Axos Financial, Inc. (AX) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to BofI Holding, Inc.'s First Quarter Fiscal 2015 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, November 4, 2014. Now I would like to turn the conference over to Mr. Johnny Lai, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining us today for BofI Holding, Inc.'s first quarter 2015 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, and they will be available to answer questions after the prepared remarks. Now before we begin, I would like to remind our listeners that on this call, prepared remarks may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for forward-looking statements that is 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 on the company's Investor Relations website located at www.bofiholding.com. All the details of this call were provided on the conference call announcement and in the press release today. At this time, I'd like to turn the call over to Mr. Greg Garrabrants, who will provide opening remarks. Greg, the floor is yours.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to BofI Holding's conference call for the first quarter of fiscal 2015 ended September 30, 2014. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for its first quarter ended 2015 of $17,841,000, up 46.5% when compared to the $12,182,000 earned in the first quarter ended September 30, 2013, and up 11.4% when compared to the $16,010,000 earned last quarter. Earnings attributable to BofI's common stockholders were $17,764,000 or $1.20 per diluted share for the quarter ended September 30, 2014 compared to $0.85 per diluted share for the quarter ended September 30, 2013, and $1.09 per diluted share for the quarter ended June 30, 2014. Excluding the after tax impact of net gains related to investment securities, core earnings for the first quarter ended September 30, 2014, increased $6,460,000 or 53.7% compared to the quarter ended September 30, 2013. Other highlights for the first quarter include total assets reached $4,825,000,000 at September 30, 2014 up $422 million compared to June 30, 2014, and up $1.5 billion from the first quarter in 2014. Total deposits reached $3,262,000,000 up $220,000,000 compared to June 30, 2014. Return on equity reached 18.61% for the first quarter. Our net interest margin was 3.98% for the quarter ended September 30, 2014, a 4-basis-point decrease over the quarter ended June 30, 2014, and a 12-basis-point improvement over the quarter ended September 30, 2013. The efficiency ratio was 34.81% for the first quarter of fiscal 2015, down from 41.37% for the first quarter of fiscal 2014 and 34.87% in the fourth quarter of 2014. Our loan units had another great quarter, with $1,005,000,000 in gross loans originated in the first quarter. As a result, the bank achieved good quarterly loan growth, with loan balances growing 12.1% linked quarter at an 84.4% annualized rate. The excellent performance of our lending group is reflected in $426.3 million of net loan growth this quarter, a 62.7% increase over the first quarter of 2014. The $1,005,000,000 of production consisted of : $88 million of single family agency eligible, gain on sale production; $17 million of single family non-agency eligible gain on sale production; $452 million of single family jumbo portfolio production; $149 million of multifamily portfolio production; $300 million of C&I and specialty asset production. Additionally, our warehouse lending division originated $387 million of single family production in the first quarter. Taken together, the bank originated $790 million of loans in single family, multifamily and C&I lending, an increase of $119 million over the prior quarter. Our C&I lending business continues to show strong results with production of $190 million. Our outlook for loan growth remains positive, with record pipelines of approximately $939 million at October 31, 2014, consisting of $481 million in jumbo loans, $156 million of multifamily loans and $217 million of C&I loans. We've seen our single family agency and warehouse lending pipelines increase so far in October and November. Our centralized mortgage operations allows us to efficiently deploy resources between single family agency and single family jumbo lending quickly, to take advantage of shifts in the marketplace. We are pleased with the risk-adjusted returns we are earning on our jumbo mortgage production, and demand remains strong. We also remain committed to growing our single family agency mortgage production. The diversity of our asset generation model continues to serve us well. We have infrastructure and expertise to sell our portfolio of our single family and jumbo mortgages, multifamily and specialty finance production as well as our C&I loan originations. The flexibility allows us to maintain a high return on equity, through various competitive and market cycles, without taking any outside interest rate or credit risks. Additionally, we continue to invest in resources to expand our expertise and production capabilities, across a broader range of lending categories, in preparation for future opportunities that may emerge. We continue to be pleased with the credit quality of the bank. Our nonperforming assets, as a percent of total assets, were down slightly from 55 basis points at the end of September 2013 quarter to 52 basis points at the end of the quarter ended September 2014. We are often seeing gains on the sale of our REOs versus our portfolio marks and the relatively few nonperforming assets we have, given the significant recovery in the housing market. We continue to have an unwavering focus on credit quality of the bank, and have not sacrificed credit quality to increase originations. For the first fiscal quarter's originations, the average cycle per single family agency eligible production was 7 62, with an average loan-to-value ratio of 64%. The average FICO for the single family jumbo production was 7 to 16, with an average loan-to-value ratio of 62%. The average loan-to-value ratio of the originated multifamily loans was 62% and a debt service coverage ratio was 1.38%. Our strong credit discipline and low loan-to-value ratio portfolio have resulted in consistently low credit losses and servicing costs. At September 30, 2014, the weighted average loan-to-value ratio of our entire portfolio of real estate loans was 55%. Turning to the liability side of our balance sheet. I am pleased with the progress we have made in growing and enhancing our deposit franchise, our goals to increase our share transaction accounts and develop deeper customer relationships. Over the past 2 years, we have successfully shifted our deposit mix to become more transaction-focused. We grew our checking and savings deposits by over $1.1 billion from September 30, 2013, representing growth of 91.1%. Transaction accounts now make up 77.7% of our deposit base, up from only 44.6% from a year ago. The diversity and quality of our deposit base position us well to fund our future growth in a variety of interest rate environment. Our Business Banking group had another solid quarter growing deposits by almost $300 million, linked quarter, to $1.7 billion in September 30, 2014. The business bank has over 3,000 accounts, where 75% of the balance is comprised of checking accounts. Our core value proposition of saving businesses 30% or more in their monthly fees and providing good customer service, is resonating with a growing base of clients who are very comfortable working with a branchless bank. Through our internal research group, we continue to identify businesses, nationwide, with a high propensity towards utilization of our treasury and cash management services. We are also investing in our infrastructure to upgrade systems and services to compete for larger accounts. All these factors combined, make us optimistic about our opportunities to continue to grow our business deposits. I'm equally excited about our consumer deposit franchise, given the strong value proposition we offer. Our structural cost advantage allows us to offer a value proposition that's not economical to our higher-cost competitors. We have been aggressively improving our organizational capabilities to grow our consumer deposits, adding senior talent in data analytics, digital marketing and customer experience management. We are building customized software that will allow us to further optimize our application funnel and deliver better real-time targeted cross-sell offers to our customers. We recently separated our direct banker customer service function, from our outbound sales functions and expanded the outbound sales function to allow us to better -- to get better consumer deposit penetration, from the customer contacts, generated throughout the organization and from third parties. On the loan side, I believe we will be able to sustain our loan yields. Our jumbo pipeline are at or near record and pricing remains consistent with levels we have seen over the past quarters. As we continue to expand the size and quality of our distribution network and enhance our inside sales capabilities, we continue to see opportunities to make low loan-to-value jumbo mortgages nationwide and strong markets to credit-worthy borrowers. While the multifamily market has been more competitive, we are not seeing meaningful degradation in our loan yields. Our focus on smaller dollar multifamily loans, that larger competitors have less interest in, has allowed us to grow our multifamily loan book opportunistically without compromising on credit structure returns. Lastly, I feel good about our C&I lending capability. Our C&I lending group has extensive experience across a variety of loan types, including lender finance, factoring, leveraged lending, equipment finance and leasing. We have deliberately chosen to focus the majority of our attention on lender finance, because it provides the best risk-adjusted returns today, providing yields that are accretive to our overall loan yield. However, we have the infrastructure and expertise to enter C&I lending categories, if and when the credit markets firm and provide more attractive risk-adjusted returns. Because we have a robust asset-generation engine and a diverse high-quality deposit base, I believe we will be able to maintain our net interest margin in the 3.80% to 4% range. We continue to invest in our marketing and data analytics infrastructure to further enhance our ability to grow deposits through our low-cost channel. We recently signed an extension of exclusivity for our transaction with H&R Block. Several weeks ago, we announced a regulatory approval of our purchase and assumption agreement of certain deposits from H&R Block Bank, will not be completed in time for the 2015 tax season. Our expected relationship with H&R Block consists of 2 components, only one of which requires regulatory approval. The first, which requires regulatory approval, is the assumption of deposit liabilities of H&R Block Bank. These deposit liabilities consist of individual retirement accounts and continuing Emerald prepaid card deposits, from cards issued prior to BofI becoming the custodial bank, under the terms and conditions of the Emerald card deposit agreement. The second is, a program management agreement under which we'll provide H&R Block-branded financial services products, specifically Emerald prepaid cards, refund transfers and Emerald Advance lines of credit through H&R Block's retail and digital channels. This agreement does not require regulatory approval, and the bank and H&R Block are free to enter this agreement at their discretion. These exact products have been offered under an OTS or OCC charter for the last 7 years and we are not changing any aspects of these products, under the program management agreement. The program management agreement has 3 primary components: first, the bank will be serving as the sole issuer and depository institution for H&R Block's Emerald cards, one of the largest prepaid card programs in the country with approximately 3 million active cards; second, the bank will act as sole processing bank for H&R Block's refund transfers; third, we will originate all Emerald Advance loans and retain a percentage of the Emerald Advance loans, that we originate through H&R Block each year. Although this bank and H&R Block are free to enter into the program management agreement at any time, independently as assumption of the deposit, we expect that we would execute the program management agreement concurrently with the closing of the deposit assumption transaction. The benefit of the concurrent execution, from BofI's perspective, was to provide regulators an opportunity to comment and gain a deeper understanding of the program management agreement. Unfortunately, I do not have further specific updates on timing of the approval of the deposit assumption transaction. I'm proud of our 34.81% efficiency ratio we attained this quarter, a 34.81% efficiency ratio, despite our investment in our management team, data analytics capabilities and our technology and compliance infrastructure as a testament to our culture of continuous improvement and ongoing efficiency initiatives. The majority of the incremental expense associated with the pending H&R Block transaction has been incurred and should stay relatively flat for the next few quarters. As I mentioned previously, we had expected these additional expenses to push our efficiency ratio closer to 37% to 38% in the short term. We will continue to work hard to become more efficient across our entire bank, while making the appropriate investments in future growth initiatives. 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 discuss our quarterly results on a year-over-year basis, meaning fiscal 2015 versus fiscal 2014 as well as this quarter ended September 2014 versus the fourth quarter ended June 30, 2014. For the quarter ended September 30, 2014, net income totaled $17,841,000 up 46.5% from the first quarter of fiscal 2014. Diluted earnings were $1.20 per share this quarter, up $0.35 or 41.2% compared to the first quarter of fiscal 2014. Net income increased 11.4% compared to the fourth quarter ended June 30, 2014. Excluding the after tax impact of gains and losses associated with our securities portfolio, core earnings were $18,485,000 for the quarter ended September 30, 2014, up 53.7% year-over-year from the $12,025,000 in core earnings for the first quarter of fiscal 2014, and up 14.7% from $16,111,000 in core earnings for the last quarter ended June 30, 2014. Net interest income increased $16,765,000 during the first quarter ended September 30, 2014 compared to the first quarter of fiscal 2014, and increased $4,379,000 compared to the fourth quarter ended June 30, 2014. This was a result of increases in average interest earning assets, combined with a decrease in the cost of funds, resulting in a net interest margin of 3.98%, this quarter, compared to 3.86% in the first quarter of fiscal 2014. The cost of funds decreased to 1.01%, down 25 basis points over the first quarter of fiscal 2014 and down 8 basis points compared to the quarter ended June 30, 2014. Provisions for loan losses were $2,500,000 this quarter and $500,000 for the first quarter of last fiscal year as well as $2,250,000 for the fourth quarter ended June 30, 2014. The increase, this quarter compared to last quarter, was a result of higher charge-offs and growth in the loan portfolio. Noninterest income for the first quarter of fiscal 2015 was $5,249,000 compared to $6,976,000 in the first quarter of fiscal 2014, and compared to $4,723,000 for the fourth quarter ended June 30, 2014. The decline from the first quarter of fiscal 2014 was primarily the result of lower gains on sales of other assets, partially offset by higher mortgage banking income and banking services fees. Noninterest expense, or operating costs, for the first quarter ended September 30, 2014, was $17,446,000 compared to $14,514,000 in operating costs for the first quarter of fiscal 2014, and compared to $15,766,000 in operating costs for the fourth quarter of 2014. For the first quarter, year-over-year salaries and related costs were up $1,915,000 related to additional staffing. Advertising and promotional increased $717,000. Data processing and Internet expenses were up $329,000, and other general and administrative costs increased $462,000. These increases were primarily due to the growth of the bank's lending and deposit operations. For the first quarter ended September 30, 2014, compared to the fourth quarter ended June 30, 2014, salaries and related costs were up $921,000 due to additional staffing. Data processing and Internet expenses were up $209,000, and other general and administrative expenses increased $512,000, primarily as a result of the improvement in mortgage banking-related activities. Our efficiency ratio was 34.81% for the first quarter of fiscal 2015 compared to 41.37% recorded in the first quarter of fiscal 2014, and compared to 34.87% for the fourth quarter of fiscal 2014. The efficiency ratio was calculated by dividing our operating expenses by the sum of our net interest income and our noninterest income. Shifting to the balance sheet. Our total assets increased $421.9 million, or 9.6% to $4,825,000,000 as of September 30, 2014, up from $4,403,000,000 at June 30, 2014. The increase in total assets was primarily due to an increase of $426.3 million in loans held for investment. Total liabilities increased $380.5 million, primarily due to an increase in demand in savings deposits, and $281.1 million partially offset by a decrease in time deposits of $60.9 million and the maturity of $10 million of reverse repurchase agreements. Stockholders equity increased by $41.3 million or 11.1% to $412.1 million at September 30, 2014, up from $370.8 million at June 30, 2014. The increase was primarily the result of our net income for the 3 months ended September 30, 2014 of $17.8 million as well as the sale of common stock of a net $20.6 million, vesting and an issuance of RSU's added $0.7 million, and $2.3 million was added as a result of unrealized gains or losses in comprehensive income with a decrease of $0.1 million in dividends, associated with preferred stock. At September 30, 2014, our Tier 1 core capital ratio for the bank was 8.72%, with $241.7 million of capital in excess of the regulatory definition of well capitalized. With that, I'll turn the call back over to Johnny.

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

[Operator Instructions] We'll go to Andrew Leisch with Sandler O'Neill Partners. Andrew Liesch - Sandler O'Neill + Partners, L.P., Research Division: Okay. So I just wanted to take a look at the securities yield over here. Looks like it's fell by over 100 basis points. Just kind of curious, what drove that?

What, I think, you need go back Andrew is, look at the way we broke out the FHLB stock. I think, if you look at our 8-K, we merged that FHLB stock with the yield and then we split it back out, this period. So that's why, I think, that's what's throwing you off a little bit. Now, that said, I am very happy that we're invested in FHLB stock because an 8% dividend is pretty darn nice. But I think, it's simply, the way it got compiled if you go back and look at whether with -- the last quarter's rate in the 8-K was blended with that and then we stripped it out. Andrew Liesch - Sandler O'Neill + Partners, L.P., Research Division: Okay. I apologize. And then, I'm curious, with the -- it also looks like in the 10-Q that you're now screening liability sensitive. Just curious, what sorts of the actions you are taking to maybe, make it more neutral or asset sensitive?

Well, sure.

Well -- go ahead and take that.

Yes. I'll add -- I'll put my sentence in and Greg will catch anything, that I go through. I think, our basing was looking to continue to grow our deposits. As you know, we were planning on adding the core deposits from the H&R Block transaction, which was being planned through 9/30. In October, subsequently, we learned that, that transaction was potentially going to be delayed. So we're looking at increasing backfill for those deposits. Andrew Liesch - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then just, one last one. Greg, I think, you said that originations for the commercial loans are around $300 million for the quarter, is that correct? And if so, I'm just curious, where that shows up in the loan breakout by category?

So I think, the biggest component, I think, Andrew, if you lie the loan components side-by-side is in the factoring increase. So that $300 million includes that factoring number. Andrew Liesch - Sandler O'Neill + Partners, L.P., Research Division: Okay. I guess, just look at that number, like take it about to $132 from $119, is all.

Right. So that's from the -- yes as well as the other increase in C&I. So we'll also strip out the multifamily increase as far as structured lender finance for you. So I'll -- we'll take it offline and I'll break those pieces out for you.

We'll take our next question from Julianna Balicka with KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of follow-up questions. One, in terms of your loan-to-deposit ratio being elevated till the H&R Bank deal closes, is that something that we should be thinking about expecting? Or are you going to let that tick down in the next couple of calendar quarters, until the deal actually does come through?

We are expanding on -- our marketing on the deposit side, adding additional individuals on our outbound consumer side, and really continuing to aggressively push our deposit production volume up. So we're already seeing quite a nice increase, this quarter, as a result of a lot of those sales efforts. And so, we're really spending a lot more time on scaling the outbound sales team and other things, that we have a lot of control over. We have a pretty good formulaic method of understanding how much each outbound salesperson can produce, and so we feel good we'll be able to grow our deposits. And so we do intend to bring that ratio down and we had a nice, a very set plan on the H&R Block side. But given the fact, that it's delayed, we're taking other significant action in order to ensure that it doesn't any -- that the deposit growth supports our asset growth. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: So theoretically, once the H&R Block Bank deal closes you could, very quickly, drop to below 100% if you're already closed, then your at 104%?

Right. That's possible. I mean, that is very possible. And I just think, though, it's prudent from the perspective of just making sure that we want to get the right amount of deposit growth in place, and so that could occur. But that's okay. At our growth rate, that will quickly come back in the balance. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: True. And then in terms of your business linking, that grew very nicely in linked quarter to $1.7 billion. So is that growth curve maturing or is this the kind of linked quarter increase that we should be thinking about for several more quarters? I mean, it's been growing, strongly linked quarter for several quarters already, so I mean, at what point do we think about maturity there?

I don't think we're anywhere close to maturity there. And in fact, we have some great and interesting opportunities on that side. We have a new cash management system that should be installed, probably in another 3 months, and it's going to really open up, a lot of opportunities for us for some larger accounts. The -- what I've been just so pleasantly surprised by the fact that, business customers are not having any discussion really at all for the segments that we're targeting about, about need for branches. And they're solely focused on the service component and the technology component. And I think, our cash management technology is good. It's just not, in every respect, up to speed in certain small areas and there's been certain elements of things that when we've come up for a competition in some larger accounts, where we found some holes in our cash management platform, that we're selling with this upgraded software. So we don't think that it's mature at all and we're continuing to grow and -- grow that book and add personnel and focus there. So we think that's going to be a big important part of our growth going forward, and we really are -- I'm even more pleasantly surprised than I thought I would be, about the response that we get from businesses. They really like the value proposition. They like the model of having energetic, in place representatives, who aren't taking them out to lunch but are rather just there for them, and are really responsive to their needs. And I think that, all of that's working well with our fee structure there. We're saving people a lot of money and they're pretty happy about it. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And then the other side of that is, with your cost of funds decreased -- deposit cost of funds decreasing, how much further do you think, that could decrease with the growth missions that you have in place, assuming no rise to short-term interest rates?

Yes. I think, that -- I think, they're probably modeling out something that's relatively flat there, is probably the right approach, right now. I mean, from my perspective, we have a great and profitable growth franchise going and over the longer term, obviously, we do believe that trade-off -- that we can really continue to work on our service elements and continue to push our deposit pricing down, which is what we've done over the last couple of years. I think that if the Block deal had happened, I think that it would've been easier for us to continue that downward trajectory. And I think right now, I just need to make sure that I'm continuing to be able to fund our growth. So I think, probably more of a leveling off would be more appropriate, right now. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then switching to a couple questions on the expense side and I'll step back. In your remarks you had said that the costs incurred, that you were [indiscernible] and the H&R Block already in the run rate. But then you also, seems to have referenced some further optimization in your existing costs. So should we be thinking about downward bias towards expenses from here, because of cost savings measures?

Yes. It's an interesting question. So when we think about cost savings, we really have -- there's 3 primary ways we think about it, right? And we then bucket them up into -- I'll call this, a set of all kinds of miscellaneous stuff, and those are everything from, how we deal with expense accounts to the ordering of supplies and all that kind of stuff. And then, there's a vendor side of it, which is really looking at -- the larger vendor, regularly occurring items we have from a cost perspective. And then the next component of it is really, personnel. And when we look at -- and we've gone through a very substantive initiative to document, and to really hone in on every process that exist at the bank. And we've got about 1,600 processes that we've gone through and we've done a lot of work on triaging those processes to make sure that we're -- we know exactly how many times they're occurring, and whether there's efficiency opportunities, and what those efficiency opportunities are, in each process. And the amazing thing is, despite how efficient we are there are still lots of things that can not only be made more automated and also, I think, therefore, more safe and more likely to be correct from a regulatory and compliance perspective, but also more efficient. Now that being said, I think, it's always a balance between investing in the future and optimizing short-term earnings. And so we've been spending a lot of money on enhancements to our management teams, enhancements to our compliance infrastructure, our data management capabilities, our research teams, to continue to make sure that we're staying ahead of our growth, from a infrastructure perspective. So we've been continually kind of guiding into that, 37%, 38% efficiency ratio range. And we -- I just unfortunately haven't been able to hit it and we keep on coming up at 35%. But we're still investing a lot in our business, and we're going to continue to do so. So I think that it's -- I think, that I wouldn't want to see -- kind of, start trying to push that efficiency ratio down. But I think, the reality of our business model is without all those substantive investments and looking at a lot of the new things that we look at and in continuing that -- those investments in growth, I think, our business model is really quite amazingly efficient. And it could run below there. But I just wouldn't expect that, for a while, because we're going to really invest in our future capabilities so -- to make sure that we have the continued growth. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: That makes sense. And then could you refresh my memory on when the H&R Block Bank deal actually closes, what will be the expense number that will grow on to your income statement from the people that you will -- you may transition over? Or is there going to be a direct expense increase related to H&R deal?

The -- from the people perspective, yes, there may be a few more folks that are brought on, in particular capacities, based on workload balancing around BSA alert monitoring and things like that. But we've really decided that -- we really bulked up our compliance team, IT team and others over the last year. And we've really decided that those folks, given the regulatory environment that exists and all the opportunities that we have, as a bank and how quickly we're growing that we're committed to those individuals. And obviously, we expect our deal to close. But whether we do or not -- whether that deal closes or not, we believe that those folks are valuable parts of our organization. We don't think, that we're going to really need to add much, in the way of personnel expense. There is some expense associated with the retention of 10% of the Emerald Advance loans, and that's simply because there's interest expense and then loan loss associated with that. But I would say, it would be reasonably fair to say that, economically modeling, from a standpoint of any H&R Block revenue, I don't really think there's going to be substantial additional cost associated with it. I mean, there may be some, but it's not going to be significant. It will be very small. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That makes sense. And then one final question and I'm going to step back. I noticed that your [indiscernible] pass through is up this quarter. So could you comment on that, whether or not there's anything to comment about that or it's just a matter of temporary filing?

Yes. There are couple of loans, mostly single family that are very low loan-to-value ratios. One is in Manhattan, one is in Malibu. They're both around 50% on original appraisal values. They're pretty new loans and one of the guys had a tax lien issue, and some other things. I don't think there's any -- I think, that in one of those cases, that loan will go back to performing. Unfortunately, it's a nice 50% loan-to-value in Malibu. Always looking for a second home up there. But -- and then the other one -- and the other one I think, we're well-protected on it. I don't know if it will cycle through it or not. But I think it would be highly unlikely that there would be any loss associated with that. And I think, it's just -- it's really a one-off and I don't think there's any pattern there.

[Operator Instructions] We'll move next to Edward Hemmelgarn with Shaker Investments.

Yes, you seem to have a bit of a decrease in the -- your originations of non-agency loans for gain on sale, things like the multifamily and your jumbo. Is that a change in mix or is it just that you basically haven't needed -- you're trying to decrease the number of -- that you sell?

Yes. There's -- and those are 2 really kind of different markets and so let me go through each one specifically. The single family non-agency jumbo market was primarily a securitization market with us selling into a number of securitization conduits. And that market has gotten quite choppy. And in a lot of respects, what's happened is, that market has become inferior from an execution perspective to bank balance sheet lending. And so, while overall, that's very beneficial to us, it kind of has resulted in a shift to more of an ARM structure for the loans that we retain of the balance sheet, the 5/1 ARM. So that's what's going on with that market. Now frankly, we have the ability to sell those loans too, although they're -- we think, they're very good risk-adjusted returns, so we, in general, keep the majority of them. However, we would be selling those more to smaller banks, regional banks, things like that. Maybe insurance companies, we wouldn't be really selling them through to securitization conduits. So that's really the difference on the single family side. And then, on the multifamily side, the multifamily loans really are fairly homogenous. They're all 5/1 ARMs. There really is no securitization and portfolio product. And we just -- we sell those loans to a variety of banks and other buyers, not for the securitization market. And that really -- so there really isn't a separate set of originations there. We have some that are categorized as, for sale, but they really are the same product set.

Second thing then is, is there -- when you look at what you've accomplished so far in 2014, what are the -- I guess, the things of -- that are new areas, that are driving growth that you've kind of gotten into, that you haven't been in, say, in 2013 and earlier?

Right. Well, so I'll talk about that in several ways. First, I'll talk about the distribution side of the business and then I'll talk about product side. So on the distribution side, there's a lot we're spending time on to refine our model. So we're much better at being able to take the data and customer contacts that we have and do a much better job of selling customers on products, they need at the right point in time. Obviously, every time, if you walk into a branch and someone tries to sell you a mortgage, that's not a good experience. But if you know from a data perspective that you can save somebody money on a mortgage and you could hit him at the time that, that's relevant, that makes a big difference. So we're spending a lot of time on thinking about how to continue to improve our distribution. And that includes, lots of effort on the digital marketing side, vastly improving our infrastructure there, implementing a global CRM. That -- we have a CRM now across, but it doesn't work perfectly across business units, all those kinds of things. And so that's improving the distribution side of the business. And obviously, the H&R Block ideas, an emblematic of components of that because there's lots of opportunity to expand products that's in cross-sell in there and that sort of thing. On the -- and then on the product side, the idea of the C&I lending business, is that it is built out from an infrastructure perspective, as a very much of a full-service C&I lending business. And although we made focus on particular sectors at any one time, we have great ability to generate asset volumes through Shared National Credits or things like that. It's just that, those -- currently those markets just really aren't very attractive from a risk-adjusted returns. So the C&I side covers a wide swath of commercial lending opportunities. On the single family side, we have a product, a home equity product, that's up, it's on Cosco. We've always had a home equity product and frankly, I would say it hasn't -- we have a very -- we've always had a very conservative stance on the risk-adjusted return we need there. And then reality of that product is that we believe, that single family jumbo mortgages right now are just simply, a better risk-adjusted return. However, that doesn't mean that we don't have the product available and we certainly could originate it, more aggressively, if we wanted to. But the reality of where we are from a business, with the loan growth that we have, is we're picking spots that we feel really, really good about growth, and those are the areas with best risk-adjusted return. And so we're balancing out, making sure that we have all the capabilities to do other products and at the same time, not necessarily focusing on products that we think are not best risk-adjusted returns. On the Business Banking side and on the deposits side, it's a little bit different, in the sense that, we do have some very interesting things we're doing there. We've been continually experimenting with moving around, what I would call, the level of customer service versus -- a personalized customer service versus more automated model and playing with different elements there, both on the business banking and the consumer side. And what we're seeing is that, increasingly, customers are caring less and less about branches in any respect, but for certain types of customers, they have more need to feel a very -- a personalized relationship with bankers. And so we're working through, what I would say, is a little bit more of a personal relationship model for higher-end customers, that we're going to break out from a branding perspective and focus a little bit more on that. And we have a ton of those customers in our queue and what we really need to do is just think about the right way of approaching their customer service. Because, if you look at a bank like First Republic and you look at what their value proposition is to their customer. It actually isn't as strong as what we believe, we can offer overtime. So we think that playing with those elements are there. The debit-reward side, our current rewards checking account is very good and it's growing dramatically. But we also think that, given our interchange advantage and cash back rewards product there might be something that will work, and we're working on some of those things. So, that -- as far as new lending products like, any other consumer products, I'll say that, we have teams of people that we've hired and continue to look at those different types of products and work on what those would look like with us, what our value proposition would be, how would we differentiate ourselves and those sorts of things. And, so we are investing in those things. But realistically, where we are right now, is we just have such incredibly good loan growth in segments that are very, very attractive, that it's a little bit tough to really push too much on things that aren't as profitable.

[Operator Instructions]

Alright. Operator, is there anybody else.

No.

Okay. Alright. Thank you very much, everyone. And we will talk to you next quarter. Thank you.

Thank you.

That does conclude today's conference. Thank you for your participation.