. Well, so, warehouse lending pipeline isn't actually included in any numbers we are disclosing. I suppose we could; it just tends to be difficult, because you often open large lines and then it takes quite a long time to get a product on those lines.

So we are not actually -- the $330 million of -- well, the C&I lending pipeline of $258 million that we are talking about is definitely not including any warehouse lines for our typical agency and single-family warehouse business. What it does include is it does include our lender finance facilities that are outside of the warehouse lending group for more atypical sorts of assets that more have an ABL flavor.

So, frankly, I suppose you could argue you could throw them all together; but we just haven't. So that would be, for example, if we are lending money on behalf of a consumer lender that is lending money; that would be -- those would be in there. Certain types of the structured settlement and lottery production is there. And that is really -- so it doesn't include the single-family warehouse.

Okay. So is it safe to then assume that you are seeing a meaningful increase in production of C&I so far in the first fiscal quarter? And what are the yields on those loans that we are seeing right now?

Yes, I think it is fair to say that we are seeing an increase in production. Obviously those loans, it depends on often the line size, which is included in the complete -- the $258 million includes the total line size of the loans.

Obviously, those loans don't draw down immediately. So there is often buildup and time frame associated with getting full interest-earning assets on those.

And rates tend to be higher. Generally, I would say on the low end they're in the mid-5%s and they can get into the -- all the way through the 6%s, into the highs 6%s.

Okay. Then as I consider those factors and obviously the addition of the H&R Block transaction, should that obviously get completed, how are you guys thinking about the stickiness of the NIM here?

And as you consider just eventually moving into a rising rate environment, outside of what you are currently doing, how are you thinking about that, in terms of just the liability sensitivity of the balance sheet? Is that something that you are considering making adjustments to? Or do you feel as though the mix shifts in both deposits and loans should take care of that for you?

Well, there is a lot of questions packed in there.

Sorry. Sorry about that.

Let me unpack them a little bit. I will start with the -- from a -- obviously at 4.01%, if I were going to guide you guys, I might guide you down 5, 10 basis points or something. Simply because -- not because we have adjusted loan rates down, but it is easy to have payoffs and movements. Structured settlements and lotteries are often fairly high rates, and if they move around a little bit you can have some sort of movements temporarily.

We did do some borrowing in preparation for the H&R Block deposits, because our business plan isn't to increase our size of the balance sheet with securities or anything from receiving that lump of deposits.

With regard to your NIM compression as a result of rising rates, remember, if you are a -- we are -- because we have grown our deposit base so rapidly, we have a higher rate of interest or a better value proposition for customers from an earnings credit perspective than generally other banks are paying. So in order to have anyone leave or have movement from a standpoint of higher rates, you have to have those rates become meaningfully higher; and you would have to have other banks compete; and you would have to have those folks leave. That is not going to be happening within the first 100 basis points of movement at the Bank, I don't believe.

Now with regard to this general interest rate risk, I will have Andy go through some of the numbers there. But it remains good, and we always obviously think about different sensitivities.

What we have really tried to do is operationally increase the quantity of our checking accounts and savings accounts, and improving the mix of our deposit base in order that it is more sticky. And I think that that has been well done.

We haven't had to compete as a highest rate provider in online savings or even, frankly, as high as a lot of the branch-based banks that are located near us. So obviously, at different points in time, we do -- we are growing fairly rapidly, and so the ability to do that and continue to attract deposits and do all those things.

There is a lot of things that have to work. We have to continue to execute our business banking strategy, which has been very strong. We have to continue to grow our cash management business.

We see so much opportunity in those areas, though. And what is never coming up is the fact that we are a branchless bank, that we generally have an efficient cost structure related to our sales function.

Every now and then there will be some system constraint that comes up in the cash management side. But we are competing with Citibank for big cash management accounts that have tons of fees, and we are winning at different times.

Sometimes, they will say: Hey, we want this batch wire feature to look differently; things like that. And we are continually looking at upgrading our systems.

But I think that the operational side of what we have done has been really the most important and most effective mechanism of combating any concerns there.

Appreciate the color. That's very helpful. Yes? Go ahead, Andy.

So if you looked at a 200-up scenario within 1 year, we are actually showing a favorable variance of 1.8% last quarter, going up to 3.3% favorable this quarter, looking at merging with the Block deposits on a pro forma basis. So to your point, we are looking toward deposit growth as some of the key important ingredients to our interest-rate risk management.

Okay, thank you. Appreciate the detail in the numbers there. Thanks.

Julianna Balicka, KBW.

Good afternoon. It's actually David Gong for Julianna. I had a question on the loan-to-deposit ratio. It looks like your loan growth was stronger than deposit growth in the quarter. Was wondering if you have a particular loan-to-deposit ratio that you manage to, and if the deposit growth in the quarter was intentional in anticipation of the inflows from HRB.

Well, we were planning and were aware that the loan-to-deposit ratio would spike up in this quarter based on our plan to receive the H&R Block deposits. So on an adjusted basis, the loan-to-deposit ratio obviously comes down around 100% range.

I know that is a ratio that different folks concentrate on, and obviously there is some natural limit to it. But our securities have become an increasingly smaller and smaller part of our book, because we have a 40% borrowing capacity at the Federal Home Loan Bank, in that primarily single and multifamily loans. And the borrowing from the FHLB is often at attractive rates and can be done at substantial durations at what we think are attractive borrowing rates. Those remain viable ways for us to think about financing loan growth and managing our interest-rate risk.

So, I am not going to give you a target ratio, but what I would say is that obviously we are planning on closing the H&R Block transaction, taking those deposits in. On the off chance that that didn't happen, we certainly have ability to raise deposits and increase those deposit -- our size of our deposits. Or if not, to do long-term borrowing with our significant borrowing capacity in order to control interest-rate risk.

We don't think we are going to have to do that, but I do think that it will probably be difficult for some time to have our securities portfolio be maintained at the same level on a percentage basis as it is of our assets right now. And so that probably will shrink the securities portfolio.

Okay, great. On your expenses, the $15.8 million in operating expenses this quarter, were there any expenses related to the preparation of closing of the transaction? And how should we think about the efficiency ratio going forward?

Sure. Yes, there were expenses related to that transaction. We have spent a significant amount of money on BSA/AML compliance upgrades and new systems and new personnel. We have also been beefing up our compliance teams.

We have our prepaid team working hand-in-hand on an extremely large and detailed integration plan. We are proceeding operationally to do all that work, and that work has elements of cost associated with it.

Whether we can maintain the 35% efficiency ratio throughout the next year is something that I think we certainly want to focus on. It's obviously very important to us.

I've guided people previously, potentially on a slightly conservative basis, to more like a 37.5% efficiency ratio. But some of it just depends on the nature of -- whenever you are doing some significant thing there may be a little more cost here and there.

But I think guiding 35% is very good, and guiding a little bit up may be a little bit cautious. But we believe there is -- we clearly see leverage in our business model with regard to our existing businesses at or below 35% from an efficiency perspective.

But we want to make sure we stay ahead of our risk management needs and make sure that certainly we stay out of BSA trouble and things like that. So we are going to be investing. So I think that going with the 37.5% is probably not bad for you.

Thank you very much.

Andrew Liesch, Sandler O'Neill & Partners.

Hi, guys. You've covered pretty much all my questions except for one. I just wanted to look at -- what are your thoughts on, in the first calendar quarter of next year with the RT business? As these tax returns come in and get put on the prepaid debit cards, are these going to be held as deposits at the bank? What are your plans with those?

Well, that -- with regard to the balance sheet management side of it, we have done careful analysis and looked closely at those inflows and have a clear plan to do that, to manage the balance sheet size. To the extent that there was a need to take balance sheets off-balance-sheet, we certainly have the ability to do that and have thought through that.

But I think the way to think about that is there is a variety of mechanisms by which -- obviously, there is a variety of mechanisms by which you can control cash. And cash is pretty easy, from a spike perspective, to be able to manage.

So we feel good about it, and we are not concerned about it. We don't believe that there will be any incremental capital requirements to deal with the cash, because to the extent that there is concern about that, we will just push it somewhere else.

Got you. No, that certainly makes sense. I guess along those lines, though, let's say there is a spike in cash and capital ratios are fine, I would imagine then, as these balances are held, that the margin would come in quite a bit. Not because of anything poor that you are doing or wrong; it is just that that is the nature of the math and how that works out.

Is that something you have been looking at? Maybe the margin dipping pretty substantially in the first quarter before rising as this cash leaves.

Yes, I think, Andrew, what you need to think about it is, if the balance sheet stood still, that might be the case. But we are growing at 30% to 40% a year, so we can actually deploy that cash during the growth mode to take the best advantage of it to fund.

So I think you will see that we are able to utilize it much better because we are growing consistently quarter to quarter.

Okay. All right. I will step back. Thanks.

Yes. In all these higher rate environments we're looking forward to selling that spare cash for lots of money. So you've got to figure out what you are worried about.

You are worried about having us too much cash? Too little cash? No, I am just kidding.

But anyway, who knows? Maybe it will be worth something someday.

Don Worthington, Raymond James.

Good afternoon. Were there any interest recoveries that impacted the margin this quarter?

Not of a large, large sense. There was a small benefit due to a payoff in one of our mortgage categories; and there was also an impact on FHLB stock. For those of you following the FHLB stock, the FHLB stock dividend rate is now up to 7%; so we had a favorable adjustment associated with that.

But, nothing that I would -- cause to be a huge change in any number.

I do think, though, I think that guiding -- I wouldn't guide you necessarily to above 4% net interest margin.

Yes. No, not at all.

I would say you need to just look at, let's say, look at the full year, this prior year, as a more accurate guide for thinking about the future.

Okay. Thanks. Then NPAs, based on the percentage that you disclosed, is a dollar amount around $16.3 million. Is that about right for the quarter?

It is a little bit bigger than that. It is around $20 million. We run it on a total loan -- gross loans, not on net loans. So that is probably why you are coming up with this small difference.

But in basis point terms, on total loans it is identical to last quarter. So it is 20 bps.

Okay, all right. Then what about performing TDRs? What is the current balance on that?

On performing TDRs, we are very, very similar to last quarter, not much change at all. So I would guide you to look at last quarter.

Okay, thanks.

Edward Hemmelgarn, Shaker Investments.

Wanted a quick update. I missed a couple of numbers. What was your jumbo gain on sale production in the quarter?

Jumbo gain on sale, that was $400,000.

No, no; I meant the originations.

Oh, the originations? Do you mean jumbo gain on sale originations?

Yes, that's correct.

That was $21 million.

$21 million. And the C&I for portfolio?

$330 million C&I and specialty assets; that includes structured settlement and lottery.

Let me clarify a number I gave out. I think I said nonperforming were 20 basis points. I meant 57 basis points, not 20 on that. But still down from 60 bps last quarter. 46 in total.

Yes, what are some of the new -- I know you are constantly investing to try to branch out into new areas of loan production, in addition to the ones that you are currently involved in. Are there any areas that you have started to focus on that you haven't been in the past?

Yes. We believe that on the C&I side, we are continuing to expand the capabilities of our asset-based lending group. We have a new advanced system that is going in there. We have been adding personnel in that area. We think that the ability to have a robust C&I capability will be relevant in different environments, and we want to make sure that we are very ready for that.

We are looking at different consumer-side opportunities. I am not ready really to talk about things like that, as we are just exploring them.

But as you know, we are very active in looking at different areas and looking at different distribution opportunities, and how those lending areas can be married to distribution opportunities that are before us, to think through new businesses.

Okay. Oh, and by the way, great quarter and great year.

Thank you, Ed.

Thanks, Ed.

(Operator Instructions)

Well, thank you all very much; appreciate you listening and we will see you next quarter. Thank you.

This concludes our conference. Thank you for your participation.