Axos Financial, Inc.

Greetings and welcome to the Axios Financial second quarter 2023 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 that this conference is being recorded. I will now turn the conference over to our host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Thanks, Diego. And good afternoon, everyone. Thanks for your interest in Axos. Joining us today for our second quarter 2023 financial results conference call are the company's President and Chief Executive Officer, Greg Darabrantz, and Executive Vice President and Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Eric will review and comment on the financial and operational results for the three and six months ended December 31st, 2022, and we 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 linking statements that are subject to risks and uncertainties, and that management may make additional forward linking 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 to 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. Before handing the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10Q, we also issued an earnings supplement for this call. All of these documents can be found on our axosfinancial.com 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 Axos Financial's conference call for the second fiscal quarter, ended December 31st, 2022. I thank you for your interest in Axos Financial and Axos Bank. We deliver double-digit year-over-year growth in earnings per share, book value per share, ending loan, and deposit balances. Our strong results were broad-based, with increasing net interest margins and double-digit net interest income growth. We grew deposits by approximately 28% year-over-year, despite an expected normalization in cash-sorting deposits from our custody business. The diversity and optionality of our deposit franchise is a valuable differentiator that will allow us to maintain a strong net interest margin and a highly competitive market for deposits. We reported net income of $82 million and earnings per share of $1.35 for the three months ended December 31st, 2022, representing year-over-year growth of 34% and 35% respectively. Our book value per share was $29.79 at December 31st, 2022, up 16% from December 31st, 2021. The highlights for this quarter include the following. Deposits increased 3% late quarter, and 28% year-over-year to $15.7 billion. Checking and saving deposits increased 5% linked quarter and 33% year-over-year, representing 93% of total deposits at 12-31-2022. Ending net loans for investment balance were $15.5 billion, up 2% linked quarter or 7% annualized. Average loans were up 4.7% or 19% annualized. Solid loan originations were partially offset by higher than expected payoffs in certain C&I lending categories. Excluding single-family warehouse ending net loans increased by approximately $300 million in the three months ended December 31, 2022. Net interest margin was 4.49% for the second quarter, up 23 basis points from 4.26% in the quarter ended September 30, 2022, and up 39 basis points from 4.1% in the quarter ended December 31st, 2021. Net interest margin for the banking business unit was 4.65% compared to 4.5% in the quarter ended September 30th, 2022 and 4.3% in the quarter ended December 31st, 2021. Higher loan yields more than offset the increase in funding cost. The gap between our consolidated and bank only net interest margin decreased this quarter to 16 basis points from 24 basis points in the prior quarter. The primary reason for this dynamic was that our loan portfolio increased and our securities lending and customer margin balances fell by 33% and 20%, respectively, linked quarter. XO Security, comprised primarily of custody and clearing businesses, made positive contributions to our fee and net income. Total deposits from XO Securities were approximately $2.3 billion compared to the elevated $3.3 billion at September 30, 2022. Quarterly pre-tax income for our securities business improved by a $6.7 million linked quarter to $15.6 million due primarily to higher interest rates. Our efficiency ratio for the three months ended December 31, 2022 was 47.11% compared to 55.9% in the first quarter of 2023. The efficiency ratio for the banking business segment was 46.1% for the second quarter of 2023 versus 52.9% in the first quarter of 2023. Capital levels remain strong with Tier 1 leverage of 10.1% at the bank and 9.1% at the holding company, both well above our regulatory requirements. Our credit quality remains strong with net annualized charge-offs to average loans of five basis points first one basis point of the second quarter of fiscal 2022. The slight uptick in our net charge-offs from very low levels was principally due to losses in our personal unsecured and auto loan portfolios. Of the five basis points of net charge-offs this quarter, three basis points were from auto loans that are covered by insurance policies, which on average have paid 85% of the principal balance of these charged-off loans. We added $3.5 million to our loan loss provision this quarter to support loan growth. Total allowance for credit losses was $157 million on December 31, 2022, representing 22 times our annualized net charge-offs and 1% of ending total loans. With the vast majority of our loans having strong collateral protection from low leverage, we feel extremely confident about our ability to manage through an economic downturn. Loan originations for investment for the quarter ended December 31, 2022 were $2 billion, down approximately 22%, from the $2.6 billion in the comparable quarter a year ago. Q2 2023 fiscal year originations were as follows. $175 million of single-family jumbo portfolio production, $110 million of multifamily production, $64 million of commercial real estate production, $59 million of auto and unsecured consumer loan production, and $1.6 billion of CNI loan production and resulting in a net increase in ending CNI loan balances of $204 million. Ending loan balances in our jumbo single family mortgage business increased by $11 million to $3.8 billion. We generated $175 million of loan production in the second quarter of 2023, taking some market share in the significantly smaller market for purchase and refinance transactions. Prepayments in our jumbo single family mortgage business was $164 million in the three months ended December 31, 2022, down from $184 million of prepayments in the prior quarter. Although we are not seeing any stress in our jumbo single-family mortgage book, we continue to maintain conservative lending standards and low loan-to-values. Our jumbo single-family mortgage pipeline was approximately $292 million on January 23, 2023. CNI Lending had another good quarter. The $203 million of net loan growth in our CNI lending moderated from record highs achieved in the prior two quarters. Strong originations in our commercial specialty real estate business and our lender finance business were partially offset by higher payoffs in the back half of the quarter. We will be able to maintain strong yields across most of our CNI lending businesses. We slowed originations in our auto and unsecured lending to reflect our cautious view of the broader economy. Our entire auto and personal unsecured lending portfolio is comprised of prime and super prime borrowers, except for select auto loan customers where the bank purchases insurance that reimburses the bank for approximately 85% of its losses, potential losses. The $632 million of ending balances in the auto and personal unsecured book combined represents less than 5% of our $15.5 billion loan portfolio. Our credit quality remains healthy. and we're not seeing any signs that our borrowers are struggling to finance their debt obligations with us. 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 an adverse economic scenario. Non-performing assets, the total assets ratio was 54 basis points for the quarter ended December 30, 2022, down from 68 basis points for the quarter ended September 30, 2022. Of our non-performing loans, approximately 41% are single-family first mortgages, where we've had historically very low realized losses. Of our non-performing single-family mortgage loans, at 12-31-2022, approximately 81% had an estimated current loan-to-value at or below 70%, and approximately 82% are below 80% of our best estimate of current loan-to-values. Given the low loan-to-values of our asset-backed loans, we remain confident that we will incur credit losses that are manageable, if any, on any of the assets that are underperforming. Our loan pipeline remains solid, with approximately $1.4 billion of consolidated loans in our pipeline at January 23, 2023, consisting approximately of $22 million of single-family agency gain-on-sale mortgages, $292 million of single-family jumbo mortgages, $185 million of multifamily and small-balance commercial real estate term loans, $833 million of CNI and commercial specialty real estate loans, and $65 million of auto and consumer unsecured loans. After two consecutive quarters of record net loan growth, we moderated the pace of growth in the second quarter of fiscal 2023. Average loans increased by 6.7% and 7.7% linked quarter, or 27% and 31% annualized in the June and September 2022 quarters, compared to 4.7% linked quarter or 19% annualized in the December 2022 quarter. We remain confident that we will have achieved our mid-teens long growth target in the second half of our fiscal 2023 as payoffs decrease from elevated levels and new originations stay strong. Deposits increased 3% linked quarter and 28% year-over-year. Growth in small business and consumer deposits were offset by declines in certain commercial banking channels and clearing and custody deposits from elevated levels at the end of the prior quarter. Competition for deposits has increased across most of our deposit verticals, and our deposit betas vary from 0% in our Axos fiduciary service deposit business to 50% in our high yield savings and 1031 exchange deposit business. We have been successful retaining and growing consumer checking, savings, and money market deposits through cross-sell and relationship pricing initiatives. In our commercial banking, our low-cost nationwide deposit gathering and specialized servicing approach has allowed us to be more competitive in retaining and growing deposits from existing clients through earnings credits and other price adjustments. Our investments in cash and treasury management capabilities and teams have also increased the pipeline of prospective new treasury management clients. In access fiduciary services, our bankruptcy trustee business total deposits were approximately $1.1 billion at the end of the second quarter. We expect a gradual pickup in Chapter 7 and non-Chapter 7 cases and deposits over the next 12 months as the economy decelerates and bankruptcy filings rebound from decades low. Access to clearing continues to generate a significant source of low-cost deposits. We had approximately $2.3 billion of clearing and custody deposits as of December 31, 2022, including $1.5 billion that was on our balance sheet and $800 million that was placed at partner banks. The average custody deposits were $1.5 billion in the quarter ended December 31, 2022, compared to $1.9 billion in the prior quarter. Cash sorting by RIAs has increased across the industry, and ending cash balances held at Axos Advisory Services fell from 11% Deposits in our clearing business declined slightly to approximately $650 million. The weighted average cost of our clearing and custody deposits remains low, even with a rapid rise in the Fed funds rate. We have a healthy pipeline of new custody and clearing clients that will partially offset the normalization in client cash balance at Axos Advisory Services. We remain slightly asset sensitive with 43% of our loans comprised of five-year hybrid single-family jumbo mortgages and multifamily turn loans, and 48% of our loans comprise primarily of floating rate CNI loans. An overwhelming majority of our CNI loans are adjustable rate with current rates above their floors. 45% of our variable rate CNI loans adjust to LIBOR, and the other 55% adjust to SOFR, Ameribor, and other indexes. Net interest margin was elevated this quarter with consolidated and bank-only net interest margin of 4.49% and 4.65% respectively. Our consolidated and bank-only net interest margins were boosted by several factors this quarter, some of which are unlikely to have the same level of benefits in future quarters. First, loan growth for the June and September 2022 quarters were exceptionally strong, which allowed us to reprice a large portion of our loan portfolio with new loans at higher yields. Second, net interest income benefited from a prepayment of one of our equipment lease borrowers in the December 31, 2022 quarter. This provided a one-time boost to this quarter's net interest income of approximately $2 million and increased the net interest margin by five basis points. Third, average deposits at Axios Advisory Services were elevated in the past two quarters before normalizing toward the end of the December 2022 quarter. Average deposits as a percentage of assets under custody over the last 12 months in our clearing and custody business were approximately 9.1%. This is elevated compared to the long-term average of 6% to 7% prior to our purchase of the custody business. In the first quarter of fiscal 2023, ended September 30, 2022, the average deposit balance in the securities business was $3.1 billion. Currently, the total deposits in the security business are approximately $2.3 billion, comprised of $1.7 billion at Axos Advisory Services and $600 million at Axos Clearing. Being able to fund a portion of our loan growth with low-cost clearing and custody deposits had an outside benefit to our consolidated and bank-only net interest margin in the first half of fiscal 2023. Finally, our loan balances grew while our securities lending and margin lending balances declined. This dynamic boosted our consolidated net interest margin this quarter because fee and interest income from securities and margin lending generally have lower yields than our loan yields. New loan yields during the quarter were as follows. Jumbo single family, 6.99%, multifamily mortgages, 6.91%, auto, 9.65%, and commercial and industrial, 9.32%. With new C&I loans coming in with a spread between 425 and 475 above the index rate, the continuation of cash sorting by custody clients and increasing deposit competition for many of our deposit businesses we expect our consolidated net interest margin to normalize to between 4.25% and 4.35% in the next few quarters. While we expect a rebound in loan growth to our mid-teens target, given the timing of loan growth coming out of the holiday season, we expect our Q3 2023 fiscal net interest income to be flat or slightly down on a dollar basis from this quarter levels before increasing in the fourth quarter of fiscal 2023. advisory service and the pace of loan growth are the biggest drivers of our net interest margin and net interest income. Axos Securities, which includes our securities, clearing and custody, self-directed trading and managed portfolio business, ended the quarter with approximately $22.5 billion of assets under custody and $9.8 billion of assets under administration. The securities business generated $17 million of pre-tax income excluding non-cash amortization expenses in the second quarter of fiscal 2023 and improvement from adjusted pre-tax income of $10 million in the prior quarter. Our securities business continues to benefit from rising rates despite volatility in the average and ending client cash balances. Our custody business also had asset and transaction-based fee income that countered some of the changes in the deposit balances. Axos Advisory Services is seeing good momentum, adding approximately $318 million of net new assets in the quarter ended December 31, 2022, and a pipeline of eight new advisors with $625 million of new assets under custody that have committed to Axos over the next 12 months. The pipeline for Axos Advisory Services remains robust, with active discussions with several multibillion-dollar firms who are looking to move portions of their assets from their existing custodians. We are making good progress with the various operational and infrastructure initiatives in our clearing and custody business. We have started to automate manual front and back-end processes and accelerated the transition of low-value tasks to lower-cost near-shore and offshore teams. These efforts, combined with the full rollout of a proprietary securities core system and successful implementation of various internal straight-through processing and other operational efficient initiatives in the next 12 to 18 months, will fundamentally improve the cost structure of our securities business and allow us to generate much better operating leverage. We continue to invest across our other businesses as well. In consumer banking, we are working hard to launch the next version of our consumer app in the summer of 2023. This new version adds a planning tab to the consumer app that will offer a variety of services such as financial planning journeys, investment content, enhanced personal financial management features, and better system and data integration with third-party service providers. The revised platform moves from a banking-centric focus to a more integrated set of financial products, including enhancements to the self-directed trading and automated model-based investment platform. The platform will also enhance our ability to bundle at account opening securities and bank accounts. We believe these enhancements will be an important upgrade that will reduce customer acquisition costs and increased user engagement and cross-sell to our large and expanding base of affluent and high-net-worth consumer deposit and lending clients. In commercial banking, we are adding new API integrations for clients and existing and new verticals. By making our cash management and payments easier to use, we should be able to generate incremental fee income and deposits. In our securities business, one of the key initiatives is a white-label banking platform for independent advisors and broker-dealers, which we expect to launch in the summer of 2023. This platform integrates our banking and lending products with the securities accounts we hold for advisors and brokers. Based on conversations with existing advisors, brokers, and prospective clients, interest in having access to a robust set of banking and lending products for their end clients is extremely high. As Charles Schwab begins the first phase of their technological transition later this year as a result of the acquisition of TD Ameritrade, our white-label banking platform, in addition to our strong custody technology and high-test service offerings, positions us as a compelling custody alternative. Before I hand the call over to Derek, I'd like to highlight several reasons why we believe Axos is well-positioned to mainstream strong, profitable growth. First, we have a diverse set of businesses that provide balance and optionality. For example, while higher rates dampen mortgage banking gain on sale and jumbo SFR lending growth, higher rates are extremely accretive to the profitability of our clearing and custody business. Our fee income, deposit, and lending businesses are much more diverse than they've been in the past. Second, we have a strong balance sheet and ample excess liquidity to weather a prolonged economic downturn. Our low loan-to-value strategies in single-family and multifamily has been battle-tested through the great financial crisis, and our asset-backed commercial specialty real estate and lending finance books are well-secured with senior positions, well-capitalized partners, and multiple exit strategies. Third, our securities book with an outstanding balance of only $250 million as of December 31st, 2022 is of short duration and small and absolute in relative terms and has resulted in de minimis impaired value despite higher interest rates. We have a clean capital structure and ample access to funding and liquidity should we need it. Fourth, we don't have any exposure to crypto related activity or deposits or any other highly cyclical source of funding. To the contrary, an extended economic downturn would likely generate significant growth in our low-cost bankruptcy and fiduciary deposit business. Finally, we have a proven track record of opportunistically strengthening and growing existing and new businesses during periods of market dislocation. We are ready and able to capitalize on opportunities that will enhance shareholder value. With that, I'll turn it 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 was 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 a few topics. Please refer to our press release, our SEC filings, and our website for additional detail. Non-interest income for the three months ended December 31st, 2022, was $28.3 million compared to $30.8 million in the corresponding three months a year ago. Broker-dealer fee income increased from $6.3 million in Q2 2022 to $9.8 million in Q2 2023, due primarily to higher interest rates. While mortgage banking was down by approximately $4 million year-over-year, to $0.6 million as a result of the industry-wide downturn in single-family agency mortgage refinancing activity. Prepayment penalty fee income was also down by $2.5 million to $0.8 million as the increased interest rate environment led to decreased levels of prepayments on multifamily and commercial loans. Our non-interest expense for the quarter ended December 31, 2022. was $107.5 million, down from $116 million in the prior quarter. Salaries and related expenses for the quarter were $49.7 million, up $2.7 million from the $47 million linked quarter, and up approximately $10 million from the year-ago quarter. The linked quarter and year-over-year increases are primarily attributable to our annual salary compensation increases that occurred at the end of the first fiscal quarter and increased headcount to support loan and deposit growth. Advertising and promotional expenses increased to $10.9 million from $6.4 million in the prior quarter to support the growth in our deposit businesses. Given the competitive landscape for deposits, We expect to maintain a higher level of spending on marketing to grow our consumer and commercial deposits. Professional services for the quarter ended December 31, 2022 was $8.5 million, an increase of $0.4 million from the $8.1 million for the three months ended September 30, 2022, and a $2.6 million increase from the $5.9 million for the quarter ended December 2021. The primary drivers of the increases were consulting expenses related to technology investments and legal expenses. Going forward, we expect our efficiency ratio for the banking business to be in the mid to high 40% level for the second half of our fiscal 2023. We expect to moderate the pace of new hires and the level of growth related investment spending to be roughly the same as the current run rate. in the first half of fiscal 2023. Lastly, with our return on equity increasing to 18.7% in the fiscal second quarter from 13.9% in the prior quarter, and loan growth decelerating to 7% annualized from the 32% annualized in the September quarter, we were able to increase our capital ratios this quarter. Tier 1 capital to risk-weighted assets for Axios Bank was 11.3% at the end of the December quarter, up from 10.9% in the prior quarter. Net capital at Axos Clearing increased 23% linked quarter, due primarily to higher profitability in our securities business. We have excess capital at the holding company available to contribute to our subsidiaries if needed, With asset growth projected to be in the mid-teens in the second half of fiscal 2023 and an ROE well north of 15%, we expect to maintain strong capital levels throughout the enterprise. With that, I'll turn the call back over to John.

Thanks, Jarek. We are ready to take questions.

Thank you. And ladies and gentlemen, at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would 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. Our first question comes from Andrew Leisch with Piper Sandler. Please state your question.

Hey, guys. Good afternoon. Thanks for taking the questions here. Hi, Andrew. I just want to look at the margin. It sounds like it's going to normalize a little bit lower because there were maybe some items affecting it here this last quarter. But if we're looking at the margin, say, a quarter from now, and we've had a couple more rate increases, is there room for it to go higher? Or this funding cost pressure just seems like it would be pretty meaningful. So do you think it could – ever go back above this range that you highlighted for the third quarter?

I think it's good to look at that range as appropriate guidance for the next several quarters. You know, we think we're kind of at more the bottom of within a couple hundred million dollars of the cash sorting element, but that makes a difference. And then it's, you know, I think it's prudent to stick within that range. There's always some potential for upside, but I think That's why we tried to give it just based on what we're seeing now just with respect to, you know, where we are in the quarter now and where we are on the deposit side with respect to the clearing and custody deposits.

Got it. Yeah, that was my next question on the cash sorting, so thank you for that. And then, Derek, just your commentary on the efficiency ratio. Did I hear that correctly? Bank level, 45%. The securities business, I think, is usually with six or seven percentage points on top of that. So should we see the efficiency ratio in the 50% range in aggregate? I'm just curious how that's going to flow through.

No, with what we were just highlighting with the cash sorting deposits, there's some intercompany there because there's a level that we keep at the bank, right? So as the... As those deposits are paid to clearing, that efficiency ratio increases on the bank side but decreases on the – the income obviously helps decrease it on the clearing side, so it actually brings the efficiency ratios closer together. So I think what you saw this quarter in terms of the efficiency ratios will be more of what to expect kind of as a run rate going forward.

Got it. All right. That's very helpful. Thanks for taking the question. We'll step back.

Thanks, Andrew.

Our next question comes from Gary Tenner with D.A. Davidson. Please state your question.

Thanks. Good afternoon.

A couple of points of clarification. Greg, did you say that you thought you'd be in the mid-teens on loan growth for the back half of the fiscal year or for the full fiscal year, including the last couple of quarters.

I annualized on the back half. Yeah. We, we, because if you look at how much loan growth we had, yeah, you assuming that we're having us, we expect to normalize more in the six, 700 ish range, roughly next quarter or something like that. Certainly lower than we had the prior quarters, but above where we are now. And, you know, it's, it's, it's hard to say things can move around, but that's kind of what we're seeing right now. And, decent visibility into it. And I think that'll be true with that or a little higher in the subsequent quarter as well. I think the key, though, here is that the one thing is that the average balances, when you come out of the holiday seasons, this quarter gets started a little more slowly, so you often end up with it a little more back-end loaded. So that's why we gave guidance on the net interest income for the next quarter, just given the you know, the cash sorting and then also the timing of loan growth, we expect to be pushed out a little bit more.

Okay. And it's likely Crestle and kind of Lender Finance being the primary drivers in the back half or the second?

Yeah, I think that's right. We are seeing some jumbo mortgage loan growth, but it's not so huge. It's more than this quarter, but not, you know, probably not. Not in the $100 million plus range.

Okay, thanks.

And then just regarding the auto charge ops and the insurance receipts, is there a lag to when that comes in and where on the income statement is the recovery to be recorded?

Yeah, it's about a six to nine month process to go through. So we've actually had a decent chunk coming in, not big numbers, but it's growing over the last several quarters. And it's coming in through banking service fees and other income. That's the line item that's coming in. But it's not huge, huge dollars, but there is a six- to nine-month lag because of the processing, the application to the insurance company. and working through that process.

Just the way the accounting works, in this period, the five basis points of charge-off, 60% of them were from those auto loans that are insured. It's obviously a small number, but it just sort of comes in a little bit differently. So it isn't as if not that five basis points is much charge-off, but even that is enhanced by the nature of the accounting for that insurance.

Great. Thank you. Thank you. And our next question comes from Michael Perito with KBW. Please state your question.

Michael, your line is open. Go ahead. Unmute yourself.

Okay. We'll move on to the next question.

Just a reminder, to ask a question, press star 1 on your telephone keypad. Our next question comes from Edward Hemal Garn with Shaker Investments.

Please go ahead. Yeah, great quarter on managing through a difficult rate environment.

Thank you.

The question, you know, back in, you know, the financial crisis, I mean, in 07, 09, when you took over, you and later on, even after that, You seem to do a very good job of taking advantage of the reluctance on the part of some of your competitors, perhaps, to be making loans. Are you finding any additional, you know, that your banks are really pulling back as much? I mean, some of the surveys and stuff certainly indicate that they are, but I'm just curious what kind of an environment you're seeing.

Yeah, you know, it's interesting. It depends on each area. I think on the jumbo mortgage side, a lot of the competition that had come up over the last couple of years were from these conduits that had securitization exits, and those have clearly been challenged. But the market is so slow, both from a purchase and a refinance side, that it's hard to see there. And we do see... you know, decent loan growth. But, you know, there's certain areas where banks have become a little less active, for sure. We're able to take a little more rate, tighten credit, things like that. It's not completely frozen, though. It certainly doesn't have, like, you know, single family had that feel in 2010 when we started doing a lot more, for example, of it just You know, everybody went to the same thing and thought that if you did a 40% LTV mortgage loan after housing prices fell 50%, that was a horrible thing. And so there was that massive, massive dislocation. It's not quite like that now. I think you see some of the securitization exits blown out a little bit. So it's more there's a little more spread. There's, I think, a higher value on certainty of execution. because I think that these type of environments, people like to work with people they've worked with before because they understand the nature of what kind of execution we provide, which I think has been valuable for our repeat clients. I feel pretty good about this environment. Actually, I like where we are here. I think we've done a good job preparing on the liquidity side The loan portfolio is looking very strong. You know, even in areas that I think we made, not that we're seeing much, I think we made good decisions around the auto side, ensuring a lower-tier product and things like that. So, yeah, I think it's pretty good. You know, obviously, you know, I know where you're going with this. You would always like to see higher growth, I think. I think, you know, we've got to be thoughtful about capital ratios. We've got to be thoughtful about the fact that the stock isn't where you'd want to issue it, right? And then any kind of subdebt or other capital is also quite a bit more expensive. That same benefit of the spreads on the side when you're the lender impact you when you're the borrower. So I think the good part for us is that with, you know, a high ROE and strong markets, and strong earnings that we are able to grow organically. And I think we just have to make sure we're staying in that range to ensure that we're building capital, keeping it relatively consistent, and not relying on any capital markets right now until the stock market better reflects the value that we believe we should get for the company.

Great. And I actually did mean that as a compliment. I thought you really managed this process well. So I'm not, as a shareholder, I wasn't hopeful for more. I thought that you did a very good job.

Okay. Well, thank you. Thank you. Thank you. I really appreciate it. Thank you. Sure. Thanks.

And our next question comes from Michael Perito with KBW. Please state your question. Take two. Hello.

Yep, we can hear you. Hi, how are you? All right. Sorry about that. I got disconnected, so I missed a few of the questions. So I'll just wrap it up with just a big-picture one for Greg. You know, this isn't the first time you guys have hit this level of ROE, but it does feel a little different. I think structurally the NIMS is a lot stronger than it was maybe a handful of years ago. You have the AAS business, which is starting to contribute more meaningfully on the bottom line. So I'm just curious, Greg, how do you think about the ROE of this business evolving? You've been in this 18 plus or minus, 18, 19% range for quite a long time, but is there kind of the box in place for that to maybe structurally move higher here, understanding that there are some elements that might normalize, but just curious how you're thinking about it.

Yeah, I think in a much longer timeframe, and I mean, let's say two years plus, I think we have some really neat plans With respect to that, for example, I think the cost structure of the securities business will be fundamentally evolved by what we're doing on the core development side. By way of example, that business does have the potential to scale at higher returns on equity if we are able to scale it and make that business grow, and I think we have that capacity over the longer term. I would be a little cautious, as much as I'd like to be optimistic, just given the you know, what we've said for margin guidance here that, you know, that will be coming down a bit. We did have those one-time benefits associated with the significant elevation of the securities deposits, which, you know, that's a, you know, a billion dollars of zero-cost deposits is a nice boost, and if that's not there, you know, you, you, then that obviously, um, you know, impacts things. And so I just think we have to be a little cautious about that, but, uh, yeah, look, it's, it's, it's kind of, I think that, I think that you can see that, that happening. Um, but a lot of, uh, but there's just a lot of unknowns, you know, with respect to, you know, where spreads go in the capital markets, all those different kinds of things kind of impact that. But, you know, I feel, I feel good about where we are and, uh, You know, I think we've got a lot of – I feel like the investments that we're making are all geared in the right way towards that continued improvement. And some of them are pretty – you know, it's significant to build your own securities core, for example, right? But it's going really, really well. So, you know, I think those kind of things are the type of things that can come together to – to generate a continued enhanced return on equity.

Great. And then just secondly, and if you guys address this while I got kicked off, feel free to just point me to the transcript. But just on the partnership with Tassin and some of the digital asset stuff that you guys were focusing on, can you maybe give us an update of where that strategically is at this point? I mean, obviously it was a volatile handful of months. in that business. I'm just curious what your updated thoughts are there and anything else you're willing to offer would be great.

I think where we are with respect to that right now is we're kind of letting the situation evolve a little bit and watching what's happening in the market. It's moving a lot. We've obviously done some technological investments, but I think there's going to be regulatory scrutiny, regulatory guidance, and we want to prepare ourselves to participate, but not necessarily get ahead of it either. So I think, frankly, just obviously watching what's happened with the market participants there, even with the deposit bases and things like that, I think it certainly has... has impacted our views on the level of strategic importance that we're going to be placing on those elements. Now, you know, I think it'll be interesting to see how the space evolves over time in the longer term. And I think what we need to do is be ready to participate. And we do have, we've built technology, we signed with Tacit Pay, things like that. And what we're going to continue to sort of watch where this goes right now. I think, frankly, there's a significantly enhanced regulatory scrutiny on these products right now, and regulators are nervous, and I can't say that that is necessarily unjustified. And I also think that some regulatory clarity around certain other elements of the business would be helpful as well. So, you know, we're We're continuing to just look at that and then be thoughtful about it. For example, we had created a process where we built our own platform to be able to launch our own Axe stablecoin, for example, and as near as we can tell from a regulatory perspective, no bank has been granted the ability to do that, nor do I foresee the regulatory environment being receptive to that for a while until there's a lot of clarity? So, you know what? Look, that's fine. It'll be ready. If there is regulatory clarity, if there's not, you know, I think even on the self-directed trading side where we thought we would, you know, be able to, to be able to utilize some of that crypto asset trading as a way of generating customer business, I think that that may be something over the longer term that we pursue. But right now, I think the level of consumer interest has also diminished significantly as well. And so other kind of elements are driving that. So, you know, frankly, we're turning more to thinking about how we can talk to our clients about fixed income, for example, which has become a lot more interesting. We still obviously will take and open deposit accounts thoughtfully in the right way there, but we also have to be cautious about just what's going on in that space right now because there's just so many movements and changes. I think that's That probably gives you a flavor of where we're thinking, how we're thinking.

That all makes perfect sense. Thanks for the thoughts and for taking my questions.

Sure. Thanks, Mike.

Thank you, and there are no further questions at this time. I'll hand the floor back to management for any closing remarks. Thank you.

Thank you, everyone. Really appreciate your time and attention, and we'll talk to you next quarter. Thank you.

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.