Axos Financial, Inc.

Good day, ladies and gentlemen, and welcome to your Axos Financial Inc. Fiscal Fourth Quarter 2022 conference call. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, Johnny Lai, Corporate Development and IR. Sir, the floor is yours.

Thanks, Melinda. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for Axos Financial Inc.' 's fourth quarter 2022 financial results conference call are the company's president and chief executive officer, Fred Garabrantz, Executive Vice President and Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg, Derek, and Andy will review and comment on the financial and operational results for the three and 12 months ended June 30th, 2022, and we will be available to answer your 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 accessfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. We also issued an earnings supplement in conjunction with this call. All of these documents can be found on the Axios Financial website. With that, I would 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 Axios Financial's conference call for the fourth quarter of fiscal year 2022, ended June 30, 2022. I thank you for your interest in Axios Financial and Axios Bank. We had another excellent quarter, with double-digit growth in loan originations for our fourth consecutive quarter. Our strong results were broad-based, with net interest margins exceeding the high end of our target and double-digit net interest income growth on a sequential and year-over-year basis. We grew deposits by 9.5% link quarter and almost 29% year-over-year, led by strong growth in deposits from Axos Securities. We reported net income of $57.9 million and $240.7 million for the three and 12 months ended June 30, 2022, representing year-over-year growth of 6.7% and 11.6% respectively. Our book value per share was $27.48 per share at June 30, 2022, up 16.3% from June 30, 2021. The highlights this quarter include the following. Ending net loans for investment balances were $14.1 billion, up 7.6% linked quarter, or 30.4% annualized. Excluding single-family mortgage warehouse, ending loan balances increased by 9% linked quarter. Net interest margin was 4.21% for the fourth quarter, up 19 basis points from 4.02% in the quarter ended March 31, 2022, and up 29 basis points from 3.92% in the quarter ended June 30, 2021. Net interest margin for the banking business unit was 4.45% compared to 4.21% in the quarter ended March 31, 2022, and 4.16% in the quarter ended June 30, 2021. In contrast to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth from the high end of our annual target through the fiscal year of 2022. We continue to make steady improvements in our funding mix, with non-interest-sparing deposits increasing by approximately $900 million from March 31, 2022. Non-interest-sparing deposits represented approximately 36% of our total deposits at June 30, 2022, a significant improvement from approximately 23% in the corresponding period a year ago. The steady growth of non-interest-sparing deposits positions us well in a rising-rate environment. Deposits from Axos Securities, our clearing and custody business, was $3.5 billion at 6-30-2022, up by approximately $600 million from March 31, 2022. Our efficiency ratio for the three months ended June 30, 2022 was 54.44% compared to 51.3% in the third quarter of 2022. The efficiency ratio for the banking business segment was 46.7% for the fourth quarter of 2022 versus 3.98% in the third quarter of 2022. Operating expenses for the bank for the fourth quarter included an $11 million charge primarily for a one-time resolution of a contractual claim. Excluding the $11 million charge, our banking efficiency ratio for the fourth quarter would have been 40.6%. Diluted earnings per share were at 96 cents, up 6.7% from 90 cents in the year-ago quarter. We continue to generate strong returns while we maintain excess capital. We generated a return on equity of 14.14% in the fourth quarter and a return on assets of 1.4%. Capital levels remain strong with Tier 1 leverage of 10.65% at the bank and 9.29% at the holding company, both well above our regulatory requirements. Our credit quality remains strong, with net annualized charge-offs to average loans of two basis points versus 22 basis points in the fourth quarter of fiscal 2021. We added $6 million to our loan loss provision this quarter to support our loan growth. Total allowance for credit losses was $148.6 million at June 30, 2022, representing 49 times our annualized net charge-offs and 1.04% of total ending loans. Our total loan originations for the fourth quarter ended June 30, 2022, were $3.2 billion, up approximately 41% from $2.3 billion in the year-ago period. Loan originations for investment were approximately $3.2 billion, an increase of 55% from the corresponding quarter a year ago. Q4 2022 originations were as follows. $57.6 million of single-family agency gain-on-sale production, $545 million of single-family jumbo portfolio production, $148.6 million of multifamily production, $230.6 million of commercial real estate production, $105.6 million of auto and unsecured consumer loan production, and $2.1 billion of CNI loan production, resulting in a net increase in ending CNI loan balances of $737 million. We generated $3.4 million of mortgage banking income compared to $5.7 million in the quarter ended March 31, 2022, and $2.9 million in the corresponding quarter last year. The single-family agency origination decreased by approximately 57.6 linked quarter to $57.6 million as a result of industry-wide declines in refinancing activity, while margins were down due to normalization and single-family mortgage gain on sale across the industry. Our MSR valuation generated a $1.5 million gain this quarter, benefiting from a 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 valuation gains, as rising interest rates further reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $33 million as of 8-1-2022. Ending loan balances in our jumbo single-family mortgage business increased by $158 million to $3.7 billion, the strongest quarterly net loan growth we've had in the past three years. We generated $545 million of loan production in the fourth quarter of 2022, benefiting from dislocation in the jumbo SFR mortgage securitization market. Prepayments in our jumbo single-family business were down. They were $390.4 million in the three months ended 6-30-2022, down from $455.6 million of prepayments in the prior quarter. While rising interest rates and economic uncertainty remain headwinds for our jumbo refi and purchase transactions, we are better positioned than most of our competitors given our efficient operations and established track record of execution. Our jumbo single-family mortgage pipeline was approximately $475 million as of 8-1-22. Based on this pipeline and our expectations for a continued decline in prepayments, we anticipate modest growth in our jumbo single-family loan balances in the next few quarters. CNI lending had another tremendous quarter. Loan originations were $2.1 billion, reflecting strong growth across Crestle, asset-backed lending, and construction lending. Our strong relationships, knowledge and 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 $970 million as of 8-1-22. We have positive momentum across multiple CNI lending verticals, and we remain confident that we'll be able to sustain strong growth in our net balances while maintaining credit and loan yields. Auto lending had a good quarter, with ending loan balances increasing by $39 million, or 8.7% linked quarter. We are getting good risk-adjusted returns in our auto lending business, focusing on prime borrowers with a strong mix of used vehicles in both direct and indirect channels. Our auto loan pipeline was approximately $105.9 million at August 1, 2022. Strong underlying profitability in our banking business was partially offset by ongoing growth investments at the bank and in our securities business. Our banking efficiency ratio was 47% and 42% for the three and 12 months ended 6-30-2022. As noted earlier, non-interest expense this quarter included a one-time charge of $9.5 million for the resolution of a contractual claim and an accrual for unrelated non-final jury verdict of $1.5 million. The $11 million aggregate charge was included in other general and administrative expenses for the fourth quarter. The contractual claim underlying the $9.5 million DART payment was based upon an indemnification obligation related to an acquisition. The settlement fully and finally resolved any claim that might be made under that provision. Representation and warranty insurance was purchased as part of this acquisition with a policy limit of $6.5 million, but present collection of those proceeds under that policy remain uncertain. The $1.5 million legal accrual was made in connection with employment litigation initiated in 2015 by a former employee. We have a series of operational efficiencies across business units that will result in cost savings as we grow. Including the $11 million of discrete contractual and legal charges, the efficiency ratio in our banking business unit would have been 40.58% and 39.94% in the three and 12 months into June 30, 2022, respectively. AXO Securities, which includes our securities clearing and custody, self-directed trading, and managed portfolio businesses, generated $0.8 million of pre-tax income, excluding non-cash amortization expenses in the fourth quarter of 2022, an improvement from a loss of $0.1 million in the prior quarter. Our securities businesses are starting to benefit from rising rates, partially offset by declines in custody and clearing fees as a result of a decline in the overall stock market activity. 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 our new Axos clearing core system. We believe these investments are appropriately sized relative to future growth and cost savings they will generate from a fee income, deposit, and customer service perspective. We grew deposits by 9.5% link quarter to $13.9 billion with broad-brace growth across our small business, commercial, and securities deposits. Checking and savings accounts represent 92% of total deposits at 6-30-2022. Consumer deposits, representing 54% of our total deposits at 6-30-2022, is comprised of consumer direct checking, savings, and money market accounts. The weighted average demand and savings and deposit costs were 29 basis points for the three months ended June 30, 2022, compared to 14 basis points for the three months ended March 31, 2022. We continue to make steady progress cross-selling deposit products to our lending customers. Non-interest-bearing deposits increased by $900 million quarter-over-quarter to $5 billion. Total client deposits from our custody and clearing business was approximately $3.5 billion at 6-30-2022 as advisors increased their cash holdings as a percentage of client assets in reaction to elevated stock market activity. We kept... $2.5 billion of the $3.5 billion on Axos Bank's balance sheet. The optionality of deploying these low to no-cost deposits to fund our bank's loan growth or earning fee income from partner banks is a significant competitive advantage relative to other banks our size. Continued growth in our non-interest-bearing deposits has been instrumental in our ability to fund our strong organic loan growth while maintaining a net interest margin above our target range for the past three quarters. Our diverse lending and deposit businesses and modest security portfolio positions us well for a rising rate environment. Our securities book with approximately $264 million in lending balances is less than 2% of total assets as of 6-30-2022. About half of our securities are floating rate, and the average duration of our securities portfolio is 2.4 years. Our single-family jumbo mortgage and multifamily loan portfolios, with $3.7 and $2.1 billion of loan principal outstanding as of June 30, 2022, represent approximately 26% and 15% of our total loans outstanding, much lower than they were in prior uprate cycles. With the exception of a small portfolio of prime jumbo mortgages, 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 2.3 and 3.8 years, respectively. Note rates on loans originated in our single-family jumbo, multifamily, and CNI loans were 5.01%, 4.75%, and 5.16% respectively in the three months ended 6-30-2022, up 89 basis points, 58 basis points, and 42 basis points respectively from the prior quarter. We have raised rates for our newly originated 5-1 jumbo single-family and multi-family loans an additional amount in July, 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 June 30, 2022, CNI loans increased by $700 million linked quarter to $6.8 billion, representing nearly half of our gross loans outstanding. With the exception of our $114.7 million of equipment finance portfolio, all of our other CNI loans are adjustable rate. At June 30, 2022, approximately 79% of our variable rate CNI loans were above their floors, and following the rate increase announced on July 27, 86% are above their floors. With another additional 75 basis points increase, 95% of CNI loans will be above their floor. Demand for our commercial specialty real estate and other CNI loans remain strong, as reflected in the $970 million of CNI loans in our pipeline at 8-1-2022. We believe our balance sheet remains asset sensitive. With floor rates reaching effectively on the vast majority of CNI loans with the next rate increase, and with aggressive repricing of newly originated single-family and multifamily mortgages, and continued, although slower, levels of prepayment of lower-yielding single- and multifamily hybrid mortgages, our asset yields will continue to increase. Furthermore, the approximately $0.9 billion of deposits at partner banks will generate higher fees for access as rates rise. While we expect deposit betas to rise as competition for deposits increase in the back half of calendar 2022 and beyond, particularly for new deposits, our deposit betas will be meaningfully lower than they were in prior Fed tightening cycles due to the granularity and diversity of our tech-enabled, customer-centric deposit servicing model. One of the key strategic benefits of being a bank-like access owning an RIA custodian is having access to low-cost deposits that we can use to fund our loan growth. Historically, the cash deposit balances held by our advisory clients have fluctuated between 6% to 8% of assets under custody. In the quarter ended 6-30-2022, advisors held more cash in reaction to elevated levels of market volatility. The additional $670 million of no-cost deposits, which represent the difference between the 9% average cash balance held by advisory clients and the 6% that we typically expect, boosted our net interest margin by approximately 12 basis points in this quarter. Our net interest margin in the fourth quarter of 2022 also benefited from non-recurring interest income from two loans that were previously categorized as non-performing that were paid off in full. We received full interest in principle on both loans, including default interest. These two loans combined added approximately $3.5 million of net interest income, boosting our net interest margin by approximately nine basis points. Excluding these two aforementioned items, our net interest margin would have been 4.02 when the three months ended June 30, 2022, up six basis points year over year. Looking forward, our outlook is that our net interest margin for the fiscal year end, June 30, 2023, will remain at or above our long-term target of 3.8 to 4. The biggest factors impacting our net interest margin will be how fast our loan portfolio grows and where our Axos advisory deposit balances are relative to the June 30, 2022 levels. As we stated previously, our expectation is that net loans will grow in their mid-teens in fiscal 2023. grew net loans by nearly $1 billion in this quarter, representing an annualized growth of over 30%. If we continue to grow net loans at that rate, or a rate above our mid-teens base case target, then the incremental cost to fund our loan growth will be on the higher end of expectations. With respect to our advisory deposits, we have a healthy pipeline of new advisors looking to transition their custody assets to us. However, relative to the size of our existing $22.4 billion of assets under custody at the end of this quarter, the biggest source of incremental low-cost deposits will come from our existing RIA clients. The amount of cash held by RIAs in their client accounts, commonly described as cash sorting, fluctuates based on advisors' risk appetite, which can change quickly. For example, when we closed the advisory acquisition last August, advisor clients held a record low of 4.8% of assets they managed in cash. Fast forward to this quarter, the cash percentage dramatically increased to 11.9% by the end of the quarter as the Fed's aggressive monetary tightening significantly reduced advisors' risk tolerance. Our baseline assumption is that the percentage of cash held by advisory clients will normalize to 7% of assets under custody in fiscal 2023. If clients become more risk-averse and continue to hold a higher cash balance, then our full-year net interest margin would be higher than our baseline targets. However, if clients reduced their cash percentage and we had to replace those low-cost deposits with relatively higher-cost deposits, then our full-year net interest margin would be reduced, depending on the percentage of cash sorted. 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, were 68 basis points for this quarter, a decrease from 87 basis points for the quarter ended March 31, 2022. Of our non-performing loans, 56% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgages, at the end of this quarter, approximately 84.3% had an estimated current loan-to-value ratio below 70, and approximately 90.5% are below 80% of our best estimates of current loan-to-value. The property of our largest non-performing single-family mortgages was sold in the fourth quarter of 2022, and we were paid back 100% of our principal and interest, including our default interest. Given the low loan-to-values of our asset-backed loans, we remain confident that we will incur minimal credit losses even if our asset values decline. Our loan loss provisions this quarter was $6 million, which is up by $1.5 million from the last quarter and up $4.7 million year over year. The increase in loan loss provision primarily reflects a record quarter of loan originations for investments and changes in loan portfolio MECs with CNI and auto accounting for a greater percentage of our total loans. Our total allowance for loan losses was $148.6 million at June 30, 2022, approximately 1.04% of our total loans and approximately 49 times our total annualized net charge-offs in the three-month end of June 30, 2022. Our loan pipeline remains solid, with approximately $1.9 billion of consolidated loans in our pipeline at August 1, 2022, consisting of $33 million of single-family agency gain-on-sale mortgages, $475 million of single-family jumbo mortgages, $273 million of multifamily and small-balance commercial real estate loans, $970 million of CNI and Crestle loans, and $109 million of auto and consumer unsecured loans. With healthy demand for loans across multiple loan categories, we are confident in achieving the mid-teens loan growth target we established at our investor day for fiscal 2023. We are making good progress with the integration of the Access Advisory Services business, which is the RA custody business we acquired from Morgan Stanley a year ago. Overall profitability for Access Securities in this quarter improved from the prior quarter primarily due to an increase in broker-dealer fee income. We see meaningful opportunities to grow assets under custody, fee income and deposit balances at advisory services by adding new clients and rolling out new products and services. We've opportunistically added a few seasoned team members to our advisory sales team to take advantage of advisors looking to move some or all of their custody business. We signed five new deals this quarter that will increase our assets under custody by approximately $200 million once they are fully onboarded. Our pipeline of custody clients is healthy and growing, and market volatility provides opportunities for a nimble and client-centric organization such as ours. Our capital ratios remain strong with Tier 1 leverage to adjusted asset leverage of 9.29% at the holding company and 10.65% at Axos Bank. We have access to approximately $2 billion of federal home loan bank borrowing and $1.9 billion in excess of the $117 million we had outstanding at the end of the fourth quarter. Furthermore, we had $2.8 billion of liquidity available at the Fed discount window as of the end of this quarter. 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 deploying excess capital for opportunistic buybacks and accretive M&A. Our securities business had a solid quarter with higher client deposit balances and lower custody and clearing fees due to an overall decline in equity markets. Broker-dealer fee income increased 105% in the fourth quarter compared to the corresponding period last year due to the addition of fee income from the Exos Advisory Services acquisition. Excluding one-time merger-related expenses and non-cash depreciation and amortization costs, Exos Clearing generated $2.1 million of pre-tax income for the quarter ended June 30, 2022. Exos Clearing ended the fourth quarter of 2022 with approximately $32 billion of assets under custody and administration, including $22 billion of assets under custody and $10 billion of assets under administration in the clearing business. Total RIA and IDB relationships increased from 254 at March 31, 2022, to 263 at the end of this quarter. Revenue from clearing activity was relatively flat, with an increase in stock borrowed balances being offset by a decline in ending margin balances. The increase in broker-dealer fee income of $3.4 million was primarily driven by multiple Fed rate hikes, resulting in FDI sweep fee income growing from $2.9 million to $6.6 million. We continue to make good progress in our ongoing effort to streamline the operations and infrastructure at Axos Clearing and Advisory Services. We have automated certain manual processes and eliminated redundant reconciliations and other internal workflows. As we discussed at our investor day in May, Axos Clearing is transitioning to a modern SaaS-based platform that will reduce our operating costs, increase the flexibility to introduce new products and features quickly and cost-effectively, and allow us to serve FinTechs that we are not able to serve today. This multi-year transition started last quarter, and the incremental costs associated with the development and implementation are in the run rate today. The rollout will occur in several stages, and we do not expect any meaningful one-time expenses associated with any one specific stage. The consistency in our growth, margins, and profitability is a testament to the diversity and efficiency of our model and the solid execution by our team. We have a long track record of managing through change and competition, interest rates, partnerships, and business max, while increasing our earnings and book value per share. Our strong loan growth and net interest margin support, continued net income growth, and growth in our broker-dealer fee will help us offset declines in mortgage banking gain on sale revenue. While the uncertain environment presents short-term challenges, we will 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. Our strong profitability, excess capital, and ability to be nimble positions us well to take advantage of market dislocations. We remain focused on generating strong organic growth that will translate into excess returns for our shareholders over time. Now I'll turn the call over to Derek who will provide additional detail on our financial results. Thanks, Greg.

First, I wanted to remind investors that in addition to our press release, an 8K with supplemental schedules and our quarterly earnings supplement was also filed with the SEC today and is available online through Edgar or through our website at accessfinancial.com. I will provide some brief comments on several topics. Please refer to our press release and supplements for additional details. To begin, I'd like to congratulate all of the team members of the Axos Enterprise on another fantastic year. We achieved record earnings of $240.7 million and diluted earnings per share of $3.97 for our fiscal year ended June 30, 2022. compared to $215.7 million and $3.56 for fiscal year end of June 30, 2021. Our fiscal 2022 return on equity was 15.61%, and our tangible book value increased from $21.36 to $24.45. Our bank efficiency ratio continues to be top of class at 41.61% for the fiscal year ended June 30, 2022. Shifting to our quarterly performance, I'll cover a few areas lightly touched on by Greg in a bit more detail. starting with our loan loss provision, which was $6 million for the quarter ended June 30, 2022, compared to $4.5 million for the quarter ended March 31, 2022, and $1.25 million for the quarter ended June 30, 2021. The increase in the provision for the three months ended June 30, 2022, was primarily due to strong loan growth, specifically in our commercial real estate and C&I lending portfolios. It is worth noting that on July 1, 2022, we reached the two-year anniversary of our adoption of CECL, as well as our election to implement the five-year CECL transition option for calculating regulatory capital ratios. This guidance allowed an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through June 30, 2022. The cumulative amount will now be phased out of our regulatory capital over the next three years. Based on our June 30, 2022 balance sheet, we expect this transition to be modestly dilutive or less than 10 basis points to our capital ratios in fiscal 23. Lastly, I'd like to touch on our non-interest expenses. For the quarter ended June 30, 2022, non-interest expenses were $104.8 million, up $18 million from the linked quarter ended March 31, 2022, and up $22.9 million from the quarter ended June 30, 2021. Excluding the $11 million contractual and legal charges, non-interest expenses were were $93.8 million for the quarter ended June 30, 2022, up $7 million on the length quarter. Data processing and professional services were the primary drivers of the sequential increase in our non-interest expenses. Data processing for the quarter ended June 30, 2022 was $13.6 million, an increase of $1.3 million from the $12.3 million for the three months ended March 31st, and a $.7 million increase from the $12.9 million for the quarter ended June 30, 2021. The increases are a reflection of the growth of our business as well as our ongoing investment in systems and personnel. Professional services for the quarter ended June 30, 2022, was $7.6 million, an increase of $3.3 million from the $4.3 million for the three months ended March 2022, and a $2.7 million increase from the $4.9 million for the quarter ended June 30, 2021. The primary drivers of the increases were legal expenses for matters Greg discussed earlier. As we look ahead into our fiscal 2023, we expect to maintain our banking efficiency ratio between 41% and 42%. based on our continued growth in our headcount, merit-based increases in compensation for existing staff at or above our historical range of 5% to 7%, and a higher level of spending on marketing to generate growth in our consumer and commercial banking businesses. With that, I'll turn the call back over to Johnny.

Thanks, Derek. Melinda, we are ready to take questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we'll go right into our first question from David Feaster with Raymond James. Please go ahead.

Hey, good afternoon, everybody. Hi, David.

Hi, David.

Maybe just touching on growth. Growth was phenomenal. It was extremely diversified. But maybe just touching about the pipelines and how they're shaping up. Is there anything notable, any notable changes in the composition? And then just curious on the demand you're seeing today. I mean, you talked in your prepared remarks about improving new loan yields. Have you seen any change in customer appetite or folks maybe getting some sticker shock? And if so, maybe what segments are you seeing that are more price inelastic or price elastic than others?

Yeah, that's a great question. I think where – so there's a multi-part question, so I'll try to get them all and correct me if I don't hit one. So pipelines are still very good. We do not expect the kind of growth in the next three or the next – next quarter that we had in this quarter, we expect growth to still be very healthy. You know, there's still a lot of activity, but there's also – there's probably reduced activity in the market, but there's also reduced competition. And that reduced competition is coming from any securitization market pullback, from general spread increases and a variety of other financial tightening conditions that are reducing competition, particularly in the non-bank sector. So that's very helpful, and that's very meaningful in the single-family business. So even though single-family volumes have gone way down, our pipelines have still been good despite us being pretty aggressive on the price side because the operations that were competing with us in many cases are literally blowing up and shutting down the next day, or they're having other issues. And so that's very helpful. On the multifamily side, some of the duration-oriented products, we've been a little bit more aggressive early on pricing up those products, and there have been declines in demand for those products somewhat market-based, but I think more on that sticker shock aspect. terminology that you've used however what we've done is we've moved to some more variable rate pricing on certain assets we've also hired an individual who can do derivatives for us and so as the yield curve inverts We haven't yet seen whether this is going to come to fruition, but for folks that are willing to lock in rates and willing to keep those rates for a period of time when you have a continually inverted yield curve, we can offer better deals to them and give them some duration and, at the same time, swap those loans entirely to floating. So, you know, I think maybe if I were to summarize it, I would say that financial tightening conditions have increased credit spread, reduced non-bank competition specifically, and then allowed us to be a little more aggressive with rate increases and maintain volumes. So although this quarter was a bit of an aberration, we feel pretty good about loan growth next year.

That's great. And that makes a lot of sense. Maybe turning to the deposit discussion on the securities business, sounds like a large majority of that might be from increased cash held in client accounts. But curious maybe how much you'd attribute to client growth. And it sounds like there's a good backlog of IRAs or RIAs that are looking to convert over. You've hired some new sales folks. Maybe just curious – you know, the potential deposit growth that you could see from new clients coming over and how you think about the deposit growth out of that business exclusive of some of those cash balance dynamics that you talked about.

Right. So we have, I think we have, you know, something like a billion dollar target of, growth, you know, for assets under custody there, something like that. You know, that translates. It's not, you know, and then obviously you apply those cash percentages. We think we can beat that. We're primarily engaging with smaller RIAs, although we do have conversations with much larger RIAs now. So I think that Where we are is we're looking right now at bringing on lots of smaller RIAs, and then those RIAs often grow. But we do have, frankly, some very large RIAs in the pipeline, and they're often converting only a portion of what they're doing now. So we're still kind of getting our sea legs a little bit. We've really expanded the sales team. The pipelines have grown dramatically, but the timeframes associated with these have these conversions are often extended. So they are, these are, the great part is it's a super sticky business. The hard part is it takes a while to get it. So I think that we are going to see these dramatic pipeline, we are seeing good pipeline increases. How much that translates immediately, particularly into the next year, is a little uncertain. You know, I think I think that it will be something meaningful, but it will – it's not going to fix or sort of – I don't think that we could say that if we get a cash sorting back to a normal level that growth is going to pull us entirely out of it, although it would be helpful.

Yeah, okay. And then just maybe curious how you think about maintaining the off-balance sheet deposits and the contribution to fee income this quarter there. You know, just, you know, when would you consider bringing some of those back on? At what point are the arbitrage opportunities still too great there? And then just curious whether you started to see any inflection in the bankruptcy trustee business at all and deposit growth from that?

You know, we are seeing some. We do expect that to get a little better. If you go to these bankruptcy trustee conferences, they've been sitting there and every conference over the last number of years has been, it's just around the corner, right? And Given that they have a counter-cyclical business, I suppose there's a certain morbidity to it. But we do expect that they do see some precursors to the filings. It's really hard to estimate, but I do expect that there would be some benefit there associated with an economic downturn to the extent it becomes obviously severe enough to drive that sort of activity forward. And then you had another part of your question. On the on-balance sheet. Oh, yeah. I think a couple of things to remember is that there are certain limitations with respect to certain components of that cash, not all of it, that makes it less beneficial from a regulatory capital perspective to have it on balance sheet. In some respects, prohibits it. So you have limitations on certain types of cash, and the percentage you can keep in an affiliate. So that likely would remain there. There's an ability to kind of potentially move that around to different types of accounts that removes that prohibition, but that requires some operational work. I think that that level probably will fluctuate more with the average level, and I still think there's some arbitrage there right now. But it's an interesting question if we continue to have such strong loan growth numbers, whether we end up having to sacrifice a little fee income on that side for lower-cost deposits. So that's a tradeoff there, and we just look at it as we go. That makes sense.

All right. Thanks, everybody. Thank you.

Next, we go to the line of Gary Tenner with DA Davidson. Please go ahead.

Thanks for the afternoon. Hey, Gary. I wanted to just follow up on that securities deposit-related question. And I was curious, is there, separate from what you just noted, Greg, in terms of some of the kind of regulatory prohibitions, you know, on some use Is there a need to maintain some level at third-party banks just to kind of have those banks to go back to over time in terms of totally turning the spigot off, or do you risk losing the ability to –

Yes. The short answer is yes. Yeah, the short answer is yes. And the other factor is the FDIC insurance. So for any customers who have multiple, and there's not too many of these, but some that have more than 500,000 of deposits with us, We want to make sure part of the key benefit of this program is providing FDIC insurance. And we have a stable of banks of over 20 partners and a pipeline that we are building to and constantly maintaining to increase our optionality there on where we can find the best rate arbitrage with those partners.

Does that make sense? And then just to make sure I caught the numbers correctly, is it $3.5 billion that are the securities deposit balances at other banks, or is that including the $2.5? I think you said that's on your bank.

That's the entire cash sorting balance. So $2.5, $2 and change was on balance sheet at Axos Bank.

So is that billion that's off? I mean, is that kind of the

more level that you would have at other banks or is there room to move some of that still without causing any of the around around it's going to vary in that kind of 800 to or so million dollar range that uh give or take a hundred million or two and that'll be the general kind of where we the the at least kind of low point, I would say. We could certainly, as we have different opportunities, send more off balance sheet, especially in a higher rate environment. But that's likely where we're going to be.

Okay. Thanks. And then in terms of just overall balance sheet management, as you think of kind of cash equivalents and the AFS portfolio, you're right around 10% of total assets right now. As we think about modeling balance, you know, the parts of the kind of earning asset mix over time, is that 10% of total assets kind of the ballpark that you would kind of look to maintain over time?

I'm sorry, what was the question?

You're saying that, what's the 10% referred to specifically?

Well, the cash and equivalents and the available for sale portfolio is right around 10%. Oh, gotcha, gotcha.

Yeah, there's a couple of different – a lot of the cash is tied to kind of regulatory-type requirements. So at the clearing business, we have requirements to hold cash against certain customer accounts. And then on the bank, we have a liquidity balance that we like to maintain there. I think the cash was arguably up slightly at quarter end. And part of that is just balancing out the loan growth that as far as some, there are a number of opportunities, some of which came through, some of which didn't at quarter end. And so we want to make sure that we have the cash on hand to fund those. So I think it's, I would expect it to be slightly below 10% as we look ahead.

Okay, thanks. And the last question from me on the expense side, Derek, I appreciate the, you know, kind of the guide you gave on the efficiency ratio at the bank segment. As you think of maybe just, you know, broader consolidated expense levels using the kind of core, you know, June 30 run rate of, what, 92, 93 million, you know, what kind of growth rate would you expect overall on a consolidated basis off that number?

So I think I gave the range on the bank side on the – I don't expect the delta between our bank side and our Axos financial efficiency ratio to be dramatically different than what it has been historically.

All right. Thank you.

Our next question or comment comes from the line of Andrew Leisch with Piper Sandler. Please go ahead.

Hey, everyone. Thanks for taking the questions here. Just following up on the expense run rate question here, it looks like they were just the two, the compliance or the contractual claim and the legal claim. So expenses are up about $6 million or so, about $92. I mean, is that the run rate we should be using, or are you looking at it more at an efficiency ratio target for the consolidated company, as you just mentioned, or is this $92 million a good run rate with some growth expenses added on there?

Yeah, the expectation is that there will be growth, and that's why we're giving kind of that 41% to 42% range of the efficiency ratio, because it certainly will have some variability from quarter to quarter depending on things. For example, we do the merit increases for staff at the end of September, so that's there'll be increases expected in our fiscal Q2 in that December quarter compared to the September quarter. So I'd point you again back to the 41% to 42% of the bank efficiency ratio and using that for your various models.

And then I also think that As rates rise, the investment in deposit personnel and systems and work on the deposit side becomes more valuable. That obviously shows up in... in expenses, but it's very valuable from a margin protection expansion perspective. We're adding a number of people, more salespeople on the deposit side. We're adding some teams with respect to some particular verticals in the deposit side and just growing that. That's where some of that guidance comes from.

Got it. And I'm sorry if I missed it. Did you say what the MSR write-up was or if there was one in the quarter?

One and a half. One and a half million.

Okay. So then if I take that out of the mortgage banking, still a little under $2 million of gain on sale revenue for the quarter from the mortgage side. Is that correct? Correct. All right. That's hopefully covered all my other questions. I'll step back. Thanks, guys. Thank you.

And we take our final question from the line of Michael Perico with KBW. Please go ahead.

Hey, guys. Good afternoon.

Thanks for taking my question.

Just a couple quick clarification questions. Just first on the – if I heard correctly, the $200 million of assets under custody that I think you guys are either brought on at the end of the quarter or bringing on next quarter from new clients, if I heard that correctly, is it still – I think at a prior analyst that you might have talked about kind of like a $2.5 million annual revenue run rate for every billion of AUC. Is that still generally a decent ballpark to think of as you guys add assets under custody in terms of flowing to the broker-dealer fee income once the full kind of impact of that's realized?

Yeah, I think that's not a bad number, but that number on an avoided cost basis would be more because of higher rates. So that would be better from a standpoint, depending upon the cash balances that come with those assets. I think one of the issues is that sometimes these opportunities all come in different sorts of packages. So, some of them, let's say, will come and they'll have heavy use of mutual funds and their cash balances, though, are lower because they're much more aggressive managers. And then others, you know, at least with respect to cash and investment, and then others will come with heavier cash balances, but they may be more ETF-based. So, You'll have differences there. I think that's a good number, though, to use. I think that's conservative, though, relative to the average cash that comes in and the avoided costs associated with the lower-cost deposits that you don't have to raise when you're growing loans.

Got it, Greg. Helpful. And then just lastly, obviously a fairly kind of volatile and dynamic macro environment right here. Just curious, how do you guys, how are you thinking about there's good commercial real estate multifamily growth in the quarter? Any views on how kind of changes in cap rates could impact LTVs in the portfolio? And just any context or additional thoughts you guys are kind of looking at or contemplating internally around credit on those books with just given everything that's going on in the macro currently?

Yes. I mean, we are very thoughtful with respect to making sure that we account for the significant stress on cap rates. And we look at those. And although, frankly, you haven't seen those translated the market transactionally, we're pricing as if we are. And remember, the vast majority of what we do is working with funds to So the loan-to-value ratios are much, much lower than the average financial institution with respect to those matters. And so I think that there's a lot of... capital in front of us, both from a lending and an equity perspective. But we do. We do look at that, and I think it's important. And I do think what you've seen is more conservatism from banks and non-banks, partially because securitization markets, other things. So I think it's actually a pretty interesting time to lend now And there's good opportunities. And we basically have some pretty strong niches, and we really focus on those. We have very strong partnerships, and we know where we're going with those. And so I think there's a real execution benefit for our partners to work with us. That's kind of played out pretty well. But look, I think it is a time to really be sitting back and looking and saying, obviously, particularly with respect to multifamily, where cap rates have been, and assuming that they absolutely need to go up. The only thing about multifamily that's sort of important to note, and obviously the question of how long those continue, is that the level of rent increases is in the market that have buoyed these investments have been shockingly high. So frankly, I've been running around complaining about how it's impossible for any of these investors to make money at the cap rates that they are buying multifamily at. but I'm lending at this rate that this LTV is so fine. And, frankly, they all get to come back to me and say, see, I told you so. I did get those 25% rate increases that I said I do, and I added all these units for these ADU elements and all these other things and look at how great things are. And the reality is they're kind of right right now, but I still think we have to be cautious about that because that cannot continue in that way.

Yeah, that makes sense. All my other questions have been answered. Thank you, guys. Appreciate it.

Thanks, Mike. This concludes our question and answer session. We return to Johnny Lai for closing remarks.

Thanks, everyone, for joining us. If you have any follow-ups, please contact me, and we will talk to you next quarter.

This concludes our teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.