Axos Financial Inc (AX) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding Incorporated Second Quarter 2016 Earnings Conference Call. For today's presentation, all parties will be in a listen-only mode. As a reminder, following the presentation, there will be a question-and-answer session. (Operator Instructions) This conference is being recorded today, Thursday January 28, 2016.

I'd now like to turn the conference over to Johnny Lai, Vice President of Corporate Development and Investor Relations for BofI Holding. Please go ahead, sir.

Great. Thanks, Jessica. Thank you and good afternoon everyone. Joining us today for BofI Holding, Inc. second quarter 2016 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 or Andy will review and comment on the financial and operational results for the three and six months ended December 31, 2015, and they will be available to answer questions after the prepared presentation.

Before we begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the Safe Harbor protection in forward-looking statements 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 forward-looking statement 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'll be an audio replay available in the Investor Relations section of the Company's website located at bofiholdings.com. Details for this call were provided on the conference call announcement and in today's press release.

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

Thanks, 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 2016 ended December 31, 2015. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced record net income for its second quarter ended 2016 of $28,149,000, up 45.3% when compared to the $19,372,000 earned in the second quarter ended December 31, 2014 and up 10.4% when compared to the $25,501,000 earned last quarter.

Earnings attributable to BofI's common stockholders were $28,071,000 or $0.44 per diluted share for the quarter ended December 31, 2015 compared to $0.32 per diluted share for the quarter ended December 31, 2014, and $0.40 per diluted share for the quarter ended September 30, 2015.

Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the second quarter ended December 31, 2015, increased $8.3 million or 43.1% when compared to the quarter ended December 31, 2014.

Other highlights for the second quarter include total assets reached $6.7 billion at December 31, 2015, up $403 million compared to September 30, 2015, and up $1.5 billion from the second quarter in 2015. Return on equity reached 18.81% for the second quarter, well above our long-term target of 15% or better.

Efficiency ratio was 34.57% for the second quarter of fiscal 2016, compared to 33.25% in the first quarter of fiscal 2016 and 34.55% for the second quarter of fiscal 2015.

Net interest margin was 4.10%, an expansion of 8 basis points over the first fiscal quarter and 25 basis points higher than the second quarter of the last fiscal year. Capital levels remained strong with Tier 1 leverage of 9.34% at the Bank and 9.75% at the holding company.

Credit quality continues to be strong with 4 basis points of net recoveries and only 40 basis points of non-performing assets to total assets.

Our loan units had another great quarter with $1.6 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% over the first quarter which equates to a 32.2% annualized growth rate.

The excellent performance of our lending groups is reflected in the $420 million of net loan growth this quarter, a 31.2% increase over the second quarter of fiscal year 2014. The primary drivers of our long production consisted of $88 million of single family agency eligible gain on sale production, $471 million of single family jumbo portfolio production, $21 million of single family non-eligible gain on sale production, $66 million of multi-family portfolio production, $22 million of non-multi-family commercial real estate secured production, $303 million of C&I production, $12 million of auto production and $413 million of Emerald advance originations.

Our outlook for long growth remains positive with a loan pipeline of approximately $877 million consisting of $565 million of singly family jumbo loans, $64 million of single family agency mortgages, $113 million of income property loans and $135 million of C&I loans. Demand for single-family jumbo mortgages remains strong particularly for purchase transactions in coastal and other desirable metro areas. Our ongoing investments in systems, personnel and distribution coupled with our strong track record of execution and compliance positions us well for continued market share gains.

Our warehouse lending business benefited from market disruption in some of our competitors caused by the implementation of (inaudible). Because our lending and compliance teams conducted extensive planning and testing in advance of these new rules and regulations, we experienced limited delays in our single family mortgage and warehouse lending operations. We're actively pursuing opportunities to grow our warehouse lending business for new warehouse lines and request for existing customers to upsize their current lines.

For the second quarter's fiscal originations the average FICO for single family agency eligible production was 761 with an average loan-to-value ratio of 64.3%. The average FICO of the single family jumbo production was 708 only with an average LTV of 61.2%. The average loan-to-value of the originated multi-family loans was 54.9% and the debt service coverage ratio was 1.48 times.

The average LTV ratio of the originated small balance commercial real estate loans was 54.5% and the debt service coverage ratio was 1.58 times. The average FICO of the auto production was 759.

Our loan portfolio credit quality remains very strong. Our strong credit discipline and low loan-to-values have resulted in consistently low credit losses and servicing costs. We had 4 basis points of recovery for the quarter ended December 31, 2015, compared to two basis points of net charge-offs in the corresponding year-ago period. Our lifetime loss in our originated single family loan portfolio represents less than two basis points of loans originated and our multi-family loan lifetime loss is also less than 2 basis points of loans originated. We increased our loan loss provision to $3.4 million in the second quarter of 2016 from $2.4 million in the prior quarter to support growth in our loan portfolio.

We have a granular and transparent C&I lending book. Unlike most community and commercial banks that have grown their C&I loan portfolio primarily through shared national credits and traditional bank loans, we agent and fully underwrite the vast majority of our C&I loans. Our C&I lender finance loans, which comprise the majority of our C&I loan book today, are first liens on pools of assets at low leverage points. These lines of credit to non-bank entities are fully reflected on our balance sheet.

The underlying collateral which is residential or commercial real estate properties or non-real estate related loans or receivables is housed in the bankruptcy remote special purpose entity that ensures the Bank that the collateral is segregated from a legal perspective in the unlikely event of a bankruptcy. The use of special-purpose entities by the Bank in this business is usual and customary in the industry and represents prudent practice.

We actively monitor the value of the underlying collateral and any piece of collateral that is not performing is removed from the borrowing base. These protections coupled with our low effective advance rates have resulted in no losses in our C&I lender finance loan book.

The one loan that has been classified as special mention in the C&I portfolio outside of the lender finance book was refinanced with full principal interest and fees collected by the Bank by another bank after the quarter ended.

We have very little direct credit exposure to energy in our loan portfolios. We have no shared national credit exposure in any oil or gas or oil field services firms, less than 5% of our multi-family book is in taxes, with most of these properties located in Dallas or Austin. The weighted average loan to value ratio of these loans is approximately 51%.

Our single family exposure in Texas and Oklahoma is just $28 million, representing less than 1% of our single family jumbo portfolio.

Total non-performing assets as a percent of total assets was 40 basis points at December 31, 2015, down from 55 basis points at June 30, 2015. Our loan loss reserve to non-performing loans is 132%. As reflected in our historically low charge-offs and recovery this quarter, a very small percentage of our non-performers result in a loss to the Bank because we have a granular portfolio, secured primarily by real estate collateral with readily ascertainable market values.

The Bank has only two REO properties with a total carrying value of $396,000. All of the Bank's REO properties are held in special purpose entities to isolate the Bank from any potential issues associated with direct ownership and these entities are consolidated at the Bank.

Despite growing competition for the multi-family lending in some of our markets, we have not loosened our credit standards. Our focus on smaller balance multi-family lending at low loan to values and high debt service coverage ratios make us comfortable with our multi-family loan book. We have detailed data of our properties and borrowers in our target markets and recently conducted the CCAR stress test of our entire multi-family loan portfolio, which showed a very manageable loan loss projection even if property values experience a severe decline. At December 31, 2015, the weighted average LTV of our entire portfolio of real estate loans was 56%.

Given that these loan-to-value ratios use origination date appraisals over current amortized balances in a generally appreciating housing market, these historic LTVs generally overstate the true loan to value ratio in the portfolio, providing a further margin of collateral security. We grew deposits 30% year over year and 9.3% on a sequential basis, generating growth across a variety of consumer business deposit categories.

Checking and savings deposits grew even faster, increasing 35.1% year over year. Checking and savings deposits increased by approximately $1.1 billion to $4.3 billion at December 31, 2015, representing 83% of total deposits, an improvement from 80% a year ago.

The shift away from CDs to transactional accounts further reduced our funding costs and improved our interest rate profile. We continue to grow deposits despite not having the best rate in the market although our overall cost of deposit is approximately 89 basis points. This is due to the fact that our time deposits have an average cost of approximately 213 basis points, because they have an average duration of approximately 4.2 years.

We further reduced our average cost of demand and saving deposits to 62 basis points compared to 64 basis points in the prior quarter, and 73 basis points in the same period a year ago, as we optimize our marketing to attract and retain deposit customers that best fit our target profile. Of the Bank's overall deposit base, we've approximately 26% business in consumer checking, 36% money market accounts, 6% IRA accounts, 11% savings and 5% prepaid accounts.

With a diverse quality deposit base across a wide range of consumer and business categories, we are well positioned to continue growing our deposits to support our loan growth. We continue to expand our software and service capabilities in order to create a better, more seamless user experience for our deposit customers. We are actively evaluating opportunities to expand our deposit base in new market segments through acquisitions or by taking advantage of market dislocations created by competitive and regulatory changes.

We completed a very successful first quarter of our seven-year strategic partnership with H&R Block. We began offering the H&R Block Emerald advance lines of credits through H&R Block's tax office locations on November 19. Emerald advance is a short term, unsecured line of credit available to qualified borrowers. Under the terms of our agreement, we retain a 10% interest of all Emerald advance loans originated while H&R Block retains a 90% interest.

We are the BIN issuer for H&R Block's Emerald Card, a general purpose reloadable prepaid card offered through H&R Block stores and online channels. As the BIN issuer we hold the deposits for each Emerald cardholder in an FDIC-insured account and process all transactions conducted by cardholders using the Emerald Card.

The third product in our program management agreement with H&R Block is refund transfer, a product that allows H&R Block's tax preparation customers to defer his or her tax preparation fees until they receive their refund. The vast majority of H&R Block's refund transfers occur in the March and June quarters.

We continue to expect that on an annual basis three initial products in the H&R Block program management agreement will generate $31 million to $34 million of annual revenue and approximately $13 million to $16 million of after-tax net income. As a reminder, we anticipate that approximately 70% of the net interest income from the program management agreement will be generated in the quarter ended March 31. We're already starting to have productive dialog on the specific steps required for us to exercise our exclusive right to cross sell individual retirement accounts through H&R Block's tax offices and through H&R Block's digital channel next tax season.

The number of customers that have the potential to be acquired through H&R Block's taxpayers selling our IRA product next tax season and integration to the tax software should be significant.

We continue investing in newer businesses that have been launched, a significant incubation program developing a number of new lending fee and deposit businesses and the product and software development capacity to create what we're calling a universal digital bank model.

The current delivery of many of our existing products and the monoline products that have arisen from the fintech revolution among non-banks has often significantly reduced the cost of acquisition and delivery for the providing institution and the cost of ownership to the customer. Neither we nor these fintech companies have been able to date to maximize the value of each of their customers to serve these customers more broadly with a significant range of personalized products.

In order to maximize that individual customer's value we see an opportunity to further differentiate our value proposition in the next few years by commercializing our online banking prototype we have built of a highly flexible front end online banking platform, utilizing an App Store type concept that will allow us to customize the products and services displayed for different user segments and differentiate our user experience in a meaningful way.

Not only will this platform allow us to greatly enhance the customer and user experience but will allow us to use advanced analytics to personalize and provide relevant advice on an ever broader scope of products that we are incubating. We are only scratching the surface in this evolution in banking and have a multitude of opportunities to differentiate ourselves from a customer acquisition, user experience and service integration perspective.

We are excited about how our vision of where we see the future banking model evolving and how we are planning to transition toward that universal digital banking model over the next several years. We believe that building systems, processes and partnerships that allow BofI to offer a seamless user experience and multiple services through an integrated software platform will further elevate and differentiate our competitive position.

This quarter some of our increased costs are reflected in our investment to build our next generation retail banking platform and become a more product-centric company that is a user experience leader in digital banking.

On the newer business front, after methodically building a dedicated team of underwriters and refining our systems, data initiatives and marketing, we originated $44 million of small balance commercial real estate loans in the past two quarters, up from $29 million in the second half of fiscal 2015. We have grown in a very disciplined manner with the average loan to value ratio of 56.2% at an average debt service coverage ratio of 1.47% in this portfolio. We will continue to slowly expand this business in Southern California and other strong markets.

We originated $12 million of prime auto loans in the quarter ended December 31, 2015, up from $8 million in the prior quarter. We continue to evaluate low cost distribution channels and niche lending segments within auto that will generate an attractive risk-adjusted return.

Our auto lending platform gives us another lending product for a universal digital bank that we can monetize through our rapidly expanding customer base, multiple partnerships and distribution channels. We recently started piloting single family agency mortgage products through our wholesale channels. The expanded product suite provides our wholesale partners access to products in competitive pricing through a self-service digital platform. Loans originated through this channel will be sold to Fannie and Freddie providing us incremental mortgage banking income.

Our efficiency ratio of 34.6% came in below our long-term target of 35%. Our corporate management framework enables us to remain efficient and nimble, even as we scale newer businesses and invest in IT, data analytics and compliance. We continue to augment our already robust enterprise risk management systems and processes with technology currently in use in much larger banks. In the second quarter, we installed the RSA Archer GRC system, which will enable smarter allocation of assurance resources and improved enterprise level reporting.

Further, our data-driven compliance framework initiatives allow us to automate, add number of compliance review functions that are more repetitive in nature while simultaneously expanding the number of relevant transactions we assess. This framework, when implemented, frequently results in 100% assurance review of all bank activity within a subject regulatory rule rather than simple sample testing. The automation also frees up more time for our compliance staff to focus on more complex tasks.

As we continue to grow assets and enter new businesses, our compliance framework allows us to maintain strong regulatory compliance and efficiency by streamlining our monitoring and reviewing processes in order to analyze and filter more data faster. We have successfully grown the Bank through a variety of competitive, economic, credit and regulatory environments while maintaining industry-leading returns and efficiency. The diversity in our lending and deposit franchise will continue to improve as we implement components of our digital banking strategies.

We're excited about the cross-marketing opportunities with H&R Block and our other distribution partners. With excellent regulatory relations and strong capital levels, we are constrained only by our ability to execute.

We continue to vigorously defend the claims initiated by former disgruntled junior employee Erhart. We are aware of no ongoing investigations of the Bank by any regulatory or government authority as a result of his baseless, previously investigated allegations. We continue to know of no one other than Mr. Erhart and his attorney, who considers Mr. Erhart to be a whistleblower.

We have successfully obtained a temporary restraining order prohibiting Mr. Erhart from disseminating the Bank's confidential information. A variety of what appears to be short seller funded attorneys and short seller funded investigators have continued to call and harass our former employees. Although, we have good relationships with a vast majority of our ex-employees, it is possible and perhaps even anticipated, that other baseless lawsuits might be filed by the same or different attorney in what will be a futile attempt to pressure us. This will not change the Bank's sound policy of terminating poor-performing employees. BofI is not in the business of settling meritless lawsuits. So we will ride out the temporary storm while focusing on continuing to grow our business in a safe and sound manner and deliver positive earnings growth.

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 bofiholding.com. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release for 10-Q for additional details. For the quarter ended December 31, 2015 the net interest margin was 4.10%, up 8 basis points from 4.02% in the quarter ended September 30, 2015, and up 25 basis points from the 3.85% in the quarter ended December 31, 2014.

Our average loan yield was 5.14% for the second quarter of fiscal 2016, compared to 5.02% in the first quarter of fiscal 2016 and compared to 4.93% in the second quarter of fiscal 2015. The primary driver of the year-over-year improvement in loan yield was growth in our C&I lending portfolio, which was a higher yield than our overall loan yield.

On the funding side, our total average deposit rate at the end of this quarter was 73 basis points including the impact of non-interest bearing. That's down from 78 basis points at the end of last quarter and down from 81 basis points at the end of December 31, 2014. The improvement was helped by the inclusion of IRA deposits from the H&R Block transaction as well as other increases in non-interest bearing deposits.

Shifting to the balance sheet, stockholders' equity increased by $79.8 million or 15% to $613.3 million at December 31, 2015, up from $533.5 million at June 30, 2015.

The increase was primarily the result of our net income for the six months ended December 31, 2015 of $53.7 million, as well as the sale of common stock of $21.1 million and vesting and issuance of RSUs and stock options of $4.8 million as well as $400,000 unrealized gain on comprehensive net income.

The Bank is very well positioned from a capital perspective. The Tier 1 capital was 9.75% for the holding company and 9.34% for the Bank at December 31, 2015. As we've discussed in the past, the expected fee income from H&R Block next quarter will likely increase ROE above 20%, reducing the need to provide equity capital for organic loan growth. That said, we have positioned the holding company to raise debt to fund capital for growth or to consider buybacks of our common stock. This is in addition to our past option of using an at the market offering to issue common equity.

How much capital we issue if any in the next quarter and in what form will depend on a variety of factors including long-term loan growth as well as external market conditions. To that end, we recently received an investment grade rating from the Kroll Bond Rating Agency for both the holding company and the Bank. We believe these ratings reaffirm our financial strength, our strong efficiency and our above average asset quality.

With that I will turn the call over to Johnny.

Great. Jessica, we're ready to take questions.

(Operator Instructions) Bob Ramsey, FBR.

I just sort of want to touch on the net interest margin. I know you highlighted that C&I was a big piece of the uptick in loan yields. Just kind of curious if there was anything else in there, either interest recoveries or prepayments or anything that sort of moves around and how you are thinking about the trajectory and was there sort of more mix to C&I this quarter that we can expect in future quarters or how are you thinking about the margin in loan yield?

Yes, Bob, a very good point. During this quarter, we did fund $42 million of Emerald advance loans at a higher rate. The impact of the Emerald advance loans was approximately 10 basis points on our net interest margin. So, we would have been -- without those loans, we would have been closer to 4%.

So as we look forward into the next quarter, we guided that ultimately we would be coming down as a result of two things, a reduction of that balance, but also having increased liquidity. That guidance generally put us at 20 to 30 basis points lower, which is about at the lower end of our range, which is about 3.80%. And again, that would just be for the next quarter, right.

And what that does mean is that the balance sheet is going to increase significantly with deposit cash, most of which will be kept at the Fed. I think it's almost going to be around $1 million of earnings -- extra earnings just from that extra cash alone but that will reduce the net interest margin and decrease the Bank's capital ratios for that temporary cash balance.

Got it. So the right way to think about margin next quarter would be that the cash balances mainly pull the margin down but they would not have -- I guess, would have a very modest positive impact on net interest income, it's not a drag (inaudible)?

Right. We think -- that's right, that's right. It should -- it's around we estimate if prior years are similar to this year, which they seem to be going that way, it would be about $1 million of extra income on that cash, of extra pre-tax income.

Got it. And then in the fourth fiscal quarter, the June quarter, as the cash goes back away and the Emerald balances are a lot lower, are you back kind of around 4% or somewhere in the 3.80% to 4% range and it's hard to say exactly where (multiple speakers)?

Yes, I think we'll stick with the 3.80%-4% range. We had a really nice C&I growth this quarter, a lot of that happened at the end of the quarter, just on the nature of the closings and how those deals went. So there is some benefit from an uptick perspective there. But I think that it's probably just best to stick with that guidance in the 3.80% to 4% range for that quarter ending June, our final fiscal quarter of our 2016.

Okay. And then In terms of loan growth this quarter, it seems like the end of period growth was a lot stronger than the average. I'm just curious if that was skewed by warehouse end of period balances or whether growth overall was more back-end loaded in the quarter or how we should think about the discrepancy there?

I know a lot of the C&I loans ended up closing more towards the end of the quarter. I think that -- were there any other areas that had --?

Warehouse growth was primarily at the end of the quarter as well as is typical of warehouse and the warehouse growth was larger than normal. So, yes, you're absolutely right. There was more growth at the end. Frankly, in the last two or three weeks, than on average.

Okay, great. And then lastly, I want to touch on -- I will give someone else a chance, but as expenses they came in a little higher this quarter than I was sort of looking for. Anyway, I know you highlighted in your prepared remarks that some of this has to do with investments in the banking platform and you're still under your sort of longer term 35% efficiency. How should we think about expense trajectory as we head through the rest of 2016? Do you all anticipate being closer to that 35% mark than maybe you were in 2015?

I think if you take out the impact of the Block incomes surge next quarter, I think that probably a guiding around 35% it makes sense. But, clearly we've guided to that the income range for Block and with 70% of that income coming next quarter, we wouldn't expect a spike in that expense.

And then additionally was it $800,000-something of extra expense?

Yes. $700,000 -- in this quarter in other G&A was $700,000 associated with the Emerald advance that will be terminated as the advance falls off. So that won't be recurring, but we will have some other expenses. So some of it was due to Block as we had always guided that there would be variable incremental expenses associated with the Block transaction.

And then that was basically our share of origination expenses essentially for what we kept.

Okay. And as far as block in the next quarter, the revenue piece, I know you talked about, but there is an expense piece that goes with it that follows the same seasonal pattern as revenues, right? I mean, they are pretty well matched proportionately through the year, right?

So there are some differences and what we've guided is 70% as Greg had in his prepared remarks, 70% to 75% of the net income we expect to be generated in Q3 which is the March 31 quarter.

And to refresh what net income guidance was, net income guidance was $13 million to $16 million for the entire year. So think about 70% to 75% of the net income coming in in Q3. There are some lopsided expenses. You'll see -- you saw a little bit higher loan loss provision this quarter and so it is relevant. But the way to think about it is 70% to 75% of the net income will hit in Q3.

Okay. And 75% of the $16 million, it's about $0.18 (multiple speakers) in this quarter.

We said $13 million to $16 million. So that $13 million to $16 million doesn't mean that it's $16 million. It means that we don't know and it could be $13 million and it could be $16 million. So it's be better to use a midpoint rather than pick the upper end of the range.

I think the bottom line is, Bob --

And 70% too is where we -- [I will first go with] 70%.

Okay. So maybe more like $0.15 of EPS from Block next quarter.

Yes.

Julianna Balicka, KBW.

So a little bit more questions on the H&R Block. In terms of the Emerald advance that you funded, the $32 million that you just said in the first quarter earnings -- excuse me, in this past calendar quarter, what is the duration of these loans? Are they still on your books, they've gotten paid off and when in the quarter that you fund those?

They are primarily funded in November and the majority of them will be done and over by March.

Okay. And then in terms of quarter to date, given that you had one month of the tax season already under your belt, what has been the transaction volume on the recent transfers that you have been processing on behalf of H&R Block?

We have no change in the guidance that we previously provided with regard to anything related to that.

All right. I'm not asking for a change to your guidance, I am saying how is the tax season going this quarter thus far.

Look I think that frankly there is obviously we need to ensure that we're thoughtful about what we provide to people based on the fact that obviously there is impact to partners based on those sorts of disclosures. What we're saying is that, and the only thing we're going to be talking about is that, that $13 million to $16 million of revenue that we guided to

Net income.

Net income, I apologize, net income that we guided to previously when we first announced the transaction, we don't feel that there is a need to update that number based on any information that we've seen to-date.

Okay. Back to the Emerald Advance loans, is there any additional dollars that you've been funding so far that you're expecting to fund this quarter on top of this $42 million from the fourth quarter?

It would be not anything of any significance.

And then as we continue to think about the losses on those loans, should we be thinking of an increase in the charge-off ratio in this coming calendar quarter or what's your sense there?

Yes, there is a possibility. We'll see how well we've provided in that process and based on that data. But, thus far, it appears to be operating exactly as planned. So, we think we're well within the reserves that we've set out from what data we have to-date. Now that might change. We don't think it will. And we don't think if it did, it would be anything of any materiality but when you have no charge-offs though, any increase would be more than what you have.

Sure. So you've provided for anticipated charge-offs to the extent that there's going to be charge-offs from these loans?

Yes, correct. And there will be some.

Right. So how much is your provision this quarter related to Emerald Advances?

So, if you look in the queue under the other assets, other loan categories, you'll see $2 million that's provided. That's primarily for Emerald Advance.

Very good. Thank you very much. Wait, one more question, if I am still on the line. In terms of the tax income -- tax season income from H&R Block Bank next quarter, what tax rate should we be applying to that?

We think that it's okay to apply 41.7% tax rate to that.

So the same tax rate as the rest of your income?

Yes, that's where that is right now.

Andrew Liesch, Sandler O'Neill.

Just one follow-up. You covered the rest of my questions. The banking service fees and other lines, kind of curious what the geography of that is? I would imagine some of it was increases from Block products but just kind of curious what made up that $6.3 million?

Right, so the banking service fees includes prepaid. So that includes the impact of the Emerald Card. And just as a reminder, the Emerald Advance gets loaded on the Emerald Card. So there is increased prepaid card activity in this quarter.

Got you. So then that should continue again in this March quarter until these balances are paid off?

Correct. As amounts get loaded from tax refunds, yes.

Gary Tenner, D.A. Davidson.

Just couple of quick questions. First, Andy, the credits that you had referenced as having been refinanced out of the bank post quarter, which category was that again, I didn't quite catch it?

So, it is the C&I loan. You will find it on the classified assets schedule as a special mention of $9 million. It was there last quarter and at point in time, December 31, it was also there but in January, it fully paid off with no loss and all recovery of past accrued interest. So that benefit isn't even reflected in our strong numbers already.

Okay. So there was some interest recoveries on that, that will be reflected here in March quarter?

No, I was always -- the interest was always paid currently there but because -- we were always within borrowing base on that, but the Company had a couple of money-losing quarters. We had classified the loan. We were in borrowing base the whole time, but that loan paid off. So, it is the reflection of the quality of the C&I book, really more than anything else. That loan was always current and it was always within borrowing base. It was a back leverage of factored receivables, but the Company wasn't doing as well as it could have been. It had some negative income quarters and then it got paid off.

Okay, great. And then, if my numbers are right, just looking at the lender finance or single family lender finance loans, it looks like they increased from September 30 somewhere near $100 million. Is that about right?

Sounds about right.

Correct.

So, that's roughly 33% sequential quarter increase and it's pretty meaningful contributor to the net growth in the quarter. So, could you kind of comment on that business? How aggressively you're trying to grow it, how large you would have it be potentially, relative to the overall portfolio?

We think that's a great business. We like it a lot. We've been involved in it for a long time. And we see our relationships growing with some of the largest players in the industry. And so, one aspect of that business is the timing of draws can also impact growth. So, you often have lines that are set up and they may be drawn partially and then as the utilization increases, you have increase in balances. And so, we've had -- those lines go up and down, but we really like that business. We think it's a very safe and strong asset class. And we have some really fantastic industry leading partners in that area, both on the origination side but also in subordinated positions relative to the bank.

Don Worthington, Raymond James.

Wanted to pursue the gain on sale other line. How much in there was sales structured settlements?

So structured settlements were approximately $2.9 million of that total.

Okay. And then, what the premiums on those these days?

We've never really given complete color, but it's obvious that they're a lot wider than mortgages for that. So --

Julianna Balicka, KBW.

I have a follow-up on your average balance sheet. One, and I am sorry if I missed this, [it's not necessarily on] your non-earning assets, what was the fluctuation this quarter once you come back down? And then, in terms of your FHLB advances are higher this quarter and the end of the year at [$700 million- and change], should that continue to come down into the next coming quarters since your seasonal tax saving deposits will be offset with cash?

Let me cover the first question and make sure we're locked in. That increase is relatively small like $17 million thereabouts on the (multiple speakers).

I've got a $100 million on non, right?

Let me look at where you are. So, $68 million to -- yes, so we'll have to -- Julianna, I'll have to take that offline and give it to you. I'm not sure what the difference is.

Okay, that's fine. And then on FHLB advance which will be discontinued [and they are] going to go down from end of the year balances, you may not need them for funding you or how should we be thinking about the fluctuation of FHLB?

Yes. On the advances, we would expect that depending on loan growth to be likely similar for that level. And just reflecting on the non-interest bearing, most of it is likely block cash that we have on the balance sheet. For that we'll take a look and make sure we give you a good clear detail on that.

Okay, that makes sense. And then, one more question (inaudible), the $13 million to $16 million net income for the year that you are guiding to, does that include all the moving parts of H&R Block, including the incremental $1 million you'll be getting from the cash offering, seasonal deposits, the incremental interchange fees from the prepaid cards or is that related just simply to the transaction (inaudible) transaction volume?

Julianna, I'm going to repeat a little bit because, I'm sorry, I got a little choppy, but your question was whether or not the $13 million to $16 million of after tax income included the benefit from the million dollars of interest income we expect to earn from the deposit balances, as well as the cross-sell income or was that or is something else?

The interchange from the prepaid cards.

So that definitely includes the interchange in the prepaid cards and it doesn't include the incremental benefit of the cash and that wasn't something we didn't know exactly what that would have been. It would have been lower without the rate increase and so that would be incremental money on top of the $13 million to $16 million and the 70% that we're estimating next quarter.

And it includes the net income from the loans, the Emerald Advance loans (multiple speakers)?

Yes, it includes the net income for the Emerald Advance loans. It includes all income from the three -- it includes all income from the three products, all the direct income, the interchange, any fees, any Emerald Advance income and any refund transfer.

As well as the deduction of the provision for loan loss.

Right.

I'd like to now turn the call back to Greg Garrabrants for any closing remarks.

We have one more question I believe. If we can open up the line for the question. Can you open that line for that question for Edward Hemmelgarn, please.

Edward Hemmelgarn, Shaker Investments.

Greg, I just had a couple of questions. One, where do you show the originations for the Emerald Advance? Is it in for loans to be sold or is it for loans to be held? Since you're only holding 10% of it, how do you (multiple speakers)?

Right. Yes, so it's in -- 90% of the volume is shown as originations for sale and 10% is shown as originations for portfolio. So we booked $42 million, which means about $370 million or thereabouts got booked as originated for sale.

Okay, then did the loans that you're holding show up in the other?

Yes.

So, we should expect a drop of about [$42 million] there or plus whatever you add in the --

Correct.

Okay. Then lastly, what was the pipeline at the end of -- or for the quarter or at the end of the quarter, I guess?

The pipeline that we gave you today, it's $877 million.

Okay, Congratulations on a good quarter.

Well, thanks very much. Everything is going very, very well and what's sort of interesting is there are some noise outside but inside everything is great. So, we'll just keep on performing and the market will have to do what the market does. Operator, if you could let's close the call and thank you very much for everyone's time and we'll talk to you next quarter. Thank you.

This concludes today's conference. Thank you for your participation.