Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BofI Holding, Incorporated Second Quarter 2016 Earnings Conference Call. For today's presentation, all parties will be in a listen-only mode. As a reminder, following the presentation, there will be a question-and-answer session. [Operator Instructions] This conference is being recorded today, Thursday January 28, 2016. I’d now like to turn the conference over to Johnny Lai, Vice President of Corporate Development and Investor Relations for BofI Holding. Please go ahead, sir.

Great. Thanks, Jessica. Thank you, and good afternoon, everyone. Joining us today for BofI Holding Inc.'s second quarter 2016 financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and six months ended December 31 2015 and they will be available to answer questions after the prepared presentation. Before we begin, I’d 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. Therefore, the company claims the Safe Harbor protection for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of BofI Holding, Inc. and its subsidiaries can be identified by common forward-looking terminology and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in the company's filings on Form 10-K, 10-Q and 8-K with the SEC. 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 bofiholdinginc.com. Details for this call were provided on the conference call announcement and in today's press release. At this time, I’d like to turn the call over to Mr. Greg Garrabrants, who will provide opening remarks. Greg, the floor is yours.

Thanks, Johnny. Good afternoon, everyone and thank you for joining us. I’d like to welcome everyone to BofI Holding's conference call for the second quarter of fiscal 2016, ended December 31, 2015. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for its second quarter ended 2016 of $28,149,000, up 45.3% when compared to the $19,372,000 earned in the second quarter ended December 31, 2014 and up 10.4% when compared to the $25,501,000 earned last quarter. Earnings attributable to BofI's common stockholders were $28,071,000 or $0.44 per diluted share for the quarter ended December 31, 2015 compared to $0.32 per diluted share for the quarter ended December 31, 2014 and $0.40 per diluted share for the quarter ended September 30, 2015. Excluding the after-tax impact of net gains related to investment securities, adjusted earnings for the second quarter ended December 31, 2015 increased $8.3 million or 43.1% when compared to the quarter ended December 31, 2014. Other highlights for the second quarter include: total assets reached $6.7 billion at December 31, 2015, up $403 million compared to September 30, 2015 and up $1.5 billion from the second quarter in 2015. Return on equity reached 18.81% for the second quarter, well above our long term target of 15% or better. Efficiency ratio was 34.57% for the second quarter of fiscal 2016 compared to 33.25% in the first quarter of fiscal 2016 and 34.55% for the second quarter of fiscal 2015. Net interest margin was 4.10%, an expansion of 8 basis points over the first fiscal quarter and 25 basis points higher than the second quarter of the last fiscal year. Capital levels remained strong with tier 1 leverage of 9.34% at the bank and 9.75% at the holding company. Credit quality continues…

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. For the quarter ended December 31, 2015 the net interest margin was 4.10%, up 8 basis points from 4.02% in the quarter ended September 30, 2015, and up 25 basis points from the 3.85% in the quarter ended December 31, 2014. Our average loan yield was 5.14% for the second quarter of fiscal 2016 compared to 5.02% in the first quarter of fiscal 2016 and compared to 4.93% in the second quarter of fiscal 2015. The primary driver of the year-over-year improvement in loan yield was growth in our C&I lending portfolio, which was higher yield than our overall loan yield. On the funding side, our total average deposit rate at the end of this quarter was 73 basis points, including the impact of non-interest-bearing, that's down from 78 basis points at the end of last quarter and down from 81 basis points at the end of December 31, 2014. The improvement was helped by the inclusion of IRA deposits from the H&R Block transaction as well as other increases in non-interest-bearing deposits. Shifting to the balance sheet, stockholders’ equity increased by $79.8 million or 15% to $613.3 million at December 31, 2015, up from $533.5 million at June 30, 2015. The increase was primarily the result of our net income for the six months ended December 31, 2015 of $53.7 million as well as the sale of common stock of $21.1 million and vesting and issuance of RSUs…

Great. Jessica, we’re ready to take questions.

[Operator Instructions] We’ll go now to Bob Ramsey with FBR.

Just sort of want to touch on the net interest margin. I know you highlighted that C&I was a big piece of the uptick in loan yields. Just kind of curious if there was anything else in there, either interest recoveries or prepayments or anything that sort of moves around and how you’re thinking about the trajectory, and was there sort of more mix of C&I this quarter than we can expect to have in future quarters, or how you’re thinking about the margin and loan yields?

Yes, Bob, and very good point. During this quarter we did fund $42 million of Emerald advance loans at a higher rate. The impact of the Emerald advance loans was approximately 10 basis points on our net interest margin. So we would've been -- without those loans we would remain closer to 4%. So as we look forward into the next quarter we guided that ultimately we would be coming down as a result of two things: reduction of debt balance but also having increased liquidity. That guidance generally put us at a 20 to 30 basis points lower, which is about at the lower end of our range, which is about 3.80%. And again that would just be for the next quarter. And what that does mean is that the balance sheet is going to increase significantly with deposit cash most of which will be capped at the Fed. I think it’s almost going to be around $1 million of earning -- extra earnings just from that extra cash alone. But that will reduce the net interest margin and decrease the bank’s capital ratios for that temporary cash balance.

So the way to think about margin next quarter would be that, the cash balances mainly pull the margin down but they would not have – I guess would have a very modest positive impact on net income, it’s not a drag even a marginal pull on there –

That's right, that’s right. It should – it’s around we estimated if prior years are similar to this year, which they seem to be going that way, it’d be about a $1 million of extra income on that cash. That’s the pre-tax income.

And then in the fourth fiscal quarter, the June quarter is like cash goes back away and the Emerald balances are a lot lower. Are you back kind of around 4% or somewhere in the 3.80% to 4% range, it’s hard to say exactly –

I think we will stick with that 3.80%, 4% range. We had a really nice C&I growth this quarter, a lot of that happened at the end of the quarter, just on the nature of the closings and how those deals went. So there is some benefit from an uptick perspective there. But I think that it’s probably just best to stock with that guidance in the 3.80% to 4% range for that quarter ending June, our final fiscal quarter of our 2016.

And then in terms of loan growth this quarter, it seems like the end of period growth was a lot stronger than the average. I am just curious if that was skewed by warehouse end of period balances or whether growth overall was more back end loaded in the quarter or how we should think about this – the discrepancy there?

I know a lot of the C&I loans ended up closing more towards the end of the quarter. I think that were there any other areas that had –

Warehouse growth was primarily at the end of the quarter as well, as is typical of warehouse and warehouse growth was larger than normal. So yes, you are absolutely right. There was more growth at the end – frankly in the last two or three weeks than on average.

And then lastly I want to touch on -- I will give someone else a chance, but as expenses, they came in a little higher this quarter than I was sort of looking for anyway. I know you highlighted in your prepared remarks that some of this has to do with investment in the banking platform and you’re still under your longer term 35% efficiency. How should we think about expense trajectory as we head through the rest of 2016? Do you all anticipate being closer to that 35% mark than maybe you were in 2015?

I think if you take out the impact of the Block income surge next quarter, I think that probably guiding around 35%, it makes sense. But clearly we've guided to that -- the income range for Block and with 70% of that income coming next quarter, we wouldn’t expect a spike in that expense. And then additionally was it 800 something of extra expense –

Yes, 700 -- in this quarter in other G&A was $700,000 associated with the Emerald advance, that will be terminated as the advance hold off. So that won't be recurring. But we will have some other expenses. So some of it was due to Block, as we always guided that there would be variable incremental expenses associated with the Block transaction.

And then that was basically our share of origination expenses, essentially for what we capped.

And as far as Block in the next quarter, the revenue piece, I know you talked about, but there is an expense piece that goes with it, it follows the same seasonal pattern as revenues, right? I mean they are pretty well matched proportionately through the year, right?

So there are some differences and what we've guided is 70 as Greg had in his prepared remarks – 70% to 75% of the net income we expect to be generated in Q3 which is the March 31 quarter. And to refresh what net income guidance was, net income guidance was $13 million to $16 million for the entire year. So think about 70% to 75% of the net income coming in in Q3. So there are some lopsided expenses you'll see – you saw a little bit higher loan-loss provision this quarter. And so it is relevant but the way to think about it is 70% to 75% of the net income will hit in Q3.

And 75% of the 16 million, it’s about $0.18 of earnings –

We said 13 million to 16 million, so that 13 million to 16 million doesn’t mean that it’s 16 million, it means that we don't know and it could be 13 million and it could be 16 million. So it’d be better to use the midpoint rather than pick up the upper end of the range. I think 70% too is where – the first goal was 70%.

So maybe more like $0.15 of EPS from Block. Okay, thank you guys.

We will take next question from Julianna Balicka with KBW.

How are you? So a little bit more questions on the H&R Block. In terms of the Emerald advance that you funded at $32 million, that you just said in the fourth quarter earnings - in this past calendar quarter. What is the duration of those loans, are they still on your books, they've gotten paid off, when in the quarter did you fund those?

They are primarily funded in November, and the majority of them will be done and over by March.

And then in terms of quarter to date, where you had a one month of tax season already under your belt. What has been in the transaction volume on the recent transfers that you have been processing on behalf of H&R Block?

We have no change in the guidance that we previously provided with regard to anything related to that.

All right. And then, I'm asking for change to guidance and saying how is the tax season going this quarter –

I think that frankly there is obviously we need to ensure that we’re thoughtful about what we provide to people based on the fact that that obviously there's impact to partners based on those sort of disclosures. So what we are saying is that and the only thing we’re going to be talking about is that that $13 million to $16 million of revenue that we guided – I think net income I apologize –net income that we guided to previously when we first announced the transaction, we don't feel that there is a need to update that number based on any information that we've seen to date.

And then back to the of Emerald Advance loans. Is there any additional dollars that you've been funding so far that you’re expecting to fund this quarter on top of the $42 million from the fourth quarter?

It would be -- not anything of any significance.

And then as we continue to think about the losses on that those loans, should we thinking of an increase in the charge-off operations this coming calendar quarter or I mean what's your sense there?

Yes, there is a possibility we will see how well we’ve provided in that process and based on those on that data. But thus far it appears to be operating exactly as planned. So we think we’re well within -- within the reserves that we set out from what data we have today. That might change, we don’t think it will. We don't think if it did, it would be anything of any materiality. But when you have no charge-offs though, any increase would be more than what you have.

Sure, so you’ve provided for anticipated charge-offs to the extent that there is going to be charge-offs from this –

Yes, correct and there will be some.

So how much of your provision this quarter related to Emerald Advance?

So if you look in the Q under the other assets, other loan category you'll see $2 million that’s provided, that’s primarily for Emerald Advance.

Very good. Thank you very much. One more question, if I am still on the line. In terms of the tax income [indiscernible] next quarter, what tax rate should we be applying to that?

We think that it’s okay to apply a 41.7% tax rate to that.

So the same tax rate as the rest of your income?

Yes, that’s where that is right now.

We’ll go next to Andrew Liesch with Sandler O'Neill

Just one follow-up, you covered the rest my questions. Banking service fees and other lines, kind of curious, what the geography of that is, so I would imagine some of that increase is from Block products, just kind of curious [indiscernible] that $6.3 million?

So the banking service fees include prepaid, so that includes the impact of the Emerald card, and just as a reminder, the Emerald Advance gets loaded on the card. So there is increased prepaid card activity in this quarter.

And then that should continue again in this March quarter until these balances are trade off?

Correct, as amounts get loaded from tax refunds, yes.

We’ll go now to Gary Tenner with D.A. Davidson.

Good afternoon. Just couple of quick questions. First, Andy, credit that you referenced as having been refinanced out of the bank post quarter, which category was that again, I didn't quite catch it?

So it is the C&I loan. You will find it on the classified assets schedule as a special mention of $9 million. It was there last quarter. And at the point in time December 31 it was also there but in January it fully paid off with no loss and all recovery of past accrued interest. So that benefit isn’t even reflected in our strong numbers already.

Okay. There was some interest recoveries, on that that, there will be reflected here in March quarter?

No, it was always – the interest was always paid currently there but because -- we were always within borrowing base on that but the company had a couple money-losing quarters, we classified the loan, we were in borrowing base the whole time. But that loan paid off. So it is a reflection of the quality of the C&I book, really more than anything else. That loan was always current and it was always within borrowing base It was a back leverage of back to receivables but the company wasn't doing as well as it could have been and had some negative income quarters and it got paid off.

And then if my numbers are right, just looking at the wonder finance or single family wonder finance loans, looks like they increased from September 30, somewhere near $100 million, is that correct?

Sounds about right.

So, I mean that's roughly a 33% sequential quarter increase and it's pretty meaningful contributor to the net growth in the quarter. So can you kind of comment on that business, how aggressively you're trying to grow it, how large you’d have it be potentially relative to overall portfolio?

We think that's a great business. We like it a lot. We've been involved in it for a long time and we see our relationships growing with some of the largest players in the industry. And so one aspect of that business is the timing of draws can also impact growth. So you often have lines that are set up and they may be drawn partially and then as the utilization increases you have increase in balances. And so those lines go up and down. So we really like that business. We think it’s a very safe and strong asset class and we have some really fantastic industry-leading partners in that area both on the origination side but also in subordinate positions relative to the bank.

We’ll now take a question from Don Worthington with Raymond James.

Wanted to pursue the gain on sale on other line. How much in there was sales structured settlements?

So structured settlements were approximately $2.9 million of that total.

And then what are the premiums on those these days?

We’ve never really given complete color but it’s obvious that they are a lot wider than mortgages for that, so.

And we’ll take our final question from Julianna Balicka with KBW.

I have a follow-up on your average balance sheet. One, and I am sorry if I missed this earlier, on your non-earning assets, what was the fluctuation this quarter once you come back down? And then, in terms of your FHLB advances are higher this quarter and the end of the year at $700 million and change, should that continue to come down into the next coming quarters since your seasonal tax saving deposits will be offset with cash?

Let me cover the first question and make sure we’re locked in. That increase is relatively small like $17 million thereabouts on the – I mean, look at where you are. So 68 million to – yes, we will have to – Julianna, I will have to take that offline and give it you. I am not sure what the difference is.

Okay, that's fine. And then on FHLB advance, should we just continue pursuing [ph] and they’re going to go down from end of the year balances, you may not need them for funding or how should we be thinking about the fluctuation of FHLBs?

On the advance, we would expect that depending on loan growth to be likely similar for that level. And just reflecting on the non-interest-bearing, most of it is likely Block cash that we have on the balance sheet for that but we will take a look and make sure we give you a good clear detail on that.

Okay, that makes sense. And then, one more question on the company macro [ph], the $13 million to $16 million net income for the year that you are guiding to, does that include all the moving parts of H&R Block, including the incremental $1 million you'll be getting from the cash offering, seasonal deposits, the incremental interchange fees from the prepaid cards or is that related just simply to the transaction -- transaction volume?

Julianna, I am going to repeat a little bit because it got – I am sorry, it got a little choppy. But your question was whether or not the $13 million to $16 million of after-tax income included the benefit from the million dollars of interest income we expect to earn from the deposit balances, as well as the cross-sell income or was that – or something else?

The interchange from the prepaid cards.

So, it definitely includes the interchange in the prepaid cards and it doesn't include the benefit of the cash and that wasn't something we didn't know exactly what that would have been. It would have been lower without the rate increase and so that would be incremental money on top of the $13 million to $16 million, the 70% that we’re estimating next quarter.

And it includes the net income from the loans, the Emerald Advance loans.

Yes, it includes the net income from the Emerald Advance loans, it includes all income from – it includes all income from the three products, all the direct income, the interchange, any fees, any Emerald Advance income and any refund –

As well as the deduction of the provision for loan loss.

I’d like to now turn the call back to Greg Garrabrants for any closing remarks.

We have one more question I believe. If we can open up the line for the question. Can you open that line for that question for Edward Hemmelgarn please.

Certainly. Go ahead Edward, your line is open.

Greg, I just had a couple of questions. One, where do you show the originations for the Emerald Advance? Is it in for loans to be sold or is it for loans to be held? Since you're only holding 10% of it, how do you –

It’s in -- 90% of the volume is shown as originations for sale and 10% is shown as originations for portfolio. So we booked $42 million which means about $370 million or thereabouts got booked as originated for sale.

Did the loans that you're holding show up in the other?

Yes.

So, we should expect a drop of about $42 million there or plus whatever you add in the –

Correct.

And lastly, what was the pipeline at the end of -- or for the quarter or at the end of the quarter, I guess?

The pipeline that we gave you today loans – it’s about 877 million.

Congratulations on a good quarter. End of Q&A

Well thanks very much. Everything is going very very well and it was sort of interesting as there is some noise outside. But inside everything is great. So we’ll just keep on performing and the market, we’ll have to do what the market does. Thanks Ed. Operator, if you could close the call and thank you very much for everyone’s time and we’ll talk to you next quarter. Thank you.