Axos Financial Inc

NYSE:AX

Earnings Call Transcript 2021-Q3

[Operator]

Greetings, and welcome to Axos Financial, Inc.'s Fiscal Q3 2021 Earnings Call and Webcast. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Johnny Lai, Vice President of Corporate Development and Investor Relations. You may begin.

[Johnny Lai, executive]

Thank you, Devin. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial's Third Quarter 2021 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the 3 and 9 months ended March 31, 2021, 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 the safe harbor protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release.

Before handing over the call to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call. All of these documents can be found on the axosfinancial.com website.

And with that, I'd like to turn the call over to Greg.

[Gregory Garrabrants, executive]

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 third quarter of fiscal year 2021 ended March 31, 2021. I thank you for your interest in Axos Financial and Axos Bank.

We delivered another strong quarter with positive sequential growth in ending loan balances and net interest income, net interest margin expansion and solid credit performance. The year-over-year comparison is distorted by the seasonal H&R Block tax products, which we no longer provide. Axos announced third fiscal quarter net income of $53.6 million for the 3 months ended March 31, 2021, and earnings per diluted share of $0.89. Excluding net interest income and noninterest income related to the discontinued H&R Block relationship, net interest income and fee income increased by 21.9% and 43.7%, respectively, reflecting solid growth in mortgage banking and Axos Securities. Axos' return on average equity for the third quarter of 2021 was 16.12%, and the bank's efficiency ratio was 42.33%. Our tangible book value per share was $20.44 at March 31, 2021, up 17.1% from March 31, 2020.

The highlights this quarter included the following. Ending loan and leases increased by approximately $102 million, up 3.5% annualized from the first quarter of 2021 and up 12.9% year-over-year. Excluding mortgage warehouse, ending loan balances increased by approximately $318 million, up 12.4% annualized from the first quarter of 2021. Strong originations in multifamily, commercial real estate and C&I were offset by higher payoffs in jumbo single-family loan balances.

Net interest margin was 3.96% for the third quarter, up 2 basis points from 3.94% in the second quarter of fiscal 2021. Excluding the impact of H&R Block-related Refund Advance and Emerald Advance loans in the prior year's third quarter, overall net interest margin was up 9 basis points year-over-year. Loan yields continue to hold up well at 5.1%, essentially flat from 5.16% in the quarter ended December 31, 2020. The cost of interest-bearing deposits is 81 basis points, down 4 basis points from the quarter ended December 30 -- 31, 2020.

Net interest margin for the banking business unit was 4.23% compared to 4.11% in the quarter ended December 31, 2020. PPP loan fees continue to have a negative -- and loan balances continue to have a negligible impact on our overall banking business unit NIM.

Our efficiency ratio for the 3 months ended March 31, 2021, was 50.64% compared to 46.86% in the second quarter of 2021. The efficiency ratio for the banking business segment was 42.33% for the third quarter of 2021 versus 40.45% in the second quarter of 2021. The sequential increase in overall banking business efficiency was a result of higher professional service expenses related to onetime legal costs and higher marketing costs related to mortgage banking.

Capital levels remained strong with Tier 1 leverage ratio of 9.56% at the bank and 8.99% at the holding company, both well above our regulatory requirements. On 3/31/2021, we redeemed all the outstanding 6.25% subordinated notes due February 28, 2026, representing an aggregate principal balance of $51 million. The redemption was principally funded with proceeds from the issuance of $175 million of sub debt that was completed in September of 2020.

Our credit quality remains strong with no loans in forbearance. Nonperforming assets fell by 20% linked quarter, representing 1.14% of total loans and leases at March 31, 2021, compared to 1.44% at December 31, 2020. Our focus on retaining asset-based loans with low loan-to-values on our balance sheet has contributed to the low loss content on the small number of loans that become delinquent.

Total loan originations for the third quarter ended March 31, 2021, was $1.8 billion, down 36.8% from $2.9 billion in the year-ago period. Excluding H&R Block-related loans in the year-ago period, total loan originations increased by 47.9% year-over-year. Q3 2021 originations were as follows: $381 million of single-family agency gain-on-sale production, $251 million of single-family jumbo portfolio production, $97 million of multifamily production, $46 million of commercial real estate production, $37 million of auto and unsecured consumer loan production and $956 million of C&I loan production, resulting in a net increase of $420 million.

Our gain-on-sale mortgage banking group had another strong quarter, generating $9 million of mortgage banking income compared to $10.7 million in the second quarter of 2021 and $3 million in the corresponding quarter last year. Originations decreased by approximately 16.3% linked quarter to $381 million due to a steady increase in interest rates from the end of 2020 to March 31, 2021. The outlook for mortgage banking remains solid, although the overall industry slowdown in refinancing activity may result in either lower loan originations and/or lower margins or both relative to what we have been experiencing over the past 2 or 3 quarters. Our loan pipeline of single-family agency mortgages was $229 million at 4/22/2021.

Our mortgage warehouse continue -- business continues to benefit from strong demand for agency mortgages. Ending balances in our mortgage warehouse portfolio was up significantly from $380 million in March 31, 2020 and down $217 million from the elevated 12/31/2020 balance of $1.2 billion. We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships. Our single-family warehouse business generates strong risk-adjusted returns for us and provides a countercyclical balance to our more asset-sensitive commercial lending businesses.

Our net interest margin for the banking business unit was 4.23% in the third quarter compared to 4.11% in the prior quarter and 4.9% in the third quarter of fiscal 2020. Excluding the impact of H&R Block, our net interest margin for the banking business unit was up 12 basis points linked quarter and up 38 basis points year-over-year. On the asset side in the banking business, our loan yields continue to hold up well with average loan yields of 5.1% compared to 5.16% in the quarter ended December 31, 2020.

The vast majority of our asset-based loans are variable-rate loans, with 95% of all variable-rate loans being at the floor as of March 31, 2021. Yields for loan originations in the quarter ended 3/31/21 were 4.81% for jumbo single-family mortgages, 5.01% for multifamily and 5.7% for C&I loans. Approximately 48% of our loans are 5/1 ARMs with single-family and multifamily mortgages as underlying collateral.

In our C&I loan book, our asset-based lending facilities and commercial specialty real estate loan portfolios have rates that adjust to an index. Of the $3.4 billion of lender finance and commercial specialty real estate loans outstanding at March 31, 2021, approximately 94% are at their floor rates. Our equipment leasing portfolio, which accounts for the remaining $120 million of C&I loans outstanding, is comprised of fixed-rate loans and leases.

Our checking and savings and money market balances increased by approximately $3 billion from March 31, 2020, 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 customers, benefiting from our technology-enabled service models.

Ending noninterest-bearing demand deposits were $2.6 billion in the quarter ended March 31, 2021, up by approximately 19% from the prior quarter. We are making good progress in our specialty commercial and treasury management businesses, including our fiduciary services businesses. Axos Clearing continues to generate low-cost deposits that we were able to put on or off balance sheet. Ending cash deposit balances of Axos Securities were approximately $800 million with approximately $480 million of those balances placed at other banks at March 31, 2021.

Our credit quality remains solid. Annualized net charge-offs to average loans and leases was 3 basis points this quarter compared to 3 basis points in the corresponding period last year. Nonperforming assets to total assets were 114 basis points for the quarter ended March 31, 2021, down from 144 basis points in the second quarter of fiscal 2021.

Of our nonperforming loans, 60% are single-family mortgages, where we've had historically very low realized losses. Of our nonperforming single-family mortgage loans at March 31, 2021, approximately 85% had an estimated current loan-to-value ratio at or below 70% and approximately 95% are below 80% of our best estimates of current loan-to-values. Given this low loan-to-value on our single-family delinquent mortgages, we do not anticipate occurring material losses on the vast majority of these loans.

Other than single-family delinquencies, the remaining delinquencies consist of 2 hotel loans we previously discussed, which are around $24.5 million of unpaid principal balance. We had 6 multifamily loans that were 30 to 59 days delinquent for a total value of around $3.1 million that are at origination LTVs of around 46% on average, 1 multifamily loan that is 60 to 90 days delinquent for $1 million with an origination loan-to-value of 44%. We continue to work with borrowers to bring delinquent loans current, and we have no loans on forbearance as of March 31, 2021.

Our loan loss provision for this quarter was $2.7 million compared to $8 million in December 31, 2020, quarter and $28.5 million in the quarter ended March 31, 2020. The primary reason for the sequential decline in loan loss provisions are lower loan growth and the sequential improvement in our nonperforming loan balances. Our total allowance for loan loss was $143.8 million at March 31, 2021, which represents 1.16% of our total loans and leases. While we have seen steady improvement in the economy since COVID-related restrictions have been rolled back and resilient housing values in the vast majority of markets where we lend have continued, we do not anticipate making significant changes to our loan loss provisions in calendar 2021. Approximately 95% of our loans outstanding at March 31, 2021, were collateralized by hard assets with an average loan-to-value in the 50s, including $10.6 billion by real estate assets and $523 million of loans secured by commercial receivables.

We continue to generate strong returns with average return on common equity of 16.12% and 18.65% in the 3 months ended March 31, 2021 and March 31, 2020, respectively. Our efficiency ratio for the banking business segment was 42.33% for the quarter ended March 31, 2021, compared to 40.45% in the last quarter. We continue to invest in people, infrastructure, technology and processes in each of our businesses so that we can continue to grow at a similar percentage on our ever larger asset base.

Our capital ratios remained strong with Tier 1 leverage to adjusted assets at 8.99% at the holding company and 9.56% at Axos Bank. We also have access to approximately $2.8 billion of Federal Home Loan Bank borrowings, $2.6 billion in excess of $173 million we had outstanding at the end of the third quarter. Furthermore, we have $2.3 billion of liquidity available at the Federal Reserve discount window as of March 31, 2021.

Our strong organic growth and returns, coupled with excess capital in Axos Financial, allows us to make opportunistic acquisitions, such as the E*TRADE Advisor Services acquisition that we announced last week. I will discuss the strategic and financial benefits of this transaction later on the call.

Our loan pipeline remains solid with approximately $1.8 billion of consolidated loans in our pipeline at March 31, 2021, consisting of $229 million of single-family agency gain-on-sale mortgages, $473 million of jumbo single-family mortgages, $192 million of multifamily and small-balance commercial real estate term loans, $845 million of C&I and other commercial specialty real estate loans and $45 million of auto and unsecured loans. We expect to be able to grow loans in the high single-digits to low double-digit percentages and maintain our net interest margin in the mid- to high end of our 3.8% to 4.0% target range for the remainder of this calendar year.

Although we are above this net interest margin range at the bank currently and we do expect to be able to lower our cost of funds significantly, particularly given our recent acquisition of EAS and the runoff of our acquired book of higher-rate certificates of deposits from Nationwide, we anticipate that loan competition in certain segments will require us to lend at rates that would result in less margin expansion in this coming year than the reduction in our cost of funds might otherwise indicate.

Our securities businesses continue to make steady progress. Axos Clearing increased total tickets processed by almost 52% linked quarter to almost 2 million tickets and ending deposits grew by approximately 3% linked quarter. We signed 3 new correspondent clearing clients in the December quarter and signed 3 new RIA clients this quarter, which will add incremental fee income and low-cost deposits with a 2 to 3 quarter lag between signing and onboarding.

On prior calls and on our most recent Investor Day in 2019, we have talked about the importance of growing our securities, clearing and custody business. Last week, we announced an agreement to acquire certain assets and liabilities of E*TRADE Advisor Services, EAS as they are called. EAS is a top 5 RIA custodian with proprietary technology platforms that hundreds of independent RIAs and TAMPs used to serve their wealthy management clients. With approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits, EAS significantly increases our scale, total addressable market and capabilities.

EAS' focus on providing high-touch services to RIAs with assets under management between $50 million and $1 billion is a perfect complement to the clearing services we provide to independent broker-dealers. We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest and our ability to provide additional technology and banking services to RIAs, advisers and their end clients makes us a credible alternative to the largest competitors in the custody space. What makes me most excited about this transaction is with the team of custody experts who are dedicated to serving independent RIAs and turnkey asset management program managers and the Liberty technology platform we are purchasing.

The EAS team, headquartered in Centennial, Colorado, is comprised of approximately 180 team members, including over 50 software engineers, application and system support and other technology, infrastructure and service FTEs and over 100 client-facing operations and business strategy FTEs. Liberty is a proprietary client-facing technology platform that interfaces with a variety of third-party middle- and back-office systems that RIAs use for portfolio management, tax reporting, transaction processing, marketing and client service functions. Adding a flexible technology platform and an experienced relationship management and operations team dramatically accelerates our time to scale and credibility in this business.

EAS' model and market opportunities share similarities and differences with those from Axos Clearing. Independent RIAs continue to grow in number and AUM as more advisers leave wirehouses to gain greater control over their practices and enhance their economics. We believe EAS is well positioned to gain market share in this growing market as more advisers look for alternatives to large custodians.

Like the clearing business, securities custody generate significance amounts of no- to low-cost deposits that become substantially more valuable as interest rates rise, offsetting the effect of businesses such as mortgage banking that benefit from a lower rate environment. Client sweep deposits from clearing and custody also provide optionality for us as we have sole discretion in determining whether we use the deposits to fund the bank's asset growth or hold them off balance sheet as a partner bank to optimize our capital efficiency. Deposits from the RIA custody business will provide us with a new source of low-cost funding that can scale dramatically faster and more cost effectively than consumer deposits.

Unlike the clearing business where fee income is generated primarily through transaction-based ticket charges that have corresponding operating expenses, the custody business generates both transaction-based fees and asset based fees. For example, EAS charges a custody fee based on the amount of assets under custody. When AUC balances increase, either from growth in net new assets from new or existing custody clients or from market appreciation, the custody fee paid to EAS also increases. In this respect, the financial model is very similar to that of asset or wealth management businesses that charge an annual management fee based on assets under management. EAS also collects commissions from third-party mutual funds and ETF providers where advisers who custody with EAS use those mutual funds and ETFs in their investment portfolios. Finally, EAS generates transaction-based fees related to paper statements and other ancillary services.

In total, EAS generated about $58 million of net revenue in 2020, with approximately half of that coming from net interest income. Going forward, depending on how much of the client deposits are held off balance sheet at partner banks and on Axos Bank's balance sheet and the rate paid on those deposits to EAS, the net revenue from EAS will vary from year-to-year. We expect to extend offers to all EAS team members and invest to grow this business.

From an operating expense perspective, about 70% of the 2020 noninterest expenses were compensation, benefits and sales commissions. If you exclude some onetime expenses related to prior initiatives that E*TRADE has discontinued, the annual operating expense run rate is approximately $39 million. The operating expenses are offset largely by fee income generated from asset and transaction-based revenues.

When we consider the net operating cost of the RIA custody business and the low cost and stable funding we are able to generate from client cash sweeps, we believe this provides us with another attractive and relatively efficient source of core deposits. We are confident that we'll identify cost synergies, particularly with respect to incremental costs at Axos Clearing, that might otherwise have been incurred as we grow our customer -- our clearing customer base. To be conservative, we are not assuming meaningful cost synergies in year 1 and only incremental cost synergies of between $1 million and $1.5 million starting in year 2.

This is an attractive transaction from a strategic and financial perspective. We will fund the entire $55 million cash purchase price with excess capital from the holding company. Using fairly conservative assumptions, we expect the acquisition to be at least 1% accretive on our EPS in year 1 and 5% accretive to our EPS in year 2. Over the next few months, we'll be transitioning the business from a bank-owned custody platform to a broker-dealer platform prior to the projected calendar Q3 2021 close. We will unlock potential cost and revenue synergies which we have not modeled in our EPS accretion and tangible earn-back forecasts.

Once EAS is fully integrated with Axos, we see meaningful revenue opportunities with Axos Clearing, Axos Invest and Axos Bank. We believe that the consumer technology we have developed as a front-end banking and securities platform and our account opening technology will be valuable to RIAs hat custody with Axos as they will have the benefit of partnering with us for the provision of banking products to their clients with a custodian that does not compete with them for -- with its own proprietary wealth management arm as is typical with other large custodians.

The combination of a broker-dealer compliant RIA custody and clearing platform and our host of white-label banking products and services at our consumer and commercial bank makes us extremely excited about the long-term cross-sell potential across our entire organization. We have not modeled additional banking cross-sell opportunities into our estimated accretion numbers however. Furthermore, the flexibility of being able to move these low-cost deposits on or off balance sheet has the potential to increase our annual net interest margin above the 3.8% to 4% range or accelerate our loan growth above the low-teens rate while maintaining our 3.8% to 4.0% NIM range. This transaction will require FINRA approval, and we submitted our application to FINRA last week.

We continue to beta test our self-directed trading platform. The preliminary launch date will be sometime in the June quarter. Version 1.0 of our self-directed trading offering will focus on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online mobile application. More importantly, it will allow us to experiment with various pricing models and do more detailed customer segmentation with a goal of delivering a more customized client experience.

It's the beginning of an ambitious and exciting journey that would be much more cost prohibited if we did not own our own clearing company. The ability to have a direct-to-consumer managed portfolio product through our robo advisor, self-directed trading and banking should enable us over time to reduce the cost of customer acquisition, increase revenue per customer and enhance retention. We are also actively working on adding cryptocurrency custody and trading into our self-directed platform and expect that, that will be in beta launch by the end of this calendar year.

I'm more excited than ever about the opportunities we have in each of our businesses. Some of the investments we have made like mortgage banking and C&I lending are generating meaningful profits today and others such as Axos Clearing and Axos Invest have only scratched the surface relative to their long-term potential. Our future launches of self-directed trading and cryptocurrency trading has the opportunity to drive significant consumer account growth. By operating a diversified set of lending, funding and fee-based businesses across our consumer bank, commercial bank, securities and investment subsidiaries by continuing to make improvements in our user experience and technological capabilities and creating product offerings that are cultivated through direct and indirect customer acquisition channels, we are better positioned than most to maintain consistent profitable growth, irrespective of economic, regulatory and competitive changes.

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

[Andy Micheletti, executive]

Thanks, Greg. First, I wanted to note that in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on 2 topics. Please refer to our press release or our SEC filings for additional details.

As Greg mentioned, our provision for credit losses was $2.7 million for this quarter ended March 31, 2021, down from $8 million from the last quarter ended December 31, 2020. The decrease in the linked quarter was due to the quarterly change in point-in-time loan growth. As we look forward to additional loan growth over the next year, we expect the loan loss provisions to generally move with the ending balance loan growth for the quarter and based on the mix of loan types.

As discussed previously, we exited our relationship with H&R Block and did not issue Refund Advance loans this quarter, which is a large portion of the $25.8 million decline in the loan loss provision this quarter ended March 31, 2021, compared to last year's quarter ended March 31, 2020. Although we exited the H&R Block relationship, they agreed to continue to pass through RIA payments through April 30, 2021, due to the IRS tax return processing delays.

As of March 31, 2021, there was approximately $7.3 million of RIA loans left, 100% of which is covered by an allowance for credit losses. Next quarter, we expect to charge off any uncollected portion of the $7.3 million RIA balance. However, that charge-off is not expected to impact our loan loss provision for the period.

Moving to our securities business. The pretax operating results for the securities segment for the quarter ended March 31, 2021, compared to last quarter ended December 31, 2020, improved by $0.4 million when excluding a onetime cost of $1 million incurred this quarter. The adjusted results for the securities segment would be about breakeven this quarter compared to a pretax loss of $0.5 million last quarter. The improvement is primarily due to a $1.7 million increase in broker-dealer fee income at Axos Clearing, resulting from the transaction growth this quarter compared to the last quarter ended December 31, 2020. The fee income benefit was partially offset by higher clearing costs and lower net interest income.

With that, I'll turn the call back over to Johnny Lai.

[Johnny Lai, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of David Feaster with Raymond James.

[David Feaster, analyst]

I just wanted to start -- appreciate all the color with EAS. I was just curious about maybe some of the integration of that and when you think you'll be able to really start driving market share. Is the integration and conversion a pretty quick process? And when do you think you can start addressing some of the platform limitations that you talked about kind of in that supplement?

[Gregory Garrabrants, executive]

Well -- so we expect that the integration that we're creating with the broker-dealer is -- we expect that to be done by July 31. We also think that Liberty is a strong product. We have an RIA custody sales team that sits in the clearing company already. They have a pipeline. We already have obviously much smaller RIA custody business. So we don't think that there is an impediment with respect to the Liberty technology that we need to fix in order to grow.

In fact, we think it's a good platform. It actually is best in class in many areas. It allows multiple models in a single account, things like that. So it actually is great in many ways. There's a few things on the technology road map, like every technology road map, that we want to work on, but we're hitting the ground running.

EAS has a pipeline with respect to -- for growth that will carry over after the acquisition closes. We have a pipeline from a growth perspective. So we'll be looking to get that momentum going. There may be a little bit of just a slowdown from a perspective of just having to make sure that we're taking care of the current customers properly and that the transition goes well. But I think it's something that should be able to grow almost immediately.

[David Feaster, analyst]

Okay. That's great. And then just looking at the loan growth, it was good to see the strength in the specialty CRE. Just curious how that -- the pipeline in that business is trending, where are you seeing strength, what kind of projects you're more interested in and then whether this is one of those segments that you talked about competitive new rates may be pressuring margins some.

[Gregory Garrabrants, executive]

Yes. So the projects are mostly residential projects. I'd say the most significant are multifamily related, often projects that are in lease-up, things like that, really residential, some condo type of loans which are performing very well, frankly. They're doing so well that by the time you make the loan, the units are getting leased up and sold. And obviously, the market on the residential side is very, very strong.

With respect to rates there, we're holding our own there. I do expect that there will be compression in those rates going forward as we continue to look to grow balances there. But we also do not expect that single-family is going to have the decline in balances it had this quarter. We did adjust rates in single-family, and the pipeline is up significantly.

And so we believe that we ought to be able to hold our own at least. We may not get much growth, but we don't believe that single-family will be dragging loan growth down in the way that it did this quarter on a going-forward basis based on what we're seeing with respect to the pipeline. So it may not be the grower that we expected and that we've had historically, but I don't think it will be a negative there.

And then obviously, warehouse lending is really much more of a variable business. And so we expected that the temporary high balance we had, the high growth we had in warehouse lending that we rolled through in the December 31, 2020, quarter was going to adjust a bit and it did, which resulted in lower loan growth this quarter, almost entirely as a result of that adjustment. But we have a lot of new clients there. We're still holding our own there as well. So hopefully, that will continue to be a much bigger business than it was 4 quarters ago.

[David Feaster, analyst]

Okay. That's good color. And then maybe just more of a higher-level strategic question. We've seen several other banks enter into some crypto partnerships and investments. Just given the securities business and kind of your innovative mindset, is this something you all have any interest in? And I guess do you see opportunity to participate in that side of things, the cryptocurrency side of things at all? And if so, how?

[Gregory Garrabrants, executive]

Yes. We do. The way that we're going to incorporate it is, in the trading platform, we will allow our clients to custody crypto assets and then trade those crypto assets for other crypto assets. And then if they would like to monetize those assets, then they can, and they can spend that off with a card.

So we don't really have a plan right now to have those crypto assets used for actual transactions. There's just -- there's not a lot of, I think, benefit right now there. I mean there's -- BMW came out and said, "We'll take crypto assets for a car." But if you exchange those crypto assets and write a check or send a wire, they'll also take that too.

So yes, I think that it is increasingly becoming something that even more conservative RIAs are recommending some percentage of portfolios being held in crypto assets. So that capability is being added to the clearing company so that we can trade that. And I think it will be something -- to have that integrated service, I think it will be something that customers will value given the way it's consolidated.

[Operator]

Our next question comes from the line of Andrew Liesch with Piper Sandler.

[Andrew Liesch, analyst]

So obviously, I mean, excluding the warehouse loan growth, pretty solid here, margin up nicely. But I guess focusing just on the NII number, the dollars. Is this a good level to build from here? The margin's going to do what it's going to do based on liquidity flows, but is the $136 million repeatable going forward?

[Gregory Garrabrants, executive]

Yes. I think -- yes, definitely. And look, we expect to have loan growth. Pipelines are good, as I said, single-family. I think that the -- I think that with respect to new asset growth, I think you should expect it to come in at a lower rate just in general and -- but not by a significant amount.

But we expect to have good loan growth. And I think to the extent you may have had higher loan growth in your model given what happened on warehouse, you may have to -- you have to, obviously, adjust that for this quarter and roll that actual into that. But yes, I think that's a fair statement.

[Andrew Liesch, analyst]

All right. You guys actually had better loan growth than I was looking for this quarter.

[Gregory Garrabrants, executive]

Okay. Well, you have to be more optimistic.

[Andy Micheletti, executive]

Our guidance -- Andrew, our guidance really didn't change. I mean we still are...

[Andrew Liesch, analyst]

And that's kind of why I'm still right around this 10% growth or so. But I guess shifting over just to your provisioning comments. Is there anything justifying the allowance up near this level?

I mean your historical loss history is much better, but it sounds like you're going to try to keep the reserve near this level or maybe drift lower, adjusting for loan growth. But -- I mean arguably, it could be a case for much lower than where it is right now. How do you see the provision playing out not just in the next couple of quarters but over the next couple of years?

[Andy Micheletti, executive]

Well, yes, a couple of years is way out there. Let me cover the couple of quarters. I think our guidance was -- for now, we're comfortable that we're going to move that provision around growth. So obviously, we had a little bit of smaller growth this quarter at point in time. If that point-in-time growth goes up, which we do expect it, depending on where it happens, the loan loss reserves for commercial are closer to between 1.5 and 2.

So if all the net growth comes in commercial real estate -- or commercial, you're looking more at 2% on growth, which could bring that number back up. That's our broader point, is that we don't necessarily expect it to go down from here if we've got good loan growth. Obviously, if single-family grows, that growth rate is -- that loan loss rate is a little bit smaller. But the mix rates that we have put out there on our release are kind of what we expect to run going forward.

[Operator]

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

[Michael Perito, analyst]

On the EAS side, Greg, are -- the $1.2 billion of deposits, are those like -- I apologize if you said this already and I missed it, but are those operating accounts that the RIAs sell?

[Gregory Garrabrants, executive]

No, no. They're client cash that is held in those individual customer accounts that is subject to a sweep agreement. And those -- yes, the RIAs manage that cash, and they have a different level of -- there's about 150,000 accounts there. And they have -- and each RIA has its own asset allocation profile and risk tolerance and things like that. And -- but in general, that's the way to think about that.

[Michael Perito, analyst]

And is there -- so is there opportunity to -- I'm just trying to think of how kind of the cross-sell of all this could fit in. I mean do they have a lot of -- do the customers of these RIAs have a lot of access to credit-type products today, on the -- something like your securities-based lending? I'm just looking at Slide 8 of the EAS that you guys put out. I mean is that stuff they have access to? Is that potential upside that could be rolled out relatively quickly? Any thoughts there?

[Gregory Garrabrants, executive]

Yes. That's a great question, and I think that's very relevant. We didn't put that in the accretion numbers, but you make a lot of good points. So given that this wasn't on a broker-dealer platform, they had 0 margin lending with these clients, which was something that was concerned and limited the ability of the RIAs to maybe place all the assets of a particular client. So they may be dual custodian things or they just don't have that. So you don't have -- so with -- once that's integrated to a broker-dealer, you can have the margin lending.

Next, the securities-based line of credit idea, which is -- it's a very secure form of lending. But the ability for the bank to automate the locking up of liquid assets for personal loans or connecting that to a very low interest rate credit card, I mean, those are the type of things that are out there.

And then finally, obviously, if you're an RIA and you're competing against -- you just left Morgan Stanley, and you had a 40% split there. And now you're keeping everything and you're paying Axos custody. And all of a sudden, your client needs a mortgage loan. Well, if Morgan Stanley is saying, "Well, hey -- gee, it's really too bad you left. And I know you like your adviser, but we're over here. And if you just had your money over here, we can give you this mortgage loan." And that's a significant problem.

So one of the sets of services that are lost by breakaway advisers from wirehouses is they lose access to banking products. So we believe -- and we've already proven it out. We have some RIA custody business now, and there's been some RIAs who have really taken to this. And during the refinance boom, they said, "Well, part of my value is going through every one of my clients' portfolios and introducing an Axos mortgage product to those clients," because they -- we're giving them -- we gave them a better deal. We said we would waive the lender fee.

So that was a significant benefit to their customers. And they went out and said, "Look, you guys need to do this." I mean there's no payments there. It was just, "Look, this is a good opportunity to get a mortgage." So that is, I think, definitely an opportunity.

And then the way we're integrating the technology is we built a really strong front-end platform. That front-end platform can also be utilized for all of these end clients, both clearing and RIA custody, to see their statements and whatever else. And then to the extent that a banking product is applied for, it gets applied for and that customer is then a core banking customer. So that -- we have work to do there because Liberty has its own app, and so -- we have our app. And so we have to work through those sort of things.

But those things are not hard to do and we'll get it moving. It will take a bit but we'll get it right. And I think there's a lot of opportunity. And when we talk to the RIAs, there's different levels of enthusiasm about this, but they're universally concerned, mostly -- universally may be an overstatement, but a wide majority are concerned that without these products, there's an angle created by a competitive wealth manager to gain access to that client.

[Michael Perito, analyst]

Right. Well, I mean, if you just think about who's going after these types of clients, right? I mean it's probably a lot like Chase Private wealth, things like that, that have all these things, right? So I mean if you can't compete with that challenge -- I mean it would seem like beyond securities-backed lending, mortgages, I mean, you could even possibly fulfill like money market-type deposit accounts, I mean it would seem like there's a pretty full suite of services that you could offer that I imagine they weren't really able to cross-sell previously, I guess, is...

[Gregory Garrabrants, executive]

Yes, agreed. I think that's absolutely right. And we have the technology to deliver that seamlessly because all the applications for our products are all API enabled. And so whether the RIA facilitates that or whether it's facilitated through a mobile application or online, we have the ability to make that a relatively seamless process.

So I think that's something that's really exciting. And frankly, the big custodians have not done that well. But we have -- because of our -- obviously, our history and how -- where we've come from, we have great account opening technology. That account opening technology is something that it would take a very large RIA to be able to generate and make that work. So how much does our account opening technology come into play and how much does the consumer platform come into play, those will be interesting opportunities on a going-forward basis.

[Michael Perito, analyst]

Got it. And as you think about the -- clearly -- actually, you just talked about, right, there's a lot of opportunity and a lot of ways to dice it up and see that there's cross-selling opportunities. As we think about those kind of -- the risk that comes with those opportunities in an acquisition like EAS, is it fair to think that a lot of the risk would look similar to that of a COR Clearing when you guys brought that onto the platform, I mean, in terms of kind of like fraud and things of that nature? Is there anything else that we should be considering for -- those of us bank guys, I guess, that are...

[Gregory Garrabrants, executive]

Yes. No, I think that this is -- yes, I think this is a much lower risk -- it's much lower risk from a standpoint of what you're worried about, obviously, fraud or those sort of things. And the reason why is just the type of clients and the mix that RIAs have. These are just simply domestic, relatively high-net-worth individuals that have hired somebody to manage a balanced portfolio of mutual funds, ETFs and some listed equities, right? So it's really not -- it's not something where you've got a lot of massive trading through -- or specific trading through these platforms.

There's not -- in Axos Clearing, you'll have people that's short, right? And so obviously, managing the liquidity positions of those shorts and making sure that they're doing it with the right stocks and all those kind of risks, that just really isn't coming up in an RIA custody business. So this -- I would say that this is a much easier business to manage from the market risk perspective.

[Michael Perito, analyst]

Makes sense. And then just lastly for me. If I think just high level for you guys, right, the entrance potentially by the end of the year to the crypto space in one way, shape or form. I think you guys obviously kind of have a dual-pronged strategy with a lot of what you do, right? There's kind of a consumer element and then there's a commercial element. And is it fair to say that the crypto side will likely evolve into both over time?

I mean it sounds like it's more consumer-focused out of the gates here, but there's a really kind of institutional adoption of cryptos in such early stages. Some banks do a lot there already. I mean is that an opportunity you guys are considering as well as you kind of go down this path? Or any thoughts there would be great.

[Gregory Garrabrants, executive]

Yes. I think it is interesting. I think that it will inevitably lead there with respect to that. And I think it's a -- I think those are interesting opportunities.

[Operator]

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

[Gary Tenner, analyst]

I wanted to ask a couple of questions, the first on EAS. You talked about they're in the $59 million, I think -- or $58 million run rate of 2020. About half of that was from net interest income. So -- and I couldn't quite square kind of what those trailing numbers look like relative to your earnings accretion assumptions. And I just wanted to get a sense of what your kind of working assumption is with regard to maybe the incremental margin on those deposits that come over. And obviously, as you pointed out, there's going to be a mix of whether you keep them on balance sheet or off, so just trying to get a better sense for how you're thinking about that.

[Gregory Garrabrants, executive]

Yes. So here's the way we thought about it, and these are the assumptions. And you can see them on Page 7 of the earnings supplement. But we said we're going to assume that EAS' client cash earned 75 basis points and that then we have a $3.6 million interest expense savings from a 4 to 5 basis point reduction in Axos Bank's interest-bearing cost.

Now the reality of it is we already have -- we have -- now we have an extra $1.2 billion of deposits. We have $400 million outside -- excess in clearing. We're going to aggressively manage down our deposit cost as a result of this. So we sort of picked a pretty -- I think, a pretty conservative estimate and said, okay, let's assume we can only take our deposit cost for all interest-bearing, checking, savings and money markets across consumer and commercial down by 4 to 5 basis points. Now that's -- I think that's a pretty conservative assumption, but that's what we have in there. And then we have EAS client cash earning that.

When you think about it, it's actually interesting from a conceptual perspective when you try to come up with these numbers because what you're supposed to be doing is saying, "What would my economics be with and what would be my economics be without?" The reality of this business is it generates a lot of 0 cost, very sticky deposits at an all-in cost that's lower to service than, let's say, consumer checking accounts, which, although they may have -- they have obviously -- we have ones that have interest rates and those interest rates are coming down as we continue to mature. But we also have a lot of operating costs associated with those accounts, and those accounts are smaller, obviously, on average than high-net-worth accounts from RIA custody.

So that's what we've made the assumptions around. I think how that actually looks sort of going forward is that it's going to look like aggressive reductions in cost of funds pretty quickly here in order to make room for those deposits. And then also, it enables growth at maybe more competitive loan rates as well, right? So that is another element that assists as we think about balancing this loan yield, NIM, asset growth set of variables. This just gives us a lot bigger tool. And we've given the assumptions that we've made with respect to the accretion in the supplement deck.

[Gary Tenner, analyst]

Okay. Yes, fair enough. I mean we're certainly looking at it in a vacuum versus commingled. And in a way, in fact, certain parts of the business are 2 different animals. I missed that second line added on that Slide 7 versus the slide in the deck last week, so I appreciate that.

In terms of the Nationwide deposits, Andy, can you just kind of remind us what the kind of remainder is of those deposits that you're going to work down and what the prevailing rate is?

[Gregory Garrabrants, executive]

And that's just the CDs. I mean there's lots of -- there was Nationwide checking, whatever, that we've adjusted and is there, good stuff.

[Andy Micheletti, executive]

Yes. Let me give you a couple of snippets. There's a big piece in July of this year, $114 million at 2.29%. There's a $60 million piece in August at 1.85%. There's a $39 million piece at 1.57% in September. So that -- as you can see, that quarter is where the bigger pieces start to amortize off across that. And so the whole book within the CD group, as you look across Nationwide, we're probably looking at about 700 -- call it, $710 million of the $331 million balance is just Nationwide.

[Gregory Garrabrants, executive]

And some of those were high -- they were long-term CDs...

[Andy Micheletti, executive]

Very long term.

[Gregory Garrabrants, executive]

That were -- that are coming due that were higher rate from a different environment. So obviously, there's excess deposits across the bulk of the securities businesses, and we're renewing some of these. But frankly, obviously, the rates are going to adjust significantly to the extent people offer renewal.

[Andy Micheletti, executive]

Yes. And let me give you 2 more numbers. I know I'm throwing a lot of numbers out there but you want them. $55 million in that group is coming off in May for that group at 1.88% and then another $55 million in June also at 1.88%. So that gives you kind of a flavor of how fast it's coming down.

[Gregory Garrabrants, executive]

Right. I think maybe a broad conceptual way to think about this, and I know it's a lot of movement, but obviously, with what we've been doing on the cost of funds side, it's going to get a lot better, right? We obviously -- of course, we're adding cost with what we're doing in these businesses.

We will get more scale there as we get into these businesses and put our process improvements in place and things like that. But obviously, having lower funding cost also allows you to have loan growth because you have more flexibility on loan rates and so -- within the target NIM ranges that we're trying to get to. So all of those kind of move around a bit, but they end up getting you a little more flexibility with respect to loan growth as a result of an ability to offer a more flexible set of loan rates.

[Gary Tenner, analyst]

Got it. And then just I'm going to bounce back to EAS for a second. And I don't think I missed this, but in terms of goodwill or any intangibles, customer relationship intangibles or anything like that, have you talked about that at all? Or can you give us any kind of insight there?

[Andy Micheletti, executive]

Yes. We -- it's obviously super early, Gary. So we're just giving you a very rough estimate. This could change one way or another. And I've got Derrick here. But Derrick, in the end, what did we end up using as total intangibles?

[Derrick Walsh, executive]

Total intangibles would be between $40 million and $50 million. Of which -- about $5 million to $10 million of that $40 million to $50 million is internally developed software.

[Andy Micheletti, executive]

So a large portion of it is, is.

[Operator]

Our next question comes from the line of Steve Moss with B. Riley Securities.

[Stephen Moss, analyst]

Maybe just following up in terms of -- just in terms of yields. Just wondering, to start, where are new money yields coming in for loans these days?

[Gregory Garrabrants, executive]

I mean the single-family is probably down. The pipeline is up just the yields are probably -- new money yields, I think, are down almost 25, 30 basis points, something like that. I think that's about right. And then the C&I stuff is a mix. Right now, it really isn't down much. It was maybe down a little bit every now and then but not much.

And then multifamily depends on the mix and say maybe -- from this quarter, I don't think it's -- I think the pipeline is pretty stable. So I just -- I don't want to overstate my concern about that or that there's going to be some massive cut. But I just think looking forward and thinking about the competitive environment and where it could go, that is just an option associated with what's happening with our funding costs.

Single-family though is something where we have cut rates. And the result is -- and we've had enough run time, I think, to see that kind of play out a bit in the pipeline. And so that's kind of where that's coming out.

[Stephen Moss, analyst]

Okay. That's helpful. And then in the quarter here, your SBLOC lending took off, pretty good growth there off a small balance. But just kind of curious how you're thinking about SBLOC over the next 6 to 12 months. And any color that you can give there?

[Gregory Garrabrants, executive]

Yes. I mean there really is -- on just the SBLOC side, there's a couple of -- I mean there's a consumer integration that occurs for both the end clearing and the RIA custody clients. And then there is also an institutional integration that occurs for the brokers and the RIAs so that they can offer those to their clients. That's not systematized right now in exactly the way it needs to be, but it's on the tech road map.

And so right now, these deals are being done more manually and sourced as the demand comes up and people ask for them and things like that. And they're much more of a -- the broker has a client who needs this and that kind of thing. But over time -- and then obviously, the assets are custody to clearing and they're locked up and they're monitored in the same way a margin would be monitored to ensure the collateral is there.

So yes, so that's -- I think that right now, it'd probably be a little more sporadic, but over time, I think those loans will become smaller, more granular and much more utilized. I think one of the goals is to be much more utilized like an overdraft line of credit or something almost or just the liquidity management tool so a customer could avoid selling assets and kind of just bridge those gaps to just sort of sit there and one click into an account kind of thing. And I think that'd be -- I think that's going to be a pretty neat synergy with respect to everything we're doing.

[Stephen Moss, analyst]

Right. Absolutely. Any idea in terms of time line on the one that could be rolled out on the tech side?

[Gregory Garrabrants, executive]

Yes. I think self-directed trading is coming in this June quarter. But we're taking this as a -- these are very kind of targeted rollouts with slow sort of -- we're not looking to try to blow out some massive number of customers. We're going through, we'll put some customers on there. We'll make sure everything is working the way we expect it to and everything is functioning well. I think probably the SBLOC side stuff is probably more -- that sort of one click kind of deal, I think, is probably going to be more in the first calendar quarter of '22 probably, just given what we've got on the plate so far.

[Stephen Moss, analyst]

Okay. That's helpful. And then just on expenses here, just kind of curious as to how you guys are thinking about total expenses going forward with continued growth in data processing, just -- but overall trends I'm curious about.

[Andy Micheletti, executive]

Sure, yes. No, we do expect expenses to come up some next quarter. In general, I would think about $1.5 million or thereabouts, potentially a little bit more. Where that adds up -- of course, there are always pluses and minuses. In the salaries area, we had a couple of offsets, and we'll have higher FICA expense. So I'm expecting a little bit over $1 million to $1.5 million more there on that side.

In that sense, in professional services, we did have some onetime items. I'm expecting that to actually come down by about $500,000, data processing up $500,000.

[Gregory Garrabrants, executive]

Isn't that mostly the clearing running through because that would be the cost of the transactions, right?

[Andy Micheletti, executive]

Yes. There's the cost of transaction and the other legal stuff, yes.

[Gregory Garrabrants, executive]

That data processing is going to...

[Andy Micheletti, executive]

Yes. Well, in data processing, we just have a number of items that are coming through that are getting -- ultimately project oriented that are not capitalized, yes. Those are the big things. And then the rest are smaller numbers in the other area.

Other G&A was up primarily because last quarter was down. We reversed $1 million of -- this is where the actual allowance associated with the uncommitted liability runs through. And so not this quarter, but last quarter, we reversed $1 million of it, which reduced last quarter's other G&A expense. And so there's $1 million that you would add back that would do that. But all in all, we do expect other G&A to be down slightly. So when you add up all those numbers, it's about -- around $1.5 million increase maybe in operating expenses consolidated.

[Operator]

Our final question comes from the line of Tim Coffey with Janney Montgomery Scott.

[Timothy Coffey, analyst]

Andy, if we can just stick on expenses for a little bit, real quick. Do you anticipate any acquisition expenses going through in the June quarter?

[Andy Micheletti, executive]

No, nothing material.

[Timothy Coffey, analyst]

Okay. And then within the banking and service fee line item in noninterest income, was there a onetime item in the quarter-to-quarter change?

[Andy Micheletti, executive]

On -- you're saying on the linked quarter change?

[Timothy Coffey, analyst]

Yes.

[Andy Micheletti, executive]

Okay. So where we see our stuff coming down about -- from 10 for the other things -- so I mean I know 2 -- a little bit over 2 is associated with -- there's an IRA fee that is a statement fee that gets earned onetime per year at December 31. That's not repeated in the March quarter. So that's going to be, call that $2.5 million. So that's the majority of the piece there. Other than that, in the other pieces...

[Gregory Garrabrants, executive]

That's the main thing, I mean. There might be a little more fee on the bankruptcy side. The Axos Fiduciary Services side probably is up a little bit. And then...

[Andy Micheletti, executive]

Yes, for that -- relative to the piece. But...

[Derrick Walsh, executive]

Block -- there's Block income in Q2.

[Andy Micheletti, executive]

Yes. So the final -- there was -- Block had some tailing fees that we earned in the December quarter that's now gone. And so the number you're seeing this quarter based on those things is closer to the run rate.

[Gregory Garrabrants, executive]

Except for the fourth quarter next year, right?

[Andy Micheletti, executive]

Yes, except for the fourth quarter next year.

[Timothy Coffey, analyst]

Well, yes, we can cover that one later in the year. And then, Greg, is it too far a feel to think that as you start to integrate your customers across the ecosystem with EAS and the legacy Axos, that you might see fewer payoffs or maybe a potential slowdown in loan payoffs as people stay in the ecosystem?

[Gregory Garrabrants, executive]

I think there's a possibility there with respect to some element of loans. But a lot -- like the commercial specialty real estate stuff, it really is designed to pay off, right? I mean that's the nature of a lot of the products. So that's potentially right, I think that is.

Where I think we can do a much better job -- I think where it probably has the biggest impact is in all the consumer stuff. And then single-family, I think that could be an impact. We are doing retention stuff. Now we're getting better and better at it. But I do think that a customer that has an RIA relationship and a custody relationship and all these different things, I think that is going to help over time with respect to that.

And so yes, I think that's a possibility. I don't -- I wouldn't try to model it but -- right now. And it's certainly a longer-term type of potential benefit.

[Operator]

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

[Gregory Garrabrants, executive]

Thank you, everyone. Appreciate the time to listen to us, and we'll talk to you next quarter.

[Operator]

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