Q3 2022 Axos Financial Inc Earnings Call
Greetings and welcome to the Axis Financial Inc. Q3, 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host senior Vice President of corporate development and Investor Relations Johnny Lai you may begin.
Thanks, Paul Good afternoon, everyone. Thanks for your interest in <unk>, joining us today for access financial Inc. Third quarter 2022 financial results Conference call are the company's President and Chief Executive Officer, Greg Gara branch.
Second as Vice President and Chief Financial Officer, Derek Walsh.
Second a vice president of Finance Nikolay.
Greg and Andy will review.
Eric 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'd 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.
Certainties.
Therefore, the company claims the safe Harbor protection pertaining to forward looking statements containing contained in the private securities.
Litigation Reform Act of 90 95.
This call is being webcast and there'll be an audio replay a replay available on the Investor Relations section of the company's web site located at access financial Dot 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 access financial web sites.
With that I would like to turn the call over to Gregg for his opening remarks. Thank you John and good afternoon, everyone and thank you for joining us.
Welcome everyone to access financials conference call for the third quarter of fiscal year 2022 ended March 31, 2022, and thank you for your interest in our subsidiary install and extra space.
We had an excellent quarter with double digit growth in loan originations net income book value per share and earnings per share for the third consecutive quarter. Our strong results were broad based with net interest margins exceeding the high end of our target and balanced net interest income and fee income growth across our consumer and banking segments excess securities increased client account.
Deposit balances, despite a challenging quarter for the industry due to headwinds caused by macroeconomic and geopolitical turmoil.
<unk> reported third quarter net income of $61 8 million for the three months ended March 31, 2022 earnings per diluted share of $1 <unk> representing year over year growth of 15, 3% in 14, 6%, respectively. Our book value per share was $26 58 at March 30.
First 2022 up 17% from March 31, 2021 highlight for this quarter include ending loan balances up $13 1 billion up three 9% linked quarter or 15, 4% annualized.
While average loan originations at our auto commercial real estate in various C&I lending loan types more than offset an expected decline in our single family mortgage warehouse loans splitting.
Splitting single family Jumbo single family mortgage warehouse ending loan balances increased by nine 5% linked quarter net interest margin was four point out 2% for the third quarter down from 410 in the quarter ended December 31st 2021.
Basis points from 396 in the quarter ended March 31 2021.
Net interest margin for the banking business was $4 two 1% compared to four 3% in the quarter ended December 31, 2021 and for two 3% in the quarter ended March 31, 2021 compared 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 <unk>.
Through the first nine months of fiscal 2022.
We continue to make steady improvements in our funding mix with non interest bearing deposits increasing by approximately $287 8 million from December 31, 2021, noninterest bearing deposits represented approximately 33% of our total deposits at March 31 2022.
A good improvement from 23% in the corresponding period, a year ago, the steady growth of non interest bearing deposits positions us well in a rising rate environment.
Our efficiency ratio for the three months ended March 31, 2022 was 51, five and two 1% compared to $48 seven 8% in the second quarter of 2022.
Efficiency ratio for the business banking the banking business segment was $39 seven nine for the third quarter of 2022 for 39.39% in the second quarter of 2022.
We achieved positive operating leverage in our banking business as a result of strong net interest income growth year over year.
The newest focus on managing our operating costs diluted earnings per share were $1. Two sets up 15% from 89 cents in the year ago quarter strong growth in our pre tax pre provision income more than offset a $1 8 million or 67% year over year increase in our provision for loan losses, we continue to gen.
<unk> strong returns, while maintaining excess capital we generated a return on equity of $15 eight 9% in the third quarter and a return on assets of 1.59% capital levels remained strong with a tier one leverage ratio of 10, five 1% at the bank and 9.43% at the holding company, both well above our regulatory requirements.
In February we raised $150 million of subordinated debt at the holding company to further augment our capital.
Our credit quality remains strong with net annualized charge offs to average loans of five basis points for three voices 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 represent.
22 times, our annualized net charge offs and one 1% of our ending total loss.
Total loan originations for the third quarter ended March 31, 2022, or $2 5 billion up 57% from $1 6 billion in the year ago period loan originations for investment were approximately $2 4 billion, an increase of 99% from the corresponding quarter a year ago Q.
Q3, 2022 originations were as follows.
$36 million of single family agency gain on sale production $378 million of single family Jumbo portfolio production $194 million of multifamily production.
$47 million of commercial real estate production of $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 the quarter ended December 31, 2021, and $9 million in the corresponding quarter of last year when refinancing activity was near record high levels originations decreased by approximately 24% linked quarter to $136 million while mark.
<unk> were down due to a normalization single family mortgage gain on sale across the industry. Our MSR evaluations generated a $3 $1 million gain this quarter benefiting from the rapid increase in mortgage rates since the end of 2021, we anticipate lower mortgage banking gain on sale in the foreseeable future, partially offset by MSR valuation.
Gains as rising interest rates reduced demand for mortgage refinancing our pipeline of single family Agency mortgages was $59 million at 425 2022, our jumbo single family mortgage business appears to have stabilized we generated $378 million of loan production offsetting elevated prepayments and then loan balances.
March 31, 2021 were reduced by $58 million as a result of prime jumbo loans, we sold during the quarter with dislocation in the secondary market for Jumbo single family mortgages, we expect to gain market share while repricing of our loan rates up our jumbo single family mortgage pipeline was approximately 761 billion at 420.
Five 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 are strong relationships knowledge structuring and track record of execution have resulted in steady expansion of loan production and that balances demand across remains strong across.
Loan types and geographies with a backlog of approximately $886 million at 425 2022.
We have positive momentum across multiple C&I lending verticals and remain confident that we will be able to sustain strong loan growth and our net balances, while maintaining our credit and loan yield standards.
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 positive operating leverage our business banking efficiency ratio was $39 seven 9% and $39 79 per cent for the three and nine months ended June 31 2022.
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 mature. Additionally, we continue to incur incremental expenses related to the growth initiatives such as crypto trading tech infrastructure upgrades for the bank and our securities business and new products and feature enhancements in consumer and commercial banking.
We will be carefully balancing investments in the future while maintaining best in class operating efficiency ratios at the bank.
We grew deposits by three 8% linked quarter to $12 7 billion with broad based growth across our small business commercial and securities deposits checking and savings accounts, representing 92% of total deposits at the end of the quarter grew at a faster clip increasing by six 5% linked quarter consumer deposits representing half of our total deposits.
331, 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, 2020 to be strategic.
You can reprice, our consumer deposits nine months ago in advance of closing the EFS acquisition. Since then we've focused on increasing the share of wallet with existing consumer banking clients and on adding new customer deposit relationships to affiliate marketing and cross sell our small business banking and cash and Treasury management businesses continued 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 come from securities and commercial deposit businesses.
Ex us Clariant continued 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 advisors increased our cash holdings as a percentage of client assets in reaction to elevated stock market volatility.
At $2 1 billion of the $2 9 billion on axis bank's balance sheet flexibility to keep these low cost deposits off balance sheet and generate fee income from other banks or on axis bank's balance sheet to support our loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase our diverse lending and deposit businesses.
Modest securities portfolio positions us well for a rising interest rate environment, Our securities book with approximately $230 million in 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 two four years.
Our single family Jumbo and multifamily loan portfolio with $3 5 billion and $2 1 billion of loan principal outstanding at March 31, 2022, representing approximately 27% and 16% of our total loans outstanding.
It's much lower than what it was in the prior rate cycle. These loans are five one arms and adjust after five years with the exception of Prime Jumbo mortgages, we originated in less than $50 million of agency mortgages, we purchased last quarter for CRA purposes, We have no other 30 year fixed rate jumbo single family or multifamily loans.
On our balance sheet.
The weighted average duration of the jumbo single family mortgages and multifamily markets. This on our balance sheet or approximately three and four years respectively.
Note rates on loans originated in our single family Jumbo multifamily in C&I loans were 4.12% for two 4% and 486% respectively. In the three months ended March 31, 2022 up 18 basis points down two basis points and up 31 basis points from the prior quarter.
We raised rates for our newly originated five one jumbo single family and multifamily 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, or just a LIBOR and the other 16 in just the sofa or apparel or other indexes at March 31, 2020 to approximately 24% of our C&I loans are above their floor and 73% of our C&I allowance will be above their floor with another 100 basis points up at 97%.
That 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.
To fund our robust loan growth with a variety of deposits from our consumer commercial banking and securities businesses.
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 jumbo mortgage customers with an increasing percentage of our new customers opting for direct deposit and bill pay with our deposit products are.
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 accessories services continued to add sticky no cost deposits we have additional.
Funding flexibility with our $2 9 billion clearing and custody deposits.
With approximately <unk> 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 that partner banks reprice immediately to changes in fed funds one of the 30% reprice within three months.
While we expect deposit betas to rise as competition for deposits increases in the back half of calendar 2022, and beyond our deposit betas will be meaningfully lower than they were in the prior fed tightening cycle.
Granularity and diversity of our tech enabled customer centric deposit services model.
Our credit quality remains healthy net charge offs to total loans remained low and our asset base level TV lending makes us extremely comfortable about our credit outlook, even in adverse economic scenarios nonperforming 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.
At December 31, 2021.
All of our nonperforming loans 81, 7% or single family first mortgages, where we've had historically very low realized losses of our nonperforming 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.
Percent of our best estimates of current loan to values given the low loan to values on our single family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent loans our loan loss provision. This quarter was $4 5 million, which is up by half a million dollars higher from the last quarter and up $1 $8 million year.
Every 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.
Total allowance for loan loss was $143 4 million at March 31st 2022, which is approximately one 1% of our total loans and approximately 22 times, our total annualized net charge offs in the three months ended March 31st time trying to.
Our loan pipeline remains solid with approximately $2 2 billion of consolidated of loans in our pipeline at April 27, 2022, consisting of $59 million of single family agency gain on sell mortgages $761 million of jumbo single family mortgages.
$2 million of multifamily and small balance commercial real estate term loans $886 million of C&I and commercial specialty real estate loans.
$89 million of auto and consumer unsecured loans.
Demand from loans across multiple loan categories and growth above our target range for the first nine months of fiscal 2022, we remain confident in achieving the higher end of our low teens loan growth target in fiscal 2022.
We are making good progress with the integration of <unk> Advisory services.
Custody business, we acquired from Morgan Stanley approximate eight months ago overall profitability Frac. So securities in March of 2022 were negatively impacted by lower average margin lending balances and lower transaction based revenue with access clearing due to industry wide declines in trading volume, we see meaningful opportunities to continue to improve the profitability of.
Our security business over time, as we consolidate systems automate manual processes eliminate redundant workflows and transition to a more efficient more scalable tech stack, we successfully converted access advisory services from J P. Morgan to ask those clearing this quarter. This will provide us with more flexibility and reduce operating costs by approximately $1 million per year.
Here, we have dozens of operational efficiency initiatives for our clearing and custody businesses that are in various phases of implementation. We remain on track to generate slight accretion for the Aes acquisition in fiscal 'twenty, two with or without the benefit of future fed funds rate increases our capital ratios remain strong with tier one leverage to adjusted assets of nine.
Four three at the holding company and 10.5 wanted access bank, we have access to approximately $1 8 billion of FHL be borrowing one 6 billion in excess of the 154 million. We had outstanding at the end of the third quarter, we took advantage of favorable market conditions to augment our capital through $150 million subordinated debt raise in February .
Furthermore, we had $2 8 billion of liquidity available at the fed discount window as of March 31 2022.
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 deploy excess capital for opportunistic buybacks and accretive M&A.
Securities business had them next quarter with higher client deposit balances and lower securities in March in lending activity is 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 Aes acquisition, excluding <unk>.
Onetime merger related expenses, and noncash depreciation and amortization costs ex those clearing generated $2 1 million of pre tax income for the quarter ended March 31st 2022 access clearing ended the third quarter of 2022 with approximately $36 billion of assets under custody and assets under administration, including $25 billion.
Assets under Aaas at $11 billion of assets under administration of acquiring business.
It'll client relationships and underlying accounts were up and client assets were down slightly due to the decline in equity markets overall transaction based fees Fracs those 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 RIAA custody acquisition, approximately eight months ago, and we're making good progress on a variety of tactical and strategic initiatives with a self clearing conversion behind us we have pivoted, our focus to growing new assets for existing and new clients at a noncompetitive custodian with a high touch service centric model and a strong capital base.
We're in active communications with dozens of RA 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 our <unk> and broker dealers and their clients and conversations with advisors large and small we have heard that integrated banking tech integration into third party <unk>.
This providers succession or M&A financing, our mortgage lending for advisers 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 our eyes and advisers, who are interested in using access for their clearing custody and bank needs.
One last important strategic initiative Frac, social securities is upgrading our core clearing infrastructure to improve our flexibility and scalability.
Probably a multi year process that will generate incremental benefits over each stage of implementation, while market volatility and turmoil may adversely impact our business in the short term they present tremendous opportunities for our securities business as well as those of our clients.
Ryan's reassess their needs from a product and technology perspective, we see exciting opportunities to gain market share by becoming a strategic partner for banking and Securities services. We look forward to sharing more details at our Investor day in Centennial, Colorado next week on initiatives, we have underway and plan to implement over the next 12 to 18 months to help access and our clients grounds.
No.
We've successfully overcome the loss of H&R block and other durbin related revenue and navigated through periods of competitive pressure in our jumbo single family and multifamily businesses by building and scaling our commercial banking 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 to point out retail crypto trading commercial real time payments and a modern core for Akzos clearing that will make us more competitive from a cost product technology and.
Scale perspective, not only are these initiatives will generate short term benefits, but they will help us become even more differentiated and competitive with fintech and other nonbank competitors are strong profitability excess capital and the ability to be nimble position us well to take advantage of market dislocations.
Aggressively deploy resources when we see these opportunities to accelerate our growth now.
Now I'll turn the call over to Derek who will provide additional details on our financial results.
Thanks, Greg.
To begin I'd like to highlight that in addition to our press release 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 financial Dot 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 will start by covering some movements in our noninterest income.
Overall noninterest 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 Q.
Three of fiscal 2021, primarily due to the addition of custody and mutual fund fees from our SaaS Division, which was acquired this past summer.
Greg highlighted the $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 will highlight that our bank efficiency ratio was $39 seven 9% for the three months ended March 31, 2022 significantly improved when compared to $42 33 per cent for the three months ended March 31, 2021, and a small change when compared to <unk>.
39, 39% for the last quarter ended December 31 2021.
The strong efficiency ratio was a reflection of loan growth prudent expense management and our scalable business model.
Our noninterest at our noninterest expense for the quarter ended March 2022 was $86 $8 million up.
Zero point $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 dollar increase in salaries and related costs from $40 million in the quarter ended December 21 to $43 1 million in the quarter ended March 'twenty two.
Over $2 million of the increase is due to the reset of the calendar year and related payroll taxes and 401K contributions.
Salaries and related costs increased $4 6 million from $38 $5 million in the quarter ended March 31, 2021 to $43 $1 million in the quarter ended March 31, 2022, which is due to increased staffing levels, including the addition of D. A S personnel.
Lastly, I'd like to touch on capital.
Our risk weighted capital ratios had been declining in past periods due to shifts in our long growth as backward looking loan origination opportunities moved away from our 50% risk weighted single family assets and towards the 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 regulatory capital raise and successfully completed a $150 million subordinated debt raise at a 4% interest rate just ahead of the March fed rate increase.
As a result, our total risk weighted capital ratio access financial increased 114 basis points from 12.16% at December 31, 2021 to $13 three zero percent at March 31 2022.
We contributed a portion of the capital to access bank and its total capital ratio increased from 11 seven 3% at December 31, 2021 to $12 two 4% at March 31 2022.
With that I'll turn the call back over to Johnny.
Thanks, Derek Kyle we're ready to take questions.
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One moment, please while we poll for questions.
Yeah.
Our first question is from David Feaster with Raymond James. Please proceed with your question.
Hey, good afternoon everybody.
Hi, David.
<unk> been able to take a ton of expenses out of that.
Our thought most of that savings would have been realized just given what you got to dawn, but it sounds like there's still more to come.
Curious you know the scalability of this business and the expense growth that we might see as you can see.
Onboard new clients as activity increases.
You know how you think about what is one of them.
Good efficiency ratio for this business is as you continue to do.
Do you operate that.
Right well so.
So first of all thank you I think I think youre right. The teams 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 is a lot of opportunity in clearing and Theres a lot of opportunity in custody as well.
I think with respect 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 but with respect to interest rates. So if you just take the securities business as a whole and you have $3 billion and you have a 100 basis point increase and you're let's say.
The transfer pricing and whenever you know, obviously something thats 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 thats not really the way.
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 is 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 six or $7 million out of out of me out of the out of the collective security has been on a cost side. It will probably take two to three years to get there fully and will require some.
But that will be an ongoing number so there's really a lot of benefit.
It's going to take a little time now because it's just it's it's a lot of different elements to gather it's training clients to interact with us differently using portals and automated processes.
Yes.
System related work that that's 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 is there's a lot of opportunity in that business to take out cost and grow and.
And I think there is a there is a scalability to it as well once that once that that sort of stuff gets done that you can add a lot more clients without having commensurate levels of costs. So.
I think without having that kind of I don't know.
Derek if you have a different answer but putting it on paper. The issue really is is this business is so interest rate dependent that to get the efficiency ratio you almost have to peg an efficiency ratio at different.
At different levels of interest rate right.
To say that as of today that the efficiency ratio won't be as good as it would be up 200 basis points right, but regardless to your point, we're carving out a lot of expenses, there and have a lot of strategic plans to make the business much more efficient there's a lot of manual stuff and we just had.
Our tech stack is just.
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.
Yeah.
No that's.
That's helpful color and then just curious on the conversation with new clients within the securities business. How are they going where are your clients seeing you know aes.
You know what are the really driving is the key differentiator between between you all in the competitors and then just the volatility in the market create a catalyst for somebody to.
You make a change.
Would that make them more sticky I was just curious how market volatility might play and an opportunity for you to accelerate growth.
Yeah, I think from us from a standpoint of catalyst to make change I think the TV acquisition.
It's 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 that really pushes them into a behemoth theres really not a lot of.
Firms that are focused on the smaller firms that grow and so if you look at the history of <unk>.
Yes.
They often brought in smaller firms that overtime grew in and out.
The business has grew together, which is why sort of the full facilitation of all of those financial products is helpful to have those those groups grow so I think that the key differentiator right. Now is that the system itself allows us to instead of having a lot of tech integrations are there.
Office, where they have to out performance reporting and I'm trying to glue. All this stuff together. It comes out of the box package that you can run your full business on and do it very effectively there's other kind of interesting.
Sub elements that some folks are really excited about you can run multiple models in a single account there is a bunch of that kind of functionality.
That that is unique and others haven't caught up in the industry.
So I think there is that and obviously also really the service levels that are smaller adviser is going to be able to get relative to having to go through what they have to go through with the schwab when the swaps just so big and that just naturally the ability to concentrate on every client in that business is difficult.
I think it's it is the good part about all of these businesses is it it's hard to lose clients because it's a real pain in the butt to switch you've gotta do repay per and all these kind of things that are.
Tougher part as it is a big deal for someone to switch they have to do a lot of work. So so.
Sales cycles tend to be long and Theres, a theres a tech roadmap.
That needs to be implemented in a yes.
And I think it'll be it'll be important there on axis clearing.
There is we're doing a lot of work to be able to serve the <unk>.
Jack market over time.
That business has historically.
Dan and <unk>.
Nominated by others in the industry and it's partly because of the cost structure that we have including our core cost and we have.
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 businesses that you see folks that are traditional.
Broker, becoming hybrid and you'll also see obviously the rise of syntax, who won not only securities API is they also want banking API too and that's a position that most are I don't know if theres anybody else who is in a position to deliver exactly that way and so those are 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.
Just the competitive landscape, what you're seeing here, obviously pricing competitive I'm 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 youre seeing pricing.
On the mortgage front like you've talked about.
I'm, just curious how well new loan yields.
Landscape and whether you're starting to see more aggressively.
From competitors in terms of standards or structure or terms or anything.
Well on the single family side.
<unk>.
The disruption in the securitization market, which has been significant it has been really helpful. So we actually think we're pretty certain it will be back to growing the single family book, certainly this quarter, probably nicely and and with having essentially taken.
It's up.
<unk>, so I think that new originations are going to be in the mid fives lets say in the first fiscal.
Quarter of calendar, our fiscal year 2023, so that June or September quarter. So we.
That's a significant increase.
We've tightened up standards a bit.
I think the market is the securitization markets kind of kicking back on some of the stuff that's been coming out I mean, it was rough competing with those conduits and those sorts of things, but you've just seen all of those conduits pull back and so there is disruption there and thats definitely benefiting us. So I think we're excited to be back.
Some single family growth.
From from having really had to watching our competitive position deteriorate.
Over the last couple of 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 were we dabbled our tolling. It we started a conduit and we had about 60 million.
About 30 year low rate fixed paper, we were.
We were strategically get was 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 to reprice I think.
We've done a lot to add capacity across so many lines that we have the ability to say no to alone. So I think we're going to be I don't I don't want to predict that our net interest margin will go up because I don't think thats the case, but I definitely don't see some kind of any kind of material deterioration as a result of the rates upside in <unk>.
Thank you.
We have that we have that gap a little bit of a gap in the and some of the floor rates I think it was what was it on the 50% John at 43, 40%, so 43% of our.
Of our variable rate loans will hit will be adjustable after the next assuming the fed increases 50 basis points to 43% and then it's in the seventies 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 given.
Given the Prepays on the hybrid side I think we're gonna be.
Look at what happened in the last rate cycle and have the team looking at it I mean, we were okay, well, we're gonna be okay, you too and will I think good loan growth.
That's helpful.
Caller. 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.
Andrew.
Thanks for the commentary there on the on the Jumbo outlook Bob.
On the commercial side.
Seems like things are firing on all cylinders. So I guess the question is what can disrupt this momentum right now the loan growth that should easily seems like it should be your your guidance, but what can disrupt that.
Yeah.
Gee.
Things things are looking pretty good on the lending side.
You know, obviously with single family coming back as a cylinder I think that that's.
That's a that's good for the engine.
And it's also good obviously for risk based capital et cetera.
I guess, it's what's interesting about this is maybe a 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 laundry pricing right.
We are seeing some positive signs or banks are getting ahead of stuff. So that's good but.
We we obviously want to be really cautious about duration here, even though some will start to argue that stuff will rollover 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 takes interest rates right I mean, we really.
We've really effectively for a really long time and been in a very low interest rate environment and I think that's something we just have to look at.
I think it's I think it's 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 or are you seeing anything concerning out there at all the numbers are great, but does anything concern you right now.
Hmm.
No there is nothing in our portfolio, specifically that concerns me, but I think every lenders should always just be concerned the disposition alright, I think 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 <unk>.
I think we're in the right place with respect to that but I. Just think that continued caution is warranted. Obviously, you've had very aggressive single family home appreciation our loan to values are low but that home appreciation has also been quite high and.
So you always have to ask your questions about how deep any individual.
Market is with respect to how many transactions are occurring with respect to where prices are so obviously I think it would be better for lenders. If if home price started to moderate at least from a growth perspective or stabilized because theyre. Just spent a lot of that so you know those are those are all <unk>.
Things that are there I think yes, I think look we're we've we're cautious about our loan to values are always focused on that and I do think assets now do you have a potential to reprice and higher rates.
Got it thanks for taking the questions I'll step back thank.
Thank you.
Thank you. Our next question is from Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good afternoon.
Thank you Eric.
Hey, I just wanted to clear.
Clarifying question on the Securities segment, I think Greg you had mentioned a prop.
Process that will.
Annual I think expenses by about $1 million did I hear that correctly and can you just.
State again, what that was.
Yes that was the J P M.
Conversion so when we brought aaas over as a reminder, part of the deal of winning that bid was we closed that deal in a matter of four months or a little less than four months, so but with that we brought over their clearing firm J P. M. So we have now completed the conversion.
Jen from J P M to self clearing for the Aaas side of the business. So that is expected to save approximately $1 million pre tax.
For the going forward.
And that was completed in March at the end of March.
Okay, Great and then in terms of the fees on the.
Swap deposits.
What's the threshold or is there an upper threshold to where those.
The interest on those ultimately get shared with the with the client.
I know the initial few hikes the benefits generally accrued to the to the bank.
But what's the cutoff to wear.
That's not the case.
There is no Ryan there is no direct kind of number but usually as you start getting pretty significant kind of triple digit basis point movement that you will you will start to see some but even that is is on the smaller.
Side. So we don't expect especially early on here any any significant data it really any beta as rates move up if we start getting into 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 a.
Negotiation to some degree with with various.
Customers in the level that they bring to us right because certainly one that could bring.
$200 million in deposits is different than one that can bring $2 million of deposits Allison Yeah look I think partially this is all related to I mean.
We would have raised pricing frankly.
If it wasn't for this so they each raid.
Did you.
Well I'll just say this.
A business that was making the first time, we looked at it $25 million and then it wasn't rate environment.
No.
18 months, they may lose $5 million right and they did this they did this through a lot of mechanisms one of them was through really hurting pricing discipline in a variety of ways. Its not worth detailing. So this is this is just in time, because you know frankly.
We need to be paid for our services. So you know.
The pricing is probably a little low for what were providing the clients, but you know with with the overall.
Change in interest rate environment, and sort of there, but this is not.
These are this is this is cash that has to be there for the.
The levels of investment in Securities. This is not.
The goal of providing savings accounts for people. So this is this is part of the way the business works and you know.
The deal is is that we bear 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.
Okay.
The prior question kind of talked to this a little bit but Greg in terms of the Cristal business I mean, that's been driving a lot of groups drove a big chunk of it being deferred growth. This quarter as you just think about higher rates.
And your projects are you seeing anything.
That gives you pause as kind of your you know your team models out real estate evaluations towards the end of a project timelines as or anything that maybe doesn't look like it with 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 have.
So did better you know.
That is your rate environment that at $2 55.
Yeah, no not really with respect to that I mean, we are we're in very low leverage positions sub 45% on these lease loans.
Certainly.
Right.
The type of rate increases that would have to have for the stabilization of the buildings not to be able to get out.
At RMB, Acs, our Rd and now it's.
We're two and three times covered and more.
I think that.
There is definitely some and this happened this happened prior to the rate increases on Covid in New York. There is theres guys, who didn't get all of their equity back that's clearly the case, but the but the mezz lenders and stuff like that.
I don't I can't really think of anybody that even got touch there and there are significant part of the capital stack and obviously ahead of us from a loss perspective so.
There is there stuff that we see that's going around I wouldn't say, it's directly connected to interest rates I would say, it's connected to a variety of factors like lets say you.
Not that we don't do a lot of this is let's say you bought a second to your office building and you were kind of rehab it in New York or something in your the equity for that Youre not getting your money back.
<unk>.
But I don't I don't think there's anything really and we do we do stress testing on that stuff.
No. It's the markets the market's still robust it's and.
For the take outside.
The projects that we do are really they're really great projects in very high demand areas with.
Premium lenders and sponsors and so we're not seeing anything that would be cause for concern there.
Thank you very much.
Thank you.
Our next question is from Edward Hemmelgarn with Shaker investments. Please proceed with your question Hi, Greg.
Sure.
How're you doing.
Can you talk a little bit about your.
Your thoughts on share buybacks, no I mean, you've done a wonderful job.
Debenture.
Debenture offering.
And you know capital and its.
You know stock price has fallen a lot what.
Yes.
If you can share or anything as your thoughts on share repurchases.
Yeah.
Well, we're always we always evaluate that I don't like to rule things out obviously, we have to balance it against loan growth and I think.
One of the things I definitely don't want to be doing is raising equity right and so I think that my my first my first.
You know view is.
I look at it.
Talk about fabrication, but obviously whenever times earnings were trading at.
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.
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 comment on that except to say that.
It.
It wasn't too long ago, you were saying you thought we could grow loans a lot faster. So you know I.
I have to have some consistency quarter to quarter Ed.
We're we're you know we're fairly flexible over here, but oh.
Oh, no I'm teasing.
Teasing young teasing you, but yes look I think I think look I think we were looking forward at a revival of single family.
At low loan to values.
With great properties and good rates we're.
We're looking at you know we've spent a lot of time and effort diversifying our our business.
So look you know there is there is 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 <unk>, if we decide to do it.
Okay.
Other one I was wondering can you you know you cool you indicated I mean, you're you feel your more asset sensitive.
So the new rates go up you benefit from that but can you give me.
You know how how much.
You know, we will you try to keep keep loan rates lower ore and so grow that in sync with your deposit costs or.
Do you expect.
Any opportunity for his roots horizon here.
Certainly some of your loans will be repriced.
Yeah.
Rig increases or do you accept that.
That's the that's the that's the million dollar question are there I don't know the 20th or question or whatever is that yeah look I think here's here's what I, what I see and that I think our NIM range. I think is good is good target because I think what it allows us to do is we feel comfortable that we can grow loan growth within.
That.
How high the mid you know mid teens or low to mid teens range that we say and then at that 4% I think that's a good way to think about it is there upside from that 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.
The speed at which other banks adjust and everything else. So we have been but we've been pretty quick too.
To reprice, our pipelines is quite candidly. We told people look you want to lock you want to pay for a lot I don't know I don't want to pay for a lot of fine your rates up and Oh. There you go right. So other banks may have not done that exactly that way. So that may result in.
Some some lower loan production at certain points in time, we're not seeing that now frankly pipelines are great.
We're getting good pull through so we still feel we still feel good about that but it is there's a lot of stuff to balancing all of that clearly we have these deposit sources that are and we have stuff off balance sheet et cetera.
But you know those.
Those are those are all decisions that we're making in real time and looking at that and there are some borrowers who some of our longtime bars on say on the multifamily side.
You know we've had guys who've wanted.
The five year deals and they say well, we want 4% no fine well, okay, well give you 425, no I don't want to know well now it's $4 75, well I don't want it right now so you know 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 that.
This in and so it is.
We'll just have to see I think I feel pretty good about it I think we're in a much better position, we do have a little bit of a lag right, which I think is not insignificant in the sense that we've only got in that 40 percentile.
Take fully that fit first 50, but then we get through the next 50, then we're at 70 something percent and we have much.
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 I don't want to get everybody to too excited about the idea of it sorry to say well we were going to be way above where we are on the NIM side, because obviously the margin 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 these lower cost deposits here now I feel good.
About their betas as you're going out and Youre getting deposits as you grow you end up having to pay higher rates for those deposits because.
Frankly, the commercial client, who a year ago would have said great I Love Your service and your Apis I'm not going to ask right.
No.
<unk>.
Three months that theyre going to ask for a rate and.
And if they if they say, they're leaving there are other bank may give them a rate because we would say no. We would say no look at all the great stuff. We have maybe now that banks are going to say you know what I'll give you a little bit of a rate. So that's all about that competitive dynamic and we just have to let that play out so yeah.
But wouldn't you I mean or do you feel that given the amount of excess deposits in the banking industry right now.
We more than loans.
Probably the repricing of deposits will move at a slower rate.
Loan me personally.
You know.
I think that I think for existing deposits, absolutely I think to get people to move.
There is always an inducement and if everybody is reading the papers and youre growing loans and you need to grow deposits.
That deposit cost is going to be higher on the margin for everybody now if you have excess deposits you'll absorb it may also mean with those excess deposits at some of those banks don't push as aggressively on loan rate increases too right. So all of those different factors are are there and they.
Lay out a different way so I think thats why we think that you know all of those elements together, we kind of have that guidance and it's.
It's been right.
For a long time, and I think it's probably good to stick with it.
Okay, alright, thank so very good quarter.
Thank you.
Yeah.
Our next question is from Michael Perito with K BW. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking my questions and Mike just a quick one.
Greg in the prepared remarks, I think I heard you mentioned something.
Something briefly about the kind of the crypto trading ability on the U D. B I was just curious if there was any more update you could provide us there on on launch and whatnot.
Yes, I think I think we're probably at around.
I'll 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 that's about the timing of it and it is it is interesting because I was just looking at this.
This study and it was incredible the number of customers new customers through these different self directed trading platforms that said they were coming specifically to trade crypto. So its actually by far the biggest draw to these platforms and so.
It's an important part of our.
Bring it on so so yeah. So 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 how well the interface is going to.
Look a cohesive with UBB because it essentially is our platforms and so on.
If 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.
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 you know some of these other kind of digital.
Platforms that have launched this it's been a fairly decent driver of profit and and I guess, just do you guys have any.
Thoughts or views that you can share about how the you know the.
Economic will work for you I know you probably can't make any predictions that hasn't even launched yet, but just in terms of its going to be a flat rate on trading as it or just any any thoughts around how the economics will work.
For the crypto trading piece.
We're still actively debating it and so I wouldn't want to 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 so youre right. There is a it's a.
It's one of the more profitable areas of the business for sure and I think thats.
So I don't think I don't think theres been anybody who's done a particularly good job of.
Integrating it into the ability just to take your have your bank.
Your bank and you're the security side. So closely linked that you can just your direct deposit comes in if you wanted to invest you can do that right away as it just even getting the basics of that right with respect to some of these other wallets are I think will be a big driver of it if we can get our get.
Get it out from a market perspective, and get people focused on it that's that's kind of the debate right to make it do it.
Now how good does it have to be before it comes out but look I think there is I think there is opportunity there and.
Now clearly it'll get tighter over time as more and more folks come out right <unk> side, they are letting people.
Crypto and therefore in one case and all that kind of stuff. So it's going to it's going to become much more of a mainstream asset class, but yes, I mean, I think it's a I think it is a it's an interesting potential for sure.
Great.
Helpful. Thanks, and then just kind of a bigger picture question I mean, we've talked a little bit about betas on an earlier question, but just how do you kind of.
Bifurcate, the strategy, right and and and how do you kind of view it overall with who you're competing with right. Because I mean, you have for example, you'd be at 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. I think you guys are offering like what 125 basis points and the checking unqualified balances and so I guess, how do you guys kind of take.
That competitive force, but married to the fact that you know relative to last cycle. You guys really are not in in kind of as media of our funding position I guess for lack of a better way of putting it right and so you're trying to balance like this this competitive dynamic versus the fact that you are just much better positioned today to be more competitive or more slow on raising rates.
On deposits 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 access invest account and access 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.
Things right. So you basically if you are coming in and you want to be the customer that's going to earn that where your primary bank you have your investment account with US you have your secure at least one of your investment accounts with us at a certain dollar amount you have a certain securities account right. So.
Yes, you can get that rate and it's clearly disclosed but the reality of that rate is very different in a sense that you are still getting a great product you. Just we're just telling you look you need to do all these things in order for that to happen right and I think thats part of the power of the platform because once that.
Once you open all of those accounts you do your direct deposit you do all that stuff youre doing a certain number of debit transactions youre 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 or you are going to shut down all of those accounts move everything and I think that sort of so I think that even on those sorts of products I think we've done a lot better job.
Making the I'm, 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 or other HOA banks right, they're going to have their own dynamic right. So <unk> stones, the Zale Smart Street Union platform Theres different banks at all and that this is a different platforms. They're CIT had one they're going to they're going to do what theyre going to do.
Just on that.
The clearing and custody side has its own dynamic that I think Derek did a good job describing.
The bankruptcy business.
Essentially.
These are these are long term software agreements that you know we operate in the entire back office for someone.
That traditionally.
Thats why I would say that's also one of those businesses, we're in low rate environments.
We're in a really don't mastery capacity, where you know when we do a lot of work for for trustees and day.
No.
And it's very nice of us to do that and then at a 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 than Youre also trying to grow and so all that stuff together and that's why I kind of bring.
Break that out to say look we think we can maintain our NIM. We think we can maintain a loan growth and I think thats 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 are.
Trying to get people to move right and that is so the even on the consumer side. The acquisition is going to be different than somebody who's done all of that stuff with you and then right and then they.
They say well do I want to bother trying to go chase rates somewhere I mean, we've been the other thing is to the extent you are with US now we've chased you out if you're a rate case for a long time ago right. We really have because we've been we've been.
We have not been in the top 2025 and rates and anything for a really long time so.
Yes, the small business side, whatever so I think 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 and the platform is used.
You shouldn't be thinking of us as someone that was going to you should be thinking houses, how great and convenient as your bank account and your crypto trading to be together or not.
We're going to give you a high interest right now.
That's certainly.
A tool that's available and there's dynamics associated with that and there is obviously if you are profitable loan growth you don't want to Miss out on et cetera. So all those things have to play out together.
Yeah.
That makes sense, thanks for all that color Greg and.
Reiterate others looking forward to seeing you all next week.
Thank you thanks explained.
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 Axis and has alluded to several times, we are hosting our investor day.
And our access advisory services office in Centennial, Colorado next Wednesday may the fourth 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.
Yeah.
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