Axos Financial, Inc. (AX) Q3 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Axos 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. [Operator instructions] 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, and thanks for your interest in Axos. Joining us today for Axos Financial, Inc’s third quarter 2022 financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President of Finance, Andy Micheletti. Greg and Derrick will review and comment on the financial and operational results for the three and nine months ended March 31, 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 risks and uncertainties. Therefore the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. All of these documents can be found on the Axos Financial website. With that, I would like to turn the call over to Greg for his opening remarks.

Thank you, Johnny and good afternoon, everyone and thank you for joining us. I'd like to welcome everyone to Axos Financial’s conference call for the third quarter of fiscal year 2022 ended March 31, 2022. I thank you for your interest in Axos Financial and Axos Bank. We had an excellent quarter with double-digit growth and 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 balanced 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 pending loan balances of $13.1 billion up 3.9% linked-quarter or 15.4% annualized, strong ending 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 balances increased by 9.5% linked-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 basis points in the quarter ended March 31, 2021. Net interest margin for the Banking Business was 4.21% compared to 4.3% in the quarter ended December 31, 2021 and 4.23% in the quarter ended March 31, 2021. Counter to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth towards 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 noninterest-bearing deposits increasing by approximately $287.8 million from December 31, 2021. Noninterest-bearing deposits represent approximately 33% of our total deposits at March 31, 2022, a significant improvement from 23% in a corresponding period a year ago. The steady growth of noninterest-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 business banking – the Banking Business segment was 39.79% for the third quarter of 2022 versus 39.39% in the second quarter of 2022, which is 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 $0.89 in the year ago quarter. Strong growth in our pre-tax prevision 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 5 basis points versus 3 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 31, 2022 representing 22 times our annualized net charge-off and 1.1% over ending total loans. Total loan originations for the third quarter ended March 31, 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 correspondent 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 multi-family production, $147 million of commercial real estate production, $105 million of auto and unsecured consumer loan production, and $1.7 billion of C&I loan production resulting in a net increase in ending C&I loan balances of $584 million. We generated $5.7 million of mortgage banking income compared to $4.6 million in a quarter ended December 31, 2021 and $9 million in the correspondent 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 valuations 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 a foreseeable future partially offset by MSR valuation gains as rising interest rates reduced 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. C&I 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 a steady expansion in loan production and net balances. Demand across remain strong across loan types and geographies with a backlog of approximately $886 million at 4/25/2022. We have positive momentum across multiple C&I lending verticals and remain confident that we'll 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 efficiencies across each business unit that will result in cost savings as we grow and our security business 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'll 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 in savings accounts representing 92% of total deposits at the end of the quarter, grew at a faster clip increasing by 6.5% linked 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 reprised 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 noninterest-bearing deposits were $4.2 billion at March 31, 2022, up from $3.7 billion at December 31, 2021. Growth in noninterest-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 in competition for deposits increase. Our diverse lending and deposit businesses and modest securities portfolio positions as well for a rising interest rate environment. Our securities broke with approximately $230 million of ending balances is less than 2% of total assets at March 31, 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 was $3.5 billion and $2.1 billion of loan principle outstanding at March 31, 2022 representing approximately 27% and 16% of our total loans outstanding as 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 multi-family loans on our balance sheet. The weighted average duration of the jumbo single-family mortgages and multi-family mortgages on our balance sheet were approximately three and four years respectively. Note rates on loans originated in our single-family jumbo multifamily and C&I loans were 4.12%, 4.24% and 4.86% respectively into three months ended March 31, 2022 up 18 basis points down two basis and up 31 basis points from the prior quarter. We raised rates for our newly originated 5/1 jumbo single-family and multi-family loans in April and demand remains solid. C&I loans have been the biggest contributor to our overall loan growth over the past several years. For the quarter ended March 31, 2022, C&I 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 C&I loans are adjustable rate. 84% of our variable rate C&I loans adjust to LIBOR and the other 16 adjust to SOFR, AMERIBOR other indexes. At March 31, 2022, approximately 24% of our C&I loans are above their floor and 73% of our C&I loans will be above their floor with another a 100 basis points up and 97% will be above their floor at 200 basis points up. While competition for well secured C&I 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 upgrade 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 access 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 and partner banks reprice immediately to changes in fed funds while another 30% repriced within three months. What we expect deposit betas to rise is 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-centric deposit services model. Our credit quality remains healthy. Net charge-offs, the 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 to 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 $0.5 a million higher from the last quarter and up $1.8 million year-over-year. The increase in loan loss provision primarily reflects changes in loan mix with C&I 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 multi-family and small balance commercial real estate term loans, $886 million of C&I 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 team’s 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 access clearing due to industry-wide declines and 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 text deck. We successfully converted access advisory services from JPMorgan to access clearing this quarter. This will provide us with more flex 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 secretion for the AAS acquisition in fiscal 2022 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 subordinate debt raise in February. Furthermore, we had $2.8 billion of liquidity available the fed discount window as of March 31, 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 access capital for opportunity buybacks and accretive M&A. Our securities business had a next 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 cost Axos Clearing generated $2.1 million of pre-tax income for the quarter ended March 31, 2022. Axos 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 Axos Clearing in the third quarter of 2022 were 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 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 access 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 the 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 need 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 months to 18 months to help access and our clients grow on scale. We’ve successfully overcome the loss of H&R Block and other driven [ph] related revenue and navigated through periods of competitor pressure in our jumbo single-family and multi-family 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 and trading, commercial real time payments in a modern core for Axos Clearing that will make us more competitive from a cause product technology and scale perspective. Not only are these initiatives will generate short-term benefits, but they’ll 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 will aggressively deploy resources when we see these opportunities to accelerate our growth. Now, I turn the call over to Derrick, 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 8-K with supplemental schedules and our 10-Q 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 a $3.1 million benefit recognized this quarter from our MSR valuation 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 31, 2022 significantly improved when compared to 42.33% for the three months ended in March 31, 2021 and a small change when compared to 39.39% for the last quarter ended December 31, 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 31, 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 2021 to $43.1 million in the quarter ended March 2022. Over $2 million of the increase is due to the reset of the calendar year and related payroll taxes and 401(k) contributions. Salaries and related costs increase $4.6 million from $38.5 million in the quarter ended March 31, 2021 to $43.1 million and the quarter ended March 31, 2022, which is due to increased staffing levels, including the addition of the AAS personal. 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 a 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 subordinate 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 Derrick. Kyle, we’re ready to take questions

[Operator Instructions] Our first question is from David Feaster with Raymond James. Please proceed with your question.

Hi, good afternoon, everybody.

Hi, David.

You guys have been able to take a ton of expenses out of that AAS business. I would’ve thought most of the savings would’ve been realized just given what you guys have done, but it sounds like there’s still more to come. Just curious, 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, how you think about what 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 has 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 risk back to what the efficiencies 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 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, and obviously some of that’s off balance sheet, 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, assuming that the deposits don’t generate anything. And there’s, 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 million or $7 million out of AA, out of collective securities business on the cost side. It’ll probably take two to three years to get there fully and it’ll require some investments, but that’ll be an ongoing number. So 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, that’s very manual. So it really is kind of, it’s sort of a grinded out approach to that kind of stuff, but yes, there’s a lot of opportunity in that business to take out a cost and grow. And I think there is a scalability to it as well, once that, that sort of stuff gets done, then you can add a lot more clients without having commensurate levels of cost. So, I think without having to kind of, I don’t know, Derrick 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 all almost have to peg an efficiency ratio at different levels of interest rates, right?

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. 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.

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 that those businesses. And that it’s really exciting and it’s something that folks are really focused on.

Yes. No, that is that – 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, AES as, what are the really they 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 stick here? I was just curious how market volatility might play into an opportunity for you to accelerate growth.

Yes, 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 with a swab when, swabs just so big, and that it just naturally, the ability to concentrate on every client in that business is difficult. So I think it’s it is a – the good part about all of these businesses is that it’s hard to lose clients because it’s a real pain in a butt to switch. You’ve got to do rep papering, 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. So it’s – these sales cycles tend to be long. And there’s a tech roadmap that needs to be implemented in AAS. And I think it’ll be important there. On Axos Clearing there’s 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 it’s partly because of the cost structure that we have including our core cost. And 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’ll be an area of potential as I think. Yes, 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, those are some of the things we’re working on right now.

That’s exciting. That’s great color. I appreciate it. And then maybe just shifting more broadly to the banking side, to just the competitive landscape and what you’re seeing, obviously pricing’s competitive. Just curious how new loan yields are trending. I know we were, you talked about being more willing to compete on pricing to drive growth. Sounds like you’re seeing pricing increases at least on the mortgage front. Like you talked about just curious, how loan – new loan yields are trending the competitive landscape, and whether you start to see more aggressiveness growth in from competitors, just in terms of standards or structure or terms or anything.

Well, on the single-family side, the disruption and 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 book, certainly this quarter probably nicely. And with having essentially taken rates up significantly. So, 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 the September quarter. So, we – that’s a significant increase. We’ve tighten up standards a bit. I think the market is the, securitization markets kind of kicking back on some of the stuff that had 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, 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 five year. We never wanted to go there ultimately made a lot of sense. We were, we doubled 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 get looking to sell it. We ended up getting out at a gain, which was great because, 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 lots 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, I don’t want to predicted, our net margin will go up because I don’t think that’s the case, but I definitely don’t see some kind of, any kind of material deterioration as a result of the rates upside. I think we’re, we have that gap a little bit of a gap in the, in some of the floor rates. I think it was what was it on the 50% Johnny?

43.

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, the given the prepays on the hybrid side, I think we’re going to be, I think if you look at what happened in the last rate cycle and have the team looking at it, I mean, it we were okay and we’re going to be okay here too, and will I think good loan growth.

That’s helpful. Thanks. That’s great color. Thank you. I’ll look forward to seeing you all next week at the Analyst Day.

Thank you.

Thanks, David.

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

Hey guys. Good afternoon.

Hey Andrew afternoon.

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

Look things, things are looking pretty good on the lending side. And obviously with single-family coming back as a cylinder, I think that’s a good for the engine. And it’s also good obviously for Axos Capital, et cetera. Look I guess it’s, what’s interesting about this is 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. We are seeing some positive signs or banks are getting ahead of stuff, so that’s good, but we obviously want to be really cautious about duration here, even though some will start to argue that stuff will roll over after, 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 interest rates. Right. I mean, we’ve really and effectively for a really long time. We’ve been in a very low interest rate environment, and I think that’s something we just have to look at, but 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?

No, there’s nothing that in our portfolio specifically that concern as me, but I think every lender should always just be concerned. It’s a disposition, right? I think that look; 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 and you just, 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 is 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, obviously I think it would be better for lenders if home price started to moderate, at least from a growth perspective or stabilized, because there’s just been a lot of that. So, those are all things that are there. I think, look we are – we’re cautious about our loan to values. We’re always focused on that. I do think assets though, do have a potential to reprice and 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 D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon. Hey, I just want to ask a clarifying question on the security segment. I think Greg, you had mentioned a process that will lower annual I think expenses by about a $1 million. Did I hear that correctly? And can you just state again what that was?

Yes, 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 little less than four months. So, but with that, we brought over their clearing firm JPM. So 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. That was completed in the – at the end of March.

Okay, great. And then in terms of the fees on the swap deposits is what’s the threshold or is there an upward threshold to where those, the interest on those ultimately get shared with the, with the client? Yes, I know the initial fee 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 that then, then it might start to become a 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.

I also, yes look, I think partially this is all related to, I mean, we would’ve raised pricing frankly in AAS, if it wasn’t for this. So they each trade did a well, I’ll say this, they, yes they took a business that was making the first time we looked at it, $25 million and there, it wasn’t a rate environment. They, in 18 months they made lose $5 million. Right. And they did this through a lot of mechanism. So one of them was through really hurting pricing discipline in a variety of ways. It’s not worth detailing. So this is just in time because, frankly we need to be paid for our services. So the pricing is probably a little low for what we’re providing the clients, but with the overall change in interest rate environment, it’s sort of there, but this is not look, this is cash that has to there for the levels of investment in securities. This is not the goal of providing savings accounts for people. So this is part of the way the business works. And, if the, 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 so…

Okay. The prior question kind of talks to this a little bit, but Greg, in terms of the CRESL [ph] business, I mean, that’s been driving a lot of growth, drove a big chunk of the end of – growth this quarter, as you just think about higher rates and looking at projects, are you seeing anything that gives you pause as kind of, your team models out real estate evaluations towards the end of projects timelines? Is there anything that maybe doesn’t look like it would cash flow 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’ve – could’ve better at a zero rate environment that at 250 by now.

Yes. No, not really with respect to that. I mean, we are in very low leverage positions, sub 45% on these lease loans are certainly are the type of – the type of rate increases they would have to have for the stabilization of the buildings, not to be able to get out at our bases or now it’s – we’re two and three times covered and more, 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 mass lenders and stuff like that, I don’t – I can’t really think of anybody that even got touched there. And they’re a significant part of the capital stack and obviously the head of us from a loss perspective. So, 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, 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. But I don’t think there’s anything really. And we do stress testing on that stuff. And no, it’s the market’s still robust it’s, and for the take outside and the projects that we do are really, they’re really great projects, and very high demand areas with really premium lenders and sponsors. And 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 – Can you talk a little bit about your thoughts on share buybacks now? I mean, you’ve done a wonderful job of the debenture offering of raising, capital and its stock price has fallen a lot. If you can share anything, share your thoughts on share repurchases here.

Yes. Look I, 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 know I want to be doing is raising equity, right? And so I think that my first view is look, I – 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. So yes, I mean, look, it’s in our arsenal. And it’s one of the things that we think about, I wouldn’t be any more committal on that except to say that wasn’t too long ago, you were saying, you thought we can grow loans a lot faster. So, I have to have some consistency quarter-to-quarter at, it’s a – we’re fairly flexible over here, but we’re not, I’m teasing you, I’m teasing you, but yes, look, I think, I think, look, I think we’re looking forward at a revival of single-family in at low loan-to-values and with great properties and good rates. We’re looking at we’ve spent a lot of time and effort diversifying our business. So look, there’s always, there’s certainly, that is always a possibility. We do have capital up there sitting at the holding company that can – we can do stuff with if we decide to do it.

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

Yes. I mean, that’s the million dollar question or the, I know the $20 million question or whatever it’s, yes, look, I think here’s what I see in that, I think, our NIM range, I think is good target, because I think what it allows us to do is, we feel comfortable that we can grow loan growth within that, high-to-mid teens sort of 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, 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, we’ve been – we’ve been pretty quick to reprice our pipelines, just quite candidly. We told people, look, you want to lock, you want to pay for a lock? Oh, no, I don’t want to pay for a lock. Fine, your rates up, there you go. Right. So other banks may have not done that exactly that way. So that may result in some lower loan production at certain points in time. I, we’re not seeing that now. Frankly, pipelines are great. We we’re getting good pull through. So we still feel, we still feel good about that, but it is there’s a lot of stuff to balance and all of that clearly we have these deposit sources that are, and we have stuff off balance sheet et cetera. But those are all decisions that we’re making in real time. And looking at that, and there are some borrowers who, some of our long-time borrowers, let’s say on the multifamily side we’ve had guys who’ve wanted, five-year deals and they say, well, we want 4%. No fine. Well, okay. We’ll give you 4.25%. No, I don’t want it now. Well, now it’s 4.75%. Well, I don’t want it, right. No. So, 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 will this have 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, right, 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. And we have 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 start to say, well, we’re going to be way above where we are on the NIM side, because obviously the cost of the marginal deposit to get it, we also don’t know what that is as well, right. So, 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’ve 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. And 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. So that’s all about that. Just competitive dynamic. And we just have to let that play out so.

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

I think that, 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. It’s 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 we think that all of those elements together, we kind of have that guidance and it’s been right for a long time. I think it’s probably good to stick with it.

Okay. All right. Thanks. Very good quarter. And I’ll see you next quarter.

Thank you.

Thanks, Ed.

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

Hey, good afternoon guys. Thanks for taking my questions. Hey, just a quick one. Greg, in the prepared 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?

Yes, I think, we’re probably at around, 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-directed 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 yes. So there – 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 a cohesive with UDB because it essentially the platforms, it sort of – 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, if we’re – we’ve really been trying to focus on the user experience and how much of that, do we want to make sure is sort of fully integrated before we launch it? So, I think that’s a reasonable timeframe to look at.

That’s helpful. And then you kind of touched a little bit on the second part of the question, but 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 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 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. There’s it’s a – it’s one of the more profitable areas of the business for sure. And I think that’s, and also, I don’t think, I don’t think there’s been anybody who’s done a particularly good job of integrating it into the ability just to take, have your bank, have your bank and your, the security side so closely linked that you can just your direct deposit comes in. If you want to invest, you can do that right away. And so just even getting the basics of that, right, with respect to some of these other wallets or I think we’ll be a big a driver of it, if we can get our – get it out from market perspective and get people focused on it, that’s, that’s kind of the debate, right to make it, do – how good does it have to be before it comes out. But look, I think there’s opportunity there and clearly it’ll get tighter over time as more and more folks come out [indiscernible] they’re letting people, buy crypto in their 401(k)s and all that kind of stuff. So it’s going to become much more of a mainstream asset class, but yes, I mean, I think it’s – I think it’s an interesting potential for sure.

Great. That’s super helpful. Thanks. And then just a, 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 of this consumer digital platform, I think the expectation from a lot of consumers is on those types of platforms that they’re going to get paid, but above average rate. Right. And I think you guys are offering like what 125 basis points to end checking on qualified balances. And so I guess, how do you guys kind of take that competitive force, but marry it to the fact 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 position today to be more competitive or more slow on raising rates on deposits. I was just curious, any, any thoughts there?

Yes. Well, so that that rewards checking account, which is some of the checking accounts in order to get that you need to have Axos Invest account and 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 securities, 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’re still getting a great product. You’re just – 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 that, once you open all those accounts, you do your direct deposit, you do all that stuff. You’re are doing a certain number of debit transactions. You’re using bill pay all this kind of stuff. Are you going to, 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, and then let’s go further. It depends on the business, right? HOA, the competitors are other HOA banks, right? They’re going to have their own dynamic, right. So PacWest owns the old Smartstreet union platform. There’s different banks that own that. There’s a different platforms there, CIT had one they’re going to do what they’re going to do based on that. The clearing in custody side has its own dynamic that I think Derrick did a good job describing. The bankruptcy business, essentially these are long term software agreements that we operate an entire back office for someone, that traditionally, that’s why I would say that’s also one of those businesses where in low rate environments we are in a [indiscernible] capacity where, who – we do a lot of work for trustees and they, and that 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, when you’re in a better position and you’re also trying to grow, and so all that stuff together, that’s why I kind of bring that out to say, look, we think we can maintain our name. 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 we’re trying to get people to move. Right. And that is so that even on the consumer side, the acquisition, it’s going to be different than somebody who’s done all that stuff with you. And then, right and then 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 2025 in rates in anything for a really long time. So the small business side, whatever. So, 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 shouldn’t be thinking of us as someone that is going to, you should be thinking of us as, how great and convenient is your bank account and your crypto trading to be together not, we’re going to give you a high interest rate. Now, that 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 all – that call Greg, and reiterate 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 has been alluded to several times we are hosting our Investor Day in our Axos Advisor Services office in Centennial, Colorado next Wednesday, May 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.