Axos Financial, Inc. (AX) Q3 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the BofI Holding, Incorporated Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Please go ahead.

Great. Thanks Darren. Good afternoon everyone. Thanks for your interest in BofI. Joining us today for BofI Holding, Inc.'s third 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 and nine months ended March 31st, 2018, and they will be available to answer questions after the prepared remarks. 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. The call is being webcast today 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 and in today's earnings press release. At this time, I would like to turn the call over to Greg for his opening remarks.

Thank you, Johnny. Good afternoon everyone and thank you for joining us. I'd like to welcome everyone to BofI Holdings conference call for the third quarter of fiscal 2018 ended March 31st, 2018. I thank you for your interest in BofI Holdings and BofI Federal Bank. BofI announced record net income of $51.3 million for the fiscal third quarter ended March 31st, 2018, up 25% from the $41 million earned in the fiscal third quarter ended March 31st, 2017 and up 61.9% when compared to the $31.7 million earned in the prior quarter. Earnings attributable to BofI's common stockholders were $51.2 million or $0.80 per diluted share for the quarter ended March 31st, 2018 compared to $0.63 per diluted share for the quarter ended March 31st, 2017 and $0.49 per diluted share for the quarter ended December 31st, 2017. Other highlights for the third quarter include; third quarter ending loan balances as of March 31st, 2018 increase by 14.9% from March 31st, 2017. Average loan balances excluding Refund Advance increased -- including Refund Advance increased by 8.44% and excluding Refund Advance loans increased by 4.6% from the December 2017 quarter with some payoffs and line reductions, primarily in single family lender finance and mortgage warehouse at the end of the quarter reducing ending loan and lease growth to 2.4% for the December 2017 quarter end. Excluding single family lender finance and mortgage warehouse, ending net loans and leases would have increased by $297 million last quarter, representing 3.7% growth or 49% annualized. Total assets reached $9.8 billion at March 31st, 2018, up $1.1 billion compared to December 31st, 2017 and up $1.3 billion from the third quarter in 2017 as a result of organic growth from our lending businesses and a seasonal boost from tax related products. Our efficiency ratio was 32.4% for the three months ended March 31st, 2018 compared to 40.28% in the quarter ended December 31st, 2017. Our reported net interest margin was 4.77% for the quarter ended March 31st, 2018 compared to 4% in the second quarter of fiscal 2018 and 4.2% in last year's third quarter. Loan yields including H&R Block related loans were 6.61% this quarter. Excluding H&R Block related loans, yields were 5.31%, up four basis points from the prior quarter. While our cost of non-interest and interest bearing liabilities increased two basis points from the prior quarter. Excluding excess H&R Block liquidity, our cost of non-interest bearing and interest bearing liabilities increased by 10 basis points. Capital levels remain strong with Tier 1 leverage ratios of 9.4% at the bank and 9.36% at the holding company. Our return on average assets was 2.08% and return on average common equity was 22.84% in our fiscal third quarter 2018. Our credit quality remains strong with two basis points of net charge-offs and a non-performing assets to total asset ratio of 39 basis points this quarter. Our allowance for loan loss represented 204.22% coverage of our non-performing loans and leases. Our effective tax rate was 34.2% in the quarter ended March 31st, 2017 [ph] compared to 42.6% in a comparable quarter a year ago. We expect our GAAP tax rate to be in the 35% to 36% range for the quarter ending June 30, 2017 before dropping to 29% to 30% beginning in our fiscal first quarter of 2019, which starts on July 1st, 2018. We originated approximately $2.5 billion of gross bonds in the third quarter, up 94% year-over-year. Originations for investments increased 113.8% year-over-year to $2.2 billion, boosted by approximately $1.08 billion of Refund Advance loans, while originations for sale increased 7.9% to $258.8 million. Ending loan balances increased by 14.9% year-over-year to $8.1 billion. Our loan production for the third quarter ended March 31st, 2018 consisted of $131 million of single family agency eligible gain on sale production, $324 million of single family jumbo portfolio production, $141 million of multifamily and other commercial real estate portfolio production, $638 million of C&I production, resulting in a $155 million of net C&I loan growth, $27 million of consumer unsecured and auto production, and $1.77 billion of Refund Advance loans. For the third quarter 2018, originations are as follows -- sorry the FICO scores are as follows; the average FICO for single family agency eligible production was 751 with an average loan to value ratio of 65.8%. The average FICO for the single family jumbo production was 713, with an average loan to value ratio of 59.2%. The average loan to value ratio of the originated multifamily loans was 56.2% and the debt service coverage was 1.32. The average loan to value ratio of the originated small balance commercial real estate loans was 50.4% and the debt service coverage was 1.77. The average FICO score of the auto production was 773. At March 31st, 2018, the weighted average loan to value ratio of the entire portfolio of real estate loans was 55%. These loan to value ratios use origination date appraisals over current amortized balances. As the March 31st, 2018 quarter, 62% of our single family mortgages have loan to value ratios at or below 60%; 32% have loan to value ratios between 61% and 70%; 4% have loan to value ratios between 71% and 75%; approximately 1% have loan to value ratios between 75% and 80%; and less than 1% greater than 80% loan to value. Loan to value is calculated using the current contrastable balance divided by the original appraisal value in markets where home prices are increasing, the loan to value ratio will generally understate the level of collateral protection available on our loans. We have a well-established track record of strong credit performance in our single family mortgage lending group, with lifetime credit losses in our originated single family loan portfolio of three basis points of loans originated. Ending balances for our multifamily loan portfolio increased by approximately $49 million or 11.6% annualized to $1.75 billion at March 31st, 2018, representing 21% of our loan book. The weighted average loan to value ratio of the multifamily loan book is 53% based on the appraised value at the time of origination. Approximately 69% of our multifamily loans are under 60% loan to value, 28% are between 60% and 70%, 3% 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 less than one basis point of loans originated over the 17 years we've originated multifamily loans. By focusing on high quality sponsors, conservative structures, and low leverage in deals backed by hard collateral with readily ascertainable market values, we have not experienced any losses in our C&I lending businesses we think in specialty real estate group since we entered these businesses, despite good growth in these product areas. Loan demand remains strong across our lending categories with a loan pipeline of $1.1 billion at March 31st, 2018, consisting of $551 million of single family jumbo loans, $122 million of single family agency mortgages, $113 million of income property loans, and $320 million of C&I loans. With C&I lending becoming a bigger percentage of our loan originations, our average and ending loan balances will fluctuate a bit more from quarter-to-quarter depending on the timing of new originations, fundings, and prepayments. Switching to funding, total deposits increased $1.2 billion or 17.1% year-over-year with growth across consumer and business deposit categories. Segment savings deposits increased by $602.3 million compared to March 31st, 2017, representing year-over-year growth of 10.1%. The deposit base is diversified across a variety of consumer and business products and verticals, which helps offset some of the funding pressure as short-term rates continue to rise. At March 31st, 2018, approximately 40% of our deposit balances were business and consumer checking accounts, 21% money market accounts, 3% IRA accounts, 8% savings, and 11% prepaid. Our average non-interest bearing deposit excluding excess H&R Block liquidity increased 65% year-over-year. As the annual increase of 65% granted over a relatively small base was primarily result of a mid-year hiring of a season treasury management team and our investment in an API technologies staff [ph] for treasury management that allows our treasury management system to integrate with our customers' core operating systems. This treasury management team has a robust pipeline of both traditional cash management clients and treasury management API clients. We have accepted offers from additional senior and mid-level talent in our treasury management business and believe this should be a growth area, given a significant market opportunity. We hope to be able to increase our non-interest bearing and low cost deposit and as well as generate fee income from our treasury management efforts. Obviously, the personnel system, software marketing, and third-party cost associated with these treasury management systems result in higher non-interest expense, we believe these investments are prudent investments in a continued evolution of our deposit base. We made a well-priced acquisition of a leading provider of [Indiscernible] foreign specialty deposit services with over $1 billion of low-cost and long-duration deposits placed currently at a variety of partner banks. This acquisition adds a new source of core deposits in the new commercial deposit vertical and an experienced team of subject matter experts with strong client relationships. New deposit from this acquisitions will generally be placed with us if we have a deposit need and while existing deposits remain at other institutions based upon existing contracts and contractual line down periods, these will provide us additional fee income as short-term rates rise. Generally, as this pipeline of deposits transition to the bank over the next two years, the loss of partner bank fees will be less valuable than the benefit of runoffs of our higher cost deposits and replacing them with the lower cost deposits from these partner banks. We believe that this offer repurchase can be utilized in other specialty deposit verticals in addition to the Chapter 7 bankruptcy vertical. Our balance sheet remains asset-sensitive and parallel shocks [ph] scenarios, with a 200 basis points instant parallel increase increasing net interest income by 13.7% in the first 12 months and 11.9% in the second 12 months. However, these numbers assumed no balance sheet growth and the presence of the current quarter's excess liability -- liquidity. Rate shocks [ph] that result in flatter yield curves such as those we've experienced this last year are generally detrimental to net interest income relative to parallel shocks [ph]. However, the deposit for the place to partner banks from our recent acquisitions will reprice as rates rise and increase the bank's fee income. This benefit from increasing rates will not be included in our net interest income shock scenarios, because the incremental income will flow through fee rather than interest income. Over the last four rate increases, we have generally erased single and multifamily rates by 12.5 basis points for each of three rate hikes and did not raise rates for one rate hike in December. We have generally been able to maintain our increased loan pipelines despite these rate increases. Obviously, these rate increases must flow through the portfolio and so, therefore, the rate at which our loan yields increase depends upon prepayments and origination rates. Our C&I specialty real estate and warehouse lending rates are generally floating. Our deposit betas have performed better-than-expected. Since March 2017, the Fed has raised short-term rates by 100 basis points and our total cost of deposits, including non-interest bearing deposits and interest bearing deposits have increased by 30 basis points, while interest bearing cost of funds has increased by 40 basis points with a 10 basis points of difference, representing the growth in non-interest bearing deposits. We have models for rising rate deposit betas to increase with each successive rate increase. While we have been able to offset rising deposit cost with higher loan and asset yields so far in this current rate cycle, we expect our future net interest margin will fluctuate between the mid and low end of our targeted range of 3.8% to 4%, provided we continue the gradual shift in our loan next to C&I lending, continue to get traction where our existing and new treasury management investments, and meet our estimates for timing the transition of deposits from partner banks to our balance sheet from our recent acquisitions. We are making good progress in development of what we consider to be a very compelling holistic value proposition for our consumer and small business banking customers. The core component of our Universal Digital Bank strategy in consumer and small business are; first, to control the user experience entirely through our online enrollment and banking software stack. We now have a core component of our Universal Digital Bank vision partially implemented with our in-house online banking software installed in two of our branch, and we will be fully converted in our all-consumer brands in this calendar year. Our new online banking software allows for the rapid addition of BofI products, third-party products, and customer experience enhancing applications, given its modular title base architecture. We have invested in enhancing our digital team to include our new Chief Digital Officer, to manage the rapid cycle of continuous improvement that we are expecting from our team. We are also fully implementing our omnichannel communication software tools to allow us to have a 360 view of the customer, regardless of whether they wish to interact with us through social media, online banking, or by phone. This will be completed before we rebrand. Second, we're also making progress on the personalization engine that will power product cross-sell and value-added alerts and information to these customers and that should be launched later in this calendar year. Third, we are developing products that can be cross-sell through the personalization engine. The consumer learning incubator business we set up with auto and unsecured lending over the last couple of years to ensure we had a robust products suite to cross-sell consumer have been developing nicely. In auto lending, we have methodically grown our loan book from approximately $20 million in the second quarter of 2016 to over $99 million in the second quarter of 2017, and approximately $197 million today. We focused on prime borrowers with an average FICO this quarter of 773. Our credit quality in this book remains very strong, with delinquencies over 60 days under three basis points of auto loans originated or outstanding. The development of our direct auto lending platform, which will be one of the products we offer through our personalization engine to our customers through the online banking platform, has been aided by our current and direct auto business. We will grow our auto lending business in a controlled fashion, while we refine our sales and data analytics capabilities and explore low cost distribution partnerships. Our controlled rollout of our consumer installment lending products that utilizes our internally developed software is going well. We're achieving about a 12% to 14% APR and have charge-off rates to-date under 1% of the loan balance. However, loan volumes right now remain immaterial to our overall net interest income. We expect volumes will ramp-up this year and to offer this product through our new banking platforms based upon personalized recommendations. Over time, these loan should be accretive to margin, but it will not likely to be materially impactful this year given our focus on credit quality. Most importantly, we have put a team in place that once the platform rollouts are finished, they can turn their attention to developing a compelling suite of applications, gamification experiences, and products that will provide compelling reasons to use us rather than simply keeping pace with the rate offered by the less sophisticated digital banks, focused entirely on a rate value proposition rather than a broad suite of personalized digitally enabled products delivered through an omnichannel customer service platform. Our rebranding initiative is another exciting component to our overall consumer value proposition and that initiative is proceeding nicely. Although it represents cost, we are bearing, as we staff our team for the significant effort and engage third-party agencies and other assistance; it is an important component of executing our bold and exciting vision. We expect to rebrand by the end of the year. We also are continuing to make investments across the variety of businesses and functional units. Just by way of example in March, we launched an innovative mobile app, designed to make it easier for realtors to track their status of their clients' mortgages, originated by BofI with direct status update said from our origination system. Our investment in our purchase money mortgage team paid dividends with an increase in mortgage banking revenue this quarter and an improvement in profitability as more competitors exit the industry and the market involves from one driven by refinanced activity to one where first-time homebuyers will become more important. We continue to upgrade our leadership team and diversify our talent base, both organically and through opportunistic hires and through M&A like the lift-out of the trustee and fiduciary service team from Epiq. Individually, none of these initiatives will have result in meaningful impact to our efficiency ratio. Collectively, including what we will spend to rebrand and launch that brand, we have deliberately chosen to reinvest a portion of our tax savings to accelerate these and other strategic initiatives. We recently completed another successful tax season with a long-term partner H&R Block. In the March 2018 quarter, we originated over $1 billion of interest-free, no fee Refund Advance loans to H&R Block tax customers. Since this was our first year, as the exclusive provider of the Refund Advance loan for H&R Block, these short-term loan secured by the borrower's expected tax refund, provided the nice boost to loan originations and net interest income in the quarter ended March 31st, 2018. Given the short timeframe these loans are outstanding; Refund Advance loans provide an attractive risk-adjusted returns for our shareholders. Operationally, the program went very well and I want to congratulate the team for standing up this well executed product. Our high profitability of excess capital position allows us the ability to finance our recent acquisitions that we closed in April with available cash and return capital to shareholders through buybacks, which we did in the second and third quarter of fiscal 2018. Last quarter, we stated that we had approximately $144 million of excess capital at the bank and the holding company combined at December 31st, 2017, if we chose to reduce our Tier 1 leverage ratio to 9%. After the debt in the purchase from our recent acquisition and once our asset levels normalized by June 30th, 2018, after they run off of excess tax season liquidity and assuming we are in the consensus sell-side forecast in the fourth quarter of fiscal 2018, and grow asset at roughly the forecasted rate, we will have roughly $100 million of capital in excess of our 9% Tier 1 leverage ratio at the end of the next quarter. Furthermore, if you take our current consensus analyst EPS estimate of roughly $3.14 per share for fiscal 2019, just by way of illustration and not validation, and assume that we grow assets by 15% next year, we will generate an additional $80 million of excess capital in fiscal 2019, above the $100 million of excess capital we have today. Given that we have significant excess capital even after our recent acquisition, we intend to deploy it. We will either redeploy that excess capital into accretive additional M&A in the relatively near future, continue to buy back shares, institute cash dividend or utilize a combination of all three. I would like to thank the dedicated team of colleagues with whom I have a pleasure to work with every day; performance is a reflection not only in our quarterly earnings, but also on our credit performance, strong regulatory relations, and our excellent compliance record. Thanks to your work, we recently received a second place ranking from SNL Financial and their ranking of the best performing thrifts for calendar 2017. Although their second place finished marks a drop from the number one ranking we achieved over the last five years, it also marks a decade as one of top five performing thrifts in the country. Additionally in 2017, BofI was ranked by Bank Director Magazine as a second highest performing banker thrift out of approximately 100 banks and thrifts traded on the NASDAQ, OMX, and New York Stock Exchange with asset between $5 billion and $50 billion, following a third place finish. With that, I'll turn the call over to Andy and then we will take question after.

Thanks Greg. Our 10-Q was filed with the SEC today and it's available online through EDGAR or through our website at bofiholding.com. I will highlight just a few areas rather than go through every financial line item. Please refer to our press release or our 10-Q for additional details. BofI's net income for the third quarter ended March 31, 2018 was $51.3 million, up 25% when compared to the $41 million earned in the third quarter ended March 31, 2017 and up 61.9% from the $31.7 million earned last quarter. Earnings attributable to BofI's common stockholders were $51.2 million or $0.80 per diluted share for the quarter ended March 31, 2018 compared to $0.63 per diluted share for the quarter ended March 31, 2017, and compared to $0.49 per diluted share for the quarter ended December 31, 2017. As Greg indicated earlier, we experienced a significant increase in Refund Advance funding this tax season. Related to the increase in Refund Advance funding this quarter is an increase in the loan loss provision to $16.9 million, up from $4.9 million in loan loss provisions for the quarter ended March 31, 2017. Of the $1.1 billion of Refund Advance loans funded during the quarter, we reserved 1.3% of the total originations yield in loan loss provision of $14.1 million related to RA and included in the other loan category. Last year, we funded $277 million and reserved 1.5% of the total fundings for a loan loss provision of $4.5 million. The credit performance of the Refund Advance loans this year is in line with our expectations. Also related to H&R Block for the nine months ended March 31, 2018, fee income from Refund Transfer and Emerald Card was $10.7 million and $5.9 million, respectively, about equal to the $10.9 million and $5.7 million earned for the nine months ended March 31, 2017. These fees are included in non-interest income under banking service fees and other income. Our efficiency ratio was 32.4% for the quarter ended March 31, 2018, down from 40.28% for the quarter ended December 31, 2017, and up slightly from the 31.7% for the quarter ended March 31, 2017. As a result of the increased H&R Block revenues, our efficiency ratio is 37.05% for the nine months ended March 31, 2018. As noted last quarter, we do expect our fourth quarter efficiency to increase to around 40%. Shifting to the balance sheet, our total assets increased $1.5 billion to $10 billion approximately as of March 31, 2018, up from $8.5 billion at June 30, 2017. The loan portfolio increased $690.2 million on a net basis, primarily due to portfolio loan origination of $4.6 billion. Investment securities decreased $99.6 million, primarily due to sales and principal repayments. Total liabilities increased by $1.4 billion to $9.1 billion at March 31, 2018, up from $7.7 billion at June 30, 2017. The increase in total liabilities were resulted primarily from growth in deposits of $1.1 billion, partially offset by a decrease in FHOB borrowings of $328 million. Stockholders' equity increased by $87.4 million to $921.7 million as of March 31, 2018, up from $834.2 million at June 30, 2017. The increase is primarily the result of our net income for the nine months ended March 31, 2018 of $115.3 million. The bank is very well-positioned from the capital perspective. The Tier 1 capital was 9.36% for the holding company and 9.40% for the bank at March 31, 2018. With that, I'll turn the call back over to Johnny.

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

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brad Berning of Craig-Hallum. Please proceed with your question.

Good afternoon guys. A couple of follow-ups in the Refund Advance. Obviously, a nice number there, but a little bit more specifics on the provisioning, if you don't mind. I think last year even though you provisioned 1.5%, I think, the loss rate ended up being at around 1.0%. Can you talk a bit about in the other loan category, how much of that has been collected post quarter end? And give us a little bit of idea how the collections are going on the remaining piece of that? And is there any reason why the 1.0% loss rate would fluctuate one way or another?

Well this with respect to the question of whether that 1.0% loss rate was for -- it was for a different product. We did a number of things this year. The line amounts are much greater. The window of time that the loans were originated prior to e-file is greater and some things like that. So, there is a bit of a product mix change, but I'll let Andy answer.

Yes, so just to give you a sense on timing. So, last year, the ultimate loss rate was approximately 1%, but that was after through the entire remainder of the post-tax season, which would include the September 30 quarter as well. So, we ended up the year June 30 at a higher than 1% number, just to be clear. And then the rest were recoveries throughout that period. So, while the 1% rate is right, by June 30, the number is technically a little bit higher. As it relates to collections, we believe we're on pace with the collections such that the provision of 1.3% that we provided will exactly match what's remaining of that $1.077 million. So, the collections stream, including the decreases we see on a week-by-week basis do indicate that we should come in at that 1.3% level by June 30. Now, as of June 30, like we did last year, we will write-off all the uncollected balances as charge-offs. If we have any subsequent recoveries, they will be included as a recovery in the post period. But to be clear, the 1% approximately loss rate of last year did include recoveries throughout the September period of the post-tax season.

Yes, understood. Thank you for the details on that. Can you talk a little bit more about the treasury team that you've hired and talk a little bit more detail? Can you scope up the magnitude of the opportunity here a little bit better? Obviously, that should be a pretty sticky business to use an open API infrastructure like that and I think it's been part of the vision you've been talking about for a while. Can you give us some thoughts to how big the pipeline is and how big the mix do you think this business can be?

Well -- so we've got -- so we hired that Orange County team. We have some -- we have a great hire that just accepted really -- plus I'm very excited about with great senior leadership skills and deep experience in these areas. So, I'm excited about that. It's going to be difficult for me to give you forecast and numbers, however, because as we do this, a lot of it is -- it's working with software providers that are also working through what their API infrastructure is like. I think the opportunity is massive. The ability -- the value proposition is clearly there. There's lots of profit pools. When we do our account analysis and we come up against other banks, we're saving customers and potential customers a very significant amount of money that can get their attention. So, it's an exciting area for us, but it's difficult for me to give a timeframe. What we've seen is that sometimes, we think that we have a great prospect that they're going to switch immediately and the CFO is busy and it takes months longer. So, these are long-term plays, but it's something that we're going to need to succeed at at some level if we want to maintain a net interest margin, if the yield curve flattens out and those -- and rates continues to rise and the yield curve inverts because the online banking competition side has gotten very brutal. So, this is a strategic initiative we need to succeed on. I'm confident we will, but I really can't -- this just wouldn't be -- it wouldn't be good because it'd be too much inaccuracy in the numbers. Pipelines, there are very -- they're substantive, but the issue is just because you have somebody who is willing to look, talk, take a bid, doesn't mean you actually get a conversion. So, that's why I'm not going to able to give you direct numbers.

Yes. No, fair enough. It will be exciting to see how that develops over time. And last quick question on the C&I business, at this level of origination that you've had the last couple of quarters, is that sustainable? Can you grow that pace of originations from here? And can you talk about what the drivers have been? Obviously, substantial growth in the C&I book and could you expand upon that a little bit further?

Sure. Yes, I think that there's a lot of opportunity there. We've got some good strategic hires that are in the pipeline and are close there to help expand that business. So, I feel very good about that. I think that is an area where I am most certain that growth is available to us if we just execute. With respect to what that looks like, there's -- the lenders finance business has good growth, the commercial and a specialty real estate side is -- there's a lot of opportunity there. Leasing has good pipelines. So, I think that there's a decent balance there. Clearly, the commercial specialty real estate product set has lots of opportunity, specifically.

I'll get back in the queue. Thank you.

Thank you.

Our next question comes from Michael Perito of KBW. Please proceed with your question.

Good afternoon guys.

Hello.

Hey Mike.

Thanks for taking the questions. I have just a few quick ones I want to address. One, I didn't hear in all the information you guys gave around the Refund Advance, but the 4.77% reported NIM, did you guys provide like a core NIM, I think, it was 3.97% in the March quarter last year. Did you guys provide a comparable number for the quarter this year?

Yes, we did. 3.84% is the number, that's separating out all the H&R Block loan stuff and separating out all the excess liquidity.

Okay, perfect. Thank you. And I was curious if you guys -- it seems like this season went pretty well. I mean I know a couple of months ago, H&R Block was happy, it seems on their earnings call and obviously the revenue production on your side looked good. I'm just curious if there have been an initial conversation about next year with H&R Block management about all putting the Refund Advance product again or is that probably something that will occur over the summer?

Well, clearly there have been conversations, but there is -- that's something that -- look, we think it went very well. We focused hard on delivering a competitive product. We delivered well. We have a great relationship there. I think the teams work well together. From everything I know that they're very happy. But -- look, I think things are good, but I'm not going to get ahead of myself on that.

Okay, that's fair. There's just two more, one on the expenses. You guys mentioned the -- some of the stuff you're doing on the rebranding side, which will be announced by the end of the year. Is there -- I mean when we try to think about those expenses specifically, is that, I guess, expense that could eventually come out, once the rebranding is completed. I guess, asking another way, is that expenses are potentially elevating you temporarily here above which you would normally think? Or should we just think of it as expense that will be replaced with other investment once the rebranding is done?

I think it's the latter rather than the former. With respect to those things, clearly, there are expenses such as branding agencies, naming agencies, and all those things. We've really tried to be very thoughtful and frankly not scrimp on these things, because we want this to be really outstanding and really be delivered as well as it possibly can be. The -- but the reality of it is with that consumer vision that I described for you and that's also going to be for the small business side, we're really looking essentially what -- a lot of what this looks like is if essentially with respect to, for example, the treasury management side is providing a little more service, which requires a higher level of non-interest expense, but you get that benefit other places. And so with respect to the consumer side, there's just so many things that we're going to develop once we get this platform. We're going to be pounding down better ways of using credit reports to lower or eliminate checking hold times and all that kind of stuff. So, there's going to be this relentless pounding on this consumer digital bank vision that -- yes, sure, we'll get rid of branding agencies, we'll get rid of this printing expense, and all those things. But it's hard for me really to want to say that we're going to be able to then claw that back. It's just not anywhere near as important as the achievement of the strategic vision, which is of so much more value.

Okay. And then just on kind of leaning into the -- my last one here. Just -- on the C&I business and the treasury management business, the C&I business, obviously, already had pretty tremendous success on the loan side, sounds like the treasury management is not too far behind with pipeline you guys have. But Greg, I was curious if you can give us a little bit more background on to how these teams are sourcing their leads? My guess, the answer is somewhat similar, but given obviously differences between commercial and consumers, my guess is there's certain businesses regions you're targeting, I'm curious, if you give us a bit more color on how these new people that are coming on are, kind of, attacking the whole country and trying to get quality credits and relationships?

Well, -- so with respect to -- I would say that the treasury management side of our business is well behind the lending side on the commercial side. So, I -- just I think that categorization -- look I'd love to tell you differently, but I think that would be unfair. So, that's there. With respect to that, obviously, one other things that we have lagged on, and just in general, and this isn't true only on the consumer side -- only on the commercial side, but also true on the consumer side is doing a great job of cross-selling our superior deposit products. There's superior in pretty much every way unless you actually think you have to walk into a branch and yes, we do a poor job. We're doing a much better job this year than we did last year of selling our consumer products to our single-family customers, our commercial product to our multifamily, and our real estate customers, and getting C&I customers to use our treasury management services. So, that's obviously one piece of low-hanging fruit and there's -- that's the easy component of that. The other is that there is customer profiles that make a significant difference. So, if you have very high transaction volume, complex software needs, you need customization through APIs and things like that, and you're not looking for a big cash flow loan, which we're not going to be likely to provide you then you might be our customers. So, I think that's -- and then you're going to get a real benefit economically and then hopefully also from an operational perspective with respect to how you're actually interacting from system perspective. I mean that's the vision, that's capability, and those are the wins that we have had. But this is still -- there's still a lot to do here.

Okay, great. Well, thanks guys for taking my questions. I appreciate.

You're welcome.

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

Hey guys, good afternoon.

Good afternoon.

Maybe just on the margin, I know you touched on the core NIM, but maybe just digging into the core yields, I think, you said it was 5.31%, maybe just give us a flavor of what the components of that did in terms of C&I, CRE, and mortgage yields did, kind of, quarter-over-quarter?

You want to do that Andy?

Yes.

Yes. So, Andy will get back to you specifically on that. Do you have another one then kind of circle back to that one?

Yes, sure. I guess as you think about your expense growth and crossing $10 billion, I think there's a $2 million to $3 million of DFAST expense already in the run rate, I guess, is that correct? And then anything additional we should see as you kind of cross here?

Well, so we have -- so what we're looking to do is we're not looking to cross before December of this calendar year. So, we're looking to stay under and squeak underneath it this December. Then subsequent to that, it's a December measurement period for Durbin. There's a little bit of a different measurement period December, the last quarter of the calendar year measurement. So, that would be -- so in December -- the December quarter of 2019, we would cross. We would have Durbin impact in July 1st of 2020. I've mentioned that before as an impact. I have not sized it for you, and I'm not ready to do that today. And then with respect to what's happening with the DFAST, I suppose there was a lot of talk where we went through our mark DFAST this year from a regulatory perspective, and they gave us feedback and stuff that that this might go away. So, it's a little bit hard to tell. And a lot of types of things that are costly associated with whatever enhanced regulatory scrutiny are these elements that are related to some system and process that you don't really think about that somebody wants to have tightened up. We've done a lot of work in our system and processes with our processed diagram database, ERM system we put in, and things like that. So, I think we're in a reasonably good shape there. But that's the continued dialogue you need to have and it's difficult to say if there's other things. As Andy is kind of messing around, I'll give you a thought on the loan yields side. I think single family was kind of flattish. We did -- so in December, we didn't raise single family or multifamily rates. Frankly, we had -- that decision -- we did that once out of every other rate increase. We raised single or multifamily rates. So, they were a little bit flattish and multifamily was a little flattish as well. C&I did well adjusting; auto went up, unsecured was pretty flat. So, look, it didn't go up much, it went up, excluding H&R Block, four basis points. But we did a raise rates 12.5 basis points on single and multifamily in this March timeframe and so those rates will start flowing through the portfolio in the next month or so.

Got it. Okay. Thanks. That's helpful. And then maybe just on loan growth. Obviously, it was very strong. And maybe just thinking about maybe some of the non-core businesses or less core, the warehouse business is, kind of, down more than maybe I was expecting this quarter, can you just give your outlook for that business and how you think about it in terms of growing it or [Indiscernible]?

Yes. It's interesting because it was down and I was looking at the numbers recently and its back up. So, it was actually doing just fine. So, clearly, I do think there's -- obviously the question on what's going to happen with mortgage banking broadly. The loan rates have been pretty flattish and they've actually stayed relatively low in the cycle so far. Clearly, we do see pressure on some of our mortgage banking customers when we look at their profitability. There's definitely folks calling us, asking for exits. And so there may be some opportunities for some aqua hires from our perspective. I think it's just going to be thinking through doing that the right way. We, obviously, have a much stronger business than an independent mortgage banker. And I think our systems and processes are tighter and with our Costco relationship, it will -- and all of our data stuff we do, it's going to allow us to try to get through that. But, look, I think, obviously, warehouse lending for independent mortgage bankers -- look, I think that's not that big of a business that we shouldn't be able to grow it. But it will be growing it in the face of some downward pressure on the industry, which we see from a profitability perspective. But it's interesting because right now it's one of the reason -- I think it actually hit a record at one point in time this post quarter as far as its size. So, that's where just the variability sometimes. You can't use one quarter to really make judgments, because there's just -- you make -- you do -- you get a big win there and it can pop it up pretty quickly.

Yes. Great. Well, thank you for taking my questions guys.

Thank you.

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

Hey guys you have covered all my questions, but one, just going back to the expense line here. This $45.5 million or so, how much of that encompasses fee that might be related to the Refund Advance or Refund Transfer products that might go away? Or is this is a good run rate to build off going forward?

Sure. Included in the other general and administrative expenses are approximately $1 million of loan processing for the EA product. So, that's the same amount it was last year, but looking on a linked-quarter basis, that won't repeat. So, that's probably the easiest to one to pick out.

Okay. So, then call it $44.5 billion, just given the hires that you make, it sounds like it's been a few -- that seems like a good level to build off going forward as far as operating the core bank?

Yes.

Okay. You covered the rest. Thanks so much.

Thank you.

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

Yes, actually you answered all of my questions too.

Ed, come on, look I want to encourage all if you have -- we will get off in time for you run into another investor call.

You've answered. It's a quarter. You answered my questions. I guess, maybe the one I would have was it would be your anticipation that you -- if given the opportunity a year from now to be ramping up your securities portfolio more than -- I mean you've kind of held it down obviously just because the returns haven't been as attractive but--

Returns have been attractive. We also want to stay -- we want to stay onto that limit, the Durbin, the $10 billion for the period. Well, look it depends on where long-term rates are. There's just -- the fact that, right, you're sitting there looking at -- you're not getting paid anything for duration. That's going to go one way or the other, right? There's going to have to be -- if there's an inversion, some kind of downturn then there'll be opportunities. It will be different. And if not, then that ought to get you -- start to get some shape in the curve. But I think unless you get some shape in the curve, I just don't really think there's a lot out there.

Okay, great. Thanks.

All right. Hey thank you very much. Appreciate it. I appreciate everybody's interest. And we'll talk to you next quarter.

Thanks guys.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.