Greetings and welcome to the BofI Holding, Inc. Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Johnny Lai, Vice President of Corporate Development and Investor Relations for BofI Holding. Please go ahead, sir.

Thank you, Kevin. Good afternoon everyone. Joining us today for BofI Holding, Inc.’s third 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 nine months ended March 31, 2016, and they will be available to answer questions after the prepared remarks. Before we begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there’ll be an audio replay available in the Investor Relations section of the company’s website located at bofiholdings.com for 90 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 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 third quarter of fiscal 2016 ended March 31, 2016. I thank you for your interest in BofI Holding and BofI Federal Bank. BofI announced record net income for its third quarter ended 2016 of $35,914,000, up 70.4% when compared to the $21,074,000 earned in the third quarter ended March 31, 2015 and up 27.6% when compared to the $28,149,000 earned last quarter. Earnings attributable to BofI’s common stockholders were $35,837,000 or $0.56 per diluted share for the quarter ended March 31, 2016 compared to $0.34 per diluted share for the quarter ended March 31, 2015, and $0.44 per diluted share for the quarter ended December 31, 2015. Excluding the impact of after-tax net gains related to investment securities, adjusted earnings for the third quarter ended March 31, 2016, increased $14.4 million or 66.9% when compared to the quarter ended March 31, 2015. Other highlights for the third quarter include total assets reaching $7.7 billion at March 31, 2016, up $1 billion compared to December 31, 2015, and up $2.2 billion for the third quarter in 2015. Excluding H&R Block temporary seasonal cash assets, linked quarter asset growth would have been $491 million and year over year growth $1.6 billion. Non-interest income was $23.3 million, up almost $15 million year over year, primarily due to the strong fee revenue from our H&R Block partnership. Return on equity reached 22.59% for the third quarter, well above our long term target of 15% or better. Efficiency ratio was 31.66% for the third quarter of fiscal 2016 compared to 34.57% in the second quarter of fiscal 2016 and 34.46% for the third quarter of fiscal 2015. Net interest margin was 3.85%…

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, 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. This quarter ended March 31, 2016 was the bank’s first income tax preparation season since it entered into its August 2015 long term agreement with H&R Block, Inc. to offer cobranded financial products to H&R Block customers. The seasonal impact of income tax refunds received by H&R Block customers this quarter caused an expected increase in the bank’s fee income for the three months ended March 31, 2016, and an expected temporary increase in assets and deposits included in the balance sheet of the bank at March 31, 2016. Excluding the H&R Block temporary seasonal growth, consolidated assets and consolidated deposits at March 31, 2016 would have been $7.2 billion and $5.5 billion, respectively. BofI had a strong balance sheet growth even after excluding the seasonal asset and deposits from the H&R Block agreement. Asset growth excluding the seasonal growth this quarter was 29.4% year over year and 29.5% annualized compared to the last quarter ended December 31, 2015. Similarly, deposit growth this quarter was 25.9% year over year and 23.2% annualized growth compared to the last quarter ended December 31, 2015, after excluding seasonal deposit growth. As Greg mentioned, net loan portfolio growth was $389 million comparing March 31, 2016 to December 31, 2015. This includes the acquisition of Pacific Western bank’s equipment leasing portfolio of approximately $140 million, but it also reflects a seasonal decline in H&R Block related loans, which decreased $55 million between March 31, 2016…

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

[Operator Instructions] Our first question today is coming from Bob Ramsey from FBR.

I wanted to talk about the core margin in loan yields, core margin came in better than we expected. It looks like it’s from those better yields on loans. Can you just talk about what drove that increase and sort of what the outlook looks like?

In a nutshell, single family is flat; multifamily is flat; C&I as a bigger percentage is higher; and the equipment finance business will generally be higher as well. That’s offset a little bit by some. We had a benefit on the deposit side in the prior quarters from the H&R Block acquisition, which is a very low cost fund. So as we grow, there may be some slight increase in deposit costs that would somewhat offset that. But I do think that the loan yields outlook is reasonably strong.

And could you maybe touch on with the new equipment finance business, what loan yields look like in that business and then also sort of what losses or charge offs [indiscernible] cycle?

On the low end, you’ll see some 5%. On the higher end, you’ll see 7%s and 8%s. Their worst year was a 90 basis point hit. It tends to be somewhat sporadic and they’ve had a lot of years that have been in the 20, 30 basis point range. They don’t have no charge offs like we often do, but they do have some, but I think they do a really good job and I think it’s a very good risk adjusted return. They have a nice pipeline; I think we’re being conservative about what they can do and how we can help them grow. So I think it’s a really nice addition and definitely will be accretive to margin even after taking into account their relatively small losses they have historically had.

And I guess kind of putting it all together, the next quarter you’ll have less Block liquidity, it sounds like your loan yields are stable-ish plus you have some lift from the equipment finance and deposit costs maybe tick up a little growth. Does that kind of put you somewhere in the ballpark of 4% or what is kind of the right range for next quarter?

Bob, I think we’re still in 3.80% to 4% range. I would lean to the higher end of that, given kind of where we’re coming out without the Block impact. But certainly in the 3.90%s would be fair.

Our next question today is coming from Gary Tenner from D.A. Davidson.

I just wanted to ask about the sequential quarter increase in interest-bearing deposit costs, 89 bps to 1.02% from the December quarter to the March quarter, was some degree of that pass through of the December rate hike or what were the moving parts that drove up the interest-bearing deposit costs?

So that also includes the CD costs, correct, in terms of looking at total deposits or you’re just looking at checking savings?

No, interest-bearing deposits?

So we continue to build in the brokered CD area an additional duration in our project or in that portfolio. So last year, we had about $300 million of long term brokerage CDs. At this quarter, we have about $500 million, with a weighted average life of 7 years. So we’ve been slowly, but surely building that CD piece. So of this CDs, $500 million really are longer term, 7-year CDs. That’s what’s influencing the cost up as part of it and then the rest would be just incremental growth, growing at a slightly higher rate.

Some of it is – and that’s – some of it pass through, some of the Fed hike as well.

And then Andy, what’s the average rate on that $500 million of brokered CDs?

So it’s approximately – I don’t have that number right here for you. I’ll see if I can get it for you.

Okay, appreciate that. And then I did miss, Greg, I think it was your comment in terms of your expectation for what the first year production in the leasing division, what was that number?

We think conservatively it’s $80 million to $100 million.

Our next question today is coming from Brad Berning from Craig Hallum.

On the H&R Block transaction for the IRAs, I was just wondering if you could expand a little bit more on the vision for that. I wasn’t sure if you could clarify the 100,000 accounts that you were talking about. Is that your business or are you looking for incremental business beyond what they’re doing on their current existing product?

No, so we have an agreement with H&R Block whereby they will incorporate our IRA products into their Do it Yourself software system and into their tax preparation interview process, so that when appropriate based on a tax customer’s needs and whether or not they would benefit from an IRA, allow them to automate the opening of that IRA during the tax preparation process. That is what we’re talking about. That starts this next tax season. And the 100,000 was simply commenting on the fact that they’ve been able to historically generate a lot of IRA accounts as a result of that process. So the way we view that is a great source of customer acquisition, not only obviously for the IRA balances which we believe are nice long term sticky and relatively low cost deposits, but also because we think that if we catch the customers at a time they’re coming in, then we have other good products to sell them like our checking account which has no overdrafts [indiscernible] reimbursement, things like that. So that’s what we’re hoping to do and we have a path for that. And that systems integration is ongoing. So the team, the operational teams at the bank and H&R Block are working together to bring that to fruition for the next tax year.

And then on the CD, longer term CDs that you’ve been adding, can you talk about the interest rates, kind of strategic view that you’re taking, how much are you pushing your liability sensitivity?

Sure. Like I say, we’ve moved the weighted average life of about $300 million and we’ve increased that balance to $500 million. In that increase year over year, we have extended from a 5-year weighted average life to a 7-year weighted average life. So I think the basic philosophy is, of course, we do expect rate hikes to continue to march upward where it’s important for us to fix some rate as rates rise. And we like using the brokered deposit mechanism. $500 million is only a portion of our $900 million in CDs. And it’s really not a huge piece of our $6 billion in deposits at the end of the period, but it allows us to help manage our interest rate sensitivity. And what’s great about it, it doesn’t require collateral other types of borrowings require. Collateral brokered CDs can’t be prepaid and our effective tools for extending liabilities.

Real quickly on the universal digital banking model, you talked about the investments you’ve been making for the last couple of quarters, can you talk a little bit more about what you’re seeing from an opportunity set? What kind of timeframe should we be thinking about that you’re thinking about going to market per se on bringing that model to vision?

Let’s talk a little bit about what the model is and its components and I’ll talk about the timing. So our view is that we need to control our technology stack that faces to the consumer. And then in that technology stack, we want to be able to personalize the banking experience for those customers by providing value added products inside the online banking experience. So that might mean by way of a use case that parents would be able to have debit cards issued to their children where they will be able to have special control over those debit cards that would be available through their mobile phones, right. And the idea is that we’re able to develop that type of software quickly, deploy it quickly, test it, see if it gets traction and give the customer a choice of whether or not they want to use that particular application at the bank. And so there is a platform that has to be developed, the online banking platform, there is one for business that has to be developed and then there’s also a set of products. And I would say that maybe the best way to think about what those products would be is to look at externally to a lot of the [FinTech] companies and look at a lot of the model line products that they’ve developed, whether it’s robot advisor, a consumer installment lending, those sort of products. We see those products as being most suited for cross-sell personalization opportunities where the ability to sell a consumer installment product would be based on an understanding of the customer’s history of direct deposits with the bank as well as an understanding of what the credit bureau said about their credit card balances. And so we think that a…

Just to be clear, you’re already seeing tangible benefits on the expense side more so than the revenue side at this point, but looking for over time to drive more on the revenue side?

That’s right. I think the only thing that’s so far from a software perspective has been the online enrollment piece, which is a significant benefit. And that benefit comes from a reduced cost associated with the software acquisition, the cost associated with the spend on an outside provider to process those accounts. But yes, you’ll – obviously the end result is you sell more loans of different types to your customers. You get greater deposit stickiness because those customers engage with you because they have strong value to your platform. They like your platform and they stay with you. And then over time, we actually think that we have a strong ability to reduce cost by doing this as well. For example, we signed – there’s a lot of sub-agreements for example for things like bill pay and our bill pay cost with the sub-agreement we signed is about 40% lower per bill pay than we’re currently paying, which is a significant saving. So over time, at scale, I do think you get savings out of this, but you have expenditures and investment over the next several years that we feel comfortable at the 35%, but we would be able to drive that down much lower if we weren’t focused on the future as much as we are.

Brad, if I can interrupt, I did get the number, since you asked in both I believe Gary asked on the brokered CDs, what the rate was for the 7-year weighted average life and it’s actually a 3% number. So of the average balance in the quarter which was approximately a grand total of $847 million, $500 million is at 3%.

Our next question today is coming from Edward Hemmelgarn from Shaker Investments.

Could you talk a little bit about what your intentions are to grow some of the existing loan originations area, as you – I know it says your balance and your overall size of the bank has increased, some of these have stabilized at a certain level, like mortgage originations and multifamily, how can you develop these areas to add more people and to grow the businesses in a way that will keep pace with the overall size of the bank?

That’s a great question, Ed. So in each of those areas, they have strategic plans that are focused on continuing to scale those operations. In each business unit, there is a unique answer to each question. I do think that in some cases I’ll take each business unit and provide a commentary on each one. On the single family agency side, our primary issue with growing more quickly has been capacity and we’ve been more circumspect about having that capacity because there is some variation in demand. So we have plans to open a location in another state that will give us access to a greater number of individuals who can work with us. There is some really neat software that we think we’ll have in by next year on the single family side, it’s going to make the process from a retail perspective a lot better. We also have opened the wholesale agency channel and are just starting to get that going. So from the agency perspective, we do have opportunities there. And also we still haven’t really gotten just given everything that we’ve been doing really crack the H&R Block cross-sell area on the mortgage side. So we think that on the agency side will make a difference. The jumbo business is about growing both the retail and the wholesale component of that. We added someone to focus on that retail side and they’ve been doing a good job there. So we have a number of data initiatives that are going on there that we think will bear fruit. The multifamily side, partly it’s geographic expansion on that side. It also is a reflection, our numbers there are a reflection of a conscious choice that the yields and the risk profiles there have gotten to the point where…

Is there any areas that you’re looking at where you can make investments in that will offer opportunities to capture appropriate returns, but also outsize growth, I mean, similar to what you’ve done in the jumbo mortgage area by offering – being willing to look at a – more detail of the borrower, or a specialized niche like well let’s say that something like those [indiscernible] in their commercial construction area over a long – took over a long period of time...

Yeah, definitely the growth area that we’re talking about, C&I I guess now, we’ve been at it for long enough that you can put it in that category. There’s an incredible set of growth opportunities there from a standpoint of just working on the bridge lending group, the lender finance group, the factoring business, the equipment leasing business. That business will have a lot of verticals that will be able to grow assets in a very productive way. We actually do end up seeing Bank of the Ozarks in the cities in which we are comfortable. So we’ll see them every now and then competing on deals in Los Angeles and those sorts of things. So we do have a group that does some of that where we’re not as broadly spread as they are in the markets that they’re in. But so, yes, there’s great opportunity there. And I also don’t mean to say that there’s not a strong opportunity in the single family side or that in the small balance commercial real estate side. I think we do have robust growth plans there and I think we’ll be able to continue to grow those originations over time. But what we’ve really done is we’ve made sure that we don’t sacrifice yield or credit quality and we left the origination volumes fall where they need to in order to have both of those two primary goals met and so sometimes what that means is we’re expanding in other product sets to make sure that we’re keeping our yields and that we’re also maintaining credit quality.

Our next question today is coming from Julianna Balicka from KBW.

I had a few follow ups, some of the topics have already been raised. One, in terms of the brokered CDs that you have been layering on, how should we think about additional growth in that line, maybe additional extension of duration and/or just more 5-year, 7-year CDs in the next few quarters, is there a target mix that you’re looking for?

Yes, we’re layering on about $30 million a quarter is probably the going forward from this period, it’s about a way to look at it.

And is there a way to think about what is your execution for how much of [indiscernible] cost of deposits that would have couple of basis points, a quarter of 5 basis points, how should we be thinking about the expansion in the rate there?

So I think it’s going to be relatively small in terms of the incremental impact going forward from here for that piece because $30 million at 3% on average isn’t going to move it all that much in terms of a basis point or two. But as we look at all the deposit movements across our board is the Block deposits leave and we look at growth in those other opportunities, I don’t see us necessarily doing an outsized portion of that, but I would just use $30 million at 3% for the next couple quarters.

And then skipping over to expenses, in terms of expenses this quarter, what was the dollar amount that you can directly associate with H&R Block products and business line?

So we what we try to do is guide very specifically towards the forward number, Julianna, so that people can get right to what we’re thinking the remainder of this fee income will be in the quarter coming up. So we’re thinking $16 million is the net income, 18% of that will be realized in the next quarter and so that’s about $2.9 million after-tax. Before-tax, that’s around $5 million of the fee income. You layer on about another $2 million of our regular bank fee income and you’re looking at bank fee income with that coming out at about $7 million for next core. But then there was a quite significant amount of cost in the other G&A line that was attributable directly to our share of origination expenses of the Emerald advance loans. So for example, other G&A was about $1.2 million of expense was one of the elements of that. Now, we don’t expect that going forward because that related to the Emerald advance and we expect the expenses to be light going forward. But I think if you’re looking at what’s left on the Block agreement for the balance of the quarter for June 30, I would guide to that way.

Looking at it from the expense side, if I were to try to think about what were the components of your expenses this quarter, some component is your regular operating expenses of both the ex-H&R Block, some of those are directly related to H&R Block, it’s something to think about for next year? What is a dollar amount associated with the fee income that you’re generating? And thirdly, what I was hoping to get at was also in terms of the investment savings you’ve been talking about, what is the dollars that you have going on this quarter that you could pinpoint as infrastructure investments growing the business because I’m trying to think about your efficiency ratios dropping back down to 34%, 35%, I mean back up to your regular long term efficiency rate with a higher investment spending, yet no fee income from H&R Block, so I’m trying to reconcile those two?

I would say that I think the best way to reconcile it is to utilize the guidance that we have that we think without – it’s not without H&R Block, but you should – we’ll see fee income that we expect to get from H&R Block next quarter and then in successive quarters based on the fact that we’ve made a lot of these investments already and frankly there’s a lot of opportunity for those investments to and all the people that we have to get more efficient, do more projects. You should utilize 35% as the efficiency ratio. Take the guidance that we provided on the revenue and that will provide you the numbers that you require to understand what the approximate costs are from the investments that we’re making in IT infrastructure and those sort of things. And the good part of that is a lot of that is already here. It doesn’t mean that we don’t need – we won’t continue to grow, but we’ve done a lot of work in bringing people on and working on the sort of things that we need to do to make our vision come alive.

So rather costs are already in the run rate, okay, that makes sense. And one more question – a couple more questions real quick. One, in terms of the markets in which you’re originating and growing your loans, any particular areas where you are getting more cautious or pulling back [indiscernible] number of banks have talked to bit more cautiously about loan growth. So given your national footprint, maybe you can talk about what you are noticing as to good points from the low points of the marketplace?

I think that in the areas that we originate single family loans which are really gateway city type markets, we’re seeing in some of those markets a little flattening out of home prices and our loan to value ratios and where we are, we’re not seeing anything at all that would be remotely troubling. And frankly we like to see that because we don’t want to see continued price appreciation like we’ve seen as we look at our values in our portfolio and continue to see the collateral increasing in value so much. And then on the other side, the multifamily side has just gotten very competitive in some cases and we see some banks from a structuring perspective moving to some IO products and some things like that and there is a lot of non-recourse out there on the market. We generally don’t do much if any non-recourse multifamily loans. So those are some areas that we see a little bit. Clearly, there’s some areas where the capital markets have foreclosed opportunities for certain companies. Obviously the energy sector is one of them, but there’s others that have fallen little bit out of favor. And then there’s some securities opportunities that have arisen in some cases as a result of that. But I think on the C&I side for us, we don’t see anything that is troubling. And the equipment leasing platform that we have, we’re obviously not going to be doing deals in the energy sector unless there’s something special of fully collateralized letter of credit or something that would completely mitigate any risk that we’d have associated with that. So that’s really what we see right now.

And final question and I’ll step back, in terms of [indiscernible] situation and I apologize if you’ve addressed this in your remarks, but [indiscernible] using, so could you clarify it for us in the conference call about the scope of this one appraiser firm, it’s got multiple employees and sub-contractors et cetera, so can you just give us some clarification if you’re able to...

So there was this comment about one of the appraisal management companies we use, so yes, the gentleman that was mentioned and incorrectly stated as having done the majority of our appraisals or some drivel like that, that’s not close to being correct. We use appraisal management companies to perform our appraisals. After those appraisals, management companies perform the appraisal. The appraisal was subject to a review by another qualified appraiser who reviews that appraiser’s work. And in the case of the Flynn Group, the Flynn Group is a group. He does appraisals on his own. He has appraisers who work for him and he has a software that gives him access to thousands of appraisers. He is well known in the market as an incredibly conservative appraiser and the appraisals that were mentioned in that frivolous suit are demonstrative. I’m not going to give out confidential information, but it is public information that that property that they were quibbling about the appraisal value their input in the lawsuit sold for $33 million and you can look that up. So that was I guess not within 18 months of an appraisal that was 60% lower than that value. And then the other property sold within 18 months for about 40% more than that allegedly high appraisal that was made. Our appraisal management practices are very strong. There’s nothing unusual about our practices. In many cases, banks have their own appraisal panels, where appraisers actually are employees of the bank. That would be the way Chase performs their multifamily appraisals using their own employees. So in this case, it’s just an appraisal management firm. We use a different appraisal management firm for single family and that’s just – and I would be cautious in assuming that even if something is in that lawsuit that that is actually what someone actually said. I just think I’m not going to say more than that, except to say that when I said the statement about it being riddled with fabrications and consistencies et cetera that was an understatement of just how inaccurate that is. Those stories are complete fabrications and leave out so many facts that render them to be complete, render the reader to have a completely different impression of those transactions than they otherwise would have. And I’d also note that if the best you’ve got after harassing our employees for all this time is that you’re picking on a property that’s sold for 40% more than what they are arguing was what the value was and then another one that sold for the $33 million where they gave out the borrower’s address that isn’t itself demonstrative of the credit quality that we have if you needed further evidence of that by obviously all the charge off ratios and all that stuff. So no, there’s nothing unusual about any of that. It’s all standard and we have very strong appraisal practices and very strong appraisal review practices.

Our next question is coming from Andrew Liesch from Sandler O’Neill.

Just one follow up for me on these brokered, Greg, do these have a similar or same breakage penalty as the brokered that you had in prior years?

You’re talking about the broker CDs? They have a [indiscernible]. So unless you’re actually willing to pass away, you don’t get to take your money out which is one of the benefits of those because it’s impossible to charge a consumer that sort of prepayment penalty and get that kind of duration. So they really are almost a substitute for borrowing from a standpoint of the certainty around their duration without the collateral.

Our next question today is coming from Gary Tenner from D.A. Davidson.

I had one quick follow up on the Emerald unsecured or excuse me, Emerald advance loans, what was the balance that you guys had left as of March 31?

So we had about $4 million, a little over $4 million.

So almost paid all the way down. And what was the loss experience like in that book relative to your expectations?

So the loss experience we booked for reserve was two and a half based on Block data and their history. It looks very close like it’s going to come in right at that over time. So we’ll see over the next quarter how that works.

Thank you. We’ve reached the end of our question-and-answer session. I’d just turn the floor back over to Johnny Lai for any further closing comments.

Great. Appreciate everyone’s interest in BofI. If you have any follow up questions, please contact me and we will speak to you next quarter. Thank you.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.