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Edited Transcript of BOFI earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q4 2019 Axos Financial Inc Earnings Call

SAN DIEGO Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Axos Financial Inc earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Micheletti

Axos Financial, Inc. - Executive VP & CFO

* Gregory Garrabrants

Axos Financial, Inc. - President, CEO & Director

* Johnny Y. Lai

Axos Financial, Inc. - VP of Corporate Development & IR

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Edward Paul Hemmelgarn

Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Nicholas Richard Duafala

B. Riley FBR, Inc., Research Division - Analyst

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Axos Financial Fourth Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Johnny Lai, Vice President, Corporate Development and IR. Thank you. Please begin.

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Johnny Y. Lai, Axos Financial, Inc. - VP of Corporate Development & IR [2]

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Great. Thank you. I'd like to welcome everyone to Axos Financial, Inc.'s Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. With me today 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 financials and operational results for the 3 and 12 months ended June 30, 2019, and they will be available to answer questions after the prepared remarks.

Before I begin, I'd 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 forward-looking statements contained under the Private Securities Litigation Reform Act of 1995.

This call is being webcast today, 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.

At this time, I'd like to turn the call over to Greg for his opening remarks.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [3]

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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 our fourth quarter and fiscal 2019 year-end ended June 30, 2019. I thank you for your interest in Axos Financial, Axos Bank and Axos Securities.

Axos announced record net income of $155.1 million for the fiscal year-ended June 30, 2019, up 1.8% over the $152.4 million earned for the fiscal year-ended June 30, 2018. Axos' return on average equity for fiscal 2019 was 15.4%, and the bank's efficiency ratio was 40.51%. Fiscal 2019 earnings per share increased 4.6% to $2.48 per diluted share compared to $2.37 per diluted share in the fiscal year-end 2018. Excluding acquisition-related expenses and non-recurring costs related to excess FDIC expenses and a client-related trading loss in our clearing business, non-GAAP earnings per share increased 15.1% to $2.75 per share in fiscal 2019, equating to a non-GAAP return on equity of 17.1%.

Net income for Axos' fourth quarter ended June 30, 2019 was $40.6 million, up 9.5% when compared to the $37.1 million earned in the fourth quarter ended June 30, 2018. Earnings attributable to Axos' common stockholders were $40.6 million or $0.66 per diluted share for the quarter ended June 30, 2019 compared to $0.58 per diluted share for the quarter ended June 30, 2018 and $0.63 per diluted share for the linked quarter ended March 31, 2019, in which we recognized the vast majority of our tax-related revenue. Other highlights for the 2019 fiscal year and the fourth quarter include net loans and leases increased by $283.7 million in the fourth quarter, representing 3.1% growth linked quarter at an annualized growth rate of 12.4%.

For the full year-ended June 30, 2019, net loans and leases grew by $949.8 million, representing 11.3% growth year-over-year.

Total assets reached $11.2 billion at June 30, 2019, up $1.7 billion or 17.6% when compared with June 30, 2018. Net interest margin was 3.81% for the quarter ended June 30, 2019, up 10 basis points from 3.71% in the fourth quarter of fiscal 2018. Excluding average balances associated with short-term H&R Block lending products and excess H&R Block liquidity, net interest margin was 3.81% in the fourth quarter of 2019, up 1 basis point from 3.8% in the comparable period a year ago. Our bank-only net interest margin without H&R Block was 3.87%, up 4 basis points from 3.83% in the fourth quarter of 2018. Loan yields increased 17 basis points year-over-year to 5.56% in the quarter ended June 30, 2019, a mix shift resulting from higher-yielding C&I loans.

For the fiscal year-ended June 30, 2019, our consolidated net interest margin was 4.07%, roughly in line with the prior fiscal year, with bank-only net interest margin remaining steady at 4.14% in the fiscal year 2019 and fiscal year 2018.

Noninterest income increased by 36.8% in the fourth quarter to $23 million from $17 million in the fourth quarter of fiscal 2018. Growth in noninterest income was boosted by fees and deposit-related revenue from securities clearing and by higher prepayment penalty fee income. Return on equity was 15.4% for the fiscal year 2019 compared to 17.05% for the fiscal year 2018. Excluding acquisition-related expenses and nonrecurring expenses related to excess FDIC insurance and a client-related trading loss in our clearing business, our non-GAAP return on equity was 17.1% for fiscal year 2019. As we grow our fee income business from securities-related and commercial banking, they are more capital efficient than our consumer and commercial lending businesses, we believe we will be able to further improve our return on equity.

Our efficiency ratio was 51.12% for the full year fiscal 2019 and 53% for the fourth quarter of fiscal 2019. The primary drivers of the year-over-year and sequential increase in our efficiency ratio were the additions of COR clearing and the WiseBanyan acquisition and the reserve for potential losses related to a corresponding clearing client. Excluding the $15.2 million reserve recorded in the third quarter of 2019 related to the corresponding clearing client, operating expenses of $65.5 million were down by approximately $1 million from Q3 2019 to Q4 2019.

The efficiency ratio of our Banking segment was 40.51% for the year-ended June 30, 2019, compared to 34.55% for the comparable period a year ago. The primary drivers of the year-over-year increase in our banking efficiency ratio were investments in technology, branding, new business initiatives and the inclusion of Axos fiduciary services, which operates at a higher efficiency ratio than our other banking businesses but provides a solid source of fee income and low-cost deposits. Excluding merger-related costs, non-GAAP efficiency in fiscal 2019 would have been 39.2% for the Banking Business segment.

Our Securities Business segment had an efficiency ratio of 88.1% for the fiscal year 2019, excluding merger-related costs, acquisition-related amortization expenses and our provision related to trading losses for an Axos Clearing client. The fourth quarter ended June 30, 2019 was the first quarter that we included a full quarter's contribution from our clearing and robo advisory businesses. Although, over the intermediate term, we will improve the efficiency of the clearing business as we bring them into our process improvement framework and introduce automation in a variety of areas, as a fee-oriented business, the clearing business has the potential to run at a significantly higher return on capital as we grow the business given the business is focused primarily on fee income and [suite] balances that can be placed off-balance sheet or replace existing bank deposits and consume no additional capital.

As we discussed on last quarter's call, investments we are making in existing and new businesses were in Axos Clearing and Axos Invest, our digital wealth management platform, will constrain the near-term profitability and returns in the Securities business segment relative to their long-term potential. Owning a securities clearing, custody and digital wealth management platform is critical for us to realize our long-term consumer banking vision and will be additive to the quality of our customer base, earnings and growth.

Our credit quality remains strong. The bank had 19 basis points of net charge-offs in fiscal 2019 and ended the year with only 51 basis points of nonperforming loans to total loans. Of the 19 basis points of net charge-offs in the fourth quarter, 13 basis points or 68% was attributable to losses from Refund Advance loans we originated in the third quarter of 2019. Our allowance for loan loss represents 117% coverage of our nonperforming loans.

Our effective tax rate was 26.6% in the quarter ended June 30, 2019 compared to 26.4% in the comparable quarter a year ago. Our tax rate in the fourth quarter benefited from the federal rate reduction under the Tax Cuts and Jobs Act of 2017. Our tax rate for fiscal year 2019 was 27.1%. We expect our GAAP tax rate to be in the 26% to 28% range for our fiscal year 2020, which began on July 1, 2019. We generated strong loan growth in the fourth quarter, led by robust loan originations in commercial real estate, multifamily, C&I lending and mortgage warehouse. Despite elevated payoffs in our jumbo single-family, lender finance and commercial specialty real estate loans, ending loan balances increased by 20 -- $283.7 million in the fourth quarter and $949.8 million in fiscal year 2019, representing annualized growth of 12.4% and 11.3%, respectively. We originated approximately $1.77 billion of gross loans in the fourth quarter, up 8% year-over-year. Originations for our investment increased 10.3% year-over-year to $1.5 billion and 41.2% linked quarter when you exclude the $1.16 billion of seasonal Refund Advance loans we originated in the quarter ended March 31, 2019.

Our loan production for the fourth quarter ended June 30, 2019, consisted of $102 million of single-family agency-eligible gain on sale production, $318 million of single-family jumbo portfolio production; $149 million of multifamily and other commercial real estate portfolio production; $861 million of C&I production, resulting in a $143 million of net C&I loan growth; and $52 million of consumer unsecured and auto production.

For the fourth fiscal quarter's originations, the average FICO of single-family agency eligible production was 731, with an average loan-to-value ratio of 75.6%. The average FICO of the single-family jumbo production was 735, with an average loan-to-value ratio of 63.5%. The average loan-to-value of the originated multifamily loans was 56.2%, and the debt service coverage was 1.1. The average loan-to-value ratio of the originated small balance commercial real estate loans was 52.1%, and the debt service coverage was 1.36. The average FICO of the auto production was 758.

At June 30, 2019, the weighted average loan-to-value ratio of the entire portfolio of real estate loans was 56%. These loan-to-value ratios use origination date appraisals over current amortized balances. As of June 30, 2019, 62% of our single-family mortgages have loan-to-value ratios below 60%. 30% have loan-to-value ratios between 61% and 70%; 2% have loan-to-value ratios between 71% and 75%; 5% between 75% and 80%; and less than 1% have a loan-to-value ratio greater than 80%. We have a well-established track record of strong credit performance in jumbo single-family mortgage lending with lifetime credit losses in our originated single-family loan portfolio of 3 basis points of loans originated.

Originations in our single-family jumbo mortgage lending business rebounded this quarter to $318 million, up 33% from the $239 million in the quarter ended March 31, 2019. Improved sentiment among high net worth homebuyers and a recovery from the holiday seasonality were the primary tailwinds for the sequential improvement in our jumbo mortgage loan production. Prepayment rates remain elevated, resulting in ending loan balances dropping modestly from March 31, 2019. We continue to believe that our jumbo single-family mortgage loan portfolio will grow in the low mid-single-digit range in fiscal 2020.

Ending balances for our multifamily loan portfolio increased by approximately $37 million or 8.64% annualized to $1.8 billion at June 30, 2019, representing approximately 19% of our total loan book. The weighted average loan-to-value ratio of our multifamily loans was 53%, based on appraised value at the time of origination. Approximately 68% of our multifamily loans are under 60% LTV, 30% are between 60% and 70% loan-to-value and only 2% are between 70% to 75% and no multifamily loans have a loan-to-value ratio above 75%. The lifetime losses in our originated multifamily loan portfolio are less than 1 basis point of loans originated over the 18 years we've originated multifamily loans.

Our C&I lending business had another strong quarter, with broad-based strength in originations and our lender finance, equipment finance and commercial specialty lending groups. We continue to focus on well-secured, well-structured asset-based loans and lines to creditworthy borrowers, financing high-quality projects in attractive markets in our lender finance and commercial specialty real estate businesses. Our commercial lending teams continue to grow in terms of relationships, products and expertise. The experienced bankers we added in our New York and Los Angeles offices have good pipelines and will produce incremental growth in commercial loans and deposits in fiscal 2020. Loan demand remains strong across a number of our lending categories as reflected in our $1.2 billion consolidated loan pipeline, which consists of $446 million of single-family jumbo mortgages, $152 million of single-family agency mortgages, $150 million of income property loans and $444 million of C&I loans.

We continue to transition our portfolio away from single-family lending into C&I lending and commercial real estate lending. Demand for auto and consumer unsecured lending remains solid even as we maintain disciplined underwriting, optimize our marketing and expand our distribution. We anticipate strong originations across our auto, small business, commercial real estate and C&I lending groups as they identify new opportunities that meet or exceed our risk-adjusted return criteria.

On an annual basis, we target overall loan growth in the low teens, which we believe is prudent given the competitive landscape for loans and deposits, the credit cycle and the shape of the yield curve.

Switching to funding. Total deposits increased $1 billion or 12.5% year-over-year with growth across various consumer and commercial deposit categories. Checking and savings accounted for approximately 74% of total deposit balances at June 30, 2019, up from 71% in March 31, 2019 as we replace the expected runoff of nationwide CDs with commercial and lower-cost deposits.

Our deposit base is diversified across a variety of consumer and business product verticals, which helps offset some of the competitive funding pressure. At June 30, 2019, approximately 41% of our deposit balances were business and consumer checking accounts, 20% money market accounts, 4% IRAs, 5% savings and 5% prepaid accounts. The addition of the deposits from Nationwide and the MWABank acquisitions and the growth in our bankruptcy related deposits have been instrumental in our ability to grow deposits and optimize our cost of funds to offset a challenging yield curve and competitive landscape for loans and deposits. The integration of the COR clearing and WiseBanyan digital wealth acquisitions are progressing well. The 2 businesses, which have been or will be rebranded Axos Clearing and Axos Invest, provide us with a solid foundation from which we can expand our securities, servicing, wealth management and private label banking services to RIAs, independent broker-dealers and their underlying retail clients.

In our internal market research and the diligence process of these and other potential securities-based servicing and advisory businesses, we saw several structural, demographic and industry trends that provide opportunities for Axos. First, industry consolidation driven partly by fee compression for active and passive investment managers and by the transition from commission to fee-based models has resulted in smaller and midsized RIAs and brokers receiving less and less attention from the big 4 securities and clearing firms, Pershing, National, TD and Schwab. Service levels for these RIAs have declined and the gap between what large and small RIAs get from a technology, pricing and product perspective continue to widen. As one of the few independent clearing firms focused on serving small IBDs and RIAs, we see opportunities to take market share through a better, more focused and efficient service model.

Second, thousands of advisers continue to leave large wire houses such as Merrill Lynch, Morgan Stanley and Wells Fargo to become independent advisers. This dynamic is driven by better economics and more autonomy over their practice for the advisers by going independent. The downside of leaving a wire house is that advisers lose their ability to provide banking and lending services to their high net worth clients. We see tremendous opportunity to provide a comprehensive set of consumer banking and lending services to individual advisory clients of independent RIAs, leveraging the reputation and experience we have with our Axos adviser business and adding new capabilities we have through acquisition and internal development.

A third macro trend is that more advisers than ever are nearing retirement and a large majority of these baby boomers own small advisory practices with 1 or 2 principals with no succession planning in place. While existing competitors are focused on large transactions involving firms with $1 billion of assets under management or greater, small RIAs and IBDs have very few options if they want to sell or transition their practice. Through Axos Bank and Axos Securities, we are building a comprehensive platform to deliver lending, banking and securities services to independent RIAs and IBDs to help them manage and monetize their practice.

Lastly, the digitization of wealth management and retail brokerage is a natural evolution that provides opportunities for a digital bank like Axos to expand its consumer product offering.

Just as consumer banking, personal and student lending and many other parts of financial services have accelerated their transition from offline to online and mobile channels due to lower cost, more convenience and a better user experience for digital channels, we believe that more consumers will migrate to digital providers that can deliver banking, financial planning, investing and asset protection services in work streams that are already part of their everyday lives. This is one of the primary reasons we decided to build UDB, our online banking platform. The personalization engine and central data warehouse coupled with new services and features we are building in the next iteration of UDB give us a clearer path to be able to deliver on the experiences and functionalities that consumer and small business owners want from their financial services provider. It's a daunting task that requires detailed planning, lots of testing and iteration and collaboration across business and functional units. It's equally exciting because of the vast opportunity it could potentially generate from an operational efficiency, customer service and revenue growth and branding perspective.

Securities-based lines of credit and margin lending represent meaningful long-term revenue opportunities and a source of incremental revenue from our securities business in the short term if client uptake ramps faster than we expect. These businesses tend to grow faster when the stock market is appreciating and clients are looking to increase investments. They're a nice balance to client cash balances, which tend to be countercyclical as investors and advisers hold more cash when they're more risk averse.

We're also looking at other sources of fee income in the clearing business. We continue to believe that the combined security business, which includes Axos Clearing and WiseBanyan, will operate at a high 80s and low 90s efficiency ratio for this coming fiscal year as we integrate WiseBanyan into the Universal Digital Bank and begin cross-selling digital investment advisory services to banking clients and providing banking services to our digital investment advisory clients. As we invest in infrastructure to provide clearing services to larger broker dealers, we expand the platform to provide more services to RIAs and monetize the pipeline of firms interested in converting to Axos Clearing.

We're seeing good progress in our strategic initiatives to grow and expand our commercial banking business. Axos Fiduciary Services, the trustee and fiduciary services business acquired from Epiq in April 2018, continues to perform well. Our trusted relationship managers and senior business leaders continue to work alongside bankruptcy trustees and fiduciaries nationwide to provide the essential services they need to administer, track and report on Chapter 7 bankruptcy and other non-7 legal matters. Concurrently, we are making good progress on our next-generation cloud-based bankruptcy software platform called Unity. With enhanced functionalities that will make it easier for trustees and trustee assistants to access and administer client and case data, Unity will further strengthen our competitive position in the marketplace. We look forward to hosting our trustees at the annual NABT conference in Denver next month. A second component of our commercial banking strategy is expanding our geographic presence and industry expertise through selective additions of experienced bankers and banking teams. We added an experienced team on the East Coast to target general middle-market deposits and select specialty deposit verticals and opened our office in Manhattan last quarter to accommodate that team and other securities personnel. This group will work side-by-side with our existing commercial lending and significant existing lending book of business in that market. This team already has a robust pipeline of exciting deposit and lending opportunities.

We're also making good progress on West Coast commercial banking expansion with our new office slated to open in downtown LA later this quarter. Many of our senior commercial bankers who have been servicing that market but currently working in our Orange County or San Diego offices will relocate to Los Angeles, where they live, to enhance the focus on specialty lending and deposit opportunities in Southern California.

Deposit competition remains high across the industry. Coupled with a flat yield curve, these dynamics have created downward pressure on net interest margins for many banks. We were able to expand our net interest margin in this cycle of higher short-term rates and a flat yield curve with net interest margin expansion of 10 basis points year-over-year to 3.81% on a consolidated basis, including the securities segment and a 12 basis point expansion at the bank. Excluding the impact from H&R Block-related loans and deposits, our net interest margin for the banking business unit increased by 4 basis points to 3.87% in the fourth quarter of 2019. This margin expansion was the result of strong growth in our floating-rate C&I loan portfolio and a lower growth in our fixed-rate jumbo single-family mortgage book and improvements we have made in the quality of our deposit base, including our investments in our consumer platform, our focus on growing our commercial banking deposit verticals and our entry into the bankruptcy trustee and clearing space.

With respect to the sensitivity of loan yields to short-term declines in LIBOR or other indexes, I believe Axos is in a relatively good position with respect to its portfolio. Of the bank's portfolio, approximately 50% of the loans are jumbo single-family loans with rate floors at the start rate. Less than 6% of these single-family loans are above their current start rate, meaning that a decline in short-term rates will have no impact on the underlying loan rate for 94% of that single-family portfolio.

Additionally, 25% of the loan book in the multifamily and commercial real estate loan types have a similar dynamic with rate floors at the start rate, with less than 8% of that portfolio currently above their floor rates. Of the remaining 25% of the book classified as C&I loans, less than $260 million of loans have floor rates below 5% and only $30 million of loans have a rate floor below 4%, with no loans with a rate floor below 3.5%. We expect approximately 72% or approximately $1.8 billion of the C&I portfolio to reprice with the first 25 basis point rate reduction and 66%, approximately $1.6 billion, in the second 25 basis point rate reduction with less than $900 million of our entire portfolio continuing to reprice in a 100 basis point decline in short-term rates. Although we are in a reasonably good position from a portfolio perspective with respect to loan rate reductions as a result of a potential decline in short-term rates, we do not believe that deposit pricing and competition, given our growth objectives, will decline commensurately in all segments with a potential rate reduction, such that we will be able to realize immediate rate reductions in all segments of our deposit portfolio. Therefore, we continue to maintain our net interest guidance in the 3.8% to 4% range for the intermediate term.

We completed another successful tax season with H&R Block's clients, providing them approximately $1.6 billion of Refund Advance and Emerald Advance loans and distributing over $17 billion of refunds to Block customers through the refund transfer program with credit losses in line with expectations.

Our emerging businesses continue to grow. Our indirect auto lending business, which focuses on serving prime customers, primarily for purchase transactions, generated approximately $160 million of loan production in the year-ended June 30, 2019. Our credit quality in this book remains very strong with delinquencies over 60 days at 9 basis points of auto loans outstanding. We continue to scale this business in a controlled manner, while testing cross-sell initiatives inside our consumer banking platform and new distribution channels over the next several quarters.

I'd like to congratulate our team members for helping Axos achieve another year of record earnings, continued strong credit quality and exemplary service to our clients and business partners. We maintained strong growth in clients, loans and earnings, while we integrated 5 acquisitions, launched a new strategic partnership with Nationwide, opened 3 new offices, rolled out our new online banking platform and completed a successful rebrand. Our capital and credit metrics, with Tier 1 leverage to adjusted average asset ratio of 9.21% for the bank and 8.75% for the holding company at June 30, 2019, affords us with the flexibility to invest in strategic initiatives, opportunistic M&A and share repurchases.

With our strong and growing capital base and highly profitable business model, we were able to fund all our acquisitions with excess capital while buying back approximately $47.8 million of stock in the 12 months ended June 30, 2019. Our strategic focus and priorities for capital have not changed. While I share in your disappointment that our strong financial results have not resulted in a commensurate stock performance, we are committed to making prudent capital allocation decisions to maximize returns for our shareholders.

Before I turn the call over to Andy to provide additional detail on our financial results for Q4 and fiscal 2019, I'd like to invite you to San Diego, October 31, for our Investor Day. We plan to provide additional details regarding our strategic plan and growth initiatives. It's a great opportunity to meet other members of our executive and management teams. Details for Investor Day will be included in an e-mail that will go out later this week. The event is by invitation only and space is limited. Please contact Johnny Lai, VP of Investor Relations, if you'd like to attend and did not receive an email invitation. Andy?

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Andrew J. Micheletti, Axos Financial, Inc. - Executive VP & CFO [4]

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Thanks, Greg. First, I wanted to note that, in addition to our press release, our 8-K was filed with the SEC today. It is available online through EDGAR or through our website at axosfinancial.com. Since our fiscal year-ended on June 30, we will file our 10-K by the end of August. Second, I will highlight a few areas rather than go through every individual financial line item. Please refer to our press release or 8-K for additional details.

For the quarter ended June 30, 2019, net interest margin was 3.81%, up 10 basis points from the quarter ended June 30, 2018. As a result of the acquisition of COR Clearing in March 31, 2019 quarter, the consolidated net interest margin includes the impacts of securities margin lending and borrowing to fund those securities activities. In our press release and 8-K this quarter, we have added a separate banking segment calculation of our net interest margin. For the quarter ended June 30, 2019, the Banking segment net interest margin was 3.87%, up 12 basis points from the quarter ended June 30, 2018. The banking segment net interest margin, when excluding the seasonal impact of H&R Block for the quarter ended June 30, 2019, was 3.87%, up 4 basis points from the fourth quarter of 2018. There was no net impact in this year's fourth quarter from the H&R Block loans and excess liquidity versus a 9 basis point impact in the fourth quarter of 2018 due to capital constraints related to the seasonal excess liquidity that no longer exists. Deposit -- despite deposit competition and challenging yield curve, we had a solid improvement in our bank net interest margin helped in part by strong growth in our noninterest-bearing deposits.

Shifting now, our credit quality remains good, with a total of 19 basis points of net charge-offs this fiscal year, the same as last year. But if you exclude the 13 basis point loss associated with the Refund Advance loans and the 2 basis point loss from our unsecured consumer loans, our net charge-offs to average loans and leases was 4 basis points for the year-ended June 30, 2019. The credit performance of the Refund Advance loans this year is in line with our expectations. We had $2.4 million of Refund Advance loans outstanding at June 30, 2019, which we recorded as a receivable. From July 1 of 2019 to July 30, we received approximately $1 million more RIA payments, bringing in the RIA receivable balance to approximately $1.4 million as of today. Because the outstanding RIA balance is recorded as a receivable, our loan loss provisions will not be impacted by future collections of this receivable. Our nonperforming assets to total assets ratio of 50 basis points this quarter, up slightly from the 48 basis points in the third quarter of 2019. The majority of our nonperformers are single-family mortgages with loan to values at or below 60%. We do not anticipate that these loans will result in any loss to the bank. Stockholders' equity increased by $112.5 million to $1,073,000,000 as of June 30, 2019, compared to $960 million as of June 30, 2018. The increase was primarily the result of our net income for the 12 months ended June 30, 2019 of $155 million.

The bank is very well positioned from a capital perspective. The Tier 1 capital was 8.75% for the holding company and 9.21% for the bank as of June 30, 2019. We deployed approximately $103 million of our excess capital to fund acquisitions and $56.7 million to buy back our common shares in the 12 months ended June 30, 2019. We have approximately $8 million remaining in our buyback authorization.

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

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Johnny Y. Lai, Axos Financial, Inc. - VP of Corporate Development & IR [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brad Berning with Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congrats on the progress. I wanted to talk a little bit further in regards to the balance sheet restructuring on the deposit side. And I was wondering if you could talk through a couple more details on that. Start with what does the period end net interest margin look like versus the quarter average given it looks like period end balances had some pretty major restructurings versus the average balances during the course of the quarter given loan-to-deposit ratios, how much CDs were down and how much federal home loan banks were down. Can you talk about where that's at, and then talk about the progress of how you expect the rest of that restructuring to kind of take course over the remainder of the calendar year here?

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Andrew J. Micheletti, Axos Financial, Inc. - Executive VP & CFO [3]

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Yes. I think in Greg's prepared remarks, he kind of summarized what our broad thoughts are. And that generally, we expect to maintain our NIM in that 3.80% to 4% going forward. So with that, he also highlighted kind of some of the repricing we have. So some of our C&I loans will reprice if we have a 25 basis point or more cut tomorrow -- or actually on Friday, sorry. So we're looking at that as a small tailwind versus the ability to reduce our deposit rates and our lending rates going forward. So right now, we're -- I would estimate that we're in a pretty good equilibrium relative to that 3.87% to 3.8% range. And as we would go forward, we would look to both reduce deposit rates commensurate with any reduction in the low rates.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [4]

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And we also do have off-balance-sheet deposits -- significant off-balance-sheet deposits still from Axos Clearing as well as from Axos Fiduciary Services as well. So that will be a benefit associated with that. Obviously, in each case, you're trading off fee income for deposit benefits and lower non -- or lower interest expense. But those are out there as well with respect to thinking about how NIM will evolve in the future.

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Andrew J. Micheletti, Axos Financial, Inc. - Executive VP & CFO [5]

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One benchmark would be our bankruptcy fiduciary services. We're at about $550 million at the end of June 30. So as you know, that grand total is closer to $900 million. So we've got a ways to go on that product. So we'll get something of a lift as that continues to grow. But I think our summary is exactly that.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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And it's just a quick follow-up. Would it be safe to assume given the average deposit mix versus the period end deposit mixes that we see that you're starting the quarter at a higher point on the NIM?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [7]

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I don't -- well I think that there already has been a reduction in LIBOR that has flowed through prior to the rate cut. So I think -- I don't think that's a great assumption because remember that -- and I know you know, I mean, obviously, the benchmarks are different. So that's something to just think through.

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Operator [8]

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Our next question comes from Andrew Liesch with Sandler O'Neill.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [9]

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I noticed the warehouse loan lines were up $113 million or so, and presumably every year those eventually end up paying off. And I mean those payoffs do then serve as a headwind to loan growth later on. So I guess with that headwind later on in this calendar year, I mean, what gives you confidence that you'll be able to continue to reach that low teens annualized loan growth?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [10]

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Well, with respect to the warehouse lines, I think -- remember those are primarily government loan -- warehouse lines to independent mortgage bankers. So if rates continue to decline, we would expect those balances to go up. So if you're looking forward in a very long period to another rate cycle then you always have to think through that.

But frankly, the demand in that business is very high, and the pipeline in that business is very good. So I think when we look and we're forecasting what we have from a loan pipeline perspective, that's how we are getting to those estimates.

Now that being said, prepayments are high and competition is high. So there is obviously always the potential that we don't reach that objective. But we think we have a reasonably good shot at it. And I don't believe that the warehouse, the agency warehouse business will be a decrement from that loan growth, I think it will be a net contributor particularly given the rate environment that, at least, it appears that we're entering into.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [11]

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Okay. That's really helpful. Then on the broker dealer fees here in the quarter, the $6.7 million. Is that a good number to model off going forward? It's just the first full quarter with that revenue stream, so I'm just curious if that's what we should be using.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [12]

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Yes, we would use that number.

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Operator [13]

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

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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I wanted to first ask on the mortgage banking gain on sale. It obviously had a nice quarter. I imagine the rate environment was supportive there. I was curious -- kind of a 2-part question here, can you talk about kind of the sources of that origination activity and how you expect that to trend moving forward now assuming we enter kind of the consensus rate outlook? And also secondly, what the margins, again, on sale motions were like? And whether you think there's some good market conditions for those types of rates to be sustained?

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Andrew J. Micheletti, Axos Financial, Inc. - Executive VP & CFO [15]

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Yes, so total originations for the quarter were $102 million, producing a net gain of $2.3 million. So quick math, it's a 2.3% margin. However, we do have adjustments, for example, the MSR adjustment is in there. And the one negative about rates coming down is that you take a small clip on your MSR. So -- but at $100 million in originations and $2.3 million of gain, you have a rough estimate.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [16]

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I think the -- I think that -- so with respect to where they're coming from, we have -- that it's a marketing-driven and data-driven process to bring those loans to us. But we think the marketing cost is -- has trended in a very strong way in a good way for us. And we continue to cross sell mortgages to an ever-increasing group of customers. We've had some decent success with the Nationwide marketing and that's just getting started. So I think that's -- obviously, the rate environment helps. So I think it's -- that should be a positive coming into the next year, hopefully.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [17]

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Got it. And then on the expense side, with fiscal 2019 kind of in the books here and as you look out -- and I imagine, this would be a topic discussed at your Investor Day in October. But just the -- I was wondering if you can maybe just repeat or remind us kind of your thoughts on overall efficiencies for fiscal 2020. But also more broadly, what's some of the more meaningful investments you think that are going to be completed next year? And kind of just -- I know it's kind of a broad question, but why you think they're so critical? And what type of revenue opportunities you think they should drive longer term? It would just be great to get an update.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [18]

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Sure, no problem. So let's talk about Axos Clearing first. So the platform that we built, the Universal Digital Banking platform, we call it a banking platform, but it really is a very flexible platform that can be utilized to add the securities information and services inside that platform. So the first opportunity that we have is with the more than 100,000 high-net-worth customers that clear through COR, those independent broker-dealers are starving for an integrated solution and a portal for their clients.

So over the next year, we will create that portal and deploy that portal to those clients. Those clients will then benefit from Axos banking services but what they'll also -- but the broker-dealers will also benefit from the fact that they're providing these services to their clients and those clients aren't seeking those banking services elsewhere to more integrated banks. So first and foremost, we have a fantastic group of clients, high-net-worth individuals that are serviced through these independent broker dealers that need that service. They also need a great account opening platform. The good news is we have a great one on the banking side. It needs to be modified for the securities business but that's -- those 2 things alone are very exciting to drive independent broker-dealers to the Axos platform. And we've had several nice wins with respect to firms that are switching from firms that just haven't catered to those technology needs. So these smaller IBDs are very, very focused on how they can get technology to those end customers. So that's a big part of that. And it's a great source of client acquisition as well.

In fact, over the last several months since we bought COR, we added 8,000 high-net-worth clients from 2 broker-dealers that transitioned and signed up to Axos Clearing. So that's one set of investments. The next -- and that's -- call that -- maybe call that the intermediated sort of channel. The next channel and opportunity is that, if you've noticed, and I'm sure you have, if you see [whether] Robinhood applying for a bank charter or all these different robo advisory firms offering banking products, what you're seeing is the recognition that the customer acquisition costs associated with these acquisitions and the services that these customers are seeking requires that digital-focused banks have investment advisory services embedded in their platforms. So that success that Schwab has had and others have had with respect to that and the direction that you clearly see in the industry is something that we can accomplish and do it in an extremely cost-effective way because we own the entire value chain, right? If you don't own a clearing company, you're not going to be able to offer this type of trading services that we can offer or the type of investment and advisory services at the cost that we can offer if that customer ends up banking with us. So the reality behind this is that the competitive offering of the future with respect to this is much more integrated. So that's the next -- that's the other component of that. Now they're all derivatives of the same platform investment, but they all have specific elements that have to be developed. So that's really the core of what that looks like. So then, if you flip forward a year, what you have is you have a consumer platform that has those services available to their customers and is attracting customers from a customer acquisition cost perspective through a free robo advisory platform. If somebody is banking with us, and those are incredibly sticky clients and then you have in the intermediated basis, you have a competitive differentiation in order to attract customers to Axos Clearing. So that's the idea.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [19]

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Helpful. And then just -- sorry, just I'm sure you guys mentioned it, but I jumped on the call a couple minutes late. But just the efficiency ratio. Do you guys have any initial thoughts on fiscal 2020, if you don't mind repeating them if you mentioned it already.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [20]

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Yes, I think that having a -- looking at a full year banking efficiency ratio where we were in that below 40 range is a reasonable modeling measure for you, that's the banking segment. And then the securities segment, we guided into that high 80s, low 90 range for the entire fiscal year, given the investment that needs to be made there. Now obviously, we don't expect it to stay there over the long term, but this is a longer-term strategy and so we've ensured that we're investing there appropriately to accomplish some fairly critical objectives.

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Operator [21]

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Our next question comes from line of Scott Valentin with Compass Point Research.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [22]

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Just with regard to the C&I portfolio. Just wondering how much of that is coming from sponsors? Is most of that still coming from sponsored transaction? Just wondering what the environment is there. We're hearing more and more competition in that space with regard to covenants and other items.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [23]

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Well, so most of it is coming from sponsors, but we're not participating in the cash flow side of that business. So the typical leverage lending business, sponsor-backed leverage lending business, we don't do that business at all. Or I'm going to say -- I shouldn't say at all, maybe there's a couple of very small pieces of transactions, but that's not the business. So yes, we don't -- we are -- we definitely -- there's no loosening of standards, loosening of covenants, loosening of collateral protection there with respect to what we have. And so yes, I don't -- I think that's a different animal.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [24]

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Okay. And then just -- I understand you have some New York City commercial real estate? Any impact from the change in the housing laws there?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [25]

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Not really. I think that the reality of our portfolio, we had -- we have some low LTV, permanent multifamily loans there. But we were never really competitive in that market because it was a -- the rent control laws resulted in most of the big competitors having an 80% loan-to-value and doing nonrecourse transactions. And we were -- we are very low a LTV shop, so we were never able to really compete there. It's sort of interesting because you do see some of the New York competitors backing off on their concentrations now with respect to that market a little bit because I think there is a little bit of consternation. But it's not particularly impactful on us. It's a -- it's kind of interesting because obviously what it should do is it should shift. We'll have a lot of impacts but one of the impacts that it will have is it will shift development towards newer development, right, which would not be constrained by some prior set of contractual relationships which are now going to be binding on the future and that interesting way that was passed. So...

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [26]

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Okay. And then just one final question on you mentioned capital management, you guys are generating excess capital. In terms of M&A opportunities, I understand you guys are -- you're working on integrating and building products, but just wondering, would you be able to take advantage of any M&A opportunities that come your way?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [27]

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I think, certainly, that's something we're always looking at. And we have a fairly narrow focus with respect to what we're interested in doing from an M&A perspective. I think we're reasonably well set up strategically to do what we need to do, and I don't foresee a need to do something more right now. However, there are components of the securities business that might be interesting as bolt-ons or thing like that, and we would certainly be able to look at those. But yes, I mean it obviously depends on the size, it depends on a lot of things with respect to -- it depends on the currency you utilize those sort of things. But we're certainly not limiting ourselves with respect to what we look at.

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Operator [28]

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Our next question comes from line of Edward Hemmelgarn with Shaker Investments.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [29]

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Just one question -- well, actually 2. When -- if you look at your -- with all the investments that you're making, which could be good. When would you expect to move more from the investment phase, I mean, what you're doing now, to more of where we start seeing more of a harvesting or improvement of margins? How long do you think that...

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [30]

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Well, I think that -- look, I think the reality with respect to things like -- it depends on what you're talking about, right? if you're thinking about, let's say, the Axos Fiduciary Services investments, the reality is, is that a lot of banks with a primarily fixed-rate loan portfolio saw their margins have a significant negative impact associated with them, right? So if someone would have come back and said years ago that we were asset-sensitive, I think that, that would have -- people would have been skeptical of that given the fact that we have such great downside protection in rates in the way we structure our lending book, which is primarily a fixed-rate book. So I think that you are seeing those benefits with respect to loan and margin rates in a lot of the things that we're doing because we aren't competing in a -- in an online savings environment that has big competitors like Goldman Sachs offering 2.80% rates. So I think that that's very important to understand that you are seeing those benefits already in the fact that we've been able to diversify the loan book in a significant way and we've been able to increase margins with a 75% fixed-rate loan book in a flat-yield-curve environment, right? I mean if you step back, I mean every -- it's always difficult to do because obviously the answer is I want more. But that's one answer. So that's with respect to those things. The next answer is that, with respect to the new developments with respect to what we're looking to do on the consumer-banking platform inside. And I'll tell you that those benefits continue to generate incremental improvement in lots of different ways and they offset lots of other costs that otherwise would accrue, going over $10 billion, doing all these other things. So for example, we digitized, at least from a customer perspective, almost all the interactions that customers have with us for wires, for beneficiary changes and all those elements with inside the platform in the last quarter since it was launched. That provides the customers a much better user experience. It should result in retention, all these other sort of things. We still have some work to do to get the straight-through processing done through the operational side of that business. And that will result in better scaling efficiency as we grow on that side of the house.

So by having these interaction platforms set up, what you do see is you do see that you can scale without having to have a commensurate and proportionate increase in selected operational personnel because you're digitizing those things. So that's an important benefit. And that benefit is going to be realized progressively over time in a methodical manner because it's not one thing. There's 3,500 process diagrams at this bank, right? So every one of those processes, you can look at with respect to this and you can work through how those operational advantages accrue. Of course, the other element is that offering services to new and existing clients with respect to the Axos Invest side, it allows you to have a contest for customer acquisition cost between digital acquisition of checking account customers and digital acquisition of Axos Invest customers. And then you're looking at what those cross-sells are and you're looking and you're saying, which is the best way to scale that customer base? Is it better to advertise an Axos Invest platform and then get a 20% to 30%, let's -- by way of example, cross sell with respect to a larger banking relationship or to go from banking and reverse. And the reality of that is we have our models and hypothesis, and we have prior data on what WiseBanyan was able to do from an acquisition cost perspective but we don't know. And we're not going to know that either until we actually complete the service offering, and then we go out in the market and we test that. And when we do that, the market is going to have changed itself because you're having lots of these fintech companies looking at banking charters or trying to figure out how to offer more comprehensive services because they're recognizing the same issue that we are, which is that customer acquisition cost in a digital environment needs to be amortized over the appropriate product set. So like all of these things, I think, unfortunately, I'd love to give you a simple answer, but that would -- that wouldn't be -- it's not -- it wouldn't be accurate.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [31]

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Well, I guess, another way to think about it is -- 2 questions, is when would you expect to see -- start seeing margins in the securities business improving?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [32]

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I think we'll see gradual -- I think we'll see -- we'll definitely see improvements in that business in fiscal year 2020, but you will see gradual improvements in it -- well, let's put it this way, there are already and we're already seeing improvements in that business in a number of ways. One is that the credibility of the firm, broadly, is bringing in clients. We are -- been able to streamline operations there. We have lots of initiatives and ability to make the businesses more efficient. However, we will also be investing that money, all of it and more, in improving that business such that it is legitimate competitor to Pershing and to National and those sorts of things, Fidelity's National. So what you're going to see is, there are improvements happening. But that -- those funds are going to go to getting better personnel. We just hired a head of ops from one of the big 3 guys who's the head of ops for that whole place. And so we're upgrading the team. We're investing in technology. We're investing in their systems and processes. We're investing in risk. We're doing all that stuff. And so that's going to offset what we're doing. But then when you're looking into that 2020 period, what you're having is you're actually having an incredible source of customer acquisition and also an amazing source of very stable cash balances that arise from this. I mean you can look at other competitors that have done this and it's been an incredibly successful strategy with respect to gathering low-cost deposits that have strong longevity.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [33]

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No, certainly. I mean I don't disagree with the strategy. I was just trying to think about it as like a -- is it going to be like a 2021 type frame where you really start to see that driving improved results for the Axos as a whole?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [34]

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Yes, I think -- look, I think that this year, with respect to the securities business is a -- you should focus on investing in that. And I think that coming into that June timeframe of next year that there definitely will be -- we will be set to go with respect to what we're doing there.

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Edward Paul Hemmelgarn, Shaker Investments, L.L.C. - Founder, President, CIO, Portfolio Manager, Member, and Director [35]

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Okay. And then lastly, just one more question. Now that you've had the Universal Digital Bank, I mean, platform up and running for a quarter, is there -- can you give any examples of something that you're doing right now, I mean, a success that you've had that you couldn't have had in the past?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [36]

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Oh, yes. I can give you many, many examples. So the first and foremost example was that we were able to take the Nationwide customers all on and create specific profiles with respect to the way they wanted to treat certain risk segments of their customers. They both had a very high-end customer segment and they had some other customer segments that needed to have a variety of different limits and a variety of different risk parameters, and we were able to customize those. The next thing we were able to do is go through every customer interaction, every fax that comes into the bank, every wire form, every one of those elements, and we were able to create digitized interactions in the platform so that customers now have a seamless experience and they don't have to interact with the bank telephonically or through fax with respect to any service that they need or any account maintenance opportunity. Another was that we were able to integrate a driver's license capture and liveness photo capture match to be able to reduce fraud and to increase the quality of CIP within the platform.

So it's a better user experience because of the speed at which it auto-fills everything. And also it allows us to have a great way of identifying someone and when someone -- because obviously there's been a lot of identity compromises over time so the quality of credit data with respect to being able to make risk-based decisions, let's say, on credit data that's reported through different types of questions has declined over time as that credit data has become more widely available to bad guys. So our ability to enhance security is another example of that. So there's lots of -- another one was that if you have a new -- if you have an existing account -- or let's say you have a savings account and you want to open a checking account because a checking account is a credit product, previously, you'd have to go out and restart an application in its entirety. Now you can go through that process internally online and gather -- and open an additional account and go through that additional process inside the platform rather than having to go outside the platform, and it seamlessly does all that work for you.

So those are the type of things that are happening every day to improve the process, and we have complete control over it now. So as we go through, we have an interactions task force. And that interactions task force looks at every contact that happens in the institution. Why is someone calling a servicing group? They're asking for a payoff statement. They're asking for a loan balance or whatever those things are or to pay -- to make a certain kind of payment. All of that data is being analyzed and then pushed through the development queue to enable a better customer experience. It's more secure because they're coming through the security -- the secure platform, and then they're also able to self-service more in a way that enhances customer satisfaction and, over the long term, results in operating scale. So I mean those are just some of the things you've got the interaction side of it, which reduces operating cost, then you've got the new product side of it, which allows us to incorporate other elements into the platform on the security side and then utilize that platform for end clients on the consumer and intermediated basis.

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Operator [37]

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

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Nicholas Richard Duafala, B. Riley FBR, Inc., Research Division - Analyst [38]

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This is actually Nick Duafala stepping in for Steve Moss. So you mentioned in your prepared remarks that jumbo single-family originations rebounded last quarter. So just wondering what the rate you were seeing for these -- seeing in these mortgages today? And also how, overall, new loan origination rates compare to existing portfolio runoff rates?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [39]

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Sure. So I think that they're -- with respect to the -- they're basically, say, mid-to lower 5s is roughly where they are. And I would say that they're relatively consistent with respect to runoffs and others. But we do think, obviously, with what's happening in the rate environment, we're going to have to be looking carefully at that and whether or not we will need to be looking at some of the fixed-rate lending products and what rates we're charging based on market competition, we think the answer to that is yes. Now we have run our models forecasting what we will need to do from a rate reduction perspective if market rates go down, and we are forecasting that we will have to reduce rates there, and we're still getting to that NIM guidance. So that's obviously in an environment where we're going to be looking at what happens from a competitive standpoint. But we're going to have to react to it to some extent, I'm sure.

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Nicholas Richard Duafala, B. Riley FBR, Inc., Research Division - Analyst [40]

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Okay. That's helpful. And could you give us some flavor of the beta on interest-bearing deposits if we were to see a 50 basis points cut by year-end?

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [41]

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That's a -- that question is very dependent upon what type of deposits we're talking about. And so with the way that we have provided guidance with respect to that is giving you some guidance with respect to the repricing of loans and then giving you a margin guidance. I think, with respect to that, that implies a deposit beta. But the reality of this -- the reason why I'm not giving you that is because it's complicated because we have current off-balance-sheet deposits that are very low cost both at clearing and at AFS that can come on balance sheet depending upon what we see from a growth perspective in our different units. We also have great pipelines for deposits in some of the commercial businesses. How those come to fruition and the timing of them are quite influential. So all of those together, we've looked at and we've modeled those out and come up with the conclusions that we've provided to you.

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Operator [42]

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

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [43]

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Actually my questions were asked and answered. Appreciate it.

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Operator [44]

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We have reached the end of our question-and-answer session. Allow me to hand the floor back over for closing remarks.

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Gregory Garrabrants, Axos Financial, Inc. - President, CEO & Director [45]

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Thank you, everyone, for your interest in Axos Financial, and we'll talk to you next quarter. Have a good rest of the day.

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Operator [46]

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Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.