Greg Garrabrants
Analyst · Sandler O'Neill & Partners
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.
