Greetings, and welcome to the BofI Holding, Inc.'s Fourth Quarter and Fiscal Year Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Johnny Lai. Thank you. You may begin.

Thanks, Rachelle. Good afternoon, everyone. Joining us today for BofI Holding, Inc.'s Fourth Quarter 2016 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the 3 and 12 months ended June 30, 2016, and they will be available to answer questions after the prepared presentation. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at bofiholding.com for 30 days. Details for this call were provided on the conference call announcement in today's earnings press release. At this time, I'd like to turn the call over to Mr. Greg Garrabrants, who will provide opening remarks. Greg, the floor is yours.

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 2016 fiscal year ended June 30, 2016. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for the fiscal year ended June 30, 2016, of $119,291,000, up 44.3% over the $82,682,000 earned for the fiscal year ended June 30, 2015. BofI's return on average equity over the fiscal year was 19.43% and the bank's 2016 fiscal year efficiency ratio was 34.4%. Fiscal year 2016 earnings per share increased 38.1% from $1.85 per diluted share compared to 100 -- $1.34 in the fiscal year ended June 2015. Net income for BofI's fourth quarter ended June 30, 2016, was $29,727,000, up 21.9% when compared to the $24,395,000 earned in the fourth quarter ended June 30, 2015. Earnings attributable to BofI's common stockholders were $29,650,000 or $0.46 per diluted share for the quarter ended June 30, 2016, compared to $0.39 per diluted share for the quarter ended June 30, 2015, and $0.56 per diluted share for the linked quarter ended March 31, 2016, in which we recognized the vast majority of our tax seasonal-related revenue. Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the fourth quarter ended June 30, 2016, increased by $6.2 million or 26.5% when compared to the quarter ended June 30, 2015. Other highlights for the 2016 fiscal year and the fourth quarter include, net loans and leases grew by 29% in the fiscal year and average balances grew by $471 million in the fourth quarter, a quarterly growth rate of 8.1% and an annualized growth rate of 32.4%. The fourth quarter average gross was increased by $140 million of average balances…

Thanks, Greg. Our 8-K was filed today with the SEC and is available online through EDGAR or through our website at bofiholding.com. In addition to our press release, the 8-K includes unaudited financial schedules. I will highlight a few areas rather than go through every financial line item. Please refer to our press release and our 8-K for additional details. First, looking at our results for the fiscal year compared to the last fiscal year, net income increased 44.3% to a record $119.3 million. Return on average common equity was 19.43%, up from 18.34% last year. This is the fifth consecutive year we have increased our average ROE, starting from 15.17% in the fiscal year ended June 30, 2011. Our earnings growth has been generated from both strong growth in our net interest income and in our fee income year-over-year. With primarily organic loan growth, our average loan portfolio balance grew $1.3 billion this year or 29.4%, while our net interest margin was stable coming in at 3.91% for the fiscal year compared to 3.92% for the last fiscal year. Our fee income this year was increased by the ongoing program management agreement with H&R Block as final revenue for the fiscal year came in slightly above the high end of the range of $34 million. Finally, including the cost of our increased size and our new products and technology, our efficiency ratio for the year was 34.4%, changed slightly from our 33.8% ratio for the last fiscal year. Looking at our results for this quarter ended June 30, 2016, compared to our results for the quarter ended March 31, 2016, average portfolio loan balances increased $471 million between linked quarters. The net interest margin for this quarter was 3.72%, but when you subtract about $321 million of average balance…

Thanks, Michelle. We are ready to take questions.

[Operator Instructions] Our first question comes from the line of Bob Ramsey with FBR.

I wanted to touch quickly on expenses, if we could. They ran a little bit higher than I was looking for, and I just didn't know if there was anything variable comp related to mortgage banking that was unusual or anything around some of the Block quarterly volatility or just sort of how we should think about the expense run rate?

Sure. Well, when you look at the overall increase in compensation, the primary reason for the increase is 70 headcounts were added between March 31 and June 30. When you break that down, the largest increase is associated with C&I and leasing. As Greg mentioned, there are about 23 to 25 people that were added for the C&I Salt Lake City office for the leasing and then another 10 people were added to C&I on top of that. The next largest growth category came out of single-family residential, where about 9 headcounts were added during the quarter. The next largest increase came out of IT, where we had 14 headcounts added in connection with our technology projects and overall growth. The balance of the headcounts are spread across a number of the groups, including an additional 5 headcounts for compliance and audit that were added in this period. So, the probably single largest factor to growth in comp comes from the addition of the leasing unit.

I think that with regard to whether we expect that kind of growth or personnel in subsequent quarters, I think the answer is no. But with everything we're doing, I think that we're more likely to be at 35% to 36% ratio over the entire year, but because the blocked income is moving so much, we will see spikes in our efficiency ratio based on what we're doing. So, I don't think it's -- it would be good to expect that we have a 35% efficiency ratio every quarter. But we hope to achieve that over the entire year, although we're not going to slow down our ambitious growth agenda, or our technology agenda for couple of hundred efficiency -- couple of hundred basis points of efficiency ratio. So, I hope that's helpful from that perspective.

That is helpful. That's great. Shifting to net interest margin, I know you guys said, excluding Block you were at 3.87%. Next quarter you expect to still be in 3.80% to 4% range and that there will be no Block impact, I guess, next quarter. Where are you -- I guess, are you expecting it to be down from where we're today, up from where we're today. Just want to get a little bit of more sort of directional vision on where you are seeing margin pressure or not in the environment today when you strip out the Block volatility?

I think, I would say that rough stability. We didn't change loan rates at all. We did have a prepaid quarter on single-family that impacted the single-family loan rate a little bit. We also have the sub-debt, which impacted our margin by about 4 basis points this quarter. So that -- and we didn't use it yet. So it essentially is sitting there just as excess capital and creating a drag because it hasn't been deployed yet and our capital ratios are above what they normally are. So I think relative stability, taking away the Block number, I mean, deposit costs were reasonably stable and loan rates were stable, at least the offer rates were stable. We didn't have to cut rates in order to attract volume and we don't intend to do that.

Okay. Then last question and I'll hop out. But what do you thinking of as the priorities for that sub-debt. I mean, I know you mentioned it so far is not being used on the balance sheet and if you push it down to the bank, it brings those ratios up very significantly. What is the priority for using that capital?

Well, clearly with where the share price is, that makes share repurchases more attractive, that's a decision that I and the Board make, but that's obviously something that after -- frankly after announcing the year that we have, and it was a good quarter, we're obviously disappointed by that reaction. But that also provides us opportunity and so we have to take advantage of that opportunity. And if we are doing that, then that will allow us to obviously increase EPS because we certainly earn a lot more on a ROE basis than we do pay on interest. So there is a lot of considerations. We have some interesting opportunities going forward from a lending perspective too. So it's a balance, but those are all considerations, whether use it for organic growth over time or to utilize it for some form of share repurchase.

Our next question comes from the line of Brad Berning with Craig-Hallum Capital Group.

Could you just start with going through each of the lending sectors, talk about market environment, talk about competition, talk about your interest to growth, growth outlook? Just kind of give of the lay of the land of each one of the sectors?

Sure. So our single-family jumbo business, I think has good growth potential. It's probably our more mature segment, but I still believe there's lots of opportunity there. And we don't really see any significant increased competition. There is a few lenders here and there, but we don't really see too much there from increased competition. I think that frankly as we continue to grow a lot of the limitations that we have in our growth opportunities are related more to our own operational infrastructure and growing it. We have a office, we're opening in different state, that has 140 people -- will have the capacity for 140 people. There is just some of those elements of operation -- of operational infrastructure build that I think are more limiting to growth than any market segment or sector. I think we have really good plans on the data strategy side there and things like that, to be able to move that business forward. On the single-family agency side, there is a lot of opportunity to grow that business. And frankly, we probably have been a little too cost conscious with regard to always maintaining an operational infrastructure that was very cost focused and so at times it hasn't allowed us to take advantage of what the market opportunities are out there. So I feel very good about that. Multifamily is a lot more competitive. There's a lot of banks focused on it. I think they've -- we've seen them sort of pushing credit, long -- IO periods, higher LTVs, nonrecourse. So that's made that segment a lot more difficult and growth has been more challenging there. So that's that something that we've been compensating for with smaller balance commercial production a little bit, which we think there is some more opportunities with…

Understood. We'll follow up more details on those later. But just wanted you -- to make sure, you had a chance to reecho a comment that I think I heard you say. But I think you did say in your prepared remarks that the regulatory exams for the year are all completed. And I just wanted to give you a chance to, given all the questions on that topic, give me a chance to kind of reecho what you said there.

Oh, sure. Well, so. Yes. The regulatory exams are always completed, but as I've said on past calls, the nature of being a regulated entity is that we've constant dialogue with regulators, including the OCC, SEC, FDIC and the Fed. I know that you got involved and a little spat over what the term investigation is and how it's defined and that sort of thing. And it's interesting because the term investigation isn't defined in Securities Law and you can characterize any question or one question as investigation, and the nature of regulatory dialogue is there's constant questions and inquiry. And so, I think the important thing to note and what's the most important is if there is any event that's occurred that would require disclosure, the answer is absolutely no. So we've not been asked any question or received any inquiry from any agency, including the SEC that would suggest concerns regarding financial misrepresentation, financial results, estimates, or other matters that would require an 8-K. And so, we have with regard to the OCC, obviously, our primary regulator, we have 2 -- we have a full scope exam and an interim exam. Our full scope exam for this year is complete. We know where that is. Obviously, we can't talk about the specific results, but I was very clear that we have no constraints on our business. We have no enforcement actions and we frankly don't have any issues that would lead me to think that we have to change any single thing about what we're doing. So while the amount of noise that the short-sellers have been able to generate is impressive, the actual impact on the operations of the business is nothing. And so allow me to repeat. We have not been asked any questions that or received any inquiry that would suggest any concerns about our financials, financial misrepresentations, financial results estimates or anything else that would require the filing of an 8-K, meaning that would be material.

Our next question comes from the line of Gary Tenner with D.A. Davidson.

Couple of quick questions. First on your comments on the prepayment speeds impacting loan yields this quarter. Could you be a little more specific on what the actual impact was, on average loan yields for the quarter?

Yes, it was like 3 to 5 basis points something like that. So it's not -- it was an -- I mean, it's enough to make a difference, right, when you're looking at a few basis points.

And that's on single-family yield, not on the entire yield. Single-family yield.

Okay. And just what you've seen through the first month of this quarter and based on where rates are you seeing as similar sort of pace of prepayments this quarter?

It's tough to say because we're only a third through it on that item, but we do believe the quarter was outsized.

Okay. And then just a follow-up on the expense piece. You discussed it as -- in terms of the outlook for the efficiency ratio, et cetera, but just trying to understand, so the leasing company came in, you said that's around 40% efficiency ratio that you should be able to get down from there. And I get how efficiency ratio would be higher this quarter than it was in the March quarter obviously with H&R Block impact. I was surprised that it was actually well above where it was through the first half of the year or at least in the counter fourth quarter last year when H&R Block was in there. So can you talk about specifically the sequential increase in professional services cost this quarter. It was $2 million versus $2.7 million for the first 3 quarters and then advertising $2.2 million versus $4.6 million for the first 3 quarters. So just in terms of any seasonal fluctuations and impacts there?

Sure. Yes, let me first cover professional services, and we'll look at the linked quarter change where it went up about $1 million so -- for that piece. So when you break that down, only $400,000 of that increase is connected to the litigation. The rest of that increase, so $600,000 is items outside of that. When you break that down, the $600,000, about $100,000 relates to accounting. So that's audit and tax work. About $200,000 relates to contract legal, that's legal work for a variety of different business contracts, unrelated to the litigation. And then about $300,000 is increased primarily for third-party consultants that we bring in from time to time for audits and other items. So for example, a BSA exam we engage Crow, which is part of our routine. That's around $200,000 for the period. So that kind of rounds out the increase in professional services.

Okay. And just on the advertising front because that was about again half of what it was in the first 3 quarters.

Yes, the advertising is a little bit more of a max, but there certainly is -- part of that is lead fees as Costco gets bigger and as mortgage banking moves, that's a little bit of that. But the issue is that we also have to develop the capacity there. So sometimes they've gotten a lot of capacity constrained in mortgage banking, and I think some of the efficacy of some of those leads really weren't where they should be. So that's a little bit -- a little bit of that there. But otherwise, it's just there is -- we're working on a lot of interesting marketing initiatives constantly testing things. And so there is an element of that, too. I would say, more broadly, is that and obviously it's -- you guys have to make models and that's important. But what I've seen in the business as we've grown is that, you go through slight stair-step waves where you bring on people, you do new things, you have a little bit of a cost increase and then you are able to get productivity out of those individuals and those initiatives, that kind of levels things out a little bit. And I think we've had a little bit of that with regard to personnel. We've really worked hard to really upgrade talent in the organization, and there is lots of new talent here that are working on a lot of new things and all those new things aren't yet at fruition. So it may be more of a little bit of an extended time frame in order to get all those things working, but people will be happy in 2 to 3 years. But there will be -- we're not absolutely bound in any 1 quarter by that 35% efficiency ratio. We're going to work hard to be cost conscious, but we're not going to sacrifice the future.

Yes, and I think I'll get there from the headcount perspective just was wanting to understand some of the other line items.

Our next question comes from the line of Andrew Liesch with Sandler O'Neill.

Sorry, if I missed it. Did you guys say what the balance of deposits from H&R Block is on the balance sheet at the end of June?

We did not, but I can give that to you. So that's going to be approximately $203 million in total at the end of the period, included in noninterest-bearing deposits.

And we don't think that's that much above the low really. I mean, it might go a little...

The run rate might be 100 roughly. So we're close. That's why we're expecting with that excess liquidity gone, to have better margin.

Got it, just a little bit of excess liquidity remains now?

Yes.

Okay. And then just curious if now with the first year of Block in there and just looking out to next year, have you had any discussions with them about any changes in tax laws that might affect the earned income tax credit and the IRS not paying out refunds until February 15th? Is that -- have you had any discussions with them on how that might affect your results?

Well, we have lots of discussions with them about things like that, about new products, about opportunities. And we're in constant dialogue with them. I don't think that any of those things would probably move where that revenue occurs to push it out in a quarter. But if it did, we'd certainly know far enough in advance so we could talk about that. But I don't think that's anything right now to be worrying about modeling in. And we have a lot of exciting potential opportunities with them. Obviously, we've got the base products that we're excited about, but there is always other things to look out and maybe we'll get some of those and there will be some opportunities for more than organic customer growth that they have. So -- but we will see. But I don't think there is anything to try to put in your model right now in that regard.

Okay. And then similar to that or somewhat related, I think it might be possible that H&R Block launches or relaunches a refund anticipation loan product next year. Does your existing program management agreement allow for you to be the issuing bank under that? Or just kind of curious if you would be willing to do that product as well, if Block is offering that product?

That's something that we're certainly looking at and obviously thinking about, and I really don't have any further comment on it.

Our final question comes from the line of Donald Worthington with Raymond James.

In terms of the gain on sale Other, what's the composition of that? Is that primarily structured settlements?

Yes. It's primarily structured settlements. So when you look at the $5.2 million gain, approximately $4.3 million of that roughly is structured settlements.

Okay. And then in terms of -- is this deposits, I think, Greg, you mentioned, a balance of business plus transaction or something like that. But do you have a balance for the business deposits, I think, has been running kind of North of $2 billion in the past?

Yes, hang on a second and if you go to your next question, I'll have it for you.

Do you have anything else you want to talk about?

The last question was -- this is a small part of what you do, but just looking for an update on kind of the high net worth brand, how that's progressing?

Yes, that's going well. It's -- I think it's around $70 million of deposit. The -- it's providing us a good place to test the cross-selling and the relationship management model for our jumbo mortgage customers. So for somebody who -- the guy who has his $20 million house for sale, and although he is the $5 million delinquency guy, doesn't want to go and call into the call center. And so there -- that model is allowing us to test that cross-sell. It's working, it's not -- it's one of the many initiatives we have, and we think there is real opportunity there to continue to grow it. We think that the -- I think we think the name Bank of Internet, at times, may be an obstacle to attracting certain high net worth customers. And so I think the branding and the structure around that and the service delivery method is something that has legs, and we'll be continuing to work on it in the future.

So I've got your numbers for you. It's about 50-50 split. $2,976,000,000 in consumer and $3,067,000,000 in business. So nearly about 50-50.

There are no further questions at this time. I'd like to turn the call back over to Mr. Greg Garrabrants for any closing remarks.

Well, thanks, everyone. I appreciate your time today and your attention. And to my knowledge, the 10-Q should be forthcoming. So we all look forward to that, and we'll look forward to talking with you next quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.