Axos Financial, Inc. (AX) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Axos Financial's First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Johnny Lai.

Thank you. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.'s first quarter 2019 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 months ended September 30, 2018 and they will be available to answer questions after the prepared remarks. Before I began, 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 statement as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to forward-looking statement contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will be an audio replay available on 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.

Thank you, Johnny. Good afternoon everyone and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the first quarter of fiscal 2019 ended September 30, 2018. I thank you for your interest in Axos Financial and Axos Bank. Axos announced record net income of $36.8 million for the first fiscal quarter ended September 30, 2018, up 13.77% from the $32.4 million earned in the fiscal first quarter ended September 30, 2017 and down 74 basis points when compared to the $37 million earned in the prior quarter. Earnings attributable to Axos' common stockholders was $36.8 million or $0.58 per diluted share for the quarter ended September 30, 2018 compared to $0.50 per diluted share for the quarter ended September 30, 2017 and $0.58 per diluted share for the quarter ended June 30, 2018. Excluding non-recurring expenses, non-GAAP adjusted earnings and earnings per share were $38.4 million and $0.61, respectively, for the quarter ended September 30, 2018. Other highlights for the first quarter include, ending loan and leases increased by $222 million, up 2.6% on a linked quarter basis or 10.4% annualized from the fourth quarter of 2019 and 15.2% year-over-year. Excluding our mortgage warehouse balances, which fluctuated quarter-to-quarter and $76 million of structured settlement sales this quarter, ending loan balances increased $317.6 million or 14.9% annualized from June 30 to September 30. Total assets reached $9.8 billion at September 30, 2018, up $0.3 billion compared to June 30, 2018 and up $1.2 billion from the first quarter in 2018. Net interest margin was 3.76% for the quarter ended September 30, 2018, up 5 basis points from 3.71% in the fourth quarter of fiscal 2019 and down compared to 3.87% in the last year's first quarter. Non-interest income increased 24% year-over-year to $16.5 million due to the addition of Axos Fiduciary Services fees and higher gain on sale from structured settlement sales this quarter. Capital levels remained strong with Tier 1 leverage ratios of 9.41% at the Bank and 10% at the Holding Company, both well above our regulatory minimums. Return on equity was 15.01% for the first quarter of 2019 compared to 15.24% in the corresponding period last year, reflecting the Bank's year-over-year increase in capital levels. Our credit quality remained strong with 2 basis points of net recoveries and non-performing assets to total asset ratio of 40 basis points this quarter. We received approximately $1 million of payments in the quarter ended September 30, 2018 for refund advanced loans originated during the 2018 tax season, which offset the increase in our loan loss provisions this quarter. Our allowance for loan loss represented 166.3% coverage of our non-performing loans and leases. We originated approximately $2 billion of gross loans in the first quarter, up 28.5% year-over-year. Originations for investment increased 40.6% year-over-year to $1.4 billion and originations for sale decreased 6.5% to $309 million. Ending loan balances increased 15.2% year-over-year to $8.7 billion. Strong originations by our single family portfolio mortgage group, commercial specialty real estate lending and multifamily teams were partially offset by higher-than-average pay offs in our single-family jumbo mortgage, lender finance and select commercial specialty real estate portfolios. Our loan production for the first quarter ended September 30, 2018 consisted of $136 million of single-family agency eligible gain on sale production, $406 million of single-family jumbo portfolio production, $186 million of multifamily and other commercial real estate portfolio production, $687 million of C&I production resulting in $91 million of net C&I loan growth, $32 million of auto production and $5 million of consumer unsecured loan production. The credit profile for loans reoriginated in the first quarter of 2019 are as follows. The average FICO for single-family agency eligible production was 754 with an average loan to value ratio of 67.1%. The average FICO for the single-family jumbo production was 734 with an average loan to value ratio of 62.5%. The average loan to value ratio of the originated multifamily loans was 55.7% and the debt service coverage ratio was 1.29%. The average loan to value ratio of the originated small balanced commercial real estate loans was 48.1% and the debt service coverage ratio was 1.5%. The average FICO of the auto production was 764. At September 30, 2018, the weighted average loan to value ratio of our entire portfolio of real estate loans was 55%. These loan to value ratios use origination date appraisals over current amortized balances. As of the September 30th 2018 quarter, 62% of our single-family mortgages have loan to value ratios at or below 60%, 31% have loan to value ratios between 61% and 70%, 4% have loan to value rations between 71% and 75%, approximately 1% between 75% and 80%, and 2% greater than 80% loan to value. The loan to value ratio is calculated by using the current principal balance divided by the original appraisal value of the property securing these loans. 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. We had approximately $1.8 billion of multifamily loans outstanding as of September 30, 2018, representing approximately 21% of our total loan book. Growth in our multifamily loan production has increased over the last several quarters and our pipeline is strong. The weighted average loan to value ratio of our multifamily loans is 53% based on appraised value at the time of origination. Approximately 68% of our multifamily loans are under 60%, 31% are between 60% and 70%, 1% are between 70% and 75%, and less than 1% of our multifamily loans have a loan to value ratio above 75%. The lifetime credit losses in our originated multifamily portfolio are less than 1 basis point originated over the 17 years we've originated multifamily loans. Our C&I lending business posed another strong quarter with ending balances increasing by approximately $140 million, excluding lender finance. We have not experienced any losses in our C&I lending and specialty real estate groups since we entered these businesses. Loan demand remained strong, an indicative of our ability over the next year to grow our lending in line with our target portfolio growth rates. Our loan pipeline was $1.2 billion at September 30, 2018, consisting of $503 million of single-family jumbo loans, $82 million of single-family agency loans, $154 million of income property loans and $464 million of C&I loans. We are continuing our gradual transition to a more balanced origination mix with all of our diverse lending businesses contributing to growth. Switching to funding, we repositioned our balance sheet in anticipation of the transfer deposits we acquired from Nationwide and increased borrowing in the September quarter and reduced higher cost deposits what temporarily created an imbalance in our loan to deposit ratio. Once we replace short-term borrowings with the Nationwide deposits which is scheduled to come over in mid-November, our loan to deposit ratio should return to its historic range. At September 30, 2018, approximately 35% of our deposit balances were business and consumer checking, 27% money market accounts, 4% IRA accounts, 6% savings accounts and 5% prepaid accounts. Checking and savings deposits represent 77% of total deposits at September 30, 2018. Since the beginning of 2018, we have taken three important steps to diversify and grow our core deposit funding. First, we signed an agreement in August to acquire Nationwide Bank's deposits. These deposits comprise of $2 billion of retail CDs and $1 billion of checking, savings and money market deposits at the time of signing, will add approximately 80,000 new customers to the Bank. Both Nationwide and Axos have received the required regulatory approvals for the deposit acquisition and we plan to convert the accounts to our Bank in mid-November. We look forward to the onboarding of Nationwide Bank's customers to Axos. Based on projected run off of some of the time and money market deposit balances, we expect to add approximately $2.4 billion to $2.5 billion of total deposits from this transaction at closing. We will use these lower cost deposits to replace higher cost borrowing and funding as well as the fund loan growth in our fiscal second quarter of 2019. Since the overwhelming majority of the acquired deposits will be used to replace current and future funding, we do not anticipate a meaningful increase in our balance sheet as a result of this transaction. We project the replacement of higher cost funding with the deposits acquired from Nationwide will reduce our funding cost by approximately $20 million to $25 million in the first 12 months versus the Bank's borrowing rate which we're assuming for the purposes of this calculation would increase on average 50 basis points over the next year. We announced today that we signed an agreement with Nationwide to provide co-branded banking products and services. The agreement with a initial term of five years entails joint marketing of various banking and insurance products and services to existing Axos and Nationwide customers. We are excited to leverage our breadth of services and flexible technology platform to help Nationwide's associates, members and general market clients achieve their financial goals. With nearly 6 million members, including over 600,000 small business customers, Nationwide offers a tremendous opportunity for us to offer high value products delivered through a seamless user experience to individual, small business owners and commercial clients. We look forward to working with our partners in Nationwide to make this collaboration a success. The second strategic action we took to further expand Axos to low cost funding is the announced acquisition of COR clearing, one of the largest independent clearing firms in the United States. The acquisition provides us scale entry into the independent broker dealer and registered investment advisor space, adding an experienced team and an established technology platform. COR currently serves approximately 60 introducing broker dealers and 90,000 underlying clients with $470 million of sticky low cost deposits. We believe we can expand their business by providing more capital, enhancing their sales capability and growing high margin services such as securities and margin lending. Over time, we intend to expand into adjacent markets such as asset custody, enacting our service offering to RIAs and providing service to robo-advisory firms. The addition of approximately $35 million of the annual fee-based income further diversifies our business and has a new vertical for client acquisition. We expect the acquisition to close in the first half of calendar 2019, subject to regulatory approval and other customary closing conditions and be accretive to earnings per share by approximately 6% in our fiscal year ended June 30, 2020. The third action we made this year from an M&A perspective was the addition of a trustee and fiduciary services business from APEC in April of this year, bringing us another new specialty vertical, deposit vertical that will over time provide additional low cost deposits to the Bank. We added an experienced team with established relationships with bankruptcy trustees and fiduciaries nationwide. The existing $1 billion of chapter 7 bankruptcy and non-chapter 7 deposits, currently held at seven partner banks represents an opportunity to reduce our cost of funds while we transition to deposits to Axos over the next four to six quarters. In the medium to long term horizon, we believe there will be opportunities to grow these counter cyclical chapter 7 deposits as well as other non-chapter 7 verticals that have larger longer durations. The integration of Axos fiduciary services with the Bank continues to progress well. Our net interest margins have held up well even though we have yet to realize the full benefits of three deposit-related acquisitions. We remain focused on growing non-interest-bearing or low cost deposits through our commercial, small business and specialty deposit verticals, and shifting our loans to our higher yielding floating rate C&I verticals. Our ability to maintain and grow net interest margin over the medium to longer term will be a function of our relative success in integrating our acquisitions, executing on our strategic initiatives, our success and our continued expansion of our commercial and treasury management efforts and the shape of the yield curve and competition from banks and non-banks. We completed the successful rebrand of the Company shortly after we converted all existing Axos clients to our new online banking platform. On October 1, the Bank was rebranded as Axos Bank. The new brand better aligns with our core mission to provide a diverse set of high value products and services to consumers, businesses and institutional clients nationwide with a strong focus on user experience. Feedback on our new brand and online banking platform from our clients business partners and team members has been extremely positive. We will engage in a series of brand-building and marketing campaigns over the next several quarters to promote awareness and affinity for Axos. We also aligned the Holding company name, rebranding from BofI Holdings to Access Financial on October 1st and transferred our stock listing from the NASDAQ stock exchange to the New York Stock Exchange. Our ticker symbol changed from the BOFI to AX. I'd like to thank the hundreds of Axos team members who worked tirelessly over the past year to execute on this ambitious and comprehensive strategic initiative. We have accomplished a tremendous amount of the development of our long term growth vision this fiscal year. We're executing well on our next generation vision for consumer and small business digital banking. We successfully developed and launched a flexible online and mobile banking platform that we control in order to allow us to add value beyond our already strong agency propositions. Nationwide's quite as a partner, who will thoughtfully service their employees and clients because of the investments we made in our digital banking platform, our omni-channel customer experience and the breadth of our consumer deposit and loan product set strategic commitment to being a best-in-class digital bank. It will allow us to provide excellent service to Nationwide employees and clients after the closing of the transaction and during our partnership. We increased the scope of our consumer product offerings, adding auto and consumer unsecured lending and are executing on our plan to improve robo-advisory services in our consumer platform. Today, we announced a small but important acquisition of the digital wealth and advisory platform WiseBanyan. WiseBanyan is one of the pioneers in the robo-advisory space, offering a comprehensive and user-friendly platform for individual investors to manage their finances and create custom investment portfolios tailored to meet their life goals free of charge. The acquisition adds a talented entrepreneurial team who built the platform from the ground up, providing us with a proven and flexible technology and service that can be deployed immediately to acquire new retail clients. WiseBanyan's free and premium model centers on understanding individual's financial goals throughout their lives in investment cycle and it's a perfect fit for Axos' technology-enabled consumer banking and wealth management services model. I'd like to welcome the nearly 25,000 WiseBanyan clients and the entire WiseBanyan team to the Axos family. We're very excited with the opportunity to integrate these services into our consumer platform. I believe integration of robo-advisory service is important to the success of our universal digital bank vision and fits well with our strategy of creating a compelling online banking experience for our customers that will allow us to differentiate ourselves from the less sophisticated digital banks, focused more on rate based value propositions rather than a broad suite of personalized digitally enabled products delivered through an omni-channel customer service platform. Our efficiency ratio was 51.47% for the first quarter of 2019 compared to 47.75% in the fourth quarter of fiscal 2018 and 40.49% for the first quarter of fiscal 2018. Multiple factors have contributed to this efficiency ratio's rise. Some are more transitory and others represent a shifting focus toward commercial banking and fee income businesses. If well executed, this shifting focus to capital-efficient base businesses will have the potential to enhance return on equity. It will either temporarily or permanently elevate our efficiency ratio beyond the more straightforward spread-based business efficiency ratio that has historically generated the majority of our income. First, retail agency mortgage banking had a rough quarter as a result of varying marketing costs and disappointing production. The retail agency mortgage banking group increased the Bank's overall efficiency ratio by approximately 300 basis points this quarter. We are working to optimize our expenses in our mortgage banking group. We're also excited about the opportunities that we expect to be available to our mortgage banking group as a result of our Nationwide partnership and the significant increase in customers that we will obtain from our recent acquisitions. Second, approximately 200 basis points of the increased efficiency ratio was the result of our acquisition of Epiq's bankruptcy trustee business. If we continue the success we are having in bringing the trustee deposits on balance sheet, the business will, when fully transitioned, generate an efficiency ratio based on internal deposit transfer pricing closer to the low 40s. Currently this business is a highly capital efficient C-based business with impacts are efficiency ratio negatively. Third, we incurred about 200 basis points of cost associated with our acquisition activities this quarter. Fourth, over the next couple of quarters we will need to increase staff and operations in our call center and in marketing to accommodate the significant increase in customers that we receive from Nationwide and to activate the exciting acquisition opportunities presented to us by the Nationwide partnership. Fifth, as we continue to focus on increasing our non-interest-bearing and lower cost deposits, we plan to continue to invest in additional treasury management personnel in this coming year. These personnel will be held to a high productivity standard, but there can be a lag of a quarter or two as these personnel get up to speed. Finally, the securities businesses that we are acquiring should be highly capital-efficient and if performing well, accretive to return on equity, but will be dilutive to the efficiency ratio. Our focus is on maximizing return on equity and that pursuit will lead us to fee-based businesses that operate at different efficiency ratios than our storage spread based businesses. Our capital ratios remain strong despite recent actions to deploy some of our excess capital into accretive M&A transactions. Our Tier 1 leverage ratio was 9.41% at the Bank, up from 8.88% at June 30, 2018. Even after we pay a modest premium for the Nationwide deposits in the December quarter, our Tier 1 leverage ratio will remain well above the 8% level that we believe is prudent for a bank with high quality, well seasoned assets. Our highly profitable business model and the listing of our OCC capital requirements related to the H&R Block approval provides us with ample flexibility to deploy excess capital and organic growth, share repurchases and additional strategic M&A transactions. In closing, I'm pleased with where we are and the success we're having executing our business plan. We have signed an exciting new strategic partnership. Our loan pipelines are strong, our credit quality remains good, our acquisitions are on track and helping us with our cost of funds and we have excess capital. Our execution is providing us a diverse set of strong building blocks for our next exciting phase of long term growth. While some of these investments have put upward pressure on our efficiency ratios, they are essential to maximizing our long term potential. We remain highly profitable with abundant opportunities to grow each of our lending deposits and fee-based businesses. I'm excited about the opportunities we have to grow. Our success will be a function of our ability to execute on these exciting initiatives and capitalize on our future opportunities. Now I'll turn the call over to Andy to provide additional detail on our financial results.

Thanks, Greg. First I wanted to note that in addition to our press release, our 10-Q was filed with the SEC today and it's available online through EDGAR or through our website at axosfinancial.com. Second, I will highlight a few areas rather than go through every financial line item. Please refer to our press release or the 10-Q for additional details. As Greg indicated earlier, Axos' net income for the first quarter ended September 30, 2018 was $36.8 million, up 13.77% when compared to the $32.4 million earned in the first quarter ended September 30, 2017 and down 0.7% from the $37.1 million earned last quarter. Earnings attributable to Axos' common stockholders was $36.8 million or $0.58 per diluted share for the quarter ended September 30, 2018 compared to $0.50 per diluted share for the quarter ended September 30, 2017 and compared to $0.58 per diluted share for the quarter ended June 30, 2018. Included in our operating costs for the quarter ended September 30, 2018, were $2.1 million of expenses related to pending or recent merger and acquisition transactions. The first impact this quarter was a $1.1 million increase in FDIC insurance which was the result of making several temporary balance sheet changes at the end of the June 30, 2018 quarter. As discussed in my prepared remarks last quarter, we were repositioning our deposit mix on the balance sheet to temporarily increase brokered CDs with maturities scheduled around our expected acquisition of approximately $2.5 billion in Nationwide deposits. Also laid in June 30, 2018 quarter, we made a large $65 million dividend from the Bank to the Parent to provide additional capital to be used for the purchase price of the pending COR transaction and other possible transactions. Those two balance sheet changes at the Bank caused adverse changes to the FDIC insurance rate formula, increasing the overall insurance rate applied to all balance sheet liabilities and adding $1.1 million to the FDIC insurance cost for the quarter. The reduction of the broker deposits and the earnings occurring during the first two quarters of this fiscal year should reduce our FDIC insurance rate. The second impact was a $1 million in direct merger and acquisition costs, including $0.7 million in non-cash amortization of intangibles associated with the Epiq transaction and $0.3 million in one-time professional costs associated with the COR clearing transaction. Excluding the after-tax impact of the $2.1 million in M&A costs, our non-GAAP diluted earnings per share for the quarter ended September 30, 2018 increased to $0.61 per share, up $0.03 per share compared to the GAAP EPS of $0.58 per share. We expect amortization of intangibles associated with the pending M&A activity to increase over the next several quarters depending on closing conditions, the timing of each transaction and the final amounts paid. For the quarter ended September 30, 2018, our net interest margin was 3.76%, down 11 basis points from the quarter ended September 30, 2017, but up 5 basis points from the 3.71% in net interest margin for the quarter ended June 30, 2018. Our average loan and lease yield was 5.51% for the first quarter of fiscal 2019 compared to 5.21% in the first quarter of fiscal 2018 and 5.39% in the quarter ended June 30, 2018. On the funding side, our average interest-bearing deposit rate at the end of the quarter was 159 basis points, up from 135 basis points for the last quarter and up from 101 basis points at September 30, 2017. As Greg mentioned, we are preparing to close in November of this year the previously announced acquisition of approximately $2.5 billion in Nationwide Bank's deposits, including $0.8 billion of non-maturity deposits and $1.7 billion of time deposits. We intend to acquire the deposits without growing the balance sheet and we've moved maturing brokered CDs and other high-cost deposit types into short-term FHLB borrowings which will be paid off at the closing of the Nationwide transaction. As a result, FHLB advances grew from $0.5 billion at June 30, 2018 to $2.6 billion at September 30, 2018, temporarily increasing our loan to deposit ratio. We expect the blended rate of the Nationwide deposits to be approximately 159 basis points and to replace borrowings and other high cost deposits at a savings between 73 basis points and 123 basis points, 73 assuming no fed increase over the next year, 123 basis points assuming an average of 50 basis points in fed increase over the next year. Loan quality remains strong with non-performing loans to total loans equal to 35 basis points at September 30, 2018, down from 42 basis points at September 30, 2017 and down from 37 basis points at June 30, 2018. The loan loss provisions were $600,000 this quarter, $1 million last year and $3.9 million for the last quarter ended June 30, 2018. The decrease this quarter compared to last quarter is attributable to higher loan loss recoveries of $1.6 million, which more than offset charge offs for a net benefit of $0.4 million and the result of loan mix changes. Included in the recovery of $1.6 million was $1 million recovery associated with a previously written off refund advance loans from the tax season, making the effective loss on the refund advance loans equal to approximately 1.2% for this season. The Bank is very well positioned from a capital perspective. The Tier 1 capital ratio was 10.02% for the Holding company and 9.4% for the Bank at September 30, 2018. The Holding company had cash of approximately $102 million at the end of the quarter from which M&A activities, stock buybacks and possible dividends could be funded. If we choose to reduce our Holding company Tier 1 leverage to approximately 8.5% and if we assume we grow our assets at a 15% annualized rate, we expect to generate enough capital internally to complete our proposed acquisitions, cover our asset growth and provide excess capital of about $100 million at June 30, 2019. With that, I'll turn the call back over to Johnny.

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

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Perito from KBW. Please proceed with your question.

I want to start maybe just a broader question, you guys mentioned in a couple of places, but can you give us some more general update on the universal digital bank initiatives and I just [indiscernible] also, how should we think about [indiscernible] and some of these new companies you're acquiring or partnering with, is there any kind of crossover opportunity or is there any relation we should be thinking about that can help these businesses grow, utilizing [indiscernible] or something like that?

Yes, absolutely. I think that's a good question and the answer is yes. So first let me give you the update, then I'll take the second part of your question. So we rolled out our platform to almost all of our brands and consolidated the brand. We still have one more brand on an external platform and that will be transferred sometime in the first quarter of the first calendar quarter of 2019, at which point in time we can sunset entirely and get rid of the duplicate cost associated with maintaining the two online banking systems. So the universal digital banking initiative is really comprised of a number of different elements. The first element was the creation of a platform that we owned entirely and then we would be able to control with respect to what was offered inside the platform. So if you look at the Nationwide, a partnership example that we're talking about today, part of the reason that they wanted to work with us is that we're able to entirely customize an instance of that platform for everything that they're looking for their customers. So that's something entirely unique. So what it allows us to do is create products and cross-sell opportunities that are unique to our partnerships associated with whatever we're looking to do going forward. So obviously, there's a lot of detail to be ironed out associated with that. But it is an acquisition opportunity, utilizing all of Nationwide's customer base. So that's an example right there of the utilization of the platform. And so we were going through the process of selection with respect to the acquisition. There were a lot of questions that were along the line of if we can't do this in our platform and it creates a lot of friction and it's not a great user experience, can you do it, do you have it? And the answer always was yes, either we have it or it's easy to build because we controlled our platform. So then the next component of that question was such the universal digital banking initiative is, so you've got a lot of customers coming through that platform, how do you automate every interaction that that customer has with the bank? So right now we're going through a process of looking at every interaction that any customer has with our institution and we're looking about how to take that and place that interaction through the universal digital bank portal. So, one way to think about that would be every servicing call that ever comes in, even if someone is servicing a mortgage loan and they don't have a deposit account, they'll be servicing that loan through the platform. There's an immense amount of cost savings associated with it. It certainly is a longer term project to do, but it's important. So there's a benefit associated with that. The next benefit is the ability to cross-sell. So through the utilization of a personalization database, we will be able to tell when these customers that we're bringing in, so we're bringing in 80,000 customers from Nationwide and hopefully this partnership will end up being useful for customer acquisition, we're able to look and see if those customers have an auto loan at a higher rate than we would otherwise offer them. We're able to understand what their entire profile is and then be able to tailor those products inside the UDB platform in order to do that. So the right way to think about UDB is it's essentially an app store inside the banking app store behind the password. So what it does is it just simply allows you to click ad tiles and those tiles later to be pushed to the consumer based on what we know about that customer from a data perspective or that customer will choose those products. So then with respect to -- this is kind of moving now to the second part of your question. The next question would be, for example, with respect to WiseBanyan. So, WiseBanyan has a great user interface for robo-advisory that really has a product that can exist in the universal digital banking platform as a tile and whatever integration we decide to do with that and none of this has been decided yet, we've got a while to go forward, but by way of example, you can get low cost or discount robo-advisory in some manner if you use it as your primary checking account. So it's not a rate based proposition with respect to that checking account, it's simply a product based proposition that is enabled through the universal digital banking platform and since WiseBanyan owns their code and their software and we own our code and software, it's just simply a matter of scheduling that into the production schedule in order to be able to integrate those products so that they're holistically there. And so, the object of this is to truly create a very high level of value for consumers with respect to these product offerings and that is in response to the competition that we see for what I'll call the simple sort of Tier 1 or Phase 1 digital banking model which we're evolving from and many others are kind of going through, which is, I'm going to put up higher rates and those sorts of things. So we're looking at certainly change the competitive landscape there. That's been going incredibly well. It's obviously an incredibly ambitious initiative. It's been costly. It's required a lot of IT resources, but it's been very successful. And so I think we've been blessed with the fact that Nationwide came along and said, wow, show us what you have here and they said, well, that's really impressive. We'd like to take it first then. So I think that's kind of a great confluence of all of these initiatives coming together in a very strategic way to allow us to execute that vision.

Helpful, Greg. Thank you for that. Maybe sticking on the Nationwide topic, to the extent you can -- I understand there might be some limitations on what you could say about, can you help us, just give us a little more color maybe on just how the actual partnership will work in terms of kind of the function either revenue or cost sharing and things like that to the extent you can.And then also are there other kind of as I guess a white label type partnership, is that something more broadly that you think Axos can be more active in, obviously maybe not in the insurance segment because of competitive issues, but other segments going forward?

I think that broadly banking -- this is kind of an esoteric comment, but hang with me for a minute, banking will distribute itself such as vertical software providers will become linked to banking services. And so that is a fanatic element that will occur across commercial small business and consumer banking. With respect to how that plays out with respect to Nationwide, the particulars are -- the agreement we signed today is a broad outline with an exclusivity provision and opportunities for us to market to their customers. The efficacy of that marketing will obviously be determined by how closely linked from a data perspective and how good our products are with respect to the needs. So there's lots of opportunities to consider the linkage in the timeframe between an auto insurance policy purchase and an auto loan, for example. Those things are close in time or the purchase of home insurance or a mortgage or vice versa, there's a linkage associated with that. Obviously, Nationwide has a incredibly well known brand, it's quite iconic, although I like our brand immensely, our new brand, we will not claim any kind of status at least for the first six months with respect to any sort of iconic status yet. So there's obviously a benefit associated with that there. But with respect to the economics side of it, I think what Nationwide's interested in doing is they clearly wanted a continuity with respect to servicing the customers that they had. So, we'll be maintaining a branch in their headquarters which will allow us to service the customers that we're taking over in a manner that will be seamless there. And so I think it's a multipronged partnership that will evolve over time. I think it's pretty premature to start trying to put particular targets on it. But I do think it's emblematic of what we're capable of from a systems perspective. With respect to whether there's other opportunities there, we think so, but that's speculative with respect to why we'd be able to do, there's lots of folks that want partnerships but you've got to find the right ones and you've got to find people that are willing to partner in it and invest the high level resources to work with you.

Okay, great. Thank you. And then just one last one from me on capital management. Andy, the comments about the excess capital expectations by the end of next year were helpful. Just curious though as we think about maybe between now and the end of next year, you've done a couple of these deposit transactions, but it still seems like there's some room around capital deployment. Share repurchases have been something you guys have used this year at times. I'm just curious if there's any, you know, with some of the volatility we've seen in the market, any expectation of you guys to maybe go back to that near term here as a method of capital deployment. Thanks for taking my question.

Sure. Yes, certainly the level of the share price has fallen too and many banks shows a form too broadly that's certainly something that has to come to mind. I don't have anything specific to say about it except to say that clearly at least with respect to what we consider our performance, the market is just generally solid on the sector which is always the right time to be thinking about how to do some opportunistic repurchases.

Our next question comes from the line of Austin Nicholas from Stephens. Please proceed with your question.

Hey guys, good afternoon. Maybe just on the Epiq deposits, can you maybe give us a feel on how those are progressing and how they're progressing on coming over to the balance sheet, maybe, and if you can quantify it?

I don't think we'll be giving out regular quantifications of that for competitive reasons. But what I would say is that we've had great responses from the trustees. We've been simply working with these trustees on a voluntary basis, working to convince them that we can do a great job in servicing their accounts and we have a significant backlog of those trustees. So we do don't, we think that it's going well. We created projections that were based on contractual termination periods for those banks, but we're exceeding those projections.

Understood, thanks. And then maybe just on non-interest-bearing deposits, it looks like they were down at about $150 million quarter-over-quarter. Can you maybe just give us some idea on what went on there and if there's any seasonality in that?

Yes, that's going to be seasonality associated with the Axos' block liquidity. There's still some Axos' block liquidity coming out of that during that period. And so, that's the majority of what you are seeing.

And then maybe on the prior efficiency guide of kind of elevated from quarter levels in the 300 to 400 range over these next few quarters and then trending down into the 40% to 41% as we move toward the end of fiscal '19 I think was the prior guidance, is that still in place or do we need to be thinking about upper end of that range or above that given the Nationwide agreement or the expanded Nationwide agreement, and then this acquisition?

I think they probably need to be thought of in the upper end of that range, particularly with businesses like COR Clearing which obviously it will be great to have a incredibly a capital-efficient business that runs at incredibly good pre-tax margin, but that's not unfortunately reality. So I think the timing of COR will be critical with that. There's the presentation on our website that gives you some numbers with respect to that, you can kind of back that in. I think that should just be added as a stand-alone. Right now, the question is on timing, probably it could be as late as June 2019, maybe as early as March, that will be impactful. The WiseBanyan acquisition, while not huge, it is also something that's going to add cost as we kind of bring that in and although there is customers in some revenue coming over that, while cheaper than building that ourselves, significantly cheaper than building that ourselves, that also will add a little bit of a drag to the business as well. So it is sort of a transitional year in a lot of respect, with respect to cost because there's just a number of things that are going on that kind of have to calm themselves down. I think what probably is worth doing and we will work on doing is to provide you guidance in the future is to create a segment associated with the security side and then you'll be able to see the capital efficiency of that segment, but you'll also see the cost associated with that segment, but I think that over time integrating into Nationwide and kind of getting all the cost associated with what we've been doing on the tax side under control, I think the COR's spread based business, if we're successful can be operating in the mid 40s range and maybe over several years kind of pushing back down depending upon the success we have on all the initiatives that we have, but that the security side is really going to add a lot to that and we'll be working hard on making that profitable right away, but it's going to take a little bit of time for WiseBanyan in part of the reason that it was a very attractive acquisition and they spent a lot of venture capital money on building their systems and platforms is that their business model really required that they do something else with those customers, they just couldn't make it work by only having one product for customers. So that's why we're such a good fit because we have a lot of products and we think that we can sell those products to their customers and they with at very low acquisition cost have been able to generate a nice acquisition volume, nice customer acquisition volume.

Maybe on the margin, I think last quarter there was talk of, the margin kind of stepping down a little bit in these two quarters, it looks like it came in around on a core basis around 380 which is nice to see. I guess as we look out to next year with Nationwide and the COR Clearing layered on, are we still within that 380 to 390 range on a core basis?

I think we have a very good shot at it, yes. I think that we're seeing good progress on our commercial side. We're seeing good traction on the trustee side. So, with Nationwide all these things working, I think they're good. And remember we've also been a little bit hampered by, we sold some of those structured settlement this quarter, we will probably end up having to do some loan sales next quarter to stay and barely scrape underneath the $10 billion. So, once we're going over that, we'll have a little more freedom with respect to loan growth as well. Our pipelines have been good, business has been solid in that area. So I think we have a good shot at that. And obviously if you get it highly inverted yield curve or something like that, then maybe I'd have to revisit that. But I think with respect to the market expectations for rate increases, we actually benefit from that in some significant ways now, not that we didn't before, but we think it's more so that way with some of the acquisitions.

Our next question from Brad Berning from Craig Hallum. Please proceed with your question.

Hey guys, good afternoon, congrats on all the acquisitions. Greg, you mentioned this kind of in reference a few different times during the call, but I wanted to try to get a little bit more specific on this. When you get all of the acquisitions that you've announced to-date fully integrated, you talked about managing to an ROE profile, how do you think about when we're in more of a calendar 2020 type time frame and everything's kind of fully smoothed out, how do you think about what is the structural change that you had from an ROE profile from an efficiency and from a NIM profile. Can you kind of just talk through also the asset sensitivity. You've made some pretty major strategic changes to the financial profile of the company. I just want to understand, how you're thinking about that?

Sure. Now so I can give you -- I can paint a vision for you of what it could be. However, there is -- as you can imagine, there's a lot of moving pieces associated with it. And so I'll try to give you some insight into the major moving pieces in order for you to understand the thesis by which we're operating and then the risks to those different thesis. So let's take COR as an initial start. If we do COR right, we should be able to generate, if we can do it well, we can do it right and it'll take some time, but by 2020 we should be able to have significantly more low-cost deposits generated from what we're doing with COR. Now there's obviously a sort of the weak form thesis which is you buy something that had sensitive and rates go up and you make money and we bought it at a pretty good PE ratio and that's great. But if we can make that work if you look at obviously Schwab [ph] Bank , the majority of their deposits come from corresponding clearing companies that are with them than it's not primarily from their retail group. So that has the potential to be hugely powerful. But we have to execute on it and that is something we just have to do. And so if we do that, that could be fantastic. The deposits generally are not particularly sensitive. So if that's done well, then that could be a significant boost to net interest margin relative to what otherwise would occur. But it depends on what kind of growth we can get from that and how we can execute. And obviously there's a lot of things that need to happen in order for that to get done, but it is a potential, extraordinarily powerful engine for growth. Now some of my early discussions with folks that I know and some CEOs that I know around this area have said, Hey, we're ready to go. We paid our clearing company and come on down, let's get it done. Well, let's see if they were actually serious about that or were not. And so we've got to go make that happen. So, that's a very nice -- very I think bucketed in and delineated potentiality. The next question with respect to that is, what kind of services can we offer to their clients to the price of the corresponding product in a way that makes them comfortable and allows them to do other things. So there's good opportunities just to enhance fully paid securities lending and do a bunch of other things that can enhance profitability there as well. So I think there's a lot of real opportunities, we just have to go and get them. With respect to this broader question, we've sort of been -- I think we've made a series of calculated and reasonably well placed bets on a conceptualizations that the Internet banking market, as everyone sort of realized that their branches weren't working anymore and their models were falling down, they would sort of swap over to what we're doing, but they'd sort of do it in awful way which is what's happened. I think it was citizens that well we raised a $1 billion, we paid 2.25% or whatever and great. Okay, fine. But still our proposition is that by truly enhancing the value proposition within the platform such that we're increasing ease of use, we're increasing products, we're able to bundle properly, they were going to be able to attract customers that is defending relationship and build very strong lasting profitable, long term relationships that are less rate sensitive. That's the hypothesis that we've been able to prove in small measure by what we've done in our online brands. Now in the sense that we haven't been rate competitive in those brands, you have to talk to the market on checking on things like that and savings for a long time, but we provide very strong service and we've done a reasonably good job of servicing and keeping those customers. So that hypothesis is one that needs to be tested and in two years we will have a decent test of it. I think how much of that is all relative, is that worth 50 basis points, it that worth 100 basis points, how do other people react to that right in their remarks really here the sound of freedom room by. So yeah, that's another component of that and we have to deliver on that. The next side of this which is sort of on the commercial side is -- on the consumer side -- going to the commercial side and we've been continuing to invest and we've been doing this for an extended period of time in the commercial and treasury management businesses and leading with story of API solutions and things like that and it's been working pretty well. We have a good pipeline there. We're adding a lot of talent in that area, that talent tends to be expensive, but it also comes with pipelines and those sorts of things that I think the question there is, is a sort of location light model or a centralized model able to service customers over a broader geographic area with a technology-led solution there. And so far we've had a lot of good success there, but that success needs to scale and so that'll be another component of that. The upside case of that is that, that group is able to scale those elements and replicate the success of let's say the acquired business like the specialty lines and that's a very positive thing. A downside of that would be that they're not able to gain traction and you've hired people that and most of their compensation is variable, but they just don't achieve as well as they otherwise would. I feel pretty good about what we have on the technology side there and I think we're able to deliver very good technology solutions. So those are some of the variables that are in play right now. Obviously, we still maintain our online consumer savings brands and those things operate as they do and we just think that to be able to achieve the type of scale that we're looking to achieve over the longer term and double the size of the institution and those sort of things that we really need to have a very, very diverse base and we need to really make these different elements work. And I think there's a lot of foundational structures that have been added here that are very powerful and they give us a very strong and doable set of execution challenges and if we can't do it then it's our fault. And you guys deserve to find people who can. But I think we're going to be able to do it. With respect to the ROE side, there are businesses that have, the securities businesses and the fee-based have very high ROEs, but without having good visibility into knowing exactly how that growth is going to be, I'm sort of reticent to just throw out an ROE target for 2020 now. I think that would be something more as we're moving forward and we hold our next Investor Day and things like that, we'd kind of really solidify all the strategies around that in a future call and provide some more guidance and as you start to get segment information I think that might be more helpful.

One follow-up. As you think about branding versus affinity and you think about acquiring cost effectively the consumer side of the business, you obviously have built out a lot of great business side of it and you've invested a lot there. You're starting to invest more in the consumer side here. How do you see that balance between branding and deals like you've just announced today? How do you think about where is your niche in the market? Do you need to be a big brand like Capital One from there or can you be like old MBNA and be more affinity based? I'm just kind of curious how you're thinking about growing the consumer side of the business over a three and five-year type time frame?

I do think that we need to have over time some element of brand presence. I think the challenge associated with that is, I remember talking to someone at Capital One, one time and they certainly said, well, you know, if you want to build a brand, you just spend $1 billion and they clearly had a look at our balance sheet. So it's obviously, there's not obvious challenge. But we think there are ways of building brand affinity and building brand slowly and methodically that don't have that kind of expense over time. And so, we've got a branding agency on that we've started, we've started the calendar '19 period to start rolling out some interesting campaigns and things like that. That will be part of the cost structure we have, but we're not going to overdo it. I think the answer is, it's going to be a bit of both. I think that obviously when we're advertising with Nationwide, that adds credibility. But we also need to have our own brand credibility. I do think that obviously having H&R Block and having the kind of exposure we have just gets a component of, gets the unaided awareness up at a relatively inexpensive level. I think that the way MBNA did things, the world has changed a lot since then. And so it's not, there's a morphing of that model and it's not perfectly effective or it still has value if you have the right partner.

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

I missed a little bit on the C&I growth. I was just wondering if you could go through the drivers for C&I growth here this quarter?

Do you want to take that Andy?

Sure. In Greg's prepared remarks, we can go back through and highlight that. And so, when we identified loan production, we identified loan production of $186 million of multifamily and commercial real estate production and then $687 million of C&I production, resulting in $91 million of net C&I growth. So production was good. However, we had pay offs netting down to $91 million for that piece. So that's I guess the key in terms of looking at those segments that have worked well for us, they continue to be the same segments where lender finance is clearly a leading segment in that group, as well as our commercial real estate specialties. So the net number was $91 million as we look at that C&I growth. And leasing does there's a lot of that business in the fourth quarter, they've got a very, they've got a nice pipeline, so their business tends to be heavy in the fourth quarter and so they'll have a better contribution this coming quarter than they did in the prior quarter. What we don't have is, we haven't done, there's nothing much on sort of unsecured cash flow enterprise value type lending. This is all very heavily asset based and secured lending at low advance rates with heavy structure.

And then I guess the second thing, I noticed on the special mention was that there were two credits that were added to the watchlist that were construction credits. I guess wondering where they located, property type and kind of what are the issues around those credits?

Sure, yes, one is a credit in West Chelsea. We have a loan of it, it's about 85% done, it has a great sponsor that the folks that are guaranteeing a loan have hundreds of millions of dollars of net worth. The reason why we put it on special mention is it had a little, few construction delays and it had one pre-sell that fell out. But this is a absolutely, it's a good loan. The pre-sales are about $2,500 bucks a foot, our loan is about $1,250 a foot. It's a beautiful property, absolutely a brand new levelly. It's almost done. It had about four months of construction delay. It has a large junior partner. Some of the general contingencies were a little light. We asked them to top up those general contingencies. They did. It's a good building and a good opportunity. The other is also something that's close to being done. It's also relatively smaller construction delays, very low basis. Well only the lender on those both those properties with significant and well capitalized mezz lenders on them. So that's a very low standard to get it in there. I don't think either of those have any sort of --

Before there's been no delays in their financial obligations. Their financial obligations had been fulfilled fine.

So I don't think there's any, I don't believe there's any risk in any underlying credit risk loans. I think these are very precautionary sort of classifications. But there's construction delays even if the basis is really low than those loans got classified that way.

And then just wondering where you've seen jumbo mortgage pricing these days?

Jumbo mortgage pricing has -- we've been able to generally keep with our 50% of funds sort of increases. We've had to back those down a little bit every now and then. We've been able generally to do that. So pricing has been fine. There's been some non-bank competitors that have come into the market. They priced above us but they have been getting a little aggressive with credit. So they're creating a bifurcation in that market a little bit. And there's some securitizations coming back, that might be something to look out for. But generally it's been fine. I don't think we have the ability to pass through 100% of fed fund increases though. So we're off to see how that market goes forward as rates continue to rise.

Our last question comes from the line of Edward Hemmelgarn from Shaker Investments. Please proceed with your question.

Just a couple of questions here. You've talked a lot about the Universal Digital Bank and the ability to really provide better services and cross-selling, the ease of doing. Can you give any example so far of where you're seeing increases and whether it's loan production or something along those lines from your efforts so far since you've had the improved platform out there?

Yes, well since it's been three weeks Ed and your patience amazes, I'm just kidding. So what we have seen is that we've seen as we focus more on cross-selling with our lending products side that we have seen an ability to cross-sell single family mortgage customers on our checking products. That's been something that has been successful. Frankly that hasn't really been happening. It's been happening for a number of months as we sort of changed the incentive structures and are working through tying those products together a little bit better maybe with discounts or other things like that, some incentives but that hasn't really been through UDB. UDB is literally just done. We just did the conversion and then right now the whole focus is on bringing Nationwide over. So that'll be the first component of that. Also we are seeing success with other loan types and our ability to fund those loan types into account. For every customer that gets a unsecured consumer loan is getting a checking account and we're seeing good utilization out of that. So what we don't have in UDB yet and it will be a effort that will be continuing will be the ability to we are in a process of building the engine which is the identification engine, call it, and then that then out to flow through to the comprehensive marketing campaigns. So what it hasn't happened and will not happen for at least a year will be the completion of that so that then we can see, okay.So a customer enters for a mortgage, they are there and when they're in the platform, they're simply able to click on something and go through their disclosures and all that is say, yes, I'm opening a checking account.And it's seamless and it's just -- it's not a reapplication because they're already on the system, they are in the system and what is that uptick. And so ask me that question on March 31, 2020, and I would give you a much better answer. In all seriousness because it's that the type of time frame we're talking about because what we need to do is first everybody has to get integrated on that platform. Then you need the data engine to sort of do that work and then you end up having to do that. But in the meantime there's a lot of things that can be done. I mean, the Nationwide deal is an example of that which is, here's a set of comprehensive requirements that we couldn't meet otherwise, but for the platform we could. And they were very concerned about the omnichannel experience, how you track the ticketing, how you track customer service and all those things and those are all integrated in a great way right now.

Okay. I only bring this up because you've done a great job of doing these acquisitions or silos of specialized lending or your taking going out and getting business deposits. But the Holy Grail for many banks has always been over talking about cross-selling, but that's easier said than done. And so, given the fact that you should have a cheaper platform than anyone else, there would be better opportunities I'll look forward to hearing of your successes as we move forward.

I look forward to having our successes.

What's the number of nationwide customers that you're going to pick up?

It's around 80,000.

What's the number of customers you have right now in the Bank?

It depends on how you're counting them and how you're doing them. There's millions floating around but there's three different partnerships and different cards and all those kind of things. So, but it's a significant increase in checking account customers and our savings account customers and so hopefully that will enable us to be able to enhance some of these cross-sell opportunities.

Okay. So you really can't, I mean you have with the H&R Block, I mean, they get the cards to access their funds but it's not really, you don't really have the opportunity to cross-sell to them.

I think that frankly, yes, I mean that would depend on what H&R Block wanted to do. To-date they have had specific strategies with respect to that. This is a more comprehensive test if we can execute it of that platform opportunity. But it's a lot and it's new. And obviously, like you said, it's, but I think that's the interesting idea is that if we can actually have very clear value propositions that are data oriented and we know when to offer a product that is a value, that hopefully that'll increase the conversion there. But obviously it's difficult across the board, acquiring customers and financial services is expensive. It's why Chase is out there offering $500 to people to open an account and they continue to do it. It's expensive and difficult and there is no Holy Grail for it. I think this is a good strategy and a good plan, but we've got a lot of execution ahead of us.

Lastly just the agency mortgage REFI business probably isn't going to be coming back anytime soon, so how are you transferring those employees to either other loan origination platforms or other areas of the Bank?

So we do have a purchase money team as well. There is, I think I'll call it right now it's interesting how these partnerships evolve, there's sort of a tale of two businesses, the organic side and the, and our the customers that come to us for these mortgages and portfolio retention which is also something that retail does and of those are doing very well. We have a couple of marketing partnerships right now that haven't adjusted their expectations to the economic realities that exist. And so we need either to have those expectations adjusted or we need to adjust those relationships. And so that's something that we just have to work through. I mentioned it because obviously it was a poor quarter for that business and obviously, but there are a lot of dynamic opportunities that can be for the redeployment of our marketing expenditures in ways that are still working. So it really is more of a allocation and commitment issue to certain marketing partners than it is to some underlying core fundamental business issue from my perspective. And so, yes, it's not going to be what it was in 2014 and 2015 from a revenue perspective, but it certainly can be from a revenue perspective what it was last year. And so if we're performing well so far.

Okay. All right. And congratulations getting the nationwide deal there.

Thank you. I appreciate it. Thank you.

Thank you everybody, thank you very much for your time and I will talk to you next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.