Axos Financial, Inc.

Greetings and welcome to the Access Financial first quarter 2021 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Johnny Lai, Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Thanks, Jesse, and good afternoon, everyone. Thanks for your interest in Axos. Joining us today for the Axos Financial Inc.' 's first quarter 2021 financial results conference call are the company's president and chief executive officer, Greg Garabrantz, 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 months ended September 30th, 2020, and they will be available to answer questions after the prepared remarks. Before we begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims to save harbor protection pertaining to forward-looking statements contained in the Private Security Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available for 30 days in the Investor Relations section of the company's website located at axosfinancial.com. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10Q, we also issued an earnings supplement for this call. All of these documents can be found on the Axios Financial website. With that, I'd like to turn the call over to Greg for his opening remarks.

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 first quarter of fiscal year 2021, ended September 30, 2020. I thank you for your interest in Axos Financial and Axos Bank. Axos announced record first quarter net income of $53 million for the three months ended September 30, 2020, up 30% over the $40.8 million earned for the quarter ended September 30, 2019, despite a $9.1 million increase in our provision for loan losses. Our pre-tax pre-provision income was $87.6 million, a 47.6% increase compared to $59.4 million in the quarter ended September 30, 2019. Axios' return on average equity for our first fiscal quarter of 2021 was 17.26%, and the bank's efficiency ratio was 39.95%. Q1 2021 earnings per share increased 33.3% to $0.88 per diluted share compared to $0.66 per diluted share in Q1 2020. Excluding acquisition-related expenses, non-GAAP earnings per share increased 33.82% to $0.91 per share in Q1 2021, equating to a non-GAAP ROE of 17.78%. Our book value per share was $20.80 at September 30, 2021, up 14.7% from the prior year. We had an outstanding quarter with stable net interest margins, double-digit growth in net interest income and non-interest income, positive operating leverage, and solid credit performance. The highlights this quarter include the following. Ending loans and leases increased by approximately $294.1 million. up 11.1% annualized from the fourth quarter of 2020, and up 11.7% 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 in jumbo single-family and certain C&I loan portfolios. Net interest margin was 3.84% for the first quarter, up seven basis points from 3.77% in the first quarter of fiscal 2020, and down slightly from 3.89% in the quarter ended June 30, 2020. Loan yields were up three basis points linked quarter to 5.22%, and average interest-bearing deposit costs were down 41 basis points to 86 basis points. Excluding approximately $900 million of excess liquidity deployed in lower-yielding cash and cash equivalents, our net interest margin would have been 4.02%, up 13 basis points, from 3.89 percent in the quarter ended June 30, 2020. Our efficiency ratio for the three months ended September 30, 2020 was 46.3 percent compared to 52.44 percent in the comparable period ended September 30, 2019. Efficiency for the banking business segment was 39.95 percent for the first quarter of 2021, an improvement from 43.93 percent in the comparable period last year and 41.02 percent in the prior quarter. Earnings per share were 88 cents, up 33.3 percent, compared to 66 cents in the first quarter of 2019, despite a 337 percent year-over-year increase in our loan loss provision and a 30.1 percent tax rate this quarter, compared to 28 percent in the prior corresponding quarter a year ago. Capital levels remain strong, with Tier 1 leverage ratio of 8.83 percent at the bank and 8.52% at the holding company, both well above our regulatory requirements. We issued $175 million of subordinated debt at an annual interest rate of 4.875% earlier this month and used some of our excess capital to repurchase approximately 582,000 shares of common stock at an average price of $21.89 in the three months ended September 30, 2020. 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 values with low loan-to-values on our balance sheet continues to serve us well as real estate values are holding up in most markets. Total loan originations for the first quarter ended September 30, 2020, was $1.78 billion, essentially flat from $1.79 billion in the year-ago period. Q1 2021 originations are as follows. We had $408.4 million of single family agency gain on sale production, $334.4 million of single family jumbo portfolio production, $87.2 million of multifamily production, $26.2 million of small balance commercial real estate production, $25.5 million of auto and unsecured consumer loan production, and $569.6 million of CNI and specialty real estate production, resulting in a net increase of $127.8 million of portfolio growth. Our gain-on-sale mortgage banking group had another record quarter, generating $19.6 million of mortgage banking income compared to $2.8 million in the corresponding quarter last year. Originations increased by approximately 40% linked quarter to $408 million, Record low interest rates drove demand for refinances and purchase transactions, and capacity constraints within the single-family mortgage industry resulted in a gain on sale margin of 394 basis points compared to 321 basis points in the quarter ended June 30, 2020. The outlook for mortgage banking remains strong. Our pipeline of single-family agency mortgages was $444 million at the end of this month. Our mortgage warehouse also benefited from record low interest rates and robust demand for mortgage purchase and refinancing. Pending balances in our mortgage warehouse portfolio increased by $249.1 million, or 52.5%, from $474.3 million at 6-30-2020. We took advantage of certain competitors pulling back in mortgage warehouse lending. Our growth in our mortgage warehouse business came from financing our customers' agency and government guaranteed mortgages. Our track record of execution and expertise in different types of mortgages allow us to gain market share in this environment. Our net interest margin for the banking business was 3.91% in the first quarter compared to 3.95% in the prior quarter and 3.83% in the first quarter of 2020. On the asset side, our loan yields continue to hold up well with an average loan yield of 5.22% compared to 5.19% in the quarter ended June 30, 2020. The vast majority of our asset-based loans are variable rate loans, with 94% of all variable rate loans being at their floor rate as of September 30, 2020. We had approximately $900 million of excess liquidity in the September quarter, which negatively impacted our net interest margin by 18 basis points. Yields for loans originated in the quarter ended 9-30-2020, where 4.85% for Jumbo Single Family, 5% Approximately 55% of our loans are 5-1 arms with single-family and multifamily mortgages as the underlying collateral. In our CNI loan book, our asset-based lender finance and commercial specialty real estate loans have rates that adjust to an index. Of the $2.8 billion of lender finance and commercial specialty real estate loans outstanding at 9-30-2020, approximately 91% are at their floor rate. Our equipment leasing portfolio, which accounts for the remaining $148 million of CNI loans outstanding, is comprised of fixed-rate loans and leases. Our consumer and commercial deposit businesses continue to benefit from investments we have made in improving our technology, marketing, and user experience. Consumer deposits, representing approximately 46% of our total deposits at 9-30-2020, is comprised of consumer direct checking, savings, money market, and non-interest-bearing prepaid accounts. Our checking, savings, and money market deposit balance is increased by almost $2 billion from 9-30-2019 with strong growth in consumer, small business, and commercial deposit accounts and balances. Our consumer checking and small business checking accounts were recently named best checking accounts for college students and the best free business checking accounts by Newsweek and NerdWallet, respectively. Average non-interest-bearing deposits was $1.9 billion in the quarter ended September 30, 2020, essentially flat-link quarter when you exclude prepaid deposit balances. We were making good progress in our specialty commercial and treasury management business as the number of bankruptcies rise. Our credit quality remains good. Annualized net charge-offs to average loans and leases was seven basis points this quarter compared to two basis points in the corresponding period last year. Non-performing assets, the total assets, was 1.31% for the quarter ended September 30, 2020, compared to 68 basis points in the fourth quarter ended June 30, 2020. The sequential increase in our non-performing assets is attributed primarily to loans coming off of forbearance and a reclassification of two hotel loans that were previously held for sale but are currently subject to Oregon's foreclosure moratorium. We ended forbearance for all borrowers on July 1, 2020, compared to $127.5 million of loans on forbearance as of June 30, 2020. The majority of our non-performing assets are comprised of real estate secured loans with low loan devalues. We have 91.2 million of single-family loans come off forbearance on July 1, 2020. Of our non-performing loans, 77% are single-family first mortgages where we've historically had very low realized losses. Of our non-performing single-family mortgage loans at 9-30-2020, Approximately 77% had an estimated current loan-to-value ratio at or below 70%, and approximately 92% are below 80% of our best estimate of their current loan-to-values. Given the low loan-to-values of our single-family mortgage loans, we did not anticipate incurring material losses on the vast majority of our delinquent loans. We had seven multifamily and commercial real estate loans that were delinquent at 9-30-2020, consisting of two hotel loans, that we previously earmarked for sale with a current loan-to-value ratio of 56% and five multifamily loans with an average loan-to-value ratio of 48.9% with no single delinquent multifamily loan with a balance greater than $2 million or an LTV greater than 57%. The only non-performing loan in our CNI loan portfolio is a $5.6 million equipment lease to a fracking company. We had no other CNI loans that were delinquent on September 30, 2020. We have a consistent track record of maintaining low credit losses through multiple economic cycles, given our conservative underwriting guidelines, senior structures in our commercial lines and loans, and the collateralized nature of our loan book. During the great financial crisis, our peak annual net charge-offs for loans we originated was less than one basis point for single-family and multi-family loans. We adopted the CECL accounting standard this quarter, adding $53 million to our allowance for loan loss consisting of $47.3 million of allocated loan loss reserves and $5.7 million of reserves for unfunded commitments. We further increased our loan reserve provisions this quarter by $11.8 million, up from $6.5 million in the June 30, 2020 quarter, and $2.7 million when the quarter ended September 30, 2019. The $11.8 million loan loss provision this quarter consisted of $6.5 million related to H&R Block refund advanced loans and $5.3 million to non-RA loans, reflecting growth in our loan balances and economic uncertainty. Our total allowance for losses was $139.6 million at September 30, 2020, which represented approximately 1.26 percent of our total loans and leases and 17.5 times our annualized net charge-offs. Approximately 94 percent of our loans outstanding at September 30, 2020 were collateralized by hard assets with LTVs in the 50s, including $9.7 billion of real estate assets and $544 million of loans secured primarily by consumer receivables. Single-family mortgages, representing 38% of our loan portfolio, had a weighted average loan-to-value of 58%. At the end of September 30, 2020 quarter, 64% of our single-family mortgages have loan-to-value ratios at or below 60. 30% have loan-to-value ratios between 61 and 70. 5% have loan-to-value ratios between 71 and 80, and less than 1% had a loan-to-value ratio greater than 80. We have a well-established track record of strong credit performance in these asset classes. Multifamily and commercial real estate loans, representing 17% of our total loan portfolio at 9-30-2020, had a weighted average loan-to-value ratio of 56%. The lifetime credit losses in our originated multifamily portfolio are less than one basis point originated over the 18 years we have originated these loans. At the end of September 30, 2020, 46% of our multifamily mortgages have loan-to-value ratios at or below 55%. 34% have loan-to-value ratios between 56% and 65%. 19% have loan-to-value ratios between 66% and 75%. And loans with a loan-to-value ratio greater than 75% are less than 1% of the portfolio. The average debt service cover of our multifamily loans is 1.78 at 9-30-2020. As stated, we granted no deferrals in the multifamily loan book. Our commercial real estate portfolio of $393 million, representing 3.6% of our total loans at 9-30-2020, had a weighted LTV of 52%. At the end of September 30, 2020, 49% of commercial real estate loans have loan-to-value ratios that are below 50%. 23% have loan-to-value ratios between 51 and 60. 21% have loan-to-value ratios between 61 and 70. 2% are between 71 and 75. And 5% are between 76 and 80% loan-to-value. In our commercial real estate loan portfolio, we had approximately $77 million of loans to hotels and resorts, representing less than 1% of our total loans outstanding. The weighted average loan-to-value of the hotel and resort loans is 51%. The average debt service cover of our small-balance commercial real estate portfolio was $1.65 at 9-30-2020. We have no loans and forbearance or delinquencies in our commercial real estate portfolio at 9-30-2020, other than the hotel loans we mentioned and the multifamily loans we previously discussed. Our commercial real estate loan book includes lender finance. and commercial specialty real estate, and is comprised in 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 30%, with no transaction with an advance rate greater than 50%. The non-real estate lender finance book, backed by primarily consumer loans, is approximately $650, balances. These structures generally require rapid paydowns in the event of any significant collateral deterioration in the receivables and are also paid down rapidly in the event of any origination decline. We have granted no deferrals in our lender finance loan book. The weighted average loan to cost of our commercial specialty real estate loan portfolio was 39% with strong junior partners supporting the capital structure. We hold the senior position in all of our lender finance and commercial specialty real estate loans and every deal has significant capital support from borrowers and sponsors. We monitor performance of the underlying collateral, housed in bankruptcy remote special purpose vehicles, allowing us to identify credit deterioration and take swift action to protect our principal and interest. Our non-real estate consumer lending is comprised of $274 million of auto loans, $56 million of personal unsecured loans, and $13.2 million of H&R Block refund advance loans. We source our auto loans primarily from dealers located in 10 states and lend to prime borrowers with an average FICO score of 764. We fully underwrite and service every auto loan we hold on our balance sheet, and the portfolio continues to perform in line with expectations. Credit performance in auto lending is further supported by value of used cars in general at this point in time. We have managed the credit risk of our personal and secured loan book by focusing on prime borrowers with an average FICO score of 760 and an average loan size of $20,000. We have no auto or unsecured consumer loans on forbearance at September 30, 2020. In our securities business, we ended the quarter with approximately 253 million of margin loans, up 46 million from June 30, 2020, as some introducing broker-dealer clients became more bullish in the September quarter. Despite elevated price volatility in the stock market since the start of the pandemic, we have successfully managed our March loan business with no losses. As I mentioned earlier, we adopted the current expected credit losses methodology, or CECL, on July 1, 2020, the original required date for our year end. The immediate impact of adopting CECL, otherwise known as the day one adjustment, is an increase in the bank's allowance for current loan losses of $53 million. The adoption of CECL means we are now considering loan losses well beyond the approximately one-year timeframe generally used under the incurred loss method. The after-tax impact of the Day 1 adjustment is recorded directly against stockholders' equity in accordance with GAAP. For regulatory purposes, we elected to defer and phase in the impact on our capital ratio over five years. Under this phase-in, the Day 1 adjustment does not reduce Tier 1 capital for the first two years, and then phases in one-third of the impact over the last three years of the five-year election. We continue to generate strong returns, with return on average common shareholder equity of 17.26% and 14.85% in the three months ending September 30, 2020, and September 30, 2019, respectively. Our efficiency ratio for the banking business segment was 39.95% for the quarter ended September 30, 2020, year-ago period. We continue to maintain strong operation efficiencies while investing prudently in each of our business units. Our capital ratio remains strong at 8.82% of the bank, 8.63% of the holding company. Despite a higher provision for loan losses and $12.6 million of common stock repurchases, our Tier 1 and CET Capital ratios remain healthy at 8.83% and 11.52% respectively for the bank at September 30, 2020. We will use the proceeds from our $175 million subordinated debt offering to support the growth in our banking and securities business, to retire the existing $51 million of subordinated debt issued in March 2016 when it becomes callable on the fifth anniversary, and to opportunistically buy back stock or to engage in accretive strategic M&A transactions. Our loan pipeline remains solid with approximately $1.2 billion of consolidated loans in the pipeline at September 30, 2020. We have a healthy liquidity position and a diverse set of funding sources. Our on-balance sheet deposits increased by 14.6% year-over-year, with checking and savings deposits increasing by 28.2%. Our consumer, commercial cash, and treasury management, small business, and specialty deposit business continues to show solid growth. Concurrently, we reduced our average interest-bearing funding cost by 34 basis points linked quarter and 108 basis points year-over-year to 0.91. Client cash deposits from Axos Securities, currently held at other banks, was approximately $673 million at 9-30-2020, an increase of $186 million from the 6-30-2020 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. We have access to approximately $3 billion of FHLB borrowing, $2.8 billion in excess of the $243 million we had outstanding at the end of the first quarter. Furthermore, we had $1.7 billion of liquidity available at the Federal Reserve discount window at September 30, 2020. Our outlook with respect to loan growth and net interest margin remains unchanged from our expectations three months ago. Demand for single-family jumbo mortgages continues to be reasonably strong, as reflected in our $479.2 million pipeline on October 27th. Pricing on new jumbo mortgages remain attractive, despite some activity in the secondary market for non-agency mortgages and the reemergence of a few non-bank lenders. The purchase market for single-family mortgages remains robust, with mortgage rates near record lows and housing inventories rebounding in most markets. Our efficient digital marketing, underwriting, and funding processes in our direct lending and third-party origination teams allow us to provide a superior experience for our borrowers and partners. In our two largest CNI lending categories, lender finance and commercial specialty real estate, we continue to see new opportunities to partner with respected non-bank lenders on secured lending transactions with conservative structures and terms. While the pace of new commercial specialty real estate transactions as we approach the election, we expect activity to rebound later this year. We continue to see demand for our lending products at our tightened credit standards. Axos Clearing continues to benefit from a flight to safety, with ending deposits increasing by approximately 38% linked quarter to $673 million. We signed eight new correspondent clearing clients in the September quarter, onboarded two of them, and signed and onboarded an RIA custody client this quarter, adding incremental fee income and low-cost client deposits. We see additional upside to providing white-label banking services to the more than 100,000 high-net-worth clients of our introducing broker-dealers and RIAs, and continue to invest in technological integration to offer these services to our corresponding clients. Like other broker-dealers, such as Suave and TD Ameritrade, Axos Clearing's profitability has been temporarily hampered by low rates earned from cash sweep deposits. As we develop and roll out additional products and services at Axos Clearing and Axos Invest, there is a clear path to higher profitability for Axos Securities. 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. Overall, we feel good about our ability to maintain an annual net interest margin within a range of 3.8% to 4%. Our loan yields remain relatively stable and we intend to reduce the amount of excess liquidity on our balance sheet over the next few quarters if loan demand does not meaningfully improve. We started submitting loan forgiveness applications on behalf of our PPP borrowers in early October. As of last Friday, we submitted 149 forgiveness applications with a combined loan balance of $15.5 million to the SBA. We expect to receive forgiveness for the vast majority of our PPP loans in the first half of calendar 2021. We've made good progress reducing our funding costs as a result of our investments and acquisitions we've made across our consumer, commercial, and specialty deposit businesses. Accelerated adoption of digital banking, which is occurring in many of our deposit businesses, gives us confidence that we will be successful in growing deposits and optimizing funding costs. We have a full pipeline of features and product enhancements that we will roll out over the next 12 months including free self-directed trading, a streamlined account opening system, and new user experience for small business banking, and significant enhancements to our digital mortgage platform, as well as integration of Axos Invest and Axos Bank functionality and new personal financial management tools in the online and mobile banking platforms. These new products and features will provide incremental value to our customers, lower acquisition costs, improve retention, and add an additional source of fee income and deposits for the companies. While it is unclear how quickly the economy will rebound and what potential regulatory and policy changes may take place in whatever political environment we may find ourselves in, we remain focused on positioning our company to sustain profitable growth. Now I'll turn the call over to Andy, hoping to get additional details on our financial results.

Thanks, Greg. First, I wanted to note that in addition to our press release, supplemental 8K schedule and our 10Q were all filed with the SEC today and are available online through EDGAR or through our website, Axos Financial. Second, I'll provide brief comments on three topics. Please refer to our press release or the SEC filings for additional details. First, as Greg mentioned, Axos Financial adopted CECL effective July 1, 2020. To implement CECL, we developed six portfolio models which use Moody's forecasts of key macroeconomic variables to predict the probability of default and the loss given default or severity of loss throughout the life of our loans. The formulas for probability of default were developed from 15 years of historic loss data and more than 1,800 Moody's macroeconomic variables measured historically each quarter. The historic loss data for single-family, multifamily, and small-balance commercial mortgage was sourced from the bank's own loss history. However, the loss history for commercial real estate, construction, C&I loans, auto and consumer loans was based upon bank call report data. Accordingly, this quarter, we regrouped our loans to align with the industry historic loss data we used to develop the CECL models and to match with the CECL model loss output. The six loan groups are as follows. One, single-family mortgage is combined with single-family warehouse. Two, multifamily mortgage is combined with small balance commercial mortgages. Number three, commercial real estate, which includes Crestle and real estate lender finance, Number four, commercial and industrial, which includes non-real estate lender finance, equipment leasing, and securities-backed lines of credit. Number five is auto and consumer. And number six is other. While the groupings are different, the subcategories making up the groupings are generally the same. Attached in our 8K file today is a PowerPoint presentation And on page 3, you will find the new loan groups and the dollar amount of loans under each of the subcategories at the end of this quarter, September 30, 2020, as well as the end of last quarter, June 30, 2020. Second, I will review the provision for credit losses. which was $11.8 million for the quarter ended September 30, 2020, compared to $2.7 million for the quarter ended September 30, 2019. The increase of $9.1 million was due to a $6.5 million increase in the allowance for uncollectible HRB refund advance loans, and $2.6 million of the increase is generally due to the new CECL methodology, including the impact of COVID-19. Based upon collections after quarter end, the refund advance provision of $6.5 million should be sufficient to mitigate any possible additional loss associated with refund advance. The majority of the remaining net increase of $2.6 million in the provisioning is coming primarily from the equipment lease portfolio. The third topic is our effective income tax rate. For the quarter ended September 30, 2020, our effective income tax rate was 30% up from 28% for the quarter ended September 30, 29, and down from 33% for the quarter ended June 30, 2020. As discussed last quarter, the primary driver of the changes in the income tax rate is the GAAP accounting for the issuance investing of restricted stock units, RSUs, which requires us to expense an estimate of the RSU cost and record a deferred tax benefit before the actual income tax compensation deduction is measured. The actual compensation deduction is dependent upon the final number of shares granted and the vesting price of the stock. If the number of shares and or the value of the shares is lower than estimated, generally an effective income tax rate increase adjustment is required. A one-time adjustment for the estimated difference was made in the quarter ended June 30, 2020, causing an increase in the effective tax rate. Going forward, we expect to be between 29% and 30% based on the current trading range of our common stock. With that, I'll turn the call back over to Johnny Locke.

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

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from Andrew Lice with Piper Sandler. Pleased to see with your question.

Hey, good afternoon, everyone. How are you? Hi, Andrew. Hi. Just wanted to look at the margin and just on the liability side here, cost of the quarter about 91 basis points down nicely from the quarter before. I think down to something like 30-something basis points. Is this the pace that it should continue to decline at, or what level do you think that that's probably going to reach its floor?

Well, if you look at the components, and I'm sure you have, you'll see that there's some CDs, obviously, there at some pretty high rates that, unfortunately, nobody's going to be interested in cashing out early. So we have about a billion dollars of that in the maturity table maturing in the next 12 months. That will obviously be helpful. There are further declines in other categories that we think we can accomplish this quarter, but they won't be likely as dramatic. So I think that if you look at where that 91 basis points is coming from, it's being pulled up a lot by those CDs, which are just going to have to run off in the natural course of things.

There is, Andrew, about 1.25 million of CD costs this quarter that actually was the write-off of brokered commissions that were on brokered CDs of $150 million that we prepaid. So that $1.25 million won't recur this quarter on the CDs, which was pushing up the CD rate a little bit. So you can take that amount off of the interest cost next quarter, for example.

Okay. That's really helpful. And it sounds like loan yields on new productions holding up pretty good, and you also have some Some good floors. So do you think the margin could rise from this level? Or right now are we just seeing this with repricing, like with the securities book and other liquidity, just maybe this is kind of like the margin just reached the floor?

You know, I think we're comfortable with our margin guidance. Obviously, the excess liquidity that we have, you know, is impacting margin right now. and loan growth, depending on what that will be, may be able to consume some of that liquidity. We have the PPP loans on as well. Eventually, those may roll off, but we just are really uncertain about that. The forgiveness is very, very slow. There is a compression in loan yields that's not only as a result of the market, but also Our warehouse lines tend to be lower rate than our other lines, particularly for the agency production, which was almost all the growth this quarter. So there's a bit of a shift there as well, and we see continued growth in that side. So look, I definitely feel good about where we are from an ability to maintain margin, but I'm a little cautious about saying it's going to go incredibly up, just given the excess liquidity we have and the market.

Okay. Oh, that's helpful. And then just shifting to credit for a second, it sounds like you're pretty well-reserved on the loans that have migrated to non-performing, but I also noticed that the special mention and substandard loans are higher, and these also seem like a lot of them are on the jumbo side, but maybe some commercial real estate Is there some overwhelming concern, or is there anything that's kind of unique or common between some of these loans that may have been downgraded?

Yeah, with respect to the commercial real estate loans, yes. We have loans that we've downgraded that we think we have effectively, you know, incredibly limited chance of having any loss in them. But the underlying borrower may have had a well-defined weakness. But the partner that we have in the transaction in the mezzanine capacity in a number of cases stepped in even with substantial paydowns this quarter. And so we see a lot of those kind of curing up this quarter. We have one payoff that is slated to occur, and in other cases we have some restructuring on those loans we're doing. So we don't think there's any possibility of loss there, but there may have been a delay in the project completion timeframe or something that represented a weakness, and so they were downgraded. On the single-family side, it's really more this payment-related. We're not deferring anyone's payments, and so we're asking that they make the adjustments they need to make now if they're unable to afford their property.

Understood. That's really helpful. Thanks for taking the questions. I'll step back. Sure.

Thank you. Our next question comes from Gary Tenner with DA Davidson. Please proceed with your question.

Thanks. Good afternoon. Hey, I think last quarter you kind of mentioned that you were preparing for, I think it was a significant housing downturn, I think is how you put it. I'm just curious, you know, if you've seen anything or kind of maybe just updated thoughts on how you were thinking about housing given that it's all done fairly well.

Right. Well, It's all done fairly well with some notable exceptions. I think New York City is a question mark right now. I mean, clearly you're seeing the interesting – it's an interesting dynamic because if you went back several years ago, you would have seen Greenwich or the Hamptons or whatever kind of being pretty stagnant, suffering quite a bit, having long sale times, those sorts of things. The city was really booming. You know, there was obviously some flattening out, but there was a very significant run-up from, say, 2014-15 until now. And so I think the city is going to be giving some of that back. So to the extent that, you know, that would be the caveat that I would make. How long that lasts depends, I think, on the policy decisions that are made in the city there. and what sort of long-term effect you get from any kind of potential ability of people to work from home over longer periods of time, things like that. But, yeah, in general, you're right. California is doing very well. If anything, you're seeing increases. Where we are seeing stress is in dense areas. non-single-family New York areas. And it's not – I mean, where we are from a loan-to-value perspective in most cases, we're fine. But one of the elements about New York that's always difficult is that sometimes the foreclosure timeframes can be quite lengthy, which adds accrued interest and those sorts of things to loans, which can be something you have to pay attention to.

Thank you. Thank you. And then kind of flipping over to some of the data you gave on MPAs, in terms of that equipment loan in the fracking industry, I'm just curious if that equipment is specific to the fracking industry? Could it be kind of repurposed elsewhere for any detail there?

It's pretty specific to the fracking industry. So that was the loan that was on MPA. Interest-only payments, they've requested interest-only payments to continue, and we're in discussions with them right now, but we haven't granted them the ability to continue to make interest-only payments. So that's where they are right now with respect to that. They have a sponsor. Our view is we want to get them put in some equity, and we're kind of in the process with that, though. But it's a relatively small loan, It's, you know, and it's, we don't have much oil and gas exposure there, so.

Okay, great. And then last question for me. Just in terms of the refund advance kind of loss recognition timing, do you think you've kind of resolved this stuff in the calendar fourth quarter, or is it really just dependent on IRS in terms of, you know, wrapping up the returns?

Yeah, we think we're done. We basically, if you look at what our exposure is after what we took this quarter, we actually saw a pretty significant uptick after the quarter ended in collections, which was positive. And so we're pretty sure, I mean, obviously we can't be 100% sure, but we're pretty sure we're done. And when we go out and ping and see, you know, what percentage of those loans are done, are coming in sort of where the tax return still hasn't been processed. There's still a significant number of the tax returns not being processed, and either anecdotally through even folks in our own organization who submitted tax returns quite early during that time frame still haven't gotten their refund. And then from some of our data work, we still see that there's funds to collect. So we definitely feel like we're done. Could we have been a little conservative with this?

Possibly, but we don't think we'll be back to the well. Yeah. I mean, after this provision, the entire exposure is $2.5 million before the collections we got this month. So it's a very small number.

Great. Thank you.

Thank you. Our next question comes from David Feaster with Raymond James. Please proceed with your question.

All right. Good afternoon, everybody. I just wanted to start on the specialty CRE and just kind of get a pulse of that. I mean, you've seen nice growth there. Just curious what markets and segments you're seeing opportunity and just your comfort with this segment, given the uncertainty, have you tightened the underwriting standards and just, you know, any thoughts on the pipeline and even new production yields in that segment?

Yes.

So clearly from a category perspective, We're focusing on residential, so that means we're focusing on multifamily, and we are seeing some industrial as well. So last mile warehouses, cold storage, multifamily, those are all categories we feel good about. I think, obviously, there's limited appetite among most folks for hotel, things like that, but there's also not a lot of projects that are – that are being started in those, in those segments. So I think from a city perspective and from a geography perspective, you know, we're, we're continuing to focus on markets where we feel, we feel good about the dynamic. You recently did some things in Nashville. You know, we're still in the markets that, you know, we were in before too. And we're, we're, we're doing, we're doing different things to, continue to ensure that we are in good positions from a credit perspective there. So, you know, there's a variety of different tradeoffs that are made. You know, the sponsors are usually quite well capitalized. You know, and so we continue to be at very, as we stated on the call, we're at around a 40%. average loan-to-value on those loans. So I think that it would be a surprise if any of those loans had any losses, and if they did, the severity would be very low because you'd really have to be digging deeply, deeply into the loan-to-value in order for us to ever get touched by something. But I think You know, as those projects move forward, is it possible that sometimes our fund partners may need to step in there? I think that's possible. I think we're finding in most cases that they're working themselves through, but things, you know, and almost all the loans look pretty good, and then there are few places the fund partners are having to step in and true up some interest. some interest reserves, some budgets, and things like that. But they've got more than that capacity and wherewithal and willingness to do it. So things look pretty good, really.

Okay. That's good, Keller. And then just on the securities business, I guess, you know, you guys have started to see some pretty nice growth there, had some significant deposit growth. I guess how do you think about the growth in the accounts going forward and then just – How has the cross-sell been into some of the other product offerings early on?

Yeah, we really are in a stage right now where we're working on the technology to enable and make that happen. So to give you a sense of where we are in the long-term plan there, Axos Invest will convert to our clearing company in the first calendar quarter of our third fiscal quarter of this year. So then what we're going to be doing is we'll be combining functionality from the securities and banking side into a single application so that individuals can access both features and functionality in our retail direct customers sometime around the beginning of the year. And then with respect to our correspondence, we have right now one of our correspondents testing our account opening software that is provided to them for automation of their securities account opening. And at a certain point, that will integrate features that allow a customer to open a bank account concurrently with that. And then The next step in the cross-sell process is that when a third party introducing broker-dealers and customer operates to look at their accounts or communicate with their broker, they're using our technology with a technological integration on the banking side. So all of that has to happen. So this is a pretty complex, very long-term strategy. that involves the acquisition via third parties of high net worth customers. And it involves a lot of technological development and work. The good part is that we have almost all of these items now, right? We have an account opening system. We have all of these different products. So it's about... the additions and the integrations to make it really seamless across the platform. So, you know, it's, you know, I think that obviously right now with the deposit rates low, it doesn't seem like much to have, you know, getting up to $700 million of zero-cost deposits. But, look, that's, we expect that to be able to grow dramatically over the next, let's say, half a decade and be a really important component of our funding costs and low-cost deposit growth. So we've got a lot of ways to win there. Obviously, with low deposit rates, it makes it difficult to show a really positive net income in that business, and that's something that's an industry-wide issue. But we're going to continue to invest in it and grow that business because we think we are a great partner. both on a technology and product perspective for these introducing broker-dealers and their NRIAs and their end clients. They really do need integrated technology, and we think we have a way of deploying our technology there. But, you know, it's a pretty long-term strategy that we're engaging in here.

Okay. That's helpful. And then just kind of following up on that a bit, I mean, just curious on the M&A commentary, what kind of transactions would you be interested in? Is it more of adding scale in certain lines, or are there any product offering gaps that you might see that it's just easier to or more efficient to expand through M&A rather than organic growth?

Yeah, there's usually fairly idiosyncratic things that fulfill particular niches. I'm not going to go in too much to the strategies there just for competitive reasons. But, you know, look, I don't think there's anything large. There's nothing eminent. But there's always, you know, opportunities given the breadth of what we have and the technological capabilities we can bring to things. So, you know, we keep on looking for things like that. And if we find them, then we, you know, can take advantage of them. But, you know, that's just – Matt, I'd consider that more general commentary on the utilization of proceeds from the offering than anything that's foreshadowing something eminent.

Okay. Thanks, everybody. Thank you.

Thank you. Our next question comes from Michael Perito with KBW. Pleased to see with your question.

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

Hey, Mike.

Hey, Mike. Um, I wanted to start on, on just the, um, non-interest income and non-interest expense line items for the quarter. Sorry if I missed this, but just if we kind of think about the elevated mortgage, um, revenues in the quarter, which I think we're a bit more self-explanatory, but if we, as we look at the expense side, um, are you guys able to break out or provide a little bit more color about what kind of the expense front, right. Might've looked like, you know, in the more normalized mortgage quarter, you know, it seems like some of the environmental trends were maybe a bit, you know, elevated to say the least this quarter. I'm just curious what, as we kind of think about the expense line going forward, you know, what some normalization of that might look like.

Sure, I'll give you some color. I think, you know, in a broad perspective, you know, when you look at general and administrative expense at $6.3 million for the quarter, that's up from $4.6 million A portion of that is going to be attributable to mortgage origination and other details. So that line is probably that change in that line. You could use that to kind of normalize things. There are a couple of other lines where the numbers were slightly larger than probably the normal run rate. When you look at professional services, we came in at about 6 million. professional services last quarter was $3.1 million. A good portion of that is a variety of consulting fees, some legal fees. Probably the more normal run rate is closer to $5 million on that, just going forward with growth. So there's a little bit, that line was a little bit larger than expected. But, you know, Thinking about those two lines, those are probably the key elements of change. The rest represents just general growth in our business and the variety of different things that we're doing. Depreciation and amortization and data processing are impacted by some of the technology items we have and the timing on capitalizing the costs can cause that to change a little bit. But in general, you know, the kind of growth rate, you know, we are going to continue to see growth in operating expenses, you know, plus or minus a million or two.

That's helpful, Andy. Thanks. But it is safe to say, I guess, well, maybe not safe to say, but at this point, you know, all is equal. The next quarter expense burden rate probably will take a step down before continuing to grow beyond that as you guys continue to grow the bank.

There's a good chance it would, but it does depend on a variety of factors. Part of it is mortgage banking. Part of it is technology.

Got it. Helpful. Thank you. And then, Greg, I think there's been a lot of increased focus, at least based on headlines you read and conversations you kind of have on the digital banking aspect of the U.S. banking sector since the pandemic started here. And I guess, My question for you is, obviously, this is not something that's new to you guys at all, but have you noticed any more receptiveness to the idea of banking without any branches or any physical contact, whether it be on the commercial side or the consumer direct side or anything along those lines over the past six months that's worth noting, or do you think it's been fairly steady? I mean, obviously, the growth has been steady, but just curious more on kind of the customer interest and and openness to dealing with a digital strategy like yours.

I definitely do think that you are seeing a significant shift there. We saw it in the application volumes, and we're continuing to see it, although the growth rate of these accounts are often relatively small. consumer side, we've seen record account volumes continuing. Partially that may be because of improvements on our platform, but we believe that it clearly is making a difference that people are no longer viewing the lack of branches as an impediment to doing business with us. And, in fact, because we have the ability to perform all the banking functions digitally, and we've designed our systems that way, that many people are communicating that that's a significant advantage for us. So I think we're really in charge of our own destiny here and in a really great place because we've spent the money on the technology in our systems, so now it's just about perfecting those systems and technologies to just get so much better at what we're doing. So there's customer experience initiatives from a digital perspective that are going on across the board in the enterprise, how to reduce checkholds by using data better, you know, all of the things that customers talk with us about. We have a customer experience committee. We listen to the customers. We listen to what they're saying about things they like, things they don't, and then we develop plans that are very targeted and fixing things those pain points. So I think we've done a really good job with that. I think there is a titanic shift ongoing and coming. And I think it also is in the nature of if you start looking at we think that we could probably over an extended period of time with our technological investments and if we grow the securities business the right way, our goal is to get our cost of deposits down to be something that would be at or below a branch-based institution. And I think if you look at where we are in comparison with, let's say, some of our competitors that are in Southern California that may have 30 or 40 branches or something like that, I think we're demonstrating and proving that out. I mean, you know, you've got to take out CDs that were done in advance of thinking about rate increases and things like that. But if you're looking at the core growth perspective, And then on the commercial side, that also, I think, is also happening as well. We have very sophisticated treasury management technology, and we have great people. We don't have a lot of folks that are in particular markets, although we do have some in some of the larger markets, and we're finding that we're able to compete on a technological basis with our API infrastructure and things like that. Yeah, I think we feel really good about where we are, and my private conversations with other CEOs are very much focused on them asking, you know, how do we make this transition? Because they're stuck with branches where they're having to play a lot of defense in trying to figure out how to deal with these different aspects of things, and the reality is people just don't want to come into those branches anymore. Right. They don't want to do that. It's not a valuable interaction, particularly if it's a transactionally-oriented interaction.

Really helpful insights, Greg. Thank you, and thanks for taking my questions, guys. Thank you.

Thank you. Our final question comes from the line of Edward Hamilton with Shaker Investments. Pleased to see with your questions.

Yeah, thanks. Greg and Andy, just one question about your loan loss provisions. You appear to be pretty conservatively reserved now, given your historical nature of loan losses and the fact that you're basically just an asset-based lender. Will you be able to use any future or any excess reserves that you might have now, I mean, based upon... future clarification of some of these loans to provide for the needed reserve for future loans that you make? I mean, is it going to be able to be, you know, adjusted or will you just have to ignore that?

No, the simple answer is yes. You know, an allowance, can be reallocated or used in other ways. So it is possible. As we spent a little time discussing our CECL discussion, obviously CECL requires a little bit more because we're looking at life of loan. But in addition, we were conservative in assuming 12, 15 months out that we would have additional significant price declines in real estate. And that's what's really driving that. Obviously, 12 months out, you know, we'll see whether that's right or not. So there's some element of, you know, is our conservative assumption correct? But assuming it is not and that, you know, we have reserves, we do have the ability to reallocate, reverse, or add them in other ways.

It's always going to be a forward-looking analysis based on what happens with respect to the future of what that loan book looks like on a going-forward basis and looking at all these forecasts and all these other things as well. So, I mean, clearly right now there's more uncertainty than there would be normally as well, which I think makes it wise to be a little more conservative about your assumptions.

Thanks for the clarification. I thought that was the case. But anyways, great quarter. Thanks, Ed. Thank you.

Thanks, Ed. Thank you. We have reached the end of our Q&A session, so I'd like to pass the floor back to management for closing comments.

Thank you, everybody. Appreciate it. We'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.