Axos Financial Inc (AX) 2016 Q4 法說會逐字稿

Greetings and welcome to the BofI Holding, Inc. Fourth Quarter and Fiscal Year Financial Results Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Johnny Lai. Thank you. You may begin.

Thanks, Michelle. Good afternoon, everyone.

Joining us today for BofI Holding, Inc.'s fourth 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 and Andy will review and comment on the financial and operational results for the three and 12 months ended June 30, 2016, and they will be available to answer questions after the prepared presentation.

Before we begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore the Company claims the Safe Harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

This call is being webcast and there will be an audio replay available in the Investor Relations section of the Company's website located at bofiholding.com for 30 days. Details for this call were provided on the conference call announcement in today's earnings press release.

At this time, I'd 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 our 2016 fiscal year ended June 30, 2016. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced record net income for the fiscal year ended June 30, 2016 of $119,291,000, up 44.3% over the $82,682,000 earned for the fiscal year ended June 30, 2015. BofI's return on average equity over the fiscal year was 19.43% and the Bank's 2016 fiscal year efficiency ratio was 34.4%. Fiscal year 2016 earnings per share increased 38.1% from -- $1.85 per diluted share compared to $1.34 in the fiscal year ended June 2015.

Net income for BofI's fourth quarter ended June 30, 2016 was $29,727,000, up 21.9% when compared to the $24,395,000 earned in the fourth quarter ended June 30, 2015. Earnings attributable to BofI's common stockholders were $29,650,000 or $0.46 per diluted share for the quarter ended June 30, 2016 compared to $0.39 per diluted share for the quarter ended June 30, 2015 and $0.56 per diluted share for the linked quarter ended March 31, 2016 in which we recognized the vast majority of our tax season-related revenue.

Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the fourth quarter ended June 30, 2016 increased by $6.2 million or 26.5% when compared to the quarter ended June 30, 2015. Other highlights for the 2016 fiscal year and the fourth quarter include net loans and leases grew by 29% in the fiscal year and average balances grew by $471 million in the fourth quarter, a quarterly growth rate of 8.1% and annualized growth rate of 32.4%. The fourth quarter average gross was increased by [$140 million] of average balances of purchased leases and reduced by $35 million of short-term H&R Block's loans outstanding in the June 2016 versus March 2016 quarters resulting in adjusted average net organic loan growth of $366 million, a quarterly growth rate of 6.1% and an annualized growth rate of 24.3%.

Total assets reached $7.6 billion at June 30, 2016, up $1.8 billion or 30.5% when compared with June 30, 2015. Excluding the impact of H&R Block's seasonal liquidity, assets grew 28.4% over the prior fiscal year and by an annualized 18.2% in the fourth quarter. Average rates on loans and leases increased from 5.02% in fiscal 2015 to 5.12% in fiscal 2016. Average loan rates in the fourth quarter of fiscal 2016 were 5.02%. Interest bearing savings and demand deposit costs fell to 67 basis points in fiscal 2016 from 72 basis points in fiscal 2015.

Non-interest income increased by 117% [from fiscal 2016 to fiscal 2015] and fiscal year fourth quarter non-interest income grew by 65.5% over the fourth quarter of fiscal 2015. Return on equity reached 19.43% for the fiscal year and declined to 17.91% for the fourth quarter as a result of less H&R Block fee income being realized in the fourth quarter. Net interest margin was 3.72% for the quarter ended June 30, 2016 compared to 3.85% in the quarter ended March 31, 2016. Excluding average balances associated with short-term H&R Block lending products and excess H&R Block liquidity, net interest margin was 3.87% in the fourth quarter of 2016 within our target, 3.8% to 4.0% range.

The reduction over the prior quarters resulted from payoffs of short-term higher yielding H&R Block lending products, additional seasonal liquidity, an increase in pre-pay rates on single family loans and the carrying cost of our subordinated debt offering. The increased cost of our subordinated debt offering which is not currently been contributed to the bank as capital or utilized for share repurchases as of today resulted in a reduction of net interest margin by 4 basis points.

For the fiscal year ended June 30, 2016, our net interest margin was 3.91%, essentially unchanged from 3.92% in the prior fiscal year.

Our efficiency ratio was 34.44% for the full fiscal year 2016 and our efficiency ratio was 38.28% for the fourth quarter of fiscal 2016. As our quarterly fee income varies, we expect to see some variation in our efficiency ratio as our expense base will be more consistent than our seasonal tax product related revenue. Additionally, we continue to make significant strategic investments in our next generation online and mobile banking infrastructure as well as an incubating new growth businesses. We believe these long-term strategic investments are controlled, reasonably sized and will augment our organic growth and competitive position in the near future.

Our credit quality remained strong. The Bank experienced small net recovery rather than a net charge-off in fiscal year 2016 and ended the year with only 50 basis points of non-performing loans to total loans. Our allowance for loan loss represents 112.5% coverage of our non-performing loans.

We originated approximately $1.2 billion of gross loans in the fourth quarter. As a result, ending loan balances increased by 5.3% linked quarter, representing a 21.2% annualized growth rate. Our loan production for the fourth quarter ended June 30, 2016 consisted of $141 million of single family agency and non-agency eligible gain on sale production, $416 million of single family jumbo portfolio production, $173 million of multi-family and small balance commercial real estate secured production, a net increase in C&I and warehouse lending of $97 million and $33 million of auto production.

We experience what we believe to be a higher level of pre-payment in our single-family portfolio this quarter, which negatively impacted our loan yield. The increased prepayments resulted in an increase in the recognition of costs associated with the origination of the loans, thereby reducing the loan yield of the single-family portfolio. We did not reduce market rates this quarter in any of our loan portfolios.

For the fourth fiscal quarter originations, the average FICO for single-family agency eligible production was 758 with an average loan to value ratio of 68%. The average FICO for the single-family jumbo production was 710 with an average LTV of 62.7%. The average LTV of the originated multi-family loans was 57% and the debt service coverage ratio was 1.42%. The average LTV of the originated small balance commercial real estate loans was 52.2% and the debt service coverage ratio was 1.51%. The average FICO of the auto production was 761. At June 30, 2016, the weighted average loan to value ratio of our entire portfolio of real estate loans was 57%. These loan to value ratios use historic origination data appraisals over current amortized balances, making these historic loan-to-value ratios even more conservative when you consider that real estate values have generally risen.

In single-family jumbo mortgages, representing 57% of our gross loans outstanding at June 30, 2016, the average loan-to-value ratio is 58%. As of the June 30, 2016 quarter, 55% of the single-family loans have loan-to-value ratios at or below 60%, 37% have loan-to-value ratios between 61% and 70%, 6% of single family loans have loan-to-value ratios between 71% and 75%, and approximately 1% have loan-to-value ratios between 75% and 80%, and approximately 1% have loan-to-value ratios greater than 80%.

The LTV is calculated using the current principle balance divided by the original appraised value of the property securing the loan. We have a proven track record as a conservative lender in jumbo single-family mortgage lending with lifetime credit losses in our originated single family loan portfolio of less than 2 basis points of loans originated. Disciplined underwriting and strong asset appreciation have resulted in excellent asset quality across our entire portfolio, with 1 basis point of recoveries over the 12 months ended June 30, 2016 and 42 basis points of non-performing assets to total assets.

Although our level of delinquencies remains well below those of average banks at only 42 basis points of non-performing assets to total assets, and 50 basis points of non-performing loans to total loans, we will have delinquencies from time to time. However, we believe that our strong collateral protection limits the severity of our loss in the event of a delinquency, because the borrower can either sell the property or we will recover substantially all our principal in the event we ultimately have to foreclose on a property.

The increase in non-performing loans this quarter of around $8 million is primarily comprised of three loans that became non-performing this quarter. One $5 million loan is a single-family first mortgage secured by a well-located beach house that is currently for sale for $20 million. The other two loans are well-secured single-family properties in coastal areas, one with a loan of $2.2 million on a property with a value of $3.7 million and the other a loan of $1.2 million on a property worth $2.6 million.

We had approximately $1.4 billion of multi-family loans outstanding at June 30, 2016, representing approximately 21% of our total loan book. We focus on smaller dollar multi-selling properties in Northern and Southern California, Florida, Texas, Illinois and certain markets in Washington, and New York. The weighted average loan-to-value ratio of our multi-family loan book is 65%, based on the appraised value at the time of origination. We do not have risks hidden in tails of our portfolio. Approximately 59% of our multi-family loans are under 60% LTV, 34% are between 60% and 70% and 6% are between 70% and 75%, and less than 1% of our multi-family loans have a loan-to-value ratio above 75%.

We conducted CCAR stress testing on our multi-family portfolio, showing very manageable projected losses in adverse and severe scenarios even without the benefit of support from guarantors. The lifetime credit losses in our originated multifamily portfolio, lifetime loss rates are also less than 2 basis points of loans originated over the entire 15 years we've originated multi-family loans.

Our C&I lending group, which includes, lender finance, real estate secured bridge lending, equipment leasing and other asset-based lending continues to generate good risk-adjusted returns for the Bank. Our ability to find good credits and create structures with significant collateral protection, our competitive advantages we believe can be extended to other C&I lending categories. Despite growing our C&I loan book from less than 10% of our total loans outstanding three years ago to almost 15% at the end of fiscal 2016, our commercial loan portfolio continues to perform extremely well from a credit perspective. We have no direct energy exposure and those shared national credit exposure to any oil and gas or oil field services firms in our loan book.

Our lender finance group has been a key driver of our C&I loan growth. These lines of credit to non-bank lenders backed by residential or commercial real estate assets, or non-real estate related loans and receivables provide good risk-adjusted returns with a large margin of safety. By conducting thorough credit analysis of our non-bank borrowers and creating sound structures, putting the bank at the top of the credit stack in the majority of instances, we've been able to avoid losses that [cash flow-blazed] commercial lenders incur when their borrowers experience deterioration in their underlying business. We use special purpose entities in this business to ring fence the collateral. This practice is usual and customary in the industry and represents prudent practice.

On March 31, we closed the purchase of approximately $140 million of equipment leases and added 25 employees from Pacific Western Equipment Finance headquartered in Salt Lake City from Pacific Western Bank. We paid a purchase premium of approximately 2.5% on a net book value of approximately $140 million of equipment lease with an average rate of approximately 7% and paid no additional premium for the business. The addition of a seasoned equipment leasing team augments our lending capabilities and provides another commercial lending vertical that we intend to broaden on an opportunistic basis.

We continue to expect the leasing teams to originate between $80 million and $100 million in new leases annually at an efficiency ratio of approximately 40%, improving to 35% within the next year. The operational integration of this business has been smooth.

We originated $33 million of prime auto loans in the quarter ended June 30, 2016, up 81% from the $18 million in the prior quarter. Our strategy in auto lending is to build a strong operational risk and compliance infrastructure, identifying niche lending opportunities and create flexibility as to whether we balance sheet, securitize or sell and hold on [from our] production. Over the past six months we've expanded our indirect distribution while investing in direct marketing and strategic partnership opportunities. We continue to target high quality borrowers in auto lending with an average FICO score of 758 in our existing loan book.

Our outlook for loan growth remains positive with a loan pipeline of approximately $954 million, consisting of $522 million of single family jumbo loans, $122 million of single family agency mortgages, $82 million of income property loans and $228 million of C&I loans including the newly purchased equipment finance business.

We had another strong quarter of deposit funding growth. Total deposits increased by $1.6 billion or 35.8% year-over-year with growth across a variety of consumer and business deposit categories. Checking and savings deposits increased by $1.3 billion compared to June 30, 2015, representing year-over-year growth of 36.4%. Checking and savings deposits represent 83% of total deposits.

We continue to expand and develop our cross-sell initiatives between our lending and deposit groups. We are developing additional cross sell initiatives in consumer and business banking that should generate new deposit accounts over time. Of the Bank's overall deposit base we have approximately 38% business and consumer checking accounts, 27% money market accounts, 5% IRA accounts, 9% savings accounts and 3% prepaid accounts.

We had a particular success growing our business banking and consumer online deposits this quarter. As we test new cross marketing initiatives across various consumer and business banking brands we see lots of opportunity to further solidify our relationships with our customers. Our commercial banking group continues to focus on attracting treasury management customers and expanding at the new specialty deposit categories. We are pleased with the smooth operational transition and the financial results in the first year of our long-term strategic partnership with H&R block. We thank H&R Block and their team members for making this a smooth transition.

While the timing of the revenue and earnings contributions and the amount of excess liquidity that stays on our balance sheet after the tax season created some volatility in our fee income, loan growth, net interest income and net interest margins, we are extremely pleased with the results and our relationship with H&R Block. We are currently working on software integration with H&R Block, so that we can execute seamlessly on our exclusive right to cross sell individual retirement accounts to H&R Block tax offices and their H&R Block digital channel for this coming tax season. We are investing in more strategic projects today than we have any time in the 16 year history of the Bank. These investments cut across every function and business unit from refining retention analytics and outbound call centers strategies in our consumer deposits franchise, to implementing an enterprise-wide business intelligence tools to enhance the efficiency of our data analysts, to automating process, testing and compliance and fully implementing our enterprise risk management system, establishing new C&I and consumer lending verticals and building our new consumer online banking platform. We have been able to accelerate the pace and scale of the initiatives as we grow our revenue and strengthen our management team.

We've made good progress in our multi-year investments in our universal digital banking model. The rationale behind the universal digital banking model is several fold. First, we believe, we must have the ability over time to control and own our user experience. This is an important competitive advantage because it allows us to rapidly integrate new technologies and services as they develop and partner more seamlessly with third parties for customer acquisition as well as to offer complementary products. We believe that the future of banking will still require the ability to be a low cost provider and offer great value to customers, but the strong user experience will also be a compelling value proposition that will increase retention and reduce customer acquisition cost.

Second, customer and third party data can provide useful guidance as to how to integrate sales efforts that involve marketing automation, outbound sales center and behind-the-password cross selling. We have a team dedicated to building a personalization engine that we believe will increase our ability to cross sell our customers' relevant products and increase their retention through customized user experience. Third, increasing the scope of our digitally-enabled products will allow us to develop more lending niches but also provide a wider variety of digitally-delivered products to our customers.

We've been making progress. We've completed our development of our consumer account opening software, eliminating significant third party software costs per account opening, we've developed an API stack that allows us to work seamlessly with partners to allow us to open deposit accounts, this API stack will be utilized to integrate it to H&R Block's tax softwares for IRA account opening this tax season, we have a prototype of our next generation online consumer banking platform, we've made significant progress and are within a few months of completing our first-in-house developed retail consumer loan origination software system, we've mapped out and begun to develop our personalization and alerts engine, we have a much improved in-house user experience and software development capability that will serve to power this ambitious project.

By building systems processes and partnerships that allow BofI to offer a seamless user experience and access multiple services either offered by us or potentially third party providers through an integrated software platform, we believe we will differentiate our value proposition, personalize the user experience and encourage more customers to use BofI as their primary banking platform. The virtuous cycle of convenience leading to higher client engagement and the Bank gaining more intelligence about customer's wants and needs is a formula that we believe will be successful in banking over the next decade. Of course, we incurred incremental costs related to these investments. However, we firmly believe that these investments will generate significant long-term returns as we build our next generation digital banking platform, our personalization engine and expand our digital product set.

Before I turn the call over to Andy to discuss our financial results, I'll provide a brief update on our ongoing litigation. I will not spend much time on this because these lawsuits are old news. The events alleged by disgruntled former junior employee Erhart happened almost a year and a half ago by his account. One of the world's largest law firms conducted an independent investigation and found his allegations to be without factual basis and cleared management of the alleged wrongdoing. Subsequently, the Bank has completed two record-setting fiscal years, closed two acquisitions that both required regulatory approval and successfully completed multiple OCC and Federal Reserve regulatory examinations. We've generally been successful in court. The court issued a temporary restraining order against Erhart, while the Bank's action against Erhart for damages proceeding toward trial, Erhart's case against the Bank has not moved forward because our motion to dismiss is under consideration.

In a decisive victory, one motion requiring Erhart's attorney Gillam to disclose her communications with short-sellers, the media and other third parties. The shocking evidence shows Gillam providing BofI's confidential information she apparently obtained from Erhart to the New York Times as well as communicating with a number of short seller hedge funds and sending celebratory emails about the stock price decline following the filing of Erhart's complaint.

With regard to the class action, I previously stated the strike suit lawyers revised complaint is riddled with numerous misrepresentations, outright fabrications, factual inaccuracies, out of context statements and the stake in application of regulatory guidance and law. During our investigation, we obtained declarations signed under penalty of perjury by two former employees indicated that the lead plaintiffs' counsel misrepresented witness allegations attributed to them in an effort to bolster his complaint. This is egregious and we are weighing our options to seek sanctions at the appropriate time to help defray some of our shareholder lawsuits.

The performance of our business has not been impacted based on today's outstanding results. The Bank is in strong regulatory standing with no enforcement actions, has not been fined a single dollar by any regulatory agency, has not been required to modify its products or business practices. Additionally, we do not foresee any further impact to the underlying business as a result of the frivolous lawsuit and the short seller head pieces. Our management team and employees remain focused on running the business. Due to the nature of the ongoing litigation, I will not answer any questions regarding our legal matters on this call in the question and answer session.

The fourth quarter was a culmination of extremely successful year that included record earnings of $119 million, nearly $5 billion in total loan originations, completion of a $51 million subordinated note offering, a first successful tax season with our new partner H&R Block and the acquisition of Pac West Equipment Financing team based in Salt Lake City, Utah. We're extremely proud to be recognized by SNL Financial as the top performing large thrift in the US for a fourth consecutive year, as well as by Bank Director magazine as a top five performing bank with assets between $5 billion to $50 billion for the second consecutive year.

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

Thanks, Greg.

Our 8-K was filed today with the SEC and is available online through EDGAR or through our website at bofiholding.com. In addition to our press release, the 8-K includes unaudited financial schedules. I will highlight a few areas rather than go through every financial line item. Please refer to our press release and our 8-K for additional details.

First, looking at our results for the fiscal year compared to the last fiscal year, net income increased 44.3% to a record $119.3 million. Return on average common equity was 19.43% up from 18.34% last year. This is the fifth consecutive year we've increased our average ROE starting from 15.17% in the fiscal year ended June 30, 2011. Our earnings growth has been generated from both strong growth in our net interest income and in our fee income year-over-year.

With primarily organic loan growth, our average loan portfolio balance grew $1.3 billion this year or 29.4% while our net interest margin was stable coming in at 3.91% for the fiscal year compared to 3.92% for the last fiscal year. Our fee income this year was increased by the ongoing program management agreement with H&R Block as final revenue for the fiscal year came in slightly above the high end of the range of $34 million. Finally, including the cost of our increased size and our new products and technology, our efficiency ratio for the year was 34.4% changed slightly from our 33.8% ratio for the last fiscal year.

Looking at our results for this quarter ended June 30, 2016 compared to our results for the quarter ended March 31, 2016, average portfolio loan balances increased $471 million between linked quarters. The net interest margin for this quarter was 3.72%, but when you subtract about $321 million of average balance related to the program management agreement for H&R Block at 44 basis points, the net interest margin increases to 3.87%. We expect the entire excess liquidity from H&R Block to be gone next quarter and the net interest margin to increase between 3.8% and 4%.

Regarding asset quality, we had 2 basis points of net charge-offs to average loans in the fourth quarter compared to 1 basis point of net charge-offs for the quarter ended March 31, 2016. Our allowance as a percentage of loans at June 30, 2016 was 56 basis points, down from 61 basis points at March 31, 2016, primarily due to the reduction of the Emerald Advance loans at June 30, 2016, which had a significantly higher allowance, which is no longer necessary.

Non-performing loans as a percentage of total loans increased slightly to 50 basis points at June 30, 2016, primarily due to the three single-family loans totaling $8.3 million, which Greg had previously discussed. Overall, our loan loss allowance as a percentage of our total non-performing was 112.5% at June 30, 2016.

The Bank is very well positioned from a capital perspective. The tier 1 capital was 9.12% from the holding company, and 8.78% for the Bank at June 30, 2016. The holding company has more than $70 million in cash at June 30, 2016 that is available to be used for general corporate purposes, possible future acquisitions and growth opportunities, possible common stock buybacks and repurchases and to provide new capital to the Bank to support future growth. For example if we push down $70 million as capital to the Bank, our tier 1 leverage ratio would increase from 8.78% to 9.71%.

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

Thanks, Michelle. We are ready to take questions.

(Operator Instructions)

Bob Ramsey, FBR.

I wanted to touch quickly on expenses, if we could. They ran a little bit higher than I was looking for and I just didn't know if there is anything variable comp related to mortgage banking that was unusual or anything around some of the Block quarterly volatility or just sort how we should think about the expense run rate.

When you look at the overall increase in compensation, the primary reason for the increase is 70 headcounts were added between March 31 and June 30. When you break that down, the largest increase is associated with C&I and leasing. As Greg mentioned, there were about 23 to 25 people that were added for the C&I Salt Lake City office for the leasing and then another 10 people were added to C&I on top of that.

The next largest growth category came out of single-family residential where about nine headcounts were added during the quarter. The next largest increase came out of IT where we had 14 headcounts added in connection with our technology projects and overall growth. The balance of the headcounts are spread across a number of the groups, including an additional five headcounts for compliance and audit that were added in this period.

So the probably single largest factor to growth in comp comes from the addition of the leasing unit.

I think that with regard to whether we expect that kind of growth of personnel in subsequent quarters, I think the answer is no, but with everything we're doing I think that we are more likely to be added 35% to 36% ratio over the entire year. But because the Block income is moving so much, we will see spikes in our efficiency ratio based on what we're doing. So I don't think it would be good to expect that. We have a 35% efficiency ratio every quarter, but we hope to achieve that over the entire year, although we're not going to slow down our ambitious growth agenda, our technology agenda for a couple of hundred efficiency -- a couple of hundred basis points of efficiency ratio. So that's -- hope that's helpful from that perspective.

Yes, that is helpful. That's great. Shifting to net interest margin, I know you guys said excluding Block, you were at 3.87%, next quarter you expect to still be in 3.80% to 4% range and that there will be no Block impact I guess next quarter. Where are you, I guess, are you expecting to be down from where we are today, up from where we are today, I just want a little bit more sort of directional vision on where you're seeing margin pressure or not in the environment today when you strip out the Block volatility.

I think, I would say that rough stability. We didn't change loan rates at all. We did have a prepay quarter on single family that impacted the single-family loan rate a little bit. We also have the sub-debt which impacted our margin by about 4 basis points this quarter. So, and we didn't use it yet. So it essentially is sitting there just this excess capital and creating a drag, because it hasn't been deployed yet in our capital ratios are above what they normally are.

So I think relative stability, taking away the Block number, I mean deposit costs were reasonably stable and loan rates were stable at least the offer rates were stable. We didn't have to cut rates in order to attract volume and we don't intend to do that.

Okay. And then last question, I'll hop out. What are you thinking of it's a -- priority is for that sub debt, you mentioned it so far is not being used on the balance sheet and if you push it down to the Bank, it brings those ratios up pretty significantly, what is the priority for using that capital?

Clearly with where the share price is, that makes share repurchases more attractive that's a decision that I and the Board make, but that's obviously something that after, frankly, after announcing the year that we have and then there was a good quarter. We're obviously disappointed by that reaction, but that also provides us opportunity and so we have to take advantage of that opportunity, and if we're doing that, then that will allow us to obviously increase EPS because we certainly are in a lot more on an ROE basis than we do pay on interest.

So there is a lot of considerations. We have some interesting opportunities going forward from a lending perspective too. So it's a balance, but those are all considerations whether to use it for organic growth over time or to utilize it for some form or share repurchase.

Brad Berning, Craig Hallum Capital Group.

Could you just start with going through each of the lending sectors, talk about market environment, talk about competition, talk about your interest to growth outlook? Just kind of give lay of the land of each one of the sectors.

So our single family jumbo business I think has good growth potential. It's probably our more mature segment, but I still believe there's lots of opportunity there. And we don't really see any significant increased competition. There is a few lenders here and there, but we don't really see too much there from increased competition. I think that frankly as we continue to grow a lot of the limitations that we have in our growth opportunities are related more to our own operational infrastructure in growing it. And we have an office, we're opening in different states that has 140 people. We have the capacity for 140 people. That is just some of those elements of operational infrastructure build that I think are more limiting to growth any market segment or sector and we have really good plans on the data strategy side there and things like that to be able to move that business forward.

On the single-family agency side, there is a lot of opportunity to grow that business. And frankly, we've probably been a little too cost conscious with regard to always maintaining an operational infrastructure that was very cost focused. And so at times it hasn't allowed us to take advantage of what the market opportunities are out there. So I feel very good about that.

Multi-family is a lot more competitive. There's a lot of banks focused on it. I think we've seen them sort of pushing credit long I/O periods, higher LTVs, non-recourse, so that's made that segment a lot more difficult and growth has been more challenging there. So that's something that we've been compensating for with a smaller balance commercial production a little bit, which we think there is some more opportunities in some different niches there although that's relatively competitive, but less so than multi-family, which is really I think the most competitive component of it.

In the C&I side, we have our lender finance businesses, there is lots of opportunity there. The production can be lumpy, the deals are long, there's lots of negotiation, it takes a lot of time, but we have good established niches there, we have a lot of great partners from a B lender perspective and from a hedge fund perspective, we work with a lot of the largest private equity firms in the world and those deals and I think we're important partners for them and they know we can execute. So that's good.

The leasing business, we clearly have plans for them to enhance their growth. We hired a leasing executive who not only focuses on the type of growth that the Pac West does but another leasing growth. And so we think there are other opportunities in the C&I side to find good risk-adjusted returns. We have our view what the markets are, we'll have to see how well we can execute there. And I think that's still to be determined.

The auto side has lots of opportunity. We've intentionally kept our credit quality extremely high. They've done a very good job of building a very high quality book. The yields are only okay. And so there is some lending niches there that we need to explore to increase the yield there, but certainly they've done a good job in building that business. And we've got some other initiatives that we're not prepared to announce here, that we're continuing to work on.

Overall, part of the universal digital banking initiatives to be able to have a broad suite of consumer products on the retail side, which would include auto, personal loans and others to sell our customers and to have a broad spectrum of business products, but probably not the sort of small business cash flow lending product at least owned by us.

So I think all in all, things are pretty good. We're not going to -- I think as we grow as I said before, we've had typically 30%-ish loan growth and I've tried to guide people more down into the 20%-s and if you look at where we were organically, after you separate the H&R Block, short term balance decreased, that's where we were. And obviously we had the acquisition which boosted that more into the 30% range, but that's not something obviously that's going to be repetitive.

I understood. We'll follow up more details on those later, but just wanted to make sure, you had a chance to re-echo a comment that I think I heard (inaudible) say, but I think you did say in your prepared remarks that the regulatory exams through the year are all completed. And I just wanted to give you a chance to, given all the questions on that topic, give you a chance to kind of re-echo what you said there.

So yes, the regulatory exams are already completed. But as I said on past calls, the nature of being a regulated entity is that we have constant dialog with regulators, including the OCC, SEC, FDIC and the Fed. I know that you've got involved in a little spat over what the term investigation is and how it's defined and that sort of thing and it's interesting because -- the term investigation is defined in securities law. And you could characterize any question or one question as an investigation and the nature of regulatory dialog is there is constant questions and enquiry.

And so, I think the important thing to note and what's most important is if there is any event that's occurred that would require disclosure, the answer is, absolutely no. So we've not been asked any question or received any inquiry from any agency including the SEC that would suggest concerns regarding financial misrepresentation, financial results, estimates, or other matters that would require an 8-K. And so we have with regard to the OCC, obviously, our primary regulator, we have two -- we have a full-scope exam and an interim exam.

Our full-scope exam for this year is complete, we know where that is. Obviously we can't talk about the specific results, but I was very clear that we have no constraints on our business. We have no enforcement actions and we frankly don't have any issues that would lead me to think that we have to change any single thing about what we're doing.

So while the amount of noise that the short-sellers have been able to generate is impressive, the actual impact on the operations of the business is nothing. And so, allow me to repeat, we have not been asked any question that or received any inquiry that would suggest any concerns about our financial misrepresentation, financial results, estimates or anything else that would require the filing of an 8-K, meaning that would be material.

Gary Tenner, D.A. Davidson.

A couple of quick questions. First on your comments on the prepayment speeds impacting loan yields this quarter, can you be a little more specific on what the actual impact was on average loan yields for the quarter?

It was like 3 basis points to 5 basis points, something like that. So it's not, it was wan, I mean, it's enough to make a difference when you're looking at a few basis points.

And that's on single family yield not on the entire yield, single family yield.

Okay. And then just, what you've seen through the first month of this quarter based on where rates are, you're seeing a similar sort of pace of prepayments this quarter?

It's tough to say because we're only a third through it on that item, but we do believe the quarter was out-sized.

Okay. And then just a follow-up on the expense piece you discussed in terms of the outlook for the efficiency ratio etcetera, but just trying to understand, so the leasing company came in, you said that's around a 40% efficiency ratio that you should be able to get down from there. And I get how efficiency ratio would be higher this quarter than it was in the March quarter obviously with H&R Block impact, I was surprised that it was actually well above where it was through the first half of the year or at least in the calendar fourth quarter last year when H&R Block wasn't there.

So can you talk about specifically the sequential increase in professional services cost this quarter was $2 million versus $2.7 million for the first three quarters and then advertising $2.2 million versus $4.6 million for the first three quarters. So just in terms of any seasonal fluctuations that impacts there?

Yes, let me first cover professional services and we'll look at the linked quarter change, where it went up about a $1 million, so for that piece. So when you break that down only $400,000 of that increase is connected to the litigation, the rest of that increase, so $600,000 is items outside of that. When you break that down the $600,000, about $100,000 relates to accounting, so that's audit and tax work; about $200,000 relates to contract legal that's legal work for a variety of different business contracts unrelated to the litigation; and then about $300,000 is increased primarily for third party and consultants that we bring in from time to time for audits and other items. So for example, BSA exam, we engaged Crowe which is part of our routine that's around $200,000 for the period. So, that kind of rounds out the increase in professional services.

Okay. And just on the advertising front, because that was about half of what it was in the first three quarters?

Yes. The advertising is a little bit more of a [mix], but there certainly is -- part of that is lead fees as Costco gets bigger in its mortgage banking, moves that's a little bit of that, but the issue is that we also have to develop the capacity there. Sometimes, we've gotten a little capacity constrained in mortgage banking and I think some of the efficacy as some of those leads really weren't where they should be. So that's a little bit -- a little bit of that there.

But otherwise it's just there is -- we're working on a lot of interesting marketing initiatives, constantly testing things and so there is an element of that too. I would say more broadly is that and obviously you guys have to make models and that's important. But what I've seen in the business as we've grown it, is that you go through slight stair-step waves where you bring on people, you do new things, you have a little bit of a cost increase and then you're able to get productivity out of those individuals and those initiatives that kind of can level things out a little bit and I think we've had a little bit of that with regard to personnel.

We've really worked hard to really upgrade talent in the organization and there is lots of new talent here that are working on a lot of new things, and all those new things aren't yet of fruition. So it may be more of -- a little bit of an extended timeframe in order to get all those things working, but people will be happy in two to three years, but they'll be -- we're not absolutely down in any one quarter by that 35% efficiency ratio. We're going to work hard to be cost conscious, but we're not going to sacrifice the future.

Yes, and I think I get that from the headcount perspective, just was one understands some of the other line items.

Andrew Liesch, Sandler O'Neill.

Sorry, if I missed it, did you guys say what the balance of deposits from H&R Block is on the balance sheet at the end of June?

We did not, but I can give that to you. So that's going to be approximately $203 million in total at the end of the period, included in non-interest bearing deposits.

And we don't (multiple speakers) that much above --.

(multiple speakers) might be $100 million roughly. So, we're close. That's why we're expecting with that excess liquidity going to have better margins.

Got it. Just a little bit of excess liquidity remains now.

Yes.

And then, just curious now with the first year of Block in there and just looking out to next year, have you had any discussions with them about any changes in tax laws that might affect the earned income tax credit and the IRS not paying out refunds until February 15, have you had any discussions with them about how that might affect your results?

We have lots of discussions with them about things like that about new products, about opportunities and we're in constant dialog with them. I don't think that any of those things would probably move where that revenue occurs to push it out in the quarter. But if it did, we'd certainly know far enough in advance so we can talk about that, but I don't think that's anything right now to be worrying about modeling. And we have a lot of exciting potential opportunities with them. Obviously, we've got the base products that we're excited about, but there is always other things to look at and maybe we'll get some of those and they'll be some opportunities for more than organic -- just organic customer growth that they have. So we'll see, but I don't think there's anything to try to put in our model right now in that regard.

And then similar to that or somewhat related, I think it might be possible that H&R Block launches or re-launches a refund anticipation loan product next year. Does your existing program management agreement allow for you to be the issuing bank under that or kind of curious if you'd be willing to do that product as well if Block is offering that product?

That's something that we're certainly looking at and obviously thinking about and I really don't have any further comment on it.

Don Worthington, Raymond James.

In terms of the gain on sale, are there -- what's the composition of that? Is that primarily structured settlements?

Yes, it's primarily structured settlements. So when you look at the $5.2 million gain, approximately $4.3 million of that roughly is structured settlements.

And then in terms of business deposits, I think Greg, you mentioned a balance of business post transaction or something like that, but do you have a balance for the business deposits I think, it's been running kind of north of $2 billion in the past.

Yes. Hang on a second, and if you go to your next question I'll have it for you.

The last question was -- this is a small part of what you do, but just looking for an update on kind of the high net worth brand?

Yes, that's going well. I think it's around $70 million in deposits. It's providing us a good place to test the cross selling and the relationship management model for our jumbo mortgage customers. So for somebody who -- the guy who has this $20 million house for sale and although he is the $5 million delinquency guy, he doesn't want to go and call into the call center and so that model is allowing us to test that cross-sell, it's working, it's one of the many initiatives we have, and we think there is real opportunity there to continue to grow it. We think the name Bank of Internet at times may be an obstacle to attracting certain high net worth customers. And so I think the branding and the structure around that and the service delivery method is something that has legs, and we'll be continuing to work on that in the future.

So, I've got your numbers for you. It's about 50-50 split, $2,976 million in consumer and $3,067 million in business. So nearly about 50-50.

There are no further questions at this time. I'd like to turn the call back over to Mr. Greg Garrabrants for any closing remarks.

Thanks, everyone. I appreciate your time today and your attention and to my knowledge, the 10-K should be forthcoming. So, we'll all look forward to that. And we'll look forward to talking with you next quarter. Thank you.

This concludes today's conference. Thank you for your participation, you may disconnect your lines at this time and have a wonderful day.