Axos Financial, Inc. (NYSE:AX) Q1 2025 Earnings Call Transcript

Axos Financial, Inc. (NYSE:AX) Q1 2025 Earnings Call Transcript October 30, 2024

Axos Financial, Inc. beats earnings expectations. Reported EPS is $1.93, expectations were $1.78.

Operator: Greetings, and welcome to the Axos Financial, Inc. First Quarter 2025 Earnings Call and Webcast [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Please go ahead, Johnny.

Johnny Lai: Thank you, John. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.’s first quarter 2025 financial results conference call are the company’s President and Chief Executive Officer, Gregory Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the three months ended September 30, 2024, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions.

Please refer to the Safe Harbor statements found in today’s earnings press release and in our investor presentation for additional details. This call is being webcast and there will be an audio replay available in the Investor Relations section of the company’s Web site located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release. Before handing over the call to Greg, I’d like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 8-K with additional financial information for this call. All of these documents can be found on the Axos Financial website. With that, I’d like to turn the call over to Greg.

Gregory Garrabrants: Thanks, Johnny, and good afternoon, everyone, and thank you for joining us. I’d like to welcome everyone to Axos Financial’s conference call for the first quarter of fiscal 2025 ended September 30, 2024. I thank you for your interest in Axos Financial. We delivered outstanding results in our first fiscal quarter of 2025 generating double digit year-over-year growth in earnings per share and book value per share for the 10th consecutive quarter. We grew deposits by approximately $614 million linked quarter with growth primarily coming in interest bearing demand and savings deposits. Ending loan balances were up 0.3% linked quarter and 13.7% year-over-year to $19.3 billion. Average loan balances were up $269 million linked quarter as origination volumes in some of our C&I and single-family mortgage warehouse lending businesses were offset by prepayments in our single-family jumbo mortgage, multifamily and commercial real estate lending groups.

We continue to generate high returns as evidenced by the 19.1% return on average common equity in the three months ended September 30, 2024. Our strong returns contributed to the 28% year over year growth in our tangible book value per share. Other highlights include the following: Net interest margin was 5.17% for quarter ended September 30, 2024, up 81 basis points from the 4.36% in the quarter ended September 30, 2023 and up from 4.65% in the quarter ended June 30, 2024. Net interest margin in Q1 2025 benefited from the payoff of three loans we purchased from the FDIC. Excluding the impact from the early payoff of these three purchased loans, net interest margin was 4.87%. Net annualized charge offs to average loans were 17 basis points in the three months ended September 30, 2024.

Excluding the auto loans covered by insurance, net annualized charge offs to average loans were 15 basis points in Q1 2025. Net income was approximately $112 million in the quarter ended September 30, 2024 up 36% from the $82.7 million in the corresponding period a year ago. Earnings per share for the three months ended September 30, 2024 were 1.93% representing year-over-year growth of 40%. Net growth in loans for investment were $49 million for the three months ended September 30, 2024. Growth in single-family mortgage warehouse and C&I loan balances were offset by declining single-family mortgage, multifamily and auto loan balances. Multifamily and auto loan balances. Elevated levels of prepayments and multifamily, single-family jumbo mortgage, commercial real estate specialty and real estate lender finance offset solid loan originations across many of our C&I lending groups.

Average loan yields for the three months ended September 30, 2024 were 9.01%, up 47 basis points from the 8.54% in the prior quarter and up 116 basis points from the corresponding period a year ago. Average loan yields for non-purchase loans were 8.28% and average yields for purchase loans were 22.82% which includes the accretion of our purchase price discount. The prepayment of the FDIC acquired loans increased the first quarter 2025 average loan yield by 35 basis points. Excluding the FDIC loan prepayments, average loan yields increased 12 basis points in the quarter. The remaining FDIC purchased loans continue to perform and all loans in that portfolio remain current. New loan interest rates were as follows; SFR mortgages were 8.3%, multifamily 9.2%, C&I 8.5% and auto 9.7%.

The credit quality of our loan book continues to be strong despite a few idiosyncratic circumstances that led to an uptick in non-performing assets this quarter. Non-performing assets in our single-family jumbo mortgage portfolio increased by $13.3 million from June 30, 2024 to September 30, 2024. The increase was the result of three loans with an average loan to value of 45%. The properties were located in highly desirable neighborhoods located in Northern and Southern California including one Beachfront property in Del Mar. Non-performing assets in our commercial real estate loan book increased by $14.5 million as a result of three loans to one borrower with a weighted average LTV of 29%. We are actively working with this borrower to bring the loan current.

We do not anticipate a material loss from loans currently classified as non performing in our single-family mortgage, multifamily and commercial mortgage or commercial real estate specialty portfolios. Our commercial real estate portfolio continues to perform very well and in line with expectations. Non-performing assets in our C&I asset based and cash flow lending business increased by approximately $40 million. Once indicated cash flow loan with an unpaid principal balance of $34.2 million and one ABL loan backed by accounts receivable of $6.4 million accounted for the increase. The $34.2 million loan is a Shared National Credit to one of the largest logistics companies in the United States. The Axos share of the loan is approximately 4% of the outstanding balance of the original loan.

The loan is a sponsor backed loan with the sponsor contributing $494 million to the purchase of the company at the time the loan was made and subsequently contributing another $30 million of preferred stock in June and another $50 million of equity in October for a total investment of $574 million excluding management’s rollover of equity. The September 30th payment was made so the loan is current on its payment at the end of the quarter. However, a restructuring transaction was executed between the borrower and a subset of lenders resulting in new incremental debt of $137 million contributed by a subset of the lender group concurrent with a $50 million equity injection from the sponsor which Axos did not agree to nor participate in. The terms of the restructuring transaction favored the group of new money participating lenders over a set of non-participating lenders.

We placed this loan on nonaccrual despite receiving the September 30 payment given the information received about this restructuring and allocated a specific loan provision of approximately $10 million in the quarter ended September 30, 2024 to account for a potential loss. We are currently evaluating the appropriate actions to take as we have been advised by counsel that the restructuring transaction may have violated the terms of the credit agreement. With respect to the other loan, the $6.4 million loan is backed entirely by account receivable that have been subject to a recent audit and found by that audit to be collectible. We are actively working with the borrower to pay down a portion of the loan, provide additional collateral and bring the loan current.

Non-performing assets in our multifamily and commercial mortgage loan book declined by $3.6 million linked quarter. We increased deposits by $614 million in the first quarter of fiscal year 2025. Demand, money market and savings accounts representing 96% of total deposits at September 30, 2024 grew at 16.3% annualized. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 60% of total deposits, treasury management representing 20%, commercial specialty representing 10%, Axos Fiduciary Services representing 6% and Axos Security which is our custody and clearing representing 4%. Total noninterest-bearing deposits were approximately $3.1 billion up $80 million quarter-over-quarter.

Total ending deposits at AAS including those on and off Axos’ balance sheet were approximately up $41 million compared to the prior quarter. Client cash sorting has stabilized at or near the bottom representing 3% of assets under custody at September 2024 compared to the historic range of 6% to 7%. We are focused on adding new assets from existing and new advisors to grow our assets under custody and cash balances. In addition to our Axis security deposits on our balance sheet, we had approximately $450 million deposits off balance sheet at partner banks. We continue to manage our interest rate risk by making tactical changes in our assets and liabilities. At September 30 at approximately 70% of our loans were floating, 23% were hybrid and 7% were fixed.

Since our hybrid arms were originated when interest rates were much lower than they are today, the replacement of these hybrid arms with new C&I and consumer loans are generally accretive to our loan yield. Noninterest-bearing deposits account for 15% of total deposits as of September 30. In September we reduced the rate on our consumer high yield savings by 30 basis points in advance of the Fed cut. Subsequent to the Fed’s action in September we reduced the rate on our consumer high yield savings products by an additional 25 basis points. We are confident on our ability to maintain our deposit cost and manage it down to maintain our net interest margin in this rate cycle. For the quarter ended September 30, 2024 our consolidated net interest margin was 5.17% while our banking business NIM was 5.21%.

Excluding the 30 basis points boost from the FDIC loans purchased that paid off early, our consolidated net interest margin would have been 4.87% up from 4.65% in the June 30, 2024 quarter. When we announced the FDIC loan purchase in December of 2023 our expectation was that the transaction would boost our net interest margin by 35 to 45 basis points. Given the prepayments in this portfolio including the three loans that paid off in the September quarter, we now expect our net interest margin benefit to be between 30 and 35 basis points for the remainder of fiscal year 2025. We break out the average balances and loan yields for the purchased and non-purchased loans in our 10-Q which was filed with the SEC today. To separate the impact of the loan purchases on our net interest margin.

We expect our consolidated net interest margin excluding the FDIC benefit to stay within the 4.25% to 4.35% range we have targeted over the past year. While we tactically adjusted deposit pricing based on future actions by the Fed and our competitors, the pace and mix of loan originations and prepayments will have the biggest impact on our net interest margin. While loan growth in the September quarter was below our high single-digit to low-teens expectation from an annual perspective, we are optimistic that we will return to our targeted range. The combination of higher interest rates, a relatively steeply inverted yield curve, elevated used car values and slowly adjusting cap rates on multifamily income properties over the past few years made us more cautious in single family jumbo mortgage, multifamily and auto lending.

Lower originations in these lending groups coupled with elevated prepayments resulted in acceleration of net attrition in these loan categories. In this September quarter ending balances in these three lending categories represented a $219 million drag on our consolidated net loan growth. These three loan categories are all hybrid loans with weighted average lives in the three-year range and are difficult to profitably originate in the interest rate environment with a highly inverted yield curve. To match the duration of our growing pipeline of multifamily, single family, and auto loans, we extended duration of $600 million of liabilities to the issuance of CDs and interest rate swaps when markets were most optimistic about rate cuts at a weighted average yield of 3.4% for a 30-month average duration.

Given recent changes in the yield curve, we have seen a rebound in our loan pipelines for each of these categories that have been reducing loan growth for several quarters. Additionally, we continue to add new clients and balances in our single-family mortgage warehouse business due to competitors scaling back or exiting the business. Finally demand in our fund finance, ABL and select C&I lending businesses remain strong with the addition of several new lending and deposit teams in the prior quarter. We grew loans in the first month of this current quarter by $160 million which is in line with our high single digit to low teen expectations. Axos Clearing which includes our correspondent clearing and RA custody business had a good quarter. Total deposits at Axos Clearing were $1.3 billion as of September 30, roughly flat from where they were at June 30.

Of the $1.3 billion deposits from Axos Clearing approximately $800 million was on our balance sheet and $450 million was held at partner banks. Net new assets for our custody business was $559 million in the September quarter. This marks the continuation of positive net new asset growth we have experienced with $100 million or more of net new asset growth at Axos Advisory Services for five consecutive months. Total assets under custody were $37.4 billion as of September 30, up from $35.7 billion as of June 30. The sales team continues to make solid progress on boarding assets from new advisory firms offsetting the decline in some of Axos Advisory Services’ historic turnkey asset management clients. The pipeline from new custody clients remains healthy and we expect continued organic asset management growth, assets under management growth from AAS.

From a product and operational efficiency perspective we continue to identify ways to generate incremental fee and transaction-based revenues and streamline processes to make our operations more scalable. We believe that sustained net new asset growth, a normalization in cash balances and operational productivity initiatives will drive positive operating leverage in our clearing and custody business in the medium to long term. We are starting to see some early benefits from investments we have made over the past few years. We have soft launched our white label banking platform to select advisors earlier this year enabling their clients to access our suite of deposit and lending products as well as new features we rolled out such as enhanced personal financial management.

This platform leverages the technology we built in UDB for Axos Bank clients and reduces the cost associated with various interactions with advisors and their end clients such as mailing a check or getting a paper statement. We have made minor modifications based on advisor and user feedback and have a suite of additional products and features in our roadmap. The team hires we have made across various commercial lending and deposit businesses are starting to contribute to loan and deposit growth. Our commercial cash and treasury management teams generated approximately $400 million in net new deposits in this quarter due in part to new teams we onboarded in the past two years. More recently we added a technology and a life science banking team in Silicon Valley including a seasoned team that has dedicated experience working together with early-stage growth companies and funds.

We also added an experienced leader to build out our middle market lending group. We have over 20 years of experience in specialty lending and a few selected national deposit verticals. These selective team hires allow us to grow a geographic presence and further diversify our lending, deposit and fee-based franchises based on our existing robust set of products. The addition of key sales and operational team members at AAS has contributed to the acceleration in net new asset growth in our custody business. Our client centric approach along with our commitment not to compete with our advisor clients makes us highly desirable to alternatives such as Schwab. Our highly profitable and diversified business positions us well to maintain above average growth and returns in a variety of economic, political and competitive environments.

While higher levels of prepayments are a short-term headwind, our asset-based lending philosophy with conservative loan to values and prudent structures and diversified mix of lending and funding affords us more flexibility than most of our competitors. Finally, our excess capital liquidity and loan loss reserves provide more than sufficient cushion to weather an extended economic downturn if that were to occur. We remain prudent with our capital reinvesting in our business, systems and people and returning capital to our shareholders through opportunistic buybacks. Now I’ll turn the call over to Derek who will provide additional details.

Derrick Walsh: Thanks Greg. To begin, I’d like to highlight that in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Our provision for credit losses was $14 million in the three months ended September 30, 2024, compared to $7 million in the corresponding period a year ago. $10 million of the $14 million loan loss provision this quarter was a specific provision for a C&I loan that we classified as nonaccrual that Greg discussed earlier on this call. Our allowance of credit losses to total loans held for investment was 1.35% compared to 1.34% at June 30, 2024.

We remain well reserved relative to our low historical and current credit loss rates. Non-interest expenses were approximately $147 million for the three months ended September 30, 2024, up by $6.9 million from the three months ended June 30, 2024. Higher salaries and benefits expenses primarily related to the new hires that we’ve made over the past six months and an increase in data processing expenses drove the sequential increase. As a reminder, our annual merit-based compensation adjustment takes place every September and we expect our salaries and benefits expenses to increase in the December quarter on an organic basis at a similar rate as it has in previous years. Our loan pipeline remains strong with $1.9 billion of total loans in our pipeline as of October 25, 2024 consisting of $345 million of SFR jumbo mortgage, $85 million of gain on sale mortgage, $165 million of multifamily and small balance commercial, $136 million of auto and consumer, and $1.2 billion of commercial.

Our loan growth outlook is largely consistent with what we have guided to in recent quarters. We believe that we will be able to grow loan balances organically by high single digits to low teens year-over-year in the fiscal year 2025 excluding the impact of any loan portfolio purchased from the FDIC and excluding any other potential loan or asset acquisitions. Our ending loan balances will continue to be impacted by the pace and timing of payoffs in any given quarter. With that, I’ll turn the call back over to Johnny.

Johnny Lai: Thanks, Derrick. John, we’re ready to take questions.

Operator: Thank you. [Operator Instructions]. The first question comes from the line of Kyle Peterson with Needham & Company. Please proceed with your question.

Q&A Session

Kyle Peterson: Great. Good afternoon, guys. Thanks for taking the questions. I want to touch a little bit on competition that you guys are seeing, particularly for new loan deals. I know that’s typically a big driver behind pricing and growth. So just wanted to see, are you seeing any change in competitive dynamic? Are things getting more or less attractive, especially in some of the C&I verticals that looked like that pretty nice growth this quarter?

Gregory Garrabrants: I think that there has been a general trend to seeing banks tighten spreads and I think one of the reasons that I try to obviously be thoughtful about that and I kind of gambled with some renewals this period and I lost a few more than I otherwise would have which impacted loan growth. So I do think that we have to be thoughtful about that that there is some pricing pressure in certain verticals. That being said, we’re still seeing very strong demand and we’ve added teams in a variety of geographies and in a variety of national verticals and so we feel pretty good about our ability to get loan growth, but we probably will have to be a little thoughtful at times about making concessions on pricing. Often they’re minor, but we definitely see increased competition, increased pricing pressure.

Kyle Peterson: Okay and that’s hopeful and maybe switching gears and just touching on fee income. I know it was kind of a little bit of a headwind this quarter. I know there’s some kind of contractual things tied to rates, but I was also just wanted to get your thoughts on how much do rates need to drop before we could see some uptick in areas like mortgage banking or prepayment penalty fees?

Gregory Garrabrants: The prepayment penalty fee issue is really one that’s related to loan mix. So almost all of those penalty fees came from multifamily hybrid loans which were 5.1 ARMs that had a typical step down 5. 4, 3,2, 1 prepay and that business as I was saying in my prepared remarks, really hasn’t been a focus because when you have such a highly inverted yield curve, it’s difficult to price off, let’s say, the five-year to get the right spreads. So we are seeing a pickup in that business now and there are more of those loans that have prepayment penalties, but that’s going to take a while to turn around. So that is one element and then the other element is that we have a servicing book. It’s not huge, but it’s not hedged.

It’s not really big enough to hedge, but what happens when rates decline Is there some mark against it? And how much was the mark this quarter, a couple of millions? So there was a mark on that. So unfortunately, if rates go down — you can’t say the market is exactly linear, but that’s not a horrible way to estimate it. You have a very complex model to get essentially a linear reduction. So that’s that piece of it. I think as rates decline, we have lots of clients that obviously offset TM fees based on earnings credit and if rates get low enough, then that starts to flip and you actually start to charge those clients. We’re not there yet. Mortgage banking volume has picked up some, but it really is much more sensitive to the 10-year and so you saw a blip, you started to see a pickup, but then you saw long rates pop back.

So I’ll have to see where that goes. I think the best chance we have to grow fee income is in the securities business, and that’s a volume play and we are finally around the corner of where our attrition from some of the TAMP clients that are just losing assets just in general. We’re not going to say we’re completely past it, but we’re basically outrunning it now and I think that will continue. So there’s an opportunity there, but it has to be a decent clip. If you think about 10 to 12 basis points on average on those net new assets, you can look at that as a way of thinking about we gave some growth rate numbers and you can look at that. Those will be increases, but unfortunately one thing you have to keep in mind about that business is that on that off-balance sheet, deposits is sensitive to a declining rate.

So to the extent that those rates decline, that is going to impact that income, which is fee. Derek, did I miss anything?

Derrick Walsh: Just one thing from a forward-looking thing Kyle is every December quarter we have some paper statement fees that we charge to customers and so that’s usually in the ballpark between $1.8 million and $2 million and so if you look back in our history you’ll usually see a bump up in that during that second fiscal quarter. So just want to make sure you’re aware of that.

Kyle Peterson: Okay. That’s all very helpful color. Thank you and nice quarter.

Operator: The next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.

Andrew Liesch: Hey, guys. Thanks for taking the questions. Just a follow-up on the broker dealer fees with the Fed cutting 50 basis points and obviously you have the net new assets coming in. Are those going to be offsetting each other here as we look forward? Have we reached that point yet?

Gregory Garrabrants: Yes. That’s not a horrible way to think about it and we also rolled out a new fee schedule that actually is seeing certain types of activities that cost us a lot of money, paper statement fees, those things that are attempting to incent behaviors that allow us to cut our costs. So that’s coming that’s some offset, but I think that let’s say you have 50 basis points, 75 basis points of offset but if you get a really — if you have 150 basis points, that’s going to hit that business. You’ve got to run. Now the pipeline is very good and if the attrition is lower, then those net new assets can grow even faster. We’ve tried to set internal targets around that, but I think they’re definitely stretched targets.

Andrew Liesch: Got it. All right. Very helpful. And then just on the margin commentary, the so you said 425 to 435 range and then what sorry if I missed it. What did you say the benefit from the acquired loans another 25 to 35 basis points, is that right?

Derrick Walsh: It was 30 basis points to 35 basis points.

Andrew Liesch: 30 basis points to 35 basis points. Okay, got it. So, I guess that if you take out the $17 million of accelerated income here, it’s still a little bit below where the margin would have come in. I guess what’s driving at the high end — I guess what’s driving the margin down towards that level? Is it just the asset repricing or is it the funding cost that you mentioned?

Gregory Garrabrants: No, I think we’re feeling pretty good about the funding cost. Frankly, we’re carrying a lot of excess deposits. We were able to reprice pretty well with the Fed rate cut. We lost less than we thought there and we also have really good deposit growth from all the teams that we’ve hired. They’re really starting to kick in very nicely. Part of the reason why loan growth is below where we wanted it to be is we turned down some deals, repricing of club deals, other things and we have just some folks coming in and repaying loans at a little tighter spread. So I think the reality is we’re going to have to tighten up those spreads a little bit in order to win volume, which we’re going to do, and so that makes a difference.

Now, that being said, we obviously still have a lot of hybrid loans that are still repricing every quarter, so there’s a lot of movement there. I think there’s a little conservatism in that because if you have the margin up high and then that loan growth doesn’t come in, you miss NII. So there’s probably a little bit of conservatism in that, but I think that really where we find the most uncertainty is in the loan growth side. Because as you get these — we feel like we have a lot of great activity. We’re seeing good activity. We’re up this month, but we had a higher average earning assets and then at the end of the quarter we had some pay downs. We have the fund finance business. We’re reaching out to those clients to ask if they’re going to address their balance sheet in December by calling capital.

We’re not getting a lot of yeses there, but that’s always a possibility. I think it’s balance, but those are really the factors. There’s a little bit of market pressure on pricing that we’re seeing that’s a little elevated from, let’s say, where it was last year or even two quarters ago.

Andrew Liesch: Got it. Great. Thanks for taking the questions. I will step back.

Operator: The next question comes from the line of Gary Tenner with D. A. Davidson. Please proceed with your question.

Gary Tenner: Thanks. Good afternoon. Wanted to ask I appreciate the additional color, Greg, on the increase in the NPLs in the quarter. I wonder if you could comment on kind of the migration within the credit book beyond that, just between special mention and substandard. Is it just too early for lower rates to take much pressure off there and kind of how do you see that kind of migration trend moving from here?

Gregory Garrabrants: You know I actually feel really good about what we’re clearing. But that’s because I see what’s going on an individual level. Some of these things just take a while. We’ve got about 20 offers on one property we’ve been holding for a while and kind of working with a borrower on and that should execute by the end of the quarter. We’ve got a couple others that we’ve been patient on because there’s been final building kind of permit sort of issues and money that borrowers or the funds that are subordinate to us have still been putting in and those sorts of things are coming to an end. So we really see even some of these things are choices like there’s these three loans we have buyers that want them but we’re looking at them and they’re such low loan to values we expect that they’ll cure and they’ll pay off because the individual is looking to do that.

So, I don’t really see I’d say, frankly, on the commercial real estate side, things look very good. Like, there really is not there’s not anything that we look at from a loss perspective and say we’re really worried about it. I mean I think you know rates can put a little pressure on special mention in multifamily, but we have guarantees on almost that entire book. So strong personal, warm body, full recourse guarantees to folks that have a lot of properties and things like that. So that looks pretty good. I think look the C&I side is going to be more of a — it’s going to be probably more of an average loan loss sort of thing. So if you look back I mean don’t think we’re going to be able to say in our multifamily book, we’ve had a couple of basis points of loss in history over 15 years or something.

Same thing with single family. It’s just super low. I think C&I will be a little more average. Not really the ones that we’re doing on the non-real estate lender finance stuff that should still be quite good, but like this Shared National Credit, you’re taking more of an average level of risk rather than what we’re taking with our real very low loan to value structures and other assets, but I feel like there’s some of the stuff idiosyncratic and it’s clearing up or we’re getting good results on resolutions.

Gary Tenner: Great. Appreciate the color. Just to go over to the expense side for a second. Derek, you mentioned expectation of obviously some more upward pressure coming up in the December quarter. Could you remind us, was there anything that kept expenses lower in the June quarter? They were kind of flat sequentially in the June quarter before this current quarter increase. I’m just trying to get a sense for sort of the deltas this quarter versus last quarter?

Derrick Walsh: In the June quarter, I think we had some lower data processing kind of looking back at the year and salaries and benefits, I think was the other key factor in the June quarter where and it really even goes back a little bit to the March quarter where March has the taxes, the annual employment tax resets and so March jumps up and then June is usually flattish to maybe slightly up from March and obviously as we touched on we’ve been hiring a lot of teams kind of investing upfront for the future growth on both the loan and deposit side of the commercial business. So I think that’s probably what you’re referring to and as we look forward we will have some continued bumps up and we’re certainly taking some hard looks at cost control around the salaries and benefits and different strategic ways that we can reduce or cost avoidance on areas there and in data processing.

Gregory Garrabrants: Yes, I don’t expect that we’re going to have the level of expense growth in the December quarter that we had here even though we have hired some teams. We’ve also obviously as you expand you get some folks that are doing great, some folks that aren’t and so we’re just being cautious of that. We’ve had a very nice run of growth and we just have to make sure we’re focused on the expense side as well and so we’re doing that.

Gary Tenner: Thanks. If I could ask one last quick question. Regarding your comment about the tightening of spreads in C&I, is it predominantly the funds finance business that you’re seeing that as folks have landed at other banks and maybe we’re seeing some more competition or is it more widespread than that?

Gregory Garrabrants: It’s interesting it’s not really I mean the fund finance business was kind of — it always was a little lower and it came in lower and we’re still seeing really good activity there maybe a tad bit but not that much. It’s really more in I think if you go and you have a standard club deal and you just see the club deal and the company is asking for a 25-basis point reduction across the grid. The three banks consent immediately and you’re sort of sitting there deciding well do you want to stay or go. So that’s really the type of stuff that I think we’re seeing and I think that that is much more — I don’t think it’s really particularly fund finance related which is still niche enough and I think we have really good competitive advantages there actually based on the team.

The fact that we have the lender finance group there too which is very often can work with funds in unique ways. So I’m not really saying it. It’s more really in the clubbed-up stuff that they’re just people — I think that there’s a lot of pressure across the banking industry on asset growth and folks don’t want to lose deals. I frankly prefer to hold pricing as most of you who follow us know and I sometimes feel like I’m the only guy in the room that is thinking about it, but that’s sort of more of what it is.

Gary Tenner: Great color. Thank you.

Operator: The next question comes from the line of David Feaster with Raymond James. Please proceed with your question.

David Feaster: Hey, good afternoon, everybody.

Gregory Garrabrants: Hey, David. How are you doing?

David Feaster: Doing great. I wanted to touch on the deposit side. You guys have done a — you started repricing deposits even ahead of cuts. Great to see the decline in deposit costs. I’m curious, have you gotten any pushback or seen any attrition as you’ve taken rates down? And then just how do you think about betas this cycle and where do you see opportunity for deposit growth? Obviously, the securities business is a tremendous opportunity for low-cost core deposit growth, but just curious some of the verticals that you think — that you’re most excited about near term?

Gregory Garrabrants: The entire C&I set of verticals across the lending businesses and the teams we’ve hired in the middle market space, the finance business and venture side which really is going to be much more focused on deposits than lending and we’re not doing venture lending. They have typically BL products, cash flow stuff but they don’t have any sort of specialty products, but they have they’re already bringing a lot of deposits and there’s just a real sort of need there. So we’re seeing that across the board and we’re seeing really good growth on the business side which was the plan to do that. It obviously requires some investments in personnel which you’ll show up in the operating expense, but I think it’s well worth it and the teams are doing a really good job.

We did see some attrition in the consumer side but not so much as to be particularly worrisome and it grew it still ended up growing for the quarter. So it makes the marketing a little less efficient so you end up with a slightly higher cost per new account things like that, but nothing that was particularly concerning and so I’ve said publicly that we intend to essentially offset on the way down our deposit costs with our reduction in interest income from our floating rate loans and so I think we definitely did that for this period and then we just continue to test ourselves throughout that and I think we’re in a much better shape than we ever have been given the diversity and given all the work that’s done on the commercial side. Frankly they’re so busy in new account openings that we’re hiring a lot of service people on the commercial side and stuff like that.

So that momentum is there and I think it really feels like it’s continuing.

David Feaster: That’s great. And then maybe just touching on some of these new verticals you were talking about, where are we at in the build out? I mean, have we started to see the contribution? I know what middle market is a pretty new hire, but life sciences and tech like you talked about, I mean, I think we did entertainment management, the marine floor plan. Just kind of curious where we are in the build out of few of those lines and how you think about them contributing to growth going forward?

Gregory Garrabrants: Right. The tech and VC side is extremely new. I think we’re going to drop out a press release I think probably this week that has just the names of the folks and their experience. I think they’re an extremely impressive group. It was actually quite fun to go up there and meet all of their connections because it was neat to have lunch with all these venture capital legends frankly that I’ve never gotten a chance to meet before. These guys are in a really interesting spot there and they’re bringing and they’re opening deposit accounts. We’re not doing venture lending, but there’s a lot of lending that can be done just on the existing products that we have, but that’s really new. I mean those guys have sort of landed and taken their training and started opening some accounts.

The middle market side is kind of the same way. The individual we hired is San Diego based, was an EVP at a larger bank and ran that business for them. We’re consolidating some existing folks under him. He brings some people so that’s also quite new and really not a lot there. The entertainment side that is boarding a lot of accounts. I think they’re on balance sheet — they’re still below $100 million but I think they’ll cross over that. Those accounts tend to be a little smaller, but those are zero cost deposits continuing to happen. There’s a decent pipeline there. Frankly, software is okay. We’re doing a lot there on that software. We’re making a very significant investment. It’s going to be quite something when it gets done, the software and it’s going to be really awesome for RIAs as well because that whole idea that an RIA can manage the entire accounting, bill payments of their clients is something that the RIAs are excited about too.

We’re excited to put that into our platform that faces the RIAs. The Marine side, we’re getting traction on the floor plan side which is really what we wanted to focus there. So we’re doing new floor plan lines and we’re continuing to sign new manufacturers. The retail side we’re trying to make it a gain on sale business. We’ve got some new banks that are interested in buying the 20-year paper. We do have a little bit of a fundamental disconnect with respect to how we think about interest rate risk and what we want to put on the balance sheet and that we have a bucket for it for some of the 20-year stuff, but we’re really looking to try to make them more of a gain on sale business and so we’ve got some traction there as well, but yes, the floor plan side we’re definitely making progress.

We want to expand that floor plan side to some other lending categories as well. We like that business. We think it can be a good national niche.

David Feaster: Okay. And then just last one for me. You touched on the white label rollout with the securities business just kind of selectively. When would you expect a broader rollout? How’s feedback been broadly? And then like what do you think are some of the implications of that? Do you think that helps accelerate client acquisition? Is it open up some cross selling opportunities within in the securities business? I’m just kind of curious.

Gregory Garrabrants: No, it absolutely does. We’re starting to absolutely get that where those advisors are acting as sales people for Axos business deposits both business deposits and consumer deposits and so we are seeing that and it is helping deposit growth and it’s helping in a lot of different ways and we’re also needing evolve what we’re doing up our service game as we make sure that we’re serving these clients in a way that they’re used to being serviced, which is happening. I’m very excited about it because I think that we are seeing a lot of traction of new advisors come on. They’re hungry for banking products and they’re interested in working with us. Now what we have done previously is we’ve tried to essentially offer sort of more zero interest style accounts on the checking side and make them more payment facilitation accounts.

We’re still going to do that but we’re rolling out we’re calling it Axos One product which is if somebody has an active checking account essentially they can get a high yield companion account and we took that out for feedback and getting a lot of incredible feedback from that. So we’re continuing to refine the product, but I think it’s a great channel and I think it’s exciting and as we board these RIAs who we have direct relationships with rather than through TAMPs, we really have an opportunity that’s much better than going through the TAMPs.

David Feaster: Okay. That’s helpful. Thanks everybody.

Operator: The next question comes from the line of Kelly Amada with KBW. Please proceed with your question.

Kelly Motta: Hey, good afternoon. Thanks for the question. I’d like to circle back to the margin. I appreciate the outlook. It doesn’t sound like it’s changed much, but your margin was about 20 basis points higher ex that accelerated accretion you had. Just wondering, I know you had talked about spreads coming in for loan yields. Just wondering with the payoffs and paydowns you saw this quarter, if there was any maybe excess loan fees or interest recoveries in there that contributed to that margin core margin pop this quarter that we should be thinking about as we’re modeling ahead?

Derrick Walsh: Hey, Kelly. No, there wasn’t any one-time things like that any interest recapture or anything like that. I think as Greg kind of highlighted earlier we’re maybe slightly conservative in what we’re forecasting but also given the management between the growth and the forward-looking rate aspect that we’re weighing those two to try to drive some additional growth as we look forward.

Gregory Garrabrants: Yes, I think there maybe. There are deals that I’m making some pricing concessions on to keep. So and that just in the book where the competition is trying let’s say particularly on these club deals are trying to take them away and the club’s conceding and we’re going to concede too in order to ensure we have loan growth. So that is a pressure. Now you have to remember offsetting that. There’s still a lot of loans that are, you know, we had that there’s a decent part of the book that’s still five-year fixed rate and those are continuing to roll off and particularly, if it depends on how far you’re looking forward, the single family, there’s a lot of repricing that’s towards the end of 2025 and 2026, I mean, billions of dollars of it. So that also will have a positive impact, it just depends on when.

Kelly Motta: Awesome. I really appreciate that color. You guys have been opportunistic with loan portfolio repurchases. We saw obviously the FDIC deal that you did before. I was looking at your Y-9C, it looks like the commercial real estate exposure ticked up above 300%. Two-part question. One, wondering if that’s a reclass or if there was some sort of mix shift that contributed to that? And two, if that impacts how you’re thinking about commercial real estate exposure ahead and your appetite and willingness for both originated and acquired growth in CRE?

Derrick Walsh: No. I don’t think the I would have to circle back with you on exactly the Y-9C aspect. I know we went through and classified a lot of loans non-depository financial institutions on the reports rather than the underlying collateral just based on the structure of the loans. So that might have been one factor of what you’re seeing when we amended some of those reports a while back, but now there hasn’t been any dramatic shift and I think you can see that in the press release and the specifically the supplement that we provide with regards to that Creswell balance. It’s really been slightly range bound over the last 12 months as we’ve been facing some repayment headwinds in the Creswell book.

Gregory Garrabrants: Yes, and the direct answer to your question is, we’d like to grow with loans that we meet our credit criteria in commercial real estate. We’re not limited by a concentration limit that’s sort of floating around in the abstract there. We have concentration limits but we’re not hitting them and in fact we’re having difficulty even maintaining the current concentration quite frankly. Not that that’s a goal, but it’s just we’d like to grow. I think that’s so that’s it’s not really that there’s not it’s — really that it’s just frankly there’s fewer deals in commercial real estate and what’s also happening to us is that we’re starting to see — what’s making a significant difference is in some projects we’re starting to see bridge lenders start reaching back sooner in some of the construction side and taking out earlier at very low rates some of those loans and so that’s happening.

Those are usually in partnership with a private debt fund and so sometimes we’re seeing that, but no, we’re still interested in growing our commercial real estate book. The book is doing extremely well. Just watching everything and all the noise around stuff, it’s looking quite good and so we’re still interested in growing it, but we’re doing our best to do that.

Kelly Motta: Got it. That’s helpful. Maybe last one for me, if I could slip it in. I appreciate the color on the NPA migration and what caused that. It sounds like one of the more impactful ones was a club deal where the leader on that may have made some concessions that you wouldn’t have. Wondering if you could provide a size of your SNCs [Ph] or kind of larger club deals.

Gregory Garrabrants: Right. So this wasn’t a club deal. That wasn’t — I mean the way I would think of a club deal is you got four banks, five banks. This was a very large syndicate, Shared National Credit. As far as, I don’t know, did we pull a Shared National Credit number or does that include club stuff? Because the club stuff is different. Is that SNCs [Ph]? Yeah, so okay. So cash-flow based SNCs [Ph] total is a $1 billion, but I mean, you know, this is very idiosyncratic and yeah, it’s not I wouldn’t you know the rest of these SNCs [Ph] you know we do enterprise value calculations off them. They’re graded by others and they’re doing well and the grading is strong in the vast majority of that book.

Kelly Motta: Got it. I appreciate the color. I’ll step back. Thank you.

Operator: The next question comes from the line of Edward Hemmelgarn with Shaker Investments. Please proceed with your question.

Edward Hemmelgarn: Yes, thanks. Just a couple of questions more involved again with the loan pricing and also participation, what percentage of your loans or participation loans or shared loans as opposed to loans that you are solely originating?

Gregory Garrabrants: It depends very much on the group, but I’d have to go through each group to go through that and you know, in CRESL, almost all those loans have junior participants, but that’s not generally what we’re talking about in that instance, right? and so there’s so many different variations. So the CRESL loans almost always have a junior counterparty whether it’s a mezz or some other investment from a fund or whatnot. Almost all of them, but not all of them, but 90% or something and then in a lot of cases we’ve actually hired some syndication folks and are syndicating our own deals. So in a lot of cases in the future, this is a smaller part of the book now. We’re acting as agent and we’re getting the deposits and then we’re syndicating deals out to clubs and then we’re, so often for the companies that we want to bank which are more established companies, the hold sizes sometimes on the cash flow side end up being clubbed up with others.

There’s just a variety of different ways that can happen. It really just depends on the business. On the let’s say straight regular multifamily, it’s almost all direct and there may be we may bring in if the borrower wants more leverage, we may bring in a mezz partner, but most of the time, it’s just that’s just direct without a mezz partner. So it just depends on the business.

Edward Hemmelgarn: Do you feel your underwriting is stronger where you are the one that’s originating loans or is there any difference?

Gregory Garrabrants: Well yes I do think that there are concessions that are given up in the market on certain documentation issues that we find difficult to push back on. Frankly, I mean one of this issue that we’re having with this loan is fundamentally a documentation issue in the sense that we believe the documentation I don’t want to get too much into it because we’ll probably end up litigating it, but I mean the documentation I think is clear enough but there’s other opportunities to make it more clear in the industry and sometimes that movement is a little bit more difficult and then look I think the reality of that everybody’s had a panic attack over time over commercial real estate and the reality of how we do the commercial real estate with our loan to values and our fund partners is fundamentally a different structure.

It’s an incredibly good structure. It requires a lot of equity and it has a lot of incentives to make sure that you continually gain investments from those clients and it doesn’t have the volatility that an individual company can have. I just think in general when you’re doing C&I lending, I mean some of it might be some of those idiosyncrasies, but some of it is also when you’re lending to an individual company and there’s different things that can go wrong in C&I lending than not. In this case, they’re a very, very large logistics company and pricing for their product has deteriorated. It has come back some but it’s deteriorated and that is a specific risk and that’s just going to be fundamentally different than you’re at 40% LTV on an apartment, right and you say gee if the apartment if people don’t like the apartment as much we can cut the rents by half and still make it work, right.

So it is a different — I think it just has to be reflected that look I think we’re still going to do very well on all those loans. I just think having sort of the perfect record that we’ve had essentially perfect record on commercial over a decade and a half. Our commercial real estate and single-family real estate as far as losses. I don’t know, look I’m not convinced this is going to go that way either, but it’s just something to watch and the risks are different.

Edward Hemmelgarn: Okay. And then talk a little bit more about pricing, I know you’ve got that question a number of times. I was looking back as recently as the June quarter of 2021, you were in the pricing range, net interest margin range that was around what you’ve always talked about was 3.8% to 4% and it’s clearly in the last several years, I mean it’s expanded a lot even ignoring the purchase the FDIC purchase loans. Are you still comfortable with the 3.8% to 4%? I mean that’s the kind of gradually you’ll be moving back down towards that and doing more volume?

Gregory Garrabrants: Johnny always loves to stand back the interest margin thing that was always funny to me because I kept on wondering how high can it get before he keeps on wanting to say it’s still 3.8% to 4% and now he’s just smiling at me, but look I think there has been some fundamental structural changes in the business and so there have been. One of them is that we’ve spent a lot more money and built a very good commercial deposit franchise and that is growing and that’s lower cost deposits so we’re spending more on OpEx and we’re managing through that and it appears to be working and hopefully it will continue to work and we see it working. We see volumes in all sorts of treasury management indicators getting better.

So that is helpful, right. So even when you have that and you continue to have even the last several quarters the growth in those have been very good. It gives you pricing power on the consumer side that you might not otherwise have had, right. So all that, that’s really good. We also have quite a diversity of lending as well. Now a big part of the whole margin benefit was that we got the interest rate risk right in a way that I think most of our competitors didn’t, right? So we emptied the bond portfolio, right. We got super short on everything. Even on multifamily we started originating two-to-three-year deals rather than five, several years before rate increases happened. So we were in a much better position that way. I also think that now the way we’ve funded the growth, we also are going to be able to manage it down because of what we’ve managed, the deposit rates down, right because we have the benefit of having the strong business deposit side.

So I think that’ll be helpful. Now look I do think that a legitimate threat to the quite beautifully elevated level that it’s at is that there’s market pricing happening where I think that there’s just in general I think that banks are hungry for loans and I think they’re pricing those loans and I also think that there’s a little bit of commercial real estate maybe there’s pressure on concentrations and things like that that folks are moving into different areas. So those are all some of the movements there, but look I think that we’ve given a new range right that 425 to 435 and I think for the foreseeable future as far as we can see that that’s without the benefit of the FDIC side. So I think that’s the better range and I actually don’t think that’s — I think that’s a pretty reasonable range.

I don’t think it’s easily achievable but I don’t think it’s that much of a stretch either. I think it does require us to manage down deposit costs at a way that I think we clearly can and we did this last quarter so.

Edward Hemmelgarn: But you’ve got quite a little bit of room between where you’re currently at, ignoring the FDIC loans.

Gregory Garrabrants: Okay. So maybe there’s a little sandbagging in it, but I mean look, the tough part is it is a tough part of this balance, right. I mean there are loans that are coming in which have lower spreads and so that will push down on that, right? And so, and then if we want to retain some of the multifamily that’s running off as it reprices, some of those are lower spreads as well, right? So there’s those kind of things that are happening. So there’s a lot of moving pieces. I think it’s better to be more conservative with it so that you have I think an estimate that’s more achievable.

Edward Hemmelgarn: Okay. All right. Thanks.

Operator: There are no further questions at this time. I would like to turn the floor back over to Johnny Lai for any closing remarks.

Johnny Lai: Great. Thanks for everyone’s interest. Have a nice afternoon. We’ll talk to you next quarter.

Operator: [Operator Closing Remarks].