BofI Holding, Inc. (NASDAQ:BOFI)
Q3 2017 Earnings Conference Call
April 25, 2017 5:00 PM ET
Johnny Lai – Vice President-Investor Relations
Greg Garrabrants – President and Chief Executive Officer
Andy Micheletti – Executive Vice President and Chief Financial Officer
Bob Ramsey – FBR
Scott Valentin – Compass Point
Brad Berning – Craig-Hallum
Edward Hemmelgarn – Shaker Investments
Andrew Liesch – Sandler O’Neill
Austin Nicholas – Stephens
Gary Tenner – D.A. Davidson
Greetings and welcome to BofI Holding Inc. Third Quarter 2017 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, VP of Investor Relations. Thank you. Sir you may begin.
Thanks, Erin. Good afternoon, everyone. Thanks for your interest in BofI. Joining us today for BofI Holding, Inc’s third quarter 2017 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 operating results for the three and nine months ended March 31, 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, the floor is yours.
Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I’d like to welcome everyone to BofI Holding’s conference call for the third quarter of fiscal 2017 ended March 31, 2017. I thank you for your interest in BofI Holding and BofI Federal Bank.
BofI announced net income for its third quarter ended March 31, 2017 of $40,994,000 million, up 14.1% when compared to the $35,914,000 earned in the third quarter ended March 31, 2016 and up 26.9% when compared to the $32,300,000 earned last quarter.
Earnings attributable to BofI’s common stockholders were $40,917,000 or $0.63 per diluted share for the quarter ended March 31, 2017, compared to $0.56 per diluted share for the quarter ended March 31, 2016 and $0.50 per diluted share for the quarter ended December 31, 2016.
Other highlights for the third quarter include: total assets reached $8.7 billion at March 31, 2017, up $0.5 billion compared to December 31, 2016 and up $1 billion for the third quarter of 2016. Net interest margin increased 24 basis points from the prior quarter and 39 basis points from the third quarter of 2016 to 4.24%.
Excluding the impact from H&R Block seasonal loan products, excess liquidity and our subordinated debt, net interest margin in the quarter ended March 31, 2017 would have been approximately 3.97% at the high end of our 3.8% to 4.0% annual net interest margin target. Return on equity was 21.10% for the third quarter, well above our long-term target of 15% or better. The efficiency ratio was 31.73% for the third quarter of fiscal 2017, compared to 35.78% in the second quarter of fiscal 2017 and 31.66% for the third quarter of fiscal 2016.
Capital levels remains strong, with Tier 1 leverage ratio of 9.11% at the bank and 9.47% at the holding company. Credit quality continues to be strong with 1 basis points of and only 39 basis points of nonperforming assets of total assets.
Our lending business had another good quarter with $1.3 billion in gross loans originated in the third quarter. As a result the bank achieved good quarterly loan growth, as loan balances grew by approximately by $209 million compared to December 31, 2016. Loan balance growth this quarter was reduced by the repayment of seasonal H&R Block loans of $59 million and reduction in single-family agency warehouse facility of $56 million, those items of which we do not expect to reoccur in the subsequent quarters.
Through the first quarter of fiscal 2017, we’ve generated $986 million of net loan growth, a 16.3% increase over the comparable period in fiscal 2016. The primary drivers of our loan production consist of $86 million of single-family agency eligible gain on sale production, $228 million of single-family jumbo portfolio production, $114 million of multi-family and commercial real-estate portfolio production, $437 million of C&I production and $33 million auto production. We also funded approximately $277 million of Refund Advance loans through our partnership with H&R Block. These refund advance loans are reflected in loan and lease purchases and our earnings press release and the 10-Q and were not included in the $1.3 billion of loan originations I referenced earlier.
We had another strong quarter in our C&I lending business with ending balances increasing $154 million sequentially and $469 million year-over-year. Total C&I lending including lender finance commercial specialty real estate and equipment leasing account for approximately 19% of total loans outstanding at March 31, 2017 up from 15% sequentially. Our lender finance business had $308 million of loan production and net loan growth of $124 million this quarter. Our commercial specialty real estate lending business originated $94 million of loans during the quarter for net loan portfolio growth of $20 million a 5.5% increase in the three months ended March 31, 2017.
Our equipment leasing business generated $34 million of loan production for the three months ended March 31, 2017 growing at loan balances by approximately $9.3 million from December 31, 2016, representing an annualized growth rate of 22.4%.
We continue to robust demand and strong growth opportunities across all our C&I business segments and as C&I pipelines remain near all-time high. Credit quality remained strong in our C&I business with nonaccruals or accounts 90 days plus delinquent at March 31, 2017. We’ve incurred no credit losses in our C&I loan portfolio since inception, and our credit quality in all segments to this group remains strong.
Our C&I loans and lines have significant credit reflection in the form of first lien positions on hard collateral. We actively monitor the borrowers financial health and the value of the underlying collateral to identify potential credit deterioration early.
Our multifamily and small balance commercial lending businesses also had a good quarter. Our multifamily and small balance commercial bunnies originated a $114 million for a net portfolio increase of $39 million and a 11% annualized increase in the entire portfolio. We took advantage of more rational pricing from key competitors in some of our multifamily markets and increased our rates on new multifamily loans, a total of between 25 basis points to 50 basis points in late December and March of 2017.
Demand in our single-family jumbo business remains healthy as evidenced by the $428 million in production we had in the current fiscal quarter with portfolio growth $91 million. Despite increasing rates by a total of 25 basis points over the last two rate increases, jumbo family loan pipeline and production remains strong. Our current national and single family lending program, which represents approximately 15% of our jumbo mortgage book is in strong regulatory standing. And we continued to offer loans at low loan-to-value selected five national borrowers. This program has excellent credit performance without a single dollar of credit loss on a single-family five national loans in the bank’s history.
Single-family residential loans to five national borrowers cannot and are not reported to [indiscernible] bank’s current report but rather a single-family residential loans as is appropriate.
The details of our third quarter 2017 originations are as follows. The average cycle for single-family agency eligible production was 753 with an average [indiscernible] of value ratio 66.5%. The average cycle of the single-family jumbo production was 708 with an average loan to value ratio of 61.6%. The average loan to value of the originated multi-family loans was 56.7% and the debt service coverage ratio was 1.39%. The average LTV ratio of the originated small balance commercial real estate loans was 55.6% and the debt service coverage was 1.47%. The average FICO of the auto production was 775.
Our outlook for loan growth remains positive, with $909 million of loans in the pipeline as of March 31, 2017 consisting of $579 million of single-family jumbo loans, $89 million of single-family agency mortgages, $100 million of income property loans and $141 million of C&I loans. Our C&I loan pipeline is based on projected initial funding which is often much lower than the average outstanding balance or aggregate line amount of the underlying credit.
Our loan portfolio credit quality remains very strong. Our strong credit discipline and low loan-to-value loans have resulted in consistently low credit losses and servicing costs. Our lifetime loss in our originated single-family loan portfolio represents less than 3 basis points of loans originated. We remain disciplined in our multifamily credit underwriting and continue to originate loans with low loan-to-value ratios and attractive debt service coverage ratios.
We do not have risks hidden in the tails of our single and multifamily portfolios. At March 31, 2017 approximately 55% of our single-family loans are under 60% loan-to-value, 36% are between 60% and 70%, and 7% are between 71% and 75% 1% of our single-family loans have a loan-to-value ratio of between 76% and 80% and less than 1% have loan-to-value ratios greater than 80%. Approximately 63% of our multifamily loans are under 60% loan-to-value, 31% are between 60% and 70%, 5% are between 70% and 75% and less than 1% of our multifamily loans have a loan-to-value ratio of above 75%.
Asset quality remains and credit losses remain close to zero, with one basis point of net recoveries in the third quarter and one basis point of net charge offs for the nine months ended March 31, 2017.
Total non-performing assets as a percentage of total assets was 39 basis points, down from 43 basis points December 31, 2016 and up from 31 basis point at March 31, 2016. The decrease since last quarter was primarily the result of improvements in non-performing multi-family loans. As reflected in our historically low charge off rates, a very small percentage of our non-performing real estate loans result in a loss to the bank because we have a granular portfolio secured primarily by sufficient real estate collateral with readily ascertainable market values to ensure real estate repayment on the small number of loans to become non-performing.
Our loan loss reserves in non-performing loans were 138.1%. The increase in our loan loss revision this quarter was driven almost entirely by reserves from refunded advance loans which had had credit losses below our projections. At March 31, 2017 the weighted average loan-to-value of our entire portfolio of real estate loans was 57%. Given that these loan-to-value ratio these current amortized balance over the origination date of appraisals and a generally appreciating housing market, these historic loan-to-value ratio is generally overstate the true loan-to-value ratio on the portfolio, providing a further margin of collateral security.
We continue to grow and diversify the deposit base cross consumer and business banking verticals. Total deposits increased by $189 million on an annualized rate of 11.4%, checking and savings accounts grew at a faster pace of 22.7% annualized compared December 31, 2016 balances. Of the banks over all deposit base at the end of this quarter, we have approximately 41% business and consumer checking, 25% money market accounts, 4% IRA, 7% savings and 11% prepaid accounts.
Time deposits or CDs have declined to 12% of total deposits. And as we continue to increase checking, savings, and money market deposits and reduce time deposits as a percentage of our funding, we’re striving to reduce our deposit betas [ph]. We successfully kept our funding costs relatively flat over the past year or growing our interest-bearing and non-interest-bearing demand deposit balance. Our average cost of interest, non-interest and interest-bearing demand in the savings deposits was 59 basis points for the quarter ended March 31, 2017, down two basis points from 61 basis points from the quarter ended December 31, 2016 and up seven basis points from 52 basis points for the quarter ended March 31, 2016.
Our time deposits have an average cost of approximate 2.5% because they have an average duration of approximately 5.3 years, compared to 4.1 years in the comparable period a year ago. Our balance sheet remains slightly outfit sensitive given the relatively short duration of our real-estate assets and our diverse base of consumer and commercial deposits comprised primarily of core deposits. Following the rate hike by the Federal Reserve in December and March, we raised our single family rates by a total of 25 basis points, while maintaining a strong pipeline and robust originations. We raised our multi-family rates following the December and March hikes by a total of between 25 to 50 basis points.
Our C&I rates are generally floating are very low duration and are generally adjusted when interest rates increase. Our C&I loans have on average higher loan yields and are growing more quickly than other loan categories, which has enhanced our average yield on book loans. Although these higher rate loans on single and multifamily take a while to enter the portfolio and impact average yields, loan yields, adjusted for H&R Block seasonality, increased eight basis points from the last quarter.
Following the rate hike by the Fed in March, we have seen selective instances where competitors have become more aggressive in our deposit repricing. We strive to offset potential future funding cost increases by changing our deposit mix enhancing loan yields on existing loan categories and changing our loan mix so that we can maintain our net interest margin in the 3.8 to 4.0 range on annual basis.
We recently completed another successful tax season offering co-branded financial products with H&R Block. As we previously mentioned, we added the Refund Advance product this year to our H&R Block product offering. We are in transaction based fees from Refund Transfer and Emerald cards. And interest income from Emerald advance loans, Refund Advance loans H&R Block franchise loans and Emerald card deposits. Because of the uncertainties entering the tax season related to be impact from the IRS tax refund delays and changes in product offerings and marketing by H&R Block this year, we conservatively guided for total revenue and net income from the program management agreement to be roughly flat compared to the 2016 tax season.
Through March 31, 2017 season to date revenue and net income from our partnership with H&R Block exceeded last year’s results, driven by higher contributions from Refunded Advance and Emerald card.
Our universal digital bank initiative includes three primary pillars. First, we are striving to own the entire customer facing technology stack in order to provide the best-in-class, personalized user experience and have flexibility to quickly incorporate customer feedback and product innovation. Second, we’re developing a broad enough consumer lending and the deposit products set to allow for profitable data-driven cross-selling and more efficient monetization of our customer acquisition cost. With our auto lending and consumer installment lending launch, we are making significant progress on expanding our consumer lending products set.
Third, we must continue developing our robust API microservices infrastructure that will enable us to partner with third parties for both customer acquisition and payments services. We have rolled out our in-house consumer online enrollment platform eliminating our need to pay a third-party an application fee for each customer application. We’ve done extensive testing on various components of our new consumer online banking platform and plan to deploy the new software on one of our smaller brands later this year. After completing the consumer online platform, we will expand the platform’s capabilities to small business banking.
We continue to expand our API toolkit in micro services architecture to allow us to integrate with third-party partners and application providers. We already have a number of successful implementations of our consumer enrollment API. By providing a seamless and integrated user experience and delivering personalized and targeted products and services to customers when they need and want a product, we believe we can increase the profitability and retention of new and existing customers.
We began to offer our consumer installment lending product on a pilot basis in January of this year and have successfully originated more than a $1 million of loans to the platform to date. Leveraging components of the software platform used to origination H&R Block franchise loans for adding a customer user interface and credit underwriting model, we were able to build our entire consumer lending platform internally. That was going to apply for $5,000 to $35,000 loans through our secure portal and receive funding within one to two business days after approval. We target prime borrowers with an established credit history and assets. We take additional steps to verify borrows’ employment income and identity.
While the production volumes are currently modest by design and will remain so for the foreseeable future as we test our credit models, we are pleased with the performance of the system and the loans we have funded so far. Overtime, this product will become one of several products and services within our universal digital bank, will be offered to new and existing customers on a targeted basis and will increase average loan yields.
The bank is very well positioned from a capital perspective for significant growth without the need to raise additional capital. At the bank our Tier I capital level is 9.11%, at the holding company our Tier 1 core capital level is 9.47%. Additionally, our capital structure consists almost entirely of common equity and therefore allows for significant flexibility regarding what type of capital instruments other than common equity that we might decide to utilize to raise capital in the event that our asset growth rate outstrips our strong earnings and begins to reduce our excess capital levels. We have not yet deployed the proceeds of our last year’s subordinated debt offering.
I like to thank the dedicated team of colleagues with whom I have the pleasure to work with every day. Your performance is reflected not only on our record quarterly earnings, but also in our credit performance, strong regulatory relations and our excellent compliance record. Thanks to your work we recently received for the 50 year in a row SNL Financial has awarded the Best of the Biggest Thrifts. This award marks the eighth year in a row that BofI has ranked in the top five performing largest thrifts according to SNL. In 2016 BofI was also ranked by Bank Director Magazine as the third highest performing banker thrift out of 102 banks and thrifts traded on the NASDAQ OMX and in New York Stock Exchanges with assets between $5 billion and $50 billion.
With respect to ongoing short-seller in Catford media attacks remember that the first short seller headpiece came out in March 19, 2014. In the March 2014 quarter the bank earned on a split-adjusted basis, $0.25 per share for total income of around $15 million, had 50 basis points of non-performing assets, total assets, 11 basis points of charge offs in that quarter and a net interest margin of 3.89%. That year BOI received many awards for its best-in-class performance including F&L’s top ranking as 2014’s highest performing system in the country based on efficiency growth return and credit quality.
So after three years of audited financials 12 quarters of strong performance, three full OCC regulatory full-scope exams, three OCC interim exams, two acquisition approvals and a recent OCC product approval for a refund advance loan that we offered this quarter and dozens of different disproven short thesis hurdled at the bank in the last three years, our net income since that first short seller headpiece of 180% higher moving from $15 million to $41 million, earnings per share 152% higher from $0.25 to $0.63 per share, non-performing assets in total assets are down from 50 basis points to 39 basis points, charge offs are down from 11 basis point of charge offs to one basis point in net recoveries and the net interest margin rose from 3.89% to 4.24% on adjusted and 3.97% adjusted this quarter. This excellent performance speaks to why we have been one of the top performing banks if not the top performing bank for such a long period of time.
Now turn the call over to Andy who provide additional details on international results.
Thanks Greg. First I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at bofiholding.com.
Second, I will 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 BOI’s net income for the third quarter ended March 31, 2017 was a record $40,994,000, up 14.1% when compared to the $35,914,000 earned in the third quarter ended March 31, 2016 and 26.9% when compared to the $32.3 million earned last quarter.
Earnings attributable to BofI’s common stockholders were $40,917,000 or $0.63 per diluted share for the quarter ended March 31, 2017, compared to $0.56 per diluted share for the quarter ended March 31, 2016 and compared to $0.50 per diluted share for the quarter ended December 31, 2016.
This quarter ended March 31, 2017, was the second income tax preparation season since the bank entered into its August 2015 long-term agreement with H&R Block, Inc. to offer co-branded financial products to H&R customers. The increase in earnings this quarter compared to our last quarter ended December 31, 2016 was due in part to H&R Block financial product revenue in the March quarter. And the increase in assets this quarter was due in part to the income tax refund from H&R Block customers causing a seasonal increase in the bank’s short-term liquid assets and in its deposits.
As Greg mentioned, new this year is the refund advance loan product. The bank purchased the refund advances at a discount during the quarter ended March 31, 2017
and accreted the discount into interest income as the loans were repaid. Of the $277 million in refund advances purchased during the quarter ended March 31, 2017 the current principal balance of the refund advance loans is approximately $3.4 million dollars reflecting the rapid pay down and the minimal exposure remaining meaning on the bank’s balance sheet.
The bank has reserved one hundred percent at this remaining amount in its loan loss provision in the third quarter. The credit performance of the refund advance loans was better than expected and BofI did not have to rely on the credit guarantees provided by H&R Block. However BofI’s charge off rate next quarter will reflect whatever dollar amount of refund advance do repay by June. And as I stated we have reserved one hundred percent of the remaining RA balances as at the end of this quarter.
For the quarter ended March 31, 2017 net interest margin was 4.24%, up 24 basis points from 4% in the quarter ended December 31, 2016 and a 39 basis points compared to the 3.85% in the quarter ended March 31, 2016. The net interest margin would have been 3.93% when excluding the average balances associated with the lower yielding excess cash and the average balance and the yield earned on the refund advance and the other H&R Block known related products, during the quarter, which consisted – which is consistent with our strong net interest margins reported in previous quarters.
Our average loan yield excluding the H&R Block temporary seasonal loan products was 5.13% for the third quarter of fiscal 2017, up from 5.05% for the second quarter of fiscal 2017.
Our efficiency ratio was 31.73% for the quarter ended March 31, 2017 and 35.13% for the nine months ended March 31, 2017. As Greg mentioned, we are investing significantly in our future with increased staffing systems and software development. Even with the additional cost we anticipate that we can keep our average efficiency ratio around 35% to 36% on any annual basis.
Shifting to the balance sheet BofI also had strong balance sheet growth even after excluding the seasonal assets and deposits from the H&R Block agreement. Asset growth excluding the seasonal growth this was 12.5% year-over-year compared to March 31, 2016. Similarly deposit growth this quarter was 11.8% year-over-year, compared to March 31, 2016 after excluding the seasonal deposit growth.
Stockholders equity increased by 116.7 million or 17.1% to 800 million at March 31, 2017, up from 683.6 million at June 30, 20216. The increase was primarily the result of our net income for the nine months ended March 31, 2017 of $102.2 million, as well as the testing and issuance of RSUs, the exercise of stock options of 8.6 million and a $6.1 million unrealized gain in other comprehensive income. This was net of a tax – net of tax and included a reduction of $0.2 million for dividends that cleared on our preferred stock.
The bank is very well positioned from a capital perspective the Tier 1 capital was 9.47% for the holding company and 9.11% for the bank at March 31, 2017.
With that I’ll turn the call back over to Johnny.
Thanks Andy. Dern [ph] 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 Bob Ramsey of FBR. Please proceed with your question.
Hey good afternoon guys. Thanks for taking the question. I wanted to talk a little more about block of anticipation loan. I guess, last year blocks sort of narrowed your margin because of all the excess liquidity. This year, without additional products, you guys have gotten a nice boost of margin. Is it your expectation that basically all goes away next quarter it sounds like the balances are almost are gone, and then sort of as we think about the seasonality of the block business, would you expect another 30 basis point benefit next year in the March quarter as well?
With respect to next quarter, yes that benefit will be essentially non-existence. Our balances are low enough now that they are de minimis from the standpoint of the impact they provide. And there’s other seasonal products as well, such as the franchise loans that are also add to minimus levels as well. So with respect to that.
With respect to next year, that’s something that we are obviously talking with H&R Block about and are not ready really to discuss anything there you’ve got but we have a good partnership with them. They obviously have to make decisions about what products they are going to decide to offer, and I’m not going to preempt that decision, which they obviously have that they obviously to make.
We think we have a good relationship with them, and we certainly would hope to be a part of that. And I think that we were pleased with how it worked, I think, they were pleased with how it worked. And I think it was very successful.
Okay. And I guess, when you all made the comment that losses on those loans have run below expectations. Is that comment applicable to sort of what’s happened over the last three weeks since quarter end on the Taylor portfolio or is that way you experienced through the first quarter? Does that indicate that the reserve being fully reserved at this point is probably more than enough, or I’m just trying to get better sense on what that comment meant?
Yes. So the reserve is more than enough, the $3.4 million number that was cited is roughly the current balance today. And so, we have that plus more allowance. So we can lose every dollar at the 3.4 and not have an increase in our loan loss provisions next quarter.
Okay, great. Got it. And then maybe you can give us a little bit more of update on the online consumer loan product. I know you gave a little information about originations, I think you guys are going to kind of take it slow. I noticed you are offering it now sort of direct to your customers through your website. Just kind of curious how you see that business growing, evolving over time, knowing that you have to take it slow, what is kind of trajectory?
Yes. Slow, slow for us on new products means slow. So we had about $1 million of originations today. It’s working very well. There’s good yields, we’re seeing good borrowers come through. We like what we’re seeing. There is certainly lots of opportunity to grow that. But we also need to make sure that our model gets tested over some period of time, has enough loans run through it before we really open that up.
So it’s really a longer-term initiative. I think it reflects what we’ve been able to do on the development side. That’s obviously completely in-house development, which is one of the, I think, many impressive things that the development team has built over time, which is going to help us in general as we move on this increasingly digital path that we have. And obviously over time, it will benefit our net interest margin. But we are going to really take it in a very controlled and measured way. You’ll see the credit quality in everything we do. We’ve done a great job on the auto side from a credit quality perspective, being thoughtful and efficient, but also controlled and how our rollout goes, and that’s what we’re going to do here too.
So I’m not going to give you exact numbers, but it’s not going to be material in this calendar year, but I would expect in the next calendar year would start to really ramp up as long as our performance continues to be good.
And any thoughts around mix of existing customers versus people that don’t have any other products or relationships with you?
Well I think that the mix will change as we have our universal digital banking platform coming up as the algorithm to determine whether that product is beneficial to a particular customer gets refined. And so if that refinement occurs, we should have much more, for example, credit consolidation loans with customers as we’re able to utilize our own internal data and the external data around the personalization engine better.
Right now, this is more front facing and there’s marketing that’s being done on a very targeted basis to small sets of internal customers. But the sophistication level as with the universal digital banking platform is all about, right, you’ve got have the product and then you’ve also got to have the personalizing engine, you’ve got to have the delivery mechanism on the front end to be able to bring all that together, and that ultimately is what’s going to come together.
Okay great thank you.
Sure, thank you.
Our next question comes from Scott Valentin from Compass Point. Please proceed with your questions.
Hi good afternoon thanks for taking my questions. With regard to loans mix, C&I growth has been strong, RV growth is strong. Just wondering how you envision overtime the portfolio mix changing and then, I guess, as a derivative of that, provision and allowance loan losses, how you see that evolving over time?
Well I’ll let Andy talk a bit more about the allowance, but from that perspective we do think C&I will become a greater proportion of the loan balance over time. The opportunities there are very strong. We’re turning away transactions that we simply just don’t have the capacity for. So, there’s definitely a lot of business there, we like overseeing there and so I think that, that will grow as a percentage of the balance.
Consumer obviously because we’re such a small part of our business right now, will continue to grow, but it will grow on a more measured fashion over time as we nurture those platforms. With respect to…
Sure I mean you are absolutely right. Over time, depending on mix, you should expect the loan loss allowance to increase as a percentage of total loans as the C&I portfolio gross. We’ve always had very good strong loan loss allowances for loans depending upon the loan-to-value ratio. For single-family loans that are typical bank that originated 80% loan-to-value, they have very high loan loss allowances. And obviously when you have much lower loan-to-value ratios you have lower loss allowances which have been historically reflective of frankly significantly greater than but certainly historically reflective of what we’ve had, which has been very low levels of loan loss.
Thanks. And then just on deposits you mentioned that you’re seeing some competitive pressure I guess some competitors raised pricing. Just wondering in terms of the deposit beta how are you guys thinking about your deposit rates relative to online competitors and maybe even brick and motor.
Sure, so with respect to – there really are several segments that we have we’ve tried hard I think have done a reasonable job of having many segments of our deposit portfolio not be competitive with direct or online competitors. And then some of our products and deposits are more competitive.
With respect to the first couple of rate increases, we’ve seen out of this call selective movement targeting by certain banks of certain customers and aggressively going after those customers because they believe those customers are profitable. We haven’t seen post sale repricing of deposits, but we have seen that sort of targeted repricing.
Certainly online competitors most recently Union Bank with pure bank or pure point is the most aggressive provider out there, which is interesting given obviously that is Union Bank. But right now it’s still fairly one off and I think that you’ll probably start to see more pressure on repricing as rates continue to go up. I think we’ve done a pretty reasonable job right now minimizing that impact. And certainly that impact has been lower than what we’ve been able to do with our loan rates. And we haven’t even begun to see the influence of raising our loan rates on multi and single family given that there’s a lot pipeline that takes some time for that lot pipeline to the fund out. And then the newer loans are coming into higher rate, but we definitely expect to see deposit pressure over time as you get higher levels of rate increases. We’ve modeled in the 60 and higher range on betas even though we are not seeing.
Which is very conservative. We’re not seeing the less than that, we’re seeing more of between 20 to 40 on a blended basis. But we’ve always modeled to make sure that we’re prepared in terms of looking at how we move loan rates in case we do have such a moment.
Thanks for the color, I appreciate it.
Our next question comes from Brad Berning of Craig-Hallum. Please proceed with your question.
Good afternoon. Just a couple of follow-ups on H&R Block. You made a comment about through the end of the March quarter that the results had been better than last year. And I just wanted to get you to clarify whether that was March quarter to March quarter or whether this year’s March quarter versus a total last year? Is the first question.
The follow-up is can you talk a little bit about the prepaid card part of it and if there’s any been any timing issues and pushing some of it from 1Q. Or should see the March quarter for you into the June quarter? How do you feel about the overall you know aggregate guidance for flat on a year-over-year basis? And just wondered if you can touch a little more in detail on that first and then I’ll come back for a follow-up?
Yes so the way we’re measuring that is the March quarter over the March quarter is what we’re looking at. So we were slightly better in the March quarter. As far as guidance going forward we still stick with the guidance that we’re going to continue to operate in that forecasted range for that bottom line as we’ve seen a little bit of shrinkage in our team, but we also saw some growth in Emerald card, that was positive. And then we added the RA on top of that. But the RA is done as Greg has mentioned, so that pretty much just leaves Emerald card which we don’t expect to be a large mover next quarter.
Yes so basically the benefit we received is in this quarter and we don’t think there’s going to be a benefit incremental over the prior years comparable quarter in this quarter as a result of H&R Block.
And then on the jumbo mortgage book you guys had a couple quarters so some refinance activity being higher than what you would like to seen. It looks like you got back to sequential growth this quarter. Can you talk about where you’re at on prepayment levels and some of the activities that you’ve been trying to curb? And talk about how you’re feeling about prepayment activity going into this quarter versus your production and do continue to expect to see growth kind of reaccelerate here now that you it seems like you’re moving through some of that issue?
Yes I think that’s a fair assessment. I do think we’ll have single family jumbo mortgage growth this quarter. We do have strong prepayment rates in our portfolio, they have declined some. But we have very strong borrowers with very low loan to value loans. And so they do have lots of opportunities for refinance. But I think that jumbo business is doing very well, the pipelines are very good, the pipeline has not been impacted by the rating increases we have, the housing market on the purchase side there’s incredible demand, the supply of homes is a little bit tight, but we’re still seeing good volumes to that channel. So we feel pretty good about being able to have a jumbo loan growth this next quarter from a portfolio perspective. I don’t want to speculate on how much but I do think that it’s there.
With respect to specific initiatives there’s a number of them doing a better job in portfolio retention which I think we are doing using better data analytics has been a big part of that. Extending some penalties associated with refinancing for some of our third-party partners and some other things and just looking at some of that behavior has been helpful too.
So in general though I think it was a good quarter for jumbo. And I think it’s shaping up to be a decent one next quarter as well.
So in the repay penalties you talked about was that part of the contributor to the pick up and repay penalties this quarter, was specifically to partners rather than to specific loans or…
No, no that was on a C&I side.
It’s going to be the C&I and the multifamily.
Yes that was – no that’s more of a deterrent and I don’t want to overemphasize that’s not a huge part of it. I think the biggest part of it is doing better job on corporate tension and also it’s a race issue as well. In a couple of those quarters rates are really scrapping the bottom and competitor rates have gone up, so it’s narrowed the refinance benefit in a lot of our book.
Understood. And then one follow-up on the NIM a little bit. You talked about some of the competitive issues on the deposit side a little bit but you talked about some of the yield side. Can you just kind of talk through any impact in your view as far as which side of the range or the high side of the range a little bit of your NIM kind of guidance over time. How are you feeling about the prospects on that in the near and intermediate term?
I don’t want to start getting yields. I think the guidance is probably as much as I’d like to give. It’s a little bit difficult to start parsing that around but I think we have lots of tools and opportunities. I think the C&I pipelines and volumes are very, very good. And there’s lots of opportunity there it’s an increasing part of the loan mix and it has higher rates. Our ability to raise rates so far on our single and multifamily has been – they’ve been either followed by competitors on time to even higher extent chase raised their multifamily loan rates by a lot more than we did so there may be some room there.
So I think – and then we have some of the higher rate products obviously the consumer side is still pretty nascent, but could be a contributor over time. It’s just going to depend. I don’t want to be overly prescriptive. But I think we have a lot of tools and so far it’s worked out pretty well. And I think that we really believe that we can get into that 380 to 400 range obviously we’re going to work hard to do that. We can’t promise it, but work hard to do that, keep it the rest of the year.
That’s helpful thank you.
Our next question comes from Edward Hemmelgarn of Shaker Investments. Please proceed with your question.
Yes hi Greg. It’s a good quarter what I was kind of wondering about was the talk about again about the loan growth because the page has in terms of balances has certainly slowed down. And you know as your originations have kind of stayed about the same in your prepayments the good news is your loans get repaid, have increased. It’s been kind of stuck in this the range of originations for about the last year now good levels. But it’s –how did we – do you really think that the commercial and industrial is that’s going to? What are you doing there to take advantage of that use of there’s more opportunities there than what you can take advantage of now? I mean what have you done to allow yourself to take more advantage of to really increase that business?
We’ve got a number of personnel additions that we’re looking to make there. And we’ve got quite a few I would say newest sponsor relationships that we’re establishing that we’re doing first deals for. And there’s a lot of good dialogue related to the pipelines of what those deals look like going forward. So I’m very comfortable with that. I think our loan growth has been really where we wanted to be. And if you look through the quarter 16-ish percent for the year I guided to mid teens mid to high teens area so maybe a couple of 200 basis points below what that would look like.
But I think it’s been really good. I think clearly we want to make sure that we maintain our yields and margins which I think there are right. And we’ve obviously got to –we’re thinking about holistically how our growth works and making sure it’s profitable. So I think that having that continuing to keep high credit standards and having that sort of loan growth is really pretty good.
And so we’re not really – I’m not feeling like we need to accelerate that loan growth anymore. And I think it’s in a pretty good place.
No I’m just thinking in terms of I mean to keep on growing 15% to 20% a year something you do right growing the by that amount just to keep growing that way.
What about the consumer part I mean is it – what’s your I know that it’s become more of a focus and you’re starting to generate some loans and things like that. I mean what type of a mix do you think that percentage of your loan portfolio, do you think your [indiscernible] be?
It’s a little bit early to tell. I do believe that it’s not something I think if you’re looking six quarters out, look for that C&I side to get a lot bigger and look for continued growth in multi and single-family. If you start to look out beyond that, you’ll start to see that like all the things that we do all the new initiatives those loans creep up and start to make up a portion of the loan book.
It’s a very early for me to tell because as you know we’ve been very good at when we enter a new loan category making sure that we do a very good job of having control losses and good credit quality. We want to really put that first. So look there’s a ton of opportunity there but I want to make sure that we’re ready for it. I don’t want to go out and speculate what multiple years out what that’s going to look like it’s just too early for that.
Do you think you have I mean is that as you kind of unveil your universal bank offering that should make a major difference in just in how you go out and start targeting consumers…
Sure the overall all the initiatives that we have related to what’s going to happen with the Universal Digital Bank. All of the product offerings and the ability to have control of the platform to have a permanent product team there and then to be able to enhance the marketing that we have to why to push those products through we think is ultimately going to be a very, very powerful driver and significant growth.
And what’s interesting, I think when I sit back and look I feel so comfortable about where we are from a future perspective because we have been so conservative in growing these platforms and really making sure that we do have incredible credit performance. And if we were looking for average credit performance, our loan growth would be double or triple what it is, but we’re not looking for that we’re looking for something much better and we hold ourselves to much higher standards. So, yeah, I think we’re in really good shape. We’re investing a lot for the future and I feel good about long-term growth prospects.
Okay. And Andy just one more question about the – actually there is two more questions. In terms of the – how did the IRA program go?
Yes, from a technological perspective, it went really well. It’s one our first API integrations into a industrial sort of scale processing platform, works very well from that perspective. The take rates were below expectations. We’re not going to give exact numbers on the accounts. We did open thousands of accounts and they were – and it was fine. But it wasn’t – it didn’t have the consumer traction that we were expecting. But from a technological perspective, it works very well.
Do you think that that something is that you can probably increase with just more timely marketing perhaps to the H&R Block providers?
Yes. I mean that will be something that we have to talk with them. And we’ve not done a lot of work on sort of post tax season and post mortem, but there’s a lot of interesting things we’re talking about and there’s a lot of ideas that we’re working through. And I think we’ve got a lot of great opportunities there. So we just have to work through what those are and it’s been a real push to get to tax season and everything turned out really well for the tax season. So we’re going to obviously take a look at that stuff and talk with them about where we want to go with respect to different products and services and see where that takes us.
Okay. And then lastly, there’s a question for Andy. I appreciate your conservatism on the Emerald Advance or Refund Advance loans fully reserving that now. But as the payments I mean or the repayments of those loans pretty much stopped or are you still getting payments on the three million…
Yeah, no, we are getting payments on the amounts. And so, we do expect some more payments between now and June, but as you can see the lion’s share has already happened.
Yes. And so you would certainly expect some losses.
Probably, no. There will absolutely be losses and that was – it is within expectations and we just – we know that they will of course be below 100% of the balance to be reserve for but where that sits. I wouldn’t expect – I wouldn’t count on some big a recovery in the next quarter or something a big reversal of loan loss. There’ll be some reversal, but I wouldn’t be putting a huge amount of reversal in your model for next quarter.
No, no I mean I was just – it sounded like I mean you really have been factored in much for that product and it sounds like that was a very profitable product for you.
Yes, we’ve worked out well.
Worked out very well. Okay, thanks.
Our next question comes from Andrew Liesch with Sandler O’Neill. Please proceed with your question.
Andy, I think you provided with the average yield on the portfolio was, excluding Block, but do you what the average deposit costs were excluding Block from this quarter compared to last?
I don’t have that number.
I’ll follow-up with you offline. And then the lower structured settlements like they just didn’t sell much that all this quarter was that planned or and then what are your thoughts on selling more of them going forward?
Yes, I would say that the market and for originating that product is different today than it’s been over the past. We’re not seeing as many opportunities to originate and sell as we saw in the past. So I would expect that lower structured settlements sales are more of the future.
Got you. And then on the similar lines of mortgage banking presumably that’s going to be lower than it’s been in the last few years as well.
I think we are looking for an improvement in mortgage banking next quarter, given kind of where the numbers came out. It’s clearly was a much smaller number than the quarter before. So we are looking forward to a better mortgage banking quarter coming up.
All right, thanks for taking my questions.
Our next question comes from Austin Nicholas with Stephens. Please proceed with your question.
Hey guys. Good afternoon.
Maybe just on the loan pipeline, I think it was the $909 million that was mentioned. Is that exclusive of the mortgage warehouse lines and is there really any growth off the decline that we saw this quarter that could happen in that business and maybe just try to think about the mortgage warehouse business going forward?
Sure. That does not include – yes, so it is exclusive of that the mortgage warehouse opportunities. That pipeline number has not included those opportunities. There are opportunities for increased and the number of customers in that business, we have very good levels of active negotiation going on. I think there was a pretty difficult quarter for a lot of independent mortgage bankers. There’s an industry layoffs happening and things like that.
So there are declines and balances. Now that being said, I think we do have the ability to take share there, because of the fact that we have a portfolio of products that we can bundle with the agency product and I think we have a good reputation in the market. I think we’ll be able to continue to look for opportunities there. In any quarter though, I don’t expect that we’d have a reduction in balances like we did this quarter though in subsequent quarters. That was – this is a relatively significant balance kind of as a result of that decline in mortgage banking activity.
Got you. Okay, that’s very helpful. Thank you. And then, maybe just on the Las Vegas office and maybe you could provide some outlook for the growth in that office and then maybe how that might impact your tax rate over the next couple of years?
Yes, so the office is being staffed, individuals are being hired in that office. That allows us to accommodate the goal of having a diverse employment base, and also providing a lower cost location for individuals that would like to live in the location like that. With respect to the tax rate side, I think over time, you gradually get to have some benefit as a result of that. I don’t want to overstate what that benefit is.
And I think that clearly any reduction in corporate tax rates that would be legislatively enacted would swamp, what those are. But over time, obviously, when you have a diverse set of employees in a number of different states. Those allocations start to have the impact, but it’s going to be a pretty extended timeframe before that impact occurs. And so we’ll – you’ll start – you might see that, but I wouldn’t be modeling that right now, it’s just – it’s going to be too gradual and too small and occur over many, many years as we would shift employees there over time.
Got you. That makes sense. And then maybe just my last question, what’s the outlook for acquisitions any fee-based businesses or lending opportunity similar to what we saw with the Pac West Equipment Financing acquisition. Anything on the radar or anything – are there are opportunities to be had over the next year or so.
Well, there certainly are opportunities we regularly look at a variety of lending and deposit M&A opportunities that we always have active pipelines. We’re thoughtful on discriminate buyers. As you can see from the acquisitions we’ve made, we’ve done a very good job of getting very good prices for good value. And that’s obviously an important goal of ours. So we don’t want to overpay for anything and that’s something we want to continued to focus on. But yes, we do see opportunities I can’t say that any one of them ends up working out and many of them are competitive, some aren’t as competitive and but we have an active M&A pipeline and we’re always focused on looking for opportunities that enhanced our overall strategic plan.
Understand, Thanks for take my question guys.
The final question comes from Gary Tenner of D.A. Davidson. Please proceed with your question.
Thanks for taking again.
Andy, I wanted to ask just a follow up – just on the sort of sequential flows on the H&R Block side, that memory serves last year. The deposit had a little longer tell kind of stick around little more into the fiscal fourth quarter. So it is a result assume that occurs the same way this year and in fact the margin could be the lower end of that range in the fiscal fourth quarter as a result of the access liquidity nothing offset by those higher yielding loans.
You’re absolutely correct. We will still have some average excess liquidity, obviously less than the impact this quarter. But it still will have some negative impact on next quarter. And so, I think it’s, as Greg articulated we’ve got a lot of good things going on, in terms of loan pricing up, which has a very optimistic that we will be in that range and could be in the higher end of the range. But when you had the extra liquidity that will become that would then post down a little bit. And potentially be at the lower end of that range. So that’s kind of why we’ve guided 3.80 to 4 and you know you’re right on it.
Okay, great, thanks. And then on securities portfolio, obviously the average balance in that portfolio this quarter $100 million to $400 million it’s by far the lowest it’s been as a percentage of earning assets or our total assets. Can you talk about and how you think about that that asset [indiscernible]
Sure. I mean I think we’ve done a lot of work on it, where as you’ll see on a linked quarter basis, the average rate is actually come up on that portfolio. We divested ourselves of lower yielding product and [indiscernible] things like [indiscernible] securities that needed to be sold except. Can you look for opportunities, I would say it’s not going to grow as fast as well [indiscernible] all but we do think that it will be a positive contributor and we will look to grow it.
Okay, and then final question for me, with regards to the accounting change in the impact that a lot of banks have had. On the stock based compensation. Is that something that wasn’t going to you all until fiscal 2018?
And would that be in the fiscal first quarter or calendar first quarter of meeting. It’s cooled quarter, we think the impact will be very, very, very small.
Okay. Thanks guys.
Ladies and gentlemen, we’ve reached the end of the question-and-answer session. I would like to turn the call back over Mr. Johnny Lai for closing remarks.
Great, thanks everyone for your interest and if you have any follow ups please to contact me. Take care. We will talk in 90 days.
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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