Axos Financial Inc (AX) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the BofI Holding Incorporated Earnings Conference Call for the quarter ended December 31, 2014. Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding Incorporated Second Quarter Fiscal 2015 Earnings Conference Call. For 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, Thursday, January 29, 2015.

Now, I would like to turn the conference over to Johnny Lai from BofI Holding Incorporated. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining us today for BofI Holding, Inc.'s second 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 second quarter, and they will be available to answer questions after the prepared presentation.

Before we begin, I would like to remind our listeners on this call that 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 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 Form 10-K, 10-Q and 8-K with the SEC. This call is being webcast and there will be an audio replay available on our Investor Relations website located at www.bofiholding.com. All the details of this call were provided on the conference call announcement and in the today's press release.

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'd like to welcome everyone to BofI Holding's conference call for the second quarter of fiscal year 2015 ended December 31, 2014. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced record net income of $19.372 million for its second quarter ended 2015, up 47.3% when compared to the $13.154 million earned in the second quarter ended December 31, 2013 and up 8.6% when compared to the $17.841 million earned last quarter. Earnings attributable to BofI's common stockholders were $19.294 million or $1.26 per diluted share for the quarter ended December 31, 2014, compared to $0.91 per diluted share for the quarter ended December 31, 2013, and $1.20 per diluted share for the quarter ended September 30, 2014. Excluding the after-tax impact of net gains related to investment securities, core earnings for the second quarter ended December 31, 2014 increased $5.6 million or 40.6% when compared to the quarter ended December 31, 2013.

Other highlights for the second quarter include, total assets reached $5.194 billion at December 31, 2014, up $792 million compared to June 30, 2014 and up $1.6 billion from the second quarter of 2014; return on equity reached 19.08% for the second quarter; the efficiency ratio was 34.55% for the second quarter of fiscal 2015, an improvement from 39.89% from the second quarter of fiscal 2014 and 34.81% in the first quarter of 2015. Credit quality remains very good with two basis points of net charge-offs in the second quarter, compared to five basis points in the corresponding period a year ago.

Our loan units had another great quarter, with $1.079 billion in gross loans originated in the second quarter. As a result, the bank achieved good quarterly loan growth as loan balances grew by 8.7% over the first quarter, which equates to a 34.8% annualized growth rate. The excellent performance of our lending groups is reflected in $344.5 million of net loan growth this quarter, a 55% increase over the second quarter of 2014.

The $1.079 billion of production consists of $88 million of single-family agency eligible gain on sale production, $2 million of single-family non-agency eligible gain on sale production, $426 million of single-family jumbo portfolio production, $67 million of single-family non-agency eligible gain on sale production, $11 million of multi-family non-agency gain on sale production, $111 million of multi-family portfolio production and $374 million of C&I and specialty asset production. Additionally, our warehouse lending division originated $448 million of single-family production in the second quarter. Taken together, the bank originated $957 million of loans in the single-family, multi-family and C&I lending groups, an increase of $166 million over the first quarter.

Our outlook for loan growth remains positive, with loan pipelines of approximately $849 million at December 31, 2014, including $438 million of jumbo loans, $107 million of multi-family loans, and $241 million of C&I loans.

We've seen a pickup in growth in our single-family agency and warehouse lending pipeline so far in January. We continue to make incremental operational improvements in our mortgage operations to more efficiently deploy resources between single family agency and single family jumbo lending, allowing us to take full advantage of the current market opportunities.

We expect to see some uptick in our agency gain on sale revenue in the next quarters. We are working on longer-term strategy that we believe will allow us to reduce volatility in our single family agency gain on sale revenue. For the second quarter's originations, the average FICO for single-family sales agency eligible production was 765, with an average loan-to-value ratio of 65.9%. The average FICO for the single-family jumbo production was 714, with an average loan-to-value ratio of 62.05%.

The average LTV of the originated multi-family loans was 61.49% and the debt service coverage was 1.335.

Our strong credit discipline and low loan-to-value portfolios have resulted in consistently low credit losses and servicing costs. At December 31, 2014, the weighted average loan-to-value ratio of the entire portfolio of real estate was only 54%. Total non-performing assets as a percentage of total loans was 80 basis points at December 31, 2014, up from 57 basis points at June 30, 2014. The increase is primarily attributable to two single family residences with balances of $7 million and $5 million, with loan-to-value ratios of 70% and 47.6% respectively. Both properties are located in premier markets, with very strong housing market and we do not expect to incur any loss on either of these loans. We do not see any early-stage delinquency trends increasing in our portfolio.

We generated very strong deposit growth in the second quarter, growing total deposits 66.7% year-over-year, and 22.8% on a sequential basis. We made further progress improving the quality of our deposit base by growing checking and savings deposits by approximately $1.6 billion from December 31, 2013, representing growth of 108%. Transaction accounts now make up 67.9% of our deposit base, up from only 52.6% from a year ago. With various data analytics, new products and technology initiatives underway, we continue to strengthen our consumer deposit franchise.

Our Business Banking Group had another successful quarter, growing deposits by almost $316 million to $2 billion at December 31, 2014. Business accounts now represent 51% of our total deposit base, up from 29% a year ago. Our core value proposition of saving business customers 30% or more on their monthly fees, and providing good customer service is resonating with a growing base of clients, who are very comfortable working with a branchless bank.

Through our internal research group, we have successfully expanded our business bankings' addressable markets by identifying new types of businesses that would be receptive to our value proposition. We continue to make additional technology and service investments to further enhance our capabilities. For example, our enhanced Treasury Management system implementation is on-track and we look forward to continuing to make progress in growing our Business Banking group, as we are better able to penetrate larger and more complex treasury management relationships.

We recently added a premier banking offering on an invitation-only basis to our product lineup. Through our analysis of customer needs, we've found that many of our best customers prefer, despite our focus on delivering a good call center experience, a Relationship Manager that would be specifically assigned to their account. Based upon the size and profitability of the relationships, the model is cost effective, and we will be launching -- and will be a launching point for the bank to continue to segment its customers and provide the appropriate level of service to customers that are more used to a personalized level of service. We see good opportunities to make loans to creditworthy borrowers at terms that provide low credit and interest rate risk to our bank and our shareholders.

Our jumbo pipelines are near record levels and pricing remains consistent with the levels we have seen over the last several years. Our internal sales teams and third-party distribution partners are seeing abundant opportunity in jumbo mortgages as a result of regulatory and structural changes in the market. Though most of our jumbo mortgage originations are for purchase transactions, the recent decline in interest rates has generated an uptick in our refinance activity for agency and non-conforming single-family mortgages.

The multi-family market has been competitive over the last few years. We remain selective on multi-family loans we originate and only hold ones with good debt service coverage and low loan-to-value ratios. While valuations have become frothy in some markets, healthy occupancy rates and steady rental rate increases provide solid support for our multi-family loans. If current pricing pressure persists, we will moderate our multi-family loan production and reallocate our capital to assets that generate a superior risk-adjusted return. While not reflected in the balances of the C&I category of our loan portfolio, our C&I lending group had a nice quarter, with period ending loan balances growing 52% from a year ago.

Much of this growth is reflected in the lender financed category for single-family and multi-family. The average yields on our C&I loans are solidly above our consolidated loan yield. We have extensive experience across a variety of C&I loan types and we'll remain opportunistic regarding expansion of our C&I portfolio. We have very little direct exposure to energy in our loan portfolios. Less than 5% of our multi-family loan book is in Texas, with most of these properties located in Dallas or Austin. The weighted average loan-to-value ratio on these loans is approximately 53%. Our single-family exposure in Texas is about $26 million, with less than 4% or about $1 million of single-family jumbo mortgages, with an LTV of 70% or higher. We have no shared national credit exposure in any oil and gas or oil field service firms. Our only commercial exposure is a small gas station in South Dakota that continues to generate significant positive cash flow and represents less than $1 million of exposure.

Based on our existing pipeline and ongoing lending and deposit initiatives, we believe we'll be able to maintain our net interest income margin in the 3.8% to 4% range. We are working hard to further diversify our asset and funding capabilities in order to sustain profitable growth in a variety of market and interest rate environments.

We received approval today for our recently announced purchase and assumption agreement last month to acquire approximately $125 million of deposits at par with no purchase premium from Union Federal Bank and its parent company, The First Marblehead Corporation. The acquisition of over 200,000 nationwide consumer checking, money market savings and CD accounts will further diversify our deposit base and be mildly accretive to our funding costs. We expect the transaction will close in the second calendar quarter of 2015 and we believe that the timing will not impact our pending transaction with H&R Block Bank. We remain committed to completing the pending transaction with H&R Block. While we have ongoing and recent communication with the OCC regarding the transaction, we have no specific updates at this time.

Our efficiency ratio of 34.6% came in below our long-term target of 35% for a second consecutive quarter. Our low-cost culture and ongoing operational efficiency program that we shared at Analyst Day last November are providing us with a growing competitive advantage as we reinvest a portion of our profits in new growth initiatives and further enhance our value proposition across each of our products. Our internal consulting team continues to identify and help each business unit implement additional costs and productivity enhancing processes.

Despite our focus on maintenance of a highly efficient operation, we have continued to aggressively invest in new business ideas and people and technology, with a focus on the longer-term opportunities that we believe will sustain the bank in a variety of credit and interest rate cycles. On the management and personnel side, we have significantly enhanced our information technology, marketing and data analytics teams to support our business units. We have invested significantly in our regulatory and compliance infrastructure, management and personnel to meet heightened regulatory demands and prepare ourselves for our relationship with H&R Block. We also continue to incubate business units that will allow us the optionality of expanding into new areas as market conditions evolve.

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, and is available online through EDGAR or through our website at bofiholdings.com. Second, I will discuss our quarterly results on a year-over-year basis, meaning fiscal 2015 versus fiscal 2014, as well as this quarter ended December 31, 2014 versus the first quarter ended September 30, 2014.

For the quarter ended December 31, 2014, net income totaled $19.372 million, up 47.3% from the second quarter of fiscal 2014. Diluted earnings per share were $1.26, up $0.35 or 38.5% compared to the second quarter of fiscal 2014. Net income increased 8.6% compared to the first quarter ended September 30 2014. For the six months ended December 31, 2014, net income totaled $37.213 million, up 46.9% compared to the six months ended December 31, 2013. Diluted earnings were $2.46 per share for the six months ended December 31, 2014, up $0.69 or 39% compared to the six months ended December 31, 2013.

Excluding the after-tax impact of gains and losses associated with our securities portfolio, core earnings were $19.386 million for the quarter ended in fiscal 2015, up 40.6% year-over-year, from the $13.786 million in core earnings for the second quarter of fiscal 2014, and up 4.9% from the $18.485 million in core earnings for the last quarter ended September 30, 2014.

Net interest income increased $15.284 million during the second quarter ended December 31, 2014, compared to the second quarter of fiscal 2014 and increased $3.236 million compared to the first quarter ended September 30, 2014. This is a result of increases in average interest earning assets combined with a decrease in cost of funds resulting in net interest margin of 3.85% this quarter, compared to 4.01% in the second quarter of fiscal 2014, and down 13 basis points compared to the quarter ended September 2014. The cost of funds decreased to 1.01%, down 15 basis points over the second quarter of fiscal 2014 and was flat compared to the quarter ended September 30, 2014.

Provisions for loan losses were $2.9 million this quarter, $1 million for the second quarter of last fiscal year and $2.5 million for the first quarter ended September 30, 2014. The increase this quarter compared to last quarter was the result of growth in the loan portfolio. Non-interest income for the second quarter of fiscal 2015 was $6.697 million compared to $5.543 million in the second quarter of fiscal 2014 and compared to $5.249 million for the first quarter ended September 30, 2014. The increase was primarily the result of increased loan sales.

Noninterest expense or operating costs for the second quarter ended December 31, 2014, was $18.937 million compared to $15.304 million in operating costs in the second quarter of fiscal 2014 and compared to $17.446 million in operating costs for the first quarter of fiscal 2015. For the second quarter year-over-year, salaries and related costs were up $2.804 million due to additional staffing added since December 31, 2013. Professional services decreased $445,000 due to lower volume of legal fees and increased insurance reimbursements, data processing and Internet expenses were up $362,000, and FDIC and regulatory fees increased $281,000. These increases are primarily due to the growth of the bank's lending and deposit operations.

For the second quarter ended December 31, 2014 compared to the first quarter ended, salaries and related costs were up $1.067 million, advertising and promotion increased $143,000. Data processing and Internet expense increased $169,000 and occupancy and equipment increased $111,000. The increases were primarily to support the growth of the bank's lending and deposit operations. Our efficiency ratio was 34.55% for the second quarter of 2015, compared to 39.89% recorded in the second quarter of 2014, and compared to 34.81% for the first quarter of fiscal 2015. 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 $791.7 million or 18%, to $5.195 billion as of December 31, 2014, up from $4.403 billion at June 30, 2014. The increase in total assets was primarily due to an increase of $770.8 million in loans held for investments.

Total liabilities increased $712.1 million, primarily due to an increase of deposits of $963.9 million, partially offset by a decrease in borrowings of $250 million. Stockholders' equity increased $79.6 million or 21.5% to $450.4 million at December 31, 2014, up from $370.8 million at June 30, 2014. The increase was primarily the result of our net income for the six months ended December 31, 2014 of $37.2 million and sale of common stock of $38.9 million, as well as vesting and issuance of RSUs and options of $2.2 million, less $1.4 million in unrealized gains on incomprehensive income and net of $0.2 million in dividends declared on our preferred stock. At December 31, 2014, our Tier 1 core capital ratio for the bank was 8.84%, with $199.9 million of capital in excess of the regulatory definition of well capitalized.

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

Great. Operator, we are ready to take the questions.

Thank you. (Operator Instructions) Bob Ramsey, FBR & Co.

Hey, good afternoon guys. First question, I noticed that the portfolio loan yield dipped below 5% this quarter. I know you've said, at least on the jumbo side, origination yields have held up, just kind of curious what drove the loan yield down this quarter and what I guess overall sort of complete blended yields are or were on originations this quarter?

In general, the single-family jumbo yield was very consistent with what it's been over the last several years. Multi-family yields on new originations have definitely been lower and they've been pulling down our average loan yields. The other issue is that the net balances on the C&I side didn't increase as much as they normally have done in prior quarters. And those are always ending up pulling us up a little bit from a balance perspective. So I think that that's -- those are the primary reasons there. But we -- I think on the good side, we don't see pressure on pricing in the single-family side. We still have a good business at reasonable yields on the multi-family side. The pipeline right now is basically where it's very close to -- from a WACC perspective to where the current portfolio yield is. But I think that volume is a bit of an issue there.

Then I think -- and then C&I pipeline looks pretty good, at pretty good rates, but those loans tend to be lumpy. We had a pretty big payoff early this quarter. That was one of our largest relationships and so sometimes those things -- that's really I think the main way to look at that. If you had anything to add, Andy?

No. I think it's a good summary.

Okay, that's helpful. And I think if I heard you right, earlier on the call, too, Greg, you said that the outlook is for your margin to stay north of 3.8% on a go-forward basis. Is that -- did I hear you correctly?

Yes, that's right. I mean, definitely when we look at even from a -- with conservative assumptions for this quarter, we've kind of tried to forecast that out and we think that that is a pretty reasonable forecast. We've had -- we've done -- I think we've done a pretty good job of migrating our deposit rates down pretty well and really being able to try to provide some different value propositions to customers. We with the delay in the Block deal and some of -- on the acquisition side, we felt like we really needed to push and just make sure we raised deposit levels and we also extended borrowings quite a bit from an interest rate reduction perspective. And so some of those things, although we did have a reduction in our deposit, the overall cost of funds, it would have been significantly greater, if we had brought on the deposits that we were expecting from our acquisitions and so -- and that also had some impact on some of the interest rate risk metrics, which we basically normalized for now as if that wasn't occurring. So I think that, as I said on the last call, I've always, I think that deal is going to get done, just the timing of that's going to impact our ability to continue to reduce our cost of funds. But all that being said, I still see from a visibility perspective based on very nice C&I loan pipelines, stability in the primary businesses that we have and stability in how we're bringing on deposits, I believe we'll be able to maintain that number. I think if -- and I believe that -- I still believe the Block transaction will happen. As that happens, I do think that will have some positive impact on margin and we might be able to move, not enough to the higher end of that range that I've given guidance on, but at least more towards the mid part of that range.

Okay, great. And then last question and I'll hop out, but -- I think you guys mentioned deposit growth was really strong this quarter, loan-to-deposit ratio came down pretty meaningfully quarter-over-quarter. And yet the cost of deposits was really pretty stable. I'm curious what you all did to sort of really accelerate the deposit growth this quarter?

Well, we did a lot of things. We spent a lot more money on marketing. We've been doing a lot on the sales teams side. We've taken a little bit different approach than maybe other branchless banks, we have a lot of outbound sales people, that are cross selling to all our customers, that they're coming in on the jumbo side, frankly, whether or not they close a loan or not. So it's really been a lot of blocking and tackling relating to marketing and sales fundamentals. And we've been putting these in place for a long time, getting our sales force systems to talk with everyone and when is -- when a lead gets registered in and exactly what's the right process for getting it on a marketing drift and where the propensity model's pushing you to have somebody reach out to that person and how to think about all that stuff. We've been doing a lot of work on it and we really kind of needed to turn it on, we were maybe a little bit complacent when we thought we were going to get our deal done and I thought we had a few more quarters to be able to kind of push some of those marketing dollars out.

We ended up having to do that. So there is, I don't know if it really -- probably what showed up in this quarter would have been spent. The marketing increases were largely, when I say largely, I'd say almost entirely focused on the deposit side. We've been adding capabilities and sales people to our Business Banking group. We've segregated, well, it was already segregated, but we've segregated a sales force that can focus on the treasury management relationships and work on more complex relationships there. So it's really been -- it's a combination of a lot of stuff. There isn't really any one thing that was there. I mean, look, we had this -- we didn't time exactly where we -- the deposit side, we expected to be in a really good place there and so, we just needed to catch up a bit. I think we did a really good job with that and I think it should alleviate any concerns about our ability to continue to raise deposits to support growth.

And without -- if you sort of put First Marblehead and H&R Block aside for a second, would it be your expectation that organically for the back half of fiscal 2015, you continue to grow deposits faster than loans?

Well, I think we certainly have the ability to do that, if that's what we want to do. I'd like to, look, I obviously, I want to continue to work to reduce our cost of funds and increase our fee income on deposits and so I think those are always things that you want to balance off, right. And so, First Marblehead -- we got an approval letter a couple hours before this call, and so the timing of that is, we have to wait. There is a DOJ waiting period, which I would be shocked if that was applicable to this transaction, I think they've got better things to do. And so that will happen and then the Block process is there too. So I think that we'll be able to balance our deposit and loan growth and do that in a way that supports our growth goals.

Great. All right, thank you very much.

Andrew Liesch, Sandler O'Neill.

Just wanted to talk about -- in the expenses, the salaries and benefits, they've gone up about $1 million each of the last three quarters and I know that you're doing a lot of hiring and growth. But I would imagine that pace slows, I was kind of curious like how you look at that number through the next few quarters?

Yes, I do think that there is some level of plateau that, that gets reached at certain points in growth cycles. But --look, we're going to continue to invest in the future of what we're doing and that means continued growth in people. I think that where our continued investment in people and where our level of cost to income ratio is I think it's -- I think that it's being done prudently and thoughtfully and we want to make sure we're ahead of opportunities. And so a lot of times, investments in data infrastructure, we put in a whole new information technology stack on the marketing side, which is I think really best-in-class. We talked about that on the Analyst Day. We're investing in a new BSA system, which we think is going to be a lot more -- better at detecting suspicious activity and those sorts of things. And so, I think there may be some moderation there and there might be, but I would say that I think that the guidance around the efficiency ratio is probably the best place to focus. And if you think about the growth trajectory we have, we just have to continue to make sure that we're on top of making sure that the management teams and the middle managers and everybody that we have are really strong folks who are going to be able to support a very good business model that we have.

Got you. And then I guess similarly, the provisions increased the few last quarters along with the loan growth. Is that kind of how we should be looking at that as well, just slowly rising as the bank continues to grow?

Yes, that's fair.

All right, those are my questions. Thanks so much.

Don Worthington, Raymond James.

In terms of deposits, how much do you have in the current balances related to your prepaid card partnerships?

It was about $80 million.

Okay. All right.

Yes, so we -- so are you going to have -- if you want to talk about the brokered (inaudible) have come up?

Yes, I think -- that was where I was headed, but obviously the number is relatively small compared to the deposit base, so I don't know that it's because --

I mean, so -- so we read that, we read that guidance. To be candid, we're not sure that based on the structure of the relationships that we have that it fits within the guidance. But just to be prudent, we're going to classify those deposits this quarter as brokered. We're having a lawyer, our attorney look at this. We right now, it was just based on the timing of it, and the timing of the call report, we wanted to do that and we will obviously look at the structure of these relationships and think about structures that matter. I think unfortunately the application of a broker deposit tag on these are really pretty, I think pretty inappropriate given the fact that they are very, very stable, low-cost funds that really don't have any of the volatile characteristics that I think the purpose of the underlying statue was designed to address. And so, I think there is -- I think there, I honestly think that there is already going to be some movement on some of these things like, there was a article that was published based on a discussion with the FDIC General Counsel, where he was already starting to make noises about particular things that they had said, well, if a one-off referral occurs then what I said there wouldn't apply, I think that there will be some movement around what these things look like over time.

So, I don't know if you know how that whole brokered deposit assessment stuff works. So basically on our base assessment we're below the minimum rate anyway. So this to the extent that the broker deposit side takes you up above it, there's some cushion because we weren't hitting the five basis points as it is, but there is a little bit of incremental costs associated with it.

You want to talk about what it was, Andy, as we computed it here?

Sure. It will bring up our insurance cost about in a basis point terms a tenth of a basis point per quarter roughly, so for that 80. So it's not very consequential. (multiple speakers). That's on the whole liability. That's not on the 80. So yes, also obviously, the real wall up is if you fall into a different risk category, right, and so I know there's been some announcements in the industry, some that was inconsequential other that was very consequential; and that's related to that risk categorization that the FDIC uses to determine what kind of penalty box you get put in for that.

Okay great, that's good color. And then in terms of capital it looks like you've used most of the current ATM, is that the route you think about going in the future, should you need to raise more capital?

Yeah. We used that, I know that the queue had, that we had an extra, I don't know, 10 or whatever left, we've in the time frame from that to date we've deployed all the remaining, we've raised all the remaining capital under the ATM. And so yes, I would expect that we would, we have a -- our shelf is expiring, we're in the process, before that expires, we'll put another shelf in place and we'll put another ATM in place. We think that's a highly effective and good way of raising capital and tit works really well for us. So we'll keep on doing it.

Okay, thank you.

Matthew Kelley, Sterne Agee.

Getting back to the FDIC guidance outside of the prepaid business, anything in that document that might impact some of your deposit lines of business and have the potential to be classified as brokered that is not today?

No, I don't think so. And I think with regard to the prepaid side, we don't really think our relationships are structured in the way that they're described there. And there may be some things that, for example, whether a program manager ever had the ability to move accounts, things like that, there may be some things that just have to change from a perspective of how those structures are created over time.

Okay. And with that classification as brokered on the prepaid deposits has any change in your longer-term view of the prepaid business overall?

Not really. I mean I think that, look, I'm a general skeptic of putting all my eggs in one basket because I think that this is an example of why it's difficult to do that, right. So you see that we're always trying to think about newer things and diversity of our business opportunities. And so, other players have taken a different approach to that and candidly, I think the deposit base that those guys have developed, if you can keep yourself out of regulatory hot water, is actually a valuable asset that is quite stable and is of good -- of low cost at least if you charged appropriately from a fee structure perspective, which I don't really think happens as often as it should, I think that the industry isn't as priced. But you know, look, we've always had this view if we wanted to have strategic partnerships with people that we could do other things with, and not just act as a [dim] sponsor, right. That's really not our focus. We want to do things with partners that have other benefits to the organization whether it's customer acquisition, cross-sell, if we can provide lending products to them and they have unique expertise, they may have particular processing abilities, they have load networks, they may have things that we need and what those look like. So we're never going to be a Bank that has 20 or 30 of these relationships, or that's just not what's it's going to look like for us.

Okay. Got you. And then on the H&R Block transaction, can you remind us of the key dates in the merger agreement that are coming up over the next couple of weeks and months, that we should be monitoring?

Yes, I think there is an exclusivity period end around February 15, and then, I think that really is the key date. Now, I mean obviously what we need to do is, I think that we've been -- there's been some exchange of information and some dialog this week with the OCC on status there. And I think that we'll expect to continue to receive information on this. And I don't think that although certainly, we want -- we are not going to continue with fool's errands we also are going to be thoughtful about around what the whole structure of everything means, right. So, obviously I've said before the agreement is really quite a simple one for an acquisition with deposits and that we're very willing and ready and able to enter into the agreement and to do the program management services at any time.

And then we have always been thought that that was the appropriate path for this. Block has a desire to do all these things together. And they have some -- they have other agencies that they'll need to -- the Fed is involved with there, with their deal and some other things like that. But we're -- frankly the -- other than some short-sellers who are trying to stem the pain that they're going to feel by choosing poorly which shares to short, I think that the hurry is more one of just alleviating the market uncertainty, because the reality of the product implementation is that it's not going to be until the 2016 tax season; right.

Sure. And once that --

I do think there is a desire to just to get it moved on just because it does create uncertainty in the market.

Right. And the detail of the exclusivity agreement, once that is past, that date, that gives Block the ability to shop at more broadly, is that how it works or explain that --

Well it's a bi- -- bilateral, I mean, theoretically we could look, it's -- the reality of, it basically doesn't allow them to shop it around and also it's bilateral in the sense that we could theoretically say that we no longer wish to comply with the terms of the agreement.

But I think that those dates were picked based on feedback that we received about times and things like that. So we'll hopefully know something. But I wouldn't -- look, the reality of these things are, is that we have a good relationship with Block and the best sort of agreements are ones that you don't have to look at very often. And I would categorize our relationship as one that we're not really sitting around looking at the agreement and worried about those sort of things.

Okay. Got you. All right, thank you.

Julianna Balicka, KBW.

I have a couple of more questions; one, if we can go back to the discussion about around the deposit growth, in your remarks you had referenced that you had identified new types of businesses that were receptive to both these value proposition and penetrating larger relationships and cash management. Could you elaborate a little bit more about these new types of businesses And where I'm going with this question is, I'm looking at the $660 million core deposit growth that you had linked quarter in dollars and wondering how much of that is kind of like low hanging fruit out of the gate real, real easy kind of catch-up growth versus how much of that can be repeated if you were to continue penetrating these businesses in the next several quarters?

Yes, I think that's a really good question and some of that growth is frankly doing some things that I'd look at and I would look cross-eyed at somebody in deposits and say so, why weren't we doing this, again? Like, for example, having introduction calls with large jumbo loan customers and talking to them about our deposit value proposition and things like that. But I still think that there's lots of opportunities, I don't think, I think that this, this was obviously a quarter that we, where we don't expect or need to have that much deposit growth. So I think that we'll be able to continue to sustain deposit growth that well supports our loan growth objectives. And our loan growth objectives are not to grow loans at 40% or something. either [So I think the asset growth objectives need to be -- they shouldn't be in the 40%s or even in the high 30%s or something. So I think that when you look at those two together, I feel pretty good about it. I mean what I think is really happening is that obviously the business banking side is maturing, there is good managers in place there. The data initiatives are working and so, I think you have to continue to -- you do exploration in some new business areas and you see where the levers are that they care about and then you exploit them and I think that there's -- I feel good about everything we're doing in deposits, better than we ever have. So --

Okay. And then kind of switching to the asset side, you obviously said not to think about 30% growth despite you guys having that kind of growth rates, but looking at your average loan-to-deposit ratio pro forma for H&R Block and First Marblehead, you will very quickly go to 99% loan-to-deposits, right. So to the extent that you really want to run that at a higher, above a 100% level, where shall we think about the next leg of loan growth to be coming from, meaning continued growth from resi, jumbo resi and multi-family? Or are you going to be pursuing new loan growth areas that are not yet contributing materially that kind of are the next natural direction for you to go, like I don't know, like commercial real estate?

Well, we have a pretty small balance, pretty small, small balance commercial real estate product out there. We've been letting it run now probably for about a year actually and looking at what type of loans we're getting, working on systems and that sort of thing. And I have liked what I've seen there so I think that that certainly is an option. We think that there are opportunities in different areas in C&I and there's some new things that we're working on, on the consumer side too from a cross-sell perspective related to our customers to be able to monetize and spread the cost of acquisition across those things. But a lot of it depends on factors that are kind of exogenous to what we're doing, we want to be ready for those things. So for example on the multi-family side as soon as the five-year goes down, all these banks that don't have, that, where none of their funding cost depends on the five-year, drop their rates, right. So that means that multi-family production, I would expect to be tougher to come by as long as we're having issues with Greece, right. And I think, and so that is, and then on the other hand if the Fed is pushing rates up higher and depending on what, let's say, of shared national credits stop being, stop having their covenants written like my sixth-grader's creative writing assignment, right, then that would mean that there would be opportunities there. So I think it's a little bit difficult for me to forecast that, the way I think about this is that you know, we work for a long time on system and infrastructure on stuff. So I'm not really ready to --because the problem is, as soon as it gets out, then it becomes, well, why am I not seeing this loan production here and there.

But we're working on pretty sustainably on some consumer stuff, where we have teams in place where we have underwriting models in place, where we have distribution relationships we're developing and we're testing systems and boarding a few loans here and there and getting ready for what those things look like, back to my view that I want diversity in what we're doing.

So, we have a home equity product that's out on Cosco. We don't do a lot of things right now with it because we don't think, when I look at the balance of the risk between first and seconds on single family. I think that it is a much better proposition from a risk-reward perspective is to do firsts. So that's really, I know that that doesn't give you a lot of specific feedback, but I think it helps you maybe understand how I'm thinking about it.

okay. No, that makes sense. That helps. Thank you. And then on the H&R Block Bank transaction, to the extent that in reviewing the transaction and kind of based on, my comments are based on kind of how regulators have approached other bank acquisitions, to the extent that the regulators had asked you or H&R Block Bank to go back and fix ABC or change ABC with how you run your own bank and then they have to go back, approve the ABC changes and then they go to approve the deal,

right. To the extent that that happened with H&R Block Bank deal, have A, B and C that they have asked for already been completed and have they been already reviewed or is that still kind of in progress? Does that makes sense?

That's I have to say, Julianna, I am going to give you like the award for that. I think my dad had a good sense of humor and he used to say, yes, that's a question, so when you get a question like have you stopped beating your wife, you always have to stop back and say, wait a minute, what is that -- what was that, this question? Still anyway, look, we -- the reasons that the OCC has for thinking about H&R Block in a longer and more drawn out fashion versus a more simple deal like the deal that they just approved very quickly, I think are related to what they perceive as a very unique and a complex transaction. And so, this is something that they want to have a very thorough review of. And that also means that there's a lot of people involved, there has been at different times mention of different guidance that they're creating and all those sort of things.

So look, we just got a transaction approved. They're not holding up transactions generally for the bank. And as I said before, we also have the ability to just simply go out and enter into the program management agreement. And I wouldn't say that if I was told, you can't informally or otherwise, you can't enter into the program management agreement or you can't enter into prepaid relationships or whatever, that's never happened. And so, that's really all I can say about that. I think we remain optimistic that this will get approved.

Excellent.

But it's not --

Well, I think I'm out of questions.

All right. That was the -- that's the -- you get the prize for this quarter, though. The best one.

Michael Millman, Millman Research Associates.

Well, actually to follow up to that last question from, for a non-bank analyst, it does seem that this is simple to Block, it's a simple transaction, its deposits are kind of very simple. So it's -- and as you say, First Marblehead went right through. It's hard to imagine what the problem is, and secondly, what is the OCC learning in the last three months that they didn't learn in the first one month or first six months?

Well, I mean, look, I think I've really probably said all I can here. And I think that there is, look, H&R Block serves lots of constituents, they touch lots of people, there is interesting issues that arise whenever you enter into third-party relationships that involve control of risk and those things are complex.

Now, I think the issue of tying the part that's complex to the part that's non-complex is something that I would say, I would categorize that as something that probably shouldn't have been done. In other words, in the sense that the program -- the part that has some complexity to it doesn't require approval, the part that is not complex does. And so, the tying of those things together I think is something that may have made this a broader scope review than it otherwise would have been. But I think that's sort of something that's out of the barn now. And it is what it is. And ultimately I think hopefully what it will do is, it will lead to a more positive outcome, because it will result in a very thorough review where everybody has exactly the same set of expectations. And so, I think on one hand, you can always look at the negative side of this, which is obviously we missed out on a nice chunk of revenue. And we've had lots of people who have been able to write things that are untrue about us. And really, I don't know how much effect they've had, I think mostly they've been disregarded for the drivel that they are.

But on the other hand what you're getting is, you're getting a really thorough good review and a great understanding of the transaction and relationships. And that is something that will matter on a going forward basis as we execute our arrangements and actually go through the relationship. And I think that there is a positive in that.

So bottom line, have you learned a lot through this procedure or is it basically repeating things that you thought from day one?

No, I definitely have learned a lot, and there are a few things that I said from day one that I expected to happen, did happen. But I'm constantly learning and that's why I love my job so much and I love working for all of you guys. So, for all -- not you analysts, but you shareholders. So --

Appreciate it. Thank you.

Thank you.

I'll now turn it over for closing remarks.

All right. Thanks, everybody, and look forward to talking with you next quarter. Have a good Super Bowl weekend. Bye.

This does conclude our conference. Thank you for your participation.