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Axos Financial Inc
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Hello and welcome to Axos Financial Q4 2021 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will be follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call to Johnny Lai, Investor Relations. Please go ahead.
Thanks Kevin and good afternoon everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.'s fourth quarter 2021 financial results conference call are the company’s President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and 12 months ended June 30th, 2021, and they will be available to answer questions after the prepared remarks.
Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions.
These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
This call is being webcast and there will be an audio replay available in the Investor Relations section of the company’s website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release.
Before handing it over to Greg, I’d like to remind our listeners that in addition to the press release, we also issued an earnings supplement and a 8-K with the financial disclosures. All of these documents can be found on the Axos Financial website.
And with that, I’d like to turn the call over to Greg.
Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I’d like to welcome everyone to Axos Financial’s conference call for the fourth quarter of fiscal year 2021 ended June 30, 2021.
I thank you for your interest in Axos Financial and Axos Bank. We ended fiscal 2021 with strong net income and loan origination growth, stable net interest margins, excellent credit quality, and industry leading returns.
Axos reported fourth quarter net income of $54.3 million for the three months ended June 30, 2021 and earnings per diluted share of $0.90. For the 12 months ended June 30, 2021, net income and earnings per share increased by 17.6% and 19.5% to $215.7 million and $3.56 respectively. Our book value per share was $23.62 at June 30, 2021, up 14.9% from June 30, 2020.
The highlights for this quarter include the following; net interest margin was 3.92% for the fourth quarter, down slightly from 3.96% in the third quarter of fiscal 2021 and up three basis points from 3.89% in the fourth quarter of 2020.
Net interest margin for the banking business was 4.16% compared to 4.23% in the quarter ended March 31st, 2021 and 3.95% for the quarter ended June 30, 2020, up 21 basis points over that prior year's comparable quarter.
For all of fiscal 2021, net interest margin for the banking business was 4.11%, down slightly from 4.19% in fiscal 2020. Excluding tax-related H&R block loans which we discontinued in the fiscal 2021, net interest margin for the banking business was up year-over-year.
Excess liquidity accounted for all of the small sequential decline and both our earning asset yield and net interest margin this quarter over the prior linked quarter. Loan yields continue to hold up well at 5.15%, a five basis point increase from 5.1% in the quarter ended March 31st, 2021.
We continue to reduce our funding costs by replacing higher cost deposits with non-interest bearing demand deposits. Non-interest bearing deposit balances grew by approximately 28% over the prior fiscal year and end of period cost of interest bearing demand and savings accounts went from 58 basis points at June 30, 2020 to 18 basis points at June 30, 2021.
Our efficiency ratio for the three months ended June 30, 2021 was 51.66% compared to 50.64% in the third quarter of 2021. Efficiency ratio for the banking business segment was 45.2% for the fourth quarter of 2021 versus 42.33% in the third quarter of 2021.
The sequential increase in overall and banking efficiency was a result of higher data processing expenses related to our software initiatives and enhancements to our bank's operating systems.
Diluted earnings per share was $0.90, up 19.2% from the $0.75 in the year ago quarter. Our corporate tax rate decreased from 29.5% in the third quarter 2021 to 28% this quarter. We continue to generate strong returns while maintaining excess capital.
We generated a return on equity of 15.56% in the fourth quarter and 16.51% in the fiscal year ended June 30, 2021. Capital levels remain strong with Tier 1 leverage ratio of 9.45% at the bank and 8.82% of the holding company, both well above our regulatory requirements.
Our credit quality remains strong with no loans in forbearance. Non-performing assets represent 1.26% of total loans and leases at June 30, 2021 compared to 1.14% in March 31st, 2021. Charge offs excluding tax related products were one basis point annualized of average loan and lease balances this quarter,
Excluding mortgage warehouse and single-family jumbo mortgages and our bulk sale of $31.5 million of PPP loans, pending loan balances increased by approximately $270 million, up 15.5% annualized from the third quarter of 2021.
For the quarter, strong originations in multifamily auto and C&I lending were offset side by record high payoffs in jumbo single-family loan balances, lower period ending balances in single-family mortgage warehouse, and $31.5 million of PPP loan sales.
Ending loan and leases were up 7.4% year-over-year, but decreased by approximately $296 million from the third quarter of 2021. Total loan originations for the fourth quarter ended June 30, 2021 were $2.1 billion, up 27.6% from $1.6 billion the year ago period.
Q4 2021 originations were as follows; $242 million of single-family agency gain on sale production, $380 million of single-family jumbo portfolio production, $186 million of multifamily production, $37 million of commercial real estate production, $83 million of auto and unsecured consumer loan production, and $1.1 billion of C&I loan production, resulting in a net increase of $232 million.
Mortgage banking gain on sale generated $2.9 million of mortgage banking income compared to $9 million in the third quarter of 2021 and $12.7 million in the corresponding quarter last year.
Originations decreased by approximately 36.3% linked quarter to $242 million, while gain on sale margins dropped slightly to 323 basis points from 333 basis points in the third quarter of 2021.
The outlook for mortgage banking remains relatively stable from the fiscal for the fiscal 2021 fourth quarter. Our pipeline of single-family agency mortgages was $193 million at 7/9/2021.
Ending balances in the mortgage warehouse portfolio were up $43 million from the $570.8 million at June 30, 2020 and down $354 million from the elevated March 31st, 2021 balance of $968 million, highlighting sensitivity to overall volumes in the mortgage market.
We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships. Our single-family warehouse business generates strong risk adjusted returns for us and remains a small part of our overall loan book, representing approximately 5% of our June 30, 2021 ending loan balances
Our diversified consumer and commercial deposit and securities businesses continue to benefit from the secular shift toward digital banking. Consumer deposits representing approximately 42% of our total deposits at June 30, 2021 is comprised of consumer direct checking, savings, money market, and non-interest bearing accounts. The weighted average interest bearing demand and saving deposit cost were 18 basis points at June 30, 2021, down by 40 basis points compared to 58 basis points at June 30, 2020.
Average non-interest bearing demand deposits was $2.6 billion in the quarter ended June 30, 2021, up 17.5% from the prior quarter. Ending time deposits at 6/30/2021 were down $180 million linked quarter and $834 million year-over-year as we replace higher cost non-tour time deposits with lower transactional deposits.
Of the total $1.5 billion of certificates of deposit of outstanding on June 30, 2021, in the next 12 months, approximately $1 billion and a weighted average rate of 117 basis points will mature.
Our small business and specialty consumer and treasury management businesses, including our fiduciary services, businesses continue to contribute to our low cost deposit growth.
Axos' clearing continues to generate low cost deposits that we'll be able to put on or off balance sheet. Ending cast deposit balances at Axos Securities was $730.2 million, with approximately $320 million on Axos' balance sheet at June 30, 2021. The pending acquisition of E*Trade Advisory Services will add over $1 billion of incremental cash loop deposits that we can use to fund loan growth, replace maturing certificates of deposit, or keep off balance sheet and generate fee income.
Our credit quality remains solid. Annualized net charge offs to average loans and leases excluding seasonal tax products was one basis point this quarter compared to five basis points in the corresponding period last year. We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021, all of which we fully provisioned for in the prior quarters.
Non-performing assets to total asset ratio was 107 basis points for the quarter ended June 30, 2021, down from 114 basis points in the third quarter of fiscal 2021. Of our non-performing loans, 73% are single-family mortgages where we have historically had very low realized losses.
Of our non-performing single-family mortgages at June 30, 2021, approximately 89.5% has an estimated current loan-to-value ratio at or below 70% and approximately 99% are below 80% of our best estimate of current loan-to-values.
Given the relatively low loan-to-values on our single-family mortgages, we did not anticipate incurring material losses on the vast majority of our delinquent loans. We had no loans in forbearance at June 30, 2021.
Other than single-family delinquencies, the remaining real estate delinquencies consist of one hotel loan we previously discussed, which is around to $12.1 million of UPB that was sold subsequent to the end of the quarter.
We had seven multifamily loans that were 30 to 59 days delinquent for a total value of around $8 million that are at an origination LTV of around 42% on average and two multifamily loans that are 60 to 90 days delinquent for $1.8 million, with an average 55% origination LTV.
Our loan loss provision this quarter was $1.3 million compared to $2.7 million in the March 31st, 2021 quarter and $6.5 million in the quarter ended June 30, 2020. The primary reason for the sequential decline in loan loss provisions is a decline in average and ending loan balances.
Our total allowances for loan loss was $133 million at June 30, 2021, which represents approximately 1.2% of our total loans and leases, contrasted with one basis points of annualized charge-offs this quarter excluding refund advances and related charge-offs and greater than 17 times the total annualized charge off-rate excluding refund and finance loans.
Our loan growth outlook for fiscal 2022 remains essentially unchanged at high single-digits to low teens. Demand and production in all of our lending areas continue to be solid, although elevated prepayment rates in our single-family mortgage book may continue to represent a risk to maintenance and growth in that portfolio. We continue to add personnel in our lending areas to bolster loan growth.
Our loan pipeline remained solid, with approximately $1.7 billion in our consolidated pipeline at June 30, 2021, consisting of $193 million of single-family agency gain on sale mortgages ,$480.4 million of jumbo single-family mortgages, $230.7 million of multifamily and small balance commercial real estate term loans, $683 million of C&I and personal loans, and $97 million of auto and consumer unsecured loans.
We continue to generate strong returns with return on average common shareholder equity of 15.56% and 16.51% in the three months and 12 months ended June 30, 2021 respectively.
Our efficiency ratio for the banking segment was 45.2% for the quarter ended June 30, 2021 compared to 42.33% in the last quarter. The slight uptick in our efficiency ratio reflects lower mortgage banking income and continued investments across our businesses.
Our capital ratio remains strong with Tier 1 leverage to adjusted assets of 8.82% at the holding company at 9.4% at Axos Bank. We have access to approximately $2.5 billion of FHLB borrowing, $2.3 billion in excess of the $186 million we had outstanding at the end of the fourth quarter. Furthermore, we had $2.1 billion of liquidity available the Fed discount window as of June 30, 2021.
Our strong organic loan growth and returns coupled with a clean capital structure allows us to make opportunistic stock buybacks and acquisitions such as the E*Trade Advisory Service acquisition that we announced last quarter.
Our securities business has an excellent quarter with strong growth and fee income and net interest income. Broker dealer fee income increased 12.6% in the fourth quarter compared to the corresponding period last year, due to higher client activity.
Securities margin balances increased 50% year-over-year to $327 million, while stock lending increased $256 million in the June 30, 2020 quarter to $729 million in the June 30, 2021 quarter.
Although ending deposits at Axos clearing decreased by approximately 8.1% linked quarter to $730 million as clients increase their risk tolerance, deposit balances are up 62% year-over-year due to growth and Axos clearings assets under custody.
In April, we announced the signing of an agreement with Morgan Stanley to acquire their RIA custody business E*Trade Advisory Services. With approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits at the time we announced the deal, EAS provides a turnkey RIA platform for independent RIAs and TAMs, an experienced team of custody specialists with decades of experience working with our RIAs and advisors, incremental fee income, and low cost deposits.
We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest, and our ability to provide additional technological and banking services to these RIAs advisors and their clients make us an ideal strategic acquirer for EAS. We have made significant progress over the past three months across a variety of conversion and integration activities.
Having already received FINRA approval to convert the EAS business to a broker dealer platform, we feel good about achieving the remaining milestones required to close the acquisition in August of 2021. We remain committed to a smooth client transition and to invest to grow the RIA custody business.
As a reminder, the business generates fee income from asset and transaction based revenue and net interest income from clients sweep deposits held on or off balance sheet. We will provide an update on the expected financial impact, including EPS accretion, expense and revenue run rate, and deposit balances when the deal closes. We soft launched our self-directed trading platform at the end of June. Version one of the self-directed trading offering is focused on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online login and mobile app. We see lots of cross-sell opportunities across our lending and fee-based businesses including Axos Invest over time.
While it's too early to draw any meaningful conclusions from our self-directed trading launch, it provides another customer acquisition and monetization tool on our growing list of lending deposit and fee-based services to our customers.
I'm proud of the Axos team for staying focused on serving our clients and delivering strong earnings growth and returns to our shareholders over the last 12 months during a challenging and uncertain environment.
Our strong organic capital generation affords us the ability to invest in existing and new businesses technology and our team. Our deposit platform investments have generated meaningful increases and non-interest bearing deposits significantly lower our cost of interest-bearing deposits, and allowed us to earn fees from placing deposits in other banking institutions.
I firmly believe that our investments in our security businesses will pay meaningful dividends to support future fee income, deposit, and loan growth. Our technological investments we have made in our banking platform are generating strong interest from EAS Advisory clients, one of the many indications that strong technology and product synergies exist across these businesses.
I'm excited about the cross-sell potential across each of our three businesses, consumer banking, commercial banking, and securities. The pending EAS acquisition will accelerate our time to scale and profitability in a growing market segments and provide an excellent source of customers for Axos banking products. Despite a challenge interest rate and competitive environment, we are better positioned than ever to maintain consistent, profitable growth.
Now, I'll turn the call over to Andy who provide additional details on our financial results.
Thanks Greg. First, I wanted to note that in addition to our press release, an 8-K with the supplemental schedules was also filed with the SEC today. It is available online through EDGAR or through our website at axosfinancial. I will provide some brief comments on several topics, please refer to our press release or our SEC filings for additional details.
As Greg mentioned, we expect to close the acquisition of E*Trade Advisory Services or EAS in August of 2021. In anticipation of the EAS closing, we took steps to prepare the bank balance sheet for an increase of up to $1.2 billion in cash and deposits and closing.
Average deposit balances increased this quarter compared to last quarter's average for the three months ended March 31, 2021. However, with targeted great decreases in certain savings and money market customers, we ended the quarter with a decrease in deposits of $796.7 billion.
With the decline of primarily higher rate deposits, the bank was able to reduce its point in time deposit rates are all interest bearing, checking and savings accounts to 18 basis points at June 30, 2021 compared to 31 basis points at March 31, 2021, while making room on the balance sheet for some or all of the EAS deposits expected in the quarter ended September 30, 2021.
The deposit decrease was funded in Port with the Bank's excess liquidity at the Federal Reserve Bank, resulting in a $432.4 million decline in low yielding cash and cash equivalents at June 30, 2021 compared to March 31, 2021. The Bank is in a position to maximize the use of EAS deposits when it closes and does not expect the acquisition to adversely impact the Bank's net interest margin or its Tier 1 leverage capital ratio next quarter. We will provide an updated on all the full financial impact of the EAS acquisition when it closes.
Moving to non-interest expense for the quarter ended June 30, 2021, operating expense was $81.9 million, up $1.05 million or 1.3% from the linked quarter ended March 31, 2021. The following detailed discussion excludes any future impact from the EAS acquisition.
Salaries and related costs declined by $1.3 million on a linked quarter basis, primarily due to favorable adjustments to compensation costs related to loan production and other compensation estimates. Next quarter, we would expect salaries to increase back to the third quarter level.
Occupancy costs increased $1.1 million on linked quarter basis, primarily due to a $900,000 one-time charge associated with subleasing the New York City office space. Next quarter, we would expect the occupancy costs to decrease to approximately $3.2 million.
Data processing costs have been impacted by growth in customers, product enhancements, and by initiatives to move legacy network equipment into the cloud. On a linked quarter basis, data processing costs increased $2.8 million, approximately $1.2 million of that increase was project-related and will not recur next quarter.
FDIC and other regulatory fees on a linked quarter basis declined $900,000 as expected, primarily due to FDIC insurance formula adjustments. Going forward, we expect next quarter's costs to approximate this quarter.
Moving to income taxes, our effective book tax rate for the year ended June 30, 2021 was 29.45%, down 70 basis points from the 30.15% effective tax rate for the year ended June 30, 2020. The largest driver of the changes in our income tax rate is the timing of our employee RSU vesting and the market price of our common stock at the time of that vesting.
If the common stock price at the vesting date is higher than the price of our common stock at the time of the RSU grant, there is a favorable impact on the book tax rate. The reverse is true, if the stock price is lower at the vesting date. A large portion of the RSU is previously issued or scheduled divest during our fourth quarter of the fiscal year, making the effective tax rate more volatile in the fourth quarter, depending on our common stock price. For this quarter ended June 30, 2021, our effective tax rate was a favorable 27.99% while last year the effective tax rate for the fourth quarter was 33.31%.
With that, I'll turn the call back over to Johnny Lai.
Thanks, Andy. Kevin, we are ready to take questions.
Thank you. [Operator Instructions] Our first question today is coming from Andrew Leisch from Piper Sandler. Your line is now live.
Hey, good afternoon, everybody. Thanks for the detail on the deposit transactions here near the end of the quarter. But I guess absent bringing anything on from EAS, how should we look at the size of the average earning asset base here -- quarter, securities borrowed and margin lending was much higher than it has been recently. And then it was also been higher at the end of last quarter, is this a new run rate for that line, and can explain what may be causing some of the flows here?
Sure, yeah. No, I think we continue to have strong growth in our stock of lending programs. And we are expecting that average to continue to creep up. So as a run rate, it is not a bad place to start.
Okay, got it. And then it looks like then with interest bearing deposits, like the liquidity intra quarter some of that's been reduced here to start this just had this first quarter. I mean, have you guys -- is there anything you can share on what you do expect to bring on from EAS? Or is it still to be determined?
Yeah, no, we'll make a final call as we get closer. And of course, we may even change that mix throughout the quarter. But I think the operative thing, Andrew, is that that excess liquidity is, is yielding only 15 basis points. So the ability to manage it down and get the better effective use from our deposits will be strong for the use capital used to the bank.
Got it. Okay. So if you're sitting here with a margin of 392 for the fourth quarter, with this less the liquidity that you've had for managing some of these deposits out ahead of the closing of the deal. It's safe to assume the margin should rise from this level?
Yes, that makes sense.
Okay. That helps a lot. All right. I'll step back. Thanks for taking the question.
Thanks. Our next question today is coming from Marla Backer from Sidoti. Your line now live.
Sorry about that. Yeah. Thank you. So I'm wondering obviously there was a very strong quarter and I guess where do you see perhaps a certain categories where you see, potential for continued growth based on just what you've seen some subsequent to the quarter end?
Sure. So on the lending side, single family, I think is definitely going to either be stable or down a lot less than it was in the prior quarter. That's been obviously the jumbo book has dragged down loan growth, which has been very strong in the C&I side. The C&I side, including CRISIL [ph] looks good. The auto and unsecured side also looks good. So warehouse lending really will be more stable. Now, I think there may be a slight pop, given that rates have come back down a little bit. And mortgage banking is maybe a little bit stronger, it's not substantially stronger, but a little bit stronger there.
So, our loan growth side, I think it's hard to know, because the prepay side, generally what you might expect to see is from a refinance perspective, when you have these rate drops, and you have a loosening of credit, which happened post the COVID kind of normalization, or the COVID concern of the tightening of normalization, that you might see, enhanced prepays, it looks like prepays are slowing down a little bit, and this month, but it's still hard to tell, it's still early. So that's -- so I think forecasts, obviously -- I think the C&I side has been strong, autos been strong, we won't have the same challenges we had with PPP loan reduction, with the same level of adjustment on warehouse, and then single family, the pipeline is very good, it's up from the quarter.
There's a lot going on there in a very positive way. I just -- I don't want to say that it's going to absolutely grow this quarter. But it's certainly I think it's fair to say that it should be more stable. Mortgage banking probably will have a chance to be up, but also, I wouldn't say it's going to be up, incredibly materially, obviously, you've got the CDs, run-offs, that helps on the margin side, but that also -- loan rates in general are lower in some categories than they were.
And as we're continuing to expand our business, the loan rate side, I think, I'd be careful about forecasting too much margin growth, because we are -- in an effort to grow loans, we are probably having lower average rates on production that come through. So I think you have to watch that there.
And then on the security side, that business continues to grow, obviously, we expect to close EAS and the fourth quarter, there's a lot of opportunity there to make that business more efficient and to grow it. We have a lot of good client activity, but that activity is going to take several quarters at a minimum, to be able to realize because we have to go in there and really add an operating efficiency and a discipline, that's going to take some time to do that.
So those are that -- the contribution that's really going to happen there, is going to be more frankly of -- it's going to take almost this year to be able to go through all that and really get that humming in the way that it could, it still should be a creative but you know, I don't think materially a creative this next six months.
Okay. Thanks very much for that color.
Thank you.
Thank you. Next question is can we from Gary Tenner with D.A. Davidson. Your line is now live.
Hey good afternoon. It's Gary Tanner. One of those a couple of questions. Greg, just clarified a point you just made in terms of mortgage making, potentially being odd. Are you talking about the fee income line?
Mortgage banking. Yeah. Mortgaging banking fee. I think it could be I wouldn't. Yeah, look it could be a million bucks up or something like that million and a half. So I mean this -- it's not going to be back to where it was. But yeah, there's a little more activity, but margins are also maybe a little compressed too. So.
Yeah. Got you. Just wanted to clarify, that's what you're referencing.
Yeah.
In terms of the broker deposits and you guys talked about the kind of deposit activity a little bit in the quarter, but broken deposit stands about 600 million cut in half year-over-year, as you get the additional deposits coming in from EAS when you expect to work the broker deposits stand even further from the period end number, or is it kind of balancing the other aspects that you mentioned in terms of the loan growth or give me some of that off balance sheet?
Yeah. So I think, you know, a good portion of the broker deposits, let's say rounding is about 300 million is CDs. So clearly, we're looking forward to the CD repricing, that's part of the billion dollar number that was in Gregg script, where he said, we've got $2 billion coming off over the next year. So that -- from a rate perspective, a good portion of that is well above 1%. So that'll be effective.
Whether we bring in from time to time other liquid broker deposits, that's still entirely possible, as you know, that the pricing on that product is still very favorable. So depending on our needs, we might consider using it. But in general, expect the CDs come down, and then the non-CDs to be around the same or maybe up a little bit.
And I think, obviously, we have more than enough off-balance sheet liquidity even without, you know, the acquisition. But when we have that we have that liquidity. But I think part of this is that because as broker sweeps are non-brokered to others, we have a lot of demand from other institutions for those deposits. And that demand could be at a higher rate than this relatively de minimis amount of broker deposits, which some of them -- which half of them more than half of them were termed out, right.
So sometimes we use brokered deposits to look at interest rates, and term out certain types of lending, that we think may deserve that and we think the rates are favorable in that market. So, we obviously are in a very good liquidity position. We can also think about how to convert some of that liquidity into fee income, and if over an extended period of time over the years, as we grow the EAS business and the clearing business, that doesn't only -- that's a significant opportunity if rates rise, but even without it, there's still a lot of banks that are willing to pay up for those deposits.
Thanks for the color. Then last question from me, on the broker dealer fee income line sequentially lower? Is there a seasonality in that business that perhaps I didn't appreciate? Or is there anything else that kind of pushed that number lower from fiscal third quarter to fourth quarter?
Sure. It depends on a number of things. Part of it is market pricing, on the stock loan, stock borrow side, not all transactions are equal in terms of spread with regard to that. So that that can be a factor in that. Obviously, our deposits came down slightly during the period, so less fee income from off balance sheet deposits, but those are the primary factors that that weigh into that side for it.
Thank you.
Thank you. Next question today is coming from Michael Perito from KBW. Your line is now live.
Hey, good afternoon, guys. Thanks for taking my questions.
Thank you.
I wanted to hop back to a comment you made just about making EAS more efficient. And I was just hopping there's been a little bit more time on that. Is that -- what does that look like exactly? Is that on the cost side? Is that on the revenue side, and maybe putting some of those deposits to work on your earning asset base or a blend or just curious if maybe you could expand, I know you guys aren't updating numbers, per se, but just expand a little bit about what that might look like posts close?
Yes. We have a we have a consulting team that focuses on operational efficiencies in the institution broadly. Morgan Stanley was kind enough to let that team get in and do a lot of work around just core operations straight through processing. And essentially, the technologies that we bring from interaction perspective, with the advisors with our existing applications and banking platforms, and then all the internal types of robotic process automations, our way that we use our customer ticketing systems, all those kind of things are in great needs there.
So I think there's real opportunities to just improve the core operational nature of that business. And we're going to get after it pretty quickly. So what that should result in is an ability to grow the assets there without adding significant incremental cost.
And to the extent that there's turnover there, we may be able to shift the cost or reduce it, but also shifted to more highly value added activities, like product development from activities that can be more automated, like customer experience and service. I mean, to make this very tangible, the way that money gets into the market is somebody mail -- a customer mails the advisor a check, the advisor mails us the check, right?
So, if you have an application, a banking application then lets the customer take a picture of the check then everybody's happy, right? And believe me, the advisor doesn't want to touch the check, we don't want to touch the check, don't want to touch the check, right? The advisor needs to send one disclosure to the client. Well, if a client our app can do that, right?
So, I mean, it's not -- none of it is sort of it's not rocket science, but it is -- it's just a process of going in there and doing that. They don't have an automated account opening system, we do, right? So it's about hooking that up and rolling it out and making sure it works on the change management process and those kind of things, right? So, there's a lot of technological synergies that we can bring to the business. It's not going to be overnight, but it will be, I think, very meaningful over time.
Very helpful. And I know it's anyone's guess about interest rates these days. But I was wondering, a perhaps a stupid question, but can you, Greg or Andy give us just a brief comment on how the securities business will react in a higher -- if we enter a higher rate, arising rate environment, I mean, my hunch would be that, it would be pretty positive, and that's the deposits would remain pretty low cost, the commercial lending and stuff would increase, but just want to confirm that and see if you have any other parameters around it, that might be helpful?
Yes, I think that's right. We expect that and we saw this, frankly, the rate on the deposits at Axos clearing was three basis points, when Fed funds were 250. It's -- I don’t know, do we tell it from three? I don't know. Whatever it's, I think it's three today, right, or something. So it's really -- it's -- there's essentially these businesses, I don't want to promise a beta of zero or something, right? But it's very, very small. And this is direct to the bottom line sort of revenue.
So these businesses have a -- we're -- our goal is to make these businesses run essentially, valuing those deposits at no cost. And then when they -- when rates rise, that's all pure profit to the business, I think we can get there. We're not quite there yet, but it's not that far away. So that's -- and I think that we can get there, frankly, just purely on operational efficiencies over time, it's going to take a while. And then there's a lot of obviously growth and revenue opportunities to there.
So yes, it creates a very favorable profile for the institution broadly and then operate in environment. And I think swaps any potential negative impacts that we would have from higher rates related to, let's say, mortgage banking income going down or something.
Andy, do you have any comments?
No, no, I think the whole point is, it will be favorable. It will increase our ability to make choices as well in terms of where we put deposits. So it's clearly favorable.
Right. Yes, our long-term goal is to continue to really push very hard on all our deposit businesses, which are doing well and growing, and growing good low cost core deposits. That securities business is then -- it was a choice, how much should we need, how much we place other places, and that decision then becomes a fee income lever. That's much more tangible in a high rate environment or higher rate environment.
Got it. And then -- that's really helpful color. Just kind of the closed loop on the securities and I mean, I ask the questions here, just for me anyway. Any thoughts Greg from like a ERM standpoint, like in terms of how big you're willing to let this business get as a portion of the pie. I mean, obviously, it's taken a lot of effort today, you guys broke even which is great, but I imagine you have grand aspirations in that. But just is there any parameters around kind of the growth of this business? How big of a piece of Axos you think it could be? Or you're comfortable with it being or I mean, it’s probably a little too early, but just any general thoughts on that?
Yes. Look, I think that the EAS business is an incredibly safe business. I mean, the -- that right now, I mean, frankly, from a lending perspective, what's interesting is that's another opportunity there, because since they were not a broker dealer compliant business, they didn't do margin lending for those customers, or S Block Lending.
We intend to really seamlessly integrate those products into that offering for those RIAs. I think that this business in general is a significant risk reducer for the business overall. And here's why? It gives us a steady source of high net worth customers. These high net worth customers are sticky to their advisor. The advisor is sticky to us. And we're not competing with the advisor, we're just helping the advisor.
So the advisor needs -- the advisor’s customer comes and asked for a mortgage. Well, they don't want the Morgan Stanley looking for that mortgage, we have that. If they need a car loan, and if they need an integrated checking account, if they need an S block loan, a one-touch S Block loan off of an app, hey, that's pretty good too, right? All those things, keep assets with the advisor, they're really safe. So the loans that will come out of this will be S Block and margin, those are very safe.
The risk associated with the clearing business is a little different. It's really -- it's operational risk around short selling things like that. So we have very defined limits with respect to those aspects. So I think when you think about limits and risk, I think it's absolutely wrong way to think about it as the overall size of the business or something. And the right way to think about it is, there's specific risks within the business, those specific risks like any business have to be managed.
And they're hierarchically ranked, and we pay a lot of attention to the ones that can bite us. And I think we've done a much better job. And we had that one issue right when we -- it was two weeks after we bought the business, and we didn't have the access to that business that we've had to EAS. And we've gone in there and made sure that those risk controls are in good shape.
So now this is overall a really, really positive thing. I mean, let's face it, right? If you look, and you would have said, predicting three years ago, would we have a 15 basis points average cost of deposits on all of our demand deposits, and then all of these are this excess liquidity that we have, and we're forming that excess liquidity out to banks, even though we have had pretty good loan growth. I think that that's another example of how it reduces the overall risk to the institution. So it's just -- it's not really any different. It's a risk management exercise. And that's really all, but it's nothing to do with the overall sizes.
And just a point of clarity, Mike that obviously assets under custody, which is the primary grower is not on the books of the broker dealer. So it assets under custody can grow rapidly, and it will cause some balance sheet growth, but it's not $1 for $1 at all. So it gives us a lot off balance sheet leverage
Got it. Really appreciate all that color, Greg and Andy. Thank you guys for taking my questions.
Yes, thank you.
Thank you. Next question is coming from Steve Moss from B. Riley Securities. Your line is now live.
Good afternoon. Greg mentioned earlier that rates were lower. Just kind of curious, how much lower were you seeing loan purchases these days?
Yes. I think we -- I think it was somewhere around, I think, I said before, it's like a 35 basis points to 40 basis points lower on single family. Maybe I carry that over on the auto side too, I think is probably reasonable. And then the C&I side, I think, I'd use like the -- with fee maybe sort of all in, in the low fives as a -- as an average rate. But look, I think we -- it depends, right? I mean, things are moving around. And I can tell just by the nature of the discussions, there's more competition in certain areas. So we continue to have to adapt to that, but that's, I think, reasonable color.
Okay, that's helpful.
Yes. I think – no, go ahead. I just -- just to -- our guidance still on the NIM is in the 3.8% to 4% range. So I think we're just we're cautious that we could have some pressure to continue to grow. But that's, I think, from a low rate perspective. We're still feeling good about our NIM and our ability to keep it.
And part of the reason when you saw that the fact that loan rates went up over the quarter, was it -- that was a Remax because the warehouse lending business has probably one of the lower average rates in the bank. And so when that shrunk it kind of move that around a little bit. So I don't think you should use that as indicative of the idea that would carry forward next quarter.
Right. Okay. That's helpful. And then just in terms of a little more color maybe on the types of businesses and properties that are driving C&I and CRISIL [ph] growth these days?
Yes. It’s a lot of multifamily, repositioning, construction, self-storage, some of that. And that's primarily -- that's a lot of it.
Okay, great. Most of my other questions been answered. Thank you.
Thank you.
Thank you. Next question today is coming from Tim Coffey from Janney. Your line is now live.
Great. Thank you. Good afternoon, gentlemen.
Good afternoon.
Hey, Greg, looking at origination activities in the quarter, there are about 50% quarter-over-quarter. And the pipeline, I think you said was around the same level as originations that quarter -- for the quarter. So I'm wondering, are you seeing greater participation with kind of your general ecosystem by clients? Or is this more of a drive to find a home for that excess liquidity?
You want to take that, Andy.
I think it's going to be a little bit of both. I think, clearly, we're looking at originations at a level to ensure that we can cover payoffs. And so the origination machine, frankly, when you have higher levels of payoffs has to work harder.
So targeting wise, we're looking at our customers, as we go through -- we have a lot of options. We will touch bases with all of our existing customers, of course, who provide us guidance on where we need to be.
Yes, look, I think that just as far as where originations have to go, the math is right, the bigger your loan book, if the pre-pay rate is steady, your originations have to go up in order to grow loans. So I think that every one of the businesses has higher targets. I think there's good possibilities they can hit those targets, but they're not slam dunks. And we have a fairly diverse set of lending platforms.
So, none of those lending platforms have to bear the full burden of this. The real element is, the warehouse lending side of it, right, when we went up so much. And we tend to be higher priced than some of the other lines. So we know we're going to fall when there's a reduction in demand for mortgage loans, particularly on the agency refinance side. So we knew that was going to happen.
I think the key is that we've been spending a lot of time making sure we can stabilize and grow the single family business. And I think we have a good plan for that. We're seeing lots of progress, the pipeline is up, all those things, but it really depends on what happens with the prepayment side. I mean, we saw we had reached a high, and we thought we’re in a good shape because the originations are pretty good, and then it got higher. It seems to be slowing down a bit, but it -- we really don't have -- I don't have enough time in this quarter to really be able to get a perfect assessment of that.
But there's a lot of things we can do to grow that business, and we are doing them. And part of what happened to in this is that when COVID happened. We really pulled back a lot. We basically had some growth plans. And immediately, when that happened, we really tightened up credit, we really pulled back. We didn't do some of the sales initiatives we had some other things that we intended to do some sales force expansion.
And so when the single family market came back so strongly, I think we were a little flat footed with what we needed to be doing strategically. I think we've righted that ship now. So now just how long does it take to have all those things sort of flow through? Well, for example, we had markets that were really good for us, where, when we were more conservative, the originator might have gotten frustrated and decided that that was this wasn't the right place. And we just said, okay, well, we'll leave this for now, and to see how this goes.
So, things like that. Obviously, I frankly, think that the market came back more quickly than we expected. Clearly, I don't think people would have looked and said, gee; home prices are going to be where they are if you were sitting there in March 2020. So, I think I think that we have a good plan there. Everything's going in the right direction. Does it take another quarter to get there? That's possible. But I definitely think, as I said previously, that we're going to be more stable close, either will be slightly growing slightly down, maybe, more than slightly down. But it'll be in that range. It won't be where it is this, this prior quarter.
Okay. Thanks. I appreciate that. It's good color. And then it might, let me know, if I'm thinking about this, right. One of the great things about bringing on all these deposits and cash from EAS is that it gives you a lot more optionality and things you can do in your funding side? And one of the big benefits of it is that is going to likely lower your deposit beta, going into next year, or whatever -- next year for sure and definitely, it's going to show up when rates rise. Is that the right way to think about this?
Yes, absolutely.
Okay, great. Thanks. Those are all my questions.
Thank you.
Thank you. Next question today is coming from David Hirons from Wedbush Securities. Your line is now live.
Hi, thanks. I wanted to ask a clarification question about the expense guidance, you gave pretty detailed guidance. So for instance, the salaries you mentioned about $39 million in the third quarter, I'm assuming that includes that's inclusive of EAS and the other expense items you gave?
It is not. So all of my guidance was without EAS.
Got it.
So yeah, we're going to -- when we close EAS, we're going to release a presentation that will provide guidance that would, whether I think it will use sufficient information to make reasonable estimates about what that will look like there.
We've given early estimates, if you go back to our original presentation. So operating expenses will move up significantly. So yeah, so these numbers are small relative to once we add EAS just typically.
Yep. No. That makes sense, because I was modeling, much higher than what you had mentioned. So that's why I was asking about the clarification. And then on the deposit side of things, given how much of a kind of step down we saw, which is clearly a good thing with the improving deposit mix shift that it almost seems like based on the trend, that the new deposits coming on board would essentially just replace what that decline is. And it seems as if there was those balances could still be declining here in the third quarter. Is that the way to think of it and so the loan to deposit ratio maybe somewhat kind of stable-ish, here in the around 105?
So yeah, so there's a number of moving pieces. One of the pieces on the loan to deposit ratio is how much you grow. Greg is just giving guidance on kind of where we think we are, we think there's a chance we grow next quarter. So with growth and filling that hole, obviously deposits will grow from the current level that we have the decline of 700 million, 800 million will -- can instantly be filled with other deposits. So, clearly, we expect deposits to grow. You know, after the EAS closing.
Yeah, I think that with respect to this, right. So the moving pieces are, we've got good momentum in our commercial deposit businesses at very low cost. So they have nice pipelines, small business continues to grow. So we have that organic growth of the deposit side, we obviously have access deposits clearing. We have actually -- will have access to positivity for the EAS even with growth.
So, the question is what we do with those, there's demand at good rates from other institutions. So we've got to figure that out and look at what that looks like and decide we may end up bringing them on balance sheet, and then placing them thoughtfully over a period of time in other institutions that that may take several months. So you know, those are -- those are the variables that we'll be looking at.
Yes. That makes sense. Thanks very much.
Thank you. Our next question is coming from Edward Hemmelgarn from Shaker Investments. Your live is now live.
Yeah, Greg, and Andy.
Hey, Ed.
Hi, Ed.
How you doing? Good. You know, you're from EAS what do you view the potential for margin lending there? What kind of reach? Do you expect?
I really, I don't want to speculate on that right now. Because there's several factors that have to come into play. I mean, first and foremost, we have to assess the core operating system of that business, doesn't yet have the capability of actually doing margin lending. Now we have that ability, and we basically mimicked the data in a system that does, but we're still working through the timing of that, then it's - there's definitely been IRAs who have been precluded from working with EAS because they didn't have either s-block or margin lending. And we talk to them through the existing sales team.
And so those clients that would never come before, if they have the product clearly represent an opportunity by the very nature of the fact that they won't come, if they don't get the product. So, and I just don't have a sufficient feel -- for what that will look like, although I can say that, think about like a 4.5% rate for the clearing IBDs, if that's helpful, with respect to what that looks like on the rate side.
But again, it's -- there's also sharing there and other things and don't share. And so, you know, it's -- look, it's, I think that those sorts of things may also end up being part of the overall discussions of profitability when we board clients and things like that. So it's -- I just think we have to wait before, before we know enough to really give guidance on that.
Okay. Do you expect to merge your existing business into EAS?
I'm sorry.
Merge the business EAS.
Okay. The actual transaction is that, that Axos clearing is buying this business. So I guess that but that's, I think that's what you mean by that?
Yeah. But I mean, it's, EAS a lot larger. And so I would assume there's expected, I would assume the surviving institution is in terms of clearing and stuff is going be yes?
Well, I think it's going to be careful. And how, how that looks? I mean, so you say, well, you're, how are you comparing it? You know, the clearing has more and different and diverse lines of business and revenues, stock lending, they do margin lending. They obviously have the clearing side of the business. There's 16 billion of assets there. There's, let's say $23 billion, 425 billion in the EAS side.
Number of people, actually not as different as you might think. There were -- I guess, maybe if what you're asking is are we going to have these teams work together to do things together? Yes. But that we're also going to pile on an incredible number of new things, right? So there's this transition period where were getting all the technology and place and all those things. And then we have quite big plans for this -- for these businesses, and we got to go and do them. So, yeah, I think that's maybe where you're going.
So I guess I'm -- just it's also -- I'm asking, I mean, do you envision down the road? I realized can't do it immediately. But just operating two businesses out of one location, I mean--
No, no. We don't envision that at all. No, I think that, we intend to maintain the Colorado office EAS we like that location, we think it's a favorable place to live in a good location. It's -- and then Omaha also has a good pool of securities talent, frankly, that offices are Schwab is right close to that office. There's just a lot of folks who are familiar with the custody business and, Centennial.
So no, I don't think that's where we're going. And I'm not thinking about, maybe what I think what you should do with respect to this is more focus on. But there's clearly opportunities to reduce costs in the business. And that will have to occur technologically over time. And then with the pipelines we have we intend to grow that business. And, hopefully, as we grow -- we can get operating leverage there.
Okay. Then, EAS, lastly, you've -- it's been over a year now, since you really introduced the enhanced customer software and experience at the bank. What's -- what has been your -- I guess, what have you seen from like cross-selling opportunities and things like that? I mean, what's the percentage of loans that you're now making to existing deposits customers or vice versa? I mean, have seen some real benefits to this?
Well, I mean, obviously, when you're looking at the cost of funds that we have, and we're sort of approaching the -- I'm not going to say, we're best-in-class yet. But as we run off as CDs, we're going to get be getting closer and closer to it. Clearly, the ability to simply have customers who are valuing your services, rather than your interest rate is obviously, a, incredible benefit that you see in the end the numbers.
And then with respect to the -- let say, mortgage banking wave of income that we made, here that was very, very significant cross-sell to our deposit customers, that was assisted by this. Now, I think that was very good. And it made us a lot of money. The problem with mortgages is that, they are one-time in nature, right?
So, if you look at what consumer products that we have that were really retail focused, and are very developed. The mortgage product really is the one right, and the cross-sell on both sides, both from a mortgage customer coming in and getting a checking account. That was very high and from checking account customers that were refinanceable the mortgage side. So that worked very, very well.
The question with respect to where should it go over time and the product development that we're working on is, how many of these, how many self-directed trading customers will we have, who have checking accounts and how many checking account customers love sell trade to trading accounts and how many checking account customers we'll have, our Robo advisory offerings, and how many will eventually have s-block loans and all those things. But it really is. I mean, this is obviously as you all know, an incredibly long term strategy and, you know, as these products roll out, then, you know, I think we'll have to determine what…..
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