Axos Financial Inc (AX) 2018 Q1 法說會逐字稿

Greetings, and welcome to the BofI Holdings, Inc. First Quarter 2018 Earnings Call. (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, sir. You may begin.

Thanks, Sharon. Good afternoon, everyone. Thank you for your interest in BofI. Joining us today for BofI Holdings, Inc.'s First Quarter 2018 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 the operational results for the three months ended September 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 BofIHoldings.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 would like to turn the call over to Greg for his opening remarks. Greg, please begin.

Thank you, Johnny. Good afternoon, everyone. And thank you for joining us. I'd like to welcome everyone to BofI Holdings' conference call for our first quarter 2018 ended September 30, 2017. I thank you for your interest in BofI Holding and BofI Federal Bank.

BofI announced net income of million for the fiscal first quarter ended September 30, 2017, up 12.1% over the $28.9 million earned for the first fiscal quarter ended September 30, 2016. BofI's return on average assets was 1.54%, up slightly from a year ago, although return on average equity for the first quarter of 2018 was $15.24%, down from 16.59% a year ago, because our Tier 1 leverage ratio increased from 9.55% to 10.29% over the year.

First quarter earnings per share increased 11.1% to $0.50 per diluted share, compared with $0.25 in the corresponding first quarter of fiscal 2017. Excluding the after tax impact of net gains related to investment securities, adjusted earnings for the first quarter ended September 30, 2017 increased by approximately $4 million or 14% when compared to the quarter ended September 30, 2016.

Other highlights for the first quarter include average loan and leases increased by $316 million in the fourth quarter, representing 4.4% growth [inaudible] quarter, and an annualized growth rate of 17.6%. Total assets reached $8.6 billion at September 30, 2017, up $727 million or 9.2% when compared to September 30, 2016.

Net interest margin was 3.87% for the quarter ended September 30, 2017, up 7 basis points from 3.8% in the fourth quarter of fiscal 2017, and up 9 basis points from 3.78% in last year's first quarter. Loan yield increased 23 basis points year over year to 5.21%, reflecting higher yields on newly originated single family jumbo mortgages, multi-family loans, and a favorable mix shift toward C&I lending, which carries the higher yields of our overall loan yield. There was no impact from H&R Block on our net interest margin or loan yields in the first quarter of 2018 or the first quarter of 2017.

Return on equity was 15.24% for the first quarter of 2018, compared to 16.59% in the corresponding period last year, both above our long term target of 15% or greater. Since return on assets slightly increased over the corresponding period last year, the entire reduction on our return on equity was based upon the bank's increased capital levels. We remain slightly asset sensitive, given the relatively short effective duration of our single family mortgage, multi-family, and C&I loans, and core checking, savings, and money market accounts representing 88% of our total deposit balances. Our actual deposit betas remain below what we modeled in our interest rate risk management forecast.

Our efficiency ratio is 40.49% for the first quarter of 2018, up from 38.9% for the first quarter of fiscal of 2017. Our efficiency ratio is higher in the first quarter of the fiscal year due to the absence of seasonal related tax revenue. Additionally we continue to make significant strategic investments in infrastructure, personnel, and growth initiatives as well as in preparation across the inaudible of asset threshold. We believe these long term investments will enhance our lending and deposit franchise and generate attractive returns for our shareholders.

Our credit quality remains strong, with 1 basis of net recovery, and a non-performing asset to total asset ratio of 39 basis points this quarter. Our allowance for loan loss represents 131.2% coverage of our non-performing loans and leases. While we have loans to borrowers secured by real estate properties located in areas affected by the devastating wildfires in California and the hurricanes in Florida and Texas, the damage to date appears immaterial, and our net exposure after insurance appears de minimis.

We originated approximately $1.3 billion of gross loans in the first quarter. Originations for investments increased 3.8% year over year to $960 million, and originations for inaudible increased $40.5 million to $330 million. Ending loan balances increased by 14.7% year over year. Higher than expected payoffs occurred in September in our single family jumbo mortgage and commercial real estate loan portfolios, reducing our first quarter ending loan balances.

Average loan and lease balances increased 4.4% loan quarter, and 15.6% year over year. Our loan collection for the first quarter ended September 30, 2017 consisted of $117 million of single family agency eligible gain on sale production, $71 million of single family non-agency eligible gain on sale production, $11 million of multi-family non-eligible gain on sale production, $271 million of single family jumbo portfolio production, $77 million of multi-family and commercial real estate portfolio production, $495 million of C&I production resulting in $36 million of net C&I loan growth, $49 million of auto production.

The $961 million of loan production for investment was offset by higher than expected levels of payoffs in our single family jumbo and commercial specialty real estate loans, and the bank's decision to sell more jumbo single family mortgages and multi-family mortgages in the first quarter of 2018, compared to the fourth quarter of 2017, resulting in end of period loan balance growth below our quarter average loan balance growth. We have seen loan payoffs fluctuate from quarter to quarter. Additionally our loan originations would have been higher if not for a few C&I loans closing after the end of the quarter. Loan demand remains strong, as reflected in our pipeline of $963 million of loans.

For the first quarter originations the average FICO for single family agency-eligible production was 753, with an average loan to value ratio of 66.8%. The average FICO for the single family jumbo production was 707, with an average loan to value ratio of 58.3%. The average loan to value ratio of the originated multi-family loans was 61.7%, and the debt service coverage ratio was 1.42. The average loan to value ratio of the originated small balance commercial real estate loans was 37.6%, and the debt service cover was 1.31. The average FICO of the auto production was 773.

At September 30, 2017, the weighted average loan to value ratio of our entire portfolio of real estate loans was 56%. The loan to value ratios use origination date appraisals of our current amortized balances, making these historic loan to value ratios even more conservative when you consider that real estate values have generally risen.

As of September 30, 2017, 59% of our single family mortgages have loan to value ratios at or below 60%, 44% have loan to value ratios between 61% and 70%, 5% have loan to value ratios between 71% and 75%, approximately 1% between 75% and 80%, and only 1% greater than 80% loan to value. The LTV is calculated using the current principal balance divided by the original appraised value of the property securing the loan. We have a well-established track record in jumbo single family mortgage lending, with lifetime credit losses on our originated single family loan portfolio of less than 3 basis points of loans originated.

We have approximately $1.6 billion of multi-family loans outstanding at September 30, 2017, representing 21% of our loan book. We focus on smaller dollar multi-family 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 54%, based on the appraised value at the time of origination. We do not have risks hidden the details of our portfolio. Approximately 66% of our multi-family loans are under 60% loan to value, 30% are between 60% and 70%, 4% are between 70% and 75%, and less than 1% of our multi-family loans have a loan to value ratio above 75%.

The lifetime credit losses in our originated multi-family portfolio are also less than 1 basis point of loans originated over the 17 years we've originated multi-family loans. We have not experienced losses in our C&I lending group since inception of the group.

Our outlook for overall loan growth remains positive, with a loan pipeline of approximately $963 million, consisting of $538 million of single family jumbo loans, $115 million of single family agency mortgages, $80 million of income property loans, and $230 million of C&I loans.

Transitioning to funding, total deposits increased $855 million, or 13.5% year over year, with growth across consumer and business deposit categories. Checking and savings deposits increased by $1.1 billion compared to September 30, 2016, representing year over year growth of 20.5%. Checking and savings deposits represented 88% of total deposits at September 30, 2017, compared to 83% at September 30, 2016.

We have made significant improvements in the diversity and quality of our deposit franchise over the past five years. Of the Bank's overall deposit base, we have approximately 49% business and consumer checking accounts, 22% money market accounts, 4% IRA accounts, 9% savings accounts, and 4% pre-paid accounts. We are continuing to invest in our commercial banking sales team, our technology platform, and our customer experience in order to allow us to better serve our retail and commercial deposit customers.

To date our deposit betas are tracking well below what we modeled in our internal and regulatory risk models. Inaudible with a relatively short duration single and multi-family loans, C&I loans, and a relatively small and short duration securities portfolio that adjusts to changes in short term rates, and reductions in the securities portfolio that repositioned us towards higher cash balances, we are targeting increases in the loan yields to offset future deposit repricing.

We are making good progress in our Universal Digital Banking initiative. As a reminder to those who may not be familiar with this initiative, we are building a flexible open architecture banking platform that will significantly enhance the user experience, allow us to better leverage data to offer targeted products to our customers, and allow us complete freedom to offer new services and features in our platform whether it is developed by us or one of our partners.

We rolled out a beta version of the software on one of our smaller consumer brands this month after testing it with internal Bank employees. As we continue to test the platform based on user feedback, we will add new features and functionalities and launch the platform into our larger consumer brands.

Secondly, we are well along on our planning of H&R Block for the upcoming tax season. We are excited about working with H&R Block as the exclusive provider of Refund Transfer, Emerald Cards, Emerald Advances, and Refund Advance loans during the 2017-2018 tax season. With two years of experience and complete control over the Refund Advance process this year, we look forward to another successful season serving H&R Block's customers.

In addition to seasonal revenue fluctuations, incremental costs related to our infrastructure and growth rate investments weighed on our efficiency ratio this quarter. Although we are firmly committed to having definite cost efficiencies even in the short term and over a longer period of time our goal is to have one of the lowest efficiency ratios in banking, there are periods where both the opportunity, the competitive environment, and the growth stage of some of our newer businesses require that longer term strategic considerations assume a higher level of importance than movements of our efficiency in any couple of quarters. We are in one of those periods.

In the current and prior quarter, by way of example only, we significantly expanded our management team with the hiring of a Chief Operating Officer, a Chief Digital Officer, an EVP and head of Commercial and Industrial Lending, a senior portfolio manager focused on C&I lending, and a senior sales business banking leader and his team. We are engaged with a strong branding and naming agency reviewing whether our name and brand architecture is the best way for us to go to market with the exciting way we are evolving our business mix. We have numerous newer business units that are progressing nicely and contributing revenue, but are currently sub-scale, including our consumer auto and unsecured lending businesses and our commercial leasing and factoring businesses.

We are also almost complete with the infrastructure build-out to support the H&R Block RA program as the sole program sponsor. We are also building our organization to allow us to take advantage of the significant flexibility offered by our online banking platform with our new products and services to increase customer cash and cross sell and lower acquisition costs.

Until the UDB platform is built out and all brands are operating, the platform will be running--we will be running two consumer online platforms. We believe these investments will solidify our ability to continue to grow a diversified high performing business, while investing appropriately in infrastructure to maintain our strong regulatory relationships.

Our capital and credit metrics remain strong with a Tier 1 leverage ratio to adjusted average assets of 9.95 for the bank and 10.29 for the holding company at September 30, 2017. While our primary use of capital is to invest in organic growth initiatives, we actively evaluate M&A opportunities that could augment our growth, further diversify our lending, deposit, or fee-based businesses, and generate accretive returns to shareholders.

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

Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at BofIHolding.com. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 10-Q for additional details.

As Greg indicated earlier, BofI's net income for the first quarter ended September 30, 2017 was $32.4 million, up 12.1% when compared to the $28.9 million earned in the first quarter ended September 30, 2016, and down slightly from the $32.5 million earned last quarter. Earnings attributable [inaudible] common stockholders were $32.3 million or $0.50 per diluted share for the quarter ended September 30, 2017, compared to $0.45 per diluted share for the quarter ended September 30, 2016, and compared to $0.50 per diluted share for the quarter ended June 30, 2017.

For the quarter ended September 30, 2017, net interest margin was 3.87%, up 9 basis points from 3.78% in the quarter ended September 30, 2016, and up 7 basis points from the 3.80% in the quarter ended June 30, 2017.

Our average loan and lease yield was 5.2% for the first quarter of fiscal 2018, compared to 4.98% in the first quarter of fiscal 2017, and compared to 5.18% in the fourth quarter of fiscal 2017.

On the funding side, our average interest-bearing checking and savings deposit rate for the quarter ended was 101 basis points, up from 87 basis points for the last quarter, and up from 72 basis points for the quarter ended September 30, 2016. Year-over-year, the Fed has increased rates 75 basis points and our average interest-bearing checking and savings deposits have only increased 29 basis points or 39%. As Greg noted, we continue to outperform our deposit interest rate risk models.

Also, if you include our non-interest-bearing deposit growth, our weight would have increased to 23 basis points, from 87 basis points--to 87 basis points up from 64 basis points. That 23 basis point increase is a beta of approximately 31% including non-interest-bearing.

In addition, as Greg mentioned we've reduced our investment in securities portfolio over the last year, shortening duration, and have reinvested primarily in liquid cash. Of the $631 million in cash on the balance sheet at September 30, 2017, more than $500 million could be redeployed into high quality investment securities as interest rates rise.

Asset quality remains strong. For the first quarter, the bank booked a net loan and lease provision of $1 million, compared to $1.9 million for the three months ended September 30, 2016, and compared to $200,000 for the quarter ended June 30, 2017. The decrease in the provision year-over-year is primarily the result of changes in the loan mix with a recovery of $300,000, partially offset by loan growth this quarter.

We have loans to borrowers secured by real estate properties located in areas affected by the hurricanes and--that moved through Texas and Florida and by the wildfires in California. We require our borrowers to maintain adequate levels of insurance, including flood insurance in areas prone to flooding. We performed analytical procedures and discussed directly with our borrowers to determine the properties most likely to be negatively impacted. To date, we have identified two loans totaling $1.7 million secured by properties that incurred significant damage. We believe, based on our analysis and our discussions with the borrowers, that each of these properties have appropriate insurance coverage and the damage incurred will not result in a material loss to the bank.

Our efficiency ratio was 40.49% for the quarter ended September 30, 2017, up from the 39.08% for the quarter ended June 30, 2017. As Greg mentioned, we are investing significantly in our future with increased staffing systems and software development. We anticipate improvement in quarterly efficiency, particularly in the third quarter, due to increased seasonal tax product revenue. However, the efficiency ratio is likely to be higher this year than the 36% ratio reported for the year ended June 30, 2017.

Shifting to the balance sheet, our total assets increased $79.9 million to $8.6 billion as of September 2017, up from $8.5 billion at June 30, 2017. The loan portfolio increased $138.5 million primarily due to loan originations of $960 million. Investment securities decreased $53 million primarily due to sales and principal repayments. Total liabilities increased by $47 million to $7.714 billion at September 30, 2017, up from $7.667 billion at June 30, 2017. The increase in total liabilities resulted primarily from growth in deposits of $279 million, partially offset by a decrease in FHOB borrowings of $240 million.

Stockholders equity increased $32.4 million or--to $866 million at September 30, 2017, up from $834 million at June 30, 2017. The increase was primarily the result of our net income for the three months ended September 30, 2017 of $32.4 million.

The bank is very well positioned from a capital perspective. Tier 1 capital was 10.29% for the holding company and 9.95% for the bank at September 30, 2017.

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

Thanks, Andy. [Inaudible] we're ready to take questions.

(Operator Instructions) Michael Perito, KBW.

I had a few questions I wanted to--I wanted to maybe start on the deposit costs. Andy, you mentioned they're up about 16 basis points I think on the interest-bearing, 87 to 101. But I was curious if there are any particular maybe products or consumer segments where you are seeing more pressure than others, or conversely some that are maybe performing better than you expected.

I would say in general the--as Greg noted early on in the conversation, really overall, all of our sectors are performing frankly better than what we've modeled on the big--in the big picture. When you look at where our growth is coming from, more is coming from business in that side. So I think we--what we've been able to do on the consumer side has been very good. I think from a rate perspective, we have been able to hold back on rate in a lot of the consumer areas where a number of the online banks are increasing rates. So I think that's been very positive. As you look at where our business deposits grow, it really was kind of across the board in our verticals and in our small business, which is primarily where it came from. But when you look at the entire growth in general we're actually raising rates less than what we expected.

Maybe a question for you, Greg, on the efficiency ratio. It was a little higher this quarter per your remarks. But how much of that is just really the fact that seasonally you have more revenues in the next couple quarters here? And I guess is 36% for the full year still kind of a good number to be thinking about at this point?

Right. Well, so certainly the efficiency ratio does decline because of the seasonally related tax revenues. So--but the efficiency ratio would go down. I think thought that the other element that's happening too is that if we are getting all the loan growth that we would like to have, then I think that obviously helps with all the investments we're doing. Because we're really not going to be changing the strategic plan for small variations in efficiency ratio.

So I think that 36% full year rate for next year is going to be a little bit hard to hit with everything we're doing. And I think it's going to be higher. And how high that is depend, obviously, on the success of the refund advance product. It depends on loan growth a lot. If loan growth is good, then the--then obviously you'll have a bigger base of revenue to amortize the costs associated with what we're doing. But we're still going to build what we think is going to be a really interesting and unique digital banking franchise and do all the software development and all the things I talked about. And that's going to happen in this next year. And that next year is a big year for us. The calendar year specifically of 2018 is going to be a pretty big year for a lot of new things.

And that just on that topic, my last one on loan growth. Obviously, the dynamic of some prepayments in the jumbo mortgage book is not new and it happened last year. But I guess are you seeing it accelerate at all? Or at this point, does the pipeline look strong enough where you expect to see some net balance growth in that portfolio this year?

Yes. I mean, I think it's--frankly, it's not perfectly easy to predict because jumbo borrowers prepay for a lot of reasons other than pure rate movement. So you can't necessarily drive it always just on rate movement. But we are expecting a general stabilization of prepaid. However, I don't--I can't say that we're--that's behind us. But we do expect growth and as we look forward over the next couple quarter, we don't think the prepay rate is going to be so high as to eliminate growth.

Okay. So I mean, it sounds like then it would seem like the targeted growth for like the fiscal year still a good number, maybe towards the lower end given this--for Q1, but production is certainly strong enough to still support it.

Yes. And the C&I pipelines are very good. But they're also--there is also a lumpiness there. You can have acquisitions that take out large lines of credit and things like that. So there is uncertainty around it. But the pipelines are good. It's not--there's definitely opportunity out there and we have to execute on it.

Austin Nicholas, Stephens.

Maybe just real quick on your outlook for the margin. I know you've kind of been striking in that guidance range of a core margin of 380 to 400 for the full year. Is that still what we can expect going out from here, excluding the H&R Block volatility?

Yes. That's what we're targeting. And we've in fact been more likely to let the actual dollar volume of loan growth move around and maintain the margin. There's a lot of reasons for that. Obviously, as we're accumulating excess capital associated with the strong profitability we have that provides us some opportunities to do some things with the relatively low PE that we have, if we decide to do that. If we're not deploying that elsewhere. So yes, with respect to your specific question, the--I think the margin guidance is good, excluding the H&R Block at least as we see it right now.

Okay. And then, maybe one other talking about H&R Block. Any change to that $8 million pretax [inaudible] estimate for the full refund advance product that you have now?

Yes. That assumes the same sales volume as last year, correct, which would be $700 million. So it could be upsized to as much as $2 billion as we're authorized, but generally, yes.

And we don't have any better information. If they--if the product outperforms, we'll make more money. And if credit stays within where we expect it to be. And if it also was lower than it was than it was last year, then we would make less money.

Okay. And then, maybe just on the pipeline, you said $963 million. Is that the total pipeline or the primary pipeline excluding mortgage warehouse?

Yes, it excludes mortgage warehouse.

Then maybe just--I think most of my other questions have been answered. But maybe just on the lost state initiative. How's that going? What's the--are you building employees there still? Any color there on how that could impact your tax rate?

Right. So the office in Nevada has space for about 150 people. There's about 50 people there. That's a very slow process from the standpoint of there's an allocation factor that occurs. But the largest reason for Nevada isn't tax related. It's really to access a diversified pool of talent to allow people to access housing at lower costs, things like that. So--but I do think obviously over time as we're building the group out there that there'll be some natural elements associated with that, that will allow us to do--to lower our tax rate. Obviously that sort of benefit associated with that is absolutely swamped by any potential effect that would arise as a result of a corporate tax change, if that is something that ultimately ended up happening.

Brad Berning, Craig Hallum.

One follow up on the $500 million of excess cash that you talked about. How do you think about what would trigger your decision to start to reinvest that, one? And two, can you talk about what kinds of things you would be targeting and what those yields are today in the types of asset categories you'd be looking at? So just to give us some context to think about that. Then secondly, on the capital side, given the loan growth is running mid-teens and you're building capital here, what would trigger the decision points? What are you looking for to make decisions on whether you start to do something more on the capital management side?

Right. So with respect to the first question regarding the deployment and the securities portfolio, it really is a judgment call related to when we think that the--where interest rates--future direction of interest rates are fully reflected in the price of securities. We've wanted to be cautious about that and it's a way of having reduced our interest rate risk. And I think it worked out pretty well. So the deployment though would generally be in--because it's part of our liquidity book, it would end up being in pretty high quality securities. So agency pass-through, stuff like that. So it's not going to be some kind of structured security or something that might not have liquidity in a negative credit environment or something. So you get upside from that. But I think it's--it would probably be a little premature for me to talk about exactly what that could look like. That's obviously--for agencies, it's going to depend on duration, things like that.

Right. And I would just add to Greg's comments that we are also looking at the shape of the yield curve, because the shape of the yield curve will be important going forward as we look at that, not only short term rates, but long term rates, how they stack up. So the current yield is right at Fed funds, so you're thinking $1.25 would be where that's earning today.

But you're looking longer duration for the securities side of that to put that money back to work?

We--if we did that, that would be an opportunity for upside. But I can't say that's where we end up. The commentary is only designed to say that--first it's to talk about how relatively small the interest rate risk is in the securities books, to say that there is upside there. The question of how we deploy that is something that we haven't decided. Obviously there's a lot of elements of--what if a tax cut actually happens and it could spur economic growth, yield curve changes. You get a new Fed Chairman. And depending on different views there, there's a lot of things in play. And so, we'll wait for some of those to play out. And then, at that point, we can make some decisions. But almost certainly the decision would involve more duration, at least at some level. Now whether that's taking essentially a zero duration asset like Fed funds and moving it to three years or five years, I don't know. It would depend on what the--what we felt was the right approach there.

And the capital management, given the ROE and given loan growth, is mid-teens?

Right. So the--so we're getting to a point--obviously there's several ways to deploy capital. One way would be in acquisitions. And so, to the extent that those opportunities exist, we obviously wouldn't want to deploy our capital in some sort of share repurchase right at that time.

And so we have to be thoughtful about that and making sure that we're thinking through the timing of opportunities there. Outside of that, we are going to probably continue to build capital. At a certain point in time, at the level from a price-earnings ratio basis that our shares are trading at, I think that share repurchases probably make more sense than dividends. So that would be an approach to look at. We certainly are building capital to a point where we've got to look at something there. But I don't expect it--expect us to be thoughtful about the timing of that and the timing of deals and that sort of stuff.

Last question is just to go through each of the product categories and talk about current environment, competitive environment. Where do you see growth? Where are you pulling back? Obviously multi-family looks like it shrunk sequentially this quarter. So if you can just walk through each of the loan categories and kind of give us your update on the outlook for each.

Sure. So on the single family side, I think that we are--we have competitors there, maybe it's gotten a little more intense. Partly the prepayments there result from the fact that there was--it happened several years ago when people caught on, there's no more prepayments essentially allowed on single family mortgages--.

--Prepayment penalty--.

--Prepayment penalty allowed on those sort of mortgages, so that sort of changed the dynamic there. But I would say that that's moving along. And a lot of it is our execution, right? We have to execute, and so I think always talking about the market and those sort of things, what happens with our team is that because we are very dynamic and we spend a lot of time on newer initiatives and had growing businesses, it's always a balance for the executive team on how they focus on things. So I think it's sometimes not always the right thing to say well, there's a slight decline here, so it must be the market. Because that's not really always the approach, and in fact, I think it's sort of an excuse. I don't think there's any one of our businesses that can't be profitably grown with the right level of focus. So yes, I think with multi-family is what it is. It's been exactly that way for years. There's no increase in competition. It's an asset class that everybody likes, but it's not--any--there's a slight decrease in the portfolio, that really in my view is an opportunity for us to do a lot more in that group. And I think we've got good plans there. And there's just a lot of things going on here and we just have to execute.

I don't really have--C&I, there's lots of opportunity. There's--I'd say that that's the area where there's the--I think that's probably the most straightforward approach. There's--it's very simply that even basic pipeline management, there's so many deal opportunities that we have versus execution talent, that just continuing to develop that execution talent will allow us to grow that book more. That's all there is to it there. There's nothing else. So that's what great is that these things are within our control and we just have to execute.

Steve Moss, FBR Capital Markets.

Just following up on the efficiency ratio trends here, perhaps a different way to ask about it, when it comes to expenses, how should we think about the expense growth for fiscal 2018? Perhaps a low 20% rate?

Yes, I think what I would do is just look at trends quarter to quarter, and look at the overall trend probably this quarter versus last quarter as being one of the lead indicators as to where we would be, meaning that sequentially we would grow expenses similarly. There are a couple of items, small expenses related to Block that pop in for the next couple of quarters, but in general the run rate of growth that you're seeing between the fourth quarter and the first quarter is probably where you--would be a good proxy.

I'd say that a low 20s is high. I would expect it to be below that. But I think Andy's answer is another approach, that I just think from the perspective of thinking about low 20s, that's high.

Okay, that's helpful. And then secondly, I do want to ask you with regard to loan growth this quarter, maybe I misheard you, but it seemed like there was a little bit more loan sales this quarter on resi mortgage and multi-family, and just wondering if that's the case, what's the strategy driving that this quarter?

Yes, it was--there was about $40 million, $50 million more of sales. There really was a couple of buyers that we viewed as strategic that were interested in production, one that we had spent a long time negotiating with them from a contractual perspective. They finally hit our price, which is something that took a while, because they had a few quarters where they didn't hit our price, so we didn't really want to--we wanted to sell them something, have a relationship, and I think it's important for us that we have good buyers of all of our products. It allows us to manage our concentrations, it allows us to manage our loan to value ratios, credit risk, and it also allows us to generate fee income. So it really--that was really the strategy. It wasn't really something related to interest rate risk or anything really that much more than that. Just we liked these buyers. We have a lot more buyers than we have product right now. And so that's--there definitely is quite a hunger for the product. So we pay--these buyers that we did deals with, I think, are good strategic partners for the future.

Okay, that's helpful. And then last question, just with regard to deposit pricing, [inaudible] here in December, what are you thinking for deposit betas?

We have--in our models, we're in the 60% range, but we've outperformed our models. I certainly hope that we would outperform our models. And so it's a continual set of execution challenges across all the businesses to continue to find ways of adding value to customers through service, through our platforms, and we just have to continue to push forward on that. So obviously I would be very disappointed if we didn't outperform our models, but that's where we have the current numbers that you see when you look at the disclosures.

Okay. Thank you very much.

Andrew Liesch, Sandler O'Neill & Partners.

Just on the mortgage banking number, the $4.7 million, how much of that was just traditional conforming gain on sale, and how much of that gain was sales of some portfolio loans?

Right. So the portfolio loan number was $71 million, which generated--that's single family--which generated $1.7 million of gain. And then $11 million of multi-family, which generated $400,000 of gain.

So we expect some more loan sales going forward? It sounded like you found some good people to--some good bank to sell them to. But is this going to be part of the strategy going forward, or is this more like one-offs this quarter?

It depends really upon where--it really is a balance, right? We're looking at all elements of this. And deposit growth is pretty good this quarter, obviously having an ability to balance all these elements out with what we want to do from a capital perspective, a growth perspective, earnings, all those elements are all a component of that. There's a lot of flexibility built into that process. There's a lot of demand. I think we probably will sell a little bit more. But that's dependent on the pricing that we get from our borrowers. We're happy to hold all the loans we originate if they--if we don't get the pricing we want.

Jesus Bueno, Compass Point Research & Trading.

You touched upon acquisitions, and obviously you did the Pac West deal, and you had mentioned previously bidding on North Point portfolio, which was from my understanding was considerably larger than the Pac West deal. So in terms of appetite of what you're looking at, is there a certain range in terms of portfolio size if you're buying a loan portfolio that you're comfortable taking down? Is it more the asset generation side capabilities there that are more important? How are you evaluating that?

From an acquisition perspective, from a portfolio size, it depends on what the asset class is. The more nichey the asset class is, arguably the level of concentration has to be taken into consideration. So definitely the North Point size there was comfortable for us. I think the reality of the market there is that the competition in the specialty finance base has gotten pretty tough. There's the price to earnings multiples that these companies are selling at are difficult for--in comparison with the prices we want to pay. So we continue to look for lots of different opportunities. We've done deposit deals in the past. We've done specialty lending deals. And so we're at a deal flow, and modestly it's not appropriate to comment on those sort of things in the pipes and things like that. And we continue to look at that. And it's obviously a consideration because you don't have 100% certainty around when and if you do something. And so on the other hand, you don't want to hold excess capital for too long, losing the opportunity to return that capital to shareholders if you're not going to get something done. And so that's just a judgment call and it's very fact-specific.

Appreciate the color there. And turning to NIM quickly, you mentioned that you have some ability on the pricing side to help offset some deposit pressure. But should we still expect you to kind of operate within that 3.8%, maybe 4% level on NIM throughout the year?

Yes, I believe so. I think that if I look forward to the next three quarters of the fiscal year, and this excludes the benefit and the impact of Block--you have to strip all that out--I think we can still hit that core 3.8% to 4% level. It's also a result of partially changing mix as well, the C&I book I think will become a bigger part of the portfolio, has higher yields. So there'll be a little bit of--there's always a little bit of noise in those numbers from the tax-related revenues and there'll be some differences in how the Refund Advance is booked given that we're the sole originator and things like that. But if you guys work through that you'll get to that core. So yes, we feel pretty good about it, and we think we can get there.

Edward Hemmelgarn, Shaker Investments.

A couple of questions. One, I'm trying to understand a little bit about the rationale behind the sale of the single family mortgages and the multi-family, given that you're in an excess capital position right now. I think you made 2.4% or something on the sale of $71 million single family and maybe 3.6% on the multi-family. Wouldn't you earn more than that just by holding on to the--.

--Well, you certainly would from--if you assume, like as you said, you have excess capital, so therefore there's no incremental capital to assume and your loan to deposit ratio would allow you to hold it, which both of those are true right now, then you certainly would make more money holding those assets than selling them. I think the question is that there's a couple of things that that assumes. One is that we tend to sell our higher loan to value loans, which allows us to balance our risks. So in general, for example, in multi-family part of the reason the portfolio has such a low loan to value is we typically have sold loans above 60% loan to value on a regular basis, really. So a lot of this is the balancing of those components.

However, I do think that your broader point is valid, and that is that it is profitable to hold our assets. We make good yields off those assets, and that's why those sales--let's put it this way. The partners that wanted to buy loans wanted to buy a significantly higher dollar amount of loans. So we are continually wanting to maintain those channels, at the same time cutting back on the amount that we sell in order to be able to preserve optionality but also not to give away too much in economics given that our capital position right now is in excess of what we need.

I guess just a broader question that getting that--and trust me, I appreciate a conservative bank. But is there a chance you're getting to be too conservative when you look at you--the delinquency rate on your loans, the--as I said, the cash that you're holding now in excess of probably what you need? But you have to discuss that more [inaudible]. And the capital situation that keeps growing. Would--are there opportunities to--from a risk reward standpoint--to perhaps take on a little bit more risk and grow the balance sheet at a faster rate without--and still being preferable decisions?

Yes.

What is holding you back?

Well, it's interesting. I think one of the things that we've done a very good job with here is getting good risk-adjusted returns. And candidly, I don't always like what I see in the market now. I see people, for example, on the jumbo single family side doing bank statement loans where they're assuming that 50% of a business cash flow without looking at the actual margin of the business is income that would support a loan. The environment is different, and people are reaching. And the question you always have to ask is what's around the corner. And obviously, that's something you've got to try to work through. I think that we've--I don't believe that we need to increase our risk profile in any significant way to continue to grow. I think that we need to execute better. And I think that with respect to the cash, the reason why we brought that up is that there certainly is an opportunity to redeploy that, and in that case you're not taking credit risk, but you're taking some kind of rate risk, which would have been imprudent to take, and a lot of banks have extended their security portfolio greatly, and they will have some issues associated with that. So I think we've done a good job of--but what should your charge-off ratio rate be, right? Is a negative charge-off rate or 1 basis point over the last couple of years, is that too low? I mean, you could argue that it is, right? Because there's always some balance that you're trying to reach there, and it's possible that we're reaching a balance that is not 100% optimal.

But I think that from our perspective, one of the reasons we've added the management additions is that we've had some dilution of management attention as we've added our newer businesses. I think there's good strategic reasons those businesses were added, but that management dilution also doesn't allow us to have our managers spend as much time in the areas that they need to spend time on. So to me, I believe that taking some wholesale approach and taking more risk is not really where we need to be. I think we can execute better. And we just have to do that. We've executed--it's all relative. The execution certainly isn't bad, but there's certain units that I think can do better from a growth perspective. And we just need to continue to make sure that happens. There's so much opportunity to do that, and I think that's probably the biggest focus that we need to have.

Okay. And I understand, as I said I've always appreciated a conservative approach, and I do realize we're getting longer in the tooth in this economic cycle. But lastly on your Universal Digital Bank initiatives and the investments that you're making there, is that going to be really focused more on serving the consumers from a depositors standpoint or do you think that's going to present you with more opportunities on the lending side too?

We're looking to try to make this a backbone of a segment strategy that allows us to have an approach to lending to consumers with some of the products that we've developed on the auto side, on the unsecured side, and there'll be others to try to work through how to utilize a personalization engine to be able to recommend products and services that would add to loan growth. That obviously, when you're making loans of relatively small size, which most of those are, they are helpful with deposit retention, hopefully acquisition cost, things like that. They don't add as much volume as a $5 million jumbo mortgage or a large C&I loan, but that is absolutely the strategy. And the Universal Digital Bank will be extended to small business as well, and there will be a lending strategy around that component as well. But these are complex and innovative things that we're doing, and they're going very, very well. But they do take time. And with regard to elements of think about our brand and all those things together, we're working a lot on making sure that all customer services all omni-channel, which is very good from a customer service perspective but it's also a set of system challenges because what that allows anyone to do is pick up a customer record any time and see every social media interaction, every phone interaction, every email, all in one place and readily understand it.

And what's happening as well as move those--move lead records around in order to get the right sales people with the right customers at the right time. So I think it's a lot of exciting things, and obviously there's a lot of benefit to doing it, but it's a pretty long-term play.

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back over to Mr. Johnny Lai for closing remarks.

Thanks for your interest in BofI. And if you have follow-up questions, please contact me directly. Thanks and have a nice rest of your day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.