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Presentation

Axos Financial, Inc. beats earnings expectations. Reported EPS is $1.8, expectations were $1.75.

Operator: Good morning, sorry, good afternoon, and welcome to the Axos Financial Second Quarter 2025 Earnings Call and Webcast At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and it is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you, Jonny, you may begin.

Johnny Lai: Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.’s second 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 December 31, 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 schedules. All of these documents can be found on axosfinancial.com and with that, I’d like to turn the call over to Greg.

Gregory Garrabrants: Thank you, Johnny, and good afternoon, everyone and thank you for joining us. I’d like to welcome everyone to Axos Financial’s conference call for the second quarter of fiscal 2025 ended December 31, 2024. I thank you for your interest in Axos Financial. We delivered solid results this quarter generating double digit year-over-year growth in net interest, income and book value per share. Ending loan balances were up 1.1% linked quarter and 6.7% year-over-year to $19.5 billion. We continue to generate high returns as evidenced by the 17% return on average common equity and 1.7% return on assets, in the three months ended December 31, 2024. Our strong returns contributed to a 21% year-over-year growth in our tangible book value per share.

Net interest income was $280 million for the three months ended December 31, 2024, up 22.5% from the $228.6 million in the prior period. Excluding the benefit from the Early Payoffs of Three FDIC Purchase Loans in the first fiscal quarter of 2025, net interest income was up approximately $5 million, linked quarter. Net interest margin was 4.83% for the quarter ended December 31, 2024, up 28 basis points from 4.55% in the quarter ended December 31, 2023 and down from 5.17% in the quarter ended September 30, 2024. Net interest margin in the first quarter of 2025 benefited from the payoff of three loans which we purchased from the FDIC. Excluding the impact from the early payoff of the three loans purchased in the three months ended September 30, 2024, net Interest Margin was 4.87%.

Total on balance sheet deposits increased 9.5% year-over-year to $19.9 million. Our diverse and granular deposit base across consumer and commercial banking in our securities business continues to support our organic loan growth. We managed our operating expenses well this quarter. Total non-interest expenses for the quarter ended December 31, 2024 were down by 1.5% from the prior quarter. The efficiency ratio for the banking business segment was 41% in 2Q25. Net annualized charge offs to average loans were 10 basis points in the three months ended December 31, 2024. Excluding the auto loans covered by insurance. Net annualized charge offs to average loans were 8 basis points in the second quarter of 2025. We remain well reserved relative to our low current and historic net credit losses.

Net income was approximately $104 million in the quarter ended December 31, 2024 compared to $152.8 million in the corresponding period a year ago. Excluding the gain from the FDIC loan purchase in the prior year period, the adjusted net income and adjusted EPS were $92.5 million and $1.60 per share respectively. Non-GAAP adjusted earnings per share for the three months ended December 31, 2024 was 1.82 — $1.82. Net growth in our non-purchased loans for investment were 208 million for the three months ended December 31, 2024. The strong loan originations of $3.5 billion and growth in single-family mortgage warehouse and C&I loan balances were offset by declines in loan balances in our 5/1 hybrid ARM, single-family and multifamily jumbo mortgages of $381 million this quarter.

We believe that we can reduce these significant headwinds to loan growth this quarter in single-family jumbo mortgages, given that the pipeline has risen from $345 million in the prior quarter to $496 million due to recent competitive exits, selective rate reductions and some assistance from the yield curve. We also believe we have the potential to be flat to slightly up in our multifamily hybrid ARMs this quarter given that the yield curve isn’t working as actively against this product as it has been over the last several years and we’re seeing more rational valuations in the market. Lender finance, fund finance and equipment leasing had strong originations and net loan growth this quarter. Ending balances in our auto loan portfolio were up slightly at December 31, 2024, representing the first sequential increase since the first quarter of fiscal year 2023.

Average loan yields for the three months ended December 31, 2024, was 8.37% and down from 9.01% in the prior quarter and up 19 basis points from the corresponding period a year ago. Average loan yields for non-purchased loans were 8.08% and average yields for purchased loans were 13.92%, which includes the accretion of our purchase price discount. The prepayment of three FDIC-acquired loans increased the first quarter 2025 average loan yield by 30 basis points. Excluding the FDIC loan prepayments in the September 2024 quarter, average yields were down sequentially due primarily to loan mix. The remaining FDIC purchased loans continue to perform and all loans in that portfolio remain current. New interest — loan interest rates were the following: single-family mortgage, 8.3%, multifamily 9.2%, C&I 8.5%, auto 9.7%.

Ending deposit balances of $19.9 billion were roughly flat linked quarter and up 9.5% year-over-year. demand, money market and savings accounts representing 96% of total deposits at December 31, 2024, increased by 10.6% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 60% of total deposits, commercial TM and institutions representing 20% commercial specialty representing 8% Axos fiduciary services representing 6% and Axos Securities, which is our custody and clearing, representing 4%. Total noninterest-bearing deposits were approximately $3 billion at the end of the quarter. Total ending deposit balances at Axos Advisory Services, including those on and off Axos’ balance sheet were up approximately $78 million compared to the prior quarter.

Client cash sorting has stabilized at or near the bottom, representing approximately 3% of assets under custody at the end of the quarter compared to the historic range of 6% to 7%. We are focused on adding net new assets from existing and new advisers to grow our assets under custody and cash balances. In addition to our Axos security deposits on our balance sheet, we had approximately $450 million of deposits off balance sheet at partner banks. For the quarter ended December 31, 2024, our consolidated net interest margin was 4.83% compared to 5.17% in the quarter ended September 30, 2024, excluding the 30-basis point boost from the FDIC purchased loans that paid off early, our consolidated net interest margin would have been 4.87% for the September 30, 2024 quarter.

We break out the average balances on loan yields for the purchase and nonpurchased loans and our supplemental schedules provided as an exhibit to the press release for readers to separate the impact of the loan purchase on net interest margin. We continue to hold excess liquidity, which had an 18-basis point drag on our net interest margin in the quarter ended December 31, 2024. Our net interest margin remains above the high end of our target with and without the benefit from the FDIC purchased loans, largely because of the diversity and granularity of our funding across our consumer banking, commercial banking and securities businesses. Total interest-bearing deposit costs were 3.95% for the quarter ended December 31, 2024, and down 51 basis points from the prior quarter.

We have been able to reprice our higher-cost consumer and wholesale deposits while maintaining on-balance sheet deposits roughly flat. We continue to grow our lower cost and noninterest-bearing deposits in our commercial cash management and treasury businesses as well as our specialty deposit business. We are also making good progress cross-selling deposits across selected lending businesses such as fund finance. Cash sweeps in our custody business were $878 million at December 31, 2024, compared to $800 million at September 30, 2024. Continued strong net new asset growth and a normalization in cash sorting will be a tailwind in our ability to grow lower cost deposit balances going forward. We expect our consolidated net interest margin ex FDIC loan purchases to stay at the high end or slightly exceed the 4.25% to 4.35% range we have targeted over the past year.

we have been successfully repricing our higher cost deposits and will continue to adjust deposit pricing based on future actions by the Fed and by competitors. We see more competition from banks and nonbanks in certain lending categories and we have selectively adjusted pricing where appropriate to be more competitive for high-quality deals. Our loan pipelines have improved meaningfully in our single-family mortgage and multifamily term lending business over the past few months as a result of strategic actions we have taken. A steeper yield curve also makes our hybrid single-family and multifamily loan products more economically viable. While it may take a few quarters for the hybrid loans in our pipeline to have a meaningful impact on our balance sheet growth, we believe the level of net attrition in our single-family and multifamily term loans, which have been about around $300 million to $400 million per quarter will subside.

The credit quality of our loan book continues to be solid despite a few idiosyncratic circumstances that led to an uptick in nonreforming assets this quarter. The majority of our nonperforming assets are in the real estate backed loan area where LTVs are conservative and our historical losses have been low. Nonperforming assets in our single-family jumbo mortgages increased by approximately $10.4 million from September to December. The increase was attributed to three assets with a weighted average loan-to-value of 56%. Nonperforming assets in our multifamily mortgage book increased by $17.8 million in the linked quarter due to two properties where we do not believe we’ll incur any additional loss. Nonperforming assets in our commercial real estate loan book increased by $20 million, primarily because of a $14.5 million loan in Brooklyn.

The loan was downgraded due to a maturity in October 2024, extension of that maturity to allow the property to be sold. The full recourse guarantors have significant liquidity and net worth and are making principal curtailments while marketing the property for sale at above our loan amount. We are confident that we’re not losing any money on this loan, given the value of the property and the strength of the guarantors. We did not anticipate a material loss from loans currently classified as nonperforming in our single-family, multifamily or commercial real estate loan portfolio. Our commercial real estate specialty portfolio continues to perform very well and in line with expectations. All C&I loans classified as nonaccrual and at December 31, 2024, but one $6.4 million loan continue to make contractual principal interest and contractual curtailment payments.

Nonperforming assets in our C&I lending portfolio increased by approximately $27.3 million, primarily due to one syndicated non-real estate lender finance loan with an unpaid principal balance of $23.9 million. This indicated loan was downgraded due to some credit deterioration in the underlying assets. However, the borrower’s current principal balances have been paid down by around 11% since June 30, 2024, and the facility balances within the collateral pledge to the borrowing base. We’re saddened for the families and communities impacted by the tragic wildfires in the Greater Los Angeles area. Thankfully, none of our employees lost their homes. We’ve been actively engaging with borrowers of properties in the affected areas since the fires initially started.

Based on the information we’ve gathered so far, with a handful of single-family residential properties that are complete losses and others that suffered less damage. Given the low LTVs that we have on most of our single-family residential mortgages, we believe that the insurance coverage maintained by the borrowers is adequate to cover the outstanding loan balances for the majority of properties. For those loans where the insurance coverage does not fully cover our loan amount. We have umbrella insurance from Lloyd’s, that we believe is adequate to cover the potential shortfalls. Additionally, the value of the land, which may be excluded from insurance coverage exceeds the value of the property in many cases, particularly those in Malibu and Pasadena.

While it’s too early to assess how quickly the revitalization effort can commence, we are willing and ready to help the communities and homeowners in the affected areas, we’re building by providing loans to rebuild these properties in these neighborhoods. Axos Clearing, which includes our corresponding clearing and RIA custody business had a good quarter. Total deposits at Axos Clearing were $1.36 billion at the end of the quarter, up $104 million from the prior quarter. Of the $1.4 billion of deposits from Axos Clearing approximately $900 million were on our balance sheet and $450 million were held at partner banks. Client margin balances grew by 24.5% up from $220.5 million at September 30 to $274 million at the end of the quarter. Securities lending increased by approximately 41% linked quarter to $135 million Net new assets from our custody business were $822 million in the December quarter up from $559 million in the September quarter.

This is a continuation of the positive net new asset momentum we have experienced over the past few quarters with new assets outpacing the runoff in certain legacy adviser assets. The Axos Advisory sales team continues to have traction in the financial planning segment of the RIA space where our client-centric noncompetitive service model resonates well. The pipeline for new asset custody clients remains healthy, and we expect continued organic net new asset growth in AAS. From a product perspective, we continue to identify ways to generate incremental fee income and partner with third parties to offer additional services such as access to alternative assets. We are realigning certain back-office servicing functions in our clearing and custody business to leverage the process and systems we have to more efficiently service broker dealer and advisory clients.

Improvements in our onboarding process for Axos Advisory services have reduced and required to onboard new advisors. We have started to leverage low-code software development and offshore practices that we have implemented broadly at the bank to more projects at the securities businesses. This has reduced the amount of time it takes for us to launch and complete projects with fewer resources than it would have taken if we used a more traditional approach. We’re also actively working on artificial intelligence use cases to enhance efficiency. We believe that the economic benefits from sustained net new asset growth a normalization in cash balances and operational productivity initiatives will more than offset investments we are making in our clearing and custody business in the medium to long term.

The team hires we have made across various commercial lending and deposit businesses are contributing to loan and deposit growth. Our commercial cash and treasury management teams generated deposit growth in this quarter with contributions coming from the existing teams and our new hires. We continue to explore different ways we can scale our incubator businesses in various deposit and lending verticals. Some require additional products and features while others can gain traction more quickly through better, more targeted marketing and client segmentation. While we remain selective in adding new teams, our focus in calendar 2025 is on scaling the teams we have added over the past year. We have active dialogue with existing and new partners in the private credit space to leverage the rapid growth of that ecosystem.

Our proven track record of working with funds and willingness to collaborate on complex deals makes us an ideal partner for nonbank depository institutions looking to deploy capital across a growing number of asset classes. I’m excited about the opportunities we have to grow each of our deposit, lending and fee income businesses. We have a strong and growing amount of excess capital to continue investing in product and technology development, new capabilities in our team members. While organic loan growth and opportunistic share repurchases remain our preferred use of capital, we are seeing a meaningful increase in the number of inorganic asset and business acquisition opportunities. Additional clarity from an economic and regulatory perspective could further increase the number of bank and nonbank opportunities that come to market.

The $150 million at-the-market shelf we announced today is a proactive step to put us in a favorable position to capitalize on potentially accretive and strategic opportunities that may require additional capital. We do not intend to raise any capital as we have a clear line of sight into an acquisition that would bear additional capital given the significant excess capital we have today. We remain disciplined in the type and valuation of businesses we acquire, regardless of whether we are successful in consummating an acquisition, our asset-based lending philosophy with conservative loan to values and prudent structures and diversified mix of lending and funding will continue to generate profitable growth for our shareholders. 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 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 $12 million in the three months ended December 31, 2024, compared to $13.5 million in the corresponding period a year ago. The primary reason for the year-over-year decline is due to lower net growth in loans held for investment in Q2 2025 compared to the corresponding period a year ago. Our allowance for credit losses to total loans held for investment was 1.37%, up slightly compared to 1.34% at June 30, 2024.

We remain well reserved relative to our low historical and current credit loss rates. Noninterest expenses were approximately $145 million for the three months ended December 31, 2024, down $2 million from the quarter ended September 30, 2024. Salaries and benefits expenses were down slightly to $74 million in advertising and promotional expenses and professional service expenses were down by $3.2 million and $0.8 million, respectively compared to the three months ended September 30, 2024. We continue to balance investing in products, systems, technology and people while identifying ways to reduce noninterest expenses through automation, straight-through processing and other improvements. Our loan pipeline remains healthy with $2.1 billion of total loans in our pipeline as of January 22, 2025, consisting of $496 million of single-family residential jumbo mortgage, $60 million of gain on sale mortgage, $138 million of multifamily and small balance commercial mortgage, $54 million of auto and consumer and $1.4 billion of commercial loans.

We expect similar loan growth dynamics compared to recent quarters with growth across a broader set of real estate and non-real estate lending businesses partially offset by payoffs in our CRESL[ph] single-family mortgage and multifamily lending verticals. We believe that we will be able to grow loan balances organically by high single digits year-over-year in the remaining two quarters of fiscal 2025, excluding the impact of any of the loan portfolio purchased from the FDIC or any other potential loan or asset acquisitions. With that, I’ll turn the call back over to Johnny.

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

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

Kyle Peterson: Great. Good afternoon, guys. Thanks for taking the questions. I wanted to start out on the deposit costs. Really impressive to see you guys be able to kind of push down the cost rates have been, although choppy. I just want to see, do you guys see more room for that moving forward if rates are stable for drift down? Or I guess, how much pressure or kind of rate-sensitive deposits do you guys see at least in the near term that you might have some room to reprice lower?

Gregory Garrabrants: Yes. With respect to what we were able to do this prior quarter, it really was the result of taking the more — most of the results taking more of the rate-sensitive deposits down. I think it’s probably a little difficult to do that. Maybe there’s some at the margin unless you get a drop in the reference rate. But we are doing a lot to try to improve the quality of the deposit mix, and that’s happening slowly. So, I think that definitely is an opportunity over time. to continue to do that. So that would be really where that is. But if we get our goal, and I think we very clearly can match it that essentially is to have to offset any decline in our interest income that we get from having a variable rate loan that reprice by repricing our deposits.

And I think we were able to do that, as you said, very well this quarter, and that’s the goal. So obviously, we want to improve the deposit mix over time, but we want to be able to demonstrate that we could do what we did on the way up, on the way down as well.

Kyle Peterson: Okay. That’s really helpful. And then I guess just a follow-up on the net interest margin. I know you guys kind of said towards the high end or slightly above on a core basis for the year, which is great to hear. How much of that is coming from whether it’s the asset side. I know you guys mentioned a competitor exit in mortgage and the yield curve has gotten a little steeper there, so which should help. How much is — should we think of between the asset side versus some of these deposit more rate-sensitive benefits that you guys have been able to sell so far?

Gregory Garrabrants: Yes. I mean, I think it’s a little bit difficult to disaggregate that because as we do loans, obviously, we’re — in a lot of the businesses, we’re getting a significant amount of deposits and those are lower rate. And then in some of the teams we’ve brought in, some of the middle market stuff may have slightly lower loan rates, but they have much higher deposit balances. So it really depends on the segment. I think what we’re doing is we’re really looking forward and forecasting as best we can, what we think yields and loan yields are going to be and how we’re raising deposits and looking at that maxim coming up with that. So in order to disaggregate that, I really have to look at each kind of business unit specifically in order to do that.

I mean, one element is, obviously, we’re running at a lot of excess liquidity right now as well. And so the question with respect to your first question around do we reprice deposits, obviously, we think we’re going to be able to get back to loan growth because a lot of the headwind we’ve had has really been the result of some of these business units where the product just didn’t make any sense for us to originate where we didn’t like where the 5-year rate was so we weren’t really going to go there. And that was really a problem for auto. It was a problem for single-family, but a problem for anything with term and we feel much better about that now. So, we’re opening that up. So obviously, we can reprice deposits and maybe if we lost a little bit because we have a lot of Axos liquidity, that would be okay.

But I think what we’re going to try to do is think we feel good about our — where we are just trying to grow into the Axos liquidity.

Operator: Thank you. Our next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question. Thanks.

Gary Tenner: Good afternoon, Greg, I was wondering if you could share any thoughts you would have with regard to kind of reengaging on the crypto side of the world, given kind of the more positive bias out of Washington?

Gregory Garrabrants: Yes. No, it’s a great question. I really think what we need is we need more specific clarity and specific rules with respect to how specific different companies are going to be regulated. And so we’ve had some executive orders and things like that, and we expect that there may be some ability to look at that. And obviously, we built products around that, which we never really even used. But it really is going to have to be a fairly comprehensive view across what our primary regulator thinks and what the SEC thinks and really getting some good either legislation or the minimum we’re making on that. I don’t really think we have a lot of appetite to kind of jump into that without the proper guidance. Right now, the way it sits out there, too, is mostly we did this anyway, but you have to go through a regulatory process of non-objection to do that just like it was before.

So you have to go through that process. And I don’t know exactly how that’s going to change. But obviously, there’s been some movement right now with best being confirmed and whatnot, but there’s still probably a lot of changes that are coming in the regulatory agencies and then really kind of figuring out where guidance comes out there. I think that’s the first step.

Gary Tenner: I appreciate it. And then I wanted to ask about NPAs. You kind of ran through some of the kind of issues that moved to nonaccrual in the quarter. If you look back from June 30, total NPAs have doubled or more than doubled by a bit. Can you just talk about kind of the level of, I guess, forward analysis you’re doing on properties and otherwise to get a kind of bringing stuff forward into nonaccrual and start working on it proactively or how that process works that access?

Gregory Garrabrants: Yes. It’s really been with respect to like a lot of these things, particularly on the C&I side, are — there sort of — the question is with respect to something is that for example, this one that we have with the value — it’s a subprime auto lender finance deal, it’s a syndicated deal. We were within the borrowing base, the assets but it’s over advanced on the advance rate, right? So, if we were able to get a lot better information on that and basically be able to have a better understanding and make sure that we are — that the assets are worth what the field exams says they are whatever, maybe we wouldn’t put that on nonaccrual. So, some of this is sort of a judgment with respect to some of these things.

So, I expect a lot of these to resolve themselves relatively quickly. In some cases, some of the borrowers have gotten used to on the real estate side, some of the borrowers have gotten used to some of the banks kind of dis capitulating and making various concessions to them. And so they’re so sort of almost daring like, hey, what’s signed out. And so our response has been fine. We have an ability to sell your loan at par better. And so you need to do what we’re asking you to do and sometimes they’ve been a little bit slow in doing that. So this is sort of just making sure that happens. But what we’re seeing on the real estate side is very positive, we are getting regular valuations looking at it. We feel really good about that. If you look at, let’s say, substandard loans, those are — those have gone down.

And we have a lot of active sale processes that are ongoing right now for the real estate side. And really the — and then on the C&I side, since we’ve had yes, they’ve gone up. We’ve essentially had next to zero nonaccruals there. And so that really is the STG syndicate, which continues to pay they’ve continued to pay us. But the reason we put it on nonaccrual is because they did this restructuring, we didn’t participate in it. We think that what they did was in violation of the credit agreement, and they’re not giving us proper information around what our collateral is. So, with that kind of uncertainty, I think it’s proper to put it on nonaccrual. Now nonaccruals are not all created equal. So all our nonaccruals, except for that $6 million on accrual in C&I or paying — and so is the lender finance deal.

It’s hard to know because sometimes timing, for example, like there’s one deal, the deal that the guy was realty a guarantor has a multibillion-dollar balance sheet, but we didn’t get the appraisal back before the end of the quarter. And so that was on nonaccrual. That will probably pop off, right? So it’s just sort of in some of these things where you just are kind of looking at what the standard is and whatever. But it will — I feel good about it. I don’t think there’s a lot of loss content there. On STG, they’re still paying. They’re a massive company, but we’re not getting the information we need there. And so we got our lawsuit on file there. And we think we’ll be successful there, but that will take a bit of time.

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

David Feaster: Hey, good afternoon, everybody. It’s a lot of encouraging conversation around the growth side. It sounds like we’re going to stem the runoff in jumbo single-family resi and in the multifamily book. The yield curves also help which you alluded to, given confidence in accelerating growth. Could you just maybe touch on the pulse of demand in your borrowers, sounds like the pipeline is solid. Curious where are you seeing the most opportunity today? And then are there any segments within the non-lender finance non-CRE lender finance and ABL that are seeing any specific strength in the quarter?

Gregory Garrabrants: Cap call continues to look quite good. The real estate lender finance and Ralph, I mean, they all have decent pipelines. I mean we did $3.5 billion of originations last quarter, right? So I mean, partly, the handover on the prepay side is, frankly, the result of a deliberate strategy that we made, which was we’re not going to do any term lending for three years, right? And that’s great from an interest rate risk perspective, and we don’t have any mark-to-market on our balance sheet but it does kind of create that issue, right? And so as you said, if you look at the term lending component of our business, where it’s been running off $300 million or $400 million a quarter, and that’s also been intentional because if you were going to lend on the 5-year at a $250 million or $300 million spread or whatever, you are going to be in a rough place but we wanted to wait for that to adjust.

So, if you look at all those spots, you look at auto, if you look at multi-family, you look at single-family that we now have a product that’s at least competitive there because we feel good enough about the credit side of where things have stabilized their multifamily borrowers are more realistic. They know their cap rates are not 4%, right? And rates are not going down to 250 in 18 months, right? That would be a typical conversation 1.5 years ago, right, really? It’s amazing when people saw it. And then auto, it’s kind of that sort of bubble kind of pops out of the asset value. So, I think if we get all that stuff right, and I see that happening. I mean we’ve also benefited on the SFR side for some exits, right? I mean was loss leg it will be used to compete with us and asset competed with us on the multi — I mean, I’m sorry, on the single-family jumbo side, they’ve pushed out.

And so it’s a little early to tell how this pipeline is going to go. It obviously has increased a lot, how quickly it closes, what the pull-through ratio is. In Summer next week, we really don’t know yet, right? This is a relatively new ramp, and so we’ve got to see that. But yes, I mean, I feel good about it. But frankly, I felt good about $3.5 billion of origination, too, right? So that was a pretty good number. And so we certainly — there’s just there’s movement. And frankly, with some of the things like cap calls, they can get paid off. We haven’t seen that. So, I’m cautiously optimistic, but there is a level of caution in it. I do believe that, for example, I think mortgage warehouse that kind of popped up that’s not as gangbuster as it was last quarter.

So that was some of the growth, right? So I think if we can stem though those that $300 million or $400 million that we’ve been having in the single family and multi. And I’m pretty confident about that. I’m pretty confident multi-can be at least flat maybe slightly growing this quarter. And I think single-family can pretty much get there, too. And so that’s a big benefit and just looking at CRESL, there’s we’ve got — we try to judge where prepays are on CRESL that’s a little bit tough to do. got a lot of great new deals there, but sometimes those new deals take a while to fund up because all the equity has got to come in first, and so our funding might be delayed. So look, I think we’ll be able to get back to it, but it’s been a slog. It’s been a struggle

David Feaster: Yes. With growth set to accelerate, I want to touch on the side. You’ve done a tremendous job like you said, it’s been a tough slog. You’ve done a great job holding the line on expenses. You are still investing in the franchise. How do you think about expense growth going forward? What are some of the key initiatives you’ve got on the horizon? And how do you think about your ability to drive positive operating leverage as we look in the out year?

Gregory Garrabrants: Yes. I think we really have to be very, very thoughtful about expense growth. And the reality is that over the last two quarters, we have not been able to deliver the sustainable asset growth that we’ve historically done for the 17 years I’ve been here. And that’s really the first time. And so prudence and discipline requires that you basically make sure that, that you get to a sustainable levels of asset growth before you expand your expense base. And I think though that — that’s very achievable because there’s so many tools and opportunities that exist now to make our operations more efficient. I mean some of the stuff that the artificial intelligence task force is doing is really looking promising, and we’re starting to roll some of those things out into the organization.

The low-code platform, we’re delivering a new product for our clearing customers that will allow them to do more fee business. And that product probably would have taken easily 3x the number of people, 3x is long, but the low-code platform was able to deliver it in around 8 months. So we’re seeing a lot of productivity coming from the technological area. And we’ve done a lot of hiring in these teams, and those teams are still getting up to speed and developing. So I think we’ve really got to be cautious about that. I’ve been telling the team that we really need to keep the type of discipline we showed this quarter keep it going forward and really try to force that unless there’s really great opportunities. And then we can get growth going further, we can continue to do that.

But we had — there’s some positive stuff with respect to AAS is growing now. I see that continuing. That’s a good thing. Getting all those engines kind of ramping up together is going to be important. So we talked about that on the loan side, where some of that term stuff was just a very big, a headwind, that’s starting to go away, at least as a headwind. We’ve got to see if we can get consistent growth there. And so yes, the expense side, we have to be thoughtful about it. And obviously, it’s not like you just grow your expenses when you’re growing your revenue, but you have to be extra thoughtful about it. And we really have done a lot of investment and with the team we have now, including all the developers, there’s a lot of projects we can do.

I mean this quarter; we delivered a ton of stuff and there’s a big effort now to go through and prioritize what we want to do next with that team without having to add a lot more folks and to get to the next set of strategic priorities.

David Feaster: That’s great. And earlier in your prepared remarks, you talked about an increased opportunity for capital deployment. Obviously, we got the ATM offering announced today, maybe reading between the lines, it sounds like there might be incrementally confident that something could happen in calendar 2025. Again, it sounds like the range of opportunities is pretty wide. I’m just curious what types of transactions are most appealing to you at this point? Is it enhancing existing lines, expanding new lines? Just kind of curious within capital deployment, what are — what’s most appealing and what’s most interesting to you?

Gregory Garrabrants: Yes. We like specialty finance businesses that add a unique niche to what we’re doing. Obviously, we have the deposit funding. We’ve got the capital. We’ve got good technological resources. So we look for businesses like that. We bid on one earlier in the year, ended up leasing out to somebody who paid more than I think they should have. But that’s definitely an opportunity. Yes. I don’t — we’re not actively looking at a lot of whole bank stuff right now. But I wouldn’t read too much into the timing of the ATM offering. I think it’s more looking forward and saying that, gee, there’s probably going to be an unfreezing of the bank M&A market. Even when — if another bank buys another bank often, that results in teams being spun off or components and pieces that are pushed out.

So it really is just about having that available. It’s not a costly thing to do. Obviously, we’re not going to draw on it. We’ve got a lot of excess capital. And if we see something that makes sense, then it allows us to get quickly to market to be able to take advantage of it.

Operator: Our next question come from the line of Andrew Liesch with Piper Sandler. Please proceed.

Andrew Liesch: Hey guys, thanks for taking the questions. You’ve answered most of mine, but I just wanted to ask about the provision. You mentioned the quantitative impact of the unemployment rate in commercial real estate mortgage rates, the — preliminary has been pretty stable for a while. So I’m curious how that sort of factored into the reserve build this quarter? And then on the CRE mortgage rates, is it more concern over upward repricing as loans hit the variable rate period, just kind of clarity on why the provision was where it was.

Derrick Walsh: Yes. On the provision, it’s the long-term unemployment. So the model takes into account the long term — a number of different economic factors. And so the long-term unemployment rate, and we use Moody’s for a lot of our data that flows into the model. And so I think it went up from about 9.0 in a — and this is in the most tower of circumstances to in their extreme stressed model that unemployment in the long-term stressed model went from 9 to 9.3. So that was one of the main drivers, and that’s what that reference is encompassing. And then the — your other question was on the commercial mortgage real estate rates. Is that — can you phrase that one?

Andrew Liesch: Well, just along with the provision, I’m just curious, is that — did you mean that as loans reprice high as loans at their adjustable-rate period on ARMs. Is it like repayment concerns based on what you might see the schedule of what’s going to be coming due or hitting their repayment period here in the near future?

Derrick Walsh: Right. Yes. There’s a variety of factors that flow in. But one of the things there that the model considers is how it does, if you have something like a hybrid loan go from a 5% interest rate and it jumps up to 8.5% or something like that, right? That would put stress on that borrower. And in a downturn economic scenario, that borrower would be more likely to default and potentially have a loss. So that’s what the model does. And I think I’ve covered this in the past, but just a refresher. We heavily wait due to our loan-to-value support, right? We have to heavily weight our S3 and S4, and it’s in line with some of our kind of some views that the economic forecast may be, could be a little more dampened than some expect. So we weight that in the models, and that’s part of what drives those — the provision.

Andrew Liesch: Got it. Since the KYC loan purchase, the reserve ratio has been right at like mid-130s level. if you look out, is there anything that’s going to — that would cause that in your mind, if you look at the portfolio now and look at the modeling now that would cause it to differ too much from that, either one way or another?

Derrick Walsh: No, because part of the idea is that we are looking over the life of the loan. And as just mentioned, we already kind of stress in a certain level. It has to be something where you either go back to the roaring 20s or the great depression of the 30s that would change that ratio or a change in the nature of our products and significant changes in the performance of our portfolio. Those are the types of economic scenarios and more independent to our portfolio type of impacts that would have to happen.

Gregory Garrabrants: Yes. I mean on the repricing on the — which is mostly on the term multifamily stuff, we’ve done a lot of analytical work on that and had — we just finished a big independent review of it. And it’s really not a material issue. I think one of the things for us that makes it interesting is that because our portfolio was so short because we had shortened everything up to mostly 2-year but some 3-year we are already experiencing a lot of role and that also results in a lot of prepays. In that business because there are others offering 5/1 ARMs to do that. So we don’t really see a lot on the repricing side and the resell side is all floating rate. So the weeding on the model of really pushing through a lot of the worst economic scenarios is something that allows you to actually get some losses associated with it.

I mean, look, I think that the C&I side is one of those areas that you just have you have less ability to just take the collateral and just liquidate it, right? So that’s always a little more uncertain. But we don’t see anything I’ve talked about a couple of those things, and there’s always a possibility there’s something else, but there’s not seeing anything of systemic or anything like that.

Andrew Liesch: Got it. Very helpful, guys. Thanks so much.

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

Kelly Motta: Hey, good afternoon, thanks for the question. Most of mine have been covered at the point. Maybe turning to the fee income. Greg, I think you mentioned Axos Advisory services is really hitting its stride and gaining new pipe in ordering. As you look ahead with the opportunity, I know this quarter got a little muddled with the MSR impairment. But just on a core basis, your outlook about on these investments ability to grow fee income contribution?

Gregory Garrabrants: Yes. I mean I think the securities business is definitely our best hope for that. And I do believe you’ll continue to see decent, let’s say, this quarter style, it looks like that net new asset growth that will contribute to fee income growth. And the only caveat that I would say about that is that, obviously, if rates stabilize, that’s good. And so what that team’s goal was what they were able to do. As I said, I want you to not only grow and make sure your costs are in line so that you can offset the rate decreases that you have, right, because that business is a rate-sensitive business because they make a decent bit of spread income off of the free cash balances. So that’s the only caveat I would say.

I do think you’re going to grow the core. And so if you get some stability on the rate side, that will be beneficial for that business. All the other little stuff like the prepay income, when you’re not doing term loans, you’re not going to get a lot of prepay income as we start doing some more of those on the multifamily, that may be something. The TM fees, we are obviously doing that, but a lot of that is offset by earnings credits, you give in a higher rate environment. So there’s something there, but it’s not — it really is the security side that has to get better there. And right now, the custody business is growing a lot, the clearing side. We’re continuing to work on a strategy there for them to be able to do more of the hybrids and we’ve got a new platform rolling out this next quarter.

And it will take a while to get that going. But hopefully, both of those engines will start to work, and that will allow that fee income line to grow a little bit more.

Kelly Motta: Awesome. And it sounds like you’re very optimistic about the prospects of organic growth picking up again. Even so, it seems like given your return feels continue to build capital, and I believe you mentioned the buyback in your remarks. Wondering how you’re thinking about the buyback here at one intangible.

Gregory Garrabrants: Yes. Well, I mean, obviously, you look at it as a multiple of earnings, you look at it as a source and uses of capital. And so I would say that I’m optimistic about loan growth returning. You said very optimistic. I’d say, I’ll just give you just flat optimistic. How about that? Look, I think I mean, again, we did $3.5 billion last quarter and grew a couple of hundred. I really do believe we’re going to do better than that. But at times, sometimes it’s just hard to know with — there’s a lot of things changing in the market right now. So there’s just a lot of instability of where a lot of competitors are really hurting for loan growth, sometimes — undercut you, things like that. But I think we will. We’ll kind of let this play out.

Obviously, we’re not going to let capital build forever, right? So this is kind of a sliding scale equation right, between where capital is, what opportunities are out there from a standpoint of acquisition, and then what we see from a repurchase perspective. And so obviously, we’re not going to continue to build capital at these levels forever. But we also want to be able to make sure that we can handle our priorities, which would be primarily organic growth. And then at that point, share repurchases and opportunistic M&A so.

Kelly Motta: That’s helpful. Maybe just last housekeeping question for me. I believe you now expect margin to come in a bit above the 4.25%, 4.35% kind of 4% basis. Wondering if that three I think to 3.5 basis points of accretion contribution if that’s still a good number as well as if you had handy what the accretion contribution was in this quarter, just help of the something of point.

Derrick Walsh: Yes. The 30 to 35 is still a good number. I believe that’s roughly where we were, but I’ll get that number refined for you.

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

Gary Tenner: Thanks. I just had a quick follow-up, Greg. You made the comment that you’ve got some nice deals as you put it in CRESL space that maybe take a liSttle time to fund before — after the equity gets put in. Can you talk about kind of the segments or loan type within CRESL that you’re seeing demand and you’ve got kind of newer money going to work in?

Gregory Garrabrants: Yes. I mean mostly it’s multi and condo. That’s mostly whether bridge or construction. That’s usually where that is. not doing a lot on the office side or next to nothing. I think actually close to nothing. I mean, it’s certainly not anything new, and that’s a very small piece of it. And the that supplement page there really says there’s — every now and then, there may be a hotel here and there, but it’s mostly multifamily and single-family.

Gary Tenner: Is there — I assume it’s metro market weighted? Is it more East Coast oriented or West Coast?

Gregory Garrabrants: It depends. New York has become less of that, more in Florida some in Texas, Southern California. It’s definitely, I’d say, entirely metro market, a couple of Nashville’s. Some of the cities that have kind of come up since the post-COVID time frame and things like that. But that is where there’s projects, where the funds that we work with are together on that because these are almost always partnerships with the funds.

Operator: There are no further questions at this time. I would like to pass the call back over to Johnny for closing remarks.

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

Operator: That concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.