Axos Financial Inc (AX) 2019 Q1 法說會逐字稿

Greetings, and welcome to Axos Financial First Quarter 2019 Earnings Call. (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 3 months ended September 30, 2018, and they will be available to answer questions after the prepared remarks.

Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance.

Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor Protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section, 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 would 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 nonrecurring 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 quarter's -- last year's first quarter. Noninterest 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 construction 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 remains strong with 2 basis points of net recoveries and nonperforming 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 Advance 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 nonperformance 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 payoffs 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; $42 million of auto production; and $5 million of consumer unsecured loan production.

The credit profile for loans we originated 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 at originated multifamily loans was 55.7%; and the debt service coverage ratio was 1.29. The average loan-to-value ratio of originated small balance 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 entire portfolio of real estate loans was 55%. These loan-to-value ratios use originations date appraisals over current amortized balances.

As of the September 30, 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 ratios between 71% and 75%, approximately 1% between 75% and 80%, and 2% greater than 80% loan-to-value.

The loan-to-value ratios is calculated by using the current principal balance divided by the original appraised value to 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 our time of origination. Approximately 68% of our multifamily loans are under 60%; 31% of between 60% and 70%; 1% are between 70% and 75% and less than 1% of our multifamily loan 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 posted 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 remains strong and indicative of our ability over the next year to grow our lending in line with our target portfolio of 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 balance origination mix with all of our diverse lending businesses contributing to growth.

Switching to funding. We repositioned our balance sheet in anticipation of transfer of deposits we acquired from Nationwide, and increased borrowing in the September quarter and reduced higher cost deposits which 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 3 important steps to diversify and grow our core deposits funding: first, we signed an agreement in August to acquire Nationwide Bank's deposits. These deposits comprised 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 on-boarding of Nationwide Bank's customers to Axos. Based on projected runoff of some of the time of 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 costs of 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 costs by approximately $20 million to $25 million in the first 12 months versus the bank's borrowing rates, which we're assuming for the purpose 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 an initial term of 5 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 individuals, small business owners and commercial clients. We look forward to working with our partners at Nationwide to make this collaboration a success.

The second strategic action we took to further expand [access] 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 to entering into the independent broker, dealer and registered investment adviser 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, enhancing our service offering to RIAs and providing service to robo advisory firms. The addition of approximately $35 million of annual fee-based income further diversifies our business, and adds a new vertical for client acquisition. We expect the acquisition to close in the first half of calendar 2019, subject to regularly 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 Epiq in April of this year, bringing us another new specialty vertical deposit -- deposit vertical that will, over time, provide additional low-cost deposit for 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 7 partner banks, represents an opportunity to reduce our cost of funds while we transition the deposits to Axos over the next 4 to 6 quarters. In the medium- to long-term horizon, we believe there will be opportunities to grow these countercyclical 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 our 3 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 towards 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 integrating our acquisitions, executing on our strategic initiatives, our success in 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 a 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 our online banking platform from our clients, business partners and team members has been extremely positive. We will engage in the series of brand building and marketing campaigns over the next several quarters to promote awareness and affinity for Axos. We also aligned our holding company name, rebranding from BofI Holdings to Axos Financial on October 1, and transferred our stock listing from the NASDAQ Stock Exchange to the New York Stock Exchange. Our ticker symbol changed from 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 development of our long-term growth vision this fiscal year. We are 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 rate and fee propositions. Nationwide selected us as a partner, who will thoughtfully service their employees and clients because of the investments we made in our digital business 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 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 offering, 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, flexible technology and service that can be deployed immediately to acquire new retail clients.

WiseBanyan's free and premium model centers on understanding individuals' financial goals throughout their lives and investment cycle, and is 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 services is important to the success of our universal digital bank vision, and fits well with our strategy in creating a compelling online banking experience for our customers that will allow us to differentiate ourselves from 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-based businesses will have the potential to enhance return on equity, but 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 over-valued marketing cost 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 are 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 is 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 fee-based business, but impacts our 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, our call center and in marketing to accommodate the significant increase in customers that we received from Nationwide and to activate the exciting acquisition opportunities presented to us by the Nationwide partnerships.

Fifth, as we continue to focus on increasing our noninterest 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 2, as these personnel get up to speed.

Finally, the securities businesses that we are requiring 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 historic 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 lifting of our OCC capital requirements related to the H&R Block approval provides us with ample flexibility to deploy excess capital in 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 deposit 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 who will 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 late 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 2 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 costs for the quarter.

The reduction of the broker deposits and the earnings occurring during the first 2 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 noncash amortization of intangibles associated with the Epiq transaction, and $0.3 million in onetime 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 deposits rate at the end of the quarter was 159 basis points, up from a 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 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 nonperforming 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 a $1 million recovery associated with the 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 the 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.

(Operator Instructions) Our first question comes from the line of Michael Perito from KBW.

I wanted to start maybe just with a broad question. Just -- you guys mentioned it in a couple places, but can you give us a more general update on the Universal Digital Bank initiative? And I guess, most specifically also how should we think about UDB and some of these new companies you're acquiring or partnering with -- and is there any kind of crossover opportunity? Or is there any relationship we should be thinking about that could help these businesses grow utilizing UDB 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, and 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 costs associated with maintaining the 2 online banking systems. So the Universal Digital Banking initiative is very comprised of the 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 are talking about today, part of the reason that they wanted to work with us is that we are able to entirely customize an instance of that platform for everything that they are looking for, for their customers. So that's something that's highly 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 are 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. So when 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, "We can't do this on 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 control that platform. So then the next component of that question with respect to the Universal Digital Bank 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 is an immense amount of cost savings associated with it. It certainly is a longer-term project to do, but it's important. So there is 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 the -- for customer acquisition, we are 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, it's essentially an App Store inside -- the banking App Store behind the password. So what it does, it just simply allows you to click, add tiles and those tiles will either be pushed to the consumer based on what we know about that customer from the data perspective, or that customer will choose those products. So then, with respect to this 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 is 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 a way of example, you can get low cost or discount robo advisory in some manner if you use us 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 are 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 are evolving from and many others are kind of going to, which is -- I'm going to put up a higher rates, and those sort of things. So we are looking to sort of change the competitive landscape there. And 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 have been blessed with the fact that Nationwide came along and said, "Wow, show us what you have here," and they say, "Wow, that's very impressive. We'd like to take it for a spin." So I think that's the kind of a great confluence of all of these initiatives coming together in a very strategic way to allow us to execute that vision.

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

I think that broadly, banking -- this is a kind of esoteric comment, but hang with me for a minute. Banking will distribute itself, such that vertical software providers will become linked to banking services. And so that is a thematic 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 and the time frame between an auto insurance policy purchase, an auto loan, for example, right. 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 an incredibly well-known brand, it's quite iconic. Although I like our brand immensely, our new brand, where we'll not claim any kind of status, at least for the first 6 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 economic side of it, I think, what Nationwide is 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 are taking over in a manner that will be seamless there. And so, I think, it's a multi-pronged 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's -- 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 what we'd be able to do. There's lots of folks that want partnerships, but you got to find the right ones, and you've got to find people that are willing to partner and invest the high-level resources to work with you.

Okay. Great. 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. I'm 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 is any, with some of the volatility we've seen in the market, any expectation of you guys to maybe go back to that in your term here as a method of capital deployment?

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

Our next question comes from the line from Austin Nicholas from Stephens.

Maybe just on the Epiq deposits. Can you maybe give us a feel on how those are progressing? And how they are progressing on coming over to the balance sheet, maybe on -- 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 don't -- we think that it's going well. We created projections that were based on contractual termination periods for those banks, but that -- we're exceeding those projections.

Understood. And then maybe just on noninterest-bearing deposits. Looks like they were down kind of $150 million quarter-over-quarter. Is there -- can you maybe just give us some idea on what went on there, and is there any seasonality on that?

Yes. That's going to be seasonality associated with the excess block liquidity. There's still some excess block liquidity coming out of that during that period. And then -- so that's the majority of what you're seeing.

Got it. That make sense. Okay, that's helpful. And then maybe on the prior efficiency guide of kind of elevated from core levels in the 300 to 400 range over these next few quarters, and then trending down into the 40% to 41% as we move towards the end of fiscal '19, I think, was the prior guidance. Is that still in place? Or do we need to be thinking about an upper end of that range or above it, 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 would be great to have an incredibly capital-efficient business that runs such an incredibly good pretax margin, but that's not unfortunately reality. So I think, the timing of COR will be critical with that. There is a presentation on our website that gives you some numbers with respect to that, so you can kind of back that in. I think that should just be added as a stand-alone right now. The question's 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, is also something that's going to add cost as we kind of bring that in, and, although there is customers and 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 respects, with respect to costs, because there is 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'll work on doing this to provide you guidance in the future, is to create a segment associated with the securities side. And then you will be able to see the capital efficiency of that segment, but you will also see the cost associated with that segment. But, I think that over time, integrating into Nationwide and kind of getting the -- all the cost associated with what we've been doing on the tech side under control, I think the [core] 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 the securities side is really going to add a lot to that and we will be working hard on making that profitable right away, but it's going to take a little bit of time for WiseBanyan. I mean 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 are such a good fit because we have a lot of products that we think we can sell those products to their customers. And they, with --at very low acquisition cost have been able to generate a nice acquisition -- nice customer acquisition volume.

Understood. That's helpful. Maybe on the margin. I think last quarter there was a talk of the margin kind of stepping down a little bit in these 2 quarters. It looks like it came in around on a core basis, around 380, which was 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 are seeing good progress on our commercial side. We are seeing good traction on the trustees side. So with Nationwide all these things working, I think they are good. And remember, we've also been a little bit hampered by -- we sold some -- little structured settlements 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. Pipelines have been good. Business has been solid in that area. So I think we have a good shot at that. Obviously if you get a highly inverted yield curve or something like that, then maybe I would have to revisit that. But I think with respect to the market's expectations for rate increases, we'll actually benefit from that in some significant ways now, not that we didn't before, but I think it's more so that way with some of the acquisitions. So...

Our next question comes from the line of Brad Berning from Craig-Hallum.

Congrats on all the acquisitions. Greg, you mentioned this kind of in reference, a few different times through the call, but wanted to try and get a little bit more specific on this. When you get all of the acquisitions that you've announced today 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 has kind of fully smoothed out, how do you think about, what is this structural change you had from an ROE profile, from an efficiency and from a NIM profile? Can you kind of talk through also the asset sensitivity? You 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 is 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 in and the risks to those different theses. 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 will take some time, but by 2020, we should be able to have significantly more low-cost deposits generated from what we we're doing with COR. Now there's obviously this sort of weak-formed thesis, which is you buy something that is asset sensitive, and rates go up and you make money, and we bought it at a pretty good P/E ratio, and that's great. But if we can make it work, if you look at obviously Schwab Bank, the majority of their deposits come from corresponding clearing companies that are with them, then it's not primarily from the 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 the folks that I know and some CEOs that I know around this area have said, "Hey, we're ready to go. We hate our clearing company and come on down, let's get it done," right? Let's see if they were actually serious about that or, not, right. So we've got to go to make that happen. So that's a very nice, a very, I think, bucketed and delineated potentiality, right? So that's -- the next question with respect to that is what kind of services can we offer to their clients, to the clients, the correspondent broker-dealers in a way that makes them comfortable and allows them to do other things, right? So there's good opportunities 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, right, we've sort of been, I think we've made a series of calculated and reasonably well-placed bets on the conceptualization that the Internet banking market -- as everyone sort of realized that their branches weren't working anymore and their models were kind of falling down, they would sort of flock over to what we were doing, but they would sort of do it in an artful way, right, which is what happened. I think it was at Citizens that said, "Well, we raised the $1 billion we paid, 2.25% or whatever," and great, right? Okay, fine. But -- so our proposition is that by truly enhancing the value proposition within the platform such that we're creating ease of use, we are increasing products, we're able to bundle properly, that we are going to able to attract customers through these outstanding relationships and build very strong lasting profitable, long-term relationships that are less rate sensitive.

That's a hypothesis that we've been able to prove in small measure by what we've done in our online branch now, and in a sense that we haven't been rate competitive in those brands as a path to the market on checking and 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 2 years, we will have a decent test of it, right? I think, how much of that, it's all relative, right? Is that worth 50 basis points? Is it worth 100 basis points? How do other people react to that? We've got a -- we're right by Miramar, so we get to hear the sound of freedom rolling by. So yes, that's another component of that and we have to deliver on that. The next side of this, which is on the commercial side -- is on the consumer side going into the commercial side, is 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 sort of API solutions and things like that. And it's been working pretty well. We have a good pipeline there. We are 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, and 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 will be another component of that. The upside case of that is that, that group is able to scale those elements and replicate the success in, let's say, the acquired business like the specialty lines, and that's a very positive thing. The downside of it would be that they're not able to gain traction, and you've hired people that 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 -- and 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 are 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, look, there are businesses that have -- and the securities businesses and the fee-based businesses have very high ROEs. But without having good visibility into knowing exactly how that growth's 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 kind of really solidify all the strategies around that in the future call and provide some more guidance. And if you start to get segment information, I think that might be more helpful.

Yes, understood. 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 out of the -- 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 just announced today? How you think about -- where is your niche in the market? Do you need to be a big brand like Capital One someday? Or can you be like the old MBNA and be more affinity-based? Was kind of curious how you're thinking about growing the consumer side of the business over a 3- and 5-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 flippantly said, "Well, if you really want to build a brand, you just spend $1 billion." And they clearly hadn't looked at our balance sheet, right. So there's obviously -- there's that 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 -- that we'll start in 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 are 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 are 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 us a component of -- gets the unaided awareness up in 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 is a morphing of that model and it's not perfectly effective. But that it can still -- it still has value if you have the right partner.

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

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

Do you want to do that, Andy?

Sure. In Greg's prepared remarks, we can go back through and highlight that. Okay. 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 payoffs 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 is -- was $91 million as we look at that C&I growth. And leasing does 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 on the fourth quarter. 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 profit-based and secured lending at low advance rates, with heavy structure.

Okay. And then, I guess, the second thing. I noticed on the special mention lists that there were 2 credits that were added to the watch list that were construction credits. I guess, wondering where they were located, property type, and what are the issues around those credits?

Sure. One is a credit in West Chelsea. We have a loan of it. It's about 85% done. It has a great sponsor, the folks that are guaranteeing the loan of hundreds of millions of dollars of net worth. The reason why we put it on special mention is it had a little -- a few construction delays and had one presale that fell out. But this is a absolutely -- it is a good loan. The presell is right about $2,500 a foot. Our loan is at about a $1,250 a foot. It is a beautiful property, absolutely brand-new lovely. It's almost done. It had about 4-ish months of construction delay. It has a large junior partner. The -- some of the general contingencies were a little light. We asked them to top off 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 similar, relatively smaller construction delays, very low basis. We are the A 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...

Yes, there's been no delays in financial and their financial obligations. Their financial obligations have been fulfilled fine.

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

Okay. That's helpful. And then just wondering, where you're seeing jumbo mortgage pricing these days?

Jumbo mortgage pricing has -- we've been able to generally keep with 50 basis -- 50% of funds sort of increases. We've have 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 nonbank competitors that have come into the market they're priced above us, but they have been getting a little aggressive with credit. So they are creating a bifurcation in that market a little bit. And there's some securitizations coming back, so 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'll have 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.

Greg and Andy, just a couple of questions here. Can you -- you talked a lot about the Universal Digital Bank and the ability to really provide better services in cross-selling, the ease of doing it. Can you give any examples so far of where you're seeing increases in, 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 3 weeks, Ed, and your patience amazes me. No, I'm just kidding. So in the 3 weeks, so -- but in all seriousness, so what we have seen is that we've seen, as we focused more on cross-selling with our lending products, 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 incentive structures and are working through tying those products together a little bit better, maybe with discounts and other things like that, some incentives, but that hasn't really been through UDB yet. I mean, UDB is literally just done. I mean, we just did the conversion. And then right now, the whole focus is on bringing Nationwide over. So that will be the first component of that. Also, we are seeing success with other loan types and our ability to fund those loan types into accounts. So every customer that gets an unsecured consumer loan is getting a checking account. And we are seeing good utilization out of that. So what we don't have in UDB yet, and it will be an effort that we'll be continuing, will be the ability to -- we're in the process of building the engine, which is the identification engine, call it, and then that then has to flow through to the comprehensive marketing campaign. 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 then they are in the platform. They are simply able to click on something and go through the disclosures and all that and say, yes, I'm opening a checking account and it's seamless. And it's just, it's not a re-application because they're already on the system, they are in the system, and what is that uptake, right? And so ask me that question on March 31, 2020, and I'll give you a best answer. No, but in all seriousness, right, because that's the type of time frame that 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 lots of things that can be done, right. 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, right. And they were very concerned about the omni-channel experience, how you track the ticketing, how you trust -- track customer services 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 you're thinking of going out and getting business deposits. But the Holy Grail for many banks has always been, oh, we're 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 and be a better opportunity, it's -- I'll look forward to hearing of your successes as we move forward.

I will look forward to having those successes.

Okay. What's the number of Nationwide customers that you're going to pick up? And how...

It's around 80,000.

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

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

Okay. Because you really can't -- I mean, you have, with the H&R Block, 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 could execute it of that platform opportunity. But look, it's a lot, and it's new. And obviously, yes, like you said, it's -- but I think that the interesting idea is that if we could 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 will increase the conversion there. But obviously, it is difficult across the board acquiring customers, and financial service is expensive. That's why Chase is off -- out there offering $500 to people to open an account, right? And they weren't intending 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 it's a -- we've got a lot of execution ahead of us.

Okay. 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 other -- either other loan origination platforms or other areas of the bank?

There is -- well, so we do have a purchase money team as well. There is -- what we -- I think I'll call up there that right now it's interesting how these partnerships evolve. There's sort of the tale of 2 businesses, the organic side and our own customers that come to us for these mortgages and portfolio retention, which is also something that retail does. All 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's okay. 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 an allocation and commitment issue of 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 are performing well.

So I just like to thank everybody, and thank you, very much for your time, and we'll talk to you next quarter. Thank you.

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