Axos Financial, Inc.

Greetings and welcome to Access Financial's second 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. Please note, this conference is recorded. I would now like to turn the conference over to your host, Johnny Locke, Vice President of Corporate Development and Investor Relations. Thank you. You may begin. Thank you.

Thank you, Devin. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc's second quarter 2021 financial results conference call are the company's president and chief executive officer, Greg Garibrand, and executive vice president and chief financial officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and six months ended December 31st, 2020, 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 risk and uncertainty. Therefore, the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Security Litigation for 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 accessfinancial.com, for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I would like to remind listeners that in addition to the earnings press release and 10Q, we also issued an earnings supplement for this call. All of these documents can be found on the Access Financial website. With that, I would 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 second quarter of fiscal year 2021, ended December 31st, 2020. I thank you for your interest in Axos Financial and Axos Bank. We had an outstanding quarter with higher net interest margins, double-digit growth in net interest income and non-interest income, and positive operating leverage year over year. We combined that with solid credit performance. Axis announced record second fiscal quarter net income of $54.8 million for the three months ended December 31, 2020, up 32.7%, compared to the $41.3 million earned for the quarter ended December 31, 2019, despite a $3.5 million increase in our provision for loan losses, increasing to $8 million from $4.5 million in the comparable period. Our pre-tax pre-provision income was $86.5 million, an increase of 38.1%, compared to the $62.7 million in the quarter end of December 31, 2019. Axos' return on average equity for Q2 2021 was 17.3%, and the bank's efficiency ratio was 40.45%. Q2 2021 diluted earnings per share increased 35.8% to $0.91 per diluted share, compared to $0.67 per diluted share in Q2 2020. Our tangible book value per share was 19.51 at December 31st, 2021, up 18% from December 30th, 2019. The highlights for this quarter include the following. Ending loan and leases increased by approximately $684 million, up 25% annualized from the first quarter of 2021, and up 14.5% year-over-year. Strong originations in multifamily, commercial specialty real estate, and mortgage warehouse, were offset by lower production in lender finance and higher payoffs in jumbo single-family and certain C&I loan portfolios. Net interest margin was 3.94% for the second quarter, up 7 basis points from 3.87% in the second quarter of fiscal 2020, and up 10 basis points from 3.84% in the first quarter of fiscal 2021. Loan yields continue to hold up well at an average of 5.16%. Interest-bearing checking and savings deposits as of December 31, 2020, were 45 basis points, with $1.8 billion of certificates of deposit acquired primarily from the nationwide acquisition at a cost of 1.71%, increasing the cost of interest-bearing deposits overall to 85 basis points, which is still six basis points improvement from the linked quarter ended September 30 of 2020. Net interest margin for the banking business was 4.11%, compared to 3.91% in the quarter ended September 30, 2020, and 3.94% in the quarter ended December 31, 2019. PPP loan fees had a negligible impact on our NIM this quarter. Our efficiency ratio for the three months ended December 31, 2020, was 46.86%, an improvement of 480 basis points compared to 51.66% in the comparable period ended December 31, 2019. The efficiency ratio for the banking business segment was 40.45% for the second quarter of 2021, an improvement from 43.81% in the comparable period last year. The year-over-year improvement in overall and business banking efficiency was the result of strong mortgage banking income, net interest margin expansion, and double-digit growth in our loan portfolio. Diluted earnings per share was $0.91, up 35.8% compared to $0.67, 2020, our corporate tax rate increased slightly from 29% in the corresponding quarter a year ago to 30.22% this quarter. Capital levels remain strong, with Tier 1 leverage ratio of 9.08 at the bank and 8.68 at the holding company, built well above our regulatory requirements. Our credit quality remains strong, with no loans in forbearance and only a small percentage that are delinquent on principal and interest payments. Our conservative underwriting, with an emphasis on retained asset loans with low LTVs on our balance sheets, continues to serve us well. Total loan originations for the second quarter ended December 31, 2020, with $2.04 billion, up 14.2% from the $2.1 billion in the year-ago period. Q1 2021 originations were as follows. $455 million of single-family agency gain-on-sale production, $286 million of single-family jumbo portfolio production, $123 million of multifamily production, $46 million of commercial real estate production, $34 million of auto and unsecured consumer loan production, and $957 million of CNI loan production, resulting in a net increase of $345 million. Our gain-on-sale mortgage banking group had another strong quarter, generating $10.7 million of mortgage banking income, compared to 2.2 million in the corresponding quarter last year. Originations increased by approximately 11.3% linked quarter to 455 million. Low interest rates continue to support strong demand for refinancing and purchase transactions, and our efficient, scalable operating model generated gain-on-sale margins of 390 basis points compared to 394 basis points in the quarter ended September 30, 2020. The outlook for mortgage banking remains strong, although the March quarter generally experiences lower volume due to the holiday season, and we expect some compression in gain on sale margins. Our pipeline of single-family agency mortgages was $399 million as of 1-4-2021. Our mortgage warehouse also benefited from robust market demand for agency mortgages. Ending balances in our mortgage warehouse portfolio increased by $461.4 million, or 63.8%, from $723.4 million as of September 30, 2020. We continue to expand our relationship with existing mortgage warehouse customers and establish new relationships. Our track record of execution and expertise in agency and non-agency mortgages assist us in growing our warehouse lending business. Our net interest margin for the banking business was 4.11 in the second quarter compared to 3.91 in the prior quarter and 3.94% in the second quarter of fiscal 2020. On the asset side in the banking business, our loan yields continue to hold up with an average loan yield of 5.15 compared to 5.21 in the quarter ended September 30, 2020. The vast majority of our asset-based loans are variable rate loans with 95% of all variable rate loans being at their floor rate as of December 31, 2020. Yields on loans originated in the quarter ended 12-31-2020 were 4.91 for jumbo single-family, 4.85 for multifamily, and 5.93 for CNI loans. Approximately 41% 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 lending, lender finance, and commercial specialty real estate loan portfolios have rates that adjust to an index. Of the $3.1 billion of lender finance and commercial specialty real estate loans outstanding in 12-31-2020, approximately 90% are at their floor rate. Our equipment leasing portfolio, which accounts for the remaining $130 million of CNI loans outstanding, is comprised of fixed-rate loans and leases. We see minimal future adjustments in our existing lending book as a result of floating-rate loan adjustments, although some adjustments to loan rates to remain competitive for future originations may be required. Our consumer and commercial deposit businesses continue to benefit from investments we have made in technology, marketing, and user experience. Consumer deposits, representing approximately 42% of our total deposits as of December 31, 2020, is comprised of consumer direct checking, savings, money market, and non-interest-bearing prepaid accounts. Our checking, savings, and money market deposit balance was increased by approximately $1 billion from 12-31-19, with strong growth in consumer small business and commercial deposit accounts and balances. Our consumer checking and small business checking accounts continue to receive accolades for offering the best value and services for our consumers. With more consumers and small business owners choosing digital as their primary channel for conducting banking transactions, we are well positioned to become their primary bank. Average non-interest-bearing demand deposits were $2 billion in the quarter ended December 31, 2020, up by approximately $136 million from the prior quarter, despite exiting our prepaid to sponsor relationships with H&R Block and NetSpend. We are making good progress in our specialty commercial and treasury management businesses, and we anticipate higher deposit balances in our fiduciary service business in the next 12 months as the number of bankruptcies rise. Our credit quality remains stable. Annualized net charge-offs to average loans and leases was 16 basis points this quarter compared to 17 basis points in the corresponding period last year. We charged off a portion of an equipment lease to a fracking company that we had a specific reserve on this quarter, accounting for the entire $2.6 million of net charge off in the CNI non-real estate loan category. Non-performing assets, the total asset ratio was 122 basis points for the quarter ended December 31st, 2020, down from 156 basis points in the first quarter of fiscal 2021. Of our non-performing loans, 77% are single-family first mortgages where we have historically had very low realized losses. Of our non-performing single-family mortgage loans at December 31, 2020, approximately 85% had estimated current loan-to-values at or below 70%, and approximately 95% are below 80% of our best estimates of current loan-to-values. Given the low loan-to-values on our single-family mortgages, we do not anticipate incurring material losses on the vast majority of these single-family delinquent loans. Other than the single-family delinquencies, the remaining delinquencies consist of two hotel loans we discussed last quarter, which are around $24.5 million of UPB. We had six multifamily loans that were 30 to 59 days delinquent for a total UPB of around 3.1 million that are at origination loan-to-values of 46% on average. One multi-family loan that is 60 to 90 days delinquent for $1 million with a 44% origination LTV. The only other loan that we have that is delinquent is a loan on a condominium building in Tribeca with an aggregate balance of $16.6 million that we have placed on non-accrual at 12-31-2020. The loan has experienced various delays and several legal challenges in getting the units to market, and we placed a reserve against it that Andy will discuss later. Our loan loss provision this quarter was $8 million compared to $11.8 million in the September 30, 2020 quarter and $4.5 million in the quarter ended December 31, 2019. The $8 million loan loss provision this quarter consisted of $3.9 million related to specific non-accrual loans and $4.1 million related to change in nature and volume of the portfolio. Our total allowance for loan losses was $136.4 million at December 31, 2020 which represents approximately 1.17% of our total loans and leases and approximately 7.5 times our annualized net charge-offs. We are well-reserved to withstand a protracted decline in residential and commercial real estate values should that occur. Given the high level of uncertainty regarding the pace and sustainability of the economic rebound, potential changes in fiscal and monetary and regulatory policy, real estate values and inventories and the success of the vaccine rollout in helping consumers and businesses return to pre-pandemic spending levels, we do not anticipate making significant changes to our loan loss provisions in calendar 2021. Approximately 95% of our loans outstanding at December 31, 2020 were collateralized by hard assets with an average loan-to-value in the 50s, including $10.5 billion of real estate assets and $510 million of loans secured primarily by consumer receivables. Multi-family loans representing 16% of our total loan portfolio at 12-31-2020 had a weighted average loan to value of 55.7% with no loans and forbearance. Our small balance commercial real estate portfolio of $432 million representing 3.7% of our total loans at 12-31-2020 had a weighted average loan to value of 52%. The average debt service cover of our small balance commercial real estate portfolio was $1.52 as of December 31, 2020. We have no loans in the small balance portfolio in forbearance as of the end of the quarter or today either. Our commercial loan book includes lender finance and specialty commercial real estate. It's comprised of loans and lines of credit secured by single-family, multifamily, commercial real estate, land, and consumer receivables. The lender finance book is comprised of real estate and non-real estate transactions. The weighted average advance rate on the real estate lender finance book is 28%. with no transactions with advance rates greater than 50%. The non-real estate lender finance book backed by primarily consumer loans is approximately $688 million with an average advance rate of 50.4% of the outstanding receivables balance. 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 origination's decline. We have no loans and forbearance in our lender finance or CRSSL book. Our non-real estate consumer lending is comprised of approximately $270 million of auto loans, $58 million of personal and secured loans, and $7.3 million of H&R Block refund advance loans. We lend to prime and super prime borrowers with an average FICO score of 765 in our auto production and 760 in our unsecured consumer portfolio. We fully underwrite and service every auto loan we hold on our balance sheet, and the portfolio continues to perform in line with expectations. We continue to generate strong returns with a return on average common shareholder equity of 17.3% and 14.35% in the three months ended December 31st, 2020 and December 31st, 2019 respectively. Our efficiency ratio for the banking segment was 40.45 for the quarter ended December 30, 2020 compared to 43.81% in the year ago period, a year over year improvement in our banking business segment efficiency ratio that would have been even better if you exclude this the 848,000 FDIC credit we received in the three months ended December 31, 2019. We continue to maintain strong operating efficiencies while investing prudently in each of our business units. Our capital ratios remain strong, with Tier 1 leverage to adjusted assets of 8.68 at the holding company and 9.08 at the bank. Our priorities for capital remain organic loan growth, reinvestment and growth initiatives, opportunistic buybacks, and accretive M&A. We bought back approximately $4 million of common stock in the December 2020 quarter at an average price of approximately $23 per share. Our loan pipeline remains solid with approximately $1.7 billion of consolidated loans in our pipeline at December 31, 2020, consisting of $399 million of single-family agency gain on sale mortgages, $347 million of jumbo single-family mortgages, $225 million of multifamily and small-balance commercial real estate loans, $677.5 million of CNI and Crestle loans, and $23.1 million of auto and consumer unsecured loans. We expect to be able to continue to grow loans in the high single-digit to low double-digit percentage throughout the remainder of this calendar year. We have a healthy liquidity position and a diverse set of funding sources. Our on-balance sheet deposits increased by 13.4% year-over-year, with checking and savings deposits increasing by 26.5%. Our consumer, commercial cash, and treasury management, small business banking, and specialty deposits continue to show solid growth. Concurrently, we reduced our average interest-bearing funding costs by six basis points, link quarter, and 103 basis points year-over-year to 85 basis points. Total client deposits at Axos Clearing were $773 million at 12-31-2020, up 14.9% from the September 30th ending balance. We have the ability to redeploy our off-balance sheet deposits to fund growth at Axos Bank if and when it is economically advantageous to do so. Of that $773 million of low-cost deposits, approximately $333 million are held away at other banks, while the remainder sit on the bank's balance sheet. We also have access to approximately $2.5 billion of FHLB borrowing, $2.3 billion in excess of the $183 million we had outstanding at the end of the second quarter. Furthermore, we have $1.8 billion of liquidity available to Fed discount window as of December 31, 2020. Our securities business continues to make progress. Exos Clearing increased total tickets processed by almost 14% link quarter to 1.3 million tickets and ending deposits by approximately 15% link quarter. We signed three new correspondent clearing clients in the December quarter and signed three new RIA clients this quarter, which will add incremental fee income and low-cost deposits for the two- to three-quarter lag between signing and onboarding. We're actively talking to introducing broker-dealers and independent RIA firms that are evaluating alternatives to Schwab, TG, E-Trade, and Pershing for clearing and custody services. The ability for Axios Clearing to generate incremental fee income as well as sticky low-cost deposits remains an important and differentiating value over the long term. Furthermore, we remain bullish on the medium to long-term cost and revenue synergies provided by Axos Clearing and Axos Invest to our banking business. We transitioned to a tiered pricing model based on assets under management and Axos Invest during the December quarter. Rather than offering a free basic service and charging monthly for various premium services, we now charge clients a flat 24 basis points annual management fee and they have access to all financial services offered through our digital wealth and financial management platform. We've seen limited attrition in the number of active accounts since we implemented the pricing change, and overall AUM is up approximately 10% from September 30, 2020 to December 31, 2020. We will transition to a self-clearing model later this month, with Axos Clearing becoming the clearing firm for Axos Invest. This will make our digital wealth management platform more scalable from a cost perspective over the long run, and provide us flexibility to enhance our product offering. We continue to beta test our self-directed trading platform. The preliminary launch date to existing Axos clients will be sometime in the June quarter. This functionality will also be accessible through the consolidated mobile application. By the end of this quarter, we will have integrated Axos Invest functionality into our mobile application so that Axos Invest functionality is available through one consolidated mobile application significantly improving the user experience and cross-sell potential. We believe we have only scratched the surface in our long-term cross-sell goals and objectives. New products and features within our universal digital banking platform, such as single sign-on for Axos Invest, Axos Trading, and Consumer Banking, will provide incremental value to our customers, lower acquisition costs, improve retention, and add additional sources of fee income and deposits for the company. We believe many of the changes in consumer behavior over the past years are structural, and the vast majority of business and consumer clients will permanently migrate their entire financial lives to digital interactions. Our focus is on acquiring customers that value convenience and service and are willing to do more with Axos over time. Our low-cost nationwide digital platform provides us with the flexibility and agility to mine data and offer consumers the best value to those looking for a superior solution. Now I'll turn the call over to Andy, who will provide additional details on our financial results.

Thanks, Greg. First, I wanted to note that in addition to our press release, an 8K with supplemental schedules and our 10Q were filed with the SEC today and are available online through Edgar or through our website at accessfinancial.com. I will provide some very brief comments. Please refer to our press release or the SEC filings for additional details. As Greg mentioned, our provision for credit losses was $8 million for this quarter ended December 31, 2020, down from $11 million for the last quarter ended September 30, 2020, and up from $4.5 million for the second quarter last year ending December 31, 2019. Also this quarter, We decreased our unfunded loan commitment liability by $1 million due to an overall decrease in the amount of unfunded loan commitments. This $1 million pretax benefit was included as a reduction to our other G&A in our non-interest expense for this quarter ended December 31, 2020. The $8 million provision for credit losses this quarter can be summarized as a net $4.1 million related to loan growth and loan mix, and $3.9 million related to specific allowances. Of that $3.9 specific allowance, $3.5 million relates to the condo rehab loan project Greg discussed earlier. Last quarter, we provided $6.5 million specific allowance related to the H&R Block refund advance loans, RAs, that were made in 2020. Although we have exited the H&R Block relationship, they agreed to continue to pass through RA payments through April 30, 2021, due to IRS return processing delays. This quarter, we continue to collect RIA payments such that we were able to reallocate $3.5 million of our RIA allowance to cover loan growth this quarter. As of December 31, 2020, there was $7.2 million of RIA loans left, 100% of which are covered by our allowance for credit losses. With that, I will turn the call back over to Johnny Lyons.

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

At this time, we would like to take any questions that you may have. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate 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 keys. One moment, please, as we call for questions. Our first question comes from the line of Andrew Leash with Piper Sandler. Please, answer your question.

Hey, guys. Thanks for all the color earlier in the call. I just want to cover your loan growth outlook. Similar comments as before, it's like high single-digit, low double-digit, but you're kind of already there in this fiscal year. I think I heard you say calendar year. So, I mean, is there any, are there any headwinds ahead that could maybe slow this pace of growth? Because the pipeline looks great. You've had great growth this quarter. What's giving you some pause right now?

Well, we don't know how quickly. Warehouse lending has been a strong contributor the last couple quarters. It's uncertain how that will continue. It looks pretty good right now. We actually have a good pipeline of new lines, but obviously that's dependent on overall mortgage banking volume. And then single-family lending. declined this quarter. The pipeline's okay. It usually comes through the holiday season, and we always have, if you look back over time, we do have these seasonal lows, but it's just uncertain how that will pick up. Frankly, we're being very conservative in New York. That was a market for us that we had previously done more business in on the single-family side, and we're doing a lot less now. So those would be the The caveats with respect to that. But as you said, I'm looking forward in the calendar year. And I'm also, frankly, trying to moderate growth expectations that they're not going to be what this quarter's loan growth was in subsequent quarters. So that's more of a way to think about it. So that's, Andy, do you have anything to add there?

No, it's a great summary. Again, Andrew, it partially depends on where warehouse ends up. it's entirely possible that it will pull back, but it could be dramatically by the time we get to June 30 of 2021.

Got it. Okay. That's helpful. And then just if you look at the entire credit quality bucket, it seems like a lot of the issues that you've mentioned, they're more unique situations to some of these borrowers. It seems like your strategy of forcing people to pay you rather than grant them deferrals is working out really well. Are there any areas that you have concern on credit beyond what you may have mentioned? Are you seeing any weakness in the economy beyond what we would have expected as a result of the pandemic?

Well, not in the asset classes that we generally work with. Obviously, the two hotels that were there frankly, the only reason they weren't solved or were gone was simply because of this Oregon foreclosure moratorium. We had an agreement to sell those loans at par plus accrued, and when the moratorium came in place, the fund that was going to buy those loans backed out. So, you know, I think, obviously, to the extent there are hotels there, on the multifamily side, mostly we You know, we had taken some of the multifamily loans we have. We have ready buyers for all these multifamily loans that Parplus accrued. And the thing of it is we've been selling them, and then they've been curing in 15 or 30 days. So, you know, sometimes somebody's a little late with a payment, and, you know, they're 35 days late, and they cure. So not really. I don't see anything particular there. This New York project is actually a nice building and a great area, but – some interesting sort of legislative things came up. The retail tenant was supposed to be moved out. There was a moratorium on moving that tenant out. That tenant stopped paying. So some of the governmental interference in the private markets is clearly, I'd say, thematically something that could happen, but we don't see it really impacting our book, given that we're so focused on asset classes that are really doing pretty well overall.

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

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

Got it. Cool. I'll step back. Thanks for taking the question. Thank you.

Our next question comes from the line of Gary Tenner with DA Davidson. Please see what your question is.

Thanks, Gary. Good afternoon. I just wanted to ask about mortgage-awareness. You actually partially addressed this, but I'm just wondering, given the pace of growth that you've seen, and obviously you're looking to continue to expand those relationships, it looks like it's right at about 10% of loans today, and that may cure itself, as you pointed out, over the next six months or 12 months. But do you have an internal limit generally for that segment?

With respect to an overall limit, we do have one, but it certainly allows us to exceed where we are. From a risk perspective, I think the right way to think about the risk associated with those loans is absent loans that we're purchasing ourselves or loans to very secured conduit relationships. They're all government mortgages. We're doing the work to make sure that those loans qualify for sale. We're a Fannie Mae direct seller. So to the extent there was ever any underlying issue with any of those mortgage companies, we would simply be able to take that collateral and sell it. The issue in mortgage warehouses is generally fraud, and there's a variety of mechanisms, including the systems that we have that are widely shared with other mortgage lenders to make sure that that dual pledging issue doesn't occur. So, frankly, it's one of the asset classes that, from a safety perspective, is a very good asset class to grow in. It exhibits, obviously, very high levels of liquidity. Essentially, the mortgages are almost entirely guaranteed by the government. The weakness in the product, as I'm sure you know, is that the rate is lower than the average rate in our loans and there's higher levels of volatility associated with those loans. And so in the event that mortgage lending pulls back, the calls you get are, well, would you like to be – I have four lines, and would you like to be used or not? And if you would like to be used, then you need to be in this range. So you can have interest rate compression on those lines if there's a pullback in mortgage lending.

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

Well, so it's interesting because Axos Clearing has always had retail brokerage accounts. and those retail brokerage accounts arose and then that they trade directly with clients on. So this is really taking this access clearing product and bringing it through the platform in a way that would expand the service. So I think with respect to the question of the nature of what's going on with Robinhood, I would say I'll address this at two levels. One level is more broadly, individuals are looking for a consolidated relationship between a trading and investing account and a banking account. And we see the massive growth of the Robin Hoods and their attempts to add checking accounts, even if it didn't exactly work out right away, right? And they'll be back at it. So the strategic moves we've been taking in my opinion, are absolutely validated by what's happening in the market with respect to the growth in online trading. Now, and that required also the clearing company, given the margins in that business, to make sure that you own all the value stream from a revenue perspective. Now, the question with respect to these, the utilization of social media and to drive trading is something that, because we own our own platform, you know, we're going to be looking at and considering in the event that some of these types of activities occur that have occurred over the last several days and thinking about how to deal with those, whether it's a speed bump that requires somebody to go through a a warning and a review of whether they're interested in trading on a speculative basis or there are other remedies associated with that are things that, you know, a compliance group would consistently review and make determinations on. So I think, you know, I don't want to comment on whether any of the events would somehow hurt a reputation of one firm and therefore make us more likely to get clients or something. I mean, given that this product is, you know, six months away, I think those things are just too speculative. But I do think overall it's demonstrative of the fact that digital financial services and the bundling of them is a strategy that's really important.

I appreciate your thoughts.

Thank you.

Our next question comes from the line of Michael Perito with KPW. Please share with your question.

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

Hi, Mike. Hey, Vic.

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

I think that the asset class will probably shift and it will become more real estate hard asset focused. I think really the reduction, I think where we attached ourselves and the structure that we had, even given a very severe recession, much more severe than it appears the consumer recession is going to be, In the U.S., I think we were safe. I think that the reality is that the market demand and our underlying customers have simply reduced originations or the demand for those originations are such that the market really isn't there right now. However, there are other lender finance areas sort of that are the result of different The more real estate-oriented lender finance opportunities that are there. So I think that that portfolio will stabilize just overall and probably grow a bit as well. So I think we're probably done with it being a drag on loan growth.

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

Yeah, I think we're away from that, whether it's only six months or not. I think our goal with respect to what we're doing in clearing is the creation of a platform both on the custody side for RIAs and on the clearing side for IBDs. The goal then is to take the software that we've developed and utilize that software for the end clients from an acquisition perspective, as well as to build on the existing trading platforms for retail that the firm has and bring those through in a very cohesive and user experience friendly way. And so that's just a lot of stuff to do. That's new businesses to build. where the competitors are large and have big head starts. Axos Clearing is about a month away from launching a really very nice RIA custody platform. It's quite comprehensive. Those are the type of things that are going on. I'm just not particularly focused on... whether they make a million dollars on the segment or make, you know, lose a million dollars or make $2 million right now. What I'm focused on is the long-term benefits that that'll generate. And I, what I hope to do is in a couple of years, instead of being sitting on, you know, seven, seven 50 or seven 70 of zero cost deposits, I want to be sitting on three and $4 billion of zero cost deposits. And that's, that's really the overall goal. And even if right now, you know, the deposit rate that clearing gets in those deposits is very low, and clearing would be very profitable right now at a 2.5% rate. You know, if Fed funds were 2.5%, clearing would be super profitable. So you say, well, it's not right now, but the reality of this is that, you know, the deposit businesses have to be built over, you know, half decades and decades, and so... the investment is really about that, and, you know, we're going to continue to invest in it and not be bothered by little drips and drabs there. Now, look, I'm not saying that I want it to increase, and I think they are doing a really good job of driving the profitability. It's just not – that's not the immediate goal.

No, that's absolutely helpful and makes a lot of sense. And I guess on that point, you know, as we think about kind of the positive platform that you guys are building, I'm just curious, you know, obviously calendar 2020 – you know, thematically seem to be a big, you know, proof of concept for a lot of kind of digital consumer banks. And I was curious if maybe you can give us a quick recap of how the digital consumer bank, you know, kind of grew over the past 12 months. And I imagine it was, you know, fairly robust. Do you think that can continue into this year? Is there still momentum in the market on that side to kind of continue to grow the consumer digital bank at a meaningful level?

Yeah, we're seeing tremendous growth. in accounts, and pretty much every month is a record account opening quarter for consumer checking accounts, for the utilization of the direct deposit switch kits. We're also obviously shifting. I think we're improving the mix of that business a lot because we have the UFB brand, which is more focused on savings accounts and kind of attracts yield-focused folks, and that That's sitting at about 20 basis points now. And so we really are, I think, you know, we're in the range of the next couple of years getting to the point where we have, you know, the checking accounts we're bringing on, the average cost is in the, you know, 20, 25 basis point, 28 basis point range, something like that. So all in. So, you know, I think it's really working. The small business side is really working. The platform is getting a lot of compliments. The all the work that's being done internally on the risk engines to make the transactions more seamless, the work that is being done to add product is really paying off. And so, yeah, all that work that was done on the UDB side is really paying off, and it's paying off in the efficiency ratio because we can take activities that are coming through call centers, analyze them, and then push them through automated fulfillment. And so, you know, efficiency ratio work is never glamorous. It's always a grind it out sort of deal. But with this platform, we're able to just digitize so much, and it helps. It helps with everything. It helps with compliance. It helps with cost. And it helps with customer experience. So, yeah, we're really excited about where we are, and we're really pleased we made the investments we did, even though they were kind of painful in the efficiency ratio as it, you know, look over the long term, it kind of ran up and now it's starting to come back down.

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

Yeah, our consumers do tend to be higher end than those other platforms. They carry larger balances, and those platforms are largely trying to drive Durban-exempt transaction revenue, and that's where they make a significant majority of their money, as you know. So that's a little bit different for us. and also obviously with what we're trying to do on the advisory side with the RAA platforms and then the customers of our introducing broker-dealers, those are gonna tend to be different customer segments. So the platform is built to accommodate everyone and it's open to everyone and we do get a mix of customers. I think that the trading side will actually shift some to the millennial groups. You have to be thoughtful about that. My 15-year-old wanted to know how to trade cryptocurrencies the other day. But it is an interesting set of products that I think we'll end up with. We do have a different demographic, though, than a Chime or something.

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

Yeah, it's interesting. There's a lot of work being done in that space for sure.

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

Thank you. Thanks, Mike.

And once again, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please. Our next question comes from the line of David Chiaveri, who is with Web4Securities. Please do with your question.

Hi, thanks. Hi, David. And actually, I'll start with on that last point in discussion about your target market. And I saw the press release today from N26 and the growth that they're generating. in the U.S., and I was curious if you're able to disclose, you know, how big this relationship is and what your expectations are going forward.

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

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

Well, an aggressive analyst might be inclined to revise their NIM targets very far up, And I would advise not to do that. And I think the reason why that would be the case is that, obviously, warehouse growth is lower. We are continually looking at loan rates. And as banks sort of adjust to this new environment, we can't tell whether we'll have loan rate compression. So that's there. We talked about how we're not going to have a lot of compression on the existing book. because we're all at floors, so that's that issue. And then also, you know, we're looking to continue to do things like draw customers in through getting them into the transaction platform on the checking side, things like that, and what kind of incentives and what sort of things we're offering to them. So, I don't know, Andy, do you have other?

No, I think, you know, our guidance is kind of, Greg stated it, is still 3.8 to 4.0. You know, you could pick somewhere between 3.8 and 3.9, kind of where we would be in the long run. And, again, I think the only caution here is we're in an environment where rates are really low. Competitive rates are coming down. We've done a great job maintaining our margin, but we're also interested, obviously, in trying to keep loan volume. And so it's a blend between both. So for that reason, we're at, you know, between 3.8 and 4.

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

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

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

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

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

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

It was, it was in, it was in, is it around 600 grand or something like that? It's modest relative to the entire financial. Yeah, I mean, the truth of the matter is, is that, you know, it's interesting because What, of course, we're doing is we're turning right around and we're adding products and services into the business and adding people there to hit our growth objectives. So I think it isn't something that's so overwhelming. It is helpful from a cost perspective, and it also ensures that we have all those capabilities from an API perspective so that it also makes us a viable – alternative for third-party investment platforms that would like to use us as a custodian to hold their securities and their deposits.

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

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

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

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

Got it. Thanks very much.

Thank you.

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

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

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