Axos Financial - Earnings Call - Q2 2021

Transcript

Speaker 0

Greetings, and welcome to Axis Financial's Second Quarter twenty twenty one Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is recorded. I would now like to turn the conference over to your host, Johnny La, Vice President of Corporate Development and Investor Relations.

Thank you. You may begin.

Speaker 1

Thank you, Devin. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc. Second quarter twenty twenty one financial results conference call are the company's President and Chief Executive Officer, Greg Garabrand 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 12/31/2020 and they will be available to answer questions after their 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 response to

Speaker 2

your

Speaker 1

questions. These forward looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will

Speaker 3

be

Speaker 1

an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for thirty days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I would like to remind listeners that in addition to the earnings press release and 10 Q, we also issued an earnings supplement for this call. All of these documents can be found on the AXIS Financial website. With that, I would like to turn the call over to Greg.

Speaker 2

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the second quarter of fiscal year twenty twenty one ended 12/31/2020. I thank you for your interest in Axos Financial and Axos Bank. We had an outstanding quarter with higher net interest margins, double digit growth in net interest income and non interest income and positive operating leverage year over year.

We combine that with solid credit performance. Axos announced record second fiscal quarter net income of $54,800,000 for the three months ended 12/31/2020, up 32.7% compared to the $41,300,000 earned for the quarter ended December 3139, despite a $3,500,000 increase in our provision for loan losses increasing to $8,000,000 from $4,500,000 in the comparable period. Our pretax pre provision income was $86,500,000 an increase of 38.1 percent compared to the $62,700,000 in the quarter ended December 3139. Axos' return on average equity for Q2 twenty twenty one was 17.3% and the bank's efficiency ratio was 40.45%. Q2 twenty twenty one diluted earnings per share increased 35.8% to $0.91 per diluted share compared to $0.67 per diluted share in Q2 twenty twenty.

Our tangible book value per share was 19.51 at 12/31/2021, up 18 from December 3039. The highlights for this quarter include the following. Ending loan and leases increased by approximately $684,000,000 up 25% annualized from the first quarter of twenty twenty one and up 14.5% year over year. Strong originations in multifamily, commercial specialty real estate and mortgage warehouse were offset by lower production and lender finance and higher payoffs and jumbo single family and certain C and I loan portfolios. Net interest margin was 3.94% for the second quarter, up seven basis points from 3.87 in the second quarter of fiscal twenty twenty and up 10 basis points from 3.84% in the first quarter of fiscal twenty twenty one.

Loan yields continue to hold up well at an average of 5.16%. Interest bearing checking and saving deposits as of 12/31/2020 were 45 basis points with $1,800,000,000 of certificates of deposit acquired primarily from the Nationwide acquisition at a cost of 1.71%, increasing the cost of interest bearing deposits overall to 85 basis points, which is still six basis points improvement from the linked quarter ended 09/30/2020. Net interest margin for the banking business was 4.11% compared to 3.91% in the quarter ended 09/30/2020 and three point 94% in the quarter ended December 3139. PPP loan fees had a negligible impact on our NIM this quarter. Our efficiency ratio for the three months ended 12/31/2020 was 46.86%, an improvement of four eighty basis points compared to 51.66% in the comparable period ended December 3139.

The efficiency ratio for the banking business segment was 40.45% for the second quarter of twenty twenty one, an improvement from 43.81% in the comparable period last year. The year over year improvement in overall and business banking efficiency was the result of strong mortgage banking income, net interest margin expansion and double digit growth in our loan portfolio. Diluted earnings per share was $0.91 up 35.8 compared to $0.67 in the second fiscal quarter of twenty twenty. Our corporate tax rate increased slightly from 29% in the corresponding quarter a year ago to 30.22% this quarter. Capital levels remain strong with Tier one leverage ratio of 9.08 at the bank and 8.68 at the holding company, requirements.

Our credit quality remains strong with no loans in forbearance and only a small percentage that are delinquent on principal and interest payments. Our conservative underwriting with an emphasis on retained asset loans with low LTVs on our balance sheets continues to serve us well. Total loan originations for the second quarter ended 12/31/2020 was $2,040,000,000 up 14.2% from the $2,100,000,000 in the year ago period. Q1 twenty twenty one originations were as follows: dollars $455,000,000 of single family agency gain on sale production, dollars $286,000,000 of single family jumbo portfolio production, dollars 123,000,000 of multifamily production, 46,000,000 of commercial real estate production, dollars 34,000,000 of auto and unsecured consumer loan production and $957,000,000 of C and I loan production resulting in a net increase of $345,000,000 Our gain on sale mortgage banking group had another strong quarter generating $10,700,000 of mortgage banking income compared to $2,200,000 in the corresponding quarter last year. Originations increased by approximately 11.3% linked quarter to $455,000,000 Low interest rates continue to support strong demand for refinancing and purchase transactions and our efficient scalable operating model generated gain on sale margins of three ninety basis points compared to three ninety four basis points in the quarter ended 09/30/2020.

The outlook for mortgage banking remains strong, although the March generally experiences lower volume due to the holiday season and we expect some compression and gain on sale margins. Our pipeline of single family agency mortgages was $399,000,000 as of onefourtwenty twenty one. Our mortgage warehouse also benefited from robust market demand for agency mortgages. Ending balances in our mortgage warehouse portfolio increased by 461,400,000 or 63.8% from $723,400,000 as of 09/30/2020. We continue to expand our relationship with existing mortgage warehouse customers and establish new relationships.

Our track record of execution and expertise in agency and non agency mortgages assist us in growing our warehouse lending business. Our net interest margin for the banking business was 4.11% in the second quarter compared to 3.91% in the prior quarter and 3.94% in the second quarter of fiscal twenty twenty. On the asset side in the banking business, our loan yields continue to hold up with an average loan yield of 5.15 compared to 5.21% in the quarter ended 09/30/2020. The vast majority of our asset based loans are variable rate loans with 95% of all variable rate loans being at their floor rate as of 12/31/2020. Yields on loans originated in the quarter ended twelvethirty onetwenty twenty were 4.91 for jumbo single family, 4.85 for multifamily and 5.93 for C and I loans.

Approximately 41% of our loans are fiveone ARMs with single family and multifamily mortgages as the underlying collateral. In our C and I loan book, our asset based lending, lender financing commercial specialty real estate loan portfolios have rates that adjust to an index. Of the $3,100,000,000 of lender financing commercial specialty real estate loans outstanding at twelvethirty onetwenty twenty, approximately 90% are at their floor rate. Our equipment leasing portfolio, which accounts for the remaining 130,000,000 of C and I loans outstanding is comprised of fixed rate loans and leases. We see minimal future adjustments in our existing lending book as a result of floating rate loan adjustments, although some adjustments to loan rates to remain competitive for future originations may be required.

Our consumer and commercial deposit businesses continue to benefit from investments we have made in technology, marketing and user experience. Consumer deposits representing approximately 42% of our total deposits as of 12/31/2020 is comprised of consumer direct checking, savings, money market and non interest bearing prepaid accounts. Our checking, savings and money market deposit balances increased by approximately $1,000,000,000 from twelvethirty onenineteen with strong growth in consumer small business and commercial deposit accounts and balances. Our consumer checking and small business checking accounts continue to receive accolades for offering the best value and services for our consumers. With more consumers and small business owners choosing digital as their primary channel for conducting banking transactions, we are well positioned to become their primary bank.

Average non interest bearing demand deposits were $2,000,000,000 in the quarter ended 12/31/2020, up by approximately $136,000,000 from the prior quarter despite exiting our prepaid sponsor relationships with H and R Block and Netspend. We are making good progress in our specialty commercial and treasury management businesses and we anticipate higher deposit balances in our fiduciary service business in the next twelve months as the number of bankruptcies rise. Our credit quality remains stable. Annualized net charge offs to average loans and leases was 16 basis points this quarter compared to 17 basis points in the corresponding period last year. We charged off a portion of an equipment lease to a fracking company that we had a specific reserve on this quarter accounting for the entire $2,600,000 of net charge off in the C and I non real estate loan category.

Non performing assets to total asset ratio was 122 basis points for the quarter ended 12/31/2020, down from 156 basis points in the first quarter of fiscal twenty twenty one. Of our non performing loans, 77% are single family first mortgages where we have historically had very low realized losses. Of our non performing single family mortgage loans at 12/31/2020, approximately 85% had estimated current loan to values at or below 70% and approximately 95% are below 80% of our best estimates of current loan to values. Given the low loan to values on our single family mortgages, we do not anticipate incurring material losses on the vast majority of these single family delinquent loans. Other than the single family delinquencies, the remaining delinquencies consist of two hotel loans we discussed last quarter, which are around $24,500,000 of UPB.

We had six multifamily loans that were thirty to fifty nine days delinquent for a total UPB of around $3,100,000 that are at origination loan to values of 46% on average. One multifamily loan that is sixty to ninety days delinquent for $1,000,000 with a 44% origination LTV. The only other loan that we have that is delinquent is a loan on a condominium building in Tribeca with an aggregate balance of $16,600,000 we have placed on non accrual at twelvethirty onetwenty twenty. The loan has experienced various delays and several legal challenges in getting the units to market and we placed a reserve against it that Andy will discuss later. Our loan loss provision this quarter was $8,000,000 compared to $11,800,000 in the 09/30/2020 quarter and $4,500,000 in the quarter ended December 3139.

The $8,000,000 loan loss provision this quarter consisted of 3,900,000.0 related to specific non accrual loans and 4,100,000.0 related to change in nature and volume of the portfolio. Our total allowance for loan losses was 136,400,000.0 at 12/31/2020, which represents approximately 1.17% of our total loans and leases and approximately 7.5 times our annualized net charge offs. We are well reserved to withstand a protracted decline in residential and commercial real estate values should that occur. Given the high level of uncertainty regarding the pace and sustainability of the economic rebound, potential changes in fiscal and monetary and regulatory policy, real estate values and inventories and the success of the vaccine rollout in helping consumers and businesses return to pre pandemic spending levels, we do not anticipate making significant changes to our loan loss provisions in calendar twenty twenty one. Approximately 95% of our loans outstanding at 12/31/2020 were collateralized by hard assets with an average loan to value in the 50s, including $10,500,000,000 of real estate assets and $510,000,000 of loans secured primarily by consumer receivables.

Multifamily loans representing 16% of our total loan portfolio at twelvethirty onetwenty '20 had a weighted average loan to value of 55.7% with no loans in forbearance. Our small balance commercial real estate portfolio of $432,000,000 representing 3.7% of our total loans at twelvethirty onetwenty twenty had a weighted average loan to value of 52%. The average debt service cover of our small balance commercial real estate portfolio was 1.52 as of 12/31/2020. We have no loans in the small balance portfolio in forbearance as of the end of the quarter or today either. Our commercial loan book includes lender finance and specialty commercial real estate is comprised of loans and lines of credit secured by single family, multifamily, commercial real estate, land and consumer receivables.

The lender finance book is comprised of real estate and non real estate transactions. The weighted average advance rate on the real estate lender finance book is 28% with no transactions with advance rates greater than 50%. The non real estate lender finance book backed by primarily consumer loans is approximately $688,000,000 with an average advance rate of 50.4 of the outstanding receivables balance. These structures generally require rapid pay downs in the event of any significant collateral deterioration in the receivables and are also paid down rapidly in the event originations decline. We have no loans in forbearance in our lender finance or CRSL book.

Our non real estate consumer lending is comprised of approximately $270,000,000 of auto loans, 58,000,000 of personal unsecured loans and $7,300,000 of H and R Block refund advance loans. We lend to prime and super prime borrowers with an average FICO score of 765 in our auto production and 760 in our own secured consumer portfolio. We fully underwrite and service every auto loan we hold on our balance sheet and the portfolio continues to perform in line with expectations. We continue to generate strong returns with a return on average common shareholder equity of 17.314.35% in the three months ended 12/31/2020 and December 30 respectively. Our efficiency ratio for the banking segment was 40.45 for the quarter ended 12/30/2020 compared to 43.81% in the year ago period, a year over year improvement in our banking business segment efficiency ratio that would have been even better if you exclude this by the 848,000 FDIC credit we received in the three months ended December 3139.

We continue to maintain strong operating efficiencies while investing prudently in each of our business units. Our capital ratios remain strong with Tier one leverage to adjusted assets of 8.68 at the holding company and 9.08 at the bank. Our priorities for capital remain organic loan growth, reinvestment and growth initiatives, opportunistic buybacks and accretive M and A. We bought back approximately $4,000,000 of common stock in the December at an average price of approximately $23 per share. Our loan pipeline remains solid with approximately $1,700,000,000 of consolidated loans in our pipeline at 12/31/2020 consisting of $399,000,000 of single family agency gain on sale mortgages, $347,000,000 of jumbo single family mortgages, $225,000,000 of multifamily and small balance commercial real estate loans, 6 and 77,500,000.0 of C and I and CRSL loans and $23,100,000 of auto and consumer unsecured loans.

Speaker 0

We expect to be able

Speaker 2

to continue to grow loans in the high single digit to low double digit percentage throughout the remainder of this calendar year. We have a healthy liquidity position and a diverse set of funding sources. Our on balance sheet deposits increased by 13.4% year over year with checking and savings deposits increasing by 26.5. Our consumer, commercial cash and treasury management, small business banking and specialty deposits continue to show solid growth. Concurrently, we reduced our average interest bearing funding costs by six basis points linked quarter and 103 basis points year over year to 85 basis points.

Total client deposits at Axos Clearing were $773,000,000 at twelvethirty onetwenty twenty, up 14.9% from the September 30 ending balance. We have the ability to redeploy our off balance sheet deposits to fund growth at Axos Bank if and when it is economically advantageous to do so. Of that $773,000,000 of low cost deposits approximately $333,000,000 are held away at other banks while the remainder sit on the bank's balance sheet. We also have access to approximately $2,500,000,000 of FHLB borrowing, 2,300,000,000.0 in excess of $183,000,000 we had outstanding at the end of the second quarter. Furthermore, we have $1,800,000,000 of liquidity available to Fed discount window as of 12/31/2020.

Our securities business continues to make progress. Exos Clearing increased total tickets processed by almost 14% linked quarter to 1,300,000 tickets and ending deposits by approximately 15% linked quarter. We signed three new correspondent clearing clients in the December and signed three new RIA clients this quarter, which will add incremental fee income and low cost deposits for the two to three quarter lag between signing and onboarding. We're actively talking to introducing broker dealers and independent RIA firms that are evaluating alternatives to Schwab, TG, E Trade and Pershing for clearing and custody services. The ability for Axos Clearing to generate incremental fee income as well as sticky low cost deposits remains an important and differentiating value over the long term.

Furthermore, we remain bullish on the medium to long term costs and revenue synergies provided by Axos Clearing and Axos Invest to our banking business. We transitioned to a tiered pricing model based on assets under management and Axos Invest during the December. Rather than offering a free basic service and charging monthly for various premium services, we now charge clients a flat 24 basis points annual management fee and they have access to all financial services offered through our digital wealth and financial management platform. We've seen limited attrition in the number of active accounts since we implemented the pricing change and overall AUM is up approximately 10% for 09/30/2020 to 12/31/2020. We will transition to a self clearing model later this month with Axos Clearing becoming the clearing firm for Axos Invest.

This will make our digital wealth management platform more scalable from a cost perspective over the long run and provide us flexibility to enhance our product offering. We continue to beta test our self directed trading platform. The preliminary launch date to existing Axos clients will be sometime in the June. This functionality will also be accessible through the consolidated mobile application. By the end of this quarter, we will have integrated Axos InVEST functionality into our mobile application so that Axos Invest functionality is available through one consolidated mobile application significantly improving the user experience and cross sell potential.

We believe we have only scratched the surface in our long term cross sell and goals and objectives. New products and features within our universal digital banking platform such as single sign on for Axos Invest, Axos Trading and Consumer Banking will provide incremental value to our customers, lower acquisition costs, improve retention and add additional sources of fee income and deposits for the company. We believe many of the changes in consumer behavior over the past years are structural and the vast majority of business and consumer clients will permanently migrate their entire financial lives to digital interactions. Our focus is on acquiring customers that value convenience and service and are willing to do more with Axos over time. Our low cost nationwide digital platform provides us with the flexibility and agility to mine data and offer consumers the best value to those looking for a superior solution.

Now I'll turn the call over to Andy who will provide additional details results.

Speaker 4

Thanks, Greg. First, I wanted to note that in addition to our press release, an eight ks with supplemental schedules and our 10 Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some very brief comments. Please refer to our press release or the SEC filings for additional details. As Greg mentioned, our provision for credit losses was $8,000,000 for this quarter ended 12/31/2020, down from 11,000,000 for the last quarter ended 09/30/2020, and up from 4,500,000.0 for the second quarter last year ending December 3139.

Also this quarter, we decreased our unfunded loan commitment liability by 1,000,000 due to an overall decrease in the amount of unfunded loan commitments. This $1,000,000 pretax benefit was included as a reduction to our other g and a in our non interest expense for the for this quarter ended 12/31/2020. The $8,000,000 provision for credit losses this quarter can be summarized as a net 4,100,000.0 related to loan growth and loan mix and 3,900,000.0 related to specific allowances. Of that 3.9 specific allowance, 3,500,000.0 relates to the condo rehab loan project Greg discussed earlier. Last quarter, we provided 6,500,000.0 specific allowance related to the H and R Block refund advance loans, RAs, that were made in 2020.

Although we have exited the H and R Block relationship, they agreed to continue to pass through RA payments through 04/30/2021 due to IRS return processing delays. This quarter, we continue to collect RIA payments such that we were able to reallocate 3 and a half million of our RIA allowance to cover loan growth this quarter. As of 12/31/2020, there was 7,200,000.0 of RA loans left, a 100% of which are covered by our allowance for credit losses. With that, I will turn the call back over to Johnny Line.

Speaker 1

Thanks, Andy. Devin, we're ready to take questions.

Speaker 0

Please proceed with your question.

Speaker 5

Hey, guys. Thanks for all the color earlier in the call. I just wanted to cover your loan growth outlook. Similar comments to before. It's, like, high single digit, low double digits, but you're kind of already already there in this fiscal year.

I think I heard you say calendar year. So, I mean, is there any are there any headwinds ahead that could maybe slow this pace of growth? Because the pipeline looks great. You've had great growth this quarter. Where what's giving you some pause right now?

Speaker 2

Well, don't we don't know how quickly warehouse lending has been a strong contributor the last couple of quarters. It's uncertain how that will continue. It looks pretty good right now. We actually have a good pipeline of new lines, but obviously that's dependent on overall mortgage banking volume. And then single family declined this quarter.

The pipeline is okay. It usually comes through the holiday season and we always have, if you look back over time, we do have these seasonal lows. But it's just uncertain how that will pick up. Frankly, we're being very conservative in New York. That was a market for us that we had previously done more business in on the single family side and we're doing a lot less now.

So those would be the caveats with respect to that. But as you said, I'm looking forward in the calendar year and I'm also, frankly trying to moderate growth expectations that they're not going to be what this quarter's loan growth was in subsequent quarters. So that's more of a way to think about it. That's don't know, Andy, do have anything to add there?

Speaker 4

No. It's a great summary. Again, it partially depends on warehouse, where warehouse ends up. It's entirely possible that it will pull back, but, you know, could be dramatically by the time we get to June thirty of twenty twenty one.

Speaker 5

Got it. Okay. That that's helpful. And then just if you look at the the the entire credit quality bucket, it it seems like a lot of the issues that you've mentioned, they're more unique situations to some of these borrowers. It seems like your strategy of forcing people to pay you rather than, put them grant them deferrals is working out really well.

Are there any areas that you have concern on on credit beyond what you may have mentioned? Are you any seeing any weakness in the economy beyond what we would have expected as a result of the pandemic?

Speaker 2

Well, not in the asset classes that we generally work with. Obviously, the two hotels that were there, frankly, the only reason they weren't solved or were gone was simply because of this Oregon foreclosure moratorium. We had an agreement to sell those loans at par plus accrued, and when the moratorium came in place, the fund that was going to buy those loans backed out. So I think obviously to the extent there are hotels there. On the multifamily side mostly, we had taken some of the multifamily loans we have.

We have ready buyers for all these multifamily loans at par plus accrued. And the thing of it is we've been selling them and then they've been curing in fifteen or thirty days. So sometimes somebody's a little late with a payment and they're thirty five days late and they cure. So not really. I don't see anything, particular there.

This New York project is actually a nice building in a great area, but, some interesting sort of legislative things came up. The retail tenant was supposed to be moved out. There was a moratorium on moving that tenant out. That tenant stopped paying. So some of the governmental interference in the private markets is clearly I'd say thematically something that could happen.

But we don't see it really impacting our book given that we're so focused on asset classes that are really doing pretty well overall.

Speaker 5

Got it. And it sounds like with these LTVs, if there was an issue, sounds like you for anyone that may have given you some trouble or consternation, you at least have willing buyers that low LTV. So it doesn't really seem like lost content is going to be all that meaningful.

Speaker 2

Yes, I think that's right. I certainly don't think lost content. I mean, the type of assets that we generally have there, you're talking about a little clips at the top end of the range, not some kind of total loss on a company that just is no longer viable or something. So I think that's right. So we feel quite good about credit and feel very well reserved.

Speaker 0

Got it.

Speaker 5

Cool. I'll step back. Thanks for taking the question.

Speaker 2

Thank you.

Speaker 0

Our next question comes from the line of Gary Tenner with D. A. Davidson. Please proceed with your question.

Speaker 6

Thanks. Good afternoon. I just wanted to ask about mortgage warehouse. You actually partially addressed this, but I'm just wondering, given the pace of growth that you've seen and, obviously, you're looking to continue to expand those relationships, It looks like it's right at about 10% of loans today and that may cure itself, as you pointed out, over the next six months or twelve months. But do you have

Speaker 2

an internal limit generally for that segment? With respect to an overall limit, we do have one, but it certainly allows us to exceed, where we are. From a risk perspective, I think the right way to think about the risk associated with those loans is absent loans that we're purchasing ourselves, or loans to very secured conduit relationships, they're all government mortgages. We're doing the work to make sure that those loans qualify for sale. We're a Fannie Mae direct seller.

So to the extent there was ever any underlying issue with any of those mortgage companies, we would simply be able to take that collateral and sell it. The issue in mortgage warehouse is generally fraud and there's a variety of mechanisms including the systems that we have that are widely shared with other mortgage lenders to make sure that that dual pledging issue doesn't occur. So frankly, it's one of the asset classes that from a safety perspective is a very good asset class to grow in. It exhibits obviously very high levels of liquidity. Essentially the mortgages are almost entirely guaranteed by the government.

The weakness in the product, as I'm sure you know, is that the rate is lower than the average rate in our loans, and there's higher levels of volatility associated with those loans. And so in the event that mortgage lending pulls back, the calls you get are, well, would you like to be I have four lines, would you like to be used or not? And if you would like to be used, then you need to be in this range. So you can have interest rate compression on those lines if there's a pullback in mortgage lending.

Speaker 6

Great. I appreciate the detail there. And then just as a follow-up, you've mentioned zero commission product, self directed trading getting ready to be launched pretty soon. Just wondering with all the noise going on with Robinhood, the last couple of days, any any thoughts or ramifications positively or negatively from, you know, kind of what's what what's going on?

Speaker 2

Well, so it's interesting because Axos Clearing has always had retail brokerage accounts. And those retail brokerage accounts arose and then that they trade directly with clients on. So this is really taking this Axos Clearing product and bringing it through the platform, in a way that would expand the service. So, you know, think with respect to the question of the nature of what's going on with Robinhood, I would say I'll address this at two levels. One level is more broadly, individuals are looking for a consolidated relationship between a trading and investing account and a banking account.

We see the massive growth of the Robinhoods and their attempts to add checking accounts even if it didn't exactly work out right away, right, and they'll be back at it. So the strategic moves we've been taking, in my opinion, are absolutely validated by what's happening in the market with respect to the growth in online trading. And that required also the clearing company, given the margins in that business to make sure that you own all the value stream from a revenue perspective. Now the question with respect to these, the utilization of social media to drive, trading is something that, because we own our own platform, we're going to be looking at and considering in the event that some of these types of activities occur that have occurred over the last several, days, and thinking about how to deal with those, whether it's speed bump that, requires somebody to go through a warning and a review of whether they're interested in trading on such a regular basis, or there are other remedies associated with that, are things that, you know, a compliance group would consistently review and make determinations on. So I think, you know, I don't want to comment on whether any of the events would somehow hurt a reputation of one firm and therefore make us more likely to get clients or something.

I mean, given that this product is, you know, six months away, I think those things are just too speculative. But I do think overall it's demonstrative of the fact that digital financial services and the bundling of them, is a strategy that's really important.

Speaker 6

Great. I appreciate your thoughts.

Speaker 2

Thank you.

Speaker 0

Our next question comes from the line of Michael Perito with KBW. Please proceed with your question.

Speaker 7

Hey, good afternoon, guys. Thanks for taking my question.

Speaker 2

Hi, Mike. Hey, Mike.

Speaker 7

Greg, I was wondering on the lender finance portfolio, I think if we look back, it was over a couple of billion, nine plus months ago, obviously came down another 34,000,000 quarter over quarter here. Do you expect that trend? Will that continue to work against your growth here near term? Do you think that's close to bottoming out? Can you maybe just give us a quick update of your view on that portfolio as you guys clearly have made

Speaker 4

an effort to run it

Speaker 7

down here over the last year or so?

Speaker 2

I think that the asset class will probably shift and it will become more real estate hard asset focused. Think really the reduction, I think where we attached ourselves and the structure that we had, even given a very severe recession, much more severe than it appears the consumer recession is going to be in The U. S, I think we were safe. I think that the reality is that the market demand and our underlying customers have simply reduced originations or the demand for those originations are such that the market really isn't there right now. However, there are other lender finance areas sort of that are the result of different, the more real estate oriented lender finance opportunities that are there.

So I think that that portfolio will stabilize just overall and probably grow a bit as well. So I think we're probably done with it being a drag on loan growth.

Speaker 7

Helpful. And then in your prepared remarks, I think you mentioned there was three pretty sizable clients on the clearing side that you guys are either brought on board or bringing on board. I was curious if you can maybe give us an update on where kind of the efficiency and the margin of that business is today. I mean, are these clients and growth from the prior couple of quarters? Are you starting to really kind of see it flow through the scalability of the platform you've built?

Or are we still maybe six months away from that? Any updated thoughts there?

Speaker 2

Yeah. I think we're away from that. Whether it's only six months or not, I think our goal with respect to what we're doing in clearing is the creation of a platform both on the custody side for RIAs and on the clearing side for IBD's. The goal then is to take the software that we've developed and utilize that software for the end clients from an acquisition perspective, as well as to build on the existing trading platforms for retail that the firm has and bring those through in a very cohesive and user experience friendly way. And so that's just a lot of stuff to do.

That's new businesses to build where the competitors are large, and have big head starts. So Axos Clearing is about a month away from launching a really, very nice, RIA custody platform. It's quite comprehensive. So those are the type of things that are going on. And so I'm just not particularly focused on whether they make $1,000,000 on the segment or lose $1,000,000 or make $2,000,000 right now.

What I'm focused on is the long term benefits that that will generate. What I hope to do is in a couple years instead of being sitting on seven fifty or seven seventy of zero cost deposits, I want to be sitting on 3,000,000,000 and $4,000,000,000 of zero cost deposits. That's really the overall goal. And even if right now the deposit rate that clearing gets in those deposits is very low, and clearing would be very profitable right now at a two and a half percent rate. You know, if fed funds were two and a half percent, clearing would be super profitable.

You say, well, it's not right now. But the reality of this is is that, you know, the deposit businesses have to be built over half decades and decades. And so the investment is really about that. And we're going to continue to invest in it and not be bothered by little drips and drabs there. Now, I'm not saying that I want it to increase, I think they are doing a really good job of driving the profitability.

It's just not that's not the immediate goal.

Speaker 7

No, that's absolutely helpful and makes a lot of sense. And I guess on that point, as we think about kind of deposit platform that you guys are building, I'm just curious, obviously, 2020 thematically seem to be a big proof of concept for a lot of kind of digital consumer banks. And just curious if maybe you can give us a quick recap of how the digital consumer bank kind of grew over the past twelve months. Do you I imagine it was fairly robust. Do you think that can continue into this year?

Still momentum in the market on that side just to kind of continue to grow the consumer digital bank at a meaningful Yes,

Speaker 2

we're seeing tremendous growth in accounts and pretty much every month is a record account opening quarter for consumer checking accounts, for the utilization of the direct deposit switch kits. We're also obviously shifting, and I think we're improving the mix of that business a lot because we have the UFB brand which is more focused on savings accounts and kind of attracts yield focused folks. That's sitting at about 20 basis points now. And so we really are, I think, we're in the range of the next couple of years getting to the point where we have the checking accounts we're bringing on. The average cost is in the twenty, twenty five basis point, 28 basis point range, something like that, so all in.

So I think it's really working. The small business side is really working. The platform is getting a lot of compliments. All the work that's being done internally on the risk engines to make the transactions more seamless, the work that is being done to add product is really paying off. So, yeah, we have a all that work that was done on the UD B side is really paying off and it's paying off in the efficiency ratio because we can take activities that are coming through call centers, analyze them, and then push them through automated fulfillment.

And so efficiency ratio work is never glamorous. It's always a grind it out sort of deal. But with this platform we're able to just digitize so much and it helps with everything. It helps with compliance, it helps with cost, and it helps with customer experience. So yeah, we're really excited about where we are and we're really pleased we made the investments we did even though they were kind of painful in the efficiency ratio as it you look over the long term it kind of ran up and now it's starting to come back down.

Speaker 0

And just sorry, if I

Speaker 7

can just sneak one last one in on that point, and that was a great rundown. Just the when you think about your kind of target consumer for the the the that platform, I mean, think a lot of the the names generating the headlines clearly have an underbanked and unbanked kind of focus. And but I'm just curious how you kind of view the target consumer that or is it are you really seeing kind of a broad range of people adopt the platform at this point? Any other additional color there would be helpful.

Speaker 2

Yes. Our consumers do tend to be higher end than those other platforms. They carry larger balances. And those platforms are largely trying to drive Durbin exempt transaction revenue. That's where they make a significant majority of their money as you know.

So that's a little bit different for us. And also obviously with what we're trying to do on the advisory side with the RIA platforms and then the customers of our introducing broker dealers, those are going to tend to be different customer segments. So the platform is built to accommodate everyone, it's open to everyone, and we do get a mix of customers. I think that the trading side will actually shift some to the millennial groups. You have to be thoughtful about that.

My 15 year old wanted to know how to trade cryptocurrencies the other day. It's an interesting set of products that I think we'll end up with. We do have a different demographic, though, than Yeah. Than than a Chime or something.

Speaker 7

Yeah. No. That makes sense. And the direction everything's going, you're probably gonna have to start offering cryptos on the UDB at some point in the near future. So

Speaker 2

Yes. It's interesting. There's, you know, there's a lot of, there's a lot of work being done in that space for sure.

Speaker 7

Yeah. Great. Well, thank you, guys. I appreciate it.

Speaker 1

Thank you. Thanks, Mike.

Speaker 0

Our next question comes from the line of David Chiaveri with Wedbush Securities. Please proceed with your question.

Speaker 3

Thanks. Questions. And actually, I'll start with on that last point in discussion about your target market. And I saw the press release today from n twenty six and the growth that they're generating in The US. And I was curious if you're able to disclose, you know, how big this relationship is and what your expectations are going forward.

Speaker 2

We don't generally try to talk about our partner relationships too much except to say that it's public information that we're their issuer and they hold their deposits with us. We like working with them. We think they're an innovative business. You could say that, well, we have a competitive platform, but the reality is that the market for consumer banking is dominated by large banks and whatever collaboration that we have, it's certainly we don't feel like it runs into them and I think they feel the same way.

Speaker 3

Got it. Thanks for that. And then I had some questions on the outlook. In terms of net interest income and net interest margin and clearly on the margin front given the strong deposit growth, we're kind of gravitating towards a discussion around net interest income. Are you able to provide any sort of outlook commentary on what you're expecting over the next couple of quarters or for the full year in, 2021?

Speaker 2

Well, an aggressive analyst might be inclined to revise their NIM targets very far up. And I would advise not to do that. And I think the reason why that would be the case is that obviously warehouse gross is lower. We are continually looking at loan rates and as banks sort of adjust to this new environment, we can't tell whether we'll have loan rate compression, so that's there. We talked about how we're not going to have a lot of compression on the existing book because we're all at floors, so that's that issue.

And then also, we're looking to continue to do things like draw customers in through getting them into the transaction platform on the checking side, things like that, and what kind of incentives and what sort of things we're offering to them. So don't know, Andy, do you have other

Speaker 4

No. I think our guidance is kind of, Greg stated is still 3.8 to four. You could pick, somewhere between three point eight and three point nine kind of where we know where we would be, in the long run. So and again, I I think the only caution here is, we're in an environment where rates are really low. Competitive rates are coming down.

We've done a great job maintaining our margin, but we're also interested obviously in trying to keep loan volume. And so it's a blend between both. So for that reason, we're at between 3.84.

Speaker 2

Yeah. And also some of that, now that we have the securities subsidiary getting this blended rate and some margin and those type of loans and things like that sometimes are not quite at the rates that others are. So you end up with a mix question with respect to the overall.

Speaker 4

Right. Probably most importantly, I mean, we upped the bank NIM a little bit to compensate for our sub debt. So as you know, we added $175,000,000 of sub debt, which was a big increase, but we still improved our, you know, our NIM a little bit. So it's a it's a balancing act and and but we're we're still targeting between, you know, that range.

Speaker 3

Got it. Thanks for that. And I think I heard in your prepared comments about the loan loss provision being stable. And I wanted to clarify, you know, is and I may have just miss misheard all the all the detail around it, but was that kind of stable with the December quarter for the next couple quarters? Or could you just kind of reiterate what you were saying in your prepared comments about the loan loss provision outlook?

Speaker 4

Sure. I mean, I think, basically, we're not seeing any kind of trend that's worrying us that we would expect any kind of prolonged increase in provisions for that piece.

Speaker 2

You've also seen the comment that, frankly, my view of that I think that's I agree with Andy. And then the other comment I would make is I saw there were a lot of banks that released reserves, with respect to this quarter. And I guess my comment, the way I meant it, was directed at don't expect us to release reserves. So that might mean that I'm not saying we're going to have the same reserves in these quarters. We'll see obviously how things turn out, look at loan volume, that's going to drive that, those sort of things.

But I just wouldn't be expecting some reserve release. That's something you've seen some other banks do.

Speaker 3

Got it. Got it. That's helpful. And then your comment about self clearing for Axos Invest, perhaps mid year, how much in savings could that generate for you guys?

Speaker 2

It was it was in, it was in is it around $600 or something like that?

Speaker 4

It's modest relative to the entire financial Yeah.

Speaker 2

I mean, the the truth is right. The truth of the matter is is that, you know, it's interesting because what, of course, we're doing is we're turning right around and we're adding products and services into the business and adding people there to hit our growth objectives. So I think it isn't something that's so overwhelming. It is helpful from a cost perspective and it also ensures that we have all those capabilities, from an API perspective so that it also makes us a viable alternative for third party investment platforms that would like to use, us as a custodian to hold their securities and their deposits. So

Speaker 4

I think what what it really speaks to is the scalability. Because now that we've got the pipes in place at a base level charge, now we can scale it at a at a

Speaker 2

at a minimal cost. Right. And and then there's there's there's a there's a lot of product advantages from that too because if we wanna add something and we wanna have the communication, it doesn't have to be a a work order to a third party firm. It's it's something we can we can work through.

Speaker 3

Great. That's really helpful. And then the last one, just PPP round two, do you have an expectation as to how much you plan to do there?

Speaker 2

As little as possible. We're not really gonna do we're we're gonna take care of, you know, selected clients and and and folks that have, you know, strong TM relationships with us. And it's just the nature of having a potential 1% loan on your balance sheet, they've extended this. It was fine, and we kind of did it, frankly, more for the purposes of trying to add capacity to a system that needed it and things like that. We never really it was useful for getting some deposit accounts for when the big banks were clogged up, but I feel like the systems have kind of worked through.

So we're taking care of our clients. I wouldn't expect it to be something significant for us.

Speaker 3

Got it. Thanks very much.

Speaker 1

Thank you.

Speaker 0

And with that, this concludes our question and answer session. And I would like to turn the call back over to our management team for any closing remarks.

Speaker 2

Thank you, everyone. I appreciate your interest, and we'll talk to you next quarter.

Speaker 1

Thank you.

Speaker 0

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful

Speaker 2

day.