Axos Financial Inc (AX) 2017 Q4 法說會逐字稿

Greetings, and welcome to the BofI Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Johnny Lai, VP of Corporate Development and IR. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thanks for your interest in BofI. Joining us today for BofI Holding, Inc.'s fourth quarter and full year 2017 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 operating results for the 3 and 12 months ended June 30, 2017, and they will be available to answer questions after the prepared remarks.

Before I 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. 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 and in today's earnings press release.

At this time, I'd like to turn the call over to Greg for his opening remarks.

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 fourth quarter and fiscal 2017 year-end ended June 30, 2017. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced record net income of $134.7 million for the fiscal year ended June 30, 2017, up 13% over the $119 million earned for the fiscal year ended June 30, 2016. BofI's return on equity for fiscal 2017 was 17.78%, and the bank's efficiency ratio was 36.08%, up slightly from a year ago, but still best in class.

Fiscal year 2017 earnings per share increased 12% to $2.07 per diluted share compared to $1.85 in the fiscal year 2016. Net income for BofI's fourth quarter ended June 30, 2017 was $32.5 million, up 9.5% when compared to the $29.7 million earned in the fourth quarter ended June 30, 2016. Earnings attributable to BofI's common stockholders were $32.5 million or $0.50 per diluted share for the quarter ended June 30, 2017 compared to $0.46 per diluted share for the quarter ended June 30, 2016, and $0.63 per diluted share for the linked quarter ended March 31, 2017, in which we recognized the vast majority of our seasonal tax-related revenue.

Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the fourth quarter ended June 30, 2017 increased by $2.4 million or 8.2% when compared to the quarter ended June 30, 2016.

Other highlights for 2017 fiscal year in the fourth quarter include: net loans and leases increased by $354 million in the fourth quarter, representing 5% growth linked-quarter and an annualized growth rate of 20%. For the full year ended June 30, 2017, net loans and leases grew by $1.02 billion, representing 16% growth year-over-year. Total assets reached $8.5 billion at June 30, 2017, up $902 million or 11.9% when compared with June 30, 2016. Net interest margin was 3.8% for the quarter ended June 30, 2017, up 8 basis points from 3.72% in the fourth quarter of fiscal 2016. Excluding average balances associated with short-term H&R Block lending products and excess H&R Block liquidity, net interest margin was 3.89% in the fourth quarter of 2017. Average loan yields increased 16 basis points year-over-year to 5.18%, reflecting higher yield by newly originated single-family jumbo mortgages and multifamily loans and a favorable mixed shift towards C&I loans, which carry a higher yield than our overall average loan yield.

Average deposit costs increased by 9 basis points over the fourth quarter of fiscal 2016, 7 basis points less than the 16 basis point increase on loan yields over the fourth quarter of fiscal 2016. The increased cost of our subordinated debt offering, which has not been either contributed to the bank or utilized for share repurchase as of today, resulted in a reduction of net interest margin by 4 basis points. For the fiscal year ended June 30, 2017, our net interest margin was 3.95%, up 4 basis points from 3.91% in the prior fiscal year.

Noninterest income increased by 2.7% from fiscal 2017 to fiscal 2016 to $68.1 million.

Return on equity was 17.78% for fiscal 2017 compared to 19.43% for fiscal 2016, both well above our long-term target of 15% or greater.

We remain slightly asset-sensitive given the relatively short effect of duration of our single-family mortgage, multifamily and C&I loans. Our deposit betas for fiscal 2017 were well below what we modeled in our interest rate risk management calculations.

Our efficiency ratio was 36.08% for the full year of fiscal 2017 and 39.08% for the fourth quarter of fiscal 2017.

As our quarterly fee income varies, we expect to see some variation on 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 in incubating new businesses.

We believe these long-term strategic investments will augment our future growth and generate attractive returns.

Our credit quality remains pristine. The bank ended the year with only 38 basis points of nonperforming loans to total loans, improving from 50 basis points of nonperforming loans to total loans at the end of fiscal 2016. The bank had 6 basis points of charge-offs in fiscal 2017. But excluding the Refund Advance product, the bank had only 2 basis points of charge-offs in fiscal 2017 attributed to the rest of our non-Refund Advance loan book. Of the 20 basis points of net charge-offs in the fourth quarter, 19 basis points, or 95%, was attributable to losses from Refund Advance loans we originated in the third quarter of 2017, and only 1 basis point was attributed to the rest of the loan book.

Despite Refund Advances accounting for 95% of our charge-off rate, the actual losses from Refund Advance loans came in below our forecast and what we provisioned for in the third quarter of 2017, resulting in a reduction on our allowance for loan loss for the fourth quarter of 2017.

Our allowance for loan loss represents 144% coverage of our nonperforming loans.

We originated approximately $1.43 billion of gross loans in the fourth quarter. Originations for investment increased 9.3% linked-quarter to $1.14 billion. Ending loan balances increased by 5% sequentially, representing a 20% annualized growth rate. Our loan production for the fourth quarter ended June 30, 2017 consisted of: $98 million of single-family agency and non-agency-eligible gain on sale production, $41 million of single-family non-agency eligible gain on sale production; $420 million of single-family jumbo portfolio production; $100 million of multifamily and small balance commercial real estate portfolio production; $503 million of C&I production, resulting in $156 million of net C&I loan growth; and $34 million of auto production.

The $354 million of net growth this quarter was led by strong loan production from our commercial specialty real estate, multifamily, lender finance and jumbo single-family lending groups.

For the fourth fiscal quarter originations, the average FICO for single-family agency eligible production was 750, with an average loan-to-value ratio of 67.6%. The average FICO for the single-family jumbo production was 721, with an average loan-to-value ratio of 59.6%.

The average loan-to-value ratio of the originated multifamily loans was 54%, and the average debt service cover was 1.34. The average loan-to-value ratio of the originated small balance commercial real estate loans was 41.2%, and the debt service coverage was 1.65. The average FICO of the auto production was 786.

At June 30, 2017, the weighted average loan-to-value ratio of our entire portfolio of real estate loans was 57%. The loan-to-value ratios use origination date appraisals over current amortized balances, making these historic loan-to-values even more conservative when you consider their real estate values have generally risen since the vast majority of our loans are placed in the portfolio. As of the June 30, 2017 quarter, 57% of our single-family mortgages have loan-to-value ratios at or below 60%, 35% have loan-to-value ratios between 61% and 70%, 6% have loan-to-value ratios between 71% and 75% and approximately 1% between 75% and 80% and approximately 1% greater than 80% loan-to-value. The loan-to-value ratio is calculated using the current principal balance divided by the original appraisal value of the property securing the loan.

Our lifetime credit losses in our originated single-family portfolio is less than 3 basis points of loans originated.

We had approximately $1.6 billion of multifamily loans outstanding at June 30, 2017, representing 22% of our total loan book. We focused on smaller-dollar multifamily 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 multifamily loan book was 54% based on the appraised value at the time of origination. We do not have risks hidden in the tails of our portfolio. Approximately 65% of our multifamily loans are under 60% loan-to-value, 30% are between 60% and 70% and 4% are between 70% and 75%, and less than 1% of our multifamily loans have a loan-to-value ratio above 75%.

The lifetime credit losses in our originated multifamily portfolio are also less than 1 basis point of loans originated over the 17 years we've originated multifamily loans.

Our C&I lending group, which includes lender finance, real estate secured bridge, equipment leasing and other asset-backed lending, continues to generate good risk-adjusted returns for the bank. Our ability to find good credits and create structures with significant collateral protection are competitive advantages we believe can be extended to other C&I lending categories. Our commercial loan portfolio continues to perform well from a credit perspective, and we have had no losses in the history of our origination of any C&I credit.

Our commercial specialty real estate lending group had an outstanding quarter from a loan production perspective. These sponsor-backed senior term loans, secured by commercial real estate assets at low advance rates, provide good risk-adjusted yields and incremental fee income. Our experienced C&I team creates sound structures, putting the bank at the top of the credit risk stack in a majority of instances, with significant cushion on the former subordinated debt and equity. We work with established sponsors on projects located in attractive markets. We see significant opportunity to continue growing our commercial specialty real estate loan portfolio in a safe and prudent matter.

Lender finance continues to generate strong loan production. We make loans to nonbank lenders backed by consumer, commercial and residential real estate assets at low effective LTVs or collateral advance rates. Our conservative advance rates, effective collateral monitoring and sound structures have resulted in the bank incurring no credit losses or delinquencies in our entire lender finance portfolio to date.

Our Equipment Finance group had another solid quarter, originating approximately $15 million of loans in the fourth quarter of 2017. Our specialty is in structuring small balance loans and leases used by middle market companies to purchase essentially used equipment. Demand remains reasonably strong and is reflected by the $35 million loan pipeline at June 30, 2017.

Our outlook for loan growth remains positive, with a loan pipeline of approximately $901 million, consisting of $550 million of single-family jumbo loans, $89 million of single-family agency mortgages, $77 million of income property loans and $185 million of C&I loans.

Transitioning to funding. Total deposits increased $855 million or 14.2% year-over-year, with growth across consumer and business deposit categories. Checking and savings deposits increased by $1.1 billion compared to June 30, 2016, representing year-over-year growth of 22.1%.

Checking and savings deposits represent 88% of total deposits at June 30, 2017 compared to 83% at June 30, 2016. Of the bank's overall deposit base, we have approximately 45% business and consumer checking, 25% money market accounts, 4% IRA accounts, 10% savings accounts and 5% prepaid accounts.

Earlier this afternoon, we announced that we will be the exclusive provider of H&R Block's Refund Advance interest-free loans for the upcoming 2018 tax season. We will originate and fund all interest-free Refund Advance loans to H&R Block tax preparation clients for the 2018 tax season. Last year, H&R Block received approximately 1 million applications, and approximately 700 million of interest-free loans were issued to H&R Block customers during the 2017 tax season. This agreement is an expansion of the services BofI provided to H&R Block in the 2017 tax season since we will be the exclusive provider of Refund Advance loans in the 2018 tax season. BofI will provide the credit underwriting, loan origination, funding and loan servicing associated with the interest rate Refund Advance loans and receive fees from H&R Block for providing those services. From a financial impact perspective, we see opportunity to increase the pretax income we generated from Refund Advance in the 2017 tax season. Assuming we originate the same volume of Refund Advance loans in the 2018 tax season as was originated in the 2017 tax season, approximately 700 million, with credit losses at estimated levels, we will earn approximately $800 million of pretax profit from Refund Advance in fiscal 2018, roughly $3 million more in pretax income from Refund Advance than we did a year ago. There is no minimum guarantee from H&R Block, so the amount we earn will be contingent upon origination volume and actual credit losses.

Similar to last year, H&R Block is providing a limited credit guarantee tied to origination volume. The guarantee would apply only after actual credit losses exceed estimated credit losses by the amount of our projected fee income from this product. In addition to fees we will receive from H&R Block for originating and funding the Refund Advance product, we may benefit from incremental revenue derived from an increase in the number of H&R Block customers purchasing the bank's Refund Transfers and Emerald Card products. We looking forward to leveraging the insight from last tax season and driving higher uptake and new customers to H&R Block in the 2018 tax season.

We're making good progress on our universal digital banking initiative. Our multi-year investments that take greater control of our consumer and business banking platform, when complete, will allow us to better leverage customer and third-party data to offer unique personalized user experience and offer an enhanced array of services to new and existing customers.

We are on track to launch a beta version of our consumer online banking software in one of our consumer brands later this year.

We incurred incremental costs related to these investments in fiscal 2017. However, we firmly believe these investments will generate significant long-term returns through lower customer acquisition costs, better ability to cross-sell customers, an ever-increasing array of products and services, lower third-party technology costs and the ability to be faster and more agile in new product and service deployment.

These platform investments will also ensure that we can react quickly to the ever-changing ways that customers may wish to interact with their banks over time.

We have started to invest in resources for the heightened regulatory requirements associated with being a $10 billion asset bank. By starting the process early, we believe the incremental costs will be more easily absorbed over an extended period of time. We continue to see opportunities to increase our productivity through process improvements and maturity on some of our newer businesses.

We continue to expand our Las Vegas office as a component of our longer-term talent diversification strategy. Approximately 34 employees are currently working out of our Las Vegas office, but we have sufficient capacity to support up to 150 team members in that location.

Our capital levels remain strong. And we're well above revelatory requirements, with a Tier 1 leverage ratio to adjusted average assets of 9.6% for the bank and 9.95% for the holding company at June 30, 2017, providing us with the flexibility to invest in strategic initiatives and opportunistic M&A and share repurchases. We remain committed to prudently managing our capital for the best long-term interest of our shareholders. Further, we're excited about the future growth prospects across each of our existing and new businesses and platforms that we will launch or have launched over the last several years.

The bank remains in strong regulatory standing with no enforcement actions, has not been fined a single dollar by any regulatory agency and has not been required to modify its products or business practices. We've received regulatory approval to enter new product areas, such as offering the Refund Advance loans with H&R Block that we announced today. Additionally, we do not foresee any future impact or underlying business as a result of the frivolous lawsuits and short seller head paces. In fact, contrary to short sellers' allegations, and despite regulatory complaints that short sellers filed, we've received confirmation from the SEC that no investigation is ongoing, and no enforcement action is contemplated against BofI. We were confident that the SEC would be able to parse through the noise, and our confidence was not misplaced.

Our senior management team and employees remain focused on learning the business, and I'm proud of our performance in fiscal 2017. I'd like to acknowledge and thank our team members for helping us achieve record results, strong credit and regulatory results and exemplary service to our clients and business partners.

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 with the SEC today, 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 individual financial line item. Please refer to our press release or 8-K for additional details.

First, looking at our results for fiscal 2017 compared to fiscal 2016, net income increased 13% to a record $134.7 million. Our earnings growth has been generated from growth in both net interest income and in fee income year-over-year.

With primarily organic loan growth, our average loan portfolio balance grew $1 billion this year or 16%, while our net interest margin increased to 3.95% for this fiscal year compared to 3.91% last fiscal year.

Our fee income this year was increased primarily by the ongoing program management agreement with H&R Block.

Finally, including the cost of our increased size in our new products and technology, our efficiency ratio for the year was 36.1%, up from 34.4% last fiscal year.

Now looking at our results for the fourth quarter ended June 30, 2017, net income was $32,548,000, up 9.5% when compared to the $29,720,000 of net income for the fourth quarter ended June 30 '16, and down 20.6% when compared to last quarter. This was due to the normal seasonal trend associated with the income tax season.

Earnings attributable to BofI's common stockholders were $32,471,000 or $0.50 per diluted share for the quarter ended June 30, 2017 compared to $0.46 per diluted share for the quarter ended June 30, 2016, and compared to $0.063 or $0.63 per diluted share for the quarter ended March 31, 2017.

For the quarter ended June 30, 2017, net interest margin was 3.80%, up 8 basis points compared to the 3.72% in the quarter ended June 30, 2016, and down 44 basis points from the 4.24% in the quarter ended March 31, 2017.

The net interest margin would have been 3.89% when excluding the average balances associated with the low-yielding excess cash from the H&R Block-related products during this quarter, which is in line with our full year target of a net interest margin of between 3.8% and 4%.

Also impacting net interest margin this quarter, the Federal Home Loan Bank of San Francisco decreased their target dividend rate, impacting net interest margin by 3 basis points.

Our average loan yield, excluding H&R Block temporary seasonal loan products, was 5.18% for the fourth quarter of fiscal 2017, up when compared to the 5.13% in the third quarter of fiscal 2017.

For the fourth quarter, the bank booked a net loan loss provision of $200,000, primarily to account for portfolio growth this quarter, which required a provision of approximately $1.7 million, but was reduced by the excess general loan loss allowance of $1.5 million due to better-than-expected collections of the Refund Advance product.

Our efficiency ratio was 39.08% for the quarter ended June 30, 2017 and 36.08% for the 12 months ended June 30, 2017. The efficiency ratio increased in the fourth quarter compared to the third quarter, primarily due to the seasonal decline in noninterest income.

As Greg mentioned, we are investing in our future with increased staffing systems in software development. Even with that additional cost, we anticipate that we can keep our average efficiency ratio around 36% on an annual basis.

Shifting to the balance sheet. BofI also had a strong balance sheet growth of 11.9% year-over-year compared to June 30, 2016, primarily the result of $1 billion growth in the loan portfolio. Similarly, deposit growth this quarter was 10.9% year-over-year compared to June 30, 2016.

Stockholders' equity increased $150,650,000, or 22%, to $834 million at June 30, 2017, up from $684 million at June 30, 2016.

The increase was primarily the result of net income for the 12 months ended June 30, 2017 of $134,470,000, and as a result of stock-based compensation, which increased equity $14,535,000.

The bank is very well positioned from a capital perspective. The Tier 1 capital was 9.95% for the holding company and 9.6% for the bank at June 30, 2017.

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

Thanks, Andy. Operator, we're ready to take questions.

(Operator Instructions) Our first question comes from Austin Nicholas with Stephens.

Just on the total dollar amount. The average excess block liquidity, do you have what that number is or was in the second quarter -- in the fiscal fourth quarter?

Yes. We can -- I can get it for you. Why don't you go on to your next question?

Sure. And then can you maybe give a little bit more color on the margin, and what you're -- if you're seeing any deposit pressure from the big money center banks kind of getting into that market, given what we're seeing on LCR? Or are they kind of waiting and seeing if there's any changes to that with Dodd-Frank reform?

No, I think that -- specifically the LCR reform, where I see that is coming on the consumer deposit side, which is what you're talking about, right, the relative value moving towards consumer, away from business deposits. Yes, I think you do see that in the nature of a Union Bank with PurePoint and things like that. And you see CLC money center banks with -- competing very hard as essentially online savings platforms. So I think we've always thought that, that was coming, recognizing from our perspective that the branch model, from a growth perspective, has serious issues. But I definitely see that there's a real push, not only on the rate side, but just also on the amount of money that a lot of the money center banks are offering for consumer checking accounts, right? You have a lot of offers, $300, $400 to open a consumer checking account. So I think competition there is really stiff. But I don't really know if that changed that much. I think that's been that way for a while.

Got you. Okay, that's helpful. And then it looks like you guys had nice rebound in the warehouse lines, which we've seen at your peers? Can you maybe give us some color on where you see those balances going over the remainder of the year, and if you have any guidance on the pipeline there?

Yes. There's -- we have a nice pipeline of new customers that are going through our process. The process does take some time. The cycle time there is not -- it's not a month, it's longer than that. That is a business that has cyclicality based on what happens with underlying origination volume. So as the market moves, we're inevitably going to be dragged along in some way there. I think we have a competitive advantage there in the sense that we do have a portfolio of products that we can offer as a bundled package. That portfolio product has a little bit less sensitivity from our perspective than the agency business and, certainly, than the refi business. So there's a little bit of a help there. But we're going to move with the market, so as the mortgage market forecast is as good forecast as any with respect to the current customers. And then we do have a nice pipeline though, and we think we'll be able to continue to grow that.

Austin, thanks for your patience on the average liquidity balance. It was $354 million. That's down from $567 million last quarter. But nonetheless, still there.

Okay. And is that all out now in this quarter? Is that all flown -- kind of flown out of the bank?

Generally, yes. We're at the trough in that cycle.

Got you, okay. And then just one final one the new Refund Advance agreement. Congrats on that. Is there -- is that just a 1-year agreement? Or is that kind of ongoing or up for renewal?

We have a 7-year deal, which we're in our third -- this is our third year with Block, right, the third year of that on the underlying other products. The -- and then this product. This is a 1-year deal. So well, we think that, obviously, if we do a good job, given our full relationships that there'll be continued opportunities there. But this year is -- it's a 1-year deal.

Our next question comes from Brad Berning with Craig-Hallum.

It'd be nice to get back to focusing on the fundamentals, so I appreciate the other updates. I was wondering if you could touch base a little bit more, Greg, from a bigger-picture perspective. We've transitioned through loan growth issues. We've transitioned through some expense initiatives. And just how do you think about the bigger picture of the growth potential of the overall business model from a top and bottom line now that we've kind of transitioned through those a little bit, and just kind of wondering how you're thinking about things from a medium-term perspective of the kind of growth rates that you're looking for?

Right. I think that having growth up until through that $10 billion mark in the 15%-ish range, with loan growth ahead of that a little bit, in between 15% and 20%, is where we'd like to target. I think that as we get through what I hope to be the period where our software platforms from a consumer and business perspective with where we want them to be, we have a lot of stuff we're looking at from a branding perspective, naming perspective and all those things. I think that -- and we've kind of pushed through that $10 billion mark, which we want to reach in a measured way. I think there probably will be a little bit of an opportunity to accelerate that. It's -- in some cases, this year was a great year in many respects from a -- I thought loan growth at 16% was pretty decent. I thought margin was good. I thought -- obviously, credit was fantastic. One of the things, when you're looking at this, the overall growth though is that our gain on -- if you look at the gain on sale, other line, it was at $15.5 million. It done went down to $4.4 million. And that really was the result of repositioning of our structured settlement portfolio, which is our longest-duration portfolio. That was a smart thing to do from a standpoint of what those assets were worth at that time versus what they'd be worth now. But that obviously was a headwind that we confronted as we had year-over-year measurements that we had. So I don't think that up to that $10 billion mark the analysts are too far off. And then I think a lot of these things are going to come together. One of the reasons why we have been so successful in keeping credit losses to an absolute minimum, and if you think about it, it's really pretty amazing, right? Because those couple of basis points of credit losses include entries into the auto lending business, unsecured lending, right? And so those aren't just the core real estate portfolio buckets. And so those are going to get to places where we're going to be comfortable letting those run a little bit more. And they could run a lot faster, but I'm just not comfortable with that until I see some good run time there. So that's I think -- hopefully, that gives you some color.

Yes. No, absolutely. That's very helpful. And then maybe you can update us on kind of the universal digital banking kind of platform initiatives. What are you seeing for opportunities to recognize and realize, say, over the next year?

Right. Yes, well, the first -- so the stages that we're operating in here is the first rollout of the consumer platform, which would be the -- would lead to the eventual sunsetting of any third-party online platforms that we're using on the consumer side. We're going to roll out that beta this year into a platform. We're going to test it, and we're going to start adding. It's a minimum viable product from a standpoint of how we thought about getting that out and testing it and making sure the architecture works. The core benefit of it is the radical flexibility embedded in the structure, such that because everything is pile-based and the product development is relatively straightforward to change things that, obviously, there's really multiple levels of how this benefits us. One is taking any element of customer experience that's problematic, biometric authentication, all these things, and being able to quickly integrate those. So that's one. And then other products, from a development perspective, the cross-selling of our own products that we have within our platform on the consumer side that we've been developing. Auto unsecured is another component of that. And that will be pushed into that environment and personalized, so that those offers are delivered in an intelligent manner in real-time based upon actual need of a customer. And then, of course, there's additional and incremental products that we're looking at as well that I don't want to spend a lot of time on now because I want to work through how much impact they'll have. And then, of course, on the business side, we'll move to that, too. But we do think there's a good definite and real advantage of being able to make sure that, that customer experience is best-in-class. And that's what we're moving towards. And right now, we just don't have enough control of that platform to get pushed into third-party development queues.

Our next question comes from Andrew Liesch with Sandler O'Neill.

Just wanted to talk about funding costs for a second here. Just so the cost of interest-bearing liabilities is up 9 basis points sequentially. Just curious what the driver is behind that. Is that more along the lines of commercial deposits or retail deposits? And then with the rate hikes coming later in your fiscal year, what's your outlook for that going forward?

Yes. It's really a mix. There's been -- there's a lot of commercial deposits that have been -- where we haven't had to do anything with. All the small business deposits really have been very steady and stable. All the consumer checking stuff has -- definitely, we've worked with a provider that, I think, is doing some neat things called MaxMyInterest. And they're a provider that we integrated on an API basis with. And that technology integration was successful. And they have partnerships with a bunch of wealth management firms, but the deposits that we're getting from there are definitely higher rate. And so that's one component of it. And I do think the deposit market is definitely getting more competitive. And I think we did a -- we vastly outperformed our models this year, and we kind of based part of our loan pricing on those models. But obviously, as we go forward, that's something we have to be very thoughtful about and make sure that we're watching our margin there. Like most things, I think it's definitely -- I get the sense that at the next number of rate hikes, maybe more banks will be really looking to pass those on and creating a little more competition. We had one of our big commercial customers, and we got their statements from Wells. And they were telling us that Wells was repricing. And we didn't really absolutely believe that, and we saw that based on their statement. So it really is -- it's not systemic now, but it certainly is something that we have to keep an eye on. We have to make sure that we're focused on it because -- and continuing to improve our deposit franchise because it definitely is something that, obviously, that's the environment we're going to be in.

And have you made any adjustments on the loan yield that you're offering relative to multifamily or jumbo like you did maybe a quarter or 6 weeks ago?

No, we really haven't. I'd say we've probably been tight around any kind of exceptions, but we haven't done that yet. And we're watching that. And so if we feel as if we need to do that to maintain margins, we will. And then we also see think that mixed shift on the C&I side will be helpful as well. So that's an area we're hopeful to grow. We have opportunity there for growth. And so what we're -- our strategy is with the mixed shift and with whatever repricing we need to do to focus on that margin maintenance. But it's -- I think it's definitely one of those -- one of the key metrics we're going to have to focus on in this year. And then, obviously, as you raise loan rates, then you have to make sure loan demand is there. And so far, it's been fine based on what we've done with respect to the loan rates. But obviously, we have our views on it, but we don't know for sure.

Okay. And then just on the expense side. Data processing and advertising costs this quarter were the highest in the bank's history. Just curious if there's anything outsized there, and if they should drop back down in the quarters ahead.

Yes. No, nothing outsized. Of course, data processing is, to a large extent, a function of our growth, as we have some variable components that tie to the number of accounts. And doing that, obviously, we've also got investments that we are making that are non-capitalized, that are going into data processing. So I do expect our run rate to be a little bit higher, maybe not as high as we were. But it will be, on average, will trend higher. With regard to advertising, part of it was a strong production period in which we had good loan growth. And in many times, we see advertising up a little bit associated with that. But on average, I expect them to be, on average, lower going forward.

Our next question comes from Steve Moss with FBR.

I was wondering if you could quantify your expectations around the H&R Block agreement for 2018, and how much you think Refund Advance originations could be?

Yes. With respect to -- what I will say is that I don't want to get into the prediction of the volume side. They disclosed that they did $700 million last year between the 2 banks that they used or the 2 banks that bought the originations last year, the originating bank. And then they kept some, and then we kept some. Look, we hope, obviously, that it goes up. And then when it goes up, our -- assuming our loss rates are within projections, and last year they were better than our projections, then we would have a linear increase based on that volume percentage in profitability, probably a little bit better than linear because there's that -- the revenue is linear and the costs are much more static because there's some fixed costs of a variety of items, personnel and other types of software development and stuff that's embedded in that. So I really just think it's way too early to predict that. And obviously, we're looking forward to focusing on making a very competitive program and a program that's desirable for consumers, that helps drive individuals into H&R Block locations. And that's good for everybody. And remember, we have ancillary benefit from that because we receive revenue from other products that are, in many ways -- that basically because the product is loaded on to Emerald Cards and such that it benefits overall volume across the entire system of financial products.

Right. And on the Emerald Cards, is it automatic that the Refund Advance is put on an Emerald Card? Or is that at the option of the client?

It's put on the Emerald Card.

Our next question comes from Edward Hemmelgarn with Shaker Investments.

I've got a couple of questions. One, as the originating bank in the future as opposed to last year, will you have any more control over credit decisions, things like that?

Yes.

So you think there's some opportunities for improvement in that area?

Frankly, I think that the credit performance was pretty strong last year. And obviously, there's a targeted credit performance. And that credit performance is based upon a set of approval rates that we're hopeful to achieve. And we're not mandated at those approval rates, but as a good partner, we are going to try very hard to hit those approval rates. So the objective is to maximize approval rates and, at the same time, have credit losses that are in the expected range. Now obviously, if we can have approval rates that are at or above expectations and also have credit losses below expectations, then that's obviously a benefit to everybody. And we would obviously work to achieve that. So that's on us to ensure that we accomplish that. But -- so from this perspective, where I know you're going with this is, what are the upside potentials from the numbers we've provided? And the upside potentials are that credit is better than expected, which we would keep the benefit of that. And the volume is better than expected, and we would keep -- we would have a linear benefit associated with that.

Okay. Second question is -- relates to your equity capital. I mean, it's been creeping up as a percentage of assets, and you're getting to the overcapitalized area. What are your thoughts on that, your capital levels?

Well, I was thinking about inventing a new capital distribution that they call the Hemmelgarn dividend. No. Look, I think you're right, Ed. I think that, clearly, the capital levels are creeping up. And at a certain point, they're creeping up at a level that if we're -- as you well know, because you've been with us a long time, that, previously, our loan growth was exceeding our ROE and, therefore, requiring us to reach out to capital markets in order to fund that loan growth. If for a period of time loan growth is going to be within the range of our return on equity, then obviously -- or even slightly lower than that, then we're generating excess capital. And that capital needs to be either utilized for strategic acquisitions that are beneficial to the overall growth or returned to the shareholders. And so I agree with that from a philosophical perspective. I don't think we're quite -- we might be getting close to that, but I don't think we're quite there. But think it's definitely something that, as you see, a close to 10% capital ratio at the holding company. On a Tier 1 basis, it's certainly -- I certainly can understand your characterization of the capital levels.

The other thing was, I mean, you did liquidate some of the investment portfolio. So that wasn't just for loan growth. I mean, is it...

No, that's true. That's true. And I think -- that's right. And so -- that's right. I mean, obviously, the asset growth rate was lower than the loan growth rate, too. So that, obviously, if you do that, then obviously, you're freeing up capital in that respect, too. So no, I think that that's a -- I'm sure there'll be robust discussions about that as we continue to go forward. And then that certainly is something that we need to actively consider. So -- how to work with excess capital.

Our next question comes from Gary Tenner with D.A. Davidson.

On that topic of liquidating the series portfolio or part of it this past quarter, the sale, you're down to about, what, $260 million of securities at the period-end balance sheet. Can you talk about what your thought process is in terms of reinvesting, and maybe what the yield is on the remaining series portfolio headed into the September quarter?

Yes. So what happened this quarter is about $107 million in securities actually matured. And so that's the primary reason for the decrease. We picked up a couple of securities, and we sold one security. But the primary difference was the decrease as a result of maturities. We continue to look for, obviously, our tactics and securities look at our low-level yields and our security yields. And to the extent that securities attrit at times that are unnecessary for liquidity, we're okay with that to the extent that loan yields are higher. And of course, that's been the case with us for quite a while. So when you look at this quarter, in terms of the 3-month yield on our investment portfolio at 4.09%, I think it will be net-net accretive when you consider the securities that paid off. So I would expect 4.09% or possibly slightly better next quarter.

Okay. And then, Greg, I was hoping you could just repeat your comments on your prepared remarks regarding SEC. I'm not sure that I heard it clearly, so just to make sure I'm understanding it.

Yes. So I'll repeat exactly what I said. So we've received confirmation from the SEC that no investigation is ongoing, and no enforcement action is contemplated against BofI.

Our next question comes from Scott Valentin with Compass Point.

With regard to the margin guidance, I think you guys were -- prior guidance was 3.8% to 4% kind of a core margin. I'm just wondering if that's still valid going forward, given what's happened with rates and deposit competition.

Yes. We are very focused on maintaining that over a full year. I can't -- I think -- I would like to have that with -- removing the impact of Block liquidity and those sorts of things that sometimes can push it around. That is absolutely the full-year guidance. And I'd like to maintain that on, call it, a core basis over every quarter as well. I have much better certainty, I think, although it's still -- obviously, everything is uncertain to some extent about maintaining it over the next year. And then over the quarters, I have less certainty, but I believe that we're going to be able to do that. I think that is -- but that's the execution, right? It's the ability to grow like do and to maintain that margin, and to maintain the safety that we do. So it's not always easy, but -- Andy's got some.

Yes. In the prepared marks, we did provide a number that eliminated the excess liquidity. And so it came in at 3.89% and very close to where we were without Block last quarter. And then we also had about 2 or 3 basis points of impact from the Federal Home Loan Bank dividend adjustment. So on a run-rate basis, we're right in the center of that range.

Right. And remember, and I think the -- when you separate out the noise of Wells, FHLB and excess liquidity and H&R Block loans that are coming in and out, our core loan yield this year was 5.18%, which was up 16 basis points. And the average deposit cost over that fourth quarter of fiscal 2016 was up by 9. So we were up 7 basis points on that core measure of just looking at loan yields versus average deposit yields. And that's -- I think, that's very good for our ability where we still were able to grow loans very nicely. And that's obviously a focus that we have to have. And I think the abilities that we have there is that we have been able to adjust loan yields without suffering strong degradations in volume or any degradations in volume. We've been able to hold them. And then we've also been able to generate strong C&I production, which is a higher average yield than some of the other asset classes. And that's helpful. And it's also floating rate. The vast majority of it's floating rate. So that also is helpful as well. And some of the -- the single-family jumbo and multifamily are 5-1 ARMs. But there's -- given that the book turns quickly, those loan yield increases that we pass through, even as -- even this year flowed through relatively quickly into the book itself, boosting loan yields by 16 basis points, the actual yield that the loans are coming on at is obviously going to be better than that. And so as those loans that have lower yields are paying off, we're replacing those as well. So there's an inherent benefit that will be achieved from -- in the underlying portfolio yield simply from the pricing that exists as well. So...

Okay. That's very helpful. I appreciate that. And then you mentioned efficiency ratio creeped up a little bit, making ongoing investments in the platform, improving delivery. Just wondering how we should think about efficiency going forward if given the outlook for revenue growth, loan growth margin kind of a stable, call it stable year-over-year. Does efficiency ratio creep up a little bit year-over-year because of the investments? Or do you think you can manage to hold the efficiency ratio relatively stable again over the course of the year?

Over the course of the year, right. I think you have to look at it on a yearly basis. I think that focusing on a 36 -- last year, we said 36% to 37% yearly efficiency ratio is where we're looking to be. I want to be in that range as well, and I want to push the make sure that that's there. I mean, there's a high level of investment going on now, and we're generating strong results from a software perspective and from a development perspective. So although there's some incremental investments that have to be made, I don't view those as particularly material. And I think that there's benefits to be achieved from the investments that we're making without us having to do a massive amount incrementally. Now whether 100 basis points here or there, I'm not going to minimize that, but those are within a tolerance. But we're pretty focused on costs around here. And we expect that if we're going to have cost increases, we'd better have revenue increases.

And then one follow-up question just around you mentioned that $10 billion threshold cross. I'm just wondering if you have kind of a timing for that, given the lag between when you cross and when you're actually subject to DFAST and things like that? And also maybe if you have a cost estimate? I understand you're incurring some costs now that will get -- kind of build slowly over time. I'm just wondering if there's a cost estimate on crossing.

You know I don't have a cost estimate for you today on that. And right now, the main focus that we have is ongoing through elements of heightened standards and looking at that from an analysis perspective, a GAAP analysis preparing for the DFAST stress testing. We'll have a trial run of that next year. So we'll have -- I think that'll end up with -- well before we're at $10 billion, we'll have had a trial run. And then, obviously, as you said, those standards don't kick in right when you cross over that mark. So there'll be multiple years of trial runs. Obviously, there's costs associated with it in different ways. We obviously -- so we'll -- as we get closer, we'll be preparing those things and probably sharing more from that perspective.

I mean, that said, we've already made investments in software and people to get ready for the simulation here coming up. So certainly, cost has already been incurred to get us closer to where we need to be.

We've got consultants and a bunch of other stuff that's happening right now that we're incurring to do this. But that's not to say that there might not be something else obviously as well. And we have -- and you have Durbin as well, which impacts interchange. So I mean, that's another cost that's out there.

Our next question comes from Don Worthington with Raymond James.

If you mentioned it, I missed it. What I was looking for was the origination volume out of the leasing group this quarter.

$15 million, Don.

$15 million? Okay. And then have you seen any shift in the composition between purchase and refi in the single-family residential area?

Yes. Our purchase volume is up. And as a percentage of our production, there's -- that's partly the result of a market shift, but it's also the result of some efforts that we've been putting in to developing 2 sort of groups. One group is a builder group, which is still relatively nascent, but is doing incredibly well given its relatively small cost footprint right now. And there's a lot -- there's is a nice pipeline there that we expect to continue. I think we bring a really compelling value proposition to builders because on the agency side, we have really great cost structure. And on the portfolio side, we have products that are really across the board on the jumbo side that can assist in niche markets. So I think that's an area that's helped that. And then we also have segmented our call centers and worked through different mechanisms of dealing with purchase leads from refi leads. And the problem is with having those together, from our perspective, the gentleman who runs that business, and I agree with him that it's a little bit -- you have to have different mechanisms of working through longer-term leads in the purchase market. And so that group is separate. It's in Las Vegas. It has a separate leader, and they're getting reasonable traction. And there's a lot of neat things we're doing to interact with realtors electronically from loan status and things like that are just more a series of investments and how we're thinking about our unique model as we go up against other purchase money competitors that have higher costs, delivery models with field loan officers that make them uncompetitive on the cost side. So we have had that increase. I think we need to do more there. I think we're -- frankly, I would have liked to be a little more ahead there than where we are. But the gentleman who runs that group is very well aware of how much he's going to work hard on that to make that happen. So ...

Okay, great. And I guess, lastly, you touched on M&A as a possibility. What types of opportunities would you be looking at in the M&A area?

There's really a variety of opportunities we've looked at. And over time, I think that opportunities that are unique, specialty lending niches, that fit within our view that specialized national lending platforms that focus on particular types of asset classes are a better approach to the market than to take geographic approaches across industry sectors. So that's one thesis. And then unique mechanisms of thinking about branch lists. Deposit gathering are also another general category. And that involves a variety of different types of companies that could be involved in that. And those -- and that -- and whatever they're doing generating deposits that are not tied to some branch infrastructure.

At this time, I would like to turn the call back over to management for closing comments.

Well, thank you very much. I'd like to thank our employees for a great year. This is -- I think was the fifth straight year we've been the #1 thrift. And thank you to all our investors who have put up with a lot of extra work to sort through a lot of noise and silliness. But I'm pleased with where we are, and I thank you very much for your time and the work you do in following the company. So thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.