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Presentation

Axos Financial, Inc. misses on earnings expectations. Reported EPS is $1.12 EPS, expectations were $1.27.

Operator: Greeting, and welcome to the Axos Financial Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Johnny Lai: Thanks, Diego, and good afternoon everyone. Thanks for your interest in Axos. Joining us today Axos Financial Inc.’s fourth quarter 2023 financial results conference call are the company’s President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President of Finance, Andy Micheletti. Greg and Derrick will review and comment on the financial and operational results for the three and 12 months ended June 30, 2023, 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 statement 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 website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release. Before handing the call over to Greg, I’d like to remind our listeners that in addition to the earnings press release and 8-K, we also issued an earnings supplement for this call. All of these documents can be found on the axosfinancial.com website. With that, I’d like to turn the call over to Greg.

Greg Garrabrants: Thank you, Johnny. Good afternoon everyone, and thank you for joining us. I’d like to welcome everyone to Axos Financial’s conference call for the fourth fiscal quarter ended June 30, 2023. I thank you for your interest in Axos Financial and Axos Bank. We delivered double-digit year-over-year growth in earnings per share, book value per share, and ending loan and deposit balances. Our consistently strong results were broad-based with strong net interest margins and double-digit net interest income growth. We grew deposits approximately 23% year-over-year despite an expected normalization in cash sorting deposits from our custody business. We reported net income of $87 million and earnings per share of $1.46 for the three months end of June 30, 2023, representing year-over-year growth of 51% and 52% respectively.

Our book value per share was $32.53 at June 30, 2023, up 18% from June 30, 2022. The highlights this quarter include the following: net interesting income increased by 2.4% linked quarter and 23.2% year-over-year to $203.8 million. We continue to generate strong net interest income growth through a combination of loan growth and solid net interest margin. For the fiscal year ended June 30, 2023, we grew net interest income by $176 million or 29%. Ending net loans for investment balance was $16.6 billion, up 3.9% linked quarter, or 15.7% annualized. Loan growth was broad-based with growth in single family warehouse, asset-Based lending and C&I loans partially offset by our deliberate pullback in auto and personal and secured multifamily and leasing.

Ending deposits increased by approximately $384 million linked quarter, driven primarily by consumer deposits. Our diverse source of funds enabled us to grow deposits despite industry-wide competition for consumer and commercial deposits. Net interest margin was 4.19% for the third quarter, down 23 basis points from 4.42% in the quarter ended March 31, 2023, and comparable to the 4.19% in the quarter ended June 30, 2022. The impact of excess liquidity on our net interest margin accounted for approximately 20 basis points of the sequential net interest margin decline, resulting in only a three basis points sequential quarterly decline not attributed to the excess liquidity. Net interest margin for the 12 months ended June 30, 2023 was 4.35%, up 22 basis points from 4.13% in fiscal year 2022.

Unlike most other banks, we have successfully increased our net interest margin in the past 12 months. Axos Securities comprised primarily of our custody and clearing businesses, made positive contributions to our fee and net income. Broker dealer fees increased 103% year-over-year due to higher interest rates and increased client activity. Quarterly pre-tax income for our securities business was $15.5 million and $59.6 million for the three and 12 months ended June 30, 2023. Our credit quality remains strong with net annualized charge-offs to average loans of only four basis points in the three and 12 months ended June 30, 2023. Of the four basis points of net charge-offs this quarter, two basis points were from auto loans that are covered by insurance policies.

Double-digit growth in net interest income and positive operating leverage resulted in a 43% year-over-year growth in our pre-tax income and a 52% increase in our diluted earnings per share. Even if you normalize, our fourth quarter 2023 tax rate to 30%, our diluted earnings per share were up 44% year-over-year. We generated a 1.73% return on assets and an 18.6% return on equity for the quarter end of June 30, 2023. Our capital levels remain strong with Tier 1 leverage ratio at 9.7% at the bank and 9% at the holding company. Both well above our regulatory requirements. We were purchased approximately 17.7 million of common stock in the fourth quarter. In addition to the 31.6 million we were purchased in the third quarter to take advantage of the unwarranted decline in our share price in reaction to the turmoil in the banking industry.

This brings our total shares were purchased in fiscal 2023 to $49 million at an average share price of $37.28 per share. We have approximately 104 million remaining in our share repurchase authorization at the end of fiscal year 2023. Our profitability, liquidity, balance sheet positioning and growth outlook all remain favorable. From a liquidity and capital perspective, we emerged from the turmoil even stronger. We increased deposits by almost $400 million this past quarter and by over $3 billion in the past 12 months with approximately 90% of our total deposits being FDIC insured or collateralized. We had $2.4 billion of cash and cash equivalents at 6/30/2023 equal to 141% of our uninsured deposits. We have no outstanding borrowing from the Fed discount window or the bank term loan funding program.

We had no overnight borrowing from the Federal Home Loan Bank as of June 30, 2023, and we have $3.7 billion of undrawn capacity at the discount window and an additional $3.1 billion of immediately available undrawn capacity at the Federal Home Loan Bank at quarter-end. The combined cash and undrawn liquidity available at approximately $9 billion at quarter-end equals to over 500% of our uninsured and uncollateralized deposits. Unlike many other banks with a significant unrealized loss in their securities and loan portfolio, we had a de minimis $9.3 million unrealized loss on our available for sale securities portfolio as of the end of our fiscal year. We reduced our available for sale portfolio from $280 million last quarter to $232 million.

The fair value of our loans held for investment was a negative $40 million at June 30, 2023 equal to only 2% of our stockholders’ equity. Our favorable liquidity and capital position are a result of our deliberate decisions not to extend the maturity in our securities and loan portfolios and to reposition our loan mix from hybrid SFR, a single-family mortgages and multi-family mortgages to variable rates C&I loans where interest rates were near zero. We have always maintained a disciplined policy of pricing our loans with the appropriate rate, fee structure, and terms commensurate with our risk and return objectives. We also proactively established channels where we can sell or pledge our loans quickly as a contingency plan should any adverse events arise.

Shifting to interest rate risk management, we continue to generate an above average net interest margin and grow deposits while maintaining a neutral to slightly asset-sensitive balance sheet. This quarter, our consolidated net interest margin was 4.19%, while our bank-only net interest margin was 4.26%. Excluding the full quarter impact from the excess liquidity we built at the start of the banking crisis in March, our consolidated net interest margin would’ve been 4.39% above our guidance range of 4.25% to 4.35%. Our ability to maintain a net interest margin above our historic range is a function of the diverse lending and deposit franchise we have built over the past decade. We built our commercial and industrial lending verticals organically and scaled them over time.

As more banks and non-bank competitors pulled out from selected asset-based commercial lending verticals, we have been able to originate high quality loans while maintaining even better terms and pricing than we had prior to the bank failures. This dynamic has allowed us to offset rising deposit costs and the cyclical decline in our Axos Advisory Services deposits. At 6/30/2023, approximately 59% of our loans were floating rate. 34% were hybrid 5/1 ARMs and only 7% were fixed. The average duration of our commercial loan portfolio was two years with multifamily being the longest at an average of 2.6 years, and the vast majority of our commercial real estate lender finance loan portfolio, having contractual maturities of less than three years with all as floating rate other than the equipment leasing portfolio.

The average yield on our held-for-investment loans was 7.51% in the fourth quarter, up 44 basis points from 7.07% in the prior quarter. New loan yields were 10.2% for auto, 8.3% for multifamily, 7.4% for jumbo, a single-family and 9.4% for C&I. While we have seen a general decline in loan demand in our single-family mortgage product, we continue to selectively take market share on our other lines of business. Ending deposit balances increased $384 million or 2.3% to $17.1 billion as of June 30, 2023. Our deposits at quarter-end were comprised of the following, 36% demand deposits, 56% savings and money markets, and 8% certificates of deposits. Our depositors remain well diversified from a business mix perspective with consumer and small business representing 57% of total deposits.

Commercial, cash, treasury management, and institutional represent 21%, commercial specialty deposits representing 6%, Axos Fiduciary Services representing 6% and Axos Securities, which includes our custody and clearing business representing another 6%. We grew deposits this quarter despite divesting approximately $71 million of deposits related to the operating and institutional accounts for digital asset companies. Due to recent changes in the regulatory landscape for U.S. banks and digital asset companies, we have decided to exit our small incubator deposit gathering for digital asset companies. That includes exchanges, brokers, and firms engaged in activities related to non-fungible tokens. The granularity and diversity of our deposits, particularly consumer savings and money market accounts, provides us with flexibility to match the duration and cost of funds to the duration and cost of our adjustable and hybrid loans.

Ending non-interest bearing deposits excluding fluctuations in Axos Advisory Services cash were down slightly from March 31, 2023 to June 30, 2023. With the ending period balances down approximately $275 million to $2.9 billion, reflecting almost entirely the reduction in AAS cash and the exit of the digital asset deposits. Total ending deposit balances at Axos Advisory Services, including those on and off Axos’ balance sheets declined by $188 million in the quarter while non-interest bearing essentially remained flat. The pace of cash sorting in our AAS deposits has slowed significantly, declining sequentially in the last quarter. We believe that the pace of cash sorting in the Advisory Service business has stabilized at or near the bottom, representing approximately 4.6% of assets under custody as of June 30, 2023, compared to the historic range of 6% to 7%.

In addition to our Axos Securities deposits on our balance sheet, we had approximately $660 million of deposits off balance sheet at partner banks and another $700 million of deposits held at other banks by software clients in our Zenith Accounting and Business Management vertical. We’re beginning to make progress transitioning deposits from Zenith clients to our bank. Through June 30, 2023, we have successfully transitioned deposits from a few accounting firms to access so far. We continue to believe that the business management market represents an attractive long-term strategic opportunity for deposits and fee income. We continue to refine our marketing strategies and add new accounts across many of our deposit businesses. Our strong liquidity and capital position makes us an ideal banking choice for consumers, small businesses and commercial deposit clients.

Our prospect pipeline for Axos Fiduciary Services has increased with the rise of bankruptcy filings. Additionally, we have added new team members in existing and new commercial deposit verticals. We expect those new team members to contribute more meaningfully to our deposit growth in the next six to nine months. Our low loan to value asset based lending philosophy continues to serve us well from a credit perspective as witnessed in the sequential decline in our non-performing assets to total loan ratio and our low net charge off ratio this quarter. Our single-family jumbo mortgage and multi-family term loans, which represent 25% and 13% of our total loans outstanding at the end of this year, have a weighted average loan to value ratio of 56% and 54% respectively.

Our single-family jumbo mortgages are concentrated along the coast and markets where new and existing housing inventories are constrained and demand generally exceeds supply. The lifetime losses in our originated single-family jumbo and multi-family mortgages are 4 basis points and less than 1 basis point respectively. Our commercial real estate specialty lending business comprised of low loan-to-value lending to non-bank lenders and well-capitalized sponsors is secured by single-family, multi-family and commercial real estate properties in attractive markets and location. Of the $5.3 billion of commercial specialty real estate loans outstanding at June 30, 2023, multi-family was the largest segment representing 33% of total commercial specialty real estate loans, while hotel, office and retail represent 17%, 10% and 5% respectively.

On a consolidated basis, the weighted average loan to value of our commercial specialty real estate portfolio is 40%. For the Retail and Office segment of our commercial specialty real estate book, the weighted average loan to value was 41% and 36% respectively. Of the $552 million commercial real estate loans secured by office properties at the end of the quarter, 75% are A notes or note-on-note structures with significant subordination from funding partners and mezzanine lenders resulting in a 36% loan to value ratio. The majority of our commercial real estate loans secured by office properties are located in metropolitan areas that have not seen a meaningful negative impact from work-from-home and other dynamics. We have no office exposure in Downtown Los Angeles, San Francisco, Downtown Seattle or Austin.

We have incurred no lifetime losses in our entire commercial specialty real estate loan book. Our Lender Finance business is comprised of lines of credits and non-bank lenders. The total lender finance loans outstanding were approximately $2.6 billion as of June 30, 2023 with real estate lender finance accounting for approximately 33% of total lender finance portfolio and non-real estate lender finance accounting for the other 67%. We have a direct and a debt fund partnership business in lender finance, and the weighted average loan to value for the lender finance portfolio was 54%. The loan structure and our senior position in the payment waterfall provides us with confidence that our lender finance portfolio can withstand the stresses and not result in any material loss to the bank.

Our auto lending business is comprised of direct and indirect lending to prime and super-prime lenders. Ending balances declined by $42 million linked quarter to $476 million, representing only 3% of our total loans outstanding. We continue to price according to our risk appetite with new auto loans yielding 10.2% this quarter. The average FICO score for borrowers in our auto lending business is 759 with lower FICO loans being secured by credit insurance. With an overwhelming majority of our total loans outstanding secured by some form of collateral, we believe our credit will perform better through the cycle. We continue to run an efficient company with high returns, while investing in new products, technologies and businesses. The efficiency ratio for our banking business was 45.1% in the fourth quarter of 2023, an improvement from 46.7% in the corresponding period a year ago.

From a product perspective, we have hired a few teams to help us incubate new lending and deposit verticals. We added to our fund finance team this quarter. We ended the quarter with $74 million of capital call loans outstanding. Our pipeline for capital total call loans continues to increase as borrowers look for reliable lenders in the marketplace. We like the credit and duration risk profile for the capital call lines, and we anticipate generating deposit relationships with those borrowers. From a technology perspective, we continue to invest in the next version of our consumer banking platform, what we’re calling Universal Digital Bank 2.0 to add new features and functionalities and a better more integrated user experience across all consumer lending deposit and securities products.

We envision that providing a more holistic financial services platform will lead to better user engagement, cross-selling client retention. Our white-label banking for registered investment advisors and introducing broker dealers continue to make progress with a beta launch expected in the next six to nine months. Axos Universal core, our proprietary securities clearing platform is also moving forward. This is a complex multi-year development that has the potential to significantly reduce costs in our securities operations and enhance our ability to win new business. We recently added a new Senior Executive from Pershing to augment the clearing sales team and execution initiatives that we have at Axos Clearing. We’re excited about the long-term cost savings and expanded capabilities that Axos Universal core could provide once it’s fully developed and implemented.

Axos Clearing, which includes our correspondent clearing and registered investment advisor custody business, continues to provide a positive contribution to Axos. The income from the securities business doubled year-over-year in this quarter, while pre-tax income increased by $16 million. The primary driver of growth in fee and pre-tax income from Axos Securities is higher interest rates. Total deposits at Axos Clearing were $1.6 billion at the end of the quarter, down from $1.9 billion in the prior quarter. The decline is consistent with the client cash sorting with that other competitors have experienced in response to rapid increases in the Fed funds rate. Of the $1.6 billion from Axos Clearing, approximately $1 billion was on our balance sheet, and $600 million was held at partner banks.

The pipeline for new custody clients remains healthy, comprised of 43 advisory firms with $2.1 billion of combined assets under custody. The number, size and combined assets under custody of the Axos Advisory Service pipeline, all more than doubled from a year ago. Once cash balance is stabilized and grow, Axos Clearing will become an even more valuable asset to our firm. Our loan pipeline remains solid with approximately $1.2 billion of consolidated loans as of July 24, 2023, consisting approximately of $50 million of single-family agency gain on sale mortgages, $345 million of jumbo single-family mortgages, $66 million of multi-family and small balance commercial real estate term loans, $751 million of C&I and commercial specialty real estate loans and $12 million of unsecured consumer loans.

We remain confident that we’ll be able to grow loan balances by high-single-digits to low teen’s year-over-year and maintain our net interest margin in the range of 4.25% to 4.35% for the next few quarters. Our loan growth outlook is based on broad-based increases in our asset-backed lending, lender finance, commercial specialty real estate and capital call lines, partially offset by declines in multi-family, small balance commercial, auto and personal unsecured loans. Our net interest margin guidance reflects loans repricing higher offset by rising deposit cost. It also assumes that Axos Advisory Service deposits are relatively flat for the next few quarters, plus or minus $100 million. We also expect to gradually reduce our excess liquidity over the next few quarters, which will reduce the 20 basis points of consolidated net interest margin drag this quarter to between only 10 basis points to 15 basis points of net interest margin drag in this coming quarter.

We believe maintaining some excess liquidity is prudent given the uncertain economic and industry environment. The combination of solid loan growth and relatively stable net interest margin gives us confidence that we will generate moderate sequential net interest income growth in the second half of calendar 2023. I’m proud of the results we delivered over the past year during an uncertain and volatile backdrop. We overcame expected and unexpected challenges by staying focused on executing our strategic and operational initiatives. Our highly profitable and diverse enterprise with strong liquidity, capital and returns allows us to reinvest in our business while having the optionality to take advantage of market dislocations through organic and inorganic means.

We’ll deploy our capital judiciously between internal investments, accretive acquisitions of business and talent and opportunistic share buybacks. Now I’ll turn the call over to Derrick, who will provide additional details on our financial results.

Derrick Walsh: Thanks, Greg. To begin, I’d like to highlight that in addition to our press release an 8-K with supplemental schedules was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial.com. I’ll provide some brief comments on a few topics. Please refer to our press release, our SEC filings and our website for additional details. Total non-interest expenses increased by $1.4 million or 1.3% to $112.5 million in the three months ended June 30, 2023 compared to the quarter ended March 31, 2023. Salaries and benefits increased by $1.5 million, primarily as a result of new team member additions that Greg alluded to earlier. Advertising and promotional expenses were down by $3.7 million or 31% on the linked quarter due to a reduction in deposit marketing expenses from elevated levels in the March quarter.

We expect non-interest expenses to grow sequentially at our historical average growth rate prior to the fourth quarter of 2023. Our income tax rate was 25.3% for the fourth quarter and June 30, 2023, down from 30.4% in the third quarter of 2023 and 29.2% in the fourth quarter of 2022. Our income tax expense in the fourth quarter of 2023 included $5.2 million of primarily one-time tax credits equal to approximately $0.08 per diluted share. Going forward, we continue to expect our annual income tax rate to be between 29% and 30%. Lastly, our return on equity was 18.6% and our return on average assets was 1.73% for the three months ended June 30, 2023. For fiscal 2023, our ROE and ROAA were 17.2% and 1.64% respectively. Tier 1 leverage capital to average assets was 8.96% at June 30, 2023 compared to 9.25% at June 30, 2022.

Excluding the $1.2 billion of excess cash held at June 30, the ratio would have been 9.5%. Tier 1 capital to risk weighted assets for Axos Bank was 11.63% at 6/30/2023 up from 11.24% in the corresponding period a year ago. We continue to hold excess capital at Axos Financial and Axos Bank even after our opportunistic share repurchases solid loan growth and continued investments in fiscal 2023. Our strong liquidity and high returns position us well to maintain consistent profitable growth. With that, I’ll turn the call back over to Johnny.

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

Operator: Thank you. [Operator Instructions] Our first question comes from Andrew Liesch with Piper Sandler. Please state your question.

Andrew Liesch: Good afternoon, guys. Greg, just wanted to talk about the fund finance team that you’ve or members that you picked up. I guess, how – well, what sort of growth are you expecting out of this business? And these are pretty safe loans, so what sort of concentration would you like it to be as far as the overall portfolio over time?

Greg Garrabrants: Yes. We put in our business plan that we would achieve $1 billion of outstandings over this fiscal year. The pipeline is very strong, obviously because of the nature of the competition in that business. Obviously having unrelated issues, so there’s a lot of opportunity in the market right now. We’re getting a lot of looks, and frankly, we know a lot of the folks that are involved here because we lend to them on the asset level side. So it’s a very familiar relationship. They’re familiar with us. I think the difference is, is that frankly, those facilities often had economics that were not favourable, but with the exit of so many competitors in that market it allows the economics to move to a place. The reference rate, the Fed funds rate plus the exit has allowed that business to come into a place where we believe that it’s clearly a low risk business and now the return is in a place that makes it desirable.

Andrew Liesch: Got it. And then just shifting gears to the margin a little bit. Just looking at asset betas as well as deposit betas, how have they tracked over this tightening cycle based on – or versus your initial expectations? Is the beta of one stronger than the other? And how do you think they’re going to perform here with this latest rate hike?

Greg Garrabrants: I think we’re going to be essentially flattish with respect to that. So I think we’ve almost gone. I mean, we really have – we obviously have had NIM expansion in the rate cycle, so that would – I mean, obviously not telling anything you don’t know, meaning that we had higher level asset betas, but I think that also is reflective of a continued shifting mix, right? And so we obviously have on the side of asset betas that are lower, obviously the 5/1 ARM single-family, and then the multi-family side. Now, in each case, what we had done on the multi-family side is we started doing 3/1 ARMs several years ago. So we have a very significant portion of that portfolio repricing next year. It’s about $1 billion dollars of that that’s going to reprice, and we’ve given data on that before, so that is a drag that will help.

And then obviously almost all the new loans, of course, and we’re still growing are coming in at much higher rates and most of them are floating as well. So, I mean, I think we gave NIM guidance where that was, and I don’t really expect that to change significantly with respect to this recent rate hike. Look, we have been adding deposit-oriented sales teams that are focused on treasury management side, and cap call facilities do come with the depository relationships, and they can be more or less heavy depending on the type of fund you’re dealing with. But we are actually having good success in some of the commercial deposit verticals too. So it really all those good things get blended together. But I think we feel pretty good about where we are, and I don’t think we’re expecting a lot of NIM compression.

There may be a few basis points here and there, but I don’t think anything particularly substantive.

Andrew Liesch: Got it. Those multi-family loans that reprice higher in the next year, any credit concerns with the new rates they’re going to be going to?

Greg Garrabrants: Generally, no and we’ve been going through them. But one of our strategies was that what we did is, we were – we basically chose to do those loans at lower loan to values than average in the market. Those loans are and that portfolio are all personally guaranteed. So I know that the standard in the market for a lot of banks were to do those loans non-recourse. We never did those loans non-recourse. And so – and then what we also did is we often were involved in where there is substantial property improvements in those. So what we were trying to do is find loans that after the improvements happened and the low LTVs that we had, that we would still have double digit debt yields. So, look, it’s possible that some folks have cash flow constraints in other parts of their portfolio.

We feel pretty good about that. Doesn’t mean they’ll be zero. But obviously, our notes are very saleable and there’s a very active market for folks that want multi-family properties that are fixed up and are at 50% of prior value. So, I don’t – I expect that if there’s constraint, people will sell that. And the other thing we’re doing is we’re offering swaps to folks too. So we’re going and proactively saying to borrowers, the long part of the curve is significantly lower. We have an active and I think reasonably sophisticated swap capability. So if a borrower wants to actually save money, they’ll have to lock themselves into a lower but longer rate, but that often can make a difference and help with cash flow as well. So, we’re looking at that and we feel pretty good about where we are, just based on the nature of how we structured those deals.

We really did not stay in that three high 3s, low 4%, 70% LTV, 5/1 ARM space, we shortened everything up, we lowered the LTVs, we always had personal recourse. So I think all those things should make it hold up better than average.

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

Greg Garrabrants: Thanks, Andrew.

Operator: Your next question comes from Gary Tenner with D.A. Davidson. Please state your question.

Gary Tenner: Thanks. A couple of questions. I missed your comments, in terms of the Zenith Business Management product, did you say how much you’ve successfully brought over to-date in that product. And in the past, have you – as you’ve talked about it, have you talked about any deposit amounts that are currently kind of linked to that product?

Greg Garrabrants: Yes, there’s about $700 million that are just simply accounts that are non-interest bearing accounts that other institutions that flow through the software. And so the software is really, that account – those accounts are really just sort of, I don’t know calling them dummy accounts, maybe that’s not the right word, but they’re just sort of completely and only accessible to the software and they just happen to be at other institutions. We bought that software. We’ve probably got $30 million, $40 million of that now. But they – but we also have gotten some pretty big commitments from the firms, some of the firms to move. The issue is the timing of the moves are, they’re slow. The software we got it for, I think a good price.

We’re spending time, kind of putting it up and – but I think it’s an interesting market opportunity. And then we’ve got to move the clients and the sub-accounts in those that are at those other institutions are extensive. So any one client might have hundreds of accounts. So just the process of moving all of it is pretty extensive, but we’re hoping to accelerate it this year. And we think over time the product is a pretty neat product, maybe even to offer to some of the registered investment advisors who might want to take over some of the administrative functionality for some of their high net worth clients, and they’ll have a software to do it. That’s helpful and effective.

Gary Tenner: Thanks. And then in terms of kind of balance sheet management, you talked about reducing excess liquidity a bit over the next few quarters and you gave kind of an outlook for low double-digit loan growth for the full year. So I guess two questions to that. One is, in terms of reducing liquidity, are you thinking of, is there going to be kind of a throttling back of deposit generation or other use of some of that cash because you don’t have any debt really to pay down?

Greg Garrabrants: Yes, I mean, I think that the – we just have, we’ve run it at a very significant excess liquidity. We’re not talking about any significant scaling back, maybe a couple hundred million, but we’ll still be well above where we were prior to the recent events at banks.

Gary Tenner: Okay, got it. And then the funds finance business, thinking about $1 billion of outstandings over fiscal 2024, is that a meaningful contributor this calendar year to the expert, to the outlook?

Derrick Walsh: Yes, we think we’ll – we think it’ll be, obviously it’s hard to judge this exactly, but we forecast there could be several hundred million dollars of closings and fundings this current quarter in that business where we are in, we’re in the documentation phase for hundreds of millions of dollars of that business now. And so the timing of that, those are fairly complex deals to paper, but it’s also a very well-defined set of documentation and whatnot. So I’m pretty sure they will close this quarter. They won’t be – they won’t contribute much from average income, but they will be, I think on the books by quarter-end.

Gary Tenner: Great. If I could ask one last question, Axos has obviously over the last several years, put a lot of resources into kind of building its own core and the universe of digital bank strategically longer term with all the talk about AI. Can you talk about any kind of the applications within the banking industry and anything you’ve thought of even though it may be way out there, down the road in terms of how it could be applied at your company?

Greg Garrabrants: Sure, sure. The way I talk about AI with respect to how we think about it at the company is the first component of any AI-oriented process is the digitization of the process. So everything has to be digitized from a data perspective, and it has to be stored in a way that’s accessible. And then the next component usually is to create rules-based engines that are associated with that. And essentially, those are much more the traditional series of if then statements, right. So take a simple process, depositing of a check and holding the check, a rules-based engine will say, well, this client has been here for a period of time. Their behavioral scoring is at this level. They have a very high balance, they have a securities account, they can clear a check without it being held up to a certain amount.

Then what you do is you take the AI or machine learning model and you run that model and parallel to the rules-based engine. And the rules-based engine is being updated and modified by risk analysts, and they’re predicting, trying to predict what that is. Once the machine learning, AI model starts to get better, then there’s a question whether you run both or you turn one off. And so that’s one way of looking at these decisions, which tend to be these heavy data-oriented decisions from a risk modeling perspective. And so that really much more applies to homogenous type of oriented decisions, right? Where there’s a set of transactions. I mean, transaction approval is another example, right? Rules-based engines are replaced by artificial intelligence that has a much more unstructured data set and allows you to do that.

There’s obviously the ability to utilize certain of these products to create the frameworks for certain kinds of reports and things like that. Internally, I view those as much of a danger as it help because frankly I’ve had a few discussions with everyone about how there’s a information security concern with certain elements of those softwares if you use them improperly. And then also they often are just simply aggregated information, so they have to be really checked that way. And then obviously over time, marketing analytics can also be impacted by those sort of tools. So anything that really has an analytics capability could be utilized to look at that. I will say that I don’t expect over the next couple years to have some amazing cost savings associated with that.

But I do – I do think that the nature of how we think about preparing for all of these elements, which is digitization of all activity and then rules-based engines that apply there, then allow the AI decision making to come in behind that.

Gary Tenner: Thank you.

Greg Garrabrants: Thank you.

Operator: Our next question comes from David Feaster with Raymond James. Please state your question.

David Feaster: Hey, good afternoon everybody.

Greg Garrabrants: Hi David.

Derrick Walsh: Hi David.

David Feaster: Maybe just looking at – it’s great to see the increase in originations, appreciate your commentary on the growth outlook. If I was kind of hearing you correctly, I’m kind of just curious on what you’re seeing on the demand front? It almost sounds like some of this growth is, is maybe competitors pulling back because they have liquidity issues versus a real increase in demand. I’m just curious, how are you seeing it from your perspective? And then maybe within Crestal just are there any specific asset classes or regions that you’re seeing notable strength?

Greg Garrabrants: So the first question I would say is absolutely yes. We are seeing very much that way where borrowers had term sheets at institutions that are subject to liquidity issues or things like that, that are saying we are basically shrinking. And so that’s absolutely happening. And so I would say that the benefits that we have, and I mean obviously we’re relatively small in the fact where we’re growing. But our competitors in certain areas like lender finance, for example, were PacWest and Western Alliance, right? So those – that, that type of – that, that type of competitive dynamic is obviously beneficial to us. PacWest sold that book that was their best book. And those clients are all now – those are clients that we all competed for and they’re all now at a private debt fund, right?

Including, so private debt funds that have businesses are now at other being lent to by other private debt funds who are their competitors, right? Who bought loans at a discount and probably don’t even intend to renew them, right? So there’s that sort of dynamic that’s going on at the – at that smaller segment level. I would say on the commercial specialty real estate side that multifamily is still going very strong but just the competitors that are out there are just fewer, right? So the ability to just be able to take and basically get better terms is really there. And we were doing a deal, it was like a 40% loan to cost deal in a great area and we’re looking at it and I went back and just said, you know what, we just going to get – we normally wouldn’t get, we’d be at that 40% loan to cost.

There was a potential for recourse from a party that normally you wouldn’t get it. And we normally, if you asked for that you would’ve been out competed by many other banks. We asked for it and they came back and after a little heaven and haw gave it to us. So even though we were just able to secure that above and beyond, I thought the 40% loan to cost was good, but I wanted to make sure in case there was some liquidity issues that we had this extra guarantee and we’re able to get it. So that’s sort of happening all the time. And so it’s actually, I think are really, it’s not – it is always the case, right? When nobody can – when people can lend it’s always a good time to be a lender. And I think it’s actually a really good time to be a lender right now.

Now you obviously have to be careful because we’re embedding in our assumptions that there’s going to be a significant re-equitization of most all commercial real estate. And so that’s just something that you’ve got to take into consideration as you’re looking at these things.

David Feaster: Okay. That’s helpful. And then maybe just kind of looking at your deposit breakdown by the lines of business, it looks like we saw a pretty decent decline in the commercial treasury management. I’m just curious, what are you seeing there in some of the underlying dynamics behind that and would you expect, I mean, is that stabilized here thus far in the quarter and just curious what you’re seeing there?

Greg Garrabrants: Yes. It has. I mean, we did if you look the AAS deposits; we put a slide in the supplement with respect to that. And then we did – we had an incubator effort around the digital asset side, and we decided just not to pursue that. So there were – there was deposits had left there for that quarter. And then there is also – there’s also, I think actually if you look at it, the rates actually have been actually stable to going down in that commercial deposit side. So to the extent that there were folks that got too aggressive with their rate requests, we’ve been allowing them to exit. So we actually have been growing and improving the quality of that base. But we also that sometimes is a rate volume trade-off.

So we feel pretty good about the ability to continue to grow those deposits. Some of it – some of these things are idiosyncratic. We had a big bankruptcy case that had sat with us for years pay off, that was a $100-ish million swing. So it’s nothing – it’s nothing systemic and we’re actually having really good traction on the commercial deposit side in HOA and a variety of other verticals.

David Feaster: Okay. That’s great. And then last quarter we had talked about some potential opportunities coming out of the March failures. I know you’ve done some hiring. I’m just curious is there still anything that you’re considering or is that kind of shelved for now? And just are there any types of portfolio acquisitions or even beyond the bank failures that you’re considering as maybe a way to accelerate, expansion or segment build out?

Greg Garrabrants: We’re still interviewing lots of folks in different segments that we like. We hired some folks in the fund finance side. We hired some folks in the premium finance side. We like those segments. We think those are very safe and good segments from a – just from a risk perspective. We’re building our – slowly building our offering around what our private wealth side would look like. And I think we’ve spent a lot of time around looking at some of the first republic models and things like that. And we’re working through the question of how successful can those models be if they’re not giving away mortgages, and I think that’s a very interesting question. So there’s been some – we’ve been – frankly we’ve been close to some teams where we’ve thought we had a shot at and bringing them on.

And then there’s been some very aggressive competitive guarantees that have come into the market that we think were overly aggressive. Sort of things like two-year earnings guarantees on prior earnings in a model that we feel like is broken. Like the model of – we’ll give you a 2.5% mortgage and you put a 30-year deposits with us, right? So if you guarantee two years of earnings to folks who had that model, I think you’re going to be, sorry. So we’re taking a more measured approach, and a lot of the clients particularly on the lending side and on the deposit side are gradually coming to our existing team. But we are increasing the team both on the deposit and the lending side and we’re going to continue to do that. I think frankly the opportunity’s not over because what everybody’s doing now, right, is, I mean, I think what we’ve always offered people is the ability to have a very entrepreneurial institution with great technology that can quickly attend to unique client problems and basically work with clients and be very proactive that way.

And a lot of the institutions that had failed, frankly had components of that and they failed for reasons completely unrelated to those components. So those clients are – those people are now at places where I talked to a lot of them and they’re very unhappy where they are, but they’ve been given guarantees. And so some of the discussions are, hey, look I’m going to stick this out because I’m getting paid a lot to do nothing right now, but no, seriously. But that I get laughing in here, but that’s the discussion but when I don’t get paid to do nothing anymore, then I want to talk to you. So I think there’s going to be a continued movement, but we’re not going to be coming out, I don’t think and saying we hired a 100 people or something like that.

I think we’re going to be hiring threes and fives and tens, maybe tens and moving along to do that. I mean, frankly, we really – we really don’t want to grow. I mean, we’re growing assets at a level that we think is prudent given the size of the diversity of what we’re doing. So if you actually look at each individual line of business, it’s not growing that much in the quarter, even the year. We have a bunch of new stuff we’re doing, and we have a lot of new deposit folks coming on board too, who are making an impact. So we’ll be doing more, I think more aggressive hiring than we normally would, but not the type of hiring that you’ve seen from some other institutions.

David Feaster: That’s helpful color. Thank you.

Greg Garrabrants: Sure.

Operator: Thank you. Our next question comes from Michael Perito with KBW. Please state your question. Michael Perito, KBW your line is open. Please go ahead.

Michael Perito: Hey, can you guys hear me okay?

Greg Garrabrants: Yes, clear Mike.

Derrick Walsh: Yes, clear Mike.

Michael Perito: Sorry about that headphones. Thanks for taking my questions. Good afternoon. I don’t want to take it too far here. I have you guys answered a lot of my questions already. Maybe just two quick ones. Greg, just on the digital asset group, just to make sure I heard you correctly. Did you say that you have exited that business or exiting that business?

Greg Garrabrants: Yes. We’ve basically. We started a little incubator that was looking at a few clients and we had done some software related work to it and we brought a few clients on board, but we’ve collectively just decided that it’s until there’s better regulatory framework around it, we’re not going to really pursue it further. And so we’re kind of exiting the few clients that we had there. And so there’s a little bit, those were all non-interest bearing. They weren’t particularly substantial, but we really didn’t plan to lever those deposits anyway, given their volatility. And I just think it’s just with – with everything going on with how the SEC is looking at these things and stuff, the exchanges and everything, it just we really need to just get – we need to get better clarity around what the future is going to look like there from a regulatory perspective and then maybe we’ll look at it, but I don’t know that…

Michael Perito: No, that makes sense. Yeah, no, that makes sense. And does that include like operating accounts too for digital asset companies, or is that just…

Greg Garrabrants: Yes, that includes operating digital assets included all of it basically.

Michael Perito: Perfect. Thank you for clarifying. And then secondly, just a really simple question, I appreciate the – the kind of the micro guide provided. If I look at where your consensus expectations were for fiscal 2024, I think coming into the quarter it was like $5.18. Obviously you guys earned more than that this year. I mean, environment aside is your expectation to grow EPS in fiscal 2024 year-on-year at this time even, I mean, I’m guessing the answer’s yes, but I just would love to hear?

Greg Garrabrants: Yes. No, no, it’s a good question. I mean, I know given how frankly that might – that would normally be an easy answer, but I think maybe a lot of banks don’t give that answer. Yes, I certainly intend to. Obviously you can’t make promises with respect to those things because there’s a lot to work out. But I do expect that to be the case. I think the environment is very, very good for us right now. And I think that we are – we are positioned with probably some of the best relationship with non-bank lenders who are interested in continuing to work with us. They’re becoming more and more relevant in the market. They’re taking share. We’re a part of that. We are getting great people who otherwise were embedded in organizations that they wouldn’t have left and we’re having really good momentum on the deposit side.

We’ve done a lot on the tech side and I think that we can do that. This quarter was obviously that the tax rate, you guys have to pay attention to that because that tax rate is going to go up next quarter, right? So I would say that frankly the next quarters you’re going to have to be careful with forecasting. But I think we’ve said we think we can grow net interest income moderately throughout the year. And yes so I think that – that certainly is an expectation then. And then if we get rid of the drag, as we get rid of the drag of some of those hybrid loans re-pricing then I think we’re going to be in really good shape because that is the only thing that would prevent us from really taking – getting the full advantage of the asset growth that we think we’re going to have.

Michael Perito: Great, thanks. And then maybe just one last one just on liquidity, just to follow up on an earlier question. I mean, I dare to say that that great clarity maybe is a little bit better than it was a year ago, right? But I mean, I think we could probably all agree that we’re probably closer to the top of this cycle than, than the bottom. And at some point does, do you guys, you talked about your mix of loans and how it’s geared towards hybrid and variable. Obviously you guys carry a lot of cash and the bond books fairly small. This served you incredibly well over the last 18 months. But does it get to a point where you maybe look to shift the duration a little bit? I mean, nothing major, but is that something a conversation you guys have given where we are in the cycle or no?

Greg Garrabrants: I would say that what our approach would be more to have floors on variable rate loans, and then you might say well those loans will pay off if rates go below those floors. And I think then that’s a very defined problem that we can deal with. We have good origination capabilities and obviously the ability to negotiate floors. So I think that’s a better approach. Look, I think it’s a very difficult – the reason why it’s a very difficult question from my perspective about, and I look I in general believe that rates will stabilize or that we’re more at the end of the tightening cycle than we’re not. But there’s also, it depends on what happens from a fiscal perspective, right? If we had – if we had a change where the fiscal stimulation started to come back in this fighting the fed which it already has been, right, and it’s still there, you could end up – I don’t think it would be outside the realm of what should be prepared for that you end up with longer – higher for longer.

Now – and I think we have to prepare for that probability. So I’m not a big fan. I know, look, and I get it, I mean, I think you could be the big hero if you did that, but I think what we’ve decided to do is have shorter duration assets, and we also have the ability to move out with a very limited CD book. We have the ability to re-price deposits really quickly. And so we’re going to try to manage it more that way rather than try to guess the top of the interest rate cycle. And for clients that want to do it we’ll obviously have the opportunity for them to use the swaps and they can take advantage of a lower part of the yield curve if they want. So somebody wants a 10-year fixed rate loan, now they can get it at a cheaper price than a variable, right?

Fair enough, they can do that here. They’re just going to be stuck with that rate, which may not be too bad for 10 years, but it depends on their mindset, but we won’t have that. We’ll have a variable rate.

Michael Perito: Yeah. Okay. No, that’s great. I appreciate all the color [indiscernible].

Greg Garrabrants: Thank you.

Derrick Walsh: Thanks Mike.

Operator: Thank you. There are no further questions at this time. I’ll hand the floor back to Johnny Lai for closing remarks.

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

Operator: Thank you. And with that we conclude today’s call. All parties may disconnect.