Q2 2022 Axos Financial Inc Earnings Call

Greetings and welcome to the actual financial Inc. Q2, 2022 earnings call.

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A question and answer session will follow the formal presentation.

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Please note this conference is being recorded.

I will now turn the conference over to your host Johnny Lai VP of corporate development and IR. Thank you you may begin.

Thanks, Alex Good afternoon, everyone and thanks for joining us for today.

Actual Inc. Second quarter 2022 financial results conference call.

Joining us today are the company's president and Chief Executive Officer, Greg Dara Branch, and Executive Vice President and Chief Financial Officer, Jeff Walsh, and Executive Vice President Finance can be nikolay.

Greg Eric and Andy.

Or do you think you can comment on the financial and operating results for the three and six months ended December 31, 2021, and we won't be available to answer questions. After the prepared remarks.

Before I begin I'd like to remind listeners that prepared remarks made on this call may contain forward looking statements.

The 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 1995.

This call is being webcast and there will be an audio replay available on the Investor Relations section of the company's web site located at Amtrust financial Dot Com for 30 days.

For this call were provided on the conference call announcement and in today's earnings press release.

All of these documents, including the 10-Q and an earnings supplement.

Are now available on our Investor Relations website with that I'd like to turn the call over to Greg for opening remarks. Thank you John and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access financial conference call for the second quarter of fiscal year 2022 ended December 31, 2021. Thank you for your interest in access to Samsung.

Axon spec.

We had an excellent quarter with double digit growth in loan originations net income book value per share and earnings per share. Our strong results were broad based with net interest margins exceeding the high end of our target and balance net interest income and fee income growth across our consumer banking and commercial banking segments.

<unk>, which is comprised of the direct to consumer securities trading business managed portfolios and our <unk> security clearing and custody business maintained solid client assets and sweep deposit balances despite a challenging quarter for the industry.

<unk> reported second quarter net income of $60 8 million for the three months ended December 31, 2021 earnings per diluted share of $1 representing year over year growth of 11% and nine 9%, respectively. Our book value per share was $25.60 at December 31 2021.

Up 17, 5% from December 30, <unk> 2020.

The highlights for this quarter include the following.

Ending loan balances were $12 6 billion.

Six 1% linked quarter or 24, 4% annualized strong loan originations that are auto and various C&I lending loan types more than offset a small decline in our single family mortgage warehouse lending business.

Net interest margin was four 1% for the second quarter down from $4 two 2% in the quarter ended September 32021, and up 16 basis points from 394% in the quarter ended December 31 2020.

Net interest margin for the banking business was four 3% compared to 4.48% in the quarter ended September 32021, and four 1% in the quarter ended December 31 2020.

We have successfully maintained a strong net interest margin and generated loan growth towards the higher end of our annual target through the first six months of our fiscal 2022, we.

We continue to make steady improvements in our funding mix with noninterest bearing deposits increasing by approximately $215 million.

Number 30 of 2021 non interest bearing deposits represented approximately 31% of our total deposits at December 31, 2021, a significant improvement from 19% in the corresponding period a year ago.

Our efficiency ratio for the three months ended December 31, 2021 was $48 seven 8% compared to $48 seven 1% in the first quarter of 2022.

The efficiency ratio for the banking business segment was $39 three 9% for the second quarter of 2020 to $39, 93% in the first quarter of 2022, we achieved positive operating leverage in our banking business. As a result of strong net interest income growth year over year and continuous focus on managing our operating costs.

Diluted earnings per share of $1 were up 10% from 91, SaaS and a year ago quarter. Excluding one time operating costs that noncash merger related depreciation and amortization expenses, our diluted earnings per share was $1 for the three months ended 12 31 2021.

An increase of 10, 6% year over year.

We continue to generate strong returns, while maintaining excess capital we generated a return on equity of $16 two 9% in the second quarter and a return on assets of 163% capital levels remain strong with tier one leverage of 21, 3% at the bank and $9 four 2% at the holding company both well above.

Our regulatory requirements.

Our credit quality remains strong with annualized net charge offs to average loans of one basis point down from 16 basis points in the second quarter of fiscal 2020, what we added $4 million to our loan loss provision this quarter to support our strong loan growth total allowance for credit losses was $140 5 million at December 31, 2020.

One representing 121 times, our annualized net charge offs and one 1% of ending total loss.

Total loan originations for the second quarter ended December 31, 2021, or $2 8 billion up 15, 8% from the $2 4 billion in the year ago period loan originations for our investment or approximately $2 6 billion, an increase of 35% from the corresponding quarter a year ago.

Two 2022 originations were as follows.

<unk> hundred $79 million of single family agency gain on sale production $385 million of single family Jumbo portfolio production.

$32 million of multifamily production.

$6 million of commercial real estate production $85 million of auto and unsecured consumer loan production and $2 billion of C&I loan production, resulting in a net increase in C&I lending loan balances.

$758 million.

Mortgage banking gain on sale income generated $4 6 million.

Okay.

Compared to $5 3 million in the quarter ended December 31, 2021, and $10 6 million in the corresponding quarter of last year originations.

Originations decreased by approximately 11% linked quarter to $179 million, while margins were down due to the normalization in the single family mortgage gain on sale market across the industry.

We anticipate lower mortgage banking gain on sale in the next few quarters as rising interest rates reduced demand for mortgage refinancing our pipeline of single family Agency mortgages was $141 million at January 25, 2022.

Jumbo single family mortgage business continues to be stable, we generated $385 million of loan production offsetting elevated prepayments.

Loan balances at December 31, 2021 were flat in line with expectations demand for purchase transactions continues to be solid as reflected in our jumbo single family mortgage pipeline of approximately $600 million at.

At January 25, 2022, we are working on a few initiatives that could potentially generate fee income in our jumbo single family lending business in the second half of calendar 2022.

C&I lending had a tremendous quarter loan originations were $2 billion, reflecting strong growth across our commercial specialty real estate business lender finance and construction lending are strong relationships knowledge in structuring a track record of execution have resulted in a steady expansion in loan production and that balance with.

Demand remained strong across loan types and geographies with a backlog of approximately 572 million at January 25 2022.

Given the large average loan size for C&I versus our jumbo single family and multifamily loans and competition from banks and nonbank lenders a few deals can have an outsized impact on our ending C&I loan balances.

Ending balances in our mortgage warehouse portfolio were $595 million down $60 million from $655 million. At September 32021 are single family warehouse business continues to focus on growing with existing and new customers, while balances will fluctuate based on underlying demand for mortgage refinancing we continue to generate strong word.

Turning to this business.

We have maintained operational efficiency, while investing and upgrading our technology infrastructure leadership and team members and incubating new businesses, our business banking segment efficiency ratio was 39, 4% and 39, 7% for the three and six months ended.

12, 31, 2021 salary and benefit expenses were up four 7% and five 1%.

And six months ended December 31, 2021, with merit based increases and additional staffing hiring expected in calendar 2022 we anticipate that the year over year increase in salaries and benefit expense will likely be up a few points around the 7% to 8% range in line with what we've seen in prior years, we have a series of.

<unk> efficiency initiatives across each business unit that will result in cost savings as we grow in various businesses become more mature. Additionally, we continue to incur incremental expenses related to the integration and modernization of our tech infrastructure in our clearing and custody doesn't once we complete the transition of access advisory services to self clearing and sunset.

Redundant conversion related workflows, we expect a more meaningful to make more meaningful improvements in the overall efficiency of our securities business. We grew deposits by four 4% linked quarter to $12 3 billion with broad based growth across our small business commercial and securities deposits checking and savings representing 90% of total deposits at 12%.

31, 2021 grew at the fastest clip increasing by five 9% in quarter consumer deposits, representing approximately 30% of total deposits. At 12 31 2021 is comprised of consumer direct checking savings and money market accounts, the weighted average demand and savings deposit costs were 17 basis points.

At December 31, 2021 down 18 basis points compared to 35 basis points as of December 31, 2020.

Musically repriced, our consumer deposits six months ago in advance of closing the access advisory service acquisition.

Is that what you're focused on increasing the share of wallet with existing consumer banking clients and adding new consumer deposit relationships to affiliate marketing and cross sell we're optimistic that additions of new features in the online and mobile banking platform, including the upcoming release of what we're calling <unk> 2.0, and further product enhancements that are self directed trading and managed.

Portfolios will generate incremental growth and consumer deposit balances.

Average noninterest bearing demand deposits was $3 7 billion for the quarter ended December 31, 2021 up from $3 5 billion in the quarter ended September 32021 growth in noninterest bearing deposits came from our securities and commercial deposit businesses.

<unk> 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 business was approximately $2 2 billion at December 31, 2021, we kept one 5 billion of that $2 2 billion on access to the balance sheet the flexibility to keep these low cost.

Posits off balance sheet and generate fee income from other banks or on access to the balance sheet to support our bank's loan growth will be an even bigger advantage when interest rates rise and competition for deposits increases are small.

All business and specialty commercial and Treasury management business, including our fiduciary service business continues to contribute to low cost core deposit growth.

Continuing to Opportunistically hire commercial bankers to our team and leverage our low cost high service model to attract new commercial banking customers from branch based competitors.

We remain slightly asset sensitive to changes in interest rates yields on loans originated in our single family Jumbo multifamily in C&I loans were 394% for two 6% and 45, 5% respectively. In the three months ended December 31, 2021 compared to the 493%.

Average loan yield in the second quarter.

And last month, we tactically reduced pricing on our high quality lending opportunities, while maintaining our credit standards in terms given our success, reducing our cost of funds competition and demand remains high across most of our lending categories.

From a 46% of our loans are five one arms with a weighted average duration of three three years all of our C&I loans with the exception of our $96 million equipment leasing portfolio have rates that adjust to changes in the underlying index rate. While we're not currently seeing any meaningful changes in deposit competition our ability to.

To continue reducing our funding cost is more limited than it was a year ago, particularly in periods. When we have loan growth at or above the high end of our target we.

We have additional funding flexibility with our $2 2 billion clearing and custody deposits currently approximately $725 million of that $2 2 billion of deposits from our securities businesses are held a partner banks, earning an average interest rate of 44 basis points, depending upon our organic loan growth and our incremental funding costs for new.

Deposits, we may decide to bring more of those deposits on our bank's balance sheets or pushed more of the deposits off the partner banks for internal modeling purposes, we assume that the margin will benefit from the first fed funds rate increase to be slightly north of 50% with a higher beta on each successive rate increase we will continue to evaluate the trade off.

Off between Manning, maintaining a strong net interest margin and a healthy rate of growth in our loan portfolio with a strong start in the first six months of our fiscal 2022, we are confident that our full year net interest margin will exceed the top end of our three eight to 4.0 a range for the full year of fiscal 2022, our credit quality remains healthy.

Annualized net charge off to average loans was one basis point, Sam as September 32021 quarter nonperforming assets to total assets was <unk> 94 basis points for the quarter ended December 31, 2021 same as the quarter ended September 30 of 2021 of our nonperforming loans 83, 8% or single family.

basis points for the quarter ended September 31, 2021, same as the quarter ended September 30, 2021. Of our non-performing loans, 83.8% are single-family first mortgages where we've had historically very low realized losses.

First mortgages, where we have had historically very low realized losses.

Of our non-performing single-family mortgage loans at December 31, 2021, approximately 91.8% had an estimated current loan-to-value at or below 70%, and approximately 98.9% are below 80% of our best estimate of current loan-to-value. Given the low loan-to-value on our single-family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent single-family loans.

Our nonperforming single family mortgage loans at December 31, 2021, approximately 91, 8% have an estimated current loan to value of at or below 70% and approximately 98, 9% are below 80% of our best estimate of current loan to value.

Even the low loan to value on our single family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent single family lots, we had no loans in forbearance at December 31, 2020, what our loan loss provision this quarter was $4 million, which is the same as the loan loss provision of $4 million in the quarter ended September 30.

we had no loans in forbearance at December 31st, 2021. Our loan loss provision this quarter was $4 million, which is the same as the loan loss provision of $4 million in the quarter ended September 30th, 2021, and down from the loss provision of $8 million in the quarter ended December 31st, 2020. The decrease in loan loss provision from one year ago reflects adjustments in loan portfolio max and changes in macroeconomic factors impacting our credit loss model.

2021, and down from the loss provision of $8 million in the quarter ended December 31, 2020, the decrease in loan loss provision from one year ago reflects adjustments in loan portfolio mix and changes in macroeconomic factors impacting our credit loss models.

The $4 million of loan loss provision for each of the past two quarters reflects strong loan growth and our overall loan balances led by CNI Lending.

$4 million of loan loss provision for each of the past two quarters reflects strong loan growth in our overall loan balances led by C&I lending.

Our total allowance for loan losses was $140.5 million at December 31st, 2021.

Total allowance for loan losses was $145 million at December 31, 2021, approximately one 1% of our total loans and approximately 121 times, our total annualized net charge offs in the three months ended December 31 2021.

approximately 1.1% of our total loans and approximately 121 times our total annualized net charge offs in the three months ended December 31, 2021.

Our loan pipeline remains solid with approximately $1.7 billion of consolidated loans in our pipeline as of January 25, 2022, consisting of $141 million of single-family agency gain on sale mortgages.

Our loan pipeline remains solid with approximately $1 7 billion of consolidated allowance in our pipeline as of January 25, 2022, consisting of $141 million of single family agency gain on sale of mortgages $600 million of Jumbo single family mortgages $284 million of multifamily and small balance commercial real estate.

$600 million of jumbo single-family mortgages, $284 million of multi-family and small-balance commercial real estate loans, $572 million of C&I and commercial specialty real estate loans, and $71 million of auto and consumer unsecured loans.

<unk> loans $572 million of C&I, and commercial specialty real estate loans and $71 million of auto and consumer unsecured loans.

With healthy demand for loans across multiple loan categories and growth above our target range for the first six months of fiscal 2022, we remain confident in achieving low teens loan growth in fiscal 2022.

With healthy demand for loans across multiple loan categories and growth above our target range for the first six months of fiscal 2022, we remain confident in achieving low teens loan growth in fiscal 2022.

We continue to generate strong returns with return on average common equity of 16.29 percent and a return on average assets of 1.63 percent in the three months ended December 31st, 2021, respectively. Our overall banking and business efficiency ratios are 48.8 percent, 39.4 percent for the three months ended December 31st, 2021, respectively.

We continue to generate strong returns with return on average common equity of $16, two 9% and our return on average assets of 163% in the three months ended December 31, 2021, respectively. Our overall banking and business efficiency ratios are 48, 8% 39, 4% for the three months and.

At December 31, 2021, respectively, we're making good progress with the integration of <unk> Advisory services CRA, a custody business, we acquired from Morgan Stanley approximately five months ago overall profitability Fracs of securities in the December 2021 quarter was negatively impacted by lower average margin lending balances and lower <unk>.

We're making good progress with the integration of Axos Advisory Services.

the RIA custody business we acquired from Morgan Stanley approximately five months ago.

Overall profitability for Axios Securities in the December 2021 quarter was negatively impacted by lower average margin lending balances and lower transaction-based revenue at Axios Clearing due to industry-wide declines in trading volume.

<unk> based revenue would access clearing due to industry wide declines in trading volume, we see meaningful opportunities to improve the profitability of our security business over time, as we consolidate systems automate manual processes eliminate redundant workflows and transition to a more efficient more scalable tech infrastructure, we remain on track.

We see meaningful opportunities to improve the profitability of our security business over time as we consolidate systems, automate manual processes, eliminate redundant workflows, and transition to a more efficient, more scalable tech infrastructure. We remain on track to generate slight accretion for the AAS acquisition in fiscal 2022.

To generate slight accretion for the <unk> acquisition in fiscal 2022.

Our capital ratios remain strong, with Tier 1 leverage to adjusted assets at 9.42% at the holding company and 10.13% at Axos Bank. We have access to approximately $1.9 billion of federal home loan bank borrowing, $1.8 billion in excess of the $158 million we had outstanding at the end of the second quarter. Furthermore, we have $2.4 billion of liquidity available at the Fed discount window as of December 31, 2021.

Capital ratios remained strong with tier one leverage to adjusted assets of $9 four 2% at the holding company and 10, 3% at access Bank, we have access to approximately $1 9 billion of federal home loan bank borrowing $1 8 billion in excess of $158 million, we had outstanding at the end of the second quarter. Furthermore.

We have $2 4 billion of liquidity available at the fed discount window as of December 31, 2021, our capital priorities remain unchanged with our focus on using our capital to support organic loan growth reinvest in our existing and emerging businesses and deploying excess capital for opportunistic buybacks and accretive M&A.

Our capital priorities remain unchanged with a focus on using our capital to support organic loan growth, reinvest in our existing and emerging businesses, and deploying excess capital for opportunistic buybacks and increase of M&A.

Our securities business had a mixed quarter with stable assets under custody and higher client deposit balances and lower trading fees and margin lending. Broker-dealer fee income increased 128.5% in the second quarter compared to the corresponding period last year due to the addition of fee income from the AAS acquisition.

Our securities business had a next quarter with stable assets under custody and higher client deposit balances and lower trading fees and margin lending broker dealer fee income increased 128, 5% in the second quarter compared to the corresponding period last year due to the addition of fee income from the Aes acquisition.

excluding one-time related merger expenses and non-cash depreciation and amortization, Axios Clearing generated $1.8 million of pre-tax income for the quarter ended December 31, 2021.

Moving one time related merger expenses, and noncash depreciation and amortization ex those clearing generated $1 8 million of pre tax income for the quarter ended December 31, 2021 ex those clearing ended the first quarter of 2022 with approximately $37 billion of assets under custody or administration, including <unk>.

Exos Clearing ended the first quarter of 2022 with approximately $37 billion of assets under custody or administration, including $26 billion of assets under custody and $11 billion of assets under administration in the clearing business. Transaction-based fees for Exos Clearing in the second quarter of fiscal 2022 were negatively impacted by lower transaction volumes from introducing broker-dealer client and reduced security lending.

$6 billion of assets under custody and $11 billion of assets under administration and the clearing business transaction based fees for access clearing in the second quarter of fiscal 2022 were negatively impacted by lower transaction volumes from introducing broker dealer clients and reduce security laughing.

We completed the RA custody acquisition approximately five months ago and we're excited as ever about the long-term opportunity to grow the combined access clearing business.

We completed the.

The acquisition approximately five months ago, and we're excited as ever about the long term opportunity to grow the combined actuals client business, we see four primary strategic and financial benefits from this business, which we rebranded access advisory services first we see significant opportunity to gain wallet share from existing <unk> and broker dealers declarer custody.

We see four primary strategic and financial benefits from this business, which we rebranded Access Advisory Services.

First, we see significant opportunity to gain wallet share from existing RIAs and broker dealers that clear a custody sum or all of their assets with another custodian other than Axos today. As a non-competitive custodian with a high-touch, service-centric model and a strong capital base, we're in active communication with dozens of RIA firms about adding Axos as their custodian.

Some or all of their assets with another custodian other than access today as a noncompetitive custodian with a high touch service centric model and a strong capital base. We're in active communication with dozens of RA firms about adding access to their custodian.

Second, we're laying the foundation to become a more integrated clearing custodian by streamlining back-end systems and processes and completing some important and needed conversion activities. One example of a deferred conversion activity is to make access advisory services self-clearing. Doing so will eliminate redundant processes, reduce operating costs, and potentially free up capital that is required to run the business, particularly during times of extreme market volatility.

Second we're laying the foundation to become a more integrated clearing custodian by streamlining backend systems and processes and completing some important and needed conversion activities. One example of a deferred conversion activity is to make access advisory services self clearing doing so will eliminate redundant processes reduce operating cost and potentially free up capital.

It required to run the business, particularly during times of extreme market volatility.

Third, we see strategic opportunities to add banking, lending, and other services to RIA, broker-dealer, and their end clients. Competition for advisory clients and advisors is fierce, and we can provide a comprehensive set of banking, clearing, and custody services to help our advisors retain and grow their practices.

Third we see strategic opportunities to add banking lending and other services to our broker dealer on their end clients competition for advisory clients and advisers is fierce and we can provide a comprehensive set of banking clearing and custody services to help our advisors retain and grow their practices, whether it's integrated banking Tech integrations to third party service.

Whether it's integrated banking, tech integration to third-party service providers, succession or M&A financing, or mortgage lending for advisers' wealth management clients, Access is committed to serving our advisers.

<unk> succession, or M&A financing, our mortgage lending for advisers wealth management clients access is committed to serving our advisers finally, the integration of our clearing and custody teams systems and operations will expand the products and revenue opportunities for both for example access advisory services has not historically offered margin lending.

Finally, the integration of our clearing and custody teams, systems, and operations will expand the product and revenue opportunities for both.

For example, Axios Advisory Services has not historically offered margin lending or options trading because it operated as a bank custodian.

Our options trading because it operated as a bank custodian now that we're operating as a broker dealer custodian, we intend to make the necessary technological investments to enable custody clients to access margin on option trading well.

Now that we're operating as a broker-dealer custodian, we intend to make the necessary technological investments to enable custody clients to access margin and option trading.

We have a healthy pipeline of technology and product enhancements that we intend to roll out over the next four to six quarters.

We have a healthy pipeline of technology and product enhancements that we intend to rollout over the next four to six quarters first we intend to add new features such as multi owner multi sign of enrollment for our small business banking and convert our digital small business banking platform to the Universal Digital Bank, we will further integrate our self directed trading and managed portfolio user experience into <unk>.

First, we intend to add new features such as multi-owner, multi-signer enrollment for our small business banking and convert our digital small business banking platform to the universal digital bank.

We will further integrate our self-directed trading and managed portfolio user experience into UDB. And by refining the front and back end processes and making it easier to transition and open new accounts through UDB, we hope to increase cross-sell of consumer lending, trading and deposit products. Second, we are exploring a few new businesses that would generate incremental fee income.

<unk> and by refining the front and back end processes, and making it easier to transition and open new accounts through <unk>, we hope to increase cross sell of consumer lending trading and deposit products second we are exploring a few new businesses that would generate incremental fee income as I mentioned earlier, we're expanding our capabilities in single family mortgage lending to add some.

As I mentioned earlier, we're expanding our capabilities in single-family mortgage lending to add securitization for agency and non-agency mortgages. This will generate incremental fee income and help offset the expected normalization in our mortgage banking gain-on-sale agency business.

<unk> for agency and non agency mortgages. This will generate incremental fee income and help offset the expected normalization in our mortgage banking gain on sale agency business.

Another product under development is our retail cryptocurrency trading service, which will allow AXOS Invest customers to easily open a cryptocurrency trading account, fund the account quickly by transferring funds from an AXOS bank account, trade a limited number of cryptocurrencies, and hold their digital assets in a secure AXOS digital wallet and see their positions and values all in the AXOS application.

Other products under development as our retail crypto currency trading service, which will allow <unk> customers to easily opened a crypto currency trading account funding account quickly by transferring funds from an actual bank account trade a limited number of crypto currencies and hold their digital assets and our secure access digital wallet and see their positions and values.

All in the ACA those applications, many individuals' lastly, understanding and confidence to open a separate crypto brokerage account and while they are and they are interested in diversifying and yield benefits from owning crypto currencies. They are fearful of the security complexity and lack of transparency and trading and holding these assets either on a private or exchange hosted wallet.

Many individuals lack the understanding and confidence to open a separate crypto brokerage account, and while they are interested in diversifying and yield benefits from owning cryptocurrencies, they are fearful of the security, complexity, and lack of transparency in trading and holding these assets, either in a private or exchange-hosted wallet. Our initial direct-to-consumer crypto offering will reduce the friction, complexities, and costs associated with trading and owning crypto for retail clients.

Our initial direct to consumer crypto offering will reduce the friction complexities and cost associated with training and owning crypto for retail clients, we anticipate launching our retail crypto currency trading in the next two to three months. Finally, we're making good progress building out our white label banking solutions for introducing broker dealers and <unk>.

We anticipate launching our retail cryptocurrency trading in the next two to three months.

Finally, we're making good progress building out our white-label banking solutions for introducing broker-dealers and RIAs.

Our vision is to enable advisors, broker-dealers, and their reps to offer checking, savings, mortgages, and other consumer banking products to their mass affluent and high-net-worth clients through an easy-to-use digital app that is powered by Access. At the same time, we'll provide us with a new low-cost acquisition channel for our consumer bank.

Our vision is to enable advisors broker dealers and their reps to offer checking savings market to us and other consumer banking products to their mass affluent and high net worth clients through an easy to use digital app that is powered by access.

At the same time I'll provide us with a new low cost acquisition channel for our consumer bank.

I'm proud of the performance we've achieved and excited about the opportunities we have to further grow our securities consumer and commercial banking businesses. We have successfully navigated through multiple credit and interest rate cycles, various regulatory policy changes, periods of intense and benign competition, and shifts in technology and end-user behavior by maintaining a consistent focus on product development, operational efficiency, and human and capital management.

I'm proud of the performance, we've achieved and excited about the opportunities we have to further grow our securities consumer and commercial banking businesses.

We have successfully navigated through multiple credit and interest rate cycles, various regulatory policy changes periods of intense and benign competition and shifts in technology and end user behaviour by maintaining a consistent focus on product development operational efficiency in human and capital management, our future success will depend on our ability to execute on our strategic and.

Our future success will depend on our ability to execute on our strategic and operational initiatives in a timely and productive manner. The great news is we have a strong foundation that includes a seasoned management team, diverse businesses that generate above average returns, and a tech-enabled model that provides the potential for positive operating leverage. We'll continue to invest in our platforms, teams, and processes and strike the optimal balance between near-term profitability and long-term growth.

Small initiatives in a timely and productive manner.

News is we have a strong foundation that includes the seasoned management team diverse businesses that generate above average returns a tech enabled model that provides the potential for positive operating leverage will continue to invest in our platforms teams and processes and strike the optimal balance between near term profitability and long term growth now I'll turn the call over to Derek who will provide.

Now, I'll turn the call over to Derek, who will provide additional details on our financial results.

Additional details on our financial results.

Thanks, Greg. To start, I'd like to highlight that in addition to our press release, an 8K with supplemental schedules and our 10Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com.

Thanks, Greg.

I'd like to highlight that in addition to our press release and 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 access financials dot com I.

I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional detail.

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 focusing on select areas of our non-interest income.

Turning to our quarterly performance I'll start by focusing on select areas of our noninterest income.

Our pre-payment penalty fee income was $3.3 million for this quarter ended December 31st, 2021, up from $3 million for the linked quarter ended September 30th, 2021, and up from $1.6 million for the quarter ended December 31st, 2020.

Our prepayment penalty fee income was $3 3 million for this quarter ended December 31 2021.

Up from $3 million for the linked quarter ended September 32021, and up from $1 $6 million for the quarter ended December 31, 2020. This quarter marked a high point for us as we continue to grow our commercial lending the likelihood of fluctuations in this category well.

This quarter marked a high point for us. As we continue to grow our commercial lending, the likelihood of fluctuations in this category will also increase dependent upon deal fee structures and prepayment activity.

Also increase dependent upon deal fee structures and prepayment activity.

Next, our broker-dealer fee income increased $2.6 million to $14.4 million for the quarter ended December 31, 2021, compared to $11.8 million in the link quarter ended September 30, 2021.

Our broker dealer fee income increased $2 6 million to $14 $4 million for the quarter ended December 31, 2021, compared to 11 $8 million in the linked quarter ended September 32021, as the advisor business was added in August 2021. This does.

As the advisor business was added in August 2021, this December quarter was the first full quarter of revenue production from AAS, recognized in the broker-dealer fee income line, and constituted the majority of the increase over the linked quarter.

Remember quarter was the first full quarter of revenue production from Aaas recognized in the broker dealer fee income line and constituted the majority of the increase over the linked quarter.

In banking and service fees, we had income of $8 $5 million. This quarter ended December 31, 2021 up from $6 $7 million for the quarter ended from the quarter ended September 32021, and down from $10 million in last year's December quarter.

In banking and service fees, we had income of $8.5 million this quarter ended December 31st, 2021, up from $6.7 million from the quarter ended September 30th, 2021, and down from $10 million in last year's December quarter.

The increase in the linked quarters is due to annual fees for certain IRA products in the December quarter. The decrease year over year is related to the exit of the H&R Block relationship that formally ended in December 2020. In that December 2020 quarter, in completing our contractual commitments with HRB, we earned $2.5 million, which did not recur in the December 2021 quarter.

The increase in the linked quarters is due to annual fees for certain IRI products in the December quarter, the decrease year over year as it related to the exit of the H&R block relationship that formally ended in December 2020.

In December 2020 quarter, and completing our contractual commitments with HIV, we earned $2 $5 million, which did not recur in the December 2021 quarter.

Moving to non-interest expense for the quarter ended December 2021, operating expense was $86 million of $1.6 million from the length quarter ended September 30, 2021.

Moving to noninterest expense for the quarter ended December 2021.

Operating expense was $86 million.

One $6 million from the linked quarter ended September 32021.

The primary reason behind the increase in operating expenses is due to the full impact of operations from AAS in the December quarter compared to the September quarter, which only had AAS operational expense for two months of the quarter.

The primary reason behind the increase in operating expenses is due to the full impact of operations from Aaas in the December quarter compared to the September quarter, which only had a S operational expense for two months of the quarter.

Salaries and related costs decreased $0.7 million on a linked quarter basis. This was primarily due to merger-related efficiencies and increased outsourcing.

Salaries and related costs decreased <unk> $7 million on a linked quarter basis. This was primarily due to merger related efficiencies and increased outsourcing.

Depreciation and amortization expense increased $1.1 million from $5.7 million at September 30, 2021 to $6.8 million at December 31, 2021, primarily due to the addition of amortizing and tangible assets from the Advisor Services acquisition.

Depreciation and amortization expense increased $1 1 million from $5 $7 million at September 32021 to $6 $8 million at December 31, 2021, primarily due to the addition of amortizing intangible assets from the advisor services acquisition.

Shifting to our interest rate management.

We are well positioned for increased rates as our net interest income parallel shock of 200 basis points up at December 31st, 2021, shows us asset sensitive and generates increased income of 8.8% for the first 12 months.

We are well positioned for increased rates as our net interest income parallel shock of 200 basis points up at December 31, 2021 shows us asset sensitive and generate increased income of eight 8% for the first 12 months.

Our asset sensitivity has improved over the last few years due to the following reasons.

Our asset sensitivity has improved over the last few years due to the following reasons.

First, we've added high-quality, core, interest-bearing demand and savings accounts that have an average rate of 20 basis points, and combined with time deposits are the lowest they've ever been at 32 basis points.

First we've added high quality core interest bearing demand and savings accounts that have an average rate of 20 basis points and combined with time deposits are the lowest they've ever been at 32 basis points second we have added businesses in recent years that provides significant levels of noninterest.

Second, we have added businesses in recent years that provide significant levels of non-interest-bearing deposits, including our bankruptcy trustee business, advisor business, and clearing business.

Just bearing deposits, including our bankruptcy trustee business advisor business and clearing business.

Third, our growth in commercial lending brings an increased level of monthly adjustable rate products. And lastly, the higher prepaid rates on our single-family jumbos shorten the duration of our single-family loan portfolio. With that, I'll turn the call back over to Johnny.

Third our growth in commercial lending brings an increased level of monthly adjustable rate products and lastly, the higher prepay rates on our single family Jumbo shorten the duration of our single family loan portfolio.

With that I'll turn the call back over to Johnny.

Thanks, Eric Alex we are ready to take questions.

Thank you.

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Our first question comes from the line of Andrew Leash with Piper Sandler. Please proceed with your question.

Our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.

Hey, good afternoon, everyone question question, Greg, for you. I think you mentioned the marginal benefit from the first spread rate hikes slightly north of 50%. We're talking about the deposit beta there. Or what did you mean by that?

Hey, good afternoon, everyone.

Hi, Andrew Your question question, Greg for you I think you mentioned the marginal benefit from the first fed rate hike.

North of 50% were you talking about the deposit beta there or what did you mean by that.

Yeah, he was talking about the deposits that we keep off the balance sheet.

Yes, he was talking about the deposit that we keep off the balance sheet at the other other partner banks, so thats, the clearing and advisers sweep deposits of which we have a little over $700 million.

at the other partner banks. So that's the queering and advisor sweep deposits of which we have a little over 700 million that sit at those partner banks. So that's recognized as fee income, non-interest income.

Those partner banks, so thats recognized as fee income noninterest income.

So, as rates move up, we expect to receive a good chunk, good increases as those...

As rates move up we expect to receive a good chunk good increases as those.

north of that 50% beta as we move forward. Right, yeah, and I think that, yeah, Andrew, with respect to your question...

North of that 50% beta as we move forward right yes.

Yes, Andrew with respect to your question.

You know, we looked at, obviously we have a lot of floating rate loans now, and they have various floor rates.

We looked at.

Obviously, we have a lot of floating rate loans now.

And they have various floor rates.

So.

For some guidance there, we looked at, say, for the first 25 basis points increase, we had about a $3 million increase annually in net interest income, and then another $8 million, roughly, for the second increase. And that's just on the income side. That's not making any assumptions on the deposit side.

Some guidance there.

Locked in and say for the first 25 basis points increase we had about it was about a $3 million increase annually and net interest income and then another 8 million Bucks roughly for the second increase.

Just on the income side, thats, not making any assumptions on the deposit side and then.

And then, so that's just the first couple of increases, what the benefit would be. And then, obviously, once you're hitting the floors, we try to be thoughtful about floors, but there are floors at the, you know, 50 and 75 basis point levels and such that prevent some repricing even on the variable portfolio.

So that's just the first couple of increases what the benefit would be and then obviously once youre hitting the floors, we're trying to be thoughtful about Florida, but there are floors at 50, and 75 basis point levels and such to prevent summer pricing even on the variable portfolio.

Got it okay. Thanks for the clarification there on the most off balance sheet funds too.

Got it. Okay. Yeah, so thanks for the clarification there on the balance sheet funds, too. What are you assuming for a deposit beta in your modeling with the account, with the deposit that you have on your balance sheet? My sense is that it's going to be much less than the last rates up cycle.

What are you assuming for deposit beta and you're modeling out with the accounts with the deposits that you have on your balance sheets.

My sense is that it's going to be much less than the last rigs up cycle.

And I'm just curious what you're using now versus what was the beta back.

I'm, just curious what you're using now versus what.

What was the beta back then.

You know, I think one good way to think about it would be that, you know, given that we have

I think one good way to think about it would be that given that we have.

Deposits that can be off balance sheet and we obviously expect to grow those deposits. We're hopeful that we could get some, you know, meaningful offset With respect to those off balance sheet deposits. We expect it to be a lot better

Deposits it can be off balance sheet, and we obviously expect to grow those deposits were hopeful that we can get some meaningful offset.

With respect to those off balance sheet deposits, we expect it to be a lot better.

And I don't know if we're prepared right now to give you a specific number.

And I don't know if we're prepared right now to give you a specific number.

But I don't think we're going to have to be doing a lot of movement in the first couple of.

But I don't think we're going to have to be doing a lot of movement in the first couple of.

of rate hikes. I really don't. For all the securities deposits and for the bankruptcy deposits, when rates were 175, the rates were three basis points and zero on those deposits. So all of that's going to stay. We think we've done a lot on the commercial side. It depends somewhat on what happens.

Of of rate hikes, I really don't we work for all the securities deposits and for the bankruptcy deposits when rates were 175, the rates were three basis points and zero on those deposits. So all of that's going to stay we think we've done a lot on the commercial side.

<unk> somewhat on what happens.

You know, we have a great checking and savings, checking account based on the small business side, very diverse accounts, very transactional in nature, so I think we're in.

So the competition.

We have a great checking and savings or checking account based on the small business side very diverse accounts.

Very transactional in nature, So I think we're in.

pretty darn good shape, you know, but we'll also have to see how the market reacts, too. I think that may make a difference.

Pretty darn good shape.

But we'll also have to see how the market reacts to I think that might make a difference.

Right right.

And then on the C&I growth, you mentioned that a few deals can have an effect on end-of-period balance, just the larger size that they have. Is that what happened here in this quarter?

And then just on the C&I growth you mentioned that a few deals can have an effect on end of period balances.

Larger size.

They have is that what happened here in this quarter or.

No, no, I think that's in there as a caveat that.

No no.

I think that I think that's in there I think that's in there as a caveat that.

I don't, I don't really see, uh, I, I see CNI balance is doing very well. Uh, there were.

I know I don't really see I see C&I balance is doing very well there.

Sure.

The growth was actually spread across a wide variety of loans this quarter, so the production was great across the board in a number of different

The growth was actually spread across a wide variety of loans. This quarter. So the production was great across the board in a number of different businesses I think thats more about a forward looking way of looking at that that there is just a little more variability in that growth given the size of it.

businesses. I think that's more about a forward-looking

way of looking at that, that there's just a little more variability in that growth given the size of those loans. We still expect the growth to be quite good, there's just more variability. And I think maybe another way to say that is, don't pencil in $700 million of loan growth this next quarter. Maybe that's easier.

Those lives, we still expect the growth to be quite good theres, just more variability and I think maybe another way to say that is don't pencil and $700 million of loan growth. This next quarter, maybe thats easy to say, yes makes sense.

makes sense. All right, thanks for taking the questions. I'll step back.

Alright, thanks for taking the questions I'll step back.

Thank you. Our next question comes from the line of Steve Moss with B Riley Securities. Please proceed with your question. Good afternoon.

Thank you. Our next question comes from the line of Steve Moss with B Riley Securities. Please proceed with your question.

Good afternoon.

Hey, Dave just following up.

Maybe just following up on loan growth here, I think the guide for the fiscal year is low teens growth. You guys are about north of 10% here on loan growth. Kind of curious, that seems a little bit conservative and kind of curious to see how you're thinking about maybe upside to that number.

Maybe just following up on loan growth here I think the guide for the fiscal year is low teens growth.

You guys are about north of 10% here on loan growth kind of curious that seemed a little bit conservative and kind of.

Curious, how youre thinking about maybe upside to that number.

Yeah, I think there will be upside to that number. I think it is conservative.

Yes, I think there will be upside to that number I think it is conservative.

You know, look, I we don't we don't give exact guidance on this, but we don't expect it to be put it this way if I was to give a range where it's I don't expect it to be 700 and I don't expect it to be 350 either. I expect it to be somewhere.

Look I, we don't we don't give exact guidance on this but we don't expect it to be.

This way if I was to give a range.

Expected to be 700, and I don't expect it to be $3 50, either I expect it to be somewhere.

you know, in between those numbers and, you know, with the commentary that obviously, you know, there's a lot of things moving around, so any one quarter can obviously move, but we do think they'll be upside from that. We, I certainly would expect the teams to perform at a higher level for this remaining six months given what we've done in the first six months of the fiscal year.

In between those numbers and with that with the commentary that obviously.

Theres a lot of things moving around so any one quarter can obviously move, but we do think there'll be upside from that.

I certainly would expect the teams to perform it at a higher level for this.

Remaining six months given what we've done in the first six months of the fiscal year.

Okay.

I appreciate that. And then on expenses, I hear you on the, I think it was 70% comp growth, but maybe just more specifically for the securities business.

That and then on expenses I hear you on the I think it was 70% comp growth, but maybe just more specifically for the securities business.

I'm talking about duplication earlier 1 billion of cost saves, but at the same time, a number of different investments to be made in an ongoing just kind of curious you know.

talked about duplication earlier, and the ability to have cost savings, but at the same time a number of different investments to be made and ongoing, just kind of curious how we think about expenses for that business.

How do we think about expenses for that business and different movie drivers and then maybe just.

and different moving drivers and maybe just, you know, stepping back from that also expense grip overall for you guys for the second.

Stepping back from that also expense growth overall for you guys for the second half.

Yeah, you know, I think, Derek, I'm not sure I can take that. Yeah, so a couple, couple different considerations there. One, it's definitely going to be on the clearing side, security side, it's definitely going to be driven by the market and transactions. If there's if there's a pullback in the market, we see a lot less transaction based fees.

Yeah.

I think I'm not.

Sure I can take that.

Yes. So couple of couple of different considerations. There one is definitely going to be on the clearing side security side is that we're going to be driven by the market and transactions. If there is if there's a pullback in the market. We see a lot last transaction based fees and transaction activity and so that reduced it.

and transaction activity, and so that reduces a couple different areas. The base clearing fees, the spec borrow, spec lending will reduce a little bit, margin lending will reduce a little bit. When the market's humming, those are all areas that are up higher. So that has one impact on fees.

There's a couple of different areas debate clearing fees.

<unk> lending will reduce a little bit margin lending will reduce a little bit when the market's humming. Those are all areas that are up higher so that that has one impact on fees on the on the integration aspect, so theres going to be.

on the integration aspect. So there's going to be...

Kind of from a numbers standpoint, youll see fits and starts from that in a sense nothing from a from a significant manner, but there'll be periods, where we may have some higher higher expense nothing significant but those will be kind of stabilized over time.

kind of from a number standpoint, you'll see fits and starts from that. In a sense, nothing from a significant manner, but there'll be periods where we may have some higher expense

nothing significant, but those will be kind of stabilized over time. And then you have periods where we have some lower expense, in part because we are able to capitalize

And then you're off periods, where we have some lower expense in part because we are able to capitalize a lot of the integration and software development that we are doing so in the as we look forward in that business, we don't expect necessarily significant swings of.

a lot of the integration and software development.

that we are doing. So in the, as we look forward in that business, we don't expect necessarily significant

swings of expenses by any means. There'll be kind of incremental growth as we grow that business, to summarize it. Yeah, I think that's right. Over the long term, there's so much opportunity to make that business.

<unk> by any means there'll be kind of incremental growth as we grow that business to summarize it yes, I think thats right.

Over the long term.

There is so much opportunity to make that business more efficient.

You know, if you look at the operations staff, and there's hundreds of people together in that business, as we get white-labeled UDB out to the client,

If you look at the operations staff and there is hundreds of people together in that business.

As we get white labeled <unk> out to the clients.

the ability to deal with, to increase straight-through processing, for example, which makes our cost

The ability to deal with to increase straight through processing for example, which makes our costs.

cheaper, and it makes the experience better, is there and available, and there's so much opportunity. There's opportunities across the board, really, to make that business more efficient. It's taken us...

Deeper and it makes the experience better is there and available and end to end.

So much opportunity there is opportunities across the board really to make that business more efficient and it's taken us we've been at we've been at a very disciplined operational structure at the bank for you now.

Yeah, we've been at a very disciplined operational structure at the bank for, you know,

more than a decade, right? And that just is something that the securities business is

More than a decade right.

And that just is something that the securities business is getting access to tools technologies and so it is improving all the time and we are getting benefits from it immediately because we're knocking down the low hanging fruit, but theres just so much opportunity there over the longer term.

getting access to tools, technologies, and so it's improving all the time. And we are getting benefits from it immediately because we're knocking down the low-hanging fruit, but there's just so much opportunity there over the longer term. In the short term, I think, you know, Derek's explanation is quite good because the reality is there's short-term opportunities, but there's short-term additions and where it's gonna shake out. I don't expect it really to, that business to be.

In the short term I think Derek explanation is quite good because the reality is there is there are short term opportunities, but there is there are short term additions and where it's going to shake out I don't I don't expect it really to that business to be driven so much by and this.

so much by in the shorter term a lot of increases or decreases in operating costs and it's more driven by the market. And then it's also driven by, sometimes it's interesting because our deposit balance is...

Short term a lot of increases or decreases in operating costs and it's more driven by the market and then it's also driven by sometimes it's interesting because.

Our deposit balances are shot up.

quite a bit in this volatile environment. So when people go to cash, we benefit from that. Those deposits are extremely low cost, they're essentially zero. So that's an offset as well, depending upon how we use that money. And if it's a higher rate environment and we're bringing it off, that that'll be helpful as well.

Right a bit in this in this volatile environment. So when people go to cash we benefit from that those deposits are extremely low cost or essentially zero. So.

That's that's an offset as well depending upon how we use that money and if it is a higher rate environment that we're bring it off that that'll be helpful as well so.

The long-term benefits of the business are going to be there. We're already seeing, because we have so much in deposits...

The long term benefits of the of the business are going to be there we were already seeing.

Because we have so much in deposits that are lower cost and we're continuing to grow those businesses and also gives us pricing power across our deposit portfolio and a lot more power to price, our commercial and consumer deposits more aggressively because we do have that.

that are lower cost and we're continuing to grow those businesses, it also gives us pricing power across our deposit portfolio and a lot more power to price our commercial and consumer deposits more aggressively because we do have that backstop and that off-balance sheet.

Stop in that off balance sheet.

potential that we can use for our own organic loan group.

Potential that we can use for our own organic loan growth.

Okay. That's helpful.

Okay, that's helpful. And, you know, obviously with the liquidity you have off balance.

Obviously with the liquidity you have off balance sheet.

And kind of the drivers you have to support lower deposit beta, you know, any thought about, you know, formally moving up your NIM guidance range from the 3% to 4% to a new higher level?

Drivers you have to support a lower deposit beta.

Any thought about.

Formerly moving up your your NIM guidance range from the 3% to 4% to a new higher level.

No, and the reason why is that if you saw and you look at the numbers, we gave you the rates on the loans. We basically decided that we wanted to increase loan growth a little bit, and I think that interest rates on our loans will be stable to up.

No and the reason why is that if you saw and you look at the numbers we did.

We gave you the rates on the loans, we basically decided that we wanted to increase loan growth a little bit and I think I think.

I think that.

Interest rates will be stable on our loans will be stable to up.

from where they were this quarter, but there's still a difference between the average rate that we have in the portfolio and the average rates that we are originating loans at. So to the extent that we don't get.

From where they were this quarter, but there's still a difference between.

The average rate that we have in the portfolio and the average rates that we are originating loans that so to the extent that we don't get pricing.

price increases on the loans, I think it's better guidance to stick with it.

Price increases on the loans I think it's better guidance to stick with that NIM and not increase it.

and not increase it given that. So I think, you know, look, we're obviously always interested in taking pricing where we can.

Given that so I think look we're obviously always interested in taking pricing, where we can but frankly we.

But frankly, we, you know, having good loan growth is also, uh, is, is, is, is important and probably more important than.

Having good loan growth is also.

It is important and probably more important than quibbling over 10 basis points here and there although we do our when we do our we do our fair share of equipment lying to let me bifurcate that or clarify that a little bit because we do expect to be north of that three 8% to 4% for this fiscal 2020.

quibbling over 10 basis points here and there, although we do our fair share of quibbling too. And let me bifurcate that or clarify that a little bit, because we do expect to be north of that 3.8 to 4% for this fiscal 2022, but our long-term guidance is the 3.8 to 4%, so we don't see a point in kind of changing that for this.

To what our long term guidance is the 38% to 4%. So we don't see a point in kind of changing that for this individual year bucket and obviously, where we have been six months through the year, we expect it will be slightly north of that 4% Mark.

individual year, but given obviously where we've been the six months through the year, we expect we'll be slightly north of that four percent mark.

Right. Okay. I appreciate all the callers. Thank you very much.

Right Okay.

Appreciate all the color. Thank you very much.

Thank you. Our next question comes from the line of Michael Perrito with KBW. Please proceed with your question.

Thank you. Our next question comes from the line of Michael Perito with T. B W. Please proceed with your question.

Hey, good afternoon. Thanks for taking the questions. I wanted to follow up on Steve's question on the AAS business. If we look at just the full quarter impact here on the securities business segment reporting in the 10-Q has about $16.5 million of non-interest income, about $21.6 million of non-interest expense. I guess as we think about those figures going forward, it's I guess

Hey, good afternoon, thanks for taking the questions.

Hey, Mike I wanted to ask.

Wanted to follow up on Steve's question on the Aaas.

If we look at the full quarter impact here on the Securities business segment reporting in the 10-Q has about $16 5 million of noninterest income about $21 6 million of noninterest expense I guess.

We think about those figures going forward.

I guess.

You know, obviously, the revenue piece, you guys have been pretty clear, you expect to grow as you scale, but on the expense side, is there room for that to move down or moderate just because of investments you guys are making that are making that elevated, or is it more going to kind of level out and grow, but you just expect the revenue growth to outpace the rate that you grow that expense figure?

Obviously the revenue piece you guys have been pretty clear you expect to grow as you scale, but on the expense side is there.

Room for that to move down or moderate.

Of investments you guys are making they're making that elevated or is it more going to kind of level out and grow but you just expect the revenue growth.

Outpace the rate that you grow that expense figure.

I think that it's going to be relatively level to slightly up for, let's say, the six to nine months, but not materially. And then there's real opportunities to make that business more efficient. They're really big.

I think that it's going to be relatively level to slightly up for let's say the six 6%.

Nine months, but not not materially and then.

There's real opportunities to make that business more efficient.

They are really big.

And it just has to, but it's complicated because it involves some software investments and things like that, but the opportunity for straight-through processing there, the opportunity to increase volumes and maintain the personnel structure is massive. It's really big. Think of it like taking over the most inefficient branch bank that exists.

And it just has that but there is.

<unk> because it involves.

It involves some software investments and things like that but the opportunity for straight through processing there the opportunity to increase volumes and maintain the personnel structure is massive.

It's really big think of it like taking over like the.

The most inefficient branch banks it exists.

and basically making it like what we are on that side. It's just a lot, right? But it's going to take time, so it's not a six-month thing. It's just.

Basically making it like what we are well we are on that side. It's just a lot right, but it's but it's going to take time. So it's not it's not a six month thing, it's just and it's not the fault of the teams there those businesses were not math that they didn't have the capabilities. We have they don't have the experience in driving.

And it's not the fault of the teams there. Those businesses were not massive. They didn't have the capabilities we have. They don't have the experience in driving operational efficiencies and things like that. And so there's just a lot, there's a lot there, which is great, right? It's, you know, we want it as fast as we can.

<unk> efficiencies and things like that and so there's just a lot there's a lot there which is great right.

We want it as fast as we can but there's a lot of things that have to happen. It's really about a lot about changing customer workflows and things like that.

but there's a lot of things that have to happen. It's really about, a lot about changing.

customer workflows and things like that, and those take time, because they're not only –

And those those take time, because theyre not only.

technology changes, there are also behavioral changes in the way customers interact, how they're used to doing things, and how to increase those efficiencies. And there's also, there's opportunities on the core processing side, which I don't want to spend a lot of time on, but those opportunities are quite significant, and we have some really cool plans there, but those are longer term, those are like two to three years out, but those are going to be big.

Technology changes there also.

Favorable changes in the way customers interact how they're used to doing things in how to and how to increase those those efficiencies and there is also there is there is opportunities on the core processing side, which I don't want to spend a lot of time on but those opportunities are quite significant and we have some really cool plans there.

But those are longer term those are like two to three years out, but those are going to be big.

And then there's some shorter term stuff like that we mentioned.

And then there are some shorter term stuff like that we mentioned.

Yeah.

Obviously, we had a very short time frame to close this acquisition, and so there are pieces

Does that is it.

Obviously, we had a very short timeframe to close this acquisition and so there are pieces that are resulting in duplicated processing charges were not even self clearing in aaas. So we're paying a third party clearing firm, which we don't need to do so theres stuff like that that's going to happen and that's kind of offset.

that are resulting in duplicated processing charges. We're not even self-clearing at AAS, so we're paying a third-party clearing firm, which we don't need to do. So there's stuff like that that's gonna happen, and that's gonna offset some of the investments we're making in the shorter term.

Some of the investments, we're making in the shorter term.

But I think you've got to really for the next year, I wouldn't be penciling in big savings or big increases. It's just

But I think you've got a really for the next year I wouldn't be penciling in big savings or big increases it's just.

It's just going to take some time to make this work and obviously the biggest benefit right now is we just have, we're just such a better liquidity position.

It's just going to take some time to make this to make this work in and obviously the biggest benefit right. Now is we just have we're just such a better liquidity position than we've ever been and.

than we've ever been, but this is going to generate fee as well and cross sell. It's a great group of clients. I mean, we have, we're talking, you know.

But this is going to generate fee as well and cross sell.

Great group of clients I mean, we have and we're talking.

300,000 higher net worth individuals that we ought to be able to get banking services out to. We can get all the platforms integrated in the right way and everybody's excited about that. It's an exciting future for sure.

300000.

Hi, higher net worth individuals that.

We ought to be able to be able to get banking services out to we can get all the platforms integrated in the right way and everybody is excited about that so it's an exciting future for sure.

That's helpful. Thank you and then.

As you guys think about that next phase of kind of scaling a lot of the investments you guys are making, not just in AAS, but on UDB 2.0 and just the general platform, I mean, how do you think, you know, obviously on the lending side, you know,

Do you guys think about that next phase.

Scaling.

You know a lot of the investments you guys are making not just in aaas, but you'd have to point out and just the general platform I mean, how do you think obviously on the lending side.

the sales group is pretty strong. I know you guys constantly add there and it's kind of the proof is in the pudding. But as you think about kind of marketing and selling, the ability to offer those cross-banking products to AAS customers and things of that nature, how far out are you in building out that type of effort and, you know, where do you guys think that will head in the next 12 to 18 months?

The sales group.

Pretty strong I know you guys constantly add there and it kind of the proof is in the putting what did you think about kind of marketing and selling the ability to offer those cross banking products to a as customers and things of that nature kind of how far out are you in building out that type of effort and where do you guys think that will head in the next 12 months.

Three months.

You know, I think there are different pieces of it that are further than some. We have our beta version of our account opening system in with our Clarin clients.

I think I think there are different pieces of it that are are further than some we have we have our beta version of our account opening system in with our clearing clients. So.

So, with a clearing client that we're going through, it's a white label account opening system that can be offered to broker dealers that clear through Axios Clearing. That helps in a lot of different ways. It helps them be more efficient, and it helps us be more efficient, right? Because those accounts go right into the system. They don't require manual touch. That's an example of those sort of things.

With the clearing clients that we're going through it.

White label account opening system that can be offered.

Two.

To broker dealers that that clear through access clearing that helps in a lot of different ways that helps them be more efficient and it helps us be more efficient right because those accounts go right into the system. They don't require manual touch. That's an example of those sort of things.

The white-labeled UDB on clearing is probably a little bit further along than it is on custody because...

The white labeled UTP.

On clearing is probably a little bit further along than it is on custody because.

That means UDV has to be integrated into the custody core, which, you know, is probably a.

That means <unk> has to be integrated into the custody core which is probably a maybe a year exercise or something like that.

maybe a year exercise, something like that. And then you also have to get the adoption. But nobody's really done this well yet, right? So this is a pretty, it's a pretty interesting strategy.

And then you also have to get the adoption, but nobody has really done this well yet right. So this is this is a pretty it's a pretty interesting strategy.

Pretty good one, I think. And then you've got to obviously.

Pretty good one I think and and then you've got obviously.

you know, see the uptake, but there's a lot of real.

See the uptake, but its theres a lot of real.

benefits and synergies that can be created. I mean, obviously, just give you a very simple example. So, you know, if you're trying to get a check into the market right now, our customers are sending, let's say, if they're using a check, they're sending that check.

Benefits and synergies that can be created I mean, obviously just give you a very simple example, so if you're trying to get at.

Check into the market right now our customers are sending let's say if they are using a check they are sending that check to there.

to their RIA, and that RIA is often forwarding that check to us, right? I mean, that's kind of, and you look at that and say, what's that? And then that check is manually processed, right? If somebody has UDB and they have a bank account.

And that is often forwarding that check to us right I mean, thats kind of and you look at that and say what is that and then that project is manually processed right. If somebody has UDP and they have a bank account.

and that happens immediately, you can use your risk engine and clear that check instantaneously, right? So that's so much better across the board. An RIA doesn't want to be mailing a check. They don't want to be using an RDC machine for a check by filling out, right? None of that stuff should make sense, but without the integration, you take a very simple process and you make it more complicated.

And that happens immediately you can use your risk engine and clear that check instantaneously right. So that's so much better across the board in all right doesn't wanna be mailing a check they don't want to be using at RTC machine for a check by filling out right. None of that stuff should make makes sense, but without the integration you at <unk>.

A very simple process and make it more complicated disbursement right, while you're cutting a check for a disbursement when somebody wants to take money out or sending a wire to a third party account as opposed to make an instantaneous transfer. So there's just there's so many things like that and when you break down all the debt.

Well, you're cutting a check for a disbursement when somebody wants to take money out or sending a wire to a third-party account as opposed to making instantaneous transfers. There's so many things like that, and when you break down all the individual activities, you just see so much synergy there on the operations side and on the cross-sell side.

Uh huh.

The individual activities you just see so much synergy there on the operations side and on the cross sell side. So.

Yeah, but I mean, partly the way that that ends up is, you know, you see it in, you know, the low, a lower beta, you see it at lower deposit costs. And we've really transformed the deposit franchise in a, in a very meaningful way. You know, as, as you can see, right, with the, with the

Yeah, but I mean, partly the way that that ends up as you see it in the low lower beta you see it in lower deposit costs I mean, we've really transformed the deposit franchise in a in.

In a very meaningful way.

As you can see right with with it.

amount of non-interest bearing deposits and everything else, and we just think that's going to be a continued focus and something that will really benefit from having those businesses.

The amount of noninterest bearing deposits and everything else and we just think thats going to be a continued focus and something that will really benefit from having those businesses.

That's helpful. Thanks for talking through that. And then.

That's helpful. Thanks, Thanks for talking through that and then.

Yeah.

On the.

One last question for me, just on the regulatory capital side. I apologize, I missed something on this in the prepared remarks. But it looked like the risk-based assets were up pretty significantly quarter-on-quarter, if I'm looking at it right. And there was some movement down in the reg-cap ratios. I mean, obviously, you guys are still all capitalized. I'm just curious what was kind of going on there. Was that just...

One last question for.

For me just on the regulatory capital.

As I have I missed something on this in the prepared remarks, but it looks like the the risk based assets were up pretty significantly quarter on quarter, if im looking at it right and there were some movement down in the Reg cap ratios I mean, obviously you guys still capitalized I'm just curious what was kind of going on there was that just.

Some remixing, it looked like, obviously, securities were lower on the average balance sheet, C&I loans were up relative, but just curious if there's anything else kind of going on that drove that variance.

Some remixing it looked like obviously securities were lower on the average balance sheet C&I loans were up relative but just curious if there's anything else kind of going on that drove that variance.

Yeah, I mean, I think that we had, you know, single family jumbo was stable, but didn't grow. And the growth was in the 100% risk weighted asset category mostly. So, you know, that does bring

Yes, I mean, I think that we had a single family Jumbo was stable, but didn't grow and the growth was in the 100% risk weighted asset category, mostly so.

That does bring.

to bear the question over the longer term of.

To bear the question over the longer term of.

If you're growing in only 100% risk-weighted assets, which we pretty much did this quarter, or you have increased commitments, which is sort of part and parcel to the C&I business.

If youre growing at only 100% of risk weighted assets, which we pretty much did this quarter or you have increased commitments, which is sort of.

Part and parcel to the C&I business, which requires some capital then obviously that has less capital efficient than single or qualified multifamily loans. So that's something we're keeping an eye on it.

which requires some capital, then obviously that is less capital efficient than single or qualified multifamily loans. So that's something we're keeping an eye on and just have to be focused on. So like you said, we're still very well capitalized and obviously the leverage ratios are great, but as the business shifts that way, that's something that we have to pay attention to. Great. Thank you, guys. Appreciate it. Thank you.

Just have to.

<unk> focused on so like you said, we're still very well capitalized and obviously the leverage ratios are great, but as the as the business shifts that way, that's something that we have to pay attention to.

Okay.

Great.

Thank you guys appreciate it.

Thank you.

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

Great. Thanks, everyone for your interest and for joining US we will talk to you next quarter. Thank you.

Great. Thanks, everyone, for your interest and for joining us. We will talk to you next quarter. Thank you.

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

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

You for your participation and have a wonderful day.