Axos Financial, Inc. Q4 FY2021 Earnings Call

Hello and welcome to Axos Financial Q4 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call to Johnny Lai, Investor Relations. Please go ahead.

Thanks, Kevin, and good afternoon everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.'s fourth quarter 2021 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 12 months ended June 30, 2021, and they will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will be an audio replay available in the Investor Relations section of the company’s website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release. Before handing it over to Greg, I’d like to remind our listeners that in addition to the press release, we also issued an earnings supplement and an 8-K with the financial disclosures. All of these documents can be found on the Axos Financial website. And with that, I’d like to turn the call over to Greg.

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 fourth quarter of fiscal year 2021 ended June 30, 2021. I thank you for your interest in Axos Financial and Axos Bank. We ended fiscal 2021 with strong net income and loan origination growth, stable net interest margins, excellent credit quality, and industry-leading returns. Axos reported fourth quarter net income of $54.3 million for the three months ended June 30, 2021 and earnings per diluted share of $0.90. For the 12 months ended June 30, 2021, net income and earnings per share increased by 17.6% and 19.5% to $215.7 million and $3.56, respectively. Our book value per share was $23.62 at June 30, 2021, up 14.9% from June 30, 2020. The highlights for this quarter include the following: net interest margin was 3.92% for the fourth quarter, down slightly from 3.96% in the third quarter of fiscal 2021 and up three basis points from 3.89% in the fourth quarter of 2020. Net interest margin for the banking business was 4.16% compared to 4.23% in the quarter ended March 31, 2021 and 3.95% for the quarter ended June 30, 2020, up 21 basis points over that prior year's comparable quarter. For all of fiscal 2021, net interest margin for the banking business was 4.11%, down slightly from 4.19% in fiscal 2020. Excluding tax-related H&R Block loans which we discontinued in fiscal 2021, net interest margin for the banking business was up year-over-year. Excess liquidity accounted for all of the small sequential decline in both our earning asset yield and net interest margin this quarter versus the prior linked quarter. Loan yields continue to hold up well at 5.15%, a five basis point increase from 5.10% in the quarter ended March 31, 2021. We continue to reduce our funding costs by replacing higher cost deposits with non-interest bearing demand deposits. Non-interest bearing deposit balances grew by approximately 28% over the prior fiscal year and end-of-period cost of interest-bearing demand and savings accounts went from 58 basis points at June 30, 2020 to 18 basis points at June 30, 2021. Our efficiency ratio for the three months ended June 30, 2021 was 51.66% compared to 50.64% in the third quarter of 2021. Efficiency ratio for the banking business segment was 45.2% for the fourth quarter of 2021 versus 42.33% in the third quarter of 2021. The sequential increase in overall and banking efficiency was a result of higher data processing expenses related to our software initiatives and enhancements to our bank's operating systems. Diluted earnings per share was $0.90, up 19.2% from $0.75 in the year-ago quarter. Our corporate tax rate decreased from 29.5% in the third quarter 2021 to 28% this quarter. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 15.56% in the fourth quarter and 16.51% in the fiscal year ended June 30, 2021. Capital levels remain strong with Tier 1 leverage ratio of 9.45% at the bank and 8.82% at the holding company, both well above our regulatory requirements. Our credit quality remains strong with no loans in forbearance. Non-performing assets represent 1.26% of total loans and leases at June 30, 2021 compared to 1.14% on March 31, 2021. Charge-offs excluding tax-related products were one basis point annualized of average loan and lease balances this quarter. Excluding mortgage warehouse and single-family jumbo mortgages and our bulk sale of $31.5 million of PPP loans, pending loan balances increased by approximately $270 million, up 15.5% annualized from the third quarter of 2021. For the quarter, strong originations in multifamily, auto, and C&I lending were offset by record high payoffs in jumbo single-family loan balances, lower period ending balances in single-family mortgage warehouse, and $31.5 million of PPP loan sales. Ending loan and leases were up 7.4% year-over-year, but decreased by approximately $296 million from the third quarter of 2021. Total loan originations for the fourth quarter ended June 30, 2021 were $2.1 billion, up 27.6% from $1.6 billion the year-ago period. Q4 2021 originations were as follows: $242 million of single-family agency gain-on-sale production, $380 million of single-family jumbo portfolio production, $186 million of multifamily production, $37 million of commercial real estate production, $83 million of auto and unsecured consumer loan production, and $1.1 billion of C&I loan production, resulting in a net increase of $232 million. Mortgage banking gain on sale generated $2.9 million of mortgage banking income compared to $9 million in the third quarter of 2021 and $12.7 million in the corresponding quarter last year. Originations decreased by approximately 36.3% linked quarter to $242 million, while gain-on-sale margins dropped slightly to 323 basis points from 333 basis points in the third quarter of 2021. The outlook for mortgage banking remains relatively stable from the fiscal 2021 fourth quarter. Our pipeline of single-family agency mortgages was $193 million at July 9, 2021. Ending balances in the mortgage warehouse portfolio were up $43 million from $570.8 million at June 30, 2020 and down $354 million from the elevated March 31, 2021 balance of $968 million, highlighting sensitivity to overall volumes in the mortgage market. We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships. Our single-family warehouse business generates strong risk-adjusted returns for us and remains a small part of our overall loan book, representing approximately 5% of our June 30, 2021 ending loan balances. Our diversified consumer and commercial deposit and securities businesses continue to benefit from the secular shift toward digital banking. Consumer deposits, representing approximately 42% of our total deposits at June 30, 2021, are comprised of consumer direct checking, savings, money market, and non-interest bearing accounts. The weighted average interest-bearing demand and savings deposit cost was 18 basis points at June 30, 2021, down by 40 basis points compared to 58 basis points at June 30, 2020. Average non-interest bearing demand deposits was $2.6 billion in the quarter ended June 30, 2021, up 17.5% from the prior quarter. Ending time deposits at 6/30/2021 were down $180 million linked quarter and $834 million year-over-year as we replaced higher-cost non-core time deposits with lower transactional deposits. Of the total $1.5 billion of certificates of deposit outstanding on June 30, 2021, in the next 12 months approximately $1 billion at a weighted average rate of 117 basis points will mature. Our small business and specialty consumer and treasury management businesses, including our fiduciary services businesses, continue to contribute to our low-cost deposit growth. Axos Clearing continues to generate low cost deposits that we'll be able to put on or off balance sheet. Ending cash deposit balances at Axos Securities were $730.2 million, with approximately $320 million on Axos' balance sheet at June 30, 2021. The pending acquisition of E*Trade Advisory Services will add over $1 billion of incremental cash sweep deposits that we can use to fund loan growth, replace maturing certificates of deposit, or keep off balance sheet and generate fee income. Our credit quality remains solid. Annualized net charge-offs to average loans and leases excluding seasonal tax products was one basis point this quarter compared to five basis points in the corresponding period last year. We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021, all of which we fully provisioned for in prior quarters. Non-performing assets to total asset ratio was 107 basis points for the quarter ended June 30, 2021, down from 114 basis points in the third quarter of fiscal 2021. Of our non-performing loans, 73% are single-family mortgages where we have historically had very low realized losses. Of our non-performing single-family mortgages at June 30, 2021, approximately 89.5% have an estimated current loan-to-value ratio at or below 70% and approximately 99% are below 80% of our best estimate of current loan-to-values. Given the relatively low loan-to-values on our single-family mortgages, we did not anticipate incurring material losses on the vast majority of our delinquent loans. We had no loans in forbearance at June 30, 2021. Other than single-family delinquencies, the remaining real estate delinquencies consist of one hotel loan we previously discussed, which was around $12.1 million of UPB that was sold subsequent to the end of the quarter. We had seven multifamily loans that were 30 to 59 days delinquent for a total value of around $8 million that are at an origination LTV of around 42% on average and two multifamily loans that are 60 to 90 days delinquent for $1.8 million, with an average 55% origination LTV. Our loan loss provision this quarter was $1.3 million compared to $2.7 million in the March 31, 2021 quarter and $6.5 million in the quarter ended June 30, 2020. The primary reason for the sequential decline in loan loss provisions is a decline in average and ending loan balances. Our total allowance for loan losses was $133 million at June 30, 2021, which represents approximately 1.2% of our total loans and leases, contrasted with one basis point of annualized charge-offs this quarter excluding refund advances and related charge-offs and greater than 17 times the total annualized charge-off rate excluding refund advances. Our loan growth outlook for fiscal 2022 remains essentially unchanged at high single-digits to low teens. Demand and production in all of our lending areas continue to be solid, although elevated prepayment rates in our single-family mortgage book may continue to represent a risk to maintenance and growth in that portfolio. We continue to add personnel in our lending areas to bolster loan growth. Our loan pipeline remained solid, with approximately $1.7 billion in our consolidated pipeline at June 30, 2021, consisting of $193 million of single-family agency gain-on-sale mortgages, $480.4 million of jumbo single-family mortgages, $230.7 million of multifamily and small balance commercial real estate term loans, $683 million of C&I and personal loans, and $97 million of auto and consumer unsecured loans. We continue to generate strong returns with return on average common shareholder equity of 15.56% and 16.51% in the three months and 12 months ended June 30, 2021, respectively. Our efficiency ratio for the banking segment was 45.2% for the quarter ended June 30, 2021 compared to 42.33% in the last quarter. The slight uptick in our efficiency ratio reflects lower mortgage banking income and continued investments across our businesses. Our capital ratio remains strong with Tier 1 leverage to adjusted assets of 8.82% at the holding company and 9.45% at Axos Bank. We have access to approximately $2.5 billion of FHLB borrowing, $2.3 billion in excess of the $186 million we had outstanding at the end of the fourth quarter. Furthermore, we had $2.1 billion of liquidity available at the Fed discount window as of June 30, 2021. Our strong organic loan growth and returns coupled with a clean capital structure allows us to make opportunistic stock buybacks and acquisitions such as the E*Trade Advisory Services acquisition that we announced last quarter. Our securities business had an excellent quarter with strong growth in fee income and net interest income. Broker-dealer fee income increased 12.6% in the fourth quarter compared to the corresponding period last year, due to higher client activity. Securities margin balances increased 50% year-over-year to $327 million, while stock lending increased from $256 million in the June 30, 2020 quarter to $729 million in the June 30, 2021 quarter. Although ending deposits at Axos Clearing decreased by approximately 8.1% linked quarter to $730 million as clients increased their risk tolerance, deposit balances are up 62% year-over-year due to growth in Axos Clearing's assets under custody. In April, we announced the signing of an agreement with Morgan Stanley to acquire their RIA custody business, E*Trade Advisory Services. With approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits at the time we announced the deal, EAS provides a turnkey RIA platform for independent RIAs and TAMPs, an experienced team of custody specialists with decades of experience working with RIAs and advisors, incremental fee income, and low-cost deposits. We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest, and our ability to provide additional technological and banking services to these RIAs, advisors, and their clients make us an ideal strategic acquirer for EAS. We have made significant progress over the past three months across a variety of conversion and integration activities. Having already received FINRA approval to convert the EAS business to a broker-dealer platform, we feel good about achieving the remaining milestones required to close the acquisition in August of 2021. We remain committed to a smooth client transition and to invest to grow the RIA custody business. As a reminder, the business generates fee income from asset and transaction-based revenue and net interest income from clients' sweep deposits held on or off balance sheet. We will provide an update on the expected financial impact, including EPS accretion, expense and revenue run rate, and deposit balances when the deal closes. We soft launched our self-directed trading platform at the end of June. Version one of the self-directed trading offering is focused on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online login and mobile app. We see lots of cross-sell opportunities across our lending and fee-based businesses including Axos Invest over time. While it's too early to draw any meaningful conclusions from our self-directed trading launch, it provides another customer acquisition and monetization tool on our growing list of lending, deposit, and fee-based services to our customers. I'm proud of the Axos team for staying focused on serving our clients and delivering strong earnings growth and returns to our shareholders over the last 12 months during a challenging and uncertain environment. Our strong organic capital generation affords us the ability to invest in existing and new businesses, technology, and our team. Our deposit platform investments have generated meaningful increases in non-interest bearing deposits, significantly lowered our cost of interest-bearing deposits, and allowed us to earn fees from placing deposits in other banking institutions. I firmly believe that our investments in our securities businesses will pay meaningful dividends to support future fee income, deposit, and loan growth. The technological investments we have made in our banking platform are generating strong interest from EAS advisory clients, one of the many indications that strong technology and product synergies exist across these businesses. I'm excited about the cross-sell potential across each of our three businesses: consumer banking, commercial banking, and securities. The pending EAS acquisition will accelerate our time to scale and profitability in a growing market segment and provide an excellent source of customers for Axos banking products. Despite a challenging interest rate and competitive environment, we are better positioned than ever to maintain consistent, profitable growth. Now, I'll turn the call over to Andy who will provide additional details on our financial results.

Thanks Greg. First, I wanted to note that in addition to our press release, an 8-K with the supplemental schedules was also filed with the SEC today. It is available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on several topics; please refer to our press release or our SEC filings for additional details. As Greg mentioned, we expect to close the acquisition of E*Trade Advisory Services, or EAS, in August of 2021. In anticipation of the EAS closing, we took steps to prepare the bank balance sheet for an increase of up to $1.2 billion in cash and deposits at closing. Average deposit balances increased this quarter compared to last quarter's average for the three months ended March 31, 2021. However, with targeted rate decreases in certain savings and money market customers, we ended the quarter with a decrease in deposits of $796.7 million. With the decline of primarily higher-rate deposits, the bank was able to reduce its point-in-time deposit rates on all interest-bearing checking and savings accounts to 18 basis points at June 30, 2021 compared to 31 basis points at March 31, 2021, while making room on the balance sheet for some or all of the EAS deposits expected in the quarter ended September 30, 2021. The deposit decrease was funded in part with the Bank's excess liquidity at the Federal Reserve Bank, resulting in a $432.4 million decline in low-yielding cash and cash equivalents at June 30, 2021 compared to March 31, 2021. The Bank is in a position to maximize the use of EAS deposits when it closes and does not expect the acquisition to adversely impact the Bank's net interest margin or its Tier 1 leverage capital ratio next quarter. We will provide an update on the full financial impact of the EAS acquisition when it closes. Moving to non-interest expense for the quarter ended June 30, 2021, operating expense was $81.9 million, up $1.05 million or 1.3% from the linked quarter ended March 31, 2021. The following detailed discussion excludes any future impact from the EAS acquisition. Salaries and related costs declined by $1.3 million on a linked quarter basis, primarily due to favorable adjustments to compensation costs related to loan production and other compensation estimates. Next quarter, we would expect salaries to increase back to the third quarter level. Occupancy costs increased $1.1 million on a linked quarter basis, primarily due to a $900,000 one-time charge associated with subleasing the New York City office space. Next quarter, we would expect the occupancy costs to decrease to approximately $3.2 million. Data processing costs have been impacted by growth in customers, product enhancements, and by initiatives to move legacy network equipment into the cloud. On a linked quarter basis, data processing costs increased $2.8 million; approximately $1.2 million of that increase was project-related and will not recur next quarter. FDIC and other regulatory fees on a linked quarter basis declined $900,000 as expected, primarily due to FDIC insurance formula adjustments. Going forward, we expect next quarter's costs to approximate this quarter. Moving to income taxes, our effective book tax rate for the year ended June 30, 2021 was 29.45%, down 70 basis points from the 30.15% effective tax rate for the year ended June 30, 2020. The largest driver of the changes in our income tax rate is the timing of our employee RSU vesting and the market price of our common stock at the time of that vesting. If the common stock price at the vesting date is higher than the price of our common stock at the time of the RSU grant, there is a favorable impact on the book tax rate. The reverse is true if the stock price is lower at the vesting date. A large portion of the RSUs is previously issued or scheduled vesting during our fourth quarter of the fiscal year, making the effective tax rate more volatile in the fourth quarter, depending on our common stock price. For the quarter ended June 30, 2021, our effective tax rate was a favorable 27.99% while last year the effective tax rate for the fourth quarter was 33.31%. With that, I'll turn the call back over to Johnny Lai.

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

Our first question today is coming from Andrew Leisch from Piper Sandler. Your line is now live.

Hey, good afternoon, everybody. Thanks for the detail on the deposit transactions here near the end of the quarter. But I guess absent bringing anything on from EAS, how should we look at the size of the average earning asset base here — securities, borrowed and margin lending was much higher than it has been recently, and then it was also higher at the end of last quarter. Is this a new run rate for that line, and can you explain what may be causing some of the flows here?

Sure. No, I think we continue to have strong growth in our stock of lending programs, and we are expecting that average to continue to creep up. So as a run rate, it is not a bad place to start.

Okay, got it. And then it looks like with interest-bearing deposits, the liquidity intra-quarter some of that's been reduced here to start this first quarter. I mean, do you have anything you can share on what you do expect to bring on from EAS? Or is it still to be determined?

Yeah, no, we'll make a final call as we get closer. And of course, we may even change that mix throughout the quarter. But I think the operative thing, Andrew, is that that excess liquidity is yielding only 15 basis points. So the ability to manage it down and get better effective use from our deposits will be strong for the bank.

Got it. Okay. So if you're sitting here with a margin of 3.92% for the fourth quarter, with this less the liquidity that you've had for managing some of these deposits out ahead of the closing of the deal, it's safe to assume the margin should rise from this level?

Yes, that makes sense.

Okay. That helps a lot. All right. I'll step back. Thanks for taking the question.

Our next question is coming from Marla Backer from Sidoti. Your line is now live.

Sorry about that. Yeah. Thank you. So I'm wondering, obviously there was a very strong quarter and I guess where do you see certain categories where you see potential for continued growth based on what you've seen some subsequent to the quarter end?

Sure. So on the lending side, single-family I think is definitely going to either be stable or down a lot less than it was in the prior quarter. The jumbo book has dragged down loan growth, which has been very strong in the C&I side. The C&I side, including CRE, looks good. The auto and unsecured side also looks good. Warehouse lending will be more stable. There may be a slight pop given that rates have come back down a little bit, and mortgage banking may be a little bit stronger — not substantially stronger, but a little bit. So our loan growth side is hard to know because the prepay side is a big factor. Generally, when you have rate drops and a loosening of credit, you might see enhanced prepayments from refinances. It looks like prepays are slowing down a little bit this month, but it's still early. So forecasting is difficult. The C&I side has been strong, autos have been strong. We won't have the same challenges we had with PPP loan reduction. The single-family pipeline is very good and it's up from the quarter. There's a lot going on in a positive way. I don't want to say it's going to absolutely grow this quarter, but it should be more stable. Mortgage banking probably has a chance to be up, but not materially. CD run-offs help margin, but loan rates in general are lower in some categories than they were. As we're continuing to expand our business, the loan rate side — to grow loans we may have lower average rates on production. So you have to watch that. On the securities side, that business continues to grow. We expect to close EAS in the fourth quarter and there's a lot of opportunity there to make the business more efficient and to grow it. We have good client activity, but realizing that activity will take several quarters as we add operating efficiency and discipline. So contributions from that area will take time to materialize, likely over the next year. Overall, I think C&I and auto are places where we see continued growth and the single-family side is stabilizing with good pipeline. We're investing in personnel and capabilities to support these areas. There's a lot of work underway and a path to growth, but timing is uncertain.

Okay. Thanks very much for that color.

Next question is from Gary Tenner with D.A. Davidson. Your line is now live.

Hey good afternoon. It's Gary Tenner. One quick question. Greg, when you said mortgage banking could be up, are you talking about the fee income line?

Mortgage banking fee. Yes, I think it could be up a little — maybe a million or so, perhaps up to $1.5 million. It's not going to be back to where it was, but there's a little more activity and margins may be a bit compressed.

Got you. In terms of the broker deposits, you talked about the deposit activity in the quarter. Broker deposits stand about $600 million, cut in half year-over-year. As you get the additional deposits coming in from EAS, would the broker deposits stand increase further from the period end number, or is it more of a balance with other aspects like loan growth or off-balance sheet placements?

So I think a good portion of the broker deposits — roughly $300 million — are CDs. We're expecting the CDs to reprice as they mature; that is part of the roughly $1 billion of CDs that come off over the next year. A portion of the brokered deposit balances were well above 1%, so their runoff helps. Whether we bring in other broker deposits over time is possible; pricing in that market is still favorable. Generally, expect CDs to come down and non-CDs to be around the same or maybe up a little bit.

And I would add that we have more than enough off-balance sheet liquidity even without the acquisition. Broker sweeps are non-brokered to others, and there is demand from other institutions for those deposits. That demand could be at a higher rate than this relatively small amount of broker deposits. Sometimes we use brokered deposits to term out certain lending when the rates make sense. We're in a strong liquidity position and can consider converting some liquidity into fee income. As the EAS business and clearing business grow, the opportunity increases; banks are willing to pay up for those deposits.

Thanks for the color. Then last question: broker-dealer fee income was sequentially lower. Is there seasonality in that business or another cause for the decline from Q3 to Q4?

It depends on a number of factors. Part of it is market pricing on the stock loan/stock borrow side; not all transactions have the same spread, so that can be a factor. Our deposits also came down slightly during the period, resulting in less fee income from off-balance-sheet deposits. Those are the primary factors affecting that line.

Next question is from Michael Perito from KBW. Your line is now live.

Hey, good afternoon, guys. Thanks for taking my questions. I wanted to hop back to a comment you made about making EAS more efficient. Can you expand on what that looks like exactly? Is that cost side, revenue side, putting deposits to work on your earning asset base, or a blend?

Yes. We have a consulting team that focuses on operational efficiencies. Morgan Stanley allowed that team to do work around core operations and straight-through processing. The technologies we bring — customer interaction, advisor-facing applications, banking platforms, robotic process automation, and customer ticketing systems — are all areas for improvement. There are real opportunities to improve the core operational workflows in that business. Our goal is to grow assets there without adding significant incremental cost. Where there's turnover or inefficient manual processes we can automate and shift people to higher-value activities like product development. To be tangible: money movement today can be manual — a client mails a check to the advisor, the advisor mails the check to the custodian. If our app allows a customer to deposit a check by taking a picture, that eliminates manual steps. EAS currently lacks some capabilities — account opening automation, for example — that we do have and can integrate. It’s not rocket science, but it's about hooking systems up, change management, and rolling things out. There are meaningful technological synergies and that will take some time, but it should be very meaningful over time.

Very helpful. And on the securities business in a rising rate environment, would you expect that to be positive overall? Deposits would remain low-cost, commercial lending would increase, etc. Any other parameters?

Yes, we expect it to be positive. We saw this previously: the rate on deposits at Axos Clearing was very low when Fed funds were at 25 basis points. These businesses have a low beta to rising rates; the deposits are effectively low cost and much of any increase in rates would accrue to the business. Our goal is to make these businesses operate as if that margin is at no cost. We're not fully there yet, but it isn't far off. Operational efficiencies will help, and growth brings more revenue opportunities. It creates a favorable profile for the institution and can offset potential negatives elsewhere, such as mortgage banking income volatility.

I agree — it will be favorable. It will increase our choices on where to put deposits and is clearly advantageous.

Got it. One more: from an ERM standpoint, how big are you willing to let this business get as a portion of Axos? Any parameters around the growth of this business?

I view the EAS business as a very safe business and a risk reducer for the institution. It gives us a steady source of high-net-worth customers who are sticky to their advisors. The advisor is sticky to us, and we don’t compete with the advisor; we augment the advisor's capabilities. That stickiness leads to relationships where clients come for mortgages, car loans, integrated checking, or margin lending. Those loans — margin and securities-based lending — are generally low risk. The main operational risk in a clearing business is things like short selling and execution-related processes; we have defined limits for those risks and pay a lot of attention to them. We had one issue early after buying the business, and we’ve since tightened controls. Overall, the business is a positive for the franchise, and thinking about its size in the organization is not the right metric — it's about managing the specific risks within the business properly.

A point of clarity: assets under custody, which is the primary growth metric, are not on the broker-dealer's balance sheet. Assets under custody can grow rapidly and will cause some balance sheet-related activity, but it is not $1 for $1. It gives us a lot of off-balance-sheet leverage.

Got it. Really appreciate all that color, Greg and Andy. Thank you.

Next question is coming from Steve Moss from B. Riley Securities. Your line is now live.

Good afternoon. Greg mentioned earlier that rates were lower. Just curious, how much lower were you seeing loan pricing these days?

I think single-family pricing is somewhere around 35 to 40 basis points lower. Auto may be somewhat lower as well. On the C&I side, using an all-in fee-adjusted rate, I'd use low-fives as an average. Things are moving around; competition varies by segment, so we continue to adapt.

Our guidance on NIM remains in the 3.8% to 4.0% range. We're cautious that we could face some pressure while we continue to grow, but we feel good about our ability to keep NIM within that range.

Part of the quarter-to-quarter movement you saw was driven by changes in the warehouse lending book, which tends to have a lower average rate in the bank. When that shrank, it impacted the averages — you shouldn't necessarily expect that to carry forward.

Okay, that's helpful. And a little more color on the types of businesses and properties driving C&I and CRE growth these days?

A lot of it is multifamily, repositioning projects, construction, self-storage and similar types of commercial real estate activity. That's driving a large portion of the C&I/CRE growth.

Okay, great. Most of my questions have been answered. Thank you.

Next question is from Tim Coffey from Janney. Your line is now live.

Great. Thank you. Good afternoon, gentlemen. Looking at origination activities in the quarter, they were about 50% quarter-over-quarter. The pipeline I think you said was around the same level as originations for the quarter. Are you seeing greater participation within your ecosystem by clients, or is this more of a drive to find a home for excess liquidity?

I think it's a little bit of both. We're looking at originations to ensure we cover payoffs. When you have higher levels of payoffs, the origination engine needs to work harder. We're targeting customers across our platforms and we have options given our diverse lending platforms.

Yes, the math is straightforward: if your prepay rate is steady, you need higher originations to grow the loan book. Each business has higher targets and none alone bears the entire burden. The warehouse lending side was large and higher priced, so we expected it to contract when mortgage demand softened. We've been investing to stabilize and grow the single-family business; the pipeline is up and progress is being made. COVID caused us to pull back on some initiatives, so when the mortgage market rebounded strongly, we had to catch up on sales and production initiatives. We've righted that ship and are seeing improvements. It may take a quarter or two to see full effects, but overall things are moving in the right direction. I expect single-family to be more stable — possibly slightly growing or slightly down — but not at the elevated prior-quarter levels.

Okay, thanks. One more: adding EAS deposits gives you more optionality on the funding side and should lower deposit beta going into next year and especially when rates rise. Is that the right way to think about it?

Yes, absolutely.

Okay, great. Thanks. Those are all my questions.

Next question is from David Hirons from Wedbush Securities. Your line is now live.

Hi, thanks. I wanted to ask a clarification question about the expense guidance. You gave detailed guidance — for instance, the salaries you mentioned around $39 million in the third quarter. I'm assuming that excludes EAS and the other expense items you gave?

It is not included — all of my guidance was without EAS.

Got it. That makes sense, because I was modeling much higher than what you had mentioned. On the deposit side, given how much of a step down we saw, which is clearly a good thing with the improving deposit mix shift, it almost seems like the new deposits coming on board would replace that decline. It seems those balances could still be declining in the third quarter. Is that the way to think about it so the loan-to-deposit ratio may be somewhat stable around 105?

There are multiple moving pieces. Loan-to-deposit will be influenced by how much loans grow. We think there's a chance loans grow next quarter. The $700–$800 million decline can be filled with other deposits, so we expect deposits to grow, especially after the EAS closing.

We have organic growth in commercial deposit businesses at low cost and small business continues to grow, so there's a steady stream of low-cost core deposits. Axos Clearing deposits and EAS deposits give us flexibility. There is demand from other institutions for deposits, so we will thoughtfully decide how much to bring on balance sheet versus place elsewhere over several months. Those are the variables we'll manage.

Yes, that makes sense. Thanks very much.

Next question is from Edward Hemmelgarn from Shaker Investments. Your line is now live.

Yeah, Greg and Andy — how are you doing? I had a question about EAS: what do you view the potential for margin lending there? What kind of reach do you expect?

I don't want to speculate too much right now. We need to assess the core operating systems — EAS doesn't yet have the capability to do margin lending fully. We have the ability and are working through the timing. There are RIAs who have been precluded from working with EAS because they lack margin or securities-based lending (SBL) capabilities. Those clients would represent an opportunity once the product is available. I don't have a firm feel for the size yet. As a point of reference, you can think about a clearing rate in that area around the mid-single digits, for illustrative purposes, but sharing arrangements and economics vary and we’ll get more precise as we integrate.

Do you expect to merge your existing clearing business into EAS?

The transaction is that Axos Clearing is acquiring this business. We will integrate operations and work the teams together to get synergies. The businesses have different lines of revenue — margin lending, stock lending, clearing — and different operational profiles. We will combine capabilities where appropriate, but there will be a transition period to get the technology and processes aligned before realizing the full benefits.

Do you envision consolidating offices? EAS is larger — will there be a single surviving location?

No, we don't envision consolidating offices in that way. We intend to maintain the Colorado office for EAS; we like that location and the talent pool there. Omaha also has a strong pool of securities talent. There are opportunities to reduce costs through technology over time, and we intend to pursue operating efficiencies while growing the business and achieving operating leverage.

Lastly, it's been over a year since you introduced the enhanced customer software and experience at the bank. What have you seen in cross-selling benefits? Are you originating more loans to existing deposit customers or vice versa? Any meaningful benefits?

When you look at our cost of funds and the improvements as CDs run off, the ability to retain customers who value our services rather than the interest rate is an important benefit reflected in the numbers. Mortgage banking was a strong cross-sell to our deposit customers and contributed meaningfully — customers who opened accounts for deposits often were refinance candidates. Mortgages are one-time events, though. Going forward, product development is focused on how many self-directed trading customers will also have checking accounts, how many checking account customers will migrate to trading accounts or robo-advisory offerings, and how many will take SBL or other products. This is a long-term strategy and as products roll out we'll determine the cross-sell economics and cadence.

Yes, the cross-sell dynamics are strong when products are in place. The mortgage example was very effective at driving deposit acquisition. As we roll out more integrated products — trading, custodial services, SBL, lending — we'll continue to see more cross-sell over time. This is a long-term effort and will evolve as product capabilities and client adoption grow.

We have no further questions at this time. I will turn the call back to Greg Garrabrants for any closing remarks.

Thank you, everyone, for joining us and for your questions. We appreciate your interest in Axos Financial. We remain focused on executing our strategy, integrating EAS, growing responsibly, and delivering value to our customers and shareholders. Have a great day.

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