Axos Financial, Inc. (AX) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding, Inc. Third Quarter 2015 Earnings Conference Call. For today's presentation all parties will be in a 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, April 30, 2015. Now I would like to turn the conference over to Johnny Lai, from BofI Holding. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining us today for BofI Inc.'s third quarter financial results conference call are the Company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the third quarter and they will be available to answer questions after the prepared presentation. Before we begin, I would like to remind 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 in the Investor Relations section of the company's website located at www.bofiholding.com. All the details of this call were provided on the conference call announcement and in today's press release. At this time, I would like to turn the call over to 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 third quarter of fiscal 2015 ended March 31, 2015. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for its third quarter ended 2015 of $21,74,000 up 44.2% when compared to the $14,610,000 earned in the third quarter ended March 31, 2014, and up 8.8% when compared to the $19,372,000 earned last quarter. Earnings attributable to BofI's common stockholders were $20,997,000 or $1.35 per diluted share for the quarter ended March 31, 2015, compared to $1 per diluted share for the quarter ended March 31, 2014, and $1.26 per diluted share for the quarter ended December 31, 2014. Excluding the after-tax impact of net gains related to investment securities, core earnings for the third quarter ended March 31, 2015, increased $6.6 million or 43.8% when compared to the quarter ended March 31, 2014. Other highlights for the third quarter include total assets reached $5.5 billion at March 31, 2015, up $334 million compared to December 31, 2014, and up $1.7 billion from the third quarter in 2014. Deposits increased by $1.5 billion from the third quarter of 2014 to $4.4 billion. Return on equity reached 17.86% for the third quarter. The efficiency ratio was 34.46% for the third quarter of fiscal 2015, down 64 basis points from 35.10% from the quarter -- third quarter of fiscal 2014, and down 9 basis points from the 34.55% in the second quarter of 2015. Credit quality remains very good, with 6 basis points of net charge-offs in the third quarter compared to 11 basis points in the corresponding period a year ago. We had another great quarter of loan production. Total loans outstanding were $4.6 billion at March 31, 2015, an increase of 7.8% from the second quarter, which equates to a 31.4% annualized growth rate. The excellent performance of our lending groups resulted in $1.5 billion of net loan growth, a 49.7% increase over the third quarter of 2014. The primary drivers of our production consists of $90 million of single-family agency eligible gain on sale production; $378 million of single-family jumbo portfolio production and $92 million of multi-family production. Additionally, our C&I lending financing warehouse funding business experienced increased activity during the quarter, but resulted in a net increase of $101 million in loans outstanding as of the end of the quarter. Our outlook for loan growth remains positive, with loan pipelines of approximately $827 million at March 31, 2015, with the primary drivers consisting of $412 million of jumbo loans, $125 million of multi-family loans and $290 million of C&I loans. For the third fiscal quarter's originations, the average FICO for single-family agency-eligible production was 765, with an average loan-to-value ratio of 65.8%. The average FICO of the single-family jumbo production was 709, with an average loan-to-value ratio of 61.5%. The average loan-to-value ratio of the originated multi-family loans was 58.1%, and the debt service coverage ratio was 1.38. We continue to maintain our conservative underwriting criteria and have not loosened credit quality to enhance yields or increase loan volumes. On March 31, 2015, single-family and multi-family mortgages secured by real estate property with a weighted average of 56% loan-to-value represented 84% of our loan portfolio. Risk is not hidden in the tail for the portfolio. Only 8% of the single-family has a loan-to-value ratio of greater than 70% less than 1% greater than 80% and no loans with a loan-to-value ratio of greater than 90%. Given that these loans originated in the generally appreciating housing market, these origination date loan-to-value ratios generally overstate the true loan-to-value ratio in the portfolio providing a further margin of security. We only originate full documentation loans that include personal and business tax returns, bank statements and one full appraisal for multi-family loans and single-family loans under $1 million and two appraisals for all single-family loans above $1 million. Our lifetime loss in our originated single family loan portfolio represents us in 2 basis points of loans originated and our multi-family lifetime loss rate is also less than two basis points of loans originated. The remainder of our loans outside of single-family and multi-family C&I lender finance are well secured by marketable collateral and much lower leverage ratios and industry average for similar portfolios. Our factored structured settlement receivables are secured by A rated or better life insurance companies. We continue to grow and diversify our funding growing total deposits 54.2% year-over-year and 9.1% on a sequential basis. Our deposit growth has outpaced our loan growth over the last two quarters by $425 million reducing our outstanding borrowings by $492 million. We further improved the quality of our deposit base by growing checking and savings deposits by approximately $1.6 billion since March 31, 2014, representing growth of 79.8%. Through various marketing and data analytics initiatives, we've enhanced our deposit generation capabilities across our consumer and business deposit channel. Transaction accounts now make up 65.6% of our deposit base, up from only 60.2% from a year ago. Our Business Banking group had another productive quarter, growing deposits by almost $122 million to $2.2 billion at March 31, 2015. Business accounts now represent half of our total deposit base, up from 39% at year ago. Our business deposit growth over the past few years demonstrates many businesses across a growing number of industries are attracted to our service delivery model and attractive fee structure. We believe that businesses are attracted to our service delivery model because we focus on assigning internal direct bankers with proper training and knowledge of the clients industry to specific accounts. These direct bankers have a high degree of availability to get their primary functions in office client service rather than field sales. Our enhanced treasury management system that will come online later this year will enable us to compete for even larger and more complex business accounts. We're very excited about our business banking growth opportunities. We introduced [Vertis] [ph] a premier banking offering on an invitation-only basis in the third quarter. The product is designed for high net worth individuals with large cash balances and unique needs serviced by a dedicated private banker through online and fund interactions. We are encouraged with our initial results with conversion rates and deposit balances exceeding our internal forecasts. We will continue to refine our customer service, marketing and product features to further enhance the value proposition for Vertis. We recognize the quality customer service and a great user experience are not dependent upon access to branches. In Business Banking too often branch personnel are insufficiently trained two junior and often not suited to serve the complex needs of a wide variety of business customers that can walk through the door of a branch. On the consumer side, the branch experience is often disconnected from the digital experience and insufficiently integrated. In almost all cases, if a customer has to go to a branch, there is an issue with a more convenient and expedited service delivery channels of that institution. Obviously charging customer overdraft fees and other such charges to pay for an increasingly irrelevant branch network also generate don’t improve customer satisfaction. Our success in growing deposits over the last number of quarters is a significant part the result of an ambitious digital strategy focusing on the customer origination and service journeys. We focused on the digital and offline customer experience, personalization and segmentation, organizational and cultural transformation on both deposit sales and services and IT agility. We greatly enhanced our digital marketing, web and application development teams more than doubling the number of staff in those areas. We launched an internal consulting engagement to empower and train our direct bankers to increase first call resolution and broadly improve customer service. We split the outbound cross-sell and sales function from the direct banker service function to enhance the efficiency of the outbound sales effort and focus our direct bankers on the customer experience. Our application development team is now in beta testing on our new account opening system. This system will reduce our overall cost of account opening by eliminating expensive third party vendor, but more importantly give us a complete control of the account opening user experience, cut the average time to complete an application for less than half the current time and enable more personalized real time cross-selling. With the investment in the development team largely complete, this team will next focus on vastly improving our overall online banking experience. The investments we have made in application development, digital marketing, UX and UI development and general management on the deposit side of the business have been substantial and these investments are generating results. We are better equipped than ever to give a customer a great multichannel experience through our online and offline channels and maintain our balance and high quality deposit growth. Similarly, our robust loan growth is a byproduct of the investments we have made over the past several years to diversify our lending businesses and diversifying deep in our distribution channel, data analytics and marketing capabilities. Our jumbo pipelines are near record high, as the demand for jumbo mortgages remain healthy. Despite a few lenders more active in the jumbo market, our pricing and average loan-to-value ratio remains consistent with levels we have seen for the past years. We're confident in our ability to grow our jumbo mortgage lending business profitably based on our efficient processes, diverse business model and disciplined underwriting standards. We continue to take a targeted approach in multifamily lending. Our focus on smaller loans in selective markets where we have extensive market intelligence allows us to originate good loans for good properties with low loan-to-value ratios while maintaining yields commensurate with a 15% return on equity. We added approximately $92 million of multifamily loans in the third quarter at an average yield of 4.6%. Demand for multifamily loans in the secondary market is healthy providing us with an alternative channel to manage our loan growth based on market conditions. Our C&I lending group had a nice quarter with $99 million of loan originations and ending loan balance increasing 17% from the last quarter. Because we focus on select C&I niches that provides good risk adjusted returns, the average yield in our C&I loans are solidly accretive to our consolidated loan yields, with a healthy loan pipeline and expensive experience across a variety of C&I loan types, we remain optimistic regarding expansion of our C&I portfolio. We believe that we’ll be able to maintain our net interest margin in the 3.8% to 4% range. We see additional opportunities to reduce our funding cost through a variety of initiatives across our consumer and business banking brands. The improvements we have made in the quality and loan deposit base along with our superior value proposition give us confidence in competing for our deposits. We believe that we're well prepared for an interest rate hike in 2015 as a result of our ongoing effort to shift our deposit funding from CDs and borrowings to checking and savings, which has made the bank asset sensitive for the first year after a rate shock. At March 31, 2015, a hypothetical 200 basis point rate increase will result in an increase in net interest income of 3.22% over the first 12 months, a significant improvement over the calculation at December 31, 2014, which produced a 1.4% increase in net interest income for the first year. This is without the benefit of additional changes we may make to our balance sheet and the asset growth through low cost deposits that are expected from the original broad transaction. At March 31, 2015, our second year net interest income also improved from a negative 9% to a negative 6.86%. These results are based on upward stock that is much higher than market expectations and did not reflect that we’re already paying a higher rate than most competitors or any steps that management can take to further mitigate risk. Given that we grew net interest income by 32.1% last year, our stock over 24 months from a 200 basis point immediate adjustment is approximately equal to only 15% of last year’s net interest income growth and around 7% of net interest income growth on an annualized basis. We announced that purchase and assumption agreement in December 2014 to acquire approximately $125 million of deposits at par with no purchase premium for the Union Federal Savings bank that is a parent company, The First Marblehead Corporation. We received OCC approval for the acquisition in the third quarter and expected to close in June 2015. We continue to work towards completing the pending transaction with H&R Block. There are no regulatory issues of any kind at the bank that would impede the approval of the H&R Block transaction, we have ongoing communications with the OCC regarding the transaction and remain committed to reaching a successful outcome. Our efficiency ratio at 34.5% demonstrates that despite robust investment and risk management capabilities, management team additions and incubating newer businesses, our business model has an embedded material, competitive advantage. We strive to increase our productivity by continuously identifying process improvement opportunities and embedding them into our work flow. We believe the level of emphasis we put into identifying cash and process improvement opportunities is unique and supported by a robust internal infrastructure to capture and track opportunities, they have generated through dialog with every person in our organization. Although we already have a substantial cost advantage over most banking competitors, we see additional opportunities to become more efficient. Last year I mentioned that we launched a comprehensive cost management program. The program had three phases. The first phase was a detailed categorization of all general and administrative costs and an implementation of a framework to manage those costs. The second phase in which we are currently engaged is a deeper dive into all our significant vendor relationships to look for cost savings opportunities and the third phase is to better link our process framework and personal capabilities models to understand areas of personnel and efficiencies in a more systemic manner. We're currently only mid-way to Phase 2. By reinvesting a portion of our profits to newer businesses and infrastructure, we're positioning ourselves for sustained growth in return from 2016 and beyond, our new business initiatives are diverse by design such that anyone initiative does not bear an undue amount of pressure to generate immediate downsize results and bear the full weight of our growth targets. We're also very patient with our newer businesses to ensure we get everything right from a credit and compliance perspective. We have increased our pace of small balance commercial lending outside of the multifamily asset class in selected markets. We have entered new C&I lending verticals and have the systems and processes and collateral monitoring teams to fully attack those verticals. We've launched an auto lending business that will fully grow over the next few years and we believe will be able to service cost of our customers to cost of our finance channels over the next several quarters. We already have the ability to originate home equity loans through Cosco channel, although our current capabilities in other platforms are more attractive from a risk return perspective currently. Although our current agency serving booked is small, given that we’ve recently begun to accumulate servicing right, we’ve developed in-house Fannie, Freddie and Ginnie Mae servicing capabilities including approval to active and issue Ginnie Mae securities. On the deposit site, we have improved and automated our overdraft fine of credit product, launched our premier bank as well as lunched a cash back debit reward product and are about to roll out our new deposit account opening first off. I’ve never been more confident in the future of our business. We have no regulatory impediments of any kind to continuing to execute to our business plan. We have a deep and talented Management Team that continues to do a great job executing each quarter, while continuing to focus on the future. 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 March 31, 2015, versus the second quarter ended December 31, 2014. For the quarter ended March 31, 2015, net income totaled $21,74,000 up 44.2% from the third quarter of fiscal 2014. Diluted earnings were $1.35 per share this quarter, up $0.35 or 35% compared to the third quarter of fiscal 2014. Net income increased 8.8% compared to the second quarter ended December 31, 2014. For the nine months ended March 31, 2015, net income totaled $58,287,000 up 45.9% compared to the nine months ended March 31, 2014. Diluted earnings were $3.81 per share for the nine months ended March 31, 2015, up $1.5 or 38% compared to the nine months ended March 31, 2014. Excluding the after tax impact of gains and losses associated with our securities portfolio, core earnings were $21,564,000 for the quarter ended in 2015, up 43.8% year-over-year from the $15 million in core earnings for the third quarter of fiscal 2014 and up 11.2% from $19,386,000 in core earnings for the last quarter ended December 31, 2014. Net interest income increased $15,02,000 during the third quarter ended March 31, 2015, compared to the third quarter of fiscal 2014, and increased $2,554,000 compared to the second quarter ended March 31, 2014. This was primarily the result of the increases in average interest earning assets. Net interest margin this quarter was 3.85% compared to 3.89% in the third quarter of fiscal 2014 and compared to 3.85% in the quarter ended December 31, 2014. The cost of funds decreased to 107 down 11 basis points over the third quarter of fiscal 2014 and increased 6 basis points when compared to the quarter ended December 31, 2014. Provisions for loan losses were $2,900,000 this quarter, $1,600,000 for the third quarter of last fiscal year and $2.9 million for the second quarter ended December 31, 2014. The loss provision was unchanged compared to last quarter and increased compared to last year primarily due to additional loan originations for the loan portfolio. Noninterest income for the third quarter of fiscal 2015 was $8,366,000 compared to $5,212,000 in the third quarter of fiscal 2014, and compared to $6,697,000 for the second quarter ended December 31, 2014. The increase was primarily the result strong mortgage banking income as well as higher banking services fees and other income for the third quarter of fiscal 2015. Noninterest expense or operating costs for the third quarter ended March 31, 2015 were $20,343,000 compared to $14,347,000 in operating costs in the third quarter of fiscal 2014 and compared to $18,937,000 in operating costs for the second quarter of fiscal 2015. For the third quarter, year-over-year salaries and related costs were up $3,528,000 due to additional staffing added since March 31, 2014. Advertising and promotional expense increased $792,000 and other general expenses increases $505,000. FDIC and regulatory fees increased $330,000. These increases are primarily due to growth in the bank's lending and deposit operations. For the third quarter ended March 31, 2015, compared to the second quarter ended December 31, 2014, professional services were up $928,000. Salaries and related costs were up $485,000, FDIC and regulated fees increased $74,000. The increase in professional services was primarily driven by higher volume of legal fees and decrease in insurance reimbursements. The salaries and the FDIC fee increase were primarily to support the growth of the bank's lending and deposit operations. Our efficiency ratio was 34.46% for the third quarter of 2015 compared to 35.10% recorded in the third quarter of 2014 and compared to 34.55% for the second quarter of fiscal 2015. 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 $1,125,000,000 or 25.6% to $5,529,000,000 as of March 31, 2015, up from $4,403,000,000 at June 30, 2014. The increase in total assets was primarily due to an increase of $1.1 billion in loans held for investments. Total liabilities increased by $1 billion, primarily due to an increase in deposits of $1,327,000,000 partially offset by a decline in FHLB advances of $327 million. Stockholder's equity increased by $125.3 million or 33.8% to $496 million at March 31, 2015, up from $370.8 million at June 30, 2014. The increase was primarily the result of our net interest income for the nine months ended March 31, 2015, which was $58.3 million, also due to our sales of common stock, which increased $61.2 million and vesting and an issuance of RSU's and exercise of stock options increased $3.9 million as well as $2.1 million in an unrealized gains associated with other comprehensive income all net of $200,000 in dividends declared on preferred stock. Return on average common stockholder's equity was 17.86% for the third quarter ended March 31, 2015 compared to 17.94% for the three months ended March 31, 2014. At March 31, 2015 our Q1 core capital to adjusted average assets ratio for the bank was 9.32% with $230.8 million of capital in excess of the regulatory definition of well capitalized. With that, I'll turn the call back over to Johnny Lai and Greg.

Great. We're ready to take questions.

Thank you. [Operator Instructions] And we'll go first to Bob Ramsey with FBR.

Hey. Good evening, guys.

Hi Bob.

First question I have for you is about net interest margin, obviously margin was stable, which is nice to see in this environment and your loan yield was actually up quarter-over-quarter. I was just wondering if you could sort of elaborate on what helps that loan yield move higher? Whether it was mix shift or whether there was anything else going on in that?

Really two things, the first was mix shift with a little bit higher proportion on the C&I side, that's generally accretive to loan yield and then we've done movements in pricing around in the multi-family side and candidly some of the -- some of our loan yields have slipped a little bit primarily due to some sales management issues that we needed to fix and so we did that. And we're actually seeing that on the loan yield on the multi-family side going the right direction, but also volumes as well. So those were both positive signs there and that's primarily the reason and they've nearly been able to do a little bit of reductions on the deposit side. They didn't see a lot of that this quarter, but there is some potential lift next quarter as well, which is why we're really very, very comfortable giving that 4% to 3.8% guidance even for next quarter as well.

Okay. Great. That's helpful. On the loan side you guys had new record loan originations this quarter, but the loan growth while it certainly is strong was not as strong as it's been in some recent quarters, just curious what you all saw in terms of prepayment activity or maybe what sort of took away some of the growth of the originations were suggested.

It was -- mostly we had -- we had a decent number of significant C&I payoffs and then we also had some larger loans that would be coming on to replace those get pushed -- was pushing in the next quarter. so that really impacted the timing there. So we expected to have a little bit better net origination growth in the C&I side than we actually had based on some payoffs there and I think that that was really the primary difference and we're not seeing much on the primary side, really changing.

Not an increase in the pre-pay rate that significant, but obviously as we get to be a bigger bank, the growth rate, the 44% growth rate has never been guiding to that and I do expect that that's going to come down a bit. I think real growth is still on the loan side is very robust. We're not shooting for a 40% growth rate year-over-year.

No. That's fair and I guess I was looking at it in dollar terms of 10% because you're right, 10% get harder the bigger you get. You'll also said in the release, I can't remember the exact lines, but you said that the pipeline heading into this coming quarter is very strong know if you could sort of quantify what it was as compared to last quarter or the recent quarters or just give a little more color on the size of the pipeline?

Yes so its $956 million is the total pipeline and while it's last quarter that was actually for our comparisons, compared to $849 for the last quarter.

Great. That is all helpful color. I'll hop out and get someone else the turn. Thank you.

Thank you.

And we'll go next to Julianna Balicka with KBW.

Hello. Good afternoon.

Hi Julianna.

Hello. A couple of questions. One just real quick on your previous answer just now that you were talking about some of the loans that were pushed into second quarter, that's in the $956 million pipeline?

Yes, they would be in that pipeline as of the date of that pipeline was measured to the extent that they were and each category has a different definition. The multi-family loans you have to have your money up. For C&I you have to have a signed LOI and for single-family you have to have a submitted application. So each of those so yes is the short answer and they would be in there.

Okay. In terms loan yields kind of going forward from here, with the first quarter typically generally being a third quarter for multi-family in general, does that mean that going forward, because your C&I growth is gaining traction and getting bigger. Should we be looking for flattish loan yield or upward lift or will just increase, cumulative increase in multi-family kind of mask C&I in the coming couple of quarters?

I think that’s fair to think about flat loan yields. I think that’s probably the right approach there. Where I think we’ve done a pretty good job of keeping it there. But there is some multi-family loans that burn off on pre-pays and things that have slightly higher rate. So we have to continually ensure that we’re able to refresh that. So I think assuming flattish yields is probably the right approach.

Okay. And then in terms of your premier banks that you started and total deposit gathering there, I know its early stages still, but what kind of deposit rate should we be thinking about for this decline?

We’re not -- we generally try not to break things down in that categorization and I’m not really ready to share that on a regular basis. But the model there is that what we’ve been finding particularly through our jumbo mortgage business and through our data initiatives that we’re running to people who would like to be part of the bank, but don’t want, but feel very, very much that the service delivery model, which would operate through a call center, which we try to keep wait times reasonable on those sort of things that just doesn’t work for them. So that’s the model. It’s doing quite well, but it’s still very early and there’s still a lot of -- it still has a very simple product set. There’s I think about 3 RM. So there’s lot to do there. It’s just more demonstrative of a lot of the creativity I think that’s going on in the bank to really serve different segments.

Okay. And then in terms of your deposit growth last quarter you had -- that your deposit growth exceeded loan growth and part of it was some low hanging fruit as you had said in terms of refocusing on deposit growth. And this quarter once again we saw strong deposit growth. At what point should we start thinking that your low hanging fruit has been gathered and we’re looking at more of trend run rate of growth or are you still kind of in the gathering of the easier deposits?

I think that this quarter I would say that that transition really has been made this March quarter. We’ve done so much on the deposit side from a structural perspective. We have very talented Chief Deposit Officers and ex Mackenzie partner who is running a large Data Analytics Group at Citi Bank. We’d expanded our digital marketing team so much. We have a much better outbound effort that has reduced -- or has increased retention dramatically, increased funding rates for accounts. There is all sorts of micro improvements that a better team has made really and those include on the application having online chat. So we get such significant flow to our site but the conversion ratios, we felt could be better or showing that. So we hear a lot of things like that, that are really going on the cash management side of business, banking is maturing, Vertis came on. So it’s a lot of things that are working. The Advisor side is growing. So it’s really core operationally. One of the things that happens is its always funny, because on your side of the house people are always trying to read the tea leaves and when you had the kind of run we have it's always, royalty loan growth it’s going to bad, deposit growth is going to be bad. Can you raise capital? The regulatory issue that, so it’s sort of always bounces around and usually it’s wrong. And it was wrong that we couldn’t raise deposits that we wanted. We just did expected that block would get done and so we were sort of preparing for that being very aggressive in reducing rates and we had to catch-up a little bit there. And so this is really more I think fundamental about the fact that we’re working on the things that matter to people we have this inherent advantage from a product perspective where we present what we have to people. They really don’t talk about branches. They really don’t care and they really get the service model and they get the value model and it’s just about getting that message out. So I feel pretty good about where we are. We don’t want our borrowings to go down too much. Most of those borrowings are longer term now and that's part of our effort to decrease our interest rate risk profile. So you have to be thoughtful about, where we are always balancing out loan and deposit growth, but its fundamental business transformations that we continually do here to make our business better.

Very good. Thank you for the color

Thank you.

And we’ll go next to Andrew Liesch with Sandler O'Neill.

Hi guys.

Hey Andrew.

Greg so you mentioned expanding into the auto lending business, I think you mentioned it before, but for you to just refresh us may be if is this through Cosco and like what sort of markets are you targeting? Are they prime auto and then like how fast would you like to ramp this growth.

Right, its, its prime auto. We're working on, working through, extending the product to Cosco, I would expect that -- it to be a very slow rollout and be part of a broader much longer term multiyear initiative for us to work through our strategy on the personal lending side and the auto lending side. Its designed to be able to allow us to capture a real time cross-sell opportunity that will be data driven around our existing customers, around all the customers we're getting debt from through H&R Block and things like that. So Cosco is a -- Cosco is very supportive of us. They've always been willing to work with us on different opportunities that we have and that they have available and that continues to be the case. So I don’t want to make promises that will absolutely can get there, but I believe very strongly that we can, but we’re going to take this very slowly. Mostly people forget that we actually take a really long time to incubate businesses and that’s why we've been so successful from a regulatory perspective and don’t have regulatory issues because we really take a long time to do what we do whether it was on the prepaid side or whatever. So, I wouldn’t even to be candid, I wouldn’t bother modeling it for this year, but in 2016 it will start to pop up and it will continue to be part of strategy which is we're not going to be dependent upon anyone thing. Candidly, I could take up my mortgage banking revenue and make it so much greater right now, but we are very smart to encourage that sort of steadiness in what we're doing and have broad diversity in our product. So that’s really where it is. I mentioned it primarily because I want everybody know we continued to invest at the same time that we have our efficiency ratio where we are or even be lower if want as investments, but that’s part of our DNA is to continually incubate businesses and I think you all continue to see a lot of fun stuffs coming out some.

Got it. That’s helpful and then I guess along those same lines of investing like, how do you feel about headcount for the organizations for your growth plans? Whether it be on the lending side, deposit side or back office like how much more hiring do you anticipate doing in the near future?

We’ve got some interesting things to think about. We really do have -- we leave -- our market opportunities are limited not by the market or by anything that’s available outside of what we’re capable of doing. And it's always important because our regulators always say we have to make sure that we have the risk management ahead of growth and those sort of things and so we’re really focused on that. But we really, what keeps us from doubling our mortgage banking income is just getting people in seats and building space and things like that. So we always have to think about making sure that we’re bringing along those that production force, the same time we're bringing along our risk management side. So I guess, I would expect that we would have similar employee growth. As we look -- if we look at with some efficiencies, so I don’t hold me to it, but you could see it another 100, 125 people over the next year or something as building out incremental sales teams on the single-family side specifically focused on purchase business. This quarter we had to turn off most of our data, big data lead gen, because we just couldn’t handle the volume right. So it’s -- we kind of always managed very efficiently, So we don’t have big ups and big downs, but at the same time when you're looking at just great gain on sell margin and you're having to just leave money on the table, there is an element of frustration about that too. So we’ve got to really balance that out. It may mean, but we look at another state to open an office to allow some of us access to some different labor pools San Diego isn’t the largest financial services market for mortgage and things like that and there are certainly other areas that could be interesting. So we have a lot to think about, but it's all really exciting, very positive stuff.

Okay. That’s helpful too. And then just one clarification question the professional services fees line items, we'll take it as about 800,00 in the last quarter up to about $1.7 million just this quarter is curious of what that difference is?

Yeah, we had, some of the -- we had losses that kind of ahead in this quarter, it was not one that we believed had any merit and we ultimately settled it for no money paid whatsoever and no business restrictions of any kind. But there is a temporary and then it was mostly paid for by insurance, but there was a temporary end balance between getting certainty around the insurance proceeds and the payment of the legal fees and that kind of -- it sort of spiked up because there were it culminating and sort of putting enough pressure on the whole situation to just get them to walk way was -- it was doing more depositions and some things like that. And so I think the good part of that is that we don't really see anything like that in the future and the coming, although you never know. Obviously there are lots of people who want to try to get a piece of something successful and even if they ultimately fail it can be a pain to get rid of them. So the only way I think that there is good news there to in a sense that we wouldn’t expect that kind of expense in the future.

As we look at going forward Andrew, I would look more toward a $1 million, $1.1 million run rate and we've bounced around a little bit, due to the timing on this, but really you’re looking at more like a $1 million, $1.1 million next quarter

Yeah and most of that would be forward-looking IT that sort of consulting stuff as we fill in little holes in our permanent staff that we keep our development efforts going

Got you. Understood. Thanks for taking my questions.

Sure

And we’ll go next to Edward Hemmelgarn with Shaker Investments.

Yeah, thanks just have a few questions. I know you had an increase in the percentage of your in-house single-family non-performing mortgages. Can you talk about that a little bit, what cautious? I know you’re not having the losses, but I mean is it…

Andrew, do you want to take that

Sure, when you look at our overall non-performing, they actually were pretty much flat over period over period for that period. As we noted last quarter, there were two single-family loans together which add up to approximately $12 million. Those two single family loans are the ones that had created a temporary spike up in the non-performing. So that’s primarily what you‘re seeing.

We don't think there anything systemic there. These are kind of more idiosyncratic situation. So we think it will be resolved very favorably there. They're in great locations with great collateral and we think there will be resolved well for us from a financial perspective and don’t see any issues with them.

Okay. All right, just was curious because your losses aren’t going up -- and in terms of commercial or the checking deposits you've really been able to offer a product to your customers that offers much lower fees, do you then what -- they're currently most banks are offering. So I think that’s been a real positive for you, what are your expectations for interest rates to be paid on these deposits as interest rate move up? Do you think that you’ll be able to interest rates fairly low just because you’re offering such a deal on the fees or…

That's certainly what we believe. We think that we see the activity reflected in the banking services fees and all the areas from an interchange perspective that, that we believe that we have a product offering that is competitive and spoke to our clients and so we don’t think will have the rate pressure on those deposits and so we think that that is a good thing. We already tend to have a value proposition but some of it is rate based and some of its fee based but fairly attractive. So there certainly is a great difficulty for anyone else to match us. There is a fundamental issue economically here right and that is that if you don’t have a 180-plus basis point and growing cost advantage on assets over your whole bank, then you have a very difficult time offering what we do regardless of rate is paid because you can’t make on a free checking account regardless, right. So it's sort of an interesting, it's an interesting issue if you’re competing with us because you really can’t do what we do and we’ve got -- our work we believe is we don’t think we’re going to have to pay higher interest on those, we have to do is just continue to improve that the UX and the UY and continue to look for innovative ways to provide value to our customers within our online experience. And I think that whole definition of the customers services is changing in the sense it could be that somebody has a great ability to set an alert that says they checked 25% at a restaurant and they get a note on that, they get a text message on that on their cell phone, put to let them know that maybe something happened at the restaurant and wasn’t what they wanted to do or maybe that is but I think that’s just a lot of the things that we’re doing are really creating consumer sticking us around our platform and we’re making people very comfortable with our service because we can do that without branches and for the people that we’re serving we don’t think that that matters very much. We really do believe that we’ve had such a low customer acquisition cost, I mean it’s been extraordinarily low partially because we’re so product led and we think that the opportunity probably to be less product led and more marketing led is going to be something that’s an opportunity as we increase our marketing team and get our digital infrastructure really where it needs to be and that’s something that is happening very rapidly but it’s still, it’s still a little bit of things we need to work on there to make it really, really efficient.

Okay, couple more questions, one regarding the H&R Block transaction, I mean this is it seems like the transaction has currently structured the -- don’t seem to will they ever approve it, would you is there a data which you would consider in kind of breaking up the terms of the deal into that’s what is needed to be approved, which is you get approved all the time for transferring deposit accounts and then have a non-approval part, I mean that seems to be the only sticking point?

Yes I understand the question and that’s a good one. I really believe that we’re going to have a resolution and I believe it’s going to be positive within a relatively short period of time. There is a good number of reasons I believe that mainly because having ongoing discussions regularly with the OCC on the matter. They had an abundance of opportunity to tell us if they thought that there would be not a chance for approval. And so I think that let me say this before I address the question of breaking it up, the three things the regulators can do I have taken approval transaction without condition they can approve it with conditions and they can decline it. I think that whenever you have a situation where you have then discussing approvals with you, they may ask for certain conditions things like that and you’re going to have discussions with those that can take a little more time but those are fruitful discussions and they’re productive discussions and they lead I think to the regulators in the bank both understanding what are the things that they care about and I think that that's a fruitful set of discussions. We've always said that we're happy to and we remain both free and committed to H&R Block the time of deal that would involve simply the PMA agreement which is primary agreement that’s from a fee structure perspective on an ongoing relationship perspective is the most important part of the transaction. But we also respect H&R Block’s desire to have absolute certainty around everything that they are doing and so that I think that they have structured this transaction on a certain way and I don’t way to speak for them, but I think that if we can get reasonably speedy resolution here I think that they probably would be willing to restructure it in a manner that’s still gets it done. They have lots of options to getting this done and so do we and if we didn’t think that, we had a viable option in the current form then we would obviously look at least from my perspective of turning to the other options, I just don’t think we’re going to have to get there.

Okay. And lastly just you mentioned the increase in legal fees, did that relate -- I recall in your last quarter, the quarter before, somebody was asking the question about there was a fraud lawsuit filed against you or something is that still ongoing or does this?

No it’s not, that was one of those blog pieces or whatever you call them, they came out, met with a suit that they had brought up and the legal fees were related to that, that is not, that is not ongoing, it’s been, let’s say completely settled. We didn’t pay a single dime in that suit, no business restrictions in that that individual just simply walked away from that particular action.

Just it cost you money but did you get rid of this…

Yes unfortunately it did. Although we had, insurance reimbursed most of it and that is some of that insurance proceeds are lagging. So but it’s still costing us something, it wasn’t a 100% covered by insurance but most of it was some.

Okay, all right, thanks. Just curious.

Sure, thank you Andrew.

And we'll go next to Don Worthington with Raymond James.

Hi good afternoon.

Hey Don.

On the mortgage banking income, I guess I’m really looking at mortgage banking plus fee gain on other loans I guess probably the structured settlements, where would you think that would be going over the next couple of years and it’s a combination of the two?

That's I would say that -- I would say that a flattish estimate maybe slightly down, I don’t, I want to be careful about that, we have got a lot of great long-term plans there, but there was a very good margin quarter. We’re little bit capacity constrained there, so even if we’re able to keep volume at our capacity, we might have slightly declining margins, it really depends but we’ve -- but I would model that out relatively flattish I think would the right approach.

Okay, okay. And then in terms of the deposit growth this quarter how much of that was in broker deposits?

We did have some broker deposits in the longer CDs. So when you look at the growth in the CD average, what you’re seeing is us doing 10 year brokered CDs. That was designed specifically of course to increase and improve our interest rate risk profile this quarter. So where we -- I don’t know that we’re going to do a similar increase but it that was up around $50 million is what we did.

Okay. All right, thank you.

And we’ll go next to Gary Tenner with D.A. Davidson.

Good afternoon.

Hi Gary.

Hey, Don sort of addressed my question but to go further on the kind of rate sensitivity piece and the improvement in the first 12 months time period since December 31. Was that purely on the funding side and the mix as well as this CBZ Bond, were there any changes to assumptions? Whether it had to do with the asset side or with the re-pricing lag on the business deposits.

Yes, no major changes in assumptions at all. It has to do with exactly what you indicated early on that we had continued deposit mix as well as extension of our longer term liabilities. We did sell some longer duration lottery assets, which had a minor impact, but the majority if from the funding side.

Okay. And with the deposits coming in, in June from the Union transaction what's the offset to that? Will it be an offset on the funding side or will that just get invested short?

Well, I think that given the fact that we grow loans at a decent clip and we know where that's coming at and end there will be some attrition there, we expect, we don't expect that to be substantially material. And then on the block side, it will be a little more challenging because we kind -- we had some short term borrowings that we were going to use to pay off and we tried to pay them off already. So that we may end up having some temporary liquidity spikes there, but overall we can continue to use that to improve our funding max and lower our cost of funds, which is what we hope to do and the good part of having a robust staff at generation side is we can generally use those deposits and reasonably speedy manner.

Okay. Thank you.

Thank you.

And this does conclude the question-and-answer portion of today's conference call. At this time, I would like to turn the conference back over to Johnny Lai for any comments or closing remarks.

Great. Thank you for your interest in BOFI and please contact me if you have any follow-up questions.

Thank you, everyone. Take care.

And this does conclude today's conference. We thank you all for your participation.