Greg Garrabrants - President and CEO Andy Micheletti - EVP and CFO Johnny Lai - VP Corporate Development and Investor Relations.
Robert Ramsey - FBR Capital Markets Andrew Liesch - Sandler O'Neill & Partners Gary Tenner - D.A. Davidson Don Worthington - Raymond James.
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding, Inc. First Quarter 2016 Earnings Conference Call. For today's presentation, all parties will be in listen-only mode. As a reminder, following the presentation, there will be a question-and-answer session.
[Operator Instructions] This conference is being recorded today, Thursday October 29, 2015. Now, I’d like to turn the conference over to Johnny Lai, Vice President of Corporate Development and Investor Relations for BofI Holding. Please go ahead, sir..
Thank you, and good afternoon, everyone. Joining us today for BofI Holding Inc.'s first quarter 2016 financial results conference call are the Company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti.
Greg and Andy will review and comment on financial and operational results for the first quarter of 2016 and they will be available to answer questions after the prepared presentation.
Before we begin, I’d like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions.
Therefore, the company claims the Safe Harbor protection for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of BofI Holding, Inc.
and its subsidiaries can be identified by common use forward-looking terminology and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in the company's filings on Form 10-K, 10-Q and 8-K with the SEC.
This call is being webcast and there will be an audio replay available in the Investor Relations section of the company's Web site located at www.bofiholdinginc.com. Details for this call were provided on the conference call announcement and in today's press release. At this time, I’d like to turn the call over to Mr.
Greg Garrabrants, who will provide opening remarks. Greg, the floor is yours..
Thanks, Johnny. Good afternoon, everyone and thank you for joining us. I’d like to welcome everyone to BofI Holding's conference call for the first quarter of fiscal year 2016, ended September 30, 2015. I thank you for your interest in BofI Holding and BofI Federal Bank.
BofI announced record net income for its first quarter ended 2016 of $25,501,000, up 42.9% when compared to the $7,841,000 earned in the first quarter ended September 30, 2014 and up 4.5% when compared to the $24,395,000 earned last quarter.
Excluding the $1.7 million special dividend that the bank received from the Federal Home Loan Bank last quarter, this quarter’s earnings grew 8.9% over the prior quarters earning.
Earnings attributable to BofI's common stockholders were $25,425,000 or $1.60 per diluted share for the quarter ended September 30, 2015 compared to $1.20 per diluted share for the quarter ended September 30, 2014 and $1.54 per diluted share for the quarter ended June 30, 2014.
Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the first quarter ended September 30, 2015 increased $7 million or 38.1% when compared to the quarter ended September 30, 2014.
Other highlights for the first quarter include, total assets reached $6.3 billion at September 30, 2015, up $436 million compared to June 30, 2014 and up $1.4 billion from the first quarter in 2015. Return on equity reached 18.34% for the first quarter.
The efficiency ratio was 33.25% for the first quarter of fiscal 2016 compared to 32.47% in the fourth quarter of fiscal 2015, excluding the effects of a one-time dividend and 34.81% for the first quarter of fiscal 2015.
Net interest margin was 4.02%, an expansion of 5 basis points over the four fiscal quarter and an expansion of 4 basis points in comparison with the first quarter of the last fiscal year. Our loan origination unit had a great quarter with $1.1 billion in gross loans originated in the first quarter.
As a result, the bank achieved good quarterly loan growth as loan balances grew by 6% over the fourth quarter, which equates to a 24.1% annualized growth rate. The excellent performance of our lending groups is reflected in $297.6 million of net loan growth this quarter, a 32% increase over the first quarter of fiscal 2015.
The primary drivers of our loan production consisted of, $125 million of single family agency eligible gain on sale production, $427 million of single family jumbo portfolio production, $39 million of single family non-eligible gain on sale production, $88 million of multifamily portfolio production, $22 million of non-multifamily commercial real estate production, and $260 million of C&I production for a net growth of $32 million and $8 million of auto production.
Our outlook for loan growth remains positive with a loan pipeline of approximately $882 million consisting of $528.1 million of single family jumbo loans, $78 million of single family agency mortgages, $89.3 million of income property loans, and $186.8 million of new C&I loans.
Although our pending warehouse lending applications of around $30 million and a significant number of in-process applications are not included in the pipeline numbers just provided. We’ve seen increased demand in our warehouse lending business for new warehouse lines and request from existing customers to upsize their current lines.
For the first fiscal quarters originations, the average FICO for single family agency eligible production was 760, with an average loan-to-value ratio of 64.1%. The average FICO for the single family jumbo production was 711 with an average loan-to-value ratio of 61.4%.
The average loan-to-value of the originated multifamily loans was 53.7%, net debt service coverage ratio was 1.38. The average loan-to-value ratio of the originated small balance commercial real estate loans was 51.9% and the debt service coverage ratio was 1.64%. The average FICO score of the auto production was 752.
Our portfolio credit quality is very strong. Our strong credit discipline and low loan-to-value portfolio have resulted in consistently low credit losses and servicing costs.
Our credit losses remain very low with 3 basis points of recovery for the quarter ended September 30, 2015 compared to 4 basis points of charge-offs in the corresponding period a year-ago.
Our lifetime loss in our originated single family loan portfolio represents less than 2 basis points of loans originated and our multifamily lifetime loss is also less than 2 basis points of loans originated.
Total non-performing assets as a percentage of total assets was 50 basis points at September 30, 2015, down from 55 basis points at June 30, 2015. Our loan loss reserve to non-performing loans was 102.4%.
As reflected in our historically low charge-off rates, and the recovery this quarter, a very small percentage of our non-performing resulted in a loss to the bank, because we have a granular portfolio secured by primarily real estate collateral with readily as-determinable market values.
We continue to maintain our conservative underwriting criteria and have not loosen credit quality to increase loan volume. At September 30, 2015, the weighted average loan-to-value ratio of our entire portfolio of real estate loans were 56%. Risk is not hidden in the tails of the portfolio.
When you look at the entire collateral package for a single family loans, only 7% of the single family loan portfolio have a loan-to-value ratio of greater than 70%. Less than 2.6% is greater than 75% and we have no loans greater than 80% loan-to-value.
Given that these loan-to-value ratios use origination date appraisals over current amortized balances in a generally appreciating housing markets, these historic LTVs generally overstayed the true loan-to-value ratio on the portfolio providing a further margin to the collateral security.
We only originate full documentation loans that include borrowers personal and business tax returns, bank statements, and one full appraisal for multifamily and single family loans under $1 million and two appraisals for all single family loans above $1 million. Our customer value proposition in the jumbo lending business is multifaceted.
First, the bank provides excellent and responsive customer service, an industry-leading turn times, which are particularly important for the purchase market.
In many of the best markets in which the bank primarily lends, a purchaser cares more about execution, which may mean a difference between getting and loosing the house and getting the absolutely best price.
We have often seen other banks stumble on transactions simply because of a poor process, an inability to make decisions in a timeframe required to close purchase transactions in the end of the borrowers’ choice. Approximately two-thirds of our jumbo mortgage business was purchased in 2015.
Much of this business could go elsewhere, but it is not because of the certainty of execution in the service we provide. Second, the bank also recognizes that high net worth borrowers have a quite attractive, but complex financial picture.
These borrowers may have a majority interest in several businesses were they participate in management of some, and as a Board member of others. Our borrowers often have minority investments in different funds that are on different properties or other investments they maybe distributing or reinvesting income.
Our borrowers often own multiple commercial and residential properties in enviable locations and receive rental income from these properties. Our borrowers have significant liquid assets. They can often pay the full purchase price in cash, but on a low leverage loan for the next business opportunity.
Through our national presence, online pricing engines, data initiatives and broker portals, the bank is able to find borrowers who are willing to play significantly greater than industry average cash down payments into properties in order to secure a strong certainty of execution which is derived from our speed and our ability to understand their complex financial picture.
When we use brokers or correspondent to source single family loans, we never delegate any underwriting decisions, outsource income calculations or employment of tax return verifications.
If we use a broker, that broker may source the deal, but the bank diligences a deal, ensures the appraisal is audited through a bank approved vendor and verifies documents. We’ve robust broker approval process and we have a score card for each broker for performance and ongoing monitoring.
Despite strong growth in our loan portfolio, we have maintained a strong discipline in pricing and structure. Given our current low -- given our low current in the historic credit losses and low loan-to-values across our entire loan book for a real estate related loans, we are sufficiently provisioned for potential future loan losses.
Our loss history is highly correlated to LTV at origination. The lower the LTV, the lower the expected loss. We generated robust deposit growth in the September quarter, growing total deposits by 45.8% year-over-year and 6.8% on a sequential basis.
This is the fourth consecutive quarter that we have increased deposits at a faster rate than loans year-over-year. Checking and savings deposits grew even faster, increasing 55.8% year-over-year and 7.8% linked quarter.
Checking and savings deposits increased by approximately $1.4 billion to $3.9 billion at September 30, 2015 representing 83% of total deposits, a significant improvement from 78% a year-ago. The shift away from CDs to transaction accounts further reduced our funding costs and improved our interest-rate risk profile.
We have not grown our deposits by having the best rates in the market, although our overall deposit cost is approximately 78 basis points. This was due to the fact that the time deposits have on average cost of approximately 203 basis points, because they have an average duration of approximately 4 years.
Looking at our demand and savings account, approximately 83% of our deposits, the average cost of demand deposit was 52 basis points and the average cost of savings was 63 basis points. Our deposits are priced at less than 55% of the cost of the Allied Bank deposits.
Of the bank's overall deposit base, we have approximately 29% business in consumer checking, 35% money market accounts, 6% IRA accounts, 9% savings accounts, and 4% prepaid accounts.
As we continue to segment our customers and further refine our behavioral propensity models that are utilized to communicate and cross-sell other products to our customers, these models also generate interesting information regarding deposit engagement.
For example, we were recently working on customer segmentation for several of our large consumer checking accounts that have created approximately 69% of total consumer checking account balances.
Of those consumer checking accounts, segmented approximately 65% of the population are what is described in this segment as representing approximately 99% of the balances or what is described in our segment as engaged or highly engaged, with engage being defined as having an average of 10 points of -- 10 point of sale transactions in one month, an average of four services used, for example bill pay, ATM withdrawals, point of sale, peer-to-peer transfer, personal financial management and account aggregation, with an average balance of at least $6,000 in order to be considered in the engaged customer segment.
Our consumer checking accounts have an average eight-year weighted average life. Despite these strong engagement numbers, the bank has been conservative in estimating its deposit bases assuming that on average its consumer checking accounts were just at 68% of the increase in Fed funds, with six months lag.
Given the level of engagement of these accounts, the best-in-class value proposition of these accounts and the fact that our checking accounts have reward and fee structures that represent one of the best value accounts in the nation, we believe this deposit beta may be conservative.
Even with what we believe to be conservative deposit betas, the bank’s interest rate risk profile continues to be moderate, because of the addition of approximately $300 million of individual retirement accounts and approximately $90 million of non-interest bank deposits through one of the country’s largest prepaid programs and the additional liquidity that arises from tax processing, the bank's net interest income shocks improved this quarter from a positive 1% in the prior quarter of the first year to a positive 3.5% in the current quarter as a result of the 200 basis point up shock and our 24 months net interest income shock improved from a negative 4% to a negative 3%.
Given that we grew net interest income by 31.8%, in the last year, this impact is immaterial to our results over 24 months even in an extreme immediate 200 basis point up shock scenario. Our business banking group delivered another solid quarter, growing deposits year-over-year by $587 million to $2.3 billion at September 30, 2015.
We offer small business, a multifaceted value proposition comprises significantly lower transaction fees, a robust cash and treasury management platform, excellent customer service, decentralized industry focused PODs in San Diego, competitive earnings credits and interest rate and unique technology driven solutions.
We are finding that many businesses no longer need or want to transact with branches and they’re working directly with knowledgeable and responsive service reps focused on their industry that can solve their problems on a timely basis is significantly more valuable.
By competing on service, software integration and fee structure, we believe our business banking deposits will exhibit strong retention rates through a rising rate environment.
The recently launched our enhanced Treasury Management system for our larger and more complex customers that we believe makes it significantly more competitive for the business for the most demanding treasury management customers.
We also recently completed a software integration for one of our business banking customers that allow them to save significant processing and reconciliation resources, by receiving real-time data directly into their core operating system relating to reconciliation and allowing for the initiation of payments from their core system.
We believe these sorts of solutions represent significant opportunities for growth over the next several years.
Over the last several years, we’ve seen that improving our customer service and targeting customer segments for industry verticals with tailored products or driving volumes will greatly improve digital marketing in an expanding base of distribution partners, have allowed us to provide our customers a much broader range and reasons to use the bank.
We see additional opportunities to further differentiate our value proposition in the next few years by commercializing the online banking platform prototype we have built of a highly flexible front end online banking platform utilizing an App Store type concept that will allow us to customize the products and services displayed for different user segments and differentiate our user experience in meaningful ways.
Not only will this platform allow us to greatly enhance the customer and user experience, but will allow us to advance -- use advanced analytics to provide personalized and relevant advise on a broader scope of product.
We are only scratching the surface of this evolution in banking and have a multitude of opportunities to differentiate ourselves from a customer acquisition user experience and the service integration perspective. We recently rolled out a new in-house consumer banking enrollment system in September for Bank of Internet USA.
The new system not only improves the customer experience, but also reduce the cost to enroll a new account by over 50%.
As most of you know, on August 31, 2015 we close the H&R Block purchase and assumption agreement to purchase certain assets and all of the deposit liabilities of H&R Block Bank as well as enter into a seven-year program management agreement, under which we will provide H&R Block branded financial services products, specifically Emerald prepaid cards, refund transfers, Emerald advance lines of credit, deposits and credit card products through H&R Block’s retail and digital channels.
We added over 250,000 IRA accounts and over 700,000 Emerald Card customers. This quarter we owned approximately $1.4 million in fee income from H&R Block. On the liability side, we absorbed only one-third of the favorable impact the H&R Block deposit from this quarter, as the transaction closed on August 31.
The integration has gone extremely well so far with the seamless launch of the Emerald Card product. Our retention rates for the IRA deposits have been strong, with under a 1% loss rate as a result of the transition.
We are actively planning and working with H&R Block on operationalizing our exclusive rights to cost our individual retirement accounts and mortgages to H&R Block’s tax offices and to H&R Block’s digital channel.
We are excited about the opportunity to work with H&R Block, and the sale of bank’s mortgage products, starting with some digital marketing and then working on some other mortgage concepts.
Our system integration skills will be critical in the rollout of our IRA products to H&R Block’s software, and so it’s approximately 12,000 stores not this coming -- not this coming tax season, but for the next tax season.
On an annual basis, we expect the three initial products in the H&R Block program management agreement to generate $31 million to $35 million of annual revenue comprised primarily of high margin volume based fee.
This excludes any potential benefit from future cross-sell opportunities, and the benefit of the deposits that were acquired and the deposits that we’ve received from the IRA relationship and our growing relationship with H&R Block franchisees, The bank is very well positioned from a capital perspective for significant future growth without the need to raise additional capital.
At the bank, our Tier 1 capital level is 9.26%. At the holding company level, our Tier 1 core capital was 9.75%, 75 basis points above our internal 9% target and 175 basis points above our 8% required level during the tax season and our 8.5% required level outside the tax season.
We are confident that we will not need to raise capital going into this tax season to maintain our target capital levels during the peak tax quarter. We are in a great capital position, given our strong organic earnings, proximity to tax season earnings, and our excess capital.
Additionally, our capital structure consist almost entirely of common equity and therefore allows for significant flexibility regarding what type of capital instruments other than common equity that we might decide to utilize to raise capital in the event that our asset growth outstrips our strong earnings, begin to reduce our excess capital levels.
We continue to make good progress diversifying our lending capabilities beyond single family, multifamily and C&I lending, demonstrating that we can incubate lending businesses in a controlled fashion that have an impact over time.
After we identified small balance commercial real estate lending as an area of interest around 18 months ago, we added underwriters and refined our systems and they did marketing strategies to target loans to meet our risk return profile.
We originated $45 million of small balance commercial real estate loans in the past two quarters, focusing on a select few California markets. The average loan-to-value ratio of these loans was 59.8% or with an average debt service cover at 1.47. We originated $8 million of auto loans as well in the quarter.
We have expanded the capabilities of the C&I team, so that we have the capability to originate and manage bank loans, asset-based loans, equipment loans and leases and other specialty commercial loans. We have a flexible and scalable loan monitoring and service infrastructure that allows us to quickly enter new niches.
Our efficiency ratio of 33.3% came in below our long-term target of 35% for the second consecutive quarter. Our corporate management accountability framework built on the pillars of operational excellence, management accountability, process-orientation and the culture of accountability enables us to remain efficient and nimble.
Our scale and operating leverage has allowed us to invest significantly on infrastructure improvements necessary to continue growing in a safe and compliant manner. We were implementing process and systems that banks two to three times our size used to manage various operational credit and compliance functions.
We continue to augment our already robust enterprise risk management systems and processes. Our data driven compliance framework allows us to automate a number of compliance review functions that are more repetitive in nature, which frees up more time for our compliance staff to focus on more complex tasks.
The compliance framework also streamlines our monitoring and review processes in order to analyze and filter more data faster.
We are in the process of implementing a process-based enterprise risk management system normally utilized by much larger banks that will provide us the core risk infrastructure, that allows us to scale significantly and institute [ph] continued regulatory compliance.
Our efficiency ratio would be even better if we do not invest a portion of our profits in new growth initiatives and infrastructure upgrades. We continue to invest significantly in new businesses such as Vertis [ph], auto lending, mortgage servicing and a significant incubation program exploring a number of new lending fee and deposit businesses.
We are confident that over time, as they have historically, these businesses will become strong contributors, just as many of our incubator businesses such as prepaid have over time.
Additionally, as I mentioned previously, we plan to accelerate IT and data analytics investments necessary to build our next generation retail banking platform to become a more product centric company and further reduce our efficiency ratio.
The good news is that with an 18.3% ROE and a 1.7% ROE this quarter and $31 million to $34 million of incremental annual revenue from the H&R Block transaction starting this fiscal year, we have the resources to fund our long-term growth sustaining initiatives without additional impact on our margin and returns.
Now I'll turn the call over to Andy to provide further details..
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 Web site at bofiholding.com.
Second, I’ll discuss our quarterly results on a year-over-year basis, meaning fiscal 2016 versus fiscal 2015, as well as this quarter ended September 30, 2015, versus the last quarter, the fourth quarter ended June 30, 2015. For the quarter ended September 30, 2015, net income totaled $25,501,000, up 42.9% from the first quarter of fiscal 2015.
Diluted earnings were $1.60 per share, up $0.40 or 33.3% compared to the first quarter of fiscal 2015. Net income increased 4.5% compared to the fourth quarter ended June 30, 2015.
Excluding the $1.7 million special dividend that the bank received from the Federal Home Loan Bank last quarter, this quarter’s earnings grew 8.8% over the prior quarter’s earnings.
Excluding the after-tax gains and losses associated with our securities, our portfolio adjusted earnings previously known as core earnings were $25.5 million for the quarter ended 2016, up 38.1% year-over-year from the $18,485,000 adjusted earnings for the first quarter of fiscal 2015.
Net interest income increased $14,253,000 during the first quarter ended September 30, 2015, compared to the first quarter of fiscal 2015 and increased $3,834,000 compared to the fourth quarter ended June 30, 2015.
This was a result of increase in average interest earning assets combined with a decrease in the cost of funds resulting in a net interest margin of 4.02% this quarter compared to 3.98% in the first quarter of fiscal 2015 and compared to 3.97% in the quarter ended June 30, 2015.
The cost of funds decreased to 96 basis points, down 5 basis points over the first quarter of fiscal 2015 and down 7 basis points when compared to the quarter ended June 30, 2015.
Provisions for loan losses were $2.4 million this quarter, $2.5 million in the first quarter of last fiscal year and $2.9 million for the fourth quarter ended June 30, 2015. The decrease for the three months ended September 30, 2015 in the loan loss provision was primarily the result of a $400,000 net recovery for the current quarter.
Non-interest income for the first quarter of fiscal 2016 was $9,789,000 compared to $5,249,000 in the first quarter of 2015 and compared to $10,278,000 for the fourth quarter ended June 30, 2015.
The increase over the first quarter of fiscal 2015 was primarily the result of $2.8 million gain on sale in the other category, as well as increases of $1.9 million in banking service fees including $1.4 million of which was due to H&R Block activity during the quarter.
It was also influenced by a favorable change in the unrealized loss on securities of $1.1 million, offset by a decrease of $1.2 million in mortgage banking income.
Non-interest expense or operating costs for the first quarter ended September 30, 2015 were $22,918,000 compared to $17,446,000 in operating costs for the first quarter of fiscal 2015 and compared to $20,752,000 in operating costs for the fourth quarter of fiscal 2015.
For the first quarter, year-over-year salaries and related costs were up $4,625,000 due to additional staffing added since September 30, 2014. Data processing and Internet expense increased $366,000. Advertising and promotional expenses increased $322,000 and FDIC and regulator fees increased to $286,000.
These increases are primarily due to the growth in the bank’s lending, business banking, and regulatory compliance.
For the first quarter ended September 30, 2015 compared to the fourth quarter ended June 30, 2015, real estate owned and repossessed vehicles expenses were up $198,000, salaries and related costs were up $2,213,000, FDIC and regulatory fees increased $138,000.
The increases were primarily to support the growth of the bank’s lending and deposit operations. Our efficiency ratio was 33.25% for the first quarter of 2016 compared to 34.81% recorded in the first quarter of fiscal 2015 and compared to 32.47% in the fourth quarter of fiscal 2015, excluding the effect of the one-time FHLB dividend.
The efficiency ratio was calculated by dividing our operating expenses by the sum of our net interest income and our non-interest income. Shifting now to the balance sheet. Our total assets increased $435.9 million or 7.5% to $6,260 million as of September 30, 2015, up from $5,824 million at June 30, 2015.
The increase in total assets was primarily due to an increase in loan portfolio of $296.7 million on a net basis. Total liabilities increased $391.2 million primarily due to an increase in deposits of $303.4 million.
Stockholders' equity increased by $44.7 million or 8.4% to $578.2 million at September 30, 2015, up from $533.5 million at June 30, 2015.
The increase was primarily the result of our net income for the three months ended September 30, 2015 of $25.5 million, also the sale of common stock which added $16 million, as well as vesting and issuance of RSUs and options which added $2.4 million, a $0.4 million unrealized gain in comprehensive income was partially reduced by a net less tax reduction of $0.14 million in dividends declared on the preferred stock.
At September 30, 2015 our Tier 1 core capital ratio for the company consolidated was 9.75% while the bank was 9.26%. With that, I will turn it back over to, Greg..
Thanks, Andy. As most of you know, I commented on our September 2, and October 14 conference call regarding the matter of our disgruntled former junior employee who filed the frivolous complaint on October 12, 2015.
In our October 14, 2015 call, I stated that this completely merit less complaint is writable with evidence of basic misunderstandings, inaccuracies, out of context statements and illogical conclusions. We filed the lawsuits against this disgruntle former junior employee in federal court on October 16, 2015.
I have made it abundantly clear in my prior statements that the allegations in this complaint whether they are made against a company or any individuals in the company including any allegations of wrong doing with regard to my accounts or allegations of reported restrictions placed on me regarding activities in my accounts or personal investments are completely false, misleading and wholly without merit.
Specifically with regard to Mr. Erhart’s allegation in his complaint in a section entitled John Ball abruptly resigns after refusing to break the law. In paragraph 51, Mr. Erhart states that “On or about March 5, 2015 Mr. Ball resigned abruptly after refusing an order from CEO, Garrabrants to engage in what Mr.
Ball reasonably viewed to be unlawful conduct to cover up the bank’s wrong doing”. In direct contravention to this allegation by Mr. Erhart in a statement that Mr. Ball provided to the bank’s legal council regarding the reasons for his departure Mr. Ball stated.
On March 5, 2015, I sent an email for the audit committee and senior management to advise them that I was resigning from BofI effective that same day. The main reason for my resignation was due to a burnout caused by continuous long hours. My immediate resignation was due to a discussion that I had on March 5 with Mr.
Garrabrants about completing time intensive work tasks facing my department which I understood would mean no relief from such long hours in the foreseeable future. In paragraph 51 of this complaint, Mr. Erhart alleges again that on or about March 5, 2015 Mr. Ball resigned abruptly after refusing an order from CEO, Garrabrants to engage in what Mr.
Ball reasonably viewed to be unlawful conduct to cover up the bank’s wrong doing. Mr. Ball has confirmed in his written statement that Mr. Erhart’s statement in paragraph 51 is false in every respect.
Now given that we’ve commented in detail on this matter on several calls, and in our federal lawsuit against this disgruntle junior employee, and provided a full explanation for Mr. Ball’s departure -- provided Mr.
Ball’s full explanation for his departure, I will not be commenting any further on this matter on this call or taking questions regarding this matter during the question-and-answer session. What I will say is the Company is not under any restrictions from operating at the business in the manner that we have historically operated.
But the fundamentals of our business are stronger than ever. We have no obstacles that would inhibit us from engaging in mergers or acquisitions. I’m very pleased that our staff has not been distracted from the job of growing our business and I’m pleased that we were able to deliver such strong operating results.
Now, we will take questions on something other than the Erhart matter.
Johnny, could you open it up for questions?.
Operator, we’re ready to take questions please..
Thank you. [Operator Instructions] The first question comes from [indiscernible] with KBW..
Hi. Thank you for taking my question..
Sure..
You mentioned the CRE group and I’ve seen that they continued to ramp.
Could you provide any color on kind of your expectations for the group and what you’re seeing there?.
Sure. Well, so it’s early, but that group really expands the product line of the multi-family group which they’ve been entirely focused on multi-family loans previously. The small balance, commercial real estate group really compliments that group.
We find a lot of our borrowers that we work to find through out data driven initiatives and through our marketing or not only multi-family properties, but other small commercial properties. So there’s a natural synergy there. That being said the underwriting is split because of the more complex and somewhat unique nature of some other properties.
I expect that we’ll continue to ramp that business up as we find good quality loans and I think it will increase over time.
I’m not really prepared to give specific numbers there, but one other benefits of that group has been that we’ve been able to maintain a relatively steady yield in the combined multi-family and commercial real-estate portfolio despite some compression in some of the multi-family markets because the commercial side provides a little bit higher yield there.
So, yes we’re excited about that. I think it’s indicative of our ability to grow businesses, but I won't be providing a specific forecast on that..
Okay. Thank you. And then, turning to fee income, I saw that mortgage banking income was a bit lower than it’s been in the past.
I wanted to see if that was normal variation or indicative of something else going on there?.
Sure. When you look at our mortgage banking income its really comprised of two different number, we have $1.3 million in gain on sale of agency loans and then when you look at our other sales of loans it came in at approximately 0.6 million.
So both of those numbers are down from the prior quarter and there is no single reason for the decline other than in the case of the individual portfolio transactions. It depends on the pool of buyers and their interest in expanding for that quarter. So there is no general trend we’re seeing other than we had fewer buyers this period..
Okay. Thank you..
And next will be Bob Ramsey with FBR..
Hi. Good evening guys..
Hi, Bob..
Hi. Thanks for taking the questions. Sorry, I missed it in your comments, but the Ball statement that was made after the suite was filed.
What was the date that he made that statement?.
The statement was made, the written statement was made after the suite was filed and with regard to any other details to that I will -- I have already said to you that I’m not commenting further on it except that statement was made in clear response to the false statement that was made in the complaint regarding why he left which is why the statement is so pointedly addressed to that particular falsehood..
Okay. No, that’s helpful. I’m just trying to establish the timeline, because I know after the New York Times article on the 15th, people expect him to be a second whistle blower and I was curious if the comment -- his comment that comes from him was after that..
Yes, that I think is great. That was a very misleading way to write that..
Okay. In terms of the net interest margin this quarter, obviously you all had nice expansion, just kind of curious sort of what the outlook looks like here. Are you still thinking 3.80% or 4%, do you come back down because you’re obviously a little bit above the high-end of that range today..
Right.
Well this quarter as we’re going into as it will start to ramp up some of the Emerald Advance loans and in a prior guidance on one of our calls we gave some rough numbers around potential expansion of that margin and then after those loans start to repay what's going to end up happening is we’re going to end up having a lot of cash on the books.
All that is going to do is, we’ll be able to earn whatever yield in Fed Funds we get out of that cash. But what that is going to do is it’s going to compress margins on a temporary basis until that cash comes off. But if we separate out that noise and look at the underlying business, we see very strong stability in our loan yields.
We’ve been able to reduce deposit cost very well with all the operational things we’re doing and we’ve also been pretty aggressive about giving people a very clear message both verbally and through pricing that if they’re here at the bank and they think that the only thing we’re providing them is a great rate and they don’t value service, they don’t value the technology in that, we may not be the bank for them.
So I think the combination of those things leads me to be confident about margin. That being said, we’ve -- we’re not changing our guidance and we are at the higher end of that range and if you look at the core business I think you could continue to look at that guidance or something that we would think makes sense going forward..
Okay. And in terms of modeling the Block fee-based income, I was just wondering, I know you guys said it was I think $1.2 million or $1.4 million this quarter.
What is the expectation for Block income in this coming quarter and just sort of how should we model the seasonality of the fee income piece?.
Yes, we gave early guidance on that and that guidance is pretty much the same which means that about 70% to 80% of it is going to be in the March quarter and then the differences -- that difference will be in the December quarter. And when we’re talking about an entire estimate, again the estimate was around after tax $16 million.
So think about 70% or so that in March quarter and then the rest in December and a small amount in the June quarter..
And then by the way Bob, one thing you did say is you used the word whistle blower and there are no whistle blowers at all at the Company..
Okay. Great. I got it.
I guess last thing and I’ll hop out, but could you just confirm again that as of today you’re not aware of any ongoing investigations by federal regulators in the BofI?.
I already said I’m not commenting on that, but I will say that you can review the very clear statements that I made on my prior two conference calls and those statements remain as true today as when I made them..
Okay. Thank you..
And your next question comes from Andrew Liesch with Sandler O'Neill & Partners..
Hi, guys..
Hi..
Just a couple of questions for me that I had left, does the prepaid fees that you have this quarter, just kind of curious how much seasonals were they this quarter, are they lumpy from one quarter to the next, what can we expect for that going forward?.
Andrew I wish I can predict it. It’s so hard to predict. Obviously we had a lot of them in the prior quarter, it came down this quarter. I would probably average between them if you want a number to go forward, but it’s just really hard to predict. It’s not necessarily a seasonal thing..
Okay. And then, Greg I’m sorry if I missed it, did you say what the percentage of your deposits are in business accounts, I know you’ve said that in prior quarters..
Yes, it’s about 52%..
52%, okay. And then ….
No, no -- 52%..
52%, okay.
And then, are they all 1031 exchange, what percentage of the 52% is 1031 exchange companies?.
No, they’re not even close to the size and close to that. I don’t have an exact number, but it’s -- I mean it’s a very small percentage. I mean it’s a very, very diverse set of businesses which with thousands of small business accounts from a diverse set of industries.
We have a significant number of deep treasury management commercial relationships, and then within the specialty deposit group there is 1031 exchanges, there’s fiduciaries, there is a variety of deposits. So it’s not -- that wouldn’t even be close to being a correct statement..
Okay. Thank you. I appreciate it..
Sure..
Next will be Gary Tenner with D.A. Davidson..
Good afternoon, guys..
Hi, Garry..
Just two quick questions, the gain on sale line, I guess this is the one income line that maybe was already asked, 3.7% this quarter versus 1.4% last quarter. Any correlation there between that line and the mortgage line or it’s just kind of timing of sales..
Yes, so gain on sale other is what you’re talking?.
Yes..
Gain on sale, yes. We originate structured settlements for sale depending on a variety of factors in terms of looking at the business, the primary increase in that is related to structured settlement sales..
Okay. And then Greg, you had made the comment regarding capital that you didn’t see any need for capital.
Does that mean that the ATM is on the shelf for the time being or were you talking about something overly on that?.
No..
You said $16 million of ….
Yes, we finished our last ATM. We generally believe that an ATM should always be outstanding, but what I was specifically referring to, well certainly the question of capital and when we need it, I believe that we’re in good shape based on asset growth and earnings projections for a nice long period of time and the fact that we have excess capital.
But then also our shelf offering allows us to raise subordinated debt and a variety of other instruments. Our capital requirements at our bank are higher than our holding company and because we don’t do anything on a double -- anything significantly. We have $5 million on a double leverage basis that just gives us opportunity and room.
So my only point is, as what I would always say is, I’m not -- I’m certainly not in a hurry to raise equity nor do I need to be and we have lots of options if we needed capital and we don’t need it right now..
Okay. Thank you..
Yes..
And moving on to Don Worthington with Raymond James..
Good afternoon..
Hi, Don..
In terms of deposits, deposits were up in the lower $300 million but you also got in 400 plus million from Block, so did you run off other types of deposits during the quarter once you got those less expense of deposits in?.
Yes, we’ve been really, really pushing down and basically non-renewing a variety of CDs that we just don’t feel when we do our segmentation have long-term customer value from a standpoint of being able to cross sell them a product or get them into higher value added services.
So if you look, I think one of the interesting things about what we’ve done just from a retail perspective is continued to, over the year we’ve run off a lot of CDs, we’ve built up others. I think this quarter as well, there was -- we had one so -- this quarter the CD side was relatively stagnant.
If we had one brand that had some higher rates and in one of the savings groups and we had been very aggressive about cutting that back and that’s a way of us establishing what elasticity is there. So we always continue to look for that because like I said if we have a lot lower cost of funds that a lot of the internet, just internet only type banks.
So we continue to look for ways to squeeze that down and run off customers that are only focused on rate. But that being said we feel very confident in our deposit pipelines and our ability to grow our deposits to fund our loan growth..
Okay.
And then in terms of loan growth for this fiscal year, still look like the opportunity to grow at 20 plus percent on a year-over-year basis?.
Yes, I think that’s right. I’ve been -- I had previously said in that 25’ish percent range, I don’t maybe 25% to 30%, maybe a little bit lower around there. I don’t think you should expect nor are we targeting the type of growth that we had in the prior year, and so that’s -- I think that’s the right way to think about that..
Okay. Thank you..
Yes..
And that does conclude the question-and-answer session. I’ll now turn the conference back over to you..
All right. Thank you everyone very much for your time. I appreciate your interest in BofI Holding and BofI Federal Bank, and we’ll talk to you next quarter. Thank you. Bye-bye..
Thank you. That does conclude today's conference call. We do thank you for your participation today..