Axos Financial, Inc. (AX) Q1 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the BofI Holding, Inc. First Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Johnny Lai. Thank you, sir. You may begin.

Thanks, Erin. Good afternoon, everyone. Thank you for your interest in BofI. Joining us today for BofI Holding, Inc's first quarter 2018 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 three months ended September 30, 2017, and they will be available to answer questions after the prepared remarks. Before I begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risk 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 Web site located at bofiholding.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. At this time, I’d like to turn the call over to Greg for his opening remarks. Greg, please begin.

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 our first quarter 2018 ended September 30, 2017. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced net income of $32.4 million for the fiscal first quarter ended September 30, 2017, up 12.1% over the $28.9 million earned for the first fiscal quarter ended September 30, 2016. BofI's return on average assets was 1.54%, up slightly from a year-ago, although return on average equity for the first quarter of 2018 was 15.24%, down from 16.59% year-ago because our Tier 1 leverage ratio increased from 9.55% 10.29% over the year. First quarter earnings per share increased 11.1% to $0.50 per diluted share compared to $0.45 in the corresponding first quarter of fiscal 2017. Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the first quarter ended September 30, 2017 increased by approximately $4 million or 14% when compared to the quarter ended September 30, 2016. Other highlights for the first quarter include: average loan and leases increased by $216 million in the fourth quarter, representing 4.4% growth linked quarter and an annualized growth rate of 17.6%. Total assets reached $8.6 billion at September 30, 2017, up $727 million or 9.2% when compared to September 30, 2016. Net interest margin was 3.87% for the quarter ended September 30, 2017, up 7 basis points from 3.8% in the fourth quarter of fiscal 2017 and up 9 basis points from 3.78% in last year's first quarter. Loan yield increased 23 basis points year-over-year to 5.21% reflecting higher yields on newly originated single-family jumbo mortgages, multifamily loans, and a favorable mix shift towards C&I lending which carries a higher yield than our overall loan yield. There is no impact from H&R Block on our net interest margin or loan yields in the first quarter of 2018 or the first quarter of 2017. Return on equity was 15.24% for the first quarter of 2018 compared to 16.59% in the corresponding period last year, both above our long-term target of 15% or greater. Since return on assets slightly increased over the corresponding period last year, the entire reduction in our return on equity was based upon the banks increased capital levels. We remain slightly asset sensitive, given the relatively short effective duration of our single-family mortgage, multifamily and C&I loans and core checking, savings and money market accounts representing 88% of our total deposit balances. Our actual deposit betas remain below what we’ve modeled than our interest rate risk management forecast. Our efficiency ratio was 40.49% for the first quarter of 2018, up from 38.9% for the first quarter of fiscal 2017. Our efficiency ratio was higher in the first quarter of the fiscal year due to the absence of seasonal related tax revenue. Additionally, we continue to make significant strategic investments in infrastructure, personnel and growth initiatives, as well as in preparation across the $10 billion [ph] of asset threshold. We believe these long-term investments will enhance our lending and deposit franchise and generate attractive returns for our shareholders. Our credit quality remains strong with 1 basis point in net recovery and nonperforming asset, the total asset ratio of 39 basis points this quarter. Our allowance for loan loss represents 131.2% coverage of our nonperforming loans and leases. While we have loans to borrowers secured by real estate properties located in areas affected by the devastating wildfires in California and the hurricanes in Florida and Texas. The damage to date appears immaterial and our net exposure after insurance appears to minimus. We originated approximately $1.3 billion of gross loans in the first quarter. Originations for investments increased 3.8% year-over-year to $960 million and originations for sale increased $40.5 million to $330 million. Ending loan balances increased by 14.7% year-over-year. Higher-than-expected payoffs occurred in September in our single-family jumbo mortgage and commercial real estate loan portfolios reducing our first quarter ending loan balances. Average loan and lease balances increased 4.4% linked quarter and 15.6% year-over-year. Our loan production for the first quarter ended September 30, 2017 consisted of $117 million of single-family agency eligible gain on sale production, $71 million of single-family non-agency eligible gain on sale production, $11 million of multifamily non-eligible gain on sale production, $271 million of single-family jumbo portfolio production, $77 million of multifamily and commercial real estate portfolio production, $495 million of C&I production resulting in $36 million of net C&I loan growth, $49 million of auto production. The $961 million of loan production for investment was offset by higher-than-expected levels of payoffs in our single-family jumbo and commercial specialty real estate loans and the bank's decision to sell more jumbo single-family mortgages and multifamily mortgages in the first quarter of 2018 compared to the fourth quarter of 2017, resulting in end of period loan balance growth below our quarterly average loan balance growth. We’ve seen loan payoffs fluctuate from quarter-to-quarter. Additionally, our loan originations would have been higher if not for a few C&I loans closing after the end of the quarter. Loan demand remains strong as reflected in our pipeline of $963 million of loans. For the first quarter originations, the average cycle for single-family agency eligible production was 753 with an average loan-to-value ratio of 66.8%. The average FICO for the single-family jumbo production was 707 with an average loan-to-value ratio of 58.3%. The average loan-to-value ratio of the originated multifamily loans was 51.7% and the debt service coverage ratio was 1.42. The average loan-to-value ratio of the originated small balance commercial real estate loans was 37.6% and the debt service cover was 1.31. The average FICO of the auto production was 773. At September 30, 2017, the weighted average loan-to-value ratio of our entire portfolio of real estate loans was 56%. These loan-to-value ratios use origination date appraisals over current amortized balances making these historic loan-to-value ratios even more conservative when you consider the real estate values have generally risen. As of September 30, 2017, 59% of our single-family mortgages have loan-to-value ratios at or below 60%. 34% have loan-to-value ratios between 61% and 70%. 5% have loan-to-value ratios between 71% and 75%. Approximately 1% between 75% and 80% and only 1% greater than 80% loan-to-value. The LTV is calculated using the current principal balance divided by the original appraisal value of the property securing the loan. We’ve a well established track record in jumbo single-family mortgage lending with lifetime credit losses in our originated single-family loan portfolio of less than 3 basis points of loans originated. We've approximately $1.6 billion of multifamily loans outstanding at September 30, 2017, representing 21% of our loan book. We focus on smaller dollar multifamily properties in Northern and Southern California, Florida, Texas, Illinois and certain markets in Washington and New York. The weighted average loan-to-value ratio of our multifamily loan book is 54% based on the appraisal value at the time of origination. We do not have risks hidden in the tails of our portfolio. Approximately 66% of our multifamily loans are under 60% loan-to-value, 30% are between 60% and 70%, 4% are between 70% and 75%, and less than 1% of our multifamily loans have a loan-to-value ratio above 75%. The lifetime credit losses in our originated multifamily portfolio are also less than 1 basis points of loans originated over the 17 years we've originated multifamily loans. We’ve not experienced losses in our C&I lending group since exemption of the group. Our outlook for overall loan growth remains positive with a loan pipeline of approximately $963 million, consisting of $538 million of single-family jumbo loans, $115 million of single-family agency mortgages, $80 million of income property loans, and $230 million of C&I loans. Transitioning the funding, total deposits increased $855 million or 13.5% year-over-year with growth across consumer and business deposit categories. Checking and savings deposits increased by $1.1 billion compared to September 30, 2016, representing year-over-year growth of 20.5%. Checking and savings deposits represented 88% of total deposits September 30, 2017, compared to 83% at September 30, 2016. We’ve made significant improvements in the diversity and quality of our deposit franchise over the past five years. Of the banks overall deposit base, we’ve approximately 49% business and consumer checking accounts, 22% money market accounts, 4% IRA accounts, 9% savings accounts, and 4% prepaid accounts. We're continuing to invest in our commercial banking sales team, our technology platform and our customer experience, in order to allow us to better serve our retail and commercial deposit customers. To date our deposit betas are tracking well below we modeled than our internal and regulatory risk models. Furthermore, with a relatively short duration single and multifamily loans, C&I loans in a relatively small and short duration securities portfolio that adjusted change in short-term rates and reductions in the securities portfolio that repositioned us towards higher cash balances, we're targeting increases in loan yields to offset future deposit repricing. We're making good progress in our universal digital banking initiative. As a reminder for those who may not be familiar with this initiative, we're building a flexible open architecture banking platform that will significantly enhance the user experience, allow us to better leverage data to offer targeted products to our customers, and allow us complete freedom to offer new services and features in our platform, whether it is developed by us or one of our partners. We rolled out a beta version of the software in one of our smaller consumer brands this month after testing it with internal bank employees. As we continue to test the platform based on user feedback, we will add new features and functionalities and launch the platform into our larger consumer brands. Separately, we're well along in our planning with H&R Block for the upcoming tax season. We're excited about working with H&R Block as the exclusive provider of refund transfer, Emerald cards, Emerald advances and refund advance loans during the 2017, 2018 tax season. With two years of experience and complete control over the refund advance process this year, we look forward to another successful season serving H&R Block's customers. In addition to seasonal revenue fluctuations, incremental costs related to our infrastructure and growth related investments weighed on our efficiency ratio this quarter. Although we are firmly committed to having best-in-class efficiencies even in the short-term, and over a longer period of time our goal is to have one of the lowest efficiency ratios in banking. There are periods where both the opportunity, the competitive environment and the growth stage with some of our newer businesses require that longer-term strategic considerations assume a higher level of importance, the movements of our efficiency in any couple of quarters. We're in one of those periods. In the current and prior quarter by way of example only, we significantly expanded our management team with the hiring of the Chief Operating Officer, a Chief Digital Officer, an EVP and Head of Commercial and Industrial Lending, a Senior Portfolio Manager focused on C&I lending and a Senior Sales Business Banking Leader and his team. We're engaged with a strong branding and naming agency, reviewing whether our name and brand architecture is the best way for us to go-to-market with the exciting way we are evolving our business mix. We have numerous newer business units that are progressing nicely and contributing revenue, but are currently subscale, including our consumer auto and unsecured lending businesses, and our commercial leasing and factoring businesses. We're also almost complete with the infrastructure build out to support the H&R Block RA program as the sole program sponsor. We are also building our organization to allow us to take advantage of the significant flexibility offered by our online banking platform to add new products and services to increase customer attention in cross-sell and lower acquisition cost. Until the [indiscernible] platform is built out and all brands are operating, the platform will be running -- we will be running two consumer online platforms. We believe these investments will solidify our ability to continue to grow a diversified high-performing business, while investing appropriately in infrastructure to maintain our strong regulatory relationships. Our capital and credit metrics remain strong with a Tier 1 leverage ratio to adjusted average assets of 9.95 for the bank and 10.29 for the holding company at September 30, 2017. While our primary use of capital is to invest in organic growth initiatives, we actively evaluate M&A opportunities that augment our growth, further diversify our lending, deposit or fee-based businesses, and generate accretive returns to shareholders. Now, I will 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 Web site at bofiholding.com. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 10-Q for additional details. As Greg indicated earlier, BofI's net income for the first quarter ended September 30, 2017 was $32.4 million, up 12.1% when compared to the $28.9 million earned in the first quarter ended September 30, 2016, and down slightly from the $32.5 million earned last quarter. Earnings attributable to BofI's common stockholders were $32.3 million or $0.50 per diluted share for the quarter ended September 30, 2017 compared to $0.45 per diluted share for the quarter ended September 30, 2016 and compared to $0.50 per diluted share for the quarter ended June 30, 2017. For the quarter ended September 30, 2017, net interest margin was 3.87%, up 9 basis points from 3.78% in the quarter ended September 30, 2016, and up 7 basis points from the 3.80% in the quarter ended June 30, 2017. Our average loan and lease yield was 5.2% for the first quarter of fiscal 2018 compared to 4.98% in the first quarter of fiscal 2017 and compared to 5.18% in the fourth quarter of fiscal 2017. On the funding side, our average interest-bearing checking and savings deposit rate for the quarter ended was 101 basis points, up from 87 basis points for the last quarter and up from 72 basis points for the quarter ended September 30, 2016. Year-over-year the fed has increased rates 75 basis points and our average interest-bearing checking and savings deposits have only increased 29 basis points or 39%. As Greg noted, we continue to outperform our deposit interest rate risk models. Also if you include our non-interest bearing deposit growth, our rate would have increased to 23 basis points from 87 basis points -- to 87 basis points, up from 64 basis points. That 23 basis point increase is a beta of approximately 31% including non-interest bearing. In addition, as Greg mentioned, we reduced our investment in securities portfolio over the last year, shortening duration and have reinvested primarily in liquid cash. Of the $631 million in cash on the balance sheet at September 30, 2017, more than $500 million could be redeployed into high-quality investment securities as interest rates rise. Asset quality remains strong. For the first quarter, the bank booked a net loan in lease provision of $1 million compared to $1.9 million for the three months ended September 30, 2016 and compared to $200,000 for the quarter ended June 30, 2017. The decrease in the provision year-over-year is primarily the result of changes in the loan mix with a recovery of $300,000, partially offset by loan growth this quarter. We have loans to borrowers secured by real estate properties located in areas affected by the hurricanes and that moved through Texas and Florida and by the wildfires in California. We require on our borrowers to maintain adequate levels of insurance, including flood insurance in areas prone to flooding. We performed analytical procedures and discuss directly with our borrowers determine the property is most likely to be negatively impacted. To date we have identified two loans totaling $1.7 million secured by properties that incurred significant damage. We believe based on our analysis and our discussions with the borrowers that each of these properties have appropriate insurance coverage and the damage incurred will not result in a material loss to the bank. Our efficiency ratio was 40.49% for the quarter ended September 30, 2017, up from the 39.08% for the quarter ended June 30, '17. As Greg mentioned, we are investing significantly in our future with increased staffing systems and software development. We anticipate improvement in quarterly efficiency, particularly in the third quarter due to increased seasonal tax product revenue. However, the efficiency ratio is likely to be higher this year than the 36% ratio reported for the year ended June 30, 2017. Shifting to the balance sheet, our total assets increased $79.9 million to $8.6 billion as of September 2017, up from $8.5 billion at June 30, 2017. The loan portfolio increased $138.5 million, primarily due to loan originations of $960 million. Investment securities decreased $53 million, primarily due to sales and principal repayments. Total liabilities increased by $47 million to $7,714 million at September 30, 2017, up from $7,667 million at June 30, 2017. The increase in total liabilities resulted primarily from growth in deposits of $279 million, partially offset by a decrease in FHLB borrowings of $240 million. Stockholders' equity increased $32.4 million or 860 -- to $866 million at September 30, 2017, up from $834 million at June 30, 2017. The increase was primarily the result of our net income for the three months ended September 30, 2017 of $32.4 million. The bank is very well positioned from a capital perspective. Tier 1 capital was 10.29% for the holding company and 9.95% for the bank at September 30, 2017. With that, I will turn the call back over to Johnny Lai.

Thanks, Andy. Erin, we are ready to take questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Michael Perito of KBW. Proceed with your question.

Hey, good afternoon, gentlemen. Thanks for taking the questions.

Hey, how are you?

Good. Thanks. I had a few questions I wanted to hear. I want to maybe start on the deposit cost. Andy, you mentioned they were up about 16 basis points [indiscernible] on the interest-bearing, maybe 7 to 101. But I was curious if there are any particular maybe products or consumer segments where you're seeing more pressure than others or conversely some that are maybe performing better than you expected?

I would say in general the -- as Greg noted early on in the conversation, really overall all of our sectors are performing frankly better than what we’ve modeled on the big -- in the big picture. When you look at where our growth is coming from, more is coming from business in that side, so I think we -- what we’ve been able to do on the consumer side it's been very good. I think from a rate perspective we've been able to hold back on rate, lot of the consumer areas where a number of the online banks are increasing rate. So I think that's been very positive. As you look at where our business deposits grow, it really was kind of across the board in our verticals and in our small business, which is primarily where it came from. But when you look at the entire growth, in general, we're actually raising rates less than what we expected.

Thanks, Andy. That was helpful. Maybe kind of question for you, Greg, on the efficiency ratio, it was little higher this quarter per your remarks, but I mean how much of that is just really the fact that seasonally you have more revenues in the next couple of quarters here and I guess, 36% for the full-year still kind of a good number to be thinking about at this point?

Right. Well, so certainly the efficiency ratio does decline because of the seasonal -- seasonally related tax revenue. So the efficiency ratio would go down. I think though that -- that’s the other element that’s happening too is that if we are getting all the loan growth that we would like to have, then I think that obviously helps with all the investments we're doing, because we are really not going to be changing the strategic plan for a small variation in efficiency ratio, so I think that 36% full-year rate. For next year it's going to be a little bit hard to hit with everything we’re doing and I think it's going to be higher. And how high that is depends obviously on the success of the refund advance product, it depends on loan growth a lot. If loan growth is good, then the -- then obviously you have a bigger base of revenue to amortize the cost associated with what we’re doing. But we are still going to build what we think is going to be a really interesting and unique digital banking franchise and do all the software development and all the things I talked about. And now it's going to happen in this next year and that next year is a big year for us, the calendar year specifically of 2018 is going to be a pretty big year for a lot of new things.

Got it. Helpful. Thank you. And then just on that topic, my last one on loan growth. Obviously, the dynamic of some prepayments in the jumbo mortgage book is not new, it happened last year, but I guess, are you seeing it accelerated all or at this point just the pipeline look strong enough where you expect to see some net balance growth in that portfolio this year?

Yes. I mean, I think it's -- frankly it is not perfectly easy to predict because jumbo borrowers prepaid for a lot of reasons other than pure rate movement. So you can't necessarily drive it always just on rate movement. But we are expecting a general stabilization of prepaid. However, I don't -- I can't say that we're -- that's behind us, but we do expect growth. And as we look forward over to the next couple quarters, we don't think that prepaid rates are going to be so high as to eliminate growth.

Okay. So, I mean, it sounds like then you wouldn't seem like that the targeted growth for like the fiscal year is still a good number, maybe towards the lower end given this slower Q1, but the production is certainly strong enough to still support it?

Yes. And the C&I pipelines are very, very good. But there is also a lumpiness there. You can have acquisitions that takeout large lines of credit and things like that. So there is uncertainty around it, but the pipelines are good. It's not -- there is definitely opportunity out there and we have to execute on it.

Great. All right. Thanks a lot for the color, guys. I appreciate it.

Thank you.

Thank you.

Our next question comes from Austin Nicholas of Stephens. Please proceed with your question.

Hey, Austin.

Hey, guys. Good morning. Hey, good morning. Maybe just real quick on the -- your outlook for the margin. I know we -- you kind of been tracking in that guidance range of the core margin of 3.80 to 4 for the full-year. Is that still what we can expect going out from here, excluding the H&R Block volatility?

Yes. That’s what we’re targeting. And we've, in fact, been more likely to let the actual dollar volume of loan growth move around and maintain the margin. There is a lot of reasons for that. Obviously, as we are cumulating excess capital associated with the strong profitability we have that -- provides us some opportunities to do some things with the relatively low P that we have if we decide to do that, if we're not deploying that elsewhere. So, yes, with respect to your specific question, the -- I think the margin guidance is good, excluding the H&R Block, at least as we see it right now.

Okay. And then maybe while we are talking about H&R Block, any change to that $8 million pre-tax profit estimate for the full refund advance product that you have now?

Yes. That assumes the same sales volume as last year, correct which would be $700 million. So it could be upsized to as much as $2 billion as we're authorized, but generally, yes. We don’t have any better information. If they -- if the product outperforms, we will make more money and if credit stays within where we expect it to be and if they also was lower than it was last year, then we would make less money.

Got you. Okay. And then maybe just on the pipeline. I think you said $963 million, is that the total pipeline or the primary pipeline excluding mortgage warehouse?

[Indiscernible] excludes mortgage warehouse.

Got it. Okay. That's helpful. And then maybe just -- I think lot of my other questions have been answered, but maybe just on the [indiscernible] initiative, how that’s going? What’s the -- are you building employees there still? Any color to there and how that could impact your tax rate?

Right. So the office in Nevada has space for about 150 people. There is about 50 people there. That's a very slow process from a standpoint of there is a allocation factor that occurs. The largest reason for Nevada isn't tax related, it's related to access a diversified pool of talent to allow people the access -- housing at lower cost, things like that. So, but I do think obviously over time as we're building the group out there, that there will be some natural elements associated with that that will allow us to do -- to lower our tax rate. Obviously, that sort of benefit associated with that is actually swamped by any potential effect that would arise as a result of a corporate tax change if that is something that ultimately ended up happening.

Right, absolutely. Okay, great. Well, I think that’s all the questions I have. I will hop out for someone else. Thanks, guys.

Thank you.

Our next question comes from Brad Berning of Craig-Hallum. Please proceed with your question.

Good afternoon, guys. One follow-up on the $500 million of excess cash that you talked about. How do you think about what would trigger your decision to start to reinvest that, one. And two, can you talk about what kinds of things you would be targeting and what those yields are today in the types of asset categories you would be looking at? So just to give us some context to think about that. And secondly, on the capital side, given the loan growth is run in mid-teens and you’re building capital here. What would trigger the decision points? What are you looking forward to make decisions on whether you start doing something more on the capital management side?

Right. So with respect to the first question regarding the deployment in the securities portfolio. It really is a judgment call related to when we think that the -- what -- where interest rates -- the interest rate -- future direction of interest rates are fully reflected in the price of securities. We’ve -- we wanted to be cautious about that and it's a way of us having reduced our interest rate risk and I think it worked out pretty well. So, the deployment though would generally be in, because it's part of our liquidity book, it would end up being in pretty high quality securities. So, agency [indiscernible] stuff like that. So it's not going to be some kind of stress in security or something that might not have liquidity in a negative -- a credit environment or something. So, you get upside from that, but I think it's probably be a little premature for me to talk about exactly what that could look like. That’s obviously for agencies. It’s going to depend on duration and things like that.

Right. And I will just add to Greg's comments that we are also looking at the shape of the yield curve because the shape of the yield curve will be important going forward as we look at that not only short-term rates, but long-term rates and how they stack up. So the current yield is right at fed funds, so you're thinking about 25 would be -- where that's -- where that churn in today.

But you look in longer duration for the security side of that to put that money back to work?

We -- if we did that, that would be an opportunity for upside, but I can't say that that's where we end up. The commentary is only designed to say that its first to talk about how relatively small the interest rate risk is in the securities book, to say that there is upside there. The question of how we deploy that is something that we haven't decided. Obviously, there's a lot of elements of -- if a tax cut actually happens and they can [indiscernible] economic growth, yield curve changes, you got a new Fed chairman, depending upon different views there's a lot of things in play. And so, we will wait for some of those to play out, and then at that point we can make some decisions. But almost certainly the decision would involve more duration at least at some level. Now whether that's taking a essentially zero duration asset like Fed funds and moving it to three years or five years, I don't know it would depend on what the -- what we felt was the right approach there.

And in the capital management given the ROE and given loan growth is mid-teens?

Right. So, the -- so we're getting to a point. Obviously, there are several ways to deploy capital. One way would be in acquisitions. And so to the extent that those opportunities exist, we obviously would want to deploy our capital in some sort of share repurchase right at that time. And so we have to be thoughtful about that in making sure that we're thinking through the timing of opportunities there. Outside of that we are going to probably continue to build capital. And at a certain point in time at the level from a price-earnings ratio basis that our shares are trading at, I think that share repurchases probably make more sense than dividends. So that would be an approach to look at. We certainly are building capital to a point where we got to look at something there. But I don't expect it -- yes, expect us to be thoughtful about the timing of that and the timing of deals and that sort of stuff.

And last question is just to go through each of the product categories and talked about current environment, competitive environment, where do you see growth? Where are you pulling back? Obviously, multifamily looks like strong sequentially this quarter. So if you can just walk through each of the loan categories and kind of give us your update on the outlook for each?

Sure. So on a single-family side, I think that we are -- we have competitors there, maybe it's getting a little more intense. You know partly the prepayments, they’re result from the fact that there was -- it really happened several years ago, we feel caught on. There's no more prepayments essentially allowed on single-family mortgages …

Prepayment penalty.

… prepayment penalty allowed on those sort of mortgages, so that’s sort of changed the dynamic there. But I would say that that’s moving along and a lot of it is our execution right. We have to execute and so I think always talking about the market and those sort of things. What happens with our team is that because we are very dynamic and we spent a lot of time on newer initiatives and [indiscernible] growing businesses. It's always a balance for the executive team on how they focus on things. So I think it’s sometimes not always the right thing to say, well, there's a slight decline here, so must be the market because that's not really always the approach and, in fact, I think it's sort of an excuse. I don't think there's any one of our businesses that can't be profitably grown with the right level of focus. So, yes, -- I think what multifamily is what it is, it's been exactly that way for years. There's no increase in competition. It's an asset class that everybody likes, but it's not -- but any -- if there was a slight decrease in the portfolio, that really in my view is an opportunity for us to do a lot more in that group and I think we’ve got good plans there. There is just a lot of things going on here and we just have to execute. I don't really have -- C&I there's lots of opportunity. There is -- I'd say that that's the area where there is the -- I think that's probably the most straightforward approach. There is -- its just simply that even basic pipeline management there's so many deal opportunities that we have versus execution talent. Just continuing to develop that execution talent will allow us to grow that bookmark. That's all [indiscernible] it, there is nothing else. So it's -- so that's -- what's great is that these things are within our control and we just have to execute.

Appreciate the update. Thank you.

Sure.

Our next question comes from Steve Moss of FBR Capital Markets. Please proceed with your question.

Good afternoon.

Hi, Steve.

Just following up on the efficiency ratio trends here, perhaps differently to ask about it, when it comes to expenses, how should we think about the expense growth for fiscal 2018? Perhaps a low 20s percent rate?

Yes, I think what I would do is just look at trends quarter-to-quarter and look at the overall trend probably this quarter versus last quarter as being one of the lead indicators as to where we would be, meaning that sequentially we would grow the expenses similarly. There are couple of items, small expenses related to Block that pop in for the next couple of quarters. But in general, the run rate of growth that that you are seeing between the fourth quarter and the first quarter is probably where you would be a good proxy.

Okay. That’s helpful.

I would say that low 20s of high. I would expect it to be below that. But I think, Andy's answer is another approach to that. But I just think from a perspective of thinking about low 20s, that's high.

Okay. That’s helpful. And then, secondly, I do want to ask with regard to loan growth this quarter. Maybe I misheard you, but it seems like there is a little bit more loan sales this quarter on resi mortgage and multifamily. I’m just wondering if that's the case, what’s the strategy driving that this quarter?

Yes. It was -- there was about $40 million, $50 million more of sales. [Indiscernible] is that a couple of buyers that we viewed as strategic that were interested in production one where we had spent a long time negotiating with them from a contractual perspective, they finally hit our price which is something that took a while because they had a few quarters, so they didn’t hit our price. So we didn't really want to -- we wanted to sell them something, have a relationship and I think it's important for us that as -- that we have good buyers of all of our products, it allows us to manage our concentration, it allows us to manage our loan-to-value ratios, credit risk and it also allows us to generate fee income. So, it really -- that was really the strategy. It wasn't really something related to interest rate risk or anything really that much more than that as we like these buyers. We have more -- we’ve a lot more buyers than we have products right now. And so, that there definitely is a -- it's quite a hunger for the product. So we pay these buyers that we did deals with I think are good strategic partners for the future.

Okay. That’s helpful. And then last question just with regard to deposit pricing. If the fed hikes here in December, what are you thinking for deposit betas?

Yes, we have -- at our models we're in the 60% range, but we’ve outperformed our models. I certainly hope that we would outperform our models. And so, it's a continual set of execution challenges across all the businesses to continue to find ways of adding value to customers through service, through our platforms and we just have to continue to push forward on that. So, obviously, I would be very disappointed if we didn’t outperform our models, but that's where we're -- that's where we have the current numbers that you see when you look at the disclosures.

Okay. Thank you very much.

Our next question comes from Andrew Liesch of Sandler O’Neill. Please proceed with your question.

Good afternoon, guys.

Hi, Andrew.

Just on the mortgage banking number here, the $4.7 million, how much of that was just traditional conforming gain on sale and how much of that gain was sale of some portfolio loans?

Right. So the portfolio loan number was $71 million, which generated that single-family which generated $1.7 million of gain. And then $11 million of multifamily, which generated $400,000 of gain.

And, I mean, should we expect some more loan sales going forward? It sounded like you’ve found some good people to some good banks that sell them to, but is this going to be part of the strategy going forward or just more like one-off this quarter?

You know it depends really upon where. It really is a balance, right. We're looking at all elements of this. And deposit growth is pretty good this quarter, obviously having an ability to balance the -- all these elements out with what we want to do from a capital perspective, a growth perspective, earnings, all those elements are all a component of that. There is a lot of flexibility built in to that process. There is a lot of demand. I think we probably will saw a little bit more. But that’s depending on the pricing that we get from our borrowers. We are happy to hold all the loans we originate, if they -- if we don't get the pricing we want.

All right. Thanks. You guys have covered all my other questions.

Yes.

Our next question comes from Jesus Bueno of Compass Point. Please proceed with your question. Q - Jesus Bueno Hi. It's Jesus Bueno. Thanks for taking my questions. You touched upon acquisitions and obviously you did the PacWest deal and you had mentioned previously bidding on the Northpoint portfolio, which my understanding was considerably larger than the PacWest deal, I guess. So in terms of appetite of what you're looking at, is there a certain range in terms of portfolio size if you’re buying a loan portfolio that you’re comfortable taking down? Is it more of the asset generation sign, the capabilities there that are more important. I guess, how do you -- how are you evaluating that?

Yes. We -- from a acquisition perspective from a portfolio size, it depends on what the asset class is. The more niche the asset classes, arguably the level of concentration has to be taken into consideration. So, definitely the Northpoint size they’re -- was comfortable for us. I think the reality in the market there is that there is a -- that the competition in the specialty finance space has gotten pretty tough. There is the price to earnings multiples that these companies are selling at are difficult for, I think in comparison with the prices we want to pay. So, we continue to look for lots of different opportunities. We've done deposit deals in the past. We've done specialty lending deals, and so we're in the deal flow and obviously it's not appropriate to comment on those sort of things and the types and things like that. But we continue to look at that and it's obviously a consideration because you don't have a 100% certainty around, when and if you do something. And so on the other hand, you don’t want to hold the excess capital for too long losing the opportunity to return that capital to shareholders, if you’re not going to get something done. And so that is just a judgment call and its very fact specific.

I appreciate the color there. And guys, turning to name quickly, you mentioned you’ve some ability, I guess, on the pricing side to help offset some deposit pressure. But should we still expect you to kind of operate within that 3.8% to 4% level on NIM kind of average throughout the year?

Yes. I believe so. I think that if I look forward to the next three quarters of the fiscal year, and this excludes the benefit and the impact of Block. Then if you have to strip all that out, I think we can still hit that core, that core of 3.8% to 4% level. It's also a result of partially changing mix as well, the C&I book, I think will become a bigger part of the portfolio. It has higher yields. So there's -- there will be a little bit of -- there's obviously a little bit of noise in those numbers from the tax related revenues, and they'll be some differences in how the refund advance is booked, given that we're the sole originator and things like that. If you guys work through that, you will get to that core. So, yes, we feel pretty good about it and we think we can get there.

That’s great. Thanks. Thanks for taking my questions.

Thank you.

Your final question comes from Edward Hemmelgarn of Shaker Investments. Please proceed with your question.

Just a couple of questions. One, I’m trying to understand a little bit about the rationale behind a -- the sale of the single-family mortgages and the multifamily, I mean, given the excess capital position right now? And I think you made 2.4% or something on the single -- $1 million single-family and maybe 3.6% on the multifamily. Would you earn more than that just by holding on to that?

Well, you certainly would from -- if you assume like as you said, that you’ve excess capital, so therefore there's no incremental capital to assume and your loan to deposit ratio would allow you to hold it, which goes both those are true right now. And you certainly would make more money holding those assets and selling them. I think the question is that that they there is a couple of things, that assumes one is that we tend to sell our higher loan-to-value loans, which allows us to balance our risks. So, in general, for example in multifamily part of the reason the portfolio is a low loan-to-value as we typically have sold loans above 60% loan-to-value. On a regular basis, really below. So a lot of this is the balancing of those components. However, I do think that your broader point is valid. And that is that -- it is profitable to hold our assets. We make good yields off those assets and that's why those sales -- let’s put it this way. Though the partners that wanted to buy loans, wanted to buy a significantly higher dollar amount of loans. So we're continually wanting to maintain those channels, at the same time cutting back on the amount that we sell in order to be able to preserve optimality but also not to give away too much in economics, given that our capital position right now is in excess of what we need.

Okay. Just a broader question then, getting that -- and trust me, I appreciate the conservative ban [ph], but is there change you’re getting to be too conservative when you look at your the delinquency rate on your loans, the -- as I said, the cash that you’re holding now in excess of probably what you need that’s -- you have to discuss that more and the capital situation that keeps growing. Would -- are there opportunities to from a risk reward standpoint to perhaps taking a little bit more risk and grow the balance sheet at a faster rate without -- and still being profitable decisions?

Yes.

What is holding you back or …?

Well, it's interesting. I think one of the things that we've done a very good job with here is getting good risk adjusted returns. And candidly I don't always like what I see in the market now. I see people, for example, on the jumbo single-family side doing bank statement loans, where they’re assuming that 50% of the business cash flow without looking at the actual margin of the business is income that would support a loan. The environment is different and people are reaching and the question you always have to ask is what's around the corner. And obviously, that's a -- that’s something you got to try to work through. I think that we've -- I don't believe that we need to increase our risk profile in any significant way to continue to grow. I think that we need to execute better and I think that with respect to the cash, the reason why we brought that up is that there certainly is an opportunity to redeploy that and in that case you’re not taking credit risk, but you’re taking some kind of rate risk, which would have been imprudent to take. A lot of banks have extended their security portfolio greatly and they will have some issues associated with that. So I think we've done a good job. But -- what is your charge-off ratio rate be, right, is a negative charge-off rate or 1 basis point or over the last couple of years that’s too low. I mean, you could argue that it is, right, because there is always some balance that you're trying to reach there and it's possible that we're reaching a balance that is not a 100% optimal. But I think that from our perspective, one of the reasons we've added the management additions is that we've had some dilution of management attention as we've added our newer businesses. I think there is good strategic reasons those businesses were added, but that management dilution also -- doesn’t allow us to have our manager spend as much time in the areas that they need to spend time on. So to me, I believe that taking some wholesale approach and taking more risk is not really where we need to be. I think we can execute better and we just have to do that. And we've executed -- look, it’s all relative. The execution certainly isn't bad, but there is a certain unit that I think can do better from a growth perspective, and we just need to continue to make sure that happens. There is so much opportunity to do that and I think that that's probably the biggest focus that we need to have.

Okay. Well, and I understand as I said I’ve always. Appreciate your conservative approach and I do realize we are getting longer in the [indiscernible] in this economic cycle. But lastly on the your Universal Digital Bank initiatives and the investments that you are making there. Do you -- does that going to be really focused more on serving the consumers from a depositor standpoint or do you think that’s going to present you with more opportunities on the lending side too?

We are looking to try to make [indiscernible] backbone of a segment strategy that allows us to have a approach to lending to consumers with some of the products that we’ve developed on the auto side, on the unsecured side and there will be others to try to work through how to utilize the personalization engine to be able to recommend products and services that would add to loan growth. That obviously when you're making loans of relatively small size which most of those are, and they are helpful with deposit retention, hopefully acquisition cost things like that. They don't add as much volume as a $5 million jumbo mortgage [indiscernible] to a large C&I loan, but that is absolutely the strategy. And the Universal Digital Bank will be extended to small business as well and there will be a lending strategy around that component as well. But these are pretty complex and innovative things we're doing and they are going very, very well, but they do take time. And with regard to elements of thinking about our brand and all those things together, we're working a lot on making sure that the all customer services, all omni-channel, which just as a -- its very good from a customer service perspective, but it's also a set of system challenges because what that allows anyone to do is pick up a customer record any time and see every social media interaction, every phone interaction, every email, all in one place and readily understand that -- and what's happening as well as move those -- move lead records around in order to get the right sales people with the right customers at the right time. So I think it's a lot of exciting things, and obviously there's a lot of benefit to doing it, but it's a pretty long-term play.

Okay. Thanks.

Sure.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I’d like to turn the call back over to Mr. Johnny Lai for closing remarks.

Great. Thanks for your interest in BofI. If any of you have follow-up questions, please contact me directly. Thanks and have a nice rest of your day.

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