BofI Holding's (BOFI) CEO Greg Garrabrants on Q2 2016 Results - Earnings Call Transcript

| About: BofI Holding, (BOFI)

BofI Holding, Inc. (NASDAQ:BOFI)

Q2 2016 Earnings Conference Call

January 28, 2016 4:30 p.m. ET

Executives

Johnny Lai - VP, Corporate Development & Investor Relations

Greg Garrabrants - President and CEO

Andy Micheletti - EVP and CFO

Analysts

Bob Ramsey - FBR

Julianna Balicka - KBW

Andrew Liesch - Sandler O'Neill

Gary Tenner - D.A. Davidson

Don Worthington - Raymond James

Edward Hemmelgarn - Shaker Investments

Operator

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.

Johnny Lai

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.

Greg Garrabrants

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 to be strong with 4 basis points of net recoveries and only 40 basis points on non-performing assets to total assets. Our loan units had another great quarter with $1.6 billion in gross loans originated in the second quarter. As a result, the bank achieved good quarterly loan growth as loan balances grew by 8% over the first quarter, which equates to a 32.2% annualized growth rate. The excellent performance of our lending groups is reflected in the $420 million of net loan growth this quarter, a 31.2% increase over the second quarter of fiscal year 2015.

The primary drivers of our loan production consisted of $88 million of single-family agency eligible gain on sale production, $471 million of single-family jumbo portfolio production, $21 million of single-family non-eligible gain on sale production, $66 million of multifamily portfolio production, $22 million of non-multifamily commercial real estate secured production, $303 million of C&I production, $12 million of auto production and $413 million of Emerald advance originations.

Our outlook for loan growth remains positive with a loan pipeline of approximately $877 million consisting of $565 million of single-family jumbo loans, $64 million of single-family agency mortgages, $113 million of income property loans and $135 million of C&I loans. Demand for single-family jumbo mortgages remained strong particularly for purchase transactions in coastal and other desirable metro areas. Our ongoing investments in systems, personnel and distribution coupled with our strong track record of execution and compliance positions us well for continued market share gains.

Warehouse lending business benefited from market disruption and some of our competitors caused by the implementation the TRIP [ph]. Because our lending and compliance teams conducted extensive planning and testing in advance of these rules and regulations, we experienced limited delays in our single-family mortgage and warehouse lending operations. We’re actively pursuing opportunities to grow our warehouse lending business for new warehouse lines and request from existing customers to upsize their current lines.

For the second quarter’s fiscal originations, the average FICO for single-family agency eligible production was 761 with an average loan-to-value ratio of 64.3%. The average FICO of the single-family jumbo production was 708 with an average LTV of 61.2%. The average loan-to-value of the originated multifamily loans was 54.9% and the debt service coverage ratio was 1.48% -- 1.48 times.

The average LTV ratio of the originated small balance commercial real estate loans was 54.5% and the debt service coverage ratio was 1.58 times. The average FICO of the auto production was 759. Our loan portfolio credit quality remains very strong. Our strong credit discipline and low loan-to-values have resulted in consistently low credit losses and servicing costs. We had 4 basis points of recovery for the quarter ended December 31, 2015 compared to 2 basis points of net charge-offs in the corresponding year ago period.

Our lifetime loss in our originated single-family loan portfolio represents less than 2 basis points of loans originated and our multifamily loan lifetime loss is also less than 2 basis points of loans originated. We increased our loan-loss provisions to $3.4 million in the second quarter of 2016 from $2.4 million in the prior quarter to support growth in our loan portfolio.

We have a granular and transparent C&I lending book. Unlike most community and commercial banks that have grown their C&I loan portfolio, primarily through shared national credit and traditional bank loans, we agents can fully [ph] underwrite the vast majority of our C&I loans. Our C&I lender finance loans which comprise the majority of our C&I loan book today, are first liens on pools of assets at low leverage points. These lines of credit to non-bank entities are fully reflected on our balance sheet.

The underlying collateral which is residential or commercial real estate properties or non-real estate related loans or receivables is housed in the bankruptcy remote special purpose entity that insures the bank at the collateral segregated from a legal perspective in the unlikely event of a bankruptcy. The use of special purpose entities by the bank in this business is usual and customary in the industry and represents prudent practice. We actively monitor the value of the underlying collateral and any piece of collateral that is not performing is removed from the borrowing base. These protections coupled of our low effective advance rates have resulted in no losses in our C&I lender finance loan book.

The one loan that has been classified as special mention in the C&I portfolio outside of the lender finance book was refinanced with full principal, interest and fees collected by the bank, by another bank after the quarter ended. We have very little direct credit exposure to energy in our loan portfolios. We have no shared national credit exposure in any oil or gas or oilfield services firms. Less than 5% of our multifamily book is in Texas with most of these properties located in Dallas or Austin. The weighted average loan to value ratio of these loans is approximately 51%. Our single-family exposure in Texas and Oklahoma is just $28 million representing less than 1% of our single-family jumbo portfolio.

Total nonperforming assets as a percentage of total assets was 40 basis points at December 31, 2015, down from 55 basis points at June 30, 2015. Our loan loss reserve to nonperforming loans is 132%. As reflected in our historically low charge-offs and recovery this quarter, a very small percentage of our non-performers result in a loss to the bank because we have a granular portfolio secured primarily by real estate collateral with readily ascertainable market values. The bank has only two OREO properties with a total carrying value of $396,000. All of the bank’s OREO properties are held in special purpose entities to isolate the bank from any potential issues associated with direct ownership and these entities are consolidated at the bank.

Despite growing competition from multifamily lending in some of our markets, we have not loosened our credit standards. Our focus on smaller balance multifamily lending at loan to value values and high debt service coverage ratios make us comfortable with our multifamily loan book. We have detailed data about properties and borrowers in our target markets and recently conducted a CCAR stress test of our entire multifamily loan portfolio, which showed a very manageable loan-loss projection even if property values experienced a severe decline.

At December 31, 2015 the weighted average LTV of our entire portfolio of real estate loans was 56%. Given that these loan to value ratios use origination date appraisals over current amortized balances in a generally appreciating housing market, these historic LTVs generally overstayed the true loan-to-value ratio in the portfolio providing a further margin of collateral security.

We grew deposits 30% year-over-year and 9.3% on sequential basis generating growth across a variety of consumer business deposit categories. Checking and savings deposits grew even faster increasing 35.1% year-over-year. Checking and savings deposits increased by approximately $1.1 billion to $4.3 billion at December 31 2015 representing 83% of total deposits, an improvement from 80% a year ago. The shift away from CDs to transactional accounts further reduced our funding costs and improved our interest rate profile.

We continue to grow deposits despite not having the best rate in the market. Although our overall cost of deposits is approximately 89 basis points, this is due to the fact that our time deposits have an average cost of approximately 213 basis points because they have an average duration of approximately 4.2 years. We further reduced our average cost of demand and saving deposits to 62 basis point compared to 64 basis points in the prior quarter and 73 basis points in the same period a year ago as we optimized our marketing to attract and retain deposit customers that best fit our target profile.

Of the bank’s overall deposit base we have approximately 26% business and consumer checking, 36% money market accounts, 6% IRA accounts, 11% savings and 5% prepaid accounts. With a diverse quality deposit base across a wide range of consumer and business categories, we are well-positioned to continue growing our deposits to support our loan growth. We continue to expand our software and service capabilities in order to create a better, more seamless user experience for our deposit customers. We’re actively evaluating opportunities to expand our deposit base in new market segments through acquisitions or by taking advantage of market dislocations created by competitive and regulatory changes.

We completed a very successful first quarter of our seven-year strategic partnership with H&R Block. We began offering H&R Block Emerald Advance lines of credit through H&R Block’s tax office location November 19. Emerald Advance is a short-term unsecured line of credit available to qualified borrowers. Under the terms of our agreement, we retain a 10% interest of all Emerald Advance loans originated while H&R Block retains a 90% interest. We’re the BIN issuer for H&R Block’s Emerald card, a general-purpose reloadable prepaid card offered through H&R Block’s stores and online channels. As a BIN issuer, where we hold the deposits for each Emerald cardholder in an FDIC insured account and process all transactions conducted by cardholders using the Emerald card, a preferred product in our program management [indiscernible] H&R Block as refund transfer, a product that allows H&R Block’s tax preparation customer to defer his or her tax preparation fees until they receive their refund. The vast majority of H&R Block’s refund transfers occur end of March and June quarters.

We continue to expect that on an annual basis three initial products in the H&R Block program management agreement will generate $31 million to $34 million of annual revenue and approximately $13 million to $16 million of after-tax net income. As a reminder, we anticipate that approximately 70% of the net income from the program management agreement will be generated in the quarter -- quarter ended March 31. We’re already starting to have productive dialogue on the specific steps required for us to exercise our exclusive right to cross-sell individual retirement accounts through H&R Block’s tax offices and through H&R Block’s digital channel next tax season. The number of customers that have the potential to be acquired through H&R Block’s tax preparers [ph], selling our IRA product next tax season and integration to the tax software should be significant.

We continue investing in newer businesses that have been launched, a significant incubation program developing a number of new lending fee and deposit businesses and the product and software development capacity to create what we're calling a universal digital bank model. The current delivery of many of our existing products and model line [ph] products that have arisen from fintech revolution among nonbanks has often significantly reduced the cost of acquisition and delivery for the providing institution and the cost of ownership to the customer. Neither we nor the fintech companies have been able to date to maximize the value of each of their customers or serve these customers more broadly with a significant range of personalized products.

In order to maximize that individual customer’s value we see an opportunity to further differentiate our value proposition in the next few years by commercializing our online banking prototype we've built, of a highly flexible front end online banking platform, utilizing an App Store type concept that will allow us to customize the products and services displayed for different user segments and differentiate our user experience in a meaningful way. Not only will this platform allow us to greatly enhance the customer and user experience but will allow us to use advanced analytics to personalize and provide relevant advice on an ever broader scope of products that we are incubating.

We are only scratching the surface in this evolution in banking and have a multitude of opportunities to differentiate ourselves from a customer acquisition, user experience and service integration perspective. We are excited about how our vision of where we see the future banking model evolving and how we’re planning to transition toward that universal digital banking model over the next several years. We believe that building systems, processes and partnerships that allow BofI to offer a seamless user experience and multiple services through an integrated software platform will further elevate and differentiate our competition position.

This quarter some of our increased costs reflected in our investment to build our next-generation retail banking platform and become a more product centric company, that is a user experience leader in digital banking.

On a newer business front, after methodically building a dedicated team of underwriters and refining our systems, data initiatives and marketings, we originated $44 million of small balance commercial real estate loans in the past two quarters, up from $29 million in the second half of fiscal 2015. We have grown in a very disciplined manner with the average loan to value ratio of 56.2% at an average debt service coverage ratio of 1.47% in this portfolio. We will continue to slowly expand this business in Southern California and other strong markets.

We originated $12 million of prime auto loans in the quarter ended December 31, 2015, up from $8 million in the prior quarter. We continue to evaluate low-cost distribution channels and niche lending segments within auto that will generate an attractive risk adjusted return. Our auto lending platform gives us another lending product for our universal digital bank that we can monetize through our rapidly expanding customer base, multiple partnerships and distribution channels.

We recently started piloting single-family agency mortgage products through our wholesale channels. The expanded product suite provides our wholesale partners access to products and competitive pricing through our self-service digital platform. Loans originated through this channel will be sold to Fannie and Freddie providing us incremental mortgage-banking income.

Our efficiency ratio of 34.6% came in below our long-term target of 35%. Our corporate management framework enables us to remain efficient and nimble even as we scale newer businesses and invest in IT, data analytics and compliance. We continue to augment our already robust enterprise risk management systems and processes with technology currently in use at much larger banks.

In the second quarter we installed the RSA Archer GRC system which will enable smarter allocation of assurance resources and improved enterprise-level reporting. Further our data-driven compliance framework initiatives allow us to automate a number of compliance review functions that are more repetitive in nature while simultaneously expanding the number of relevant transactions we assess. This framework when implemented frequently results in a 100% assurance review of all bank activity within a subject regulatory rule rather than simple sample testing.

The automation also frees up more time for our compliance staff to focus on more complex tasks. As we continue to grow assets and enter new businesses, our compliance framework allows us to maintain strong regulatory compliance and efficiency by streamlining our monitoring and reviewing processes in order to analyze and filter more data faster. We have successfully grown the bank through a variety of competitive, economic, credit and regulatory environments while maintaining industry-leading returns and efficiency. The diversity in our lending and deposit franchise will continue to improve as we implement components of our digital banking strategies. We’re excited about the cross marketing opportunities with H&R Block and our other distribution partners. With excellent regulatory relations and strong capital levels we are constrained only by our ability to execute.

We continue to vigorously defend the claims initiated by former disgruntled junior employee Erhart. We are aware of no ongoing investigations of the bank by any regulatory or governmental authority. As a result, this is baseless previously investigated allegations. We continue to know of no one other than Mr. Erhart and his attorney who considers Mr. Erhart to be a whistleblower. We have successfully obtained a Temporary Restraining Order prohibiting Mr. Erhart from disseminating the bank's confidential information.

A variety of what appears to be short seller funded attorneys and short-seller funded investigators have continued to call and harass our former employees. Although we have good relationships with the vast majority of our ex-employees, it is possible and perhaps even anticipated that other baseless lawsuits might be filed by the same or different attorney in what will be a futile attempt to pressure us. This will not change the bank’s sound policy of terminating poor performing employees. BofI is not in the business of selling meritless lawsuits. So we will ride out the temporary storm while focusing on continuing to grow our business in a safe and sound manner and deliver positive earnings growth.

Now I will turn the call over to Andy who will provide additional details on our financial results.

Andy Micheletti

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 and stock options of $4.8 million as well as $400,000 unrealized gain on comprehensive net income.

The bank is very well-positioned from a capital perspective. The tier 1 capital was 9.75% for the holding company and 9.34% for the bank at December 31, 2015. As we discussed in the past, the expected fee income from H&R Block next quarter will likely increase ROE above 20%, reducing the need to provide equity capital for organic loan growth. That said, we have positioned the holding company to raise debt to fund capital for growth or to consider buybacks of our common stock. This is in addition to our past option of using an at the market offering to issue common equity.

How much capital we issue if any in the next quarter and in what form will depend on a variety of factors, including long-term loan growth as well as external market conditions. To that end, we recently received an investment grade rating from the Kroll Bond Rating Agency for both the holding company and the bank. We believe these ratings reaffirm our financial strength, our strong efficiency and our above average asset quality.

With that, I will turn the call over to Johnny.

Johnny Lai

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

Question-and-Answer Session

Operator

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

Bob Ramsey

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?

Andy Micheletti

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.

Bob Ramsey

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 –

Greg Garrabrants

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.

Bob Ramsey

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 –

Greg Garrabrants

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.

Bob Ramsey

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?

Greg Garrabrants

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 –

Andy Micheletti

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.

Bob Ramsey

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?

Greg Garrabrants

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 –

Andy Micheletti

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.

Greg Garrabrants

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

Bob Ramsey

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?

Andy Micheletti

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.

Bob Ramsey

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

Andy Micheletti

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%.

Bob Ramsey

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

Operator

We will take next question from Julianna Balicka with KBW.

Julianna Balicka

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?

Greg Garrabrants

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

Julianna Balicka

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?

Greg Garrabrants

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

Julianna Balicka

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

Greg Garrabrants

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.

Julianna Balicka

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?

Greg Garrabrants

It would be -- not anything of any significance.

Julianna Balicka

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?

Greg Garrabrants

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.

Julianna Balicka

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

Greg Garrabrants

Yes, correct and there will be some.

Julianna Balicka

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

Andy Micheletti

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.

Julianna Balicka

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?

Andy Micheletti

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

Julianna Balicka

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

Andy Micheletti

Yes, that’s where that is right now.

Operator

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

Andrew Liesch

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?

Andy Micheletti

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.

Andrew Liesch

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

Andy Micheletti

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

Operator

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

Gary Tenner

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?

Andy Micheletti

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.

Gary Tenner

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

Greg Garrabrants

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.

Gary Tenner

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?

Greg Garrabrants

Sounds about right.

Gary Tenner

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?

Greg Garrabrants

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.

Operator

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

Don Worthington

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

Andy Micheletti

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

Don Worthington

And then what are the premiums on those these days?

Greg Garrabrants

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

Operator

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

Julianna Balicka

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?

Andy Micheletti

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.

Julianna Balicka

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?

Andy Micheletti

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.

Julianna Balicka

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?

Greg Garrabrants

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?

Julianna Balicka

The interchange from the prepaid cards.

Greg Garrabrants

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.

Julianna Balicka

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

Greg Garrabrants

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 –

Andy Micheletti

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

Operator

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

Greg Garrabrants

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.

Operator

Certainly. Go ahead Edward, your line is open.

Edward Hemmelgarn

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 –

Greg Garrabrants

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.

Edward Hemmelgarn

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

Greg Garrabrants

Yes.

Edward Hemmelgarn

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

Greg Garrabrants

Correct.

Edward Hemmelgarn

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

Greg Garrabrants

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

Edward Hemmelgarn

Congratulations on a good quarter.

End of Q&A

Greg Garrabrants

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.

Operator

This concludes today's conference. Thank you for your participation.

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