Axos Financial, Inc.

Greetings. Welcome to the Axios Financial Inc. Q3 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Senior Vice President of Corporate Development and Investor Relations, Johnny Lai. You may begin.

Thanks, Kyle. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Links' third quarter 2022 financial results conference call are the company's President and Chief Executive Officer, Greg Garabrantz, and Executive Vice President and Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Andy will review Greg and Eric will review and comment on the financial and operational results for the three and nine months ended March 31st, 2022, 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 risk and uncertainties. Therefore, the company claims a 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 AxiosFinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. All of these documents can be found on the Axios Financial website. With that, 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 Axios Financial's conference call for the third quarter of fiscal year 2022, ended March 31st, 2022. I thank you for your interest in Axios Financial and Axios Bank. We had an excellent quarter with double-digit growth in loan originations, net income, book value per share, and earnings per share for the third consecutive quarter. Our strong results were broad-based with net interest margins exceeding the high end of our target and balance net interest income and fee income growth across our consumer and banking segments. Axos Securities increased client accounts and deposit balances despite a challenging quarter for the industry due to headwinds caused by macroeconomic and geopolitical turmoil. Axos reported third quarter net income of $61.8 million for the three months ended March 31, 2022, earnings per diluted share of $1.02, representing year-over-year growth of 15.3% and 14.6% respectively. Our book value per share was $26.58 at March 31, 2022, up 17% from March 31, 2021. The highlights for this quarter include ending loan balances of $13.1 billion, up 3.9% linked quarter, or 15.4% annualized. Strong loan originations in our auto, commercial real estate, and various C&I lending loan types more than offset an expected decline in our single-family mortgage warehouse loans. Excluding single-family jumbo and single-family mortgage warehouse, ending loan balance has increased by 9.5% in quarter. Net interest margin was 4.02% for the third quarter, down from 4.10 in the quarter ended December 31, 2021, and up six basis points, from 3.96 in the quarter ended March 31st, 2021. Net interest margin for the banking business was 4.21% compared to 4.3% in the quarter ended December 31st, 2021, and 4.23% in the quarter ended March 31st, 2021. Counter to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth toward the higher end of our annual target through the first nine months of fiscal 2022. We continue to make steady improvements in our funding mix, with non-interest-bearing deposits increasing by approximately $287.8 million from December 31, 2021. Non-interest-bearing deposits represent approximately 33% of our total deposits at March 31, 2022, a significant improvement from 23% in the corresponding period a year ago. The steady growth of non-interest-bearing deposits positions us well in a rising rate environment. Our efficiency ratio for the three months ended March 31, 2022, was 51.21% compared to 48.78% in the second quarter of 2022. The efficiency ratio for the banking business segment was 39.79% for the third quarter of 2022 versus 39.39% in the second quarter of 2022. We achieved positive operating leverage in our banking business as a result of strong net interest income growth year over year, and continuous focus on managing our operating costs. Diluted earnings per share were $1.02, up 15% from 89 cents in the year-ago quarter. Strong growth in our pre-tax, pre-provision income more than offset a 1.8 million or 67% year-over-year increase in our provision for loan losses. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 15.89% in the third quarter, and a return on assets of 1.59%. Capital levels remain strong with a Tier 1 leverage ratio of 10.51% at the bank and 9.43% at the holding company, both well above our regulatory requirements. In February, we raised $150 million of subordinated debt at the holding company to further augment our capital. Our credit quality remains strong with net annualized charge-offs to average loans of five basis points versus three basis points in the third quarter of fiscal 2021. We added 4.5 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was 143 million at March 31st, 2022, representing 22 times our annualized net charge off and 1.1% of our ending total loans. Total loan originations for the third quarter ended March 31st, 2022, were 2.5 billion, up 57% from 1.6 billion in the year-ago period. Loan originations for investment were approximately 2.4 billion, an increase of 99% from the corresponding quarter a year ago. Q3 2022 originations were as follows. 136 million of single-family agency gain-on-sale production, 378 million of single-family jumbo portfolio production, 194 million of multifamily production, 147 million of commercial real estate production, 105 million of auto and unsecured consumer loan production, and $1.7 billion of CNI loan production, resulting in a net increase in ending CNI loan balances of $584 million. We generated $5.7 million of mortgage banking income, compared to $4.6 million in the quarter ended December 31, 2021, and $9 million in the corresponding quarter last year, when refinancing activity was near record high levels. Originations decreased by approximately 24% linked quarter to $136 million, while margins were down due to a normalization in single-family mortgage gain on sale across the industry. Our MSR evaluations generated a $3.1 million gain this quarter, benefiting from the rapid increase in mortgage rates since the end of 2021. We anticipate lower mortgage banking gain on sale in the foreseeable future, partially offset by MSR evaluation gains as rising interest rates reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $59 million, at 4-25-2022. Our jumbo single-family mortgage business appears to have stabilized. We generated $378 million of loan production, offsetting elevated prepayments. Ending loan balances at March 31, 2021, were reduced by $58 million as a result of prime jumbo loans we sold during the quarter. With this location in the secondary market for jumbo single-family mortgages, we expect to gain market share while repricing our loan rates up. Our jumbo single-family mortgage pipeline was approximately $761 million at 4-25-2022. CNI lending had another tremendous quarter. Loan originations were $1.7 billion, reflecting strong growth across commercial specialty real estate, asset-backed lending, and construction lending. Our strong relationships, knowledge in structuring, and track record of execution have resulted in steady expansion in loan production and net balances. Demand remains strong across loan types and geographies, with a backlog of approximately $886 million at 4-25-2022. We have positive momentum across multiple CNI lending verticals and remain confident that we will be able to sustain strong loan growth in our net balances while maintaining our credit and loan yield standards. Ending balances in our mortgage warehouse portfolio were $423 million down $172 million from $595 million at December 31, 2021. We continue to look for opportunistic ways to grow our single-family warehouse business with existing and new customers. We continue to focus on generating good returns while maintaining an efficient operating structure. Our core banking business continues to generate strong and positive operating leverage. Our business banking efficiency ratio was 39.79%, and 39.79% for the three and nine months ended 3-31-2022. We have a series of operational efficiency becomes more mature. Additionally, we continue to incur incremental expenses related to the growth initiatives such as crypto trading, tech infrastructure upgrades for the bank and our securities business, and new products and feature enhancements in consumer and commercial banking. We will be carefully balancing investments in the future while maintaining best-in-class operating efficiency ratios at the bank. We grew deposits by 3.8% linked quarter to $12.7 billion with broad-based growth across our small business commercial and securities deposits. Checking and savings accounts representing 92% of total deposits at the end of the quarter grew at a faster clip, increasing by 6.5% in quarter. Consumer deposits representing half of our total deposits at 3-31-2022 are comprised of consumer direct checking, savings, and money market accounts. The weighted average demand and savings deposits were 22 basis points of cost at March 31, 2022, compared to 38 basis points of cost as of March 31, 2022. We strategically repriced our consumer deposits nine months ago in advance of closing the AAS acquisition. Since then, we've focused on increasing the share of wallet with existing consumer banking clients and on adding new customer deposit relationships through affiliate marketing and cross-sell. Our small business banking and cash and treasury management businesses continue to generate solid deposit growth, providing granular low-cost deposits to fund our organic loan growth. Average non-interest-bearing deposits were $4.2 billion at March 31, 2022, up from $3.7 billion at December 31, 2021. Growth in non-interest-bearing deposits came from securities and commercial deposit businesses. Axos Clearing continues to generate low-cost deposits that we were able to put on or off balance sheet. Total client deposits from our custody and clearing businesses were approximately $2.9 billion at March 31, 2022, as advisors increased their cash holdings as a percentage of client assets in reaction to elevated stock market volatility. We kept $2.1 billion of the $2.9 billion on Axos Bank's balance sheet. The flexibility to keep these low-cost deposits off balance sheet and generate fee income from other banks or on Axos Bank's balance sheet to support our loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase. Our diverse lending and deposit businesses and modest securities portfolio Our securities book with approximately $230 million in ending balances is less than 2% of total assets at March 31st, 2022. About half of our securities are floating rate and the average duration of our securities portfolio is only 2.4 years. Our single family jumbo and multifamily loan portfolio with $3.5 billion and $2.1 billion of loan principal outstanding at March 31st, 2022 is representing approximately 27% and 16% of our total loans outstanding, is much lower than what it was in the prior rate cycle. These loans are 5-1 arms and adjust after five years. With the exception of prime jumbo mortgages we originated and less than $50 million of agency mortgages we purchased last quarter for the CRA purposes, we have no other 30-year fixed-rate jumbo single-family or multifamily loans on our balance sheet. The weighted average duration of the jumbo single-family mortgages and multifamily mortgages on our balance sheet were approximately three and four years, respectively. Note rates on loans originated in our single-family jumbo, multifamily, and CNI loans were 4.12%, 4.24%, and 4.86%, respectively, and the three months ended March 31, 2022, up 18 basis points, down two basis points, and up 31 basis points from the prior quarter. We raised rates for our newly originated 5-1 jumbo single-family and multifamily loans in April, and demand remains solid. CNI loans have been the biggest contributor to our overall loan growth over the past several years. For the quarter ended March 31, 2022, CNI loans increased by $584 million linked quarter to $6.1 billion, representing nearly half of our gross loans outstanding. With the exception of $107 million of equipment finance loans, all of our other CNI loans are adjustable rate. 84% of our variable rate CNI loans adjust to LIBOR, and the other 16% adjust to SOFR, Ameribor, or other indexes. At March 31, 2022, approximately 24% of our CNI loans are above their floor, and 73% of our CNI loans will be above their floor with another 100 basis points up, and 97% will be above their floor at 200 basis points up. While competition for well-secured CNI loans from high-quality borrowers remain elevated, We expect upward pricing on new loans as rates continue to rise, putting further pressure on non-bank competitors. We have transformed our deposit franchise since the last uprate cycle and feel good about our ability to fund our robust loan growth with a variety of deposits from our consumer, commercial, banking, and securities businesses. Our core Axos consumer checking accounts continue to offer tremendous value with a state-of-the-art, easy-to-use mobile app and no fees. We have made further progress cross-selling consumer checking and savings accounts to our agency mortgage and jumbo mortgage customers, with an increasing percentage of our new customers opting for direct deposit and bill pay with our deposit products. Our cash and treasury management teams are winning operating accounts by offering superior customer service and API integrations for middle market clients that are already transacting digitally without the need for a branch location. Our specialty deposit groups, including HOA and Axos fiduciary services, continue to add sticky no-cost deposits. We have additional funding flexibility with our $2.9 billion clearing and custody deposits. With approximately $0.8 billion of the $2.9 billion from our security businesses are held at partner banks, earning an average rate of 45 basis points. Approximately 70% of the $800 million of deposits at partner banks repriced immediately to changes in Fed funds, while another 30% repriced within three months. While we expect deposit betas to rise as competition for deposits increases in the back half of calendar 2022 and beyond, our deposit betas will be meaningfully lower than they were in the prior Fed tightening cycle due to the granularity and diversity of our tech-enabled, customer-centered deposit services model. Our credit quality remains healthy. Net charge-offs to total loans remain low, and our asset-based low LTV lending makes us extremely comfortable about our credit outlook, even in adverse economic scenarios. Non-performing assets, the total assets, was 87 basis points for the quarter ended March 31, 2022, a decrease from 94 basis points for the quarter ended December 31, 2021. Of our non-performing loans, 81.7% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgages at March 31, 2022, approximately 93.6% had an estimated current loan-to-value at or below 70%, and approximately 98.8% are below 80% of our best estimates of current loan-to-values. Given the low loan-to-values on our single-family mortgages, we do not anticipate occurring material losses on the vast majority of our delinquent loans. Our loan loss provision this quarter was $4.5 million, which is up by half a million dollars higher from the last quarter and up $1.8 million year over year. The increase in loan loss provision primarily reflects changes in loan MACs, with CNI and auto accounting for a greater percentage of our total loans. Our total allowance for loan loss was $143.4 million at March 31, 2022, which is approximately 1.1% of our total loans and approximately 22 times our total annualized net charge-offs in the three months ended March 31, 2022. Our loan pipeline remains solid with approximately $2.2 billion of consolidated loans in our pipeline at April 25, 2022, consisting of $59 million of single-family agency gain-on-sale mortgages, $761 million of jumbo single-family mortgages, $402 million of multifamily and small-balance commercial real estate term loans, $886 million of CNI and commercial specialty real estate loans, and $89 million of auto and consumer unsecured loans. With healthy demand from loans across multiple loan categories and growth above our target range for the first nine months of fiscal 2022, we remain confident in achieving the higher end of our low-teens loan growth target in fiscal 2022. We are making good progress with the integration of Axos Advisory Services, the RIA custody business we acquired from Morgan Stanley approximately eight months ago. Overall profitability for Axos Securities in March of 2022 were negatively impacted by lower average margin lending balances and lower transaction-based revenue at Axos Clearing due to industry-wide declines in trading volume. We see meaningful opportunities to continue to improve the profitability of our security business over time as we consolidate systems, automate manual processes, eliminate redundant workflows, and transition to a more efficient, more scalable tech stack. We successfully converted Axos Advisory Services from J.P. Morgan to Axos Clearing this quarter. This will provide us with more flexibility and reduce operating costs by approximately $1 million per year. We have dozens of operational efficiency initiatives for our clearing and custody businesses that are in various phases of implementation. We remain on track to generate slight accretion for the AAS acquisition in fiscal 22, with or without the benefit of future Fed funds rate increases. Our capital ratios remain strong with Tier 1 leverage to adjusted assets of 9.43 at the holding company and 10.51 at Axos Bank. We have access to approximately 1.8 billion of FHLB borrowing, 1.6 billion in excess of the 154 million we had outstanding at the end of the third quarter, We took advantage of favorable market conditions to augment our capital through $150 million subordinated debt raise in February. Furthermore, we had $2.8 billion of liquidity available at the Fed discount window as of March 31st, 2022. Our capital priorities remain unchanged, with a focus on using our capital to support organic loan growth, reinvest in our existing and emerging businesses, and deploy excess capital for opportunistic buybacks and accretive M&A. Our securities business had a mixed quarter. with higher client deposit balances and lower securities and margin lending activity as broker-dealer clients reduced risk. Broker-dealer fee income increased 62.6% in the third quarter compared to the corresponding period last year due to the addition of fee income from the AAS acquisition. Excluding one-time merger-related expenses and non-cash depreciation and amortization costs, Axios Clearing generated $2.1 million of pre-tax income for the quarter ended March 31, 2022. Axios Clearing ended the third quarter of 2022 with approximately $36 billion of assets under custody and assets under administration, including $25 billion of assets under AAS and $11 billion of assets under administration in the clearing business. Total client relationships and underlying accounts were up, and client assets were down slightly due to the decline in equity markets overall. Transaction-based fees for Axios Clearing in the third quarter of 2022 We're negatively impacted by lower transaction volumes from our introducing broker-dealers and reduced securities lending activity. We completed the RIA custody acquisition approximately eight months ago, and we're making good progress on a variety of tactical and strategic initiatives. With a self-clearing conversion behind us, we have pivoted our focus to growing new assets for existing and new clients. As a non-competitive custodian with a high-touch service-centric model and a strong capital base, We are in active communications with dozens of RIA firms about adding access to their custodian. Second, we're expanding our capabilities and investing in the necessary infrastructure to add banking, lending, and other services to RIAs and broker-dealers and their end clients. In conversations with advisors, large and small, we have heard that integrated banking, tech integration into third-party service providers, succession or M&A financing, or mortgage lending for advisors' wealth management clients are important, value-added services that would benefit their practice and their end investor clients. We are expanding the number of relationships we have with third parties to introduce RIAs and advisors who are interested in using Axos for their clearing, custody, and banking needs. One last important strategic initiative for Axos Securities is upgrading our core clearing infrastructure to improve our flexibility and scalability. It's a multi-pronged, multi-year process that will generate incremental benefits over each stage of implementation. While market volatility and turmoil may adversely impact our business in the short term, they present tremendous opportunities for our securities business as well as those of our clients. As clients reassess their needs from a product and technology perspective, we see exciting opportunities to gain market share by becoming their strategic partner for banking and security services. We look forward to sharing more details at our Investor Day in Centennial, Colorado, next week on initiatives we have underway and plan to implement over the next 12 to 18 months to help access and our clients grow and scale. We've successfully overcome the loss of H&R Block and other Durban-related revenue and navigated through periods of competitor pressure in our jumbo single-family and multifamily businesses by building and scaling our commercial bank and securities business. Our ability to generate double-digit loan growth and maintain a 4% net interest margin is a testament to the diversity and resiliency of our business model. We continue to invest in initiatives such as our Universal Digital Bank 2.0, retail crypto trading, commercial real-time payments, and a modern core for access clearing that will make us more competitive from a cost, product, technology, and scale perspective. Not only are these initiatives will generate short-term benefits, but they will help us become even more differentiated and competitive with fintech and other non-bank competitors. Our strong profitability, excess capital, and ability to be nimble position us well to take advantage of market dislocations. We'll aggressively deploy resources when we see these opportunities to accelerate our growth. Now I'll turn the call over to Derek who will provide additional details on our financial results.

Thanks, Greg. To begin, I'd like to highlight that in addition to our press release, an 8K with supplemental schedules and our 10Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. please refer to our press release and our SEC filings for additional details. Turning to our quarterly performance, I'll start by covering some movements in our non-interest income. Overall non-interest income for Q3 fiscal 2022 was consistent with Q2 fiscal 2022 when removing the annual fees of $1.9 million for certain bank IRA products recognized once per year in the December quarter. and up $4.9 million from Q3 fiscal 2021, primarily due to the addition of custody and mutual fund fees from our AAS division, which was acquired this past summer. Greg highlighted the $3.1 million benefit recognized this quarter from our MSR evaluation that we do not expect to recur next quarter for mortgage banking, as well as the off-balance sheet sweep deposit fee income that generally tracks interest rate movements. Next, I'll highlight that our bank efficiency ratio was 39.79% for the three months ended March 31st, 2022, significantly improved when compared to 42.33% for the three months ended March 31, 2021, and a small change when compared to 39.39% for the last quarter ended December 31st, 2021. the strong efficiency ratio is a reflection of loan growth, prudent expense management, and our scalable business model. Our non-interest expense for the quarter ended March 2022 was $86.8 million, up $0.8 million from the linked quarter ended December 2021, and up $6 million from the quarter ended March 31st, 2021. The primary reason behind the increase in the linked quarter operating expenses is due to $3.1 million increase in salaries and related costs from $40 million in the quarter ended December 21 to $43.1 million in the quarter ended March 22. Over $2 million of the increase is due to the reset of the calendar year and related payroll taxes and 401 contributions. Salaries and related costs increased $4.6 million from $38.5 million in the quarter ended March 31, 2021, to $43.1 million in the quarter ended March 31, 2022, which is due to increased staffing levels, including the addition of the AAS personnel. Lastly, I'd like to touch on capital. Our risk-weighted capital ratios have been declining in past periods, due to shifts in our loan growth as backward-looking loan origination opportunities moved away from our 50% risk-weighted single-family assets and towards 100% risk-weighted commercial assets. We closely monitor our capital levels in conjunction with market data and various other key performance indicators, including our return on average equity. This past quarter, we determined the timing was appropriate for a regulatory capital raise and successfully completed a $150 million subordinated debt raise at a 4% interest rate, just ahead of the March Fed rate increase. As a result, our total risk-weighted capital ratio at Axos Financial increased 114 basis points from 12.16% at December 31, 2021, to 13.30% at March 31, 2022. We contributed a portion of the capital to Axos Bank and its total capital ratio increased from 11.73% at December 31, 2021 to 12.24% at March 31, 2022. With that, I'll turn the call back over to Johnny.

Thanks, Derek. Kyle, we're ready to take questions.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 the star keys. One moment, please, while we poll for questions. Our first question is from David Feaster with Raymond James. Please proceed with your question.

Hey, good afternoon, everybody. Hi, David. You guys have been able to take a ton of expenses out of that AAS business. I would have thought most of the savings would have been realized just given what you guys have done, but it sounds like there's still more to come. Just curious, you know, the scalability of this business and the expense growth that we might see as you continue to onboard new clients and activity increases and just, you know, how you think about what a – a good efficiency ratio for this business is as you continue to operate that?

Right. Well, so first of all, thank you. I think you're right. The team's done a good job working on process improvement and increasing its efficiency. There is still so much opportunity. We've been at it for a long time at the bank, and there's a lot of opportunity in clearing and there's a lot of opportunity in custody as well. I think with respect to what the efficiency should look like over the longer term, it's kind of – it's bound up a little bit, and I'll try to disaggregate it, but with respect to interest rates. So if you just take the securities business as a whole, and you have $3 billion, and you have a 100 basis point increase, and you – let's say that the transfer pricing and whatever – Obviously, some of that's off balance sheets, some of that's on, and you look at that and you do that. That's $30 million of extra pre-tax income that goes to that business, obviously impacting the efficiency ratio. But that's not really the way I'd like to look at it. What I'd like to say is that I think we should be able to target having positive income in assuming that the deposits don't generate anything. We actually have some interesting opportunities. It's going to take a little while, but we're working on a modern core project that could take $6 or $7 million out of the collective securities business on a cost side. It'll probably take two to three years to get there fully. It'll require some investments, but that'll be an ongoing number. There's really a lot of benefit. It's going to take a little time though because it's just, it's a lot of different elements together. It's training clients to interact with us differently using portals and automated processes. It's some system related work that's very manual. So it really is kind of, it's sort of a grinded out approach to that kind of stuff. But yeah, there's there's a lot of opportunity in that business to take out cost and grow. And I think there is a scalability to it as well once that sort of stuff gets done that you can add a lot more clients without having commensurate levels of cost. So, you know, I think without having to kind of, I don't know, Derek, if you have a different answer, but putting it on paper, the issue really is, is this business is so interest rate dependent that to get the efficiency ratio, you almost have to peg an efficiency ratio at different levels of interest rate.

Right. You'd have to say that, as of today, that the efficiency ratio won't be as good as it would be up 200 basis points. Right. But regardless, to your point, we're carving out a lot of expenses there and have a lot of strategic plans to make the business much more efficient. Right.

There's a lot of manual stuff, and we just have – our tech stack is just – that we've been able to implement is so useful for those businesses and that, you know, it's really exciting, and it's something that, you know, folks are really focused on.

Yeah. No, that is – and that's Hopeful Color. And then just curious on the conversation with new clients within the securities business, how are they going – Where are your clients seeing AAS as – what are they really driving as the key differentiator between you all and the competitors? And then just does the volatility in the market create a catalyst for some of these RIAs to make a change? Or would that make some of them stickier? I was just curious how market volatility might play into an opportunity for you to accelerate growth.

Yeah, I think from a standpoint of catalyst to make change, I think the TD acquisition is really weighing heavily on folks because a lot of the advisors are multi-custodial. They sort of wanted some choices with respect to their custodial relationships, and then when TD gets purchased, that then really pushes them into a behemoth. There's really not a lot of... firms that are focused on the smaller firms that grow. And so if you look at the history of AAS, they often brought in smaller firms that over time grew and the businesses grew together, which is why sort of the full facilitation of all those financial products is helpful to have those groups grow. So I think that the key differentiator right now is that the system itself allows an RIA to instead of having a lot of tech integrations for their office where they have to have performance reporting and they're trying to glue all this stuff together, it comes as an out of the box package that you can run your full business on and do it very effectively. There's other kind of interesting sort of sub elements that some folks are really excited about. You can run multiple models in a single account. There's a bunch of that kind of functionality. that is unique and others haven't caught up in the industry. So I think there's that. And obviously also really the service levels that a smaller advisor is going to be able to get relative to having to go through what they have to go through at a Schwab when Schwab is just so big and just naturally the ability to concentrate on everything client in that business is difficult. The good part about all of these businesses is that it's hard to lose clients because it's a real pain in the butt to switch. You've got to do repapering, all these kind of things. The tougher part is it is a big deal for someone to switch. They have to do a lot of work. These sales cycles tend to be long. There's a tech roadmap that that needs to be implemented in AAS, and I think it'll be important there. On Axos Clearing, we're doing a lot of work to be able to serve the fintech market over time, and that business has historically been dominated by others in the industry, and that's partly because of the cost structure that we have, including our core cost, and we we have a very cool plan for that that's going to make us very competitive there. It's going to take a bit to get there, maybe 18 months, but it will definitely put us in a really good place there. So that will be an area of potential. I think the interesting thing about the business is that you see folks that are traditional broker becoming hybrid, and you also see, obviously, the rise of fintechs. who want not only securities APIs, they also want banking APIs, too. And that's a position that most, I don't know if there's anybody else who's in a position to deliver exactly that way. And so, you know, those are some of the things we're working on right now.

That's exciting. That's great, Carl. I appreciate it. And then maybe just shifting more broadly to the banking side, to just the competitive landscape, what you're seeing. Obviously, pricing is competitive. Just curious how new loan yields are trending. I know you talked about being more willing to compete on pricing to drive growth. It sounds like you're seeing pricing increases at least on the mortgage front like you talked about. Just curious how new loan yields are trending, the competitive landscape, and whether you're starting to see more aggressiveness from competitors just in terms of standards or structure or terms or anything.

Well, on the single-family side, The disruption in the securitization market, which has been significant, it has been really helpful. So we actually think we're pretty certain we'll be back to growing the single-family books, certainly this quarter, probably nicely, and with having essentially taken rates up significantly. So, you know, I think that new originations are going to be in the mid-fives let's say, in the first fiscal quarter of calendar, of fiscal year 2023, so that June to September quarter. So we, that's a significant increase. You know, we've tightened up standards a bit. I think the market is, the securitization market is kind of kicking back on some of the stuff that has been coming out. I mean, it was rough competing with those conduits and those sort of things. but you've just seen all of those conduits pull back. And so there is disruption there, and that's definitely benefiting us. So I think we're excited to be back to some single-family growth from having really had to, you know, watching our competitive position deteriorate. over the last couple years due to where the securitization market was and where 30-year rates were. This wasn't really enough of a difference between a 30-year and a 5-year. We never wanted to go there. Ultimately, it made a lot of sense. We dabbled our toe in it. We started a conduit, and we had about $60 million of that 30-year low-rate fixed paper. We were strategically looking to sell it. We ended up getting out. at a gain, which was great because, you know, frankly, those loans would be worth a lot less now because they were the only real 30-year stuff on the balance sheet. I think on the other side, we feel good about our ability to reprice. I think we've done a lot to add capacity across so many lines that we have the ability to say no to loans. So I think we're going to be – you know, I don't – I don't want to predict that our net interest margin will go up because I don't think that's the case, but I definitely don't see any kind of material deterioration as a result of the rates upside. I think we have that gap, a little bit of a gap in some of the floor rates. I think it was, what was it on the 50%, Johnny? So 43% of our variable rate loans will hit will be adjustable after the next, assuming the Fed increases 50 basis points, 43%, and then it's in the 70s with another one. So there's a little gap before we get a one-for-one on that side, but not too bad. And then, you know, given the prepays on the hybrid side, I think we're going to be, if you look at what happened in the last rate cycle and have the team looking at it, I mean, we were okay, and we're going to be okay here, too. And with, I think, good loan growth.

That's helpful. That's great color. Thank you all. Look forward to seeing you all next week at the analyst day. Thank you. Thanks, David.

Our next question is from Andrew leash with Piper Sandler. Please proceed with your question.

Hey guys. Good afternoon. Thanks for the commentary there on the, on the jumbo outlook, but on the commercial side, you know, it seems like things are firing on all cylinders. So, I guess the question is, what can disrupt this momentum right now? The loan growth, it should easily, seems like it should beat your guidance. But what can disrupt that?

You know, gee, you know, look, things are looking pretty good on the lending side. And, you know, obviously with single family coming back as a cylinder, I think that's good for the engine. and it's also good obviously for a space capital, et cetera. You know, look, I guess what's interesting about this is maybe it's, maybe it's a question of how the economy reacts to the rate increases and what individual decisions are made with respect to aggregate loan demand and how that sort of plays out across what other banks do with respect to loan repricing. Right. Um, You know, we are seeing some positive signs. Our banks are getting ahead of stuff, so that's good. But, you know, we obviously want to be really cautious about duration here, even though, you know, some will start to argue that stuff will roll over after, you know, maybe wherever the Fed gets to in the next year. So I think it's probably more about aggregate economics and what aggregate demand is with respect to how the economy takes takes interest rates, right? I mean, we really, we've really effectively for a really long time have been in a very low interest rate environment, and I think that's something we just have to look at. But, you know, I think it's good. I think things are, on the loan growth side, are looking pretty good.

Good, good. And then just a quick question on credit quality. Are you seeing anything concerning out there at all? The numbers are great, but does anything concern you right now?

Yeah. No, there's nothing in our portfolio specifically that concerns me, but I think every lender should always just be concerned. It's a disposition, right? I think that we've had a lot of years of lowering of cap rates based on low interest rates, and so that is going to change, and it's going to be interesting how that flows through valuations. I think we're in the right place with respect to that, But I just think that continued caution is warranted. Obviously, you've had very aggressive single-family home appreciation. Our loan-to-values are low, but that home appreciation has also been quite high. And so you always have to ask your questions about how deep any individual market is with respect to how many transactions are occurring with respect to where prices are. So You know, obviously, I think it would be better for lenders if home price started to moderate, at least from a growth perspective, or stabilize because there's just been a lot of that. So, you know, those are all things that are there. I think, you know, I think, look, we're cautious about our loan-to-values. We're always focused on that. And I do think assets, though, do have a potential to reprice at higher rates.

Got it. Thanks for taking the questions. I'll step back. Thank you.

Thank you. Our next question is from Gary Tanner with DA Davidson. Please proceed with your question.

Thanks. Good afternoon. Hey, I just want to ask a clarifying question on the securities segment. I think, Greg, you had mentioned a process that will lower annual, I think, expenses by about a million dollars. Did I hear that correctly? And can you just state again what that was?

Yeah, that was the JPM conversion. So when we brought AAS over, as a reminder, part of the deal of winning that bid was we closed that deal in a matter of four months, or a little less than four months. But with that, we brought over their clearing firm, JPM. we have now completed the conversion from JPM to self-clearing for the AAS side of the business. So that's expected to save approximately a million dollars pre-tax for the going forward. And that was completed in the March – at the end of March.

Okay, great. And then in terms of the fees on the – SWAT deposits, what's the threshold or is there an upward threshold to where the interest on those ultimately gets shared with the client? I know the initial few hikes, the benefits generally accrued to the bank, but what's the cutoff to where that's not the case?

There's no direct kind of number But usually as you start getting pretty significant kind of triple-digit basis point movements, that you will start to see some. But even that is on the smaller side. So we don't expect, especially early on here, any significant beta, really any beta as rates move up. If we start getting into your 200, 300, 400 basis points, type of upward space, then it might start to become small amounts, but it's still not going to be overly significant. And it's going to be dependent on negotiation to some degree with various customers and the level that they bring to us, right? Because certainly one that can bring 200 million of deposits is different than one that can bring 2 million of deposits.

Also, yeah, look, I think partially this is all related to, I mean, we would have raised pricing, frankly, in AAS if it wasn't for this. So they, E-Trade, did a, you know, well, I'll just say this. They took a business that was making, the first time we looked at it, $25 million. And it was a great environment. They, you know, In 18 months, they made it lose $5 million, right? And they did this through a lot of mechanisms, but one of them was through really hurting pricing discipline in a variety of ways that's not worth detailing. So this is just in time because, you know, frankly, you know, we need to be paid for our services. So, you know, the pricing is probably a little low for what we're providing the clients, but... You know, with the overall change in interest rate environment, it's sort of there. But this is not... Look, this is cash that has to be there for, you know, the levels of investment and securities. This is not, you know, the goal of providing savings accounts for people. So this is part of the way the business works. And, you know, the deal is that... we bear lower profitability and lower rates, and we get higher profitability and higher rates. And if that stops becoming the deal, then we have to raise fees and lower rates.

Okay. The prior question kind of talked to this a little bit, but, Greg, in terms of the Crestle business, I mean, that's been driving a lot of growth, you know, drove a big chunk of it. the end of period growth this quarter, as you just think about higher rates and, and looking at projects, are you seeing anything that gives you pause as, as kind of, you know, your team models out real estate evaluations towards the end of projects timelines? Is there anything that, you know, maybe it doesn't look like it would cashflow as well. I guess the question is, are you getting more, or have you gotten any more conservative or are you seeing things that maybe would have put it better, you know, at a zero rate environment that a two 50. Why not?

Yeah. No, not really with respect to that. I mean, we are in very low leverage positions, you know, sub 45% on these loans are certainly the type of rate increases that would have to have for the stabilization of the buildings not to be able to get out at our bases or, you know, we're two and three times covered and more. You know, I think that there's definitely some... And this happened prior to the rate increases in COVID in New York. There's guys who didn't get all their equity back. That's clearly the case. But the Mez lenders and stuff like that, I can't really think of anybody that even got touched there, and they're a significant part of the capital stack and obviously ahead of us from a loss perspective. So, you know, I think... There's stuff that we see that's going around. I wouldn't say it's directly connected to interest rates. I'd say it's connected to a variety of factors. Like, let's say you, you know, not that we don't do a lot of this, but let's say you bought a second-tier office building and you were going to rehab it in New York or something, and you're the equity for that. You're not getting your money back, right? Right. But I don't think there's anything really. We do stress testing on that stuff. The market's still robust for the takeout side. The projects that we do are really great projects in very high demand areas with really premium lenders and sponsors. So we're not seeing anything that would be cause for concern there.

Thanks very much.

Thank you.

Our next question is from Edward Hemmelgarn with Shaker Investments. Please proceed with your question.

Hi, Greg.

Just a couple of questions.

How are you doing?

Can you talk a little bit about your thoughts on share buybacks? I mean, you've done a wonderful job of, you know, with the venture offering. of raising, you know, capital and it's, you know, stock price has fallen a lot. What, you know, if you can share anything, share your thoughts on share repurchases.

Yeah. You know, I, look, I, I, we always, we always evaluate that. I don't like to rule things out. Obviously we have to balance it against loan growth. And I think, One of the things I definitely don't want to be doing is raising equity, right? And so I think that my first view is, look, I talk about valuation, but obviously at whatever times earnings we're trading at, that stock price doesn't make a lot of sense to me. But obviously there's been a lot of equity outflows across the board. um so yeah i mean look it's it's in our arsenal um and uh it's one of the things that we think about i wouldn't be any more committal on that except to say that uh you know um wasn't too long ago you were uh saying you know you thought we could grow loans a lot faster so you know uh i have to have some consistency quarter to quarter and you know it's a You know, we're fairly flexible over here, but, you know, we're not. No, I'm teasing you. I'm teasing you. But, yeah, look, I think we're looking forward at a revival of single family, you know, at low loan-to-values with great properties and good rates. We're looking at, you know, we've spent a lot of time and effort diversifying our business. So, look, you know, there's always – There's certainly – that is always a possibility. We do have capital up there sitting at the holding company that we can do stuff with if we decide to do it.

Okay. The other one I was wondering, can you – you know, you clearly indicated, I mean, you feel you're more asset sensitive. I mean, so that your rates go up, you benefit from that. But can you give me, you know, how much – Will you try to keep loan rates lower and so grow that in sync with your deposit costs, or do you expect, is there any opportunity for as rates rise in here? Certainly some of your loans will be repriced. Yeah. You know, to pick up rate increases, or do you expect it to stay pretty much the same?

Yeah, I mean, that's the million-dollar question or the, I don't know, the $20 million question or whatever. It's, yeah, look, I think here's what I see in that. I think, you know, our NIM range, I think, is a good target because I think what it allows us to do is we feel comfortable that we can grow loan growth within that, you know, high to mid-teens or low to mid-teens range that we say. And then at that 4%, I think that's a good way to think about it. Is there upside from that, you know, potentially? But there also could be some downside from it because we just don't really know how everyone's going to behave. So it depends on the speed at which other banks adjust and everything else. So, you know, we've been pretty quick to, you know, to reprice our pipelines, just quite candidly. We told people, look, you want a lock? You want to pay for a lock? No, I don't want to pay for a lock. Fine, your rate's up. There you go. Other banks may have not done that exactly that way, so that may result in some lower loan production at certain points in time. We're not seeing that now. Frankly, pipelines are great. We're getting good pull-through, so we still feel good about that, but there's a lot of stuff to balance and all of that. Clearly, You know, we have these deposit sources that are – and we have stuff off balance sheet, et cetera. But, you know, those are all decisions that we're making in real time and looking at that. And, you know, there are some borrowers who – some of our longtime borrowers, let's say on the multifamily side, you know, we've had guys who've wanted, you know, five-year deals, and they said, well – You know, we want 4%. No, fine. Well, okay, we'll give you 425. No, I don't want it. Now it's 475. Well, I don't want it, right? And then they're sitting there and they need it, right? So I think that some of this is psychological and it takes a little bit of time for folks to kind of adjust to this. And so it's, we'll just have to see. I think, I feel pretty good about it. I think we're in a much better position. We do have a little bit of a lag. which I think is not insignificant in the sense that we've only got in that 40th percentile that are going to take fully that first 50, but then we get to the next 50, then we're at 70-something percent, and we have a much greater percentage of floating rate than we ever had if you went back even four years ago. So, Look, I think I don't want to get everybody too excited about the idea and sort of say, well, we're going to be way above where we are on the NIMS side because obviously the cost of the marginal deposit to get it, we also don't know what that is as well, right? So, you know, obviously we have these lower-cost deposits here now. I feel good about their betas. As you're going out and you're getting deposits as you grow, you end up having to pay higher rates for those deposits because, frankly – The commercial client who a year ago would have said, great, I love your service and your APIs. I'm not going to ask for a rate. In three months, I bet they're going to ask for a rate. If they say they're leaving, their other bank may give them a rate because we would say no. We'd say, no, look at all the great stuff we have. Maybe now that bank's going to say, you know what? I'll give you a little bit of a rate. That's all about that competitive dynamic and And we just have to let that play out.

Yeah, but wouldn't you, do you feel that given the amount of excess deposits in the banking industry right now, way more than loans, that probably the repricing of deposits will move at a slower rate than loan repricing?

You know, I think for existing deposits, absolutely. I think to get people to move there's always an inducement. And if everybody's reading the papers and you're growing loans and you need to grow deposits, I think that deposit cost is going to be higher on the margin for everybody. Now, if you have excess deposits, you'll absorb it. It may also mean with those excess deposits that some of those banks don't push as aggressively on loan rate increases too, right? So all of those different factors are there and they play out in different ways. So I think that's why you know, we think that, you know, all of those elements together, we kind of have that guidance. And it's been right for a long time, and I think it's probably good to stick with it.

Okay. All right. Thanks. Very good, Corder. Thank you.

Thanks. Thank you.

Our next question is from Michael Parito with KBW. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking my questions. Hi, Mike. Hi, Mike. Just a quick one. Greg, in the prepare remarks, I think I heard you mention something briefly about the kind of the crypto trading ability on the UDB. I was just curious if there was any more update you could provide us there on launch and whatnot.

Yeah, I think we're probably at around, you know, probably around the end of this calendar year for a beta on that. We actually have a lot of the plumbing done and stuff. We just got to get the front end out there and make that right. So I think that's about the timing of it. And it is interesting because I was just looking at this study and it was incredible the number of customers, new customers to these different self-traded trading platforms that said they were coming specifically to trade crypto. So it's actually by far the biggest draw to these platforms. And so it's an important part of bringing it on So, yeah, but there's a lot of pre-work that's been done, and so it's partly, some of it is about how pretty or how well the interface is going to look cohesive with UDB, because it essentially, the platforms, it's sort of, you know, you can go in and do the trading now, but you kind of have to jump off to a different software and it doesn't really look nice and integrated. And so I think we're kind of working through the questions of exactly, you know, if we've really been trying to focus on the user experience and how much of that, you know, do we want to make sure is sort of fully integrated before we launch it. So I think that's a reasonable time frame to look at.

That's helpful. And then you kind of touched a little bit on the second part of the question, but you know, at some of these other kind of digital platforms that have launched this, it's been a fairly decent driver of profit. And I guess just, do you guys have any thoughts or views that you can share about how the, you know, the economics will work for you? I know you probably can't make any predictions that hasn't even launched yet, but just in terms of Is it going to be a flat rate on trading? Or just any thoughts around how the economics will work for the crypto trading piece?

I think we're still actively debating it, and so I wouldn't want to say something that we might change our mind on. I think we are looking at it carefully, and we're going through that process of looking at the competition and seeing how they're doing it. I do think, though, you're right, it's a – it's one of the more profitable areas of the business for sure. And I think that's, you know, and also I don't think there's been anybody who's done a particularly good job of integrating it into, you know, the ability just to take your, have your bank, you know, your bank and the security side so closely linked that you can just, you know, your direct deposit comes in. If you want to invest, you can do that right away. And just even getting the basics of that right with respect to some of these other wallets, I think will be a big driver of it if we can get it out from a market perspective and get people focused on it. That's kind of the debate, right, to make it, you know, how good does it have to be before it comes out? But, look, I think there's opportunity there, and, you know, clearly it will get tighter over time. as more and more folks come out, right? Fidelity said they're letting people, you know, buy crypto in their 401ks and all that kind of stuff. So it's going to, it's going to become much more of a mainstream asset class, but yeah, I mean, I think it's, I think it is a, it's an interesting potential for sure.

Great. That's, that's super helpful. Thanks. And then just kind of a bigger picture question. I mean, we talked a little bit about betas on an earlier question, but just how do you kind of, bifurcate the strategy, right? And how do you kind of view it overall with who you're competing with, right? Because, I mean, you have, for example, UDB, you have this consumer digital platform. You know, I think the expectation from a lot of consumers is on those types of platforms that they're going to get paid at above average rate, right? And I think you guys are offering, like, what, 125 basis points to end the checking on qualified balances. And so, I guess, how do you guys kind of take, you know, that competitive force and But marry it to the fact that, you know, relative to last cycle, you guys really are not in kind of as needy of a funding position, I guess, for lack of a better way of putting it, right? And so you're trying to balance, like, this competitive dynamic versus the fact that you're just much better positioned today to be more competitive or more slow on raising rates on deposits. Just curious, any thoughts there?

Well, so, you know, that rewards checking account, which is some of the checking accounts. In order to get that, you need to have – an Axos Invest account, an Axos Securities account, all with certain balances. You need to have direct deposits. You need to do a certain number of transactions every month, right? So if you don't have any of those things, right, so you basically, if you're coming in and you want to be the customer that's going to earn that, we're your primary bank. You have your investment account with us. You have your secure, at least one of your investment accounts with us at a certain dollar amount. You have a certain securities account, right?

So

that, yes, you can get that rate, and it's clearly disclosed, but the reality of that rate is very different in the sense that, you know, you're still getting a great product. We're just telling you, look, you need to do all these things in order for that to happen, right? And I think that's part of the power of the platform because once you open all those accounts, you do your direct deposit, you do all that stuff, you're doing a certain number of debit transactions, you're using bill pay, all this kind of stuff, If somebody else comes out and says, well, I'll give you 1.75 on your account, are you going to shut down all those accounts, move everything? And I think that's sort of – so I think that even on those sort of products, I think we've done a lot better job of making all of that work together, right, from a platform perspective. And so I think that's really important. And so then let's go further. It depends on the business, right? You know, HOA, the competitors are other HOA banks, right? They're going to have their own dynamic, right? So PacWest owns the old Smart Street Union platform. There's different banks that own that. There's different platforms there. CIT had one. They're going to do what they're going to do based on that. You know, the clearing and custody side has its own dynamic that I think Derek did a good job describing. The bankruptcy business, you know, essentially these are long-term software agreements that, you know, we operate an entire back office for someone, you know, that traditionally, you know, that's why I would say that's also one of those businesses where in low-rate environments, we're in a, you know, iliomentary capacity where, you know, we do a lot of work for trustees and they, you know, and it's very nice of us to do that. And then in the higher rate environment, we take a little bit of that back. So I think each of these dynamics really just depend and clearly, you know, when you're in a better position, then you're also trying to grow and sew all that stuff together. And that's why I kind of, you know, bring that out to say, look, we think we can maintain our NIM. We think we can maintain loan growth. And I think that's really the right way to think about it. And I do think that each of these all blend together. And I also – and as I said, I think that it's different when you're trying to get people to move, right? And that is – so even on the consumer side, the acquisition is going to be different than somebody who's done all that stuff with you and then, right, and then they – They say, well, do I want to bother trying to go chase rates somewhere? I mean, we've been – the other thing is, to the extent you're with us now, we've chased you out if you're a rate chaser a long time ago, right? We really have because we've been – we have not been in the top 20, 25 in rates in anything for a really long time. So – you know, the small business side, whatever. So, you know, I think that it's just about continuing to add value. And so what we're trying to do over the longer term, of course, in the platform is, you know, you shouldn't be thinking of us as someone that, you know, is going to – you should be thinking of us as how great and convenient is, you know, your bank account and your crypto trading to be together or not. We're going to give you a high interest rate. Now, you know, that's certainly a tool. And it's available, and there's dynamics associated with that, and there's obviously if you have profitable loan growth you don't want to miss out on, et cetera. So all those things have to play out together.

That makes sense. Thanks for that call, Greg. And reiterate to others, looking forward to seeing you all next week.

Thank you.

Thanks.

We have reached the end of the question and answer session, and I will now turn the call over to Johnny Lai for closing remarks.

Great. Well, thanks for your interest in Axos. And as has been alluded to several times, we are hosting our Investor Day in our Axos Advisor Services office in Centennial, Colorado, next Wednesday, May the 4th. If you have any questions and are interested in attending, please contact me directly. Thank you.

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