Axos Financial, Inc.

Hello, and welcome to the Axos Financial Q4 2021 earnings call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to John Eli, Investor Relations. Please go ahead.

Thanks, Kevin, and good afternoon, everyone. Thank you for your interest in Axos. Joining us today for Axos Financial Inc.' 's fourth quarter 2021 financial results conference call are the company's president and chief executive officer, Greg Gerbrand, and executive vice president and chief financial officer, Andy Micheletti. Greg and Andy will review and comment on the financial and operational results for the three and 12 months ended June 30th, 2021, and they will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Security Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing it over to Greg, I would like to remind our listeners that in addition to the press release, we also issued an earnings supplement and an AK with the financial disclosures. All of these documents can be found on the Access Financial website. With that, I'd like to turn the call over to Greg. Thank you, Johnny. Good afternoon, everyone, and thank you for joining us.

I'd like to welcome everyone to Access Financial's conference call for the fourth quarter of fiscal year 2021. ended June 30, 2021. I thank you for your interest in Axos Financial and Axos Bank. We ended fiscal 2021 with strong net income and loan origination growth, stable net interest margins, excellent credit quality, and industry-leading returns. Axos reported fourth quarter net income of $54.3 million for the three months ended June 30, 2021, and earnings per diluted share of $0.90. For the 12 months ended June 30, 2021, Net income and earnings per share increased by 17.6% and 19.5% to $215.7 million and $3.56 respectively. Our book value per share was 23.62 at June 30, 2021, up 14.9% from June 30, 2020. The highlights for this quarter include the following. Net interest margin was 3.92 for the fourth quarter. down slightly from 3.96 in the third quarter of fiscal 2021, and up three basis points from 3.89% in the fourth quarter of 2020. Net interest margin for the banking business was 4.16, compared to 4.23 in the quarter ended March 31st, 2021, and 3.95 for the quarter ended June 30, 2020, up 21 basis points over that prior year's comparable quarter. For all of fiscal 2021, net interest margin for the banking business was 4.11, down slightly from 4.19 in fiscal 2020, excluding tax-related H&R Block loans, which we discontinued in fiscal 2021. Net interest margin for the banking business was up year over year. Excess liquidity accounted for all of the small sequential decline in both our earning asset yield and net interest margin this quarter over the prior linked quarter. Loan yields continue to hold up well at 5.15%, a five basis point increase from 5.1% in the quarter ended March 31st, 2021. We continue to reduce our funding costs by replacing higher cost deposits with non-interest bearing demand deposits. Non-interest bearing deposit balances grew by approximately 28% over the prior fiscal year, An end-of-period cost of interest-bearing demand and savings accounts went from 58 basis points at June 30, 2020 to 18 basis points at June 30, 2021. Our efficiency ratio for the three months ended June 30, 2021 was 51.66% compared to 50.64% in the third quarter of 2021. The efficiency ratio for the banking business segment was 45.2% for the fourth quarter of 2021 versus 42.33% in the third quarter of 2021. The sequential increase in overall and banking efficiency was a result of higher data processing expenses related to our software initiatives and enhancements to our bank's operating systems. Diluted earnings per share was 90 cents, up 19.2% from the 75 cents in the year-ago quarter. Our corporate tax rate decreased, from 29.5% in the third quarter of 2021 to 28% this quarter. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 15.56% in the fourth quarter and 16.51% in the fiscal year ended June 30, 2021. Capital levels remain strong with Tier 1 leverage ratio of 9.45 at the bank and 8.82% at the holding company, both well above our regulatory requirements. Our credit quality remains strong with no loans and forbearance. Non-performing assets represent 1.6% of total loans and leases at June 30, 2021, compared to 1.14% at March 31, 2021. Charge-offs excluding tax-related products were one basis point annualized of average loan and lease balances this quarter. Excluding mortgage warehouse and single-family jumbo mortgages and our bulk sale of $31.5 million of PPP loans, Ending loan balances increased by approximately $270 million, up 15.5% annualized from the third quarter of 2021. For the quarter, strong originations in multifamily, auto, and C&I lending were offside by record high payoffs in jumbo single-family loan balances, lower period ending balances in single-family mortgage warehouse, and $31.5 million of PPP loan sales. Ending loan and leases were up 7.4% year-over-year, but decreased by approximately $296 million from the third quarter of 2021. Total loan originations for the fourth quarter ended June 30, 2021, were $2.1 billion, up 27.6% from $1.6 billion in the year-ago period. Q4 2021 originations were as follows. $242 million of single-family agency gain on sale production. 380 million of single-family jumbo portfolio production, 186 million of multifamily production, 37 million of commercial real estate production, 83 million of auto and unsecured consumer loan production, and 1.1 billion of CNI loan production, resulting in a net increase of $232 million. Mortgage banking gain on sale generated 2.9 million of mortgage banking income compared to 9 million in the third quarter of 2021, and $12.7 million in the corresponding quarter last year. Originations decreased by approximately 36.3% linked quarter to $242 million, while gain on sale margins dropped slightly to 323 basis points from 333 basis points in the third quarter of 2021. The outlook for mortgage banking remains relatively stable for the fiscal 2021 fourth quarter. Our pipeline of single-family agency mortgages was $193 million at 7-9-2021. Ending balances in the mortgage warehouse portfolio were up $43 million from the $570.8 million of June 30, 2020, and down $354 million from the elevated March 31, 2021 balance of $968 million, highlighting sensitivity to overall volumes in the mortgage market. We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships. Our single-family warehouse business generates strong risk-adjusted returns for us and remains a small part of our overall loan book, representing approximately 5% of our June 30, 2021 ending loan balances. Our diversified consumer and commercial deposit and securities businesses continue to benefit from the secular shifts toward digital banking. Consumer deposits, representing approximately 42% of our total deposits at June 30, 2021, is comprised of consumer direct checking, savings, money market, and non-interest-bearing accounts. The weighted average interest-bearing demand and saving deposit costs were 18 basis points at June 30, 2021, down by 40 basis points compared to 58 basis points at June 30, 2020. Average non-interest-bearing demand deposits was $2.6 billion in the quarter ended June 30, 2021, up 17.5% from the prior quarter. Ending time deposits at 6-30-2021 were down $180 million in quarter and $834 million year-over-year as we replaced higher-cost non-core time deposits with lower transactional deposits. Of the total $1.5 billion, of certificates of deposit of outstanding on June 30, 2021. In the next 12 months, approximately $1 billion at a weighted average rate of 117 basis points will mature. Our small business and specialty consumer and treasury management businesses, including our fiduciary services businesses, continue to contribute to our low-cost deposit growth. Axel's clearing continues to generate low-cost deposits that we will be able to put on or off balance sheet. Ending cash deposit balances at Axos Securities was $730.2 million, with approximately $320 million on Axos' balance sheet at June 30, 2021. The pending acquisition of E-Trade Advisory Services will add over $1 billion of incremental cash sweep deposits that we can use to fund loan growth, replace maturing certificates of deposit, or keep off balance sheet and generate fee income. Our credit quality remains solid. Annualized net charge-offs to average loans and leases, excluding seasonal tax products, was one basis point this quarter, compared to five basis points in the corresponding period last year. We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021, all of which we fully provisioned for in the prior quarters. Non-performing assets, the total asset ratio was 107 basis points for the quarter ended June 30, 2021, down from 114 basis points in the third quarter of fiscal 2021. Of our non-performing loans, 73% are single-family mortgages, where we have historically had very low realized losses. Of our non-performing single-family mortgages at June 30, 2021, approximately 89.5% had an estimated current loan-to-value ratio at or below 70%, and approximately 99% are below 80% of our best estimate of current loan-to-values. Given the relatively low loan-to-values on our single-family mortgages, we did not anticipate occurring material losses on the vast majority of our delinquent loans. We had no loans in forbearance at June 30, 2021. Other than single-family delinquencies, the remaining real estate delinquencies consist of one hotel loan we previously discussed, which is around $12.1 million of UPB that was sold subsequent to the end of the quarter. We had seven multifamily loans that were 30 to 59 days delinquent for a total value of around $8 million that are at an origination LTV of around 42% on average, and two multifamily loans that are 60 to 90 days delinquent for $1.8 million with an average 55% origination LTV. Our loan loss provision this quarter was $1.3 million compared to $2.7 million in the March 31, 2021 quarter, and $6.5 million in the quarter ended June 30, 2020. The primary reason for the sequential decline in loan loss revisions is a decline in average and ending loan balances. Our total allowances for loan loss was $133 million at June 30, 2021, which represents approximately 1.2% of our total loans and leases, contrasted with one basis points of annualized charge-offs this quarter, excluding refund advances, and related charge-offs, and greater than 17 times the total annualized charge-off rate, excluding refund advance loans. Our loan growth outlook for fiscal 2022 remains essentially unchanged at high single digits to low teens. Demand and production in all of our lending areas continue to be solid, although elevated prepayment rates in our single-family mortgage book may continue to represent a risk to maintenance and growth in that portfolio. we continue to add personnel in our lending areas to bolster loan growth. Our loan pipeline remains solid, with approximately $1.7 billion in our consolidated pipeline in June 30, 2021, consisting of $193 million of single-family agency gain-on-sale mortgages, $480.4 million of jumbo single-family mortgages, $230.7 million of multifamily and small-balance commercial real estate term loans, $683 million of CNI and CRSSL loans, and $97 million of auto and consumer unsecured loans. We continue to generate strong returns, with return on average common shareholder equity of 15.56% and 16.51% in the three months and 12 months ended June 30, 2021, respectively. Our efficiency ratio for the banking segment was 45.2% for the quarter ended June 30, 2021, compared to 42.33% in the last quarter. The slight uptick in our efficiency ratio reflects lower mortgage banking income and continued investments across our businesses. Our capital ratio remains strong with Tier 1 leverage to adjusted assets of 8.82 at the holding company and 9.45 at Axos Bank. We have access to approximately 2.5 billion of FHLB borrowing, 2.3 billion in excess of the 186 million we had outstanding at the end of the fourth quarter, Furthermore, we had $2.1 billion of liquidity available at the Fed discount window as of June 30, 2021. Our strong organic loan growth and returns, coupled with a clean capital structure, allows us to make opportunistic stock buybacks and acquisitions, such as the E-Trade Advisory Service acquisition that we announced last quarter. Our securities business had an excellent quarter with strong growth in fee income and net interest income. Broker dealer fee income increased 12.6% in the fourth quarter compared to the corresponding period last year due to higher client activity. Securities margin balances increased 58% year-over-year to $327 million, while stock lending increased $256 million in the June 30, 2020 quarter to $729 million in the June 30, 2021 quarter. Although ending deposits at Axos Clearing decreased by approximately 8.1% linked quarter to $730 million as clients increased their risk tolerance, deposit balances are up 62% year-over-year due to growth in Axos Clearing's assets under custody. In April, we announced the signing of an agreement with Morgan Stanley to acquire their RIA custody business, E-Trade Advisory Services. With approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits at the time we announced the deal, EES provides a turnkey RIA platform for independent RIAs and TAMPs, an experienced team of custody specialists with decades of experience working with RIAs and advisors, incremental fee income, and low-cost deposits. We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest, and our ability to provide additional technological and banking services to these RIAs, advisors, and their end clients make us an ideal strategic acquirer for EAS. We have made significant progress over the past three months across a variety of conversion and integration activities. Having already received FINRA approval to convert the EAS business to a broker-dealer platform, we feel good about achieving the remaining milestones required to close the acquisition in August of 2021. We remain committed to a smooth client transition and to invest to grow the RA custody business. As a reminder, the business generates fee income from asset and transaction-based revenue and net interest income from client sweep deposits held on or off balance sheet. We will provide an update on the expected financial impact, including EPS accretion, expense and revenue run rate, and deposit balances when the deal closes. We soft-launched our self-directed trading platform at the end of June – Version 1 of the self-directed trading offering is focused on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online login and mobile app. We see lots of cross-sell opportunities across our lending and fee-based businesses, including Axos Invest, over time. While it's too early to draw any meaningful conclusions from our self-directed trading launch, It provides another customer acquisition and monetization tool in our growing list of lending, deposit, and fee-based services to our customers. I am proud of the Access team for staying focused on serving our clients and delivering strong earnings growth and returns to our shareholders over the last 12 months during a challenging and uncertain environment. Our strong organic capital generation affords us the ability to invest in existing and new businesses technology in our team. Our deposit platform investments have generated meaningful increases in non-interest-bearing deposits, significantly lowered our cost of interest-bearing deposits, and allowed us to earn fees from placing deposits at other banking institutions. I firmly believe that our investments in our security businesses will pay meaningful dividends to support future fee income, deposit, and loan growth. Our technological investments we have made in our banking platform are generating strong interest from EAS advisory clients, one of the many indications that strong technology and product synergies exist across these businesses. I'm excited about the cross-sell potential across each of our three businesses, consumer banking, commercial banking, and securities. The pending EAS acquisition will accelerate our time to scale and profitability in a growing market segment and provide an excellent source of customers for Axos banking products. Despite a challenging interest rate and competitive environment, we are better positioned than ever to maintain consistent profitable growth. Now I'll turn the call over to Andy, who will provide additional details on our financial results. Thanks, Greg.

First, I wanted to note that in addition to our press release, an 8K with the supplemental schedules was also filed with the SEC today and is available online through EDGAR or through our website at Access Financial. I will provide some brief comments on several topics. Please refer to our press release or our SEC filings for additional details. As Greg mentioned, we expect to close the acquisition of E-Trade Advisory Services, or EAS, in August of 2021. In anticipation of the EAS closing, we took steps to prepare the bank balance sheet for an increase of up to $1.2 billion in cash and deposits at closing. Average deposit balances increased this quarter compared to last quarter's average for the three months ended March However, with targeted rate decreases in certain savings and money market customers, we ended the quarter with a decrease in deposits of $796.7 million. With the decline of primarily higher rate deposits, the bank was able to reduce its point-in-time deposit rate for all interest-bearing checking and savings accounts to 18 basis points at June 30, 2021. compared to 31 basis points at March 31, 2021, while making room on the balance sheet for some or all of the EAS deposits expected in the quarter ended September 30, 2021. The deposit decrease was funded in part with the bank's excess liquidity at the Federal Reserve Bank, resulting in a $432.4 million decline in low-yielding cash and cash equivalents at June 30, 2021, compared to March 31, 2021. The bank is in a position to maximize the use of EAS deposits when it closes and does not expect the acquisition to adversely impact the bank's net interest margin or its Tier 1 leverage capital ratio next quarter. We'll provide an update on all the full financial impact of the EAS acquisition when it closes. Moving to non-interest expense, for the quarter ended June 30, 2021, operating expense was $81.9 million, up $1,050,000, or 1.3% from the linked quarter ended March 31, 2021. The following detailed discussion excludes any future impact from the EAS acquisition. Salaries and related costs declined by $1.3 million on a length quarter basis, primarily due to favorable adjustments to compensation costs related to loan production and other compensation estimates. Next quarter, we would expect salaries to increase back to the third quarter level. Occupancy costs increased $1.1 million on a link quarter basis, primarily due to a $900,000 one-time charge associated with subleasing the New York City office space. Next quarter, we would expect the occupancy costs to decrease to approximately $3.2 million. Data processing costs have been impacted by growth in customers, product enhancements, and by initiatives to move legacy network equipment into the cloud. On a linked quarter basis, data processing costs increased 2.8 million. Approximately 1.2 million of that increase was project-related and will not recur next quarter. FDIC and other regulatory fees on a linked quarter basis declined $900,000. as expected, primarily due to FEIC insurance formula adjustments. Going forward, we expect next quarter's costs to approximate this quarter. Moving to income taxes, our effective book tax rate for the year ended June 30, 2021, was 29.45%, down 70 basis points from the 30.15% effective tax rate for the year ended June 30, 2020. The largest driver of the changes in our income tax rate is the timing of our employee RSU vestings and the market price of our common stock at the time of that vesting. If the common stock price at the vesting date is higher than the price of our common stock at the time of the RSU grant, there is a favorable impact on the book tax rate The reverse is true if the stock price is lower at the vesting date. A large portion of the RSUs previously issued are scheduled to vest during our fourth quarter of the fiscal year, making the effective tax rate more volatile in the fourth quarter depending on our common stock price. For this quarter ended June 30, 2021, our effective tax rate was a favorable 27.99%. While last year, the effective tax rate for the fourth quarter was 33.31%. With that, I'll turn the call back over to Johnny Lai.

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

Thank you. We're now conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Andrew Leash from Piper Sandler. Your line is now live.

Hey, good afternoon everybody. Thanks for the detail on the deposit transactions here near the end of the quarter. But I guess absent bringing anything on from EAS, how should we look at the size of the average earning asset base here? Intra-quarter securities borrowed and margin lending was much higher than it has been recently. And then it's also been higher at the end of last quarter. Is this a new run rate for that line? And can you explain what may be causing some of the flows here?

Sure. Yeah. No, I think we continue to have strong growth in our stock lending programs. And we are expecting that average to continue to creep up. So as a run rate, it is not a bad place to start.

Okay. Got it. And then... It looks like then with interest-bearing deposits like the liquidity intra-quarter, some of that's been reduced here to start this first quarter. I mean, have you guys – is there anything you can share on what you do expect to bring on from EAS, or is it still to be determined?

Yeah, we'll make a final call as we get closer. And, of course, we may even change that mix throughout the quarter. But I think the operative thing, Andrew, is that excess liquidity is yielding only 15 basis points. So the ability to manage it down and then get the better effective use from our deposits will be strong for the use, capital use of the bank.

Got it. Okay. If you're sitting here with a margin of 392 for the fourth quarter with this less liquidity that you've had for managing some of these deposits out ahead of the closing of the deal, is it safe to assume the margin should rise from this level?

Yes. That makes sense.

Okay.

That helps a lot. All right. I'll step back. Thanks for taking the question. Thank you. And this question today is coming from Marla Backer from Sedota. Your line is now live.

Sorry about that. Yes. Thank you. So I'm wondering, you know, obviously there was, you know, a very strong quarter and I guess, you know, where do you see perhaps a certain categories where you see, you know, potential for, continued growth based on just, you know, what you've seen subsequent to the quarter end?

Sure.

So on the lending side, you know, single family I think is definitely going to either be stable or down a lot less than it was in the prior quarter. That's been obviously the jumbo book has dragged down loan growth, which has been very strong on the CNI side. The CNI side, including Crestle, looks good. The auto and unsecured side also looks good. So warehouse lending really will be more stable now, I think. There may be a slight pop given that rates have come back down a little bit and mortgage banking is maybe a little bit stronger. It's not substantially stronger, but a little bit stronger there. So On a loan growth side, I think it's hard to know because the prepay side, generally what you might expect to see is from a refinance perspective when you have these rate drops and you have a loosening of credit, which happened post the COVID kind of normalization or the COVID concern and the tightening and then a normalization, that you might see enhanced prepays. It looks like prepays are slowing down a little bit in this month, but it's still hard to tell. It's still early. So I think forecast, obviously, the CNI side has been strong. Auto has been strong. We won't have the same challenges we had with PPP loan reduction with the same level of adjustment on warehouse. And then single family, the pipeline is very good. It's up from the quarter level. you know, there's a lot going on there in a very positive way. I just don't want to say that it's going to absolutely grow this quarter, but certainly I think it's fair to say that it should be more stable. You know, mortgage banking probably will have a chance to be up, but also, you know, I wouldn't say it's going to be up, you know, incredibly materially. Obviously, you've got the the CD runoff that helps on the margin side, but that also, you know, loan rates in general are lower in some categories than they were. And as we're, you know, continuing to expand our business, the loan rate side, I think I'd be careful about forecasting too much margin growth because we are, in an effort to grow loans, we are probably having lower average rates on production that come through. So I think you have to watch that there. And then on the security side, you know, that business continues to grow, obviously. We expect to close EAS in the fourth quarter. There's a lot of opportunity there to make that business more efficient and to grow it. We have a lot of good client activity, but that activity is going to take several quarters at a minimum to be able to realize because we have to go in there and really add an operating efficiency and a discipline that's going to take some time to do that. So the contribution that's really going to happen there is going to be more you know, frankly, it's going to take almost this year to be able to go through all that and really get that humming in the way that it could. It still should be accretive, but, you know, I don't think materially accretive this next six months.

Okay, thanks very much for that call.

Thank you.

Thank you.

Next question is coming from Raggy Tenner from D.A. Davidson. Your line is now live.

Hey, good afternoon. It's Gary Tanner. I want to ask a couple questions. Greg, just to clarify a point you just made in terms of mortgage banking potentially being up. Are you talking about the fee income line?

Mortgage banking, yeah, mortgage banking fee. I think it could be. I wouldn't – yeah, look, it could be a million bucks up or something like that, a million and a half. I mean, it's not going to be back to where it was, but – Yeah, there's a little more activity, but margins are also maybe a little compressed, too.

Yeah, gotcha. I just wanted to clarify that's what you're referencing. In terms of the broker deposits, and you guys talked about the kind of deposit activity a little bit in the quarter, but broker deposits down to about $600 million cut in half year over year. As you get the additional deposits coming in from EAS, would you expect to work the broker deposits down even further from the period end number? Or is it just kind of balancing the other aspects that you mentioned in terms of the loan growth or keeping some of it off balance sheet?

Yeah. So I think, you know, a good portion of the broker deposits, let's say rounding is about 300 million is CDs. So clearly we're looking forward to the CD repricing. That's part of the billion-dollar number that was in Greg's script where he said we've got a billion dollars coming off over the next year. So that, from a rate perspective, a good portion of that is well above 1%. So that will be effective. Whether we bring in from time to time other liquid broker deposits, That's still entirely possible. As you know, the pricing on that product is still very favorable. So depending on our needs, we might consider using it. But in general, expect the CDs to come down and then the non-CDs to be around the same or maybe up a little bit.

And I think, obviously, we have more than enough off-balance sheet liquidity even without the EAS But when we have that, we have that liquidity. But I think part of this is that because these broker sweeps are non-brokered to others, we have a lot of demand from other institutions for those deposits. And that demand could be at a higher rate than this relatively de minimis amount that of broker deposits, which some of them were termed, which half of them, more than half of them were termed out, right? So sometimes we use broker deposits to, you know, look at interest rates and term out certain types of lending that we think, you know, may deserve that and we think the rates are favorable in that market. So, you know, we obviously are in a very good liquidity position. We can also think about how to convert some of that liquidity into fee income, and if, you know, over an extended period of time, over years, as we grow, you know, the EAS business and the clearing business, that doesn't only, you know, that's a significant opportunity if rates rise, but even without it, there's still a lot of banks that are willing to pay up for those deposits.

Thanks for the call. And then last question for me. On the broker-dealer fee income line, sequentially lower, is there a seasonality in that business that perhaps I didn't appreciate, or is there anything else that kind of pushed that number lower from fiscal third quarter to fourth quarter?

Sure. It depends on a number of things. Part of it is market pricing on the stock loan, stock borrow side. Not all transactions are equal in terms of spread with regard to that. So that can be a factor in that. Obviously, our deposits came down slightly during the period, so less fee income from off-balance sheet deposits. But those are the primary factors that weigh into that side for it.

Thank you. Thank you.

Next question today is coming from Michael Perito from KPW. Your line is now live.

Hey, good afternoon, guys. Thanks for taking my questions. Thank you. to a comment you made just about making EAS more efficient. And I was hoping to spend a little bit more time on that. What does that look like exactly? Is that on the cost side? Is that on the revenue side? And maybe putting some of those deposits to work on your earning asset base or a blend? Or just curious if you could expand. I know you guys aren't updating numbers per se, but just expand a little bit about what that might look like post-close.

Yes. We have a consulting team that focuses on operational efficiencies in the institution broadly. Morgan Stanley was kind enough to let that team get in and do a lot of work around just core operations straight through processing and essentially the technologies that we bring from an interaction perspective with the advisors with our existing applications and banking platforms, and then all the internal types of robotic process automations, our way that we use our customer ticketing systems, all those kind of things are in great need there. So I think there's real opportunities to just improve the core operational nature of that business, and we're going to get after it pretty quickly. So what that should result in is an ability to grow the assets there without adding significant incremental cost. And to the extent that there's turnover there, we may be able to shift the cost, reduce it, but also shift it to more highly value-added activities like product development from activities that could be more automated like customer experience and service. I mean, to make this very tangible, you know, the way that money gets into the market is a customer mails the advisor a check, the advisor mails us the check, right? So, you know, if you have an application, a banking application that lets the customer take a picture of the check, then everybody's happy, right? And believe me, the advisor doesn't want to touch the check. We don't want to touch the check. No one wants to touch the check, right? You know, the advisor needs to send, you know, a disclosure to the client. Well, if a client, you know, our app can do that, right? So, you know, I mean, none of it is sort of – it's not rocket science, but it is – it's just a process of going in there and doing that. You know, if they don't have an automated account opening system, we do, right? right? So it's about hooking that up and rolling it out and making sure it works and the change management process and those kind of things, right? So there's a lot of technological synergies that we can bring to the business. It's not going to be overnight, but it will be, I think, very meaningful over time.

Very helpful. And I know it's anyone's guess about interest rates these days, but I was wondering, perhaps a stupid question, but can you, Greg or Andy, give us just a brief comment on how the securities business will react if we enter a higher rate, a rising rate environment? I mean, my hunch would be that it would be pretty positive and that the deposits would remain pretty low cost and some of the margin lending and stuff would increase, but I just want to confirm that and see if you have any other parameters around it that might be helpful.

Yeah, I think that's right. You know, we expect that, and we saw this, frankly, you know, the rate on the deposits at Axios Clearing was three basis points when Fed funds were 250. It's, I don't know, do we cut it from three? I don't know. Whatever. It's, I think it's three today, right, or something. So it's really, you know, there's essentially these businesses, you know, I don't want to promise, you know, a beta of, zero or something, right? But it's very, very small. And this is direct to the bottom line sort of revenue. So these businesses have a, you know, our goal is to make these businesses run essentially valuing those deposits, you know, at, you know, no cost. And then when rates rise, that's all pure profit to the business. I think we can get there. You know, we're not quite there yet, but it's not that far away. So that's, and I think that we can get there, frankly, just purely on operational efficiencies over time. It's going to take a while, and there's a lot of, obviously, growth and revenue opportunities, too, there. So, yeah, it creates a very favorable profile for the institution broadly in an upgrade environment, and I think swamps any potential you know, negative impacts that we would have from higher rates related to, let's say, mortgage banking, you know, income going down or something. And, I'll be honest, do you have any comments?

No, no, I think, you know, the whole point is it will be favorable. It will increase our ability to make choices as well in terms of where we put deposits. So, it's clearly favorable.

Right, yeah, our long-term goal is to continue to really push very hard on all our deposit businesses, which are doing well and growing and growing, you know, good low-cost core deposits. The securities business is then, you know, it's a choice how, you know, how much do we need, how much we place other places, and that decision then becomes a fee income lever that's much more tangible in a high-rate environment or a higher-rate environment.

Got it. And then that's a really helpful caller. Just kind of to close the loop on the securities and EIS questions here, just for me anyway. Any thoughts, Greg, from like an ERM standpoint, like in terms of how big you're willing to let this business get as a portion of the plan? I mean, obviously, it's taking a lot of effort today. You guys broke even, which is great, but I imagine you have grander aspirations than that. But just is there any parameters around kind of the growth of this business, how big of a piece of act so as you think it could be or you're comfortable with it being? It's probably a little too early, but just any general thoughts on that?

Yeah, look, I think that the EAS business is an incredibly safe business. I mean, right now, I mean, frankly, from a lending perspective, what's interesting is that's another opportunity there because since they were not a broker-dealer-compliant business, They didn't do margin lending for those customers or S-block lending. We intend to really seamlessly integrate those products into that offering for those RIAs. I think that this business in general is a significant risk reducer for the business overall, and here's why. It gives us a steady source of high net worth customers. These high net worth customers are you know, sticky to their advisor. The advisor is sticky to us. And we're not competing with the advisor. We're just helping the advisor. So, you know, the advisor needs, you know, the advisor's customer comes and asks for a mortgage. Well, they don't want them in Morgan Stanley looking for that mortgage. We have that. If they need, you know, a car loan, if they need an integrated checking account, if they need an S-block loan, a one-touch S-block loan off of an app, you know, hey, that's pretty good too, right? All those things, keep assets with the advisor. They're really safe. So the loans that will come out of this will be S block and margin. Those are very safe. You know, the risk associated with the clearing business is a little different. It's really, you know, it's operational risk around you know, short selling, things like that. So we have very defined limits with respect to those aspects. So I think when you think about limits and risk, I think it's the absolutely wrong way to think about it as, you know, the overall size of the business or something. And the right way to think about it is there are specific risks within the business. Those specific risks, like any business, have to be managed. And, you know, they're hierarchically ranked. and we pay a lot of attention to the ones that, you know, can bite us. And I think, you know, we've done a much better job, and, you know, we had that one issue right when we, you know, it was two weeks after we bought the business, and we didn't have the access to that business that we've had to EAS. And, you know, we've gone in there and made sure that those risk controls are in good shape. a really, really positive thing. I mean, let's face it, right? If you look and you would have said, you know, predicting three years ago, would we have a 15 basis points average cost of deposits on all of our, you know, demand deposits and then, you know, all of these excess liquidity that we have and, you know, we're farming that excess liquidity out to banks even though we have had, you know, pretty good loan growth. You know, I think that that's another example of how it reduces the overall risk to the institution. So it's not really any different. It's a risk management exercise, and that's really all. But it's nothing to do with the overall sizes.

And just a point of clarity, Mike, that obviously assets under custody, which is the primary grower, you know, is not on the books of the broker-dealer. So assets under custody can grow rapidly, and it will cause some balance sheet growth, but it's not, you know, not a dollar for dollar at all. So it gives us a lot of off-balance sheet leverage.

Got it. Really appreciate all that, caller, Greg and Andy. Thank you guys for taking my questions. Yeah, thank you.

Thank you. Next question is coming from Steve Moss from B Riley Securities. Your line is now live.

Good afternoon. Greg, you mentioned earlier that rates were lower. Just kind of curious, you know, how much lower, where are you seeing loan prices this day?

Yeah, I think we... I think it was somewhere around, I think I said before, like 35 to 40 basis points lower on single family. You know, maybe I'd carry that over on the auto side, too, I think is probably reasonable. And then the CNI side, I think I'd use, like, with fee maybe sort of all in, in the low fives as an average rate. But, you know, look, I think we – it depends, right? I mean, you know, things are moving around, and I can tell just by the nature of the discussions there's more competition in certain areas. So, you know, we continue to have to adapt to that, but that's, I think, reasonable color.

Okay. Yeah, I –

Yeah, no, go ahead. Our guidance still on the NIM, you know, is in, you know, the 3.8% to 4% range. So I think we're just cautious that we could have some pressure to continue to grow. But that's, I think, from a loan rate perspective, you know, we're still feeling good about, you know, our NIM and our ability to keep it.

And part of the reason... when you saw that the fact that loan rates went up over the quarter was that that was a remax because the warehouse lending business has probably one of the lower average rates in the bank. And so when that shrunk, it kind of moved that around a little bit. So I don't think you should use that as indicative of the idea that that would carry forward next quarter.

Right. Okay, that's helpful. And then just in terms of a little more color maybe on the types of businesses and properties that are driving CNI and Crestle growth these days?

Yeah, it's a lot of multifamily repositioning, construction, self-storage, some of that. And that's, you know, primarily, that's a lot of it.

Okay, great. Most of my other questions have been answered. Thank you.

Thank you.

Thank you. Next question today is coming from Tim Coffey from Jenny. Your line is now live.

Great. Thank you. Afternoon, gentlemen. Good afternoon. Hey, Greg, looking at origination activities in the quarter, they're up about 50% quarter over quarter, and the pipeline, I think you said, was around the same level as the originations for the quarter. So I'm wondering, are you seeing greater participation with kind of your general ecosystem by clients, or is this more of a drive to find a home for that excess liquidity?

You want to take that, Andy?

It's going to be a little bit of both. I think clearly we're looking at originations at a level to ensure that we can cover payoffs. And so the origination machine, frankly, when you have higher levels of payoffs, has to work harder. So targeting-wise, we're looking at our customers. As we go through, we have a lot of options. We will touch bases with all of our existing customers, of course, who provide us guidance on where we need to be.

Yeah, look, I think that just as far as where originations have to go, the math is, right, the bigger your loan book, if the prepay rate is steady, Your originations have to go up in order to grow loans. So I think that every one of the businesses has higher targets. I think there's good possibilities they can hit those targets, but they're not slam dunks. And we have a fairly diverse set of lending platforms, so none of those lending platforms have to bear the full burden of this The real element, the warehouse lending side of it, when we went up so much, and we tend to be higher priced than some of the other lines, so we know we're going to fall when there's a reduction in demand for mortgage loans, particularly on the agency refinance side. So we knew that was going to happen. I think the key is that we've been spending a lot of time making sure we can stabilize and grow the single-family business, and I think we have a good plan for that. We're seeing lots of progress. The pipeline is up, all those things, but it really depends on what happens with the prepayment side. I mean, we thought we had reached a high, and we thought we were in a good shape because the originations were pretty good, and then it got higher. It seems to be slowing down a bit, but we really don't have enough time to in this quarter to really be able to get a perfect assessment of that. But, you know, there's a lot of things we can do to grow that business, and we are doing them. I mean, part of what happened, too, in this is that when COVID happened, we really pulled back a lot. We basically had some growth plans, and immediately when that happened, we really tightened up credit. We really pulled back. We didn't do some of the sales initiatives we had, some other things that we intended to do, some Salesforce expansion. And so when the single-family market came back so strongly, I think we were a little flat-footed with what we needed to be doing strategically. I think we've righted that ship now. So now it's just how long does it take to have all those things sort of flow through. For example, we had markets that were really good for us where – you know, when we were more conservative, the originator might have gotten frustrated and decided that this wasn't the right place, and we just said, okay, well, we'll leave this for now and just see how this goes. So, you know, things like that. Obviously, I frankly think that the market came back more quickly than we expected. Clearly, I don't think people would have looked and said, gee, home prices are going to be where they are if you were sitting there in March 2020. So, I think that we have a good plan there. Everything's going in the right direction. Does it take another quarter to get there? That's possible, but I definitely think, as I said previously, that we're going to be more stable. Either we'll be slightly growing, slightly down, maybe more than slightly down, but it'll be in that range. It won't be where it is this prior quarter.

Okay, thanks. I appreciate that. That's good color. And then let me know if I'm thinking about this right. One of the great things about bringing on all these deposits and cash from EAS is that it gives you a lot more optionality and things you can do in your funding side. And one of the big benefits of it is that it's going to likely lower your deposit beta, you know, going into next year or whatever, you know, next year for sure, and definitely it's going to show up when rates rise. Is that the right way to think about this?

Yes, absolutely.

Absolutely. Okay, great. Thanks. Those are all my questions. Thank you.

Thank you. Next question today is coming from David Chivarine from Wedbush Securities. Your line is now live.

Hi, thanks. I wanted to ask a clarification question about the expense guidance. You gave pretty detailed guidance. So, for instance, the salaries, you mentioned about $39 million in the third quarter. I'm assuming that includes, that's inclusive of EAS and the other expense items you gave?

It is not. So all of my guidance was without EAS.

Got it.

So yeah, we're going to, when we close, when we close EAS, we're going to release a presentation that will provide guidance that would, you know, whether, you know, I think It will allow you sufficient information to make reasonable estimates about what that will look like there.

Sure. We've given early estimates, if you go back to our original presentation, so operating expenses will move up significantly. So, yeah, so these numbers are small relative to once we add EAS. Yeah, but sole revenue, so.

Yes. Just to be clear.

Yeah.

Yep. No, that makes sense because I was modeling, you know, much higher than what you had mentioned. So that's why I was asking about the clarification. And then on the deposit side of things, given how much of a kind of step down we saw, which is clearly a good thing with the improving deposit mix shift, that it almost seems like based on the trend that the new deposits coming on board would essentially just replace what the decline is in It seems as if those balances could still be declining here in the third quarter. Is that the way to think of it? And so the loan-to-deposit ratio may be somewhat kind of stable-ish here around 105?

So, yeah, so there's a number of moving pieces. One of the pieces on the loan-to-deposit ratio is how much you grow. Greg is just giving guidance on kind of where we think we are. We think there's a chance we grow next quarter. So with growth and filling that hole, obviously deposits will grow from the current level that we have. The decline of 700, 800 million can instantly be filled with other deposits. So clearly we expect deposits to grow, you know, after the EAS closing.

Yeah, I think that with respect to this, right, so the moving pieces are we've got good momentum in our commercial deposit businesses at very low cost. So they have nice pipelines. Small business continues to grow. So we have that organic growth of the deposit side. We obviously have excess deposits and clearings. we'll have access to positive EAS even with growth. So the question is what we do with those. There's demand at good rates from other institutions. So we've got to figure that out and look at what that looks like and decide. We may end up bringing them on balance sheet and then placing them thoughtfully over a period of time in other institutions. And that may take several months. So, you know, those are the variables that we'll be looking at.

Yep, that makes sense.

Thanks very much.

Thank you. Our next question is coming from Edward Hamelgram from Shaker Investments.

Your line is now live. Yeah, hi, Greg and Andy.

Hey, Ed. How you doing? Good. You know, you're from EAS, right? What do you view the potential for margin lending there? What kind of rates do you expect?

You know, I really, I don't want to speculate on that right now because there's several factors that have to come into play. I mean, first and foremost, we have to assess the core operating system of that business doesn't yet have the capability of actually doing margin lending. Now, we have that ability and we basically mimicked the data in a system that does, but we're still working through the timing of that, then there's definitely been RIAs who have been precluded from working with EAS because they didn't have either S block or margin lending and we talked to them through the existing sales team. And so those clients that would never come before, if they have the product, clearly represent an opportunity by the very nature of the fact that they won't come if they don't get the product. And I just don't have a sufficient feel for what that will look like, although I can say that think about like a 4.5% rate for the clearing IBDs, if that's helpful with respect to what that looks like on the rate side. But again, there's also sharing there and other things, and the RIAs don't share. Look, I think that those sort of things may also end up being part of the overall discussions of profitability when we board clients and things like that. So it's, I just think we have to wait before, uh, before we, uh, know enough to, to really give guidance on that.

Okay. Um, the, um, uh, you know, do you expect to merge your existing business into? Yes.

I'm sorry. Uh,

Merge the business. The actual transaction is that Axos Clearing is buying this business. I think that's what you mean by that.

It's a lot larger. I would assume there's expected surviving institutions. in terms of clearing and stuff is going to be yes.

Well, I think you've got to be careful in how, you know, how that looks. I mean, so, you know, you say, well, how are you comparing it? You know, clearing has more and different and diverse lines of business and revenue. Stock lending, they do margin lending. They obviously have the clearing side of the business. There's $16 billion of assets there. There's, let's say, $23, $25 billion in the EAS side. You know, number of people, actually not as different as you might think. You know, I guess maybe what you're asking is, are we going to have these teams work together to do things together? Yes, but that – we're also going to pile on an incredible number of new things, right? So there's this transition period where we're getting all the technology in place and all those things, and then we have quite big plans for these businesses, and, you know, we've got to go and do them. So, yeah, I think that's maybe where you're going.

Oh, I guess I'm just – it's also – I'm asking, I mean, do you envision down the road, I realize you can't do it immediately, but just operating the two businesses out of one location?

No, no, we don't envision that at all, no. I think that we intend to maintain the Colorado office for EAS. We like that location. We think it's a favorable place to live and a good location. Um, you know, it's, uh, and then, uh, Omaha also has a good, um, pool of securities talent. Uh, frankly, that office is, uh, our Schwab is right close to that office. So there's just a lot of folks who are familiar with the custody business and, uh, in a centennial. So no, I don't think that's, uh, that's where we're going. And I'm, and I'm not thinking about, uh, Maybe what I think what you should do with respect to this is more focus on, look, there's clearly opportunities to reduce costs in the business, and that will have to occur technologically over time. And then with the pipelines we have, we intend to grow that business. And, you know, hopefully as we grow, we can get operating leverage there.

Okay. Then, A.S., lastly, you know, you've, It's been over a year now since you really introduced the enhanced customer software and experience at the bank. What have you seen from cross-selling opportunities and things like that? What's the percentage of loans that you're now making to existing deposit customers or or vice versa? I mean, have you seen some real benefits to this?

Well, I mean, obviously, when you're looking at the cost of funds that we have and we're, you know, sort of approaching the, you know, I'm not going to say we're best in class yet, but as we run off those CDs, we're going to be getting closer and closer to it. Clearly, the ability to simply have customers who are valuing your services rather than your interest rate is obviously important. a, you know, incredible benefit that, you know, you see in the numbers. And then with respect to the, let's say, mortgage banking wave of income that we made here, there was a very, very significant cross-sell to our deposit customers, you know, that was assisted by this. Now, I think that was very good, and it made us a lot of money, The problem with mortgages is that they are one time in nature, right? So if you look at what consumer products that we have that were really retail-focused and that are very developed, the mortgage product really is the one, right? And the cross-sell on both sides, both from a mortgage customer coming in and getting a checking account, that was very high, and from checking account customers that were were refinanceable on the mortgage side. So that worked very, very well. You know, the question with respect to where should it go over time and the product development that we're working on is, you know, how many of these, how many self-directed trading customers will we have who have checking accounts and how many checking account customers will have self-directed trading accounts and how many checking account customers will have, you know, our robo-advisory offerings and how many will eventually have S-block loans and all those things. But it really is – I mean, this is obviously, as you well know, an incredibly long-term strategy. And, you know, as these products roll out, then, you know, I think we'll have to determine –