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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the BofI Holdings Inc. Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Johnny Lai, Vice President of Corporate Development and Investor Relations.
Thank you.
[Operator Instructions] I would now like to turn the conference over to your host, Johnny Lai, Vice President of Corporate Development and Investor Relations.
Thank you. Good afternoon, everyone. Thanks for your interest in BofI. Joining us today for BofI Holdings Inc.'s Second Quarter 2018 Financial Results Conference Call are: The company's President and Chief Executive Officer Greg Garrabrants; and Executive Vice President and Chief Financial Officer Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the 3 and 6 months ended December 31, 2017, and they will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward-looking statements contained in the Private Security Litigation Reform Act of 1995. The call is being webcast today and there will be an audio replay available in the Investor Relations section of the Company's website located at bofiholding.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. At this time, I would like to turn the call over to Greg for his opening remarks. 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 Holdings conference call for the second quarter of fiscal 2018, ended December 31, 2017. I thank you for your interest in BofI Holdings and BofI Federal Bank. BofI announced net income of $31.7 million for the fiscal second quarter ended December 31, 2017, down 2% from the $32.3 million earned in the fiscal second quarter ended December 31, 2016, and down 2.2% when compared to the $32.4 million earned in the prior quarter. Excluding the onetime revaluation of the deferred tax asset value with reduced reported net income by approximately $8 million in the second quarter of fiscal 2018, our net income would have been $39.7 million for the quarter ended December 31, 2017, up 23% from the same period a year ago. BofI's return on average assets of 1.49% and return on equity of 14.37% for the second quarter of 2018 were similarly impacted by the deferred tax asset charge. Earnings attributable to BofI's common stockholders were $31.6 million or $0.49 per diluted share for the quarter ended December 31, 2017, compared to $0.50 per diluted share for the quarter ended December 31, 2016, and $0.50 per diluted share for the quarter ended September 30, 2017. Excluding the deferred tax asset charge, our non-GAAP earnings per diluted share would have been $0.61 for the second quarter ended December 31, 2017, a 22% increase from a year ago. Other highlights for the second quarter include: ending loan and leases increased by $361 million, up 4.8% on a linked quarter basis or 19% annualized from the first quarter of 2018; total assets reached $8.9 billion at December 31, 2017, up $334 million compared to September 30, 2017, and up $0.7 billion from the second quarter of 2017. Net interest margin was 4% for the quarter ended December 31, 2017, up 13 basis points from 3.87% in the first quarter of fiscal 2018 and stable compared to the 4% in last year's second quarter. Loan yields increased 24 basis points year-over-year to 5.38%, reflecting higher yields on newly originated single-family jumbo mortgages and multifamily loans, a favorable mixed shift towards higher-yielding C&I loans and higher interest rates on H&R Block seasonal loans. Our net interest margin benefited from H&R Block seasonal loan products originated in the December quarter. Without the effect of H&R Block seasonal loans, our net interest margin would have been approximately 3.92% for the second fiscal quarter of 2018, approximately 4 basis points higher on a comparable basis in the second fiscal quarter of 2017. Capital levels remain strong, with Tier 1 leverage ratio of 10.26% at the bank and 10.26% at the holding company, both well above our regulatory capital requirements. We took steps to redeploy some of our excess capital this quarter, buying back 28 million of common stock at an average price of $28 per share. As we previously stated, we believe that a 9% Tier 1 leverage ratio makes sense for us. On a capital base of $874 million at 12/31/2017, and a $40 million cash holding above our target holding company cash levels, we have approximately $144 million of excess capital that we can return to shareholders through buybacks and/or a cash dividend if we decide to reduce our Tier 1 leverage ratio to 9%. Furthermore, if you take our current consensus analyst EPS estimate of roughly $3.10 per share for fiscal 2019, and assume that we grow assets by 15% next year, we would generate an additional $80 million of excess capital in fiscal 2019. This is a truly illustrative exercise to help quantify the significant amount of potential excess capital we may have over the next 6 quarters. It should not be construed as any guidance that the company is providing from an earnings or asset growth perspective or providing guidance on a particular method of capital return, or the presence or absence of acquisition opportunities that we might pursue with our excess capital. Our return on equity was 14.37% for the second quarter of 2018 compared to 17.49% of the corresponding last year -- period last year, reflecting the bank's year-over-year increase in capital levels and the onetime deferred tax asset reevaluation this quarter. Excluding the onetime tax valuation charge and considering a full quarter's impact of our share repurchases, return on assets and return on equity would have been 1.87% and 18.54%, respectively, for the quarter ended December 31, 2017. The pro forma deferred tax adjusted return on assets and return on equity were benefited by a lower federal and state income tax rate of approximately 29% to 30% in the second fiscal quarter of 2018, which is around the long-term tax rate we will be expecting to pay beginning with the 2019 fiscal year. Our credit quality remains strong, with 3 basis points of net charge-offs and a nonperforming asset to total asset ratio of 44 basis points this quarter. Our allowance for loan loss represents a 152.1% coverage of our nonperforming loans and leases. While we have a small number of loans to borrowers secured by real estate properties located in areas affected by the wildfires and mudslides in California, our net exposure after insurance appears de minimis. Our efficiency ratio was 40.28% for the second quarter of 2018 compared to 40.49% in the first quarter of fiscal 2018, and 35.78% for the second quarter of fiscal 2017. We continue to make investments across each of our businesses, in personal technology infrastructure and compliance that will help us to sustainably grow over the next 5 years and beyond. As discussed, we are a beneficiary of a tax legislation passed at the end of calendar 2017. With the majority of our employees still working in California, although we've been growing in Nevada, and a proportion of lending in California, our effective tax rate has been 41% to 42% for the past several years. Beginning in the first quarter of fiscal 2019, which begins on July 1, 2018, we expect our GAAP tax rate to be 28% to 30%. As a result, our net income, return on equity, EPS and book value, but not our efficiency ratio, will be positively impacted by the Tax Act. Our higher level of profitability and capital efficiency provides us with the flexibility to opportunistically reinvest in our people, businesses and customers, while potentially returning excess capital to shareholders through buybacks, a dividend, acquisitions or other corporate actions. We originated approximately $2 billion of gross loans in the second quarter, up 22.2% year-over-year. Originations for investment increased 27.7% year-over-year to $1.4 billion, and originations for sale increased 12.6% to $686.2 million, ending well on balances increased by 15.6% year-over-year to $7.9 billion. Originations were well balanced with strong contributions from single-family, commercial specialty real estate, commercial and multifamily lender finance and equipment leasing. Our loan production for the second quarter ended December 31, 2017, consisted of: $131 million of single-family agency eligible gain on sale production; $350 million of single-family jumbo portfolio production; $121 million of single-family non-eligible gain on sale production; $106 million of multifamily and other commercial real estate portfolio production; $186 million of net C&I loan growth, resulting from $776 million of C&I production; and $239 million of auto, consumer unsecured and seasonal tax-related products, including Emerald Advance and small business loans to H&R Block franchisees. For the second quarter 2018 originations, the average FICO for single family agency eligible production was 752, with an average LTV of 66.6%. The average FICO score for single family jumbo production was 716, with an average loan-to-value ratio of 58.4%. The average loan-to-value ratio of the originated multifamily loans was 53.2% and the debt service coverage was 1.37. The average loan-to-value ratio of the originated small balance commercial real estate loans was 50.6% and the debt service coverage was 1.41. The average FICO of the auto production was 773. At December 31, 2017, the weighted average loan to value of our entire portfolio of real estate loans was 56%. These loan-to-value ratios use origination date appraisals over current amortized balances, making these historic LTVs even more conservative when you consider the real estate values had generally risen since the time the loans were originated. 61% of our single-family mortgages have loan-to-value ratios at/or below 60%, 32% have loan-to-value ratios between 61% and 70%, 5% have loan-to-value ratios between 71% and 75%, approximately 2% between 75% and 80%, and less than 1% greater than 80% loan-to-value. Our loan-to-value is calculated using the current principal balance divided by the original appraisal value of the property. We have a well-established record of strong credit performance in jumbo single family mortgage lending, with lifetime credit losses in our originated single family loan portfolio of 3 basis points of loans originated. We had approximately $1.7 billion of multifamily loans outstanding at December 31, 2017, representing 21% of our loan book. The weighted average loan to value of our multifamily loan book is approximately 53% based on the appraisal value at the time of origination. Approximately, 68% of our multifamily loans are under 60% loan-to-value, 28% are between 60% and 70%, 4% are between 70% and 75%, and less than 1% of our multifamily loans have a loan-to-value above 75%. The lifetime credit losses in our originated multifamily portfolio are less than 1 basis point of loans originated over the 17 years we have originated multifamily loans. Our credit performance is equally good in our C&I lending book by focusing on high quality sponsors and borrowers, structures and low leverage and deals backed by a hard collateral, which readily ascertain market values. We have not experienced any losses in our C&I lending groups since we entered this business. We remain optimistic on our outlook for loan growth, with $981 million loan pipeline at December 31, 2017, consisting of $441 million of single-family jumbo loans, $115 million of single-family agency mortgages, $131 million of income property loans and $293 million of C&I loans. With the addition of senior-level team members and credit lending and compliance and an expansion in our sales network over the last several quarters, we are well positioned to grow our loan book across a diverse set of lending categories. Switching to funding. Total deposits increased $782.6 million or 11.8% year-over-year, with growth across consumer and business deposit categories. Checking and savings deposits increased by $689.6 million compared to December 31, 2016, representing year-over-year growth of 12.2%. Our consumer checking and savings products with great customer service, competitive rates and fees, continue to garner industry recognition as one of the most consumer friendly products on the market. Checking and savings deposits represent 86% of total deposits as of December 31, 2017. Our deposit base is well diversified across a variety of consumer and business products and verticals, which positions us well to maintain and grow our net interest margin as interest rates rise. At December 31, 2017, approximately 47% of our deposit balances with business and consumer checking, 23% money market accounts, 3% IRA accounts, 9% savings accounts and 4% prepaid accounts. We continue to have success growing our noninterest-bearing deposits with average balances increasing 13% linked quarter to $862.7 million this quarter. As we expand our cross marketing efforts across more business lines and invest in our treasury management products and distribution, we should see additional opportunities to grow our noninterest-bearing deposits. We believe our balance sheet to be slightly asset sensitive, with 5/1 jumbo mortgages and multifamily loans providing a good trade-off between yield duration and credit, and lender finance, commercial specialty real estate and equipment loans and leases providing accretive yields that are generally floating rate in nature. Our deposit betas have performed better-than-expected. Since December, 2016, the Fed has raised short term rates by 100 basis points while our cost of funds has increased by 29 basis points despite strong deposit growth. Our expectations are for deposit rates to gradually trend higher, with rising deposit betas with each successful rate -- successive rate increase, and we will work to offset higher funding costs with improvements in our asset yields and adjustments to our loan mix. Throughout the history of the bank, we have made significant investments across a variety of strategic growth initiatives that have enabled us to sustain our impressive growth trajectory and financial performance. Our long-standing philosophy is continuous process improvements and controlled investments in new businesses and new technologies, has served us well in terms of balancing shareholder returns and reinvestment for the future. For example, 4 years ago, we started to invest in personnel and infrastructure to expand our business banking and commercial and cash deposit management businesses. It took a good year to hire a team and to put the systems and compliance infrastructure processes and marketing in place. Once we started to gain traction in the marketplace and added more industry verticals, we're able to generate meaningful deposit growth. This quarter, over 50% of our deposits come from business customers, providing us with fee income and high-quality core deposits to fund our loan growth. We could point to numerous other ongoing investments in various stages of development. More recently, one of our more segment investments in our multiyear strategic initiative called the Universal Digital Bank. Our goal of this initiative is to develop a state-of-the-art, open architecture banking platform that is highly personalized for each individual user. We are making steady progress, with the core software and infrastructure fully implemented in one of our smaller consumer brands. As we become more efficient at software development, system integration and third-party on-boarding, our ability to offer a superior user experience and differentiated products and partnerships with third parties will grow rapidly. Similarly, we continue to upgrade our management team and diversify our talent base. We opened our office in Las Vegas over a year ago, transitioning various loan production, servicing and treasury functions there. We now have 64 team members working out of the Nevada office, with sufficient capacity to add up to 150 over the next few years. We recently hired a Chief Operating Officer and a new Chief Digital Officer. We also added a new business banking team in Irvine to expand our commercial deposit capabilities. While we fully expect these investments to contribute meaningful to our revenue, deposits and earnings over time, they will be a bit of a headwind to the bank's efficiency ratio until they become fully productive. Since we became a public company in 2006, our aspirational long-term financial targets have been a 15% after-tax return on ROE and a 35% efficiency ratio. For the last several years, we've exceeded one or both of those targets while prudently investing in future growth opportunities. Because we will generate a sizable recurring earnings boost from the reduction in our corporate tax rate from 42% in fiscal 2017 to 29% to 30% starting in the first quarter of fiscal 2019, we've decided to opportunistically reinvest a portion of these savings to accelerate some strategic initiatives. These included additional build out of business banking and C&I lending teams, IT and other infrastructure investments, marketing and rebranding initiatives for the bank and our consumer brands and opportunistic additions of senior-level talent. The net effect is that, with the exception of the March quarter, when we received the bulk of our seasonal H&R Block related fee income, our target efficiency ratio for the next several years is now at 40% while maintaining an after-tax return on equity of 18% or higher. In taking advantage of the favorable tax changes to accelerate investment in our business, we believe we will significantly improve the probability of maintaining the earnings growth we aspire to well into the future. We will be focused on elevating our client experience, brand and service offerings to levels commensurate with the growth we expect over the next decade and beyond, and expanding existing businesses and growing new ones. Our set of investments we made this last year that was for -- in the infrastructure side, and a team to act as a sole originator of H&R Block's Refund Advance loans. Earlier this year, we began acting as H&R Block's exclusive provider of interest free, no fee refund advance loans to qualified H&R tax prep customers. These short-term loans, secured by the borrowers' expected tax refund are being originated now and through February, and they'll be paid back when tax payers receive their refunds from the IRS. We receive a fee from H&R Block based on the principal amount of Refund Advance loans we originate that is impacted by the actual credit performance of the loans versus our expected credit performance. We are excited to expand our partnership with H&R Block as the exclusive originator of the Refund Advance loans, while continuing to act as exclusive provider of Emerald Card, Emerald Advance and refund transfer products to Block's millions of customers. Now I'll turn the call over to Andy, who will provide additional details on our financial results.
Thanks, Greg. First, I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today. It 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, BofI net income for the second quarter ended December 31, 2017, was $31.7 million down 2% when compared to $32.3 million earned in the second quarter ended December 31, 2016, and down 2.2% from the $32.4 million earned last quarter. Earnings attributable to BofI's common stockholders were $31.6 million or $0.49 per diluted share for quarter ended December 31, 2017, compared to $0.50 per diluted share for the quarter ended December 31, 2016, and $0.50 per diluted share for the quarter ended September 30, 2017. Excluding the onetime reevaluation of deferred tax asset, which reduced reported net income by approximately $8 million in the second quarter of 2018, our net income would have been $39.7 million for the quarter ended December 31, 2017, up 23% from the same period a year ago and up 23% from the last quarter. As Greg noted earlier, the Tax Act passed in December, 2017, provides a favorable impact by reducing the federal income tax rate from 35% to 21%. However, the timing of the full rate decrease is temporarily impacted by 2 factors: First, a onetime charge to income tax expense for adjustment of our deferred tax assets; and second, a 28% blended federal rate, resulting from our fiscal year ended June 30. Because half of our fiscal year ended June 30, 2018, is before the effective date of January 1, 2018, the Tax Act requires us, for this fiscal year only, to apply a 50-50 weighting to the federal rates. So midway between the new rate of 21% and the old rate of 35% is the 28% federal rate we will use for all of our fiscal year ended June 30, 2018, regardless of when it is actually earned during the fiscal year. For all fiscal years thereafter, the federal rate will be 21% and when added to the state income tax rates, we expect our combined federal and state income tax rate to average around 30% down from the 42% effective tax rate for our last fiscal year ended June 30, 2017. To calculate the income tax provision for this second fiscal quarter ended December 31, 2017, we first applied the onetime charge of $8 million for the adjustment of the deferred tax asset; and second, we applied the pretax net income, a federal tax rate of 21%. The federal rate was adjusted to 21% this second quarter ended December 31, 2017, so that when it is combined with our first quarter's federal rate of 35%, the blended 6 month federal rate is 28%. Going forward, for the third quarter ended March 31, 2018 and for the fourth quarter ended June 30, 2018, we will use the blended federal rate of 28%. The 21% federal rate for the second quarter ended December 31, 2017, is the same as the federal rate we expect after the fiscal year-end. So by excluding the onetime charge of $8 million from the quarter's income tax provision and adding the average state income tax rate to the federal rate of 21%, the pro forma tax rate of 29.8% excluding the deferred tax charge for this quarter, is a good approximation of our blended income tax rate for the next fiscal year and thereafter. Excluding the onetime charge of approximately $8 million and using the 29.8% effective rate for the second quarter, pro forma earnings for Q2 increased $0.12 per diluted share to $0.61 per share. Going forward, for the third quarter and the fourth quarter of fiscal 2018, the blended federal and state income tax rate will go up to 36% and reduce the benefit due to the application of the blended rate. But it will fall back to 29.8% in the first quarter of next fiscal year, ending September 30, 2018. Also, to understand the potential impact of lower tax rates on ROE and ROA, the actual ROE and ROA for the second quarter was 14.37% and 1.49%, respectively, which would increase on a pro forma basis to 18.54% and 1.84%, respectively, when calculating pro forma earnings of 61% per share, or $0.61 per share, and adjusting the average equity for the full quarter reduction of our common stock repurchases. Moving to net interest margin. For the quarter ended December 31, 2017, the net interest margin was 4%, flat from the quarter ended December 31, 2016, and up 13 basis points from the 3.87% in the quarter ended September 30, 2017. The positive impact of higher interest rates on our -- from our H&R Block loan products this quarter and the negative impact of excess balance liquidity for this quarter, when adjusted out of the 4% margin, results in an adjusted downward calculation of 8 basis points to 3.92% for the margin for the second quarter ended December 31, 2017. We will have a benefit next quarter from our loan growth from this quarter, with the majority of the growth driven by C&I lending, where the average rates are above our average loan portfolio yield of 5.38%, and should continue to help to provide protection against the increased deposit costs. Asset quality remains strong. Our provision for loan and lease losses for the quarter ended December 31, 2017, was $4 million compared to $4.1 million for the quarter ended December 31, 2016, and up from $1 million on last quarter ended September 30, 2017. The increase from the linked quarter is due to the seasonal H&R Block loan products, which account for approximately $2.2 million of the loan loss provision for the quarter ended December 31, 2017. We have loans secured by real estate located in areas affected by the hurricanes that moved through Texas and Florida and by the wildfires and mudslides in California. We require our borrowers to maintain adequate levels of insurance, including flood insurance in areas prone to flooding. We performed analytic procedures and discussed directly with our borrowers to determine those properties impacted. To date, we have identified 2 loans, totaling $1.7 million that incurred significant collateral property damage, up to a total property loss, and a small number of loans that have had some collateral property damage. We believe, based on our analysis and discussions, that each of these properties appear to have appropriate insurance coverages and that the damages incurred will not result in a material loss to the bank. With that summary, I'll turn it over to Johnny Lai.
Thanks, Andy. Omar, we are ready to take questions.
[Operator Instructions] Our first question is from Andrew Liesch, Sandler O'Neill.
A question here on the Universal Digital Bank. Just in general, how far along are you in implementing it, and then just if you can provide some dollar amount that's possible. What more needs to be spent to build it, like just to upgrade the technology?
Sure. So we've rolled out a prototype in one of the smaller consumer brands, we're going through a full testing process and vetting process and user experience, reviews and testing. There's a -- the teams that are in place now and are currently there are in our expense, current existing expense structure, are sufficient with respect to the particular platform to continue to build it. We're trying to time the rollout of the platform to our other consumer brands before we go through our rebranding. So we can make sure that all that is taken care of in conjunction with a variety of other experience-enhancing initiatives that we're doing. We're going through this full omnichannel upgrade of all the mechanisms by which customers interact with the bank and a variety of other projects to really make sure that when we come out of this, not only do we have a really best-in-class user experience on the consumer and small business side, but also that we're coming to be -- the rebranding, with everything that we want to do to really make a splash from a consumer experience perspective.
Okay. And then turning to loan growth. I think in the past couple of quarters, you talked about a mid-teens pace as being, what we should be looking at with this quarter, certainly above that. Any opportunity to improve your outlook or is mid-teens pace still the right number?
I think mid-teens pace is right. Remember there's a little H&R Block production in this. But things, on the C&I side, the pipeline's very robust, single-family's holding in. So I think that it's the right, at the right level of guidance, and you have to consider that there is some H&R Block production in this number, too.
Right. Right. And then just one quick question. Just on the special mention credits on the in-house originated mortgages this quarter. Just curious what may have driven that.
Is that the Laguna? Or...
It's the taxes on the single family, yes. So, we -- generally, we review property taxes to -- on single family properties to see exactly that they make their tax payments. If they're late in making that payments, those single-family's will temporarily go into special mention. And so that's what you're seeing as an increase.
Our next question is from Steve Moss, B. Riley FBR.
This is actually Makenzy Brown on here for Steve Moss today. First for me, you guys provided some good color on this in your prepared remarks, but if you could talk a little bit more about how the corporate tax cut will change your business plan moving forward into 2018, that would be great.
Sure. So as I discussed on the call, that we had provided really, 2 pillars of performance that we were interested in hitting. One was a 15 return on equity, now there's a 35% efficiency ratio. Clearly a -- obviously, the efficiency ratio is a pretax number and ROE is an after-tax number. By the nature of the tax rate going down and the way that it has, I think the, but we are updating our return on equity guidance and also updating our efficiency ratio guidance to be commensurate with the plans that we have to grow the business. So I think that where we're spending some of these additional monies that we're going to be spending, it's in a variety of areas. There's no one thing. It didn't -- some newer businesses that we're looking to continue to grow and develop that have proven themselves to be strong contributors, both from an earnings perspective and yield perspective such as our consumer unsecured business, which has done a very good job on the credit side, but can increase their volume. Our auto lending business, factoring, so there's a number of places that we have businesses that we've started that we want to continue to invest in. The -- on a corporate side, we're going through a rebranding effort now. We're building our own digital platform. There's a personalization engine that we're building associated with that to enhance cross-sell. So we've added executives in some key areas in the bank to help drive we think, what we think is a pretty aggressive vision and a unique one. So that's really what we're going to spend that on from a standpoint of development and, in the company. We also talked, of course, about the capital return issue. We're running now with significant excess capital, and even at a target of 40% efficiency ratio, the tax cut's going to assist us in generating significant excess capital, assuming that we're hitting a mid-teens loan growth rate. So I gave some numbers around what that looks like, and we're not going to continue to let our capital build up over time. So we took some small action there and brought back about roughly $28 million of stock over this last period, and including, so yes, it's the $28 million in this period. So we're going to be doing some more looking at whether we should be paying a dividend, buying back stock and we're always looking for acquisitions to help us grow our business as well.
Great. I really appreciate that. And then just one more. Does a flatter yield curve change any of your loan growth strategies moving forward into 2018?
I think a flatter yield curve makes margin maintenance more difficult in general. A decent part of our business is out there on the 5/1 ARMs, so that's certainly something that's meaningful. Obviously, the C&I production is shorter term, has better interest rate characteristics. So we've been shifting on a relative basis to the C&I loan categories, which do benefit from short term increases and rates relative to yield curve flattening in that 5-year range.
Our next question is from Gary Tenner, D. A. Davidson & Company.
Just wanted to make sure that I'm understanding the efficiency ratio, sort of change in tone there. Greg, it sounds like 40% is the target in the non-fiscal third quarter, and then obviously, that tends to be a lower quarter, so it pulled down the overall efficiency ratio for the year. And is that a fiscal 2018 or is that more like the next couple of years, is kind of what the view is?
I think it's for the next couple of years. Obviously, if I think that there's just a lot that we need to do, and I want to take advantage of the opportunity to do that. So I think you should think about that for the next couple of years, and if it changes and we're able to achieve some economies that are beyond that, then we'll certainly update you.
Okay. And then, as you roll into fiscal 2019 now, and you get the further step down in the tax rate, obviously, it doesn't change the efficiency ratio but it will help support the ROE, looks like at some level, above the 18%. So is it, is that the right way to think about it? Or are you going to be managing more towards the 18% number, to give you some more freedom on spend?
No. I think the -- the way that we got to the 18% number is, if you look at a 15% ROE and then you adjust that tax rate, you get to around 18%. Clearly though, what that is dependent on, the reason why we're at 15% in that baseline and not at a higher level than -- when I'm doing that change in calculation, is because we have all this excess capital. So as the excess capital is deployed, the return on equity, at a base level prior to the tax benefit should increase. And so no, if you really look at it, right, we've been sort of inching up to that 40% efficiency ratio over the last number of quarters anyway, and we've kept that guidance out there, under the hope that we could see some improvements there. But the reality of what I see when I look at all the things that we want to do, I'm just simply unwilling to trim them and sacrifice the long-term future of the bank over a number that is really not particularly meaningful anymore, because the relationship between the pretax income and the after-tax income has changed based on the tax rate. And obviously, what we're focused on is the ultimate return on equity, which is the most meaningful number.
Okay, fair enough. And then just, Andy, I think you've gone through this maybe in your prepared remarks, or actually Greg did, while he was running through the production. But the period end loan balances, obviously well above the average. Can you tell us what the kind of seasonal impact recurred and impact is or was from the H&R Block-related products?
Yes. So a couple of notes there. We did have a 1 large C&I pay off early in the quarter, which then got replaced later in the quarter, which caused the average to drop. In general, the deployment of the Block loans, from a year-over-year perspective is very similar. So that would be, the Emerald advances are going out in November, late November, and so about smack in the middle of the quarter. So that's -- that really hasn't changed year-over-year. The rest is just simply production, particularly for C&I, was loaded in the last half of that quarter, which is why the point time is higher than the average.
Our next question comes from Brad Berning, Craig-Hallum.
Obviously, a little bit better growth this quarter. Can you walk through your progress on the jumbo mortgage book and obviously, some of the attrition rates you've had in the last few quarters? Talk about the progress in there, since it's had little bit better growth there, but showed very strong growth in multifamily C&I. Can you just talk a little bit more about what you're seeing from market conditions, what you're seeing for opportunities, and how sustainable is the growth that you're seeing this quarter? But then, can you tie that back into, kind of the efficiency ratio investments that you're booking to help sustain the growth? And how do you think about what is a targeted sustainable growth rate that you're thinking about, given the additional investments?
Sure. So over the next several years, we're still targeting from an asset growth perspective into the mid-teens, so the 15%, maybe slightly higher. We'd like to achieve that. We think that's very achievable with the existing businesses that we have, continuing to grow and develop in their normal course. With respect to single family, they did have a good quarter this quarter. The first calendar quarter, third fiscal quarter, tends to be slower for single family loans, whereas on the commercial side, they tend to be slower for single-family and some multifamily, sort of the more mom and pop styles, where they kind of don't really focus on doing deals from that Thanksgiving period through Christmas, whereas, hard-core commercial folks necessarily, if they want to do things, they're going to continue to do that. So I think that single-family just historically has had a little bit of a dip in that quarter, coming off the holidays. But overall, I think the team is focused and there's lots of opportunity there still. I think there is increased competition there, with just some banks continuing to be aggressive in that space, but I think we have a very good, mature business there that I'm confident that's going to continue to perform. So yes, from a sustainable growth rate perspective, we're looking at that 15% range, I think that's a good place to be for us. So yes -- was there another piece, Brad, that you wanted to talk about there?
No, I think that's fine. I just want to make sure, as far as, more from a sustainability and a near term basis as well, and then one other follow up is, given the excess capital and given the appetite for portfolio acquisitions, can you talk about, what does the market look like given some of the interest rate changes out there, what are you seeing for opportunities?
From a straight loan portfolio acquisition opportunity set, I can't -- actually we haven't been incredibly focused on that, but we are in the flow to some extent, and I don't really see a lot out there. I think that banks are very hungry for loans. We have a very significant appetite for other institutions looking to purchase our products, and if we could generate more, we can certainly sell those loans. So I don't really see that as a -- as something that we're going to be pursuing. There are interesting acquisition opportunities here and there that we look at, that would be part of our strategic plan that we could use the excess capital for. But the most obvious utilization of that excess capital will either be for the institution of a dividend, which we haven't decided upon, but we are actively discussing, or continued share repurchases.
Our next question comes from Austin Nicholas, Stephens.
Maybe on the, just on the H&R Block impact on the NIM. I know you've mentioned the kind of 8 basis points all-in number. But you could you break that down between just the negative impact from the excess liquidity, and then the benefit from the lending products?
Generally, the way to think about it is, we have, probably on the excess liquidity front, around $150 million at approximately, call it 140 basis points to factor in. The Block idea, we don't usually discuss that because we don't want to give an early indication of what Block volumes are. But you can back into it using that number. So if the negative impact is $150 million of excess liquidity at roughly 1.4% rate.
Got it. Okay, that's helpful. And then, maybe just, while we're on the topic of H&R Block. Looking out to the next quarter, can you give any idea of, has the changes in tax reform changed anything in the business, in terms of volumes at all. I know you obviously don't want to speak to H&R Block, but any color you can give on how you're feeling about those initial, call it pretext revenue numbers that I think we're guided to, when the, you've adopted the full relationship.
Well, yes, you're right. We're not going to speak to any other volumes or any of those things, but our guidance has been very straightforward. It's been the amount of money that we made last year from H&R Block is the amount of money you should stick in your model for this year. With respect to any other indications, we're just not going to go there.
Our next question comes from Jesus Bueno, Compass Point.
If we just start quickly on the jumbo side. Heard some concerns about higher tax states losing cell production and the impact of mortgage interest deduction. Your pipeline seems pretty healthy, and you've maintained your loan growth guide. I guess, are you seeing anything in volumes, have you, make you think tax reform is impacting any kind of volume side there?
We have not seen that. I think that whatever -- if you do the math on that, right, you look at the difference between $1 million and $750,000, and you look at that on the mortgage interest side, it's not that significant. The property tax deduction is more significant from the maintenance of high-end homes. Counteracting that is obviously, we see a lot, the higher end homes that we do, and the type of people who buy those homes are heavily impacted by the stock market and asset values. So the fact that the stock market has done so remarkably well in a more free society than we've had previously under prior administrations, I think is going to drive some housing demand. Now whether that housing demand ends up in California and high tax states, or it ends up in states that are a little more less regulatory-oriented is yet to be seen. However, we're also a nationwide lender, so just need to make sure that we have the appropriate presence in all places and to the extent that there would be demand for homes in a high-tech state that would drop, you would imagine that, that demand would be pushed somewhere else.
That's helpful. And jumping back to capital return, you've mentioned a few uses for deploying capital. I was just hoping, could you prioritize, I mean, between buybacks, dividends and acquisitions, and obviously, you bought back kind of closer to that 2x tangibles, if you could also add kind of how you think about buybacks, what, I guess at what level you'd be more willing to be buying back your shares?
Yes, I think the -- that's a question, and a set of discussions that we're actively engaged in looking at, and we're looking at the analytics around what sort of a dividend would make sense, what our shareholder base looks like and whether they're investors that typically would focus on dividends, and what kind of benefit that shareholders would receive from that. I mean, clearly, we have -- I think we have -- because of the fact that we're a very profitable business, our price to earnings ratio isn't particularly great. However, you can always argue about what book value multiple should be for a very profitable company, or I'd arguably, as you sustain a higher level of return on equity, you should naturally have a higher book value multiple. So for a company that makes 10% return on equity, maybe a 2x book value multiple is good, but it might not be good for a company that has an 18% or 19% ROE. So I think those things are things to consider. Clearly, from an acquisition perspective, we don't view acquisitions and say, gee, we've got excess cash, so we should go to Nordstrom's and buy a company. So that's going to depend on whatever. If there's something that is a good value and is additive to our business in a way that makes long-term sense, then we'll do that deal. And if we had to finance it, we would. But the issue right now is we do obviously have the benefit of that tax cut. We have investments that we're going to make, but those investments are simply -- and growth that we're going to absorb, but the reality is, we're simply going to have excess capital. And there's only so many ways to return that capital to shareholders and so we have to make a decision about it.
That's great. And if I could just slip one more in. We've heard a lot of talk about deregulation for banks. It's mainly been centered around systematically important banks at the $50 billion level, but there has been some talk of perhaps raising a threshold for DFAST banks, up from $10 billion to perhaps $50 billion. But I take it that in your efficiency guidance, you have most of the costs associated with DFAST baked in there. But I mean, hypothetically speaking, if we were to see that threshold lifted, I guess would you have the ability to perhaps, kind of I guess lower your expectations for where your efficiency ratio would shake out, if that were the case?
I don't really think very much. I -- you are right that we have been investing in all the DFAST modeling and those sort of things. But that's not really the biggest driver at $10 billion. The biggest driver for us at $10 billion is obviously, the interchange side of it is not something that's really being talked about. So that's an issue for us. The DFAST side, I think we have a very analytically sophisticated bank with good data infrastructure. So I don't project that, that's going to be a significant difficulty. And the level of investment we're making in analytics to do the really complex things that we're looking to do, we're looking forward to figuring out how artificial intelligence can be used in Reg TAC and things like that. So I don't view DFAST as this massive challenge, that it would be much more important if we could get Durban removed. But I don't think that's going to happen. I don't think that's being debated.
Our next question comes from Edward Hemmelgarn, Shaker Investments.
Just got a couple of questions. First, related to the accounting for the loan advances. In the first quarter, at the end of the Emerald program with H&R Block. And last year, you accounted forward as interest income, but it's my understanding that this year it's all just going to flow through, well none of it will flow through interest income it'll just flow through as fee income, is that correct?
Yes. So Ed, first, let me clarify just for everybody that there are 2 different products. There's a product called Emerald Advance. That is a product that we did this quarter, meaning, the second quarter ended December 31, 2017. That product is in interest income and the balances are shown as interest income and yield. The product you're alluding to is called Refund Advance. Refund Advance is a noninterest bearing advance to the consumer. The payment for our advance on that product is a fee that we received from Block. So the accounting for RA next quarter will be as you suggest, there will be fee income for the advances. However, we will show the loan-loss provision in loan-loss, and there will be no interest income. So it'll be non-interest-bearing in -- for the average balance. So that's a little bit different from last year, where we purchased the RAs. But you'll see its increased fee income next quarter. And that fee income -- the fee income is grossed up for 2 components. One component is the expected fee that we negotiated to make and the second is the expected credit losses. So you'll see a higher fee than the expected profitability, and then you'll see the loan-loss provision associated with the expected credit losses. And so, to make the -- you just have to understand what that accounting is going to look like. If our models and the work that we've done and the credit underwriting side is better, then expectations and the agreed upon level, then we'll make more money and if it's worse, we'll make less, and that's the way it's going to be accounted for next quarter.
Okay, but you could, I mean, and dependent upon how the numbers work out, I mean, you could see a drop in net interest income after provision this March quarter compared to the December quarter, but then that's all more than offset by a big pick up in fee income?
Yes, that would be the likely result. And the only way that, that would be not be the result is if somehow we vastly underperformed on the credit side there, which we clearly don't expect, but is always a possibility, at least contractually. And then, at the point in time where our fee income would be reduced to 0, we have certain guarantees from Block and things. But we obviously don't expect that to happen, and that will be an event that would be very bad, and these are very safe loans. They are repaid by tax refunds, so we expect that we'll have a nice return from them.
Okay, and I can understand how in the Durban, you don't want to be losing the additional change fees. So would you -- then the cutoff date is always as of December 31, for all banks?
Yes.
So I'm assuming that you may work to keep your asset balances under $10 billion for a year from now?
Yes. I think that, that's a reasonable assumption. I think that, what we like to do is delay that impact if it's on balance, right. It's not significant enough to delay loan growth in any substantive way for a long period of time, but it's enough that if you're close to it, we would, we'd try to make sure that, that would be the case, because if what happens, if you have that December measurement period, you're under that threshold in December, then you're going to go a whole other year, and then you're going to have that impact occur in July or July 1 of that subsequent year, so it buys several years of time associated with that impact.
I'm assuming that as if you would also then have more, perhaps more opportunities to expand the securities portfolio than in calendar 2019, if you anticipate going over the $10 billion number anyways? If the opportunity...
I think that's right. I think well, you're bringing up something. I mean, there's obviously 3 legs to a stool, there's capital, there's some asset, which could be loans or securities, and there's deposits or borrowing, right? And so, I think, clearly, at a point we're exceeding with securities in order -- that $10 billion mark prior to December of 2019 calendar, is probably not a good decision. And I think that obviously, we have the capital to do that, we have the capital to increase the balance sheet dramatically. But we're looking for balanced growth. So that balance growth in the loan portfolio, as we've -- and we've been kind of shedding securities as you know, but the securities portfolio is relatively small now. So there's really not a lot of opportunity to make that smaller and the opportunity to make it bigger is impacted by the timing of that movement over $10 billion.
I mean, you said, prior to December 31, 2019, you're talking about --
2018, I'm sorry.
I mean, it's pretty hard for you to keep it under.
I'm sorry, I was wrong. I'm sorry I misspoke, I apologize. I -- even as long as I've been doing this fiscal calendar year thing, at times it gets to me. Yes, 2018.
Our next question comes from Michael Perito, KBW.
Just a couple of questions for me. I guess, maybe just on that topic of $10 billion in Durban, since -- you guys are just on it. Just kind of curious, does that, and I understand that if you stay under $10 billion through the end of this year, kind of pushes out any potential revenue impact to mid-2020, as you just mentioned. But is that kind of factored into that 40% efficiency outlook for the next couple of years here, the potential loss of interchange or decrease of interchange revenue related to those relationships?
Yes. We believe so. Obviously, we think there's -- we think as we grew certain books and we get to certain investments, there's an opportunity to improve that, and then you also have this negative associated with that. And there's other opportunities to mitigate through product design and negotiation with some of the relationships and things. But it's something that we have thought about, so.
And then I was curious if -- as you mentioned in your prepared remarks, the deposit beta looked pretty good this quarter, and you've had a kind of full 4 quarters or so now with successive raises to kind of view the increase of pricing. I was just curious if you could maybe give us any more, kind of granularity about which specific, are there any niches that have performed stronger? I mean has most of the increase been in kind of the retail consumer side? Just any more like specific color on some of your different deposit verticals that you can give us, in terms of the pricing and trends?
Yes, I think we've had -- I'd say it's been pretty good performance across the board, except non-checking, savings, retail savings. And that's just been subject to a plethora of new competitors. So to the extent that there are folks that are willing to move and look for higher rates and they're chasing those rates, there's a lot of movement, right? One couple day period, Goldman moved, I think it was 20 basis points in a day. There's a lot more online banks looking to get higher-yielding, online savings accounts, PurePoint, others, Union Bank's, PurePoint. I think people would have been shocked if they thought that Union Bank would be out offering much higher rates than I am in our core brand, but that has been the case now for quite a while. So our goal is obviously -- what we have to do, and our margin depends on it, is execute our business plan and continue to diversify our deposits. But we've done a good job, and we have a lot of investment in the commercial cash management side. We have a very good product set there, we have good people there, and we can save companies a lot of money, and so there's a huge pocket of money for us, if we can do that, and continue to grow that. So it's really about that balance of continuing to work, to take the quality of the deposit from the channels that are most attractive and grow those, and recognizing that the online savings side is subject to more competition, so. And that's the reason why we're spending so much time on this Universal Digital Banking project, so that our platform will be differentiated, and so the differentiation would be platform. We're working through their brand side of it too, which is a longer-term deal, but we're spending a lot of time and effort on that, to think about what that looks like going forward, the service side. And then clearly, we have the fee-based edge advantage on the checking side and things like that. It'll be more difficult to sustain that fee-based advantage on the checking side, because a lot of our checking accounts are supported by the interchange side. If the interchange goes down, that's a cause for concern, we have some product design ideas around that, but that's something we have to deal with. So I think, I -- look, I think we have a good strategy. We've got a lot of tools in place. But that's why we've got to continue to evolve the business, to do what they've been doing, which we've -- and by the way, we've been very successful at it. It's not as if this is something that we've just been talking about. We knew that obviously, rates wouldn't stay low forever, and we've been working very hard on it, and I think particularly, given the growth we've had in our deposit side, we've done pretty well on the beta side and pretty well in developing some good business deposits here.
Helpful color, right. And then just one last one, I apologize, I'm jumping back and forth between a couple of calls, but I know you've repurchased some shares in the quarter. You talked about it, I know, I'm not going to ask capital question again and beat that horse. But just curious if you could give any color on what type of repurchase authorization you currently have outstanding, and what's left on it just going forward?
Yes, we have -- yes, which we, I'm trying to think about, we have -- basically, we have publicly announced share repurchase amount that was, was less -- is there 170? Was it...
It was $100 million, and so $28 million minus $100 million is $71 million and some change.
But I think frankly, if we decide that -- the Board is engaged in this discussion. So if we decide that we're going to pursue a return of capital, primarily through share repurchases, we'll simply make sure that all the formalities are in place to do that. And if we obviously decide that it's through the dividend, then we'll do that.
Our next question is from Don Worthington, Raymond James.
Just a couple, I guess more minor questions. Greg, you mentioned the capacity in the Las Vegas office. Just curious as to what the drivers might be for adding people there, would it be volume driven or growth driven, or would there be a reason to move existing employees to Nevada?
We've had some existing employees who have raised their hand and wanted to move, often for cost of living reasons. And we have certain groups that we've decided to locate there, because we think that the talent pool is better there, and it's more sustainable to have those groups there. Obviously, there is a tax benefit to having employees in Nevada, and so over time, we think that we'll continue to look at the different opportunities to source employees in a manner that makes the most sense, and I think one of the benefits of being in San Diego, despite the really terrible tax rates we have in California, is that you have a lot of talented people here who are dislocated by all the companies that are moving. And so we've actually been able to take advantage of that. So it's somewhat of a counterintuitive talent strategy, but in places that are booming, because they're more competitive like Texas, companies are relocating there whereas here, companies are leaving. And so it allows us to attract talent here.
Okay, right. And then are you seeing any shift in the composition between purchase and refi of your single-family lending?
Yes. Both on the gain and sale and the jumbo side. We've been investing a lot in some interesting technology ideas to better connect us to the purchase market, to better work on purchase leads, which tend to have a longer gestation period. So we're seeing a positive movement there. The jumbo business has always been very purchase-oriented but the gain on sale business is becoming a much more purchase-oriented as a result of specific strategies, including a very specifically focused sales team in Las Vegas that is purchase-oriented for gain on sale.
Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Johnny Lai for closing remarks.
Thanks. I know we ran over, a little over here. So appreciate everybody staying on. If you have any follow-up questions, please give me a call, and we will talk to you next quarter.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.