Q1 2024 Axos Financial Inc Earnings Call

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Greetings welcome to access financial Incorporated's first quarter 2024 earnings call and webcast.

At this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll turn the conference over to Johnny Lai Senior Vice President corporate development and Investor Relations. Mr. <unk> you may begin.

Good afternoon, everyone and thanks for your interest in after joining us today for <unk> Financial Inc. First quarter 2024 financial results Conference call are the company's President and Chief Executive Officer, Greg <unk>, and executive Vice President and Chief Financial Officer, Eric well.

Greg and Eric will review and comment on the financial and operational results for the three months ended September 30th 2023, and we will be available to answer questions. After the prepared remarks.

Before I begin I would like to remind listeners that remarks made on this call may contain forward looking statements that are subject to risks and uncertainties.

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 <unk>.

Our investor presentation for additional detail.

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

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

All of the documents, including the earnings press release, and 10-Q and earnings supplement can.

It can be found on our on.

On the actual financial website with that I'd like to turn the call over to Greg for opening remarks. Thank.

Thank you John and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access financial conference call for the first quarter of fiscal 'twenty 'twenty four and at September 30 of 2023. Thank you for your interest in access financial and access that.

We generated double digit year over year growth in earnings per share book value per share ending loan and deposit balances for our fourth quarter.

For four consecutive quarters broad based loan growth coupled with net interest margin expansion resulted in double digit net income growth year over year.

Linked quarter annualized we grew deposits by approximately 440 million linked quarter. Despite intense competition for deposits in the execution of our previously announced exit of approximately 235 million of deposits for cryptocurrency additional asset complex. We reported net income of 83 million and earnings per share of $1.38 for the.

Three months ended September 30 of 2023, representing year over year growth of 42% freight our book value per share was $33 78. Since September 30 of 2023, 19% for September 30th 2022.

Other highlights this quarter I'll say the following.

Ending loans for investment balances were 17 billion up 3% linked quarter at 12% annualized growth was broad based with press and CNI loans single family Jumbo mortgages and single family warehouse offsetting deliberate run offs of auto multifamily and small balance commercial real estate loans the acquisition of the L. D Marine finance business.

Added approximately $15 million of Floorplan loans in the quarter ended September 30 of 2023.

Net interest margin was 4.36% for the first quarter ended September 32023 of 17 basis points from four point or 9% in the quarter ended June 32023.

10 basis points from 42, 6% in the quarter ended September 30 of 2022.

Net interest margin, despite holding excess liquidity for a third consecutive quarter.

So security is comprised.

Primarily if our custody and clearing businesses had another strong contribution to our net income broker dealer fee income increased 36% year over year due to higher interest rates and increased client activity advisory fee income increased 18% year over year due to higher mutual fund fees and higher average assets under custody.

Pre tax income for our Securities business was $12 6 million in the first quarter of 2024 up 41% from the corresponding period a year ago.

Our credit quality remains strong with net annualized charge offs to average loans of four basis points in the three months ended September 30 of 2023 of the four basis points of charge offs two basis points from auto loans that are covered by insurance policy it's not.

Nonperforming loans as a percentage of total loans improved from seven 8% in the comparable quarter.

September 32000, 22.62%, but up from five 2% in the prior court.

A few loans in our jumbo single family mortgage and commercial real estate portfolios, resulting in a small sequential increase in our nonperforming assets nonperforming loans are reasonably well secured by the crowds just the value of the underlying properties.

Our capital levels remain strong with tier one leverage of nine 9% at the bank and nine 3% at the holding company, both well above our regulatory requirements, we repurchased approximately 25 million of common stock in the first quarter. In addition to the 18 million, we repurchased in the prior quarter to take advantage of the armed forces are declining.

Our share price. This brings our total share repurchases through September 30 at 74 million at an average share price of $37 47 per share representing three 3% of the shares outstanding at 12 31 2022.

From October one to October 20, <unk>, we repurchased an additional $35 $2 million of stock representing one 6% of the shares outstanding at September 30 of 2023 at an average share price of $36.55, we have approximately $44 million remaining on our share repurchase authorization.

As of October 20, <unk> 2023, with our consistently high returns and strong capital position. We continue to believe that buying back our stock at these attractive valuations is a prudent use of excess capital generated by our strong earnings.

We grew ending loan balances of 11% year over year in the first quarter loan growth was a bit back ended loaded this quarter as several large commercial deals closed in the last months of the court.

We had strong originations in our real estate and non real estate lender finance and asset backed lending groups, including our capital call lines single family mortgages grew.

Net ending loan balances by 95 million, despite the tough environment for purchase and refinance activity in the single family mortgage market.

We continue to reduce our multifamily small balanced commercial real estate and auto loan balances given our preference for originating and retaining allowance with lower durations floating rates and a better risk adjusted return in the current environment at September 32023, approximately 61% of our allowance for flooding, 32% were hybrid five.

One of the arms and 7% were fixed the average duration of our commercial loan portfolio was only two years with multifamily being the longest had an average of less than three years. The vast majority of our commercial specialty real estate and lender finance portfolios.

Floating rate with contractual maturities of less than three years.

Loan yields for the three months ended September 30 of 2020 for what 785% up 34 basis points from 751% in the prior quarter and up 220 basis points from the corresponding period a year ago.

We have successfully remixed our loan portfolio as rates continue to rise by replacing lower yield hybrid loans with higher yielding adjustable rate loans, our New York loan yields this quarter were the following single family mortgages eight final, 6% multifamily, 858% C&I nine point or 9% in Otto 10.3.

4%.

Our commercial real estate loans continue to perform well the low loan to value and senior structures. We have in place for an overwhelming majority of our commercial specialty real estate loans provides us significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay the valuation of the underlying properties, our cost overruns or project delays.

Of the $5 5 billion of commercial specialty real estate loans outstanding as of September 30 of 2023 multifamily was the largest segment representing 33% of total loans, while hotel office and retail represent 19%, 8% and 4% respectively on a consolidated basis, the weighted average loan to value of our commercial.

Specialty real estate portfolio was 41% for the retail and office segment of the commercial real estate loan book, the weighted average loan to value was 43% and 38% respectively.

Total commercial real estate loans secured by office properties declined by 96 million linked quarter to 456 million to large office loans paid off this quarter totaling approximately $100 million of the four.

One is what are the 456 million in commercial real estate specialty loans secured by office properties at the end of the quarter, 70% or a notes are node on node structures all of a significant subordination with some having recourse to funds of cross collateralization with other asset types from fund partners and mezzanine lenders.

Loans have an average loan to value ratio of 38%, excluding the recourse and cross Collateralization and commercial specialty real estate portfolio, we had approximately $26 million of nonperforming loans at September 32023, representing 42 basis points of the total CRE loans outstanding currently with respect to these two loans were.

We're working with the borrowers and the mezzanine lenders who are either putting in new money. Currently are in the process of working with our borrowers to provide additional support in both cases, we believe we will not incur significant losses, if we acquire any at all given the current unexpected commitments from the subordinate capital and the borrowers.

Nonperforming loans in our multifamily and commercial mortgage portfolio increased by $3 7 million to $38.8 million in the September quarter. The largest nonperforming loan in this category is a $25 million allowance for an assisted living facility in van Nuys, California and theirs.

Been included in our nonperforming loans since the fourth quarter of 2022, we filed a notice that so far closed four months ago and recently filed the notice itself.

He has an appraised value of $27 million and we have over $5 million Atlanta crude defaulted interest in this lull. We also have personal guarantees from the two principal owners of this property.

Multifamily and commercial mortgage with an outstanding principal balance of 5 million became delinquent. This quarter. The guarantor has provided 750000 principal curtailments. Since 831 23, the guarantor has a net worth of over $100 million. The only other meaningful new nonperforming loan in the multifamily and commercial category. It was a 1.3.

Darla and on a multi tenant retail building in San Diego the loan to value was 34% and the debt service coverage was 152, although we cannot be certain we do not expect to incur a material loss of any of these aspects I've asked that these asset backed loans currently categorized as non performing.

We had another strong quarter of deposit growth with ending balances increasing by 443 million from June 32023, or 10% annualized checking and savings accounts represent 94% of total deposits at September 32023 grew even faster at a 16% annualized pace.

Deposits remained well diversified from a business snacks perspective, with consumer and small business, representing 59% of total deposits commercial cash Treasury management, and institutional representing 19% commercial specialty 6% access fiduciary services, 6% and access securities, including custody and clearing 5% our total noninterest.

Just bearing deposits were essentially flat quarter over quarter with ending balances of approximately $2 nine building billion, while the number of accounts increased approximately 2% linked quarter, reflecting growth in various commercial deposit verticals. Excluding the divestiture of approximately 235 million of deposits related to operating an institutional accounts.

It'll asset companies total noninterest bearing deposits were up approximately $235 million from June 30 of 2023 to September 30 of 2023.

Due to recent regulatory changes in the landscape for U S banks and digital asset companies, we completed our previously announced exit of our small business incubator.

First of all like you paid or deposit gathering business. That's focused on selected digital asset companies such as exchanges brokers and firms engaged in activities related to not fungible tokens, given recent panther buying down short sellers about our alleged exposure to crypto currency companies, particularly binance dot com I'll provide a factual summary of our brief involvement in.

This business.

Access has never had any relationship we're open to any accounts from finance Dot com. The global exchange between March 14th 2023 August 10th 2023 access maintained limited purpose accounts from finance U S. Since license subsidiaries wholly different entities and finance Dot com. The initial contact with finance U S began.

After silver gate and signature bank failed J&J entire Purion finance U S accounts for open access maintain strict risk controls and transactional restrictions, including but not limited to consult to ensure that no transaction for process between finance U S and finance dot com or its controlling shareholder.

Significant finance Dotcom U S counterparties require preapproval from the bank's risk and compliance teams prior to any transaction activity being processed.

<unk> activity within these accounts was primarily limited to payroll.

Rents and other similar routine business expenses of the type that any business would need to process individuals' retail customer funds were not permitted to be deposited into any of these accounts.

Access is internal risk assessment of the digital asset business concluded that the regulatory trailing for retail accounts was indeterminable and therefore cannot meet the bank's client acceptance criteria. Accordingly access did not process retail customer accounts are processed retail customer wallet transactions from finance U S. This restrictions severely limited the number of Counterparties.

With accessories required intelligence.

Previously stated access process no transactions between finance Dot Com and global exchange and Finance U S. Prior to opening the finance U S accounts access performed significant due diligence, including by way of example, I'm not limitation a comprehensive review of corporate Foundation documents prior bank statements financial reports and transaction Counterparties.

Baltimore, BSA, and AML, or fac, and CFT tools, including churn analysis blockchain surveillance software.

Following the FCC's action against Finance U S access reassess the regulatory landscape for the crypto currency in digital asset businesses in the U S and exited our small incubator deposit gathering business for digital asset companies that included exchanges brokers and firms engaged in activities related to digital coins, including all business with finance U S.

Access never extended credit to finance U S or any other company involved in crypto currency of digital assets and that breaks out the digital assets or cryptocurrency as loan collateral if any credit or law made.

As such access never had currently does not have any risk of loss in connection with digital assets in crypto currencies are entities participating in cryptocurrency related businesses within the bank's long standing trust and fiduciary deposit verticals access managers, an immaterial amount of bankruptcy trustee deposits related to fail to cryptocurrency and digital asset businesses.

That has filed for bankruptcy protection or some other form of corporate restructuring and are managed by trustees are fiduciaries access had no deposits with finance U S. After it exit exited from their relationship on August 10th 2023.

All access invested to build technologies related to it some stable client ask PE and real time payment technologies. The products and services was never launched I know customers are allowed to access the network that was under construction no payments wherever process for any third party on such network access never operated any real time payment networks based on block chain technology.

Allergies are on stable client or other crept out network.

Also never offered any direct to consumer services related to cryptocurrency trading non fungible tokens or other digital assets.

The granularity and diversity of our deposits, particularly consumer savings and money market accounts provides us the flexibility to match the duration of the cost of our funding to the duration and cost of our adjustable on hybrid loans. This quarter. Our consolidated net interest margin was 436%, while our bank only net interest margin was 454, 6%.

Our consolidated and bank only net interest margins were above our guidance of four point to five to 4.35, despite maintaining a higher level of excess liquidity. Then we have maintained historically total ending deposit balances that access advisory services, including that was on and off access as balance sheet declined by $50 million in the quarter an improvement from 800.

$88 million decline in the prior quarter and a $383 million decline in the quarter ended March 30 of 2023, we believe that the pace of cash sorting at access advisory service have stabilized at or near the bottom representing four 5% of assets under custody as of September 32023, compared to the historic.

A 6% to 7%.

In addition to our access securities deposits on our balance sheet and approximately $515 million of deposits off balance sheet partner banks and another $750 million of deposits held at other banks by software clients and has seen us accounting and deposit business to match the vertical.

We are starting to see increased traction in deposit inflows from teams, we hired over the past six months and from newer commercial deposit verticals as.

As we slowly unwind, our excess liquidity and grow deposits from lower cost sources, such as our commercial Treasury management access fiduciary services access advisory services and other sources.

We feel confident in our ability to maintain onshore 0.25% to 43, 5% net interest margin guidance for the next few quarters.

Our profitability liquidity balance sheet positioning and growth outlook all remain favorable we completed a strategic acquisition of the Marine finance business named.

[laughter] Lovick tire in the September quarter. This transaction added approximately 50 million of marine Floorplan loans, a $500 million servicing portfolio of retail malines marine loans held by purchasers of those lines and a dedicated team of more with more than 15 years of experience in the marine finance industry.

This acquisition provides us with another specialty lending vertical with attractive risk adjusted returns, particularly in the dealer floor plan lines of credit segment, our relationships with leading boat manufacturers and dealers in high net worth retail customers provide tremendous cross sell opportunities for our consumer and commercial bank. We are excited to welcome the <unk> team to access.

Yes.

From a technology perspective, we continue to invest in front and backend systems infrastructure security and other enterprise software and systems that will further optimize our business and functional units, we lost our universal digital bank to point out the latest version of our consumer and mobile banking application in September the platform has new features and functionality in it.

Better more integrated user experience across all consumer lending deposits and securities products. It's only been a few months to where we're seeing good engagement with our new consumer banking application from new and existing customers.

Banking for registered investment advisors, and introducing broker dealers continues to make progress with a beta launch expected in the next three to six months at our recent advisor event earlier. This month, we received tremendous interest in our white label banking solution over time, we believe the ability to leverage our relationships with advisors and broker dealers to cross sell access consumer.

Posits and lending products will be a good source of incremental growth.

It was clearing which includes our correspondent clearing and custody business continues to make steady progress noninterest income from the securities business increased 18% year over year to $34 $6 million. The primary drivers of growth in fee and pre tax income tracks. Our securities is higher interest rates total deposits with access clearing was one 6 billion.

As of September 32023, essentially flat from $1 6 billion as of June 30 of 2023 of the $1 $6 billion of deposits from access clearing approximately 1 billion was on our balance sheet and a $550 million were held at partner banks net new assets in our custody business increased by a pricing.

$163 million three months ended September 32023, the pipeline for new custody clients remains healthy comprised of 11 advisory firms with more than $700 million of combined assets under custody.

This MRI alright is considering an alternative custodian and moving some or all of their assets from Schwab TD ameritrade to us.

We remain focused on executing our strategic and operational initiatives. We are in a better position today relative to others. Because we are more diverse and we did not make critical mistakes that others have with strong liquidity and capital at de Minimis unrealized loss on our small investment securities portfolio and solid growth prospects given the diverse nature of our <unk>.

Banking and securities businesses, we're operating from a position of strength relative to our competitors.

Our returns credit in March and our best in class, because we focused on asset based lending opportunities with the best risk adjusted returns.

Structured deals with low leverage and credit enhancements, we continue to evaluate opportunistic asset and business practices such as the ELV Marine Finance acquisition, we closed in the September quarter, we will deploy our capital judiciously between internal investments accretive acquisitions of businesses and talent and opportunistic share buybacks we are.

All positioned to maintain strong profitability and EPS growth irrespective of the interest rate regulatory or economic environment.

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

Thanks, Greg.

To begin I'd like to highlight that in addition to our press release and 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through Edgar or through our website at access financial Dot com.

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

Following a strong start to our fiscal year, our outlook remains consistent with what we have guided to in recent quarters.

We believe that we will be able to grow loans by high single digits to low teens year over year and maintain our net interest margin in the range of four to five to $4 35 per cent for the next few quarters.

Our loan growth outlook is based on broad based increases in our asset base lending lender finance and capital call lines.

Partially offset by declines in single family warehouse multifamily small balanced commercial auto and personal unsecured loan balances.

We continue to see banks and non banks pull back or exit many lending areas. We are in such as lender finance and note on note commercial lending.

Our market share gains have been partially offset by higher levels of prepayments in our C&I book, given the shorter duration for these loans.

We are also seeing a more pronounced pullback in loan demand as developers and borrowers reassess their return objectives in a higher rate environment and a slowing economy.

That said, we continue to identify strong credits and our loan pipeline remains solid at $1.6 billion as of October 20th 2023.

Operator: . [inaudible] .

Insisting of $238 million of single family residential jumbo mortgage.

<unk> million dollars of agency gain on sale mortgage.

$44 $2 million of multifamily and small balance commercial mortgage.

$63 million of auto and consumer.

And one point to $8 billion across the commercial platform.

Our NIM guidance reflects higher yields from new loans, replacing lower yielding hybrid loans offset by rising deposit costs. It also assumes that aaas deposit balances bottom at current level.

At current levels and grow gradually driven primarily by net new asset growth not any material reversal in cash sorting.

One factor that could impact our net interest margin in the December 2023 quarters, the timing of expected loan payoffs and new loan originations. Our base case assumes the majority of loan payoffs occur earlier in the quarter and new loan originations ramped throughout the quarter.

We expect to maintain some excess liquidity, given the uncertain economic geopolitical and industry and industry environment.

Total noninterest expenses increased by $8 million or seven 2% to $125 million in the three months ended September 32023, compared to the quarter ended June 30th 2023.

Professional services expenses were up by $3 $8 million or 64% on a linked quarter basis as we return to a more normal run rate with additional seasonal impacts in Q1 tied to supporting fiscal year, Andrew reporting activities.

Advertising and promotional expenses were up by $2 $3 million or 28% from the linked quarter due to an increase in deposit marketing expenses as competition remained strong for deposits.

Salary and benefits expenses increased by $1 $3 million, primarily as a result of new team member additions as we continue to take advantage of broader dislocations in the industry and attract top talent in key growth areas and in small part due to merit increases, which will have a full rate next quarter.

We expect noninterest expenses to grow sequentially at our historical average growth rate as we continue to invest in people and growth engines of our business.

Our income tax rate was 30.05% for the first quarter ended September 32023 up from 25, 3% for the fourth quarter ended June 30th 2023, and up from 29, 5% in the first quarter of 2022 as.

As we discussed last quarter, our income tax expense in the fourth quarter of 2023 included $5 $2 million of primarily onetime tax credits equal to approximately <unk> <unk> 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 16, 9% and our return on average assets was 164% for the three months ended September 30th 2023.

Even missed our share repurchases over the quarter tier one leverage capital to average assets was 92, 7% at September 30th.

Gregory Garrabrants: . Ending net loans for investment balances were $17 billion, up 3% link quarter or 12% annualized. Growth was broad-based with growth in CNI loans, single-family jumbo mortgages, and single-family warehouse, offsetting deliberate run-offs of auto, multi-family, and small-balance commercial real estate loans. The acquisition of the LV Marine Finance business added approximately $50 million of floor plan loans in the quarter-ended September 30, 2023. Net interest margin was 4.36% for the first quarter-ended September 30, 2023, up 17 basis points from 4.19% in the quarter-ended June 30, 2023, and up 10 basis points from 4.26% in the quarter-ended September 30, 2022.

<unk> to $8, 96% at June 30th.

Total capital to risk weighted assets for access financial was 14.06% at 932023 up from $13 eight 2% at 630 'twenty to 'twenty three.

We continue to hold excess capital at access financial and access bank, even after our opportunistic share repurchases solid loan growth and continued investments in our business.

We are confident that our model of strong liquidity and high return possessions.

Hi returns positions us well to generate consistent profitable loan growth growth with that I'll turn the call back over to Johnny.

Gregory Garrabrants: We've ruined net interest margin despite holding access liquidity for a third consecutive quarter. Axos security is comprised primarily of our custody and clearing businesses had another strong contribution to our fee and net income. Broker Diller fee income increased 36% year-over-year due to higher interest rates and increased client activity. Advisory fee income increased 18% year-over-year due to higher mutual fund fees and higher average assets under custody. Quarterly pre-tax income for our securities business was $12.6 million in the first quarter of 2024 up 41% from the corresponding period a year ago.

Thanks, Eric operator, we're ready to take questions.

Thank you.

At this time well be conducting a question and answer session if.

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Gregory Garrabrants: Our credit quality remains strong with net annualized charge-off to average loans of four basis points in the three months and in September 30, 2023. Of the four basis points of charge-off, two basis points were from auto loans that are covered by insurance policies. Non-performing loans is a percentage of total loans improved from 0.78% in the comparable quarter and in September 30, 2022 to 0.62% but up from 0.52% in the prior quarter.

Thank you and the first question today comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.

Hey, guys good afternoon.

Andrew Yes.

On the.

This year it sounds like Youre not going to see any.

Coffee or anything or good quarter did seem a little bit outside.

It's kind of like the new run rate.

Patiency ratio did tick up to 49% I guess, how should we be looking at going forward is.

Gregory Garrabrants: We'll have a few loans in our jumbo single-family mortgage and commercial real estate portfolios resulted in a small sequential increase in our non-performing assets. These non-performing loans are reasonably well secured by the current and just the value of the underlying properties. Our capital levels remain strong with tier one leverage of 9.9% at the bank and 9.3% at the holding company, both well above our regulatory requirements. We were purchased approximately 25 million of common stock in the first quarter.

I mean it.

Revenue can be growing fast enough to get that back down to that 48% number or is it kind of where we should be looking at here going forward.

I think the efficiency ratio should generally be between 48, 5% to 50% would be that that's the range that it'll operate and to your point it will depend on the.

From quarter to quarter as far as some of the timing of the as we referenced some of the loan growth and the timing of the interest income recognized related to that.

Gregory Garrabrants: In addition to the 18 million, we were purchased in the prior quarter to take advantage of the warranted decline in our share price. This brings our total share repurchased through September 30th to 74 million at an average share price of $37.47 per share, representing 3.3% of the share's outstanding at 12.31, 2022. From October 1st to October 20th, we were purchased an additional 35.2 million dollars of stock, representing 1.6% of the share's outstanding at September 30th, 2023 at an average share price of $36.55.

We also have narrowed down our classes are merit increases higher in June so so that this quarter yes.

Yes.

September yet.

<unk> made a message Jim but by the time they were all through there in late September. So that's what I was referencing and so that's what's going to kind of keep us towards that that 49 end of the range right, but the is that that salaries and benefits. We do expect to increase as a full merit increase comes in.

Gregory Garrabrants: We have approximately $44 million in our share repurchased authorization as of October 20th, 2023. With our consistently higher returns in strong capital position, we continue to believe that buying back our stock at these attractive valuations is a prudent use of excess capital generated by our strong earnings. We grew ending loan balances 11% year over year in the first quarter. Loan growth was a bit back and it loaded this quarter as several large commercial deals closed in the last month of the quarter.

The second quarter.

Got it alright, that's helpful.

And then just looking into the 10-Q.

Like never some credit migration with an increase in Beckman Shannon pub standard common.

Multifamily and commercial real estate and C&I, just any comment there on what what might be causing that and.

Yeah, Yeah, I'll leave it there.

Yeah no.

Gregory Garrabrants: We had strong originations in our real estate and non-real estate lender finance and asset back lending groups including our capital call lines. Single-family mortgages grew net ending loan balance was by 95 million, despite a tough environment for purchasing refinance activity in the single-family mortgage market. We continue to reduce our multi-family small-balanced commercial real estate and auto loan balances given our preference for originating and retaining loans with lower durations, floating rates, and a better risk adjusted return in the current environment.

It's not that.

Significant but.

Yes.

Those things are often moving in and out and anytime we see anything that.

For example on the <unk>.

On some of the substandard side it just may be if.

If a project is slightly delayed or something like that so there's nothing really that we see that.

You know of any significant.

Set of concerns with respect to any actual loss content and.

Gregory Garrabrants: At September 30th, 2023, approximately 61% of our loans were floating. 32% were hybrid 5.1 arms and 7% were fixed. The average duration of our commercial loan portfolio was only two years with multi-family being the longest at an average of less than three years. An vast majority of our commercial specialty real estate and lender finance portfolios floating rate with contractual maturities of less than three years. Average loan yields for the three months and in September 30th of 2024 was 7.85% of 34 basis points from 7.51% in the prior quarter and up 220 basis points from the corresponding period a year ago. We have successfully remixed our loan portfolio was raised continue to rise by replacing lower yield hybrid loans with higher yielding adjustable rate loans.

We've been as I said on the in the prepared remarks.

We were getting on the <unk>.

Every cross a lot of it is there's two that are that are actually delinquent there.

One UBS O'connor is the Mezz and they are still supporting it.

And so we've decided to sit still and let them continue to support the property. It is.

Close to being finished in some very nice condominiums in Greenwich village and New York.

I don't think we'll have any loss there is it possible.

A little maybe but nothing much.

And then the other one is also.

Is that being supported by the Mezz and Theyre going to put more money in and Theyre working with a bar at this time and so we're just kind of hanging out there and so obviously, we could take more aggressive action.

Gregory Garrabrants: Our new loan yields this quarter were the following. Single-family mortgages, 8.06%, multi-family, 8.58%, C&I, 9.09%, and auto, 10.34%. Our commercial real estate loans continue to perform well. The well-known to value and senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provide this will significant downside protection in the event of a significant deterioration in the borrowers ability or willingness to repay. The valuation of the underlying properties or cost overruns or project delays.

Those cases, but given the fact that everybody is behaving nicely who has much more at risk than we do.

We think it's the right thing to sit on that.

And so it just really depends because most of the time our notes are quite sellable. So if we feel like we want to sell a note or something we usually can.

I don't think that's changed so this is just you know nothing nothing of any real significance.

Gregory Garrabrants: Of the 5.5 billion of commercial specialty real estate loans outstanding as the September 30, 2023, multi-family was the largest segment representing 33% of total loans. While hotel office and retail represent 19%, 8% and 4% respectively. On a consolidated basis the weighted average loan to value of our commercial specialty real estate portfolio was 41%. For the retail and office segment of the commercial real estate loan book, the weighted average loan to value was 43% and 38% respectively.

Or anything that I'm looking at and saying Wow.

This may translate into some significant loss content.

Got it.

Very helpful. Thanks for taking the questions here.

Thank you.

Our next question is coming from the line of Tim Sweitzer with K B W. You see with your question.

Hey, I'm on for Mike Perito, Thank you for taking my questions.

Hey, Tim.

I had a couple of questions about your.

Gregory Garrabrants: Total commercial real estate loans secured by office properties declined by 96 million in length quarter to 466 million. Two large office loans paid off this quarter totaling approximately 100 million dollars. Of the 46 million commercial real estate specialty loans secured by office properties at the end of the quarter, 70% are A-nodes or no-don node structures, all the significant subordination with some having recourse to funds across collateralization with other asset types from fund partners and mezzanine lenders.

Asset sensitivity here at this stage of the cycle I was looking at slide three and you guys are earning presentation and you guys do good job putting out you're at your maturities over the next few years.

You are you able to help on that.

Quantify maybe what's the loan yields are.

These maturing loans over the next year or so.

You guys called out.

Yeah, well I don't know if you have the I have I can give you a generalized numbers do you have an exact Glenn it's Eric I'm going to give sort of general.

Gregory Garrabrants: These loans have an average loan to value ratio of 38% excluding the recourse across collateralization. In the commercial specialty real estate portfolio, we had approximately 26 million of non-performing loans at September 30, 2023, representing 42 basis points of the total seary loans outstanding. Currently, with respect to these two loans, we're working with the borrowers and the mezzanine lenders who are either putting in new money currently or in the process of working with the borrowers to provide additional support.

So there really are so there really are so let's talk about the loans that are hybrid loans. Those consists of two primary categories. One is single family and the other is the sorry multifamily smaller balanced commercial we shorten those the multifamily and small balance commercial up from five.

One arms to three one arms several years ago. After new originations. So that book is really repricing relatively quickly in general you might take loans that are sort of in mid fives, and you're repricing them all the way up to eight eight and a half or nines now.

Gregory Garrabrants: In both cases, we believe we will not incur significant losses if we occur any at all given the current and expected commitments from the subordinate capital and the borrowers. Non-performing loans in our multi-failment commercial mortgage portfolio increased by 3.7 million to 38.8 million in the September quarter. The largest non-performing loan in this category is a 25 million dollar loan to an assisted living facility in Van Ayes, California, but has been included in a non-performing loan since the fourth quarter of 2022.

You know, we've we're looking a lot of times they'll run off at that point in time and to simply pay off we've done an analysis of looking at those in and where they are coming through so there is a net benefit to us that will accrue associated with that particularly that portfolio repricing.

Gregory Garrabrants: We filed a notice, that's a foreclose, four months ago, and recently filed a notice to sell. The property has an appraised value of 27 million dollars, and we have over five million dollars have unaccrued defaulted interest in this month. We also have personal guarantees in the two principal owners of this property. One multi-failment commercial mortgage with an outstanding principal balance of five million became the link with this quarter. The guarantor has provided 750,000 in principal curtailments since 831 by 23.

I think we've made the right moves to shorten those deals at the generally competitor banks were more in that five to seven to 10 range and we were more in that three range with a little creep to five and Thats five was really kind of sunset. It more years ago. So I think thats pretty good and then on the single family side.

Those were all five one arms I wanted to shorten them, but you actually can't because if they're not at least five years you have to price them at the rate cap from a from a DTI perspective, which is kind of a regulatory.

Gregory Garrabrants: The guarantor has a net worth of over 100 million dollars. The only other meaningful and new non-performing loan in the multi-failment commercial category was a 1.3 million dollar loan on a multi-tenant retail building in San Diego. The loan value was 34% and the debt service cover is 1.52. Although we cannot be certain, we do not expect to incur a material loss in any of these assets that these assets back loans currently categorized as non-performing.

Saying that makes doesn't make a lot of sense, but in any event. It kind of precludes you from doing shorter than five one arms.

Those you can sort of see it in the chart there but to give you some flavor of it let's say those would be like another five five to $5 three yes that sort of thing and they are repricing and they'll reprice into the eights and nines as well.

Gregory Garrabrants: We had another strong quarter of deposit growth with ending balances increasing by 443 million from June 30, 2023 or 10% annualized. Checking and savings accounts represent 94% of total deposits of September 30, 2023 grew even faster at a 16% annualized pace. Our deposits remain well-diversified from a businessmex perspective with consumer and small business representing 59% of total deposits, commercial cash, treasury management and institutional representing 19%, commercial specialty 6%, exos producerry services 6% and exos securities including costing and clearing 5%.

And that will they are a little bit heavier.

In out years, though because because we had so many prepays in that really low rate that low rate environment and the COVID-19 period that some of the new originations are a little more stacked. So you might make an argument that lets say that five one arms there is 20% repricing.

A year every year, you can think of it but thats not right. It's much more push towards those sort of out years now I think that being said if you and then auto auto was just the auto loans are a little bit longer duration, but theyre prepaying rapidly and those are prepaying and let's say their let's say their five ish percent.

Gregory Garrabrants: Our total non-interest bearing deposits were essentially flat quarter over quarter with ending balances of approximately 2.9 billion or the number of accounts increased approximately 2% length quarter reflecting growth in various commercial deposit verticals. Excluding the divestiture of approximately 235 million of deposits related to operating in institutional accounts for digital asset companies, total non-interest bearing deposits were up approximately 235 million from June 30, 2023 to September 30, 2023. Due to recent regulatory changes in the landscape for US banks and digital asset companies, we completed our previously announced exit of our small business incubator, of our small incubator deposit gathering business that focused on selected digital asset companies such as exchanges, brokers and firms, engage in activities related to not-fundable tokens.

And then we're just letting that book drop and when we're originating were run at originating at.

Above 10, so I think what is good about this is that if if sometimes there's this worry that I hear analysts talk about that.

You know that.

What happens is you end up at the end of the rate cycle, where all your all your adjustable loans have repriced and then youre. The only thing. That's left is for your deposits to sort of creep up and sort of reduce your NAV, but that's not what we have to look forward to actually we actually have.

Something different and look forward to we have to look forward to the fact that we're going to get these hybrids to reprice correct pretty quickly because we made reasonably good decisions about the structure of those loans and so those will reprice and then additionally, as we grow almost all the new loans that are coming on or adjust.

Gregory Garrabrants: Given recent banter by known short sellers about our alleged exposure to cryptocurrency companies, particularly Binance.com, I'll provide a factual summary of our brief involvement in this business. Access is never had any relationship or opened any accounts for Binance.com, the global exchange. Between March 14, 2023 and August 10, 2023, access maintained limited purpose accounts for Binance US and selected subsidiaries, wholly different entities than Binance.com. The initial contact with Binance US began after Silvergate and signature bank failed.

The bill rate loans, and so they do have floors often those floors.

<unk> are good and sometimes they're not as good as far as for us, but they do have some floor you say embedded in them with respect to sofa to limit our downside risk. So I think if where your questions going is for a little bit of flavor around are we going to have this sort of end of <unk>.

Gregory Garrabrants: During the entire period when Binance US accounts were open, access maintained strict risk controls and transaction restrictions, including but not limited to, controls to ensure that no transactions were processed between Binance US and Binance.com or its controlling shareholder. All significance, Binance.com, US counter parties, required pre-approval from the bank's risk and compliance teams prior to any transaction activity being processed. The approved activity within these accounts was primarily limited to payroll, Rance and other similar routine business expenses of the type that any business would need to process.

Cycle compression in Nims I think we will.

But I don't think its going to be significant and I don't and I think we have a lot of offsetting factors.

<unk> with that they can aid us and I think it's going to really be more about credit spreads on new originations given that we have such a relatively quick cycle time for our existing commercial book.

Gregory Garrabrants: Individual retail customer funds were not permitted to be deposited into any of these accounts. Axos's internal risk assessment of the digital asset business concluded that the regulatory trading for retail accounts was indeterminable, and therefore cannot meet the bank's coin acceptance criteria. Accordingly, access to non-process retail customer accounts or process retail customer wallet transactions for Binance US. This restriction severely limited the number of counter parties that Axos was required to diligence. As previously stated, Axos process no transactions between Binance.com and global exchange and Binance US.

Okay, Yeah that makes sense on your last point and I was actually going to maybe take this a step further along the cycle. If we get to where you know maybe the fed begins to cut rates sometime and you know in the next year or so if that occurs like how how would how do you think you guys are positioned like what's your sensitivity to rate cuts.

Well.

It depends on the.

It depends on the the asset so all single family loans have a floor at the start rate that are originated itself you originated in the eights theyre not going down I think let's take so let's talk about Florida for a second and then I'll talk about borrower behavior. So we do put floors in certain things, but a cap.

Gregory Garrabrants: Prior to opening the Binance US accounts, Axos performed significant due diligence, including by way of example, on not limitation, a comprehensive review of corporate formation documents, prior bank statements, financial reports and transaction counter parties, utilizing multiple BSB and AML OFAC and CFT tools, including chain analysis block chain surveillance software. Following the FCC's action against Binance US, Axos reassessed the regulatory landscape for the cryptocurrency and digital asset businesses in the US, and exited our small incubator deposit gathering business for digital asset companies that included exchanges, brokers, and firms engaged in activities related to digital coins, including all business with Binance US.

Call facility for example is going to have a 1% sulfur floor others. Other loans, let's say certain cross sell deals might have a four or three 5% sulfur floor. So there is there is some compression that occurs immediately and a reduced short term rate environment associated with those loans we've.

Kept our deposit base.

You know in a way that we can reprice. It. The question is always what's the demand for deposits at that time, and what does that repricing due.

Gregory Garrabrants: Axos never extended credit to Binance US or any other company involved in cryptocurrency or digital assets, and never accepted digital assets or cryptocurrency as loan collateral for any credit or loan made. As such, Axos never had and currently does not have any risk of loss in connection with digital assets or cryptocurrencies, or any of these participating in cryptocurrency related businesses. Within the bank's long-standing trustee and fiduciary deposit verticals, Axos manages an immaterial amount of bankruptcy trustee deposits related to failed cryptocurrency and digital asset businesses that are filed for bankruptcy protection or some other form of corporate restructuring and are managed by trustees or fiduciaries.

To your ability to grow deposits et cetera, right now we're pretty diverse business.

Did we did grow.

Noninterest bearing deposits by over $200 million this quarter, if you exclude the.

The runoff that we.

Pushed out on the digital asset side. So there is good stuff happening there and that all blends together and if you don't if you look at that you say you grew that by that amount of money and grew loans by 500.

It's kind of pretty good actually right. So there is there's good stuff happening. There. So these things are all kind of going to come together, but if somehow there was a massive demand for deposits and we werent able to cut any deposit rates and still grow and rates came down on that short side, we might see.

Gregory Garrabrants: Axos had no deposits with Binance US after it exited from the relationship on August 10, 2023. While Axos invested to build technologies related to its own stablecoin tax pay and real-time payment technologies, the products and service was never launched and no customers were allowed to access the network. It was under construction. No payments were ever processed for any third party on such network. Axos never operated any real-time payment networks based on blockchain technologies or on stablecoin or other crypto network.

A little compression, but I think the other question that.

The issue that could arise as you have floors on these loans if that if the if the market rate falls very much below the floor rate that you could see prepayments too right. So I mean I think you.

Gregory Garrabrants: Axos also never offered any direct to consumer services related to cryptocurrency trading non-fundable tokens or other digital assets. The granularity and diversity of our deposits, particularly consumer savings and money market accounts, provides us with flexibility to match the duration of cost of our funding to the duration of cost of our adjustable and hybrid loans. This quarter our consolidated net interest margin was 4.36% while our bank-only net interest margin was 4.46%. Our consolidated and bank-only net interest margins were above our guidance of 4.25 to 4.35, just by maintaining a higher level of exf liquidity than we have maintained historically.

Realistically, we've thought we thought pretty hard about how to deal with this and it's sort of.

Part of the issue is that I've had I've had some different folks of course.

I Havent brought this up lately, but there were investment bankers and such approaching saying, Hey, you should extend duration when they thought the long rate was sort of where it was going to be which was about 100 basis points below where it was now and we firmly didn't do that and their commentary was well youre, taking a risk on the <unk>.

Gregory Garrabrants: Total ending deposit balances that Axos Advisory Services including those on and off Axos's balance sheet declined by $50 million in the quarter and improvement from $888 million declined in the prior quarter and the $383 million declined in the quarter and in March 30, 2023. We believe that the pace of cash sorting at Axos Advisory Services stabilized at or near the bottom, representing 4.5% of assets under custody as of September 30 of 2023 compared to the historic range of 67%.

Other side in the short term.

Environment and I don't really think so because the tough part is unless you're extending loans with absolutely you know hard.

Lockouts, where they can't prepay, you're really taking asymmetrical risk there. So I think we've positioned it about as fast as we can.

And so if somebody who has a higher floor wants to prepay and the market's there for them that not alone will have to be replaced and then it's up to our origination engines, which are pretty.

Gregory Garrabrants: In addition to our Axos securities deposits on our balance sheet, it approximately $550 million of deposits off balance sheet to partner banks and another $750 million of deposits held with other banks by software clients in our zenith accounting and the business management vertical. We are starting to see increased traction and deposit inflows from teams we hired over the past six months and from newer commercial deposit verticals. As we slowly unwind our access liquidity and grow deposits from lower-cost sources such as our commercial and treasury management, Axos Financial Inc. Axos Advisory Services and other sources, we feel confident in our ability to maintain our 4.25% to 4.35% net interest margin guidance for the next few quarters. Our profitability of liquidity balance sheet positioning and growth outlook all remain favorable.

Good and Theyre continuing to grow with our with our Caf call business.

With our floor plan business et cetera to be able to replace those assets.

But for what it's worth I don't I am not saying rates are not ever going to come down, but I think all the all the folks that were so optimistic that we're going to get rate cuts next year.

We were not in that camp and we've been right so far and I'm I don't think it's something eminent.

Great. Thank you that's good color I'm done.

Sure. Thanks, Thank you.

Our next question is from the line of David <unk> with Wedbush. Please proceed with your question.

Hi, Thanks, I wanted to ask about the digital asset business and how you guys exited I was curious did your regulators bring up any concern with your involvement in the digital asset business or was this entirely voluntary and have has there been any legal action.

Gregory Garrabrants: We completed a strategic acquisition of the Marine Finance business named Lovevittor in the September quarter. This transaction added approximately 50 million of marine floor plan loans, a $500 million servicing portfolio of retail marine loans held by purchasers of those loans, and a dedicated team of more with more than 15 years of experience in the marine finance industry. This acquisition provides us with another specialty landing vertical with attractive risk adjuster returns, particularly in the dealer floor plan line of credit segment. Our relationships with leading boat manufacturers and dealers and high net worth retail customers provide tremendous cross-sell opportunities for our consumer and commercial back. We're excited to welcome the LV team to Axos.

At all related to this.

No theres small sites are all the questions. So I'll ask the last one first no. There is no legal action related to it at all and nothing pending or anything we're aware of the only reason I even mentioned it is because.

There has been.

Some short seller tweets that have.

Deliberately confused evidently there was a couple of tracks some transactions related to finance dot com that were that were widely reported to be involved with the various characters and then there was an attempt to link us Tobias Dot com.

Gregory Garrabrants: From a technology perspective, we continue to invest in front and back-end systems, infrastructure, IT security and other enterprise software and systems that will further optimize our business and functional units. We lost our universal digital bank 2.0, the latest version of our consumer and mobile banking application in September. The platform has new features and functionality and a better, more integrated user experience across all consumer landing deposit and securities products. It's only been a few months, but we are seeing good engagement with our new consumer banking application from new and existing customers.

Which was a false statement.

Just wanted to be able to get.

A statement out about that so the short answer is no legal and regulatory action, we're not involved.

And any and any elements of that from.

From a regulatory perspective, we spent a long time with the regulators.

Seeking a variety of not objections going through.

A bunch of different risk reviews associated with these assets and ultimately.

Gregory Garrabrants: Our white label banking for registered investment advisors and introducing broker dealers continues to make progress, with a data launch expected in the next three to six months. That our recent advisor event earlier this month, who received tremendous interest in our white label banking solution. Over time, we believe the ability to leverage our relationships with advisors and broker dealers to cross-sell Axos consumer deposits and landing products will be a good source of incremental growth.

The exit we decided to do.

Was really based on.

When the SEC came out and essentially said that most crypto currencies, where securities and therefore, the exchanges would be have to be licensed as securities exchanges and so.

Even though we were only doing operating accounts for these businesses essentially allowing them to do payroll in whatever we werent doing any wallet transactions, we werent doing retail transactions. We just decided that it was we wanted to pause until we got.

Gregory Garrabrants: Axos clearing, which includes our corresponding clearing and RIA custody business, continues to make steady progress. Non-interest income from the securities business increased 18% year over year to 34.6 million. The primary drivers of growth and fee and protection income for Axos securities is higher interest rates. Total deposits that Axos clearing was 1.6 billion as a September 30 of 2023 essentially flat from 1.6 billion as of June 30 of 2023. Of the 1.6 billion dollars of deposits from Axos clearing, approximately 1 billion was on our balance sheet and a 550 million were held at partner banks.

More regulatory clarity and by the way I don't want what we did to disparage any one, particularly in the crypto business theirs.

There is obviously good players in bad players in that business and.

I would still retain the optionality at some point in time to to look at some sort of involvement in the future but that would.

Gregory Garrabrants: Net new assets and our custody business increased by approximately 163 million to three months ended September 30 of 2023. The pipeline for new custody clients remains healthy comprised of 11 advisory firms with more than $700 million of combined assets under custody. We continue to see more RIAs considering an alternative custodian and moving somewhere other assets from Schwab TD Ameritrade to us. We remain focused on executing our strategic and operational initiatives. We are in a better position today relative to others because we are more diverse and we do not make critical mistakes that others have.

Wait until we get better regulatory clarity around.

What the treatment of of these exchanges are going to be and what's the what's the overall landscape. So that theres just more certainty associated with it so we thought we.

We werent doing anything there until after seeing insurance subrogate collapsed.

We look to do and we did some limited purpose accounts.

Yes, the SEC kind of had their rulings theres been obviously, they've they've been aggressive in that space. But then they are also kind of put that pushed back by courts in certain instances and things like that but at the end. It was it was our own decision and it was just in relation.

Gregory Garrabrants: We're strong liquidity in capital, a diminimif unrealized loss on our small investment securities portfolio and solid growth prospects given the diverse nature of our banking and securities businesses. We're operating from a position of strength relative to our competitors. Our returns credit in margin are best in class because we focus on asset-based lending opportunities with the best risk adjusted returns and we stretch our deals with low leverage and credit enhancements. We continue to evaluate opportunities that gas set in business purchases such as the LV Marine Finance Acquisition, we close in the September quarter.

<unk>. So what we saw not anything particular with respect to us and this doesn't have theres nothing thats impacting us with respect to this this is just the attempts by our folks who were shorted the stock to try to to.

Just trying to make something out of nothing.

And Thats and Thats, why we said something about it.

Got it very helpful. Thanks for that and then I had a follow up on the professional services expenses, you mentioned that it was related to the fiscal year end process. I was curious was any of it related to the latest release of <unk> 2.0 was there any capitalized software expenses in there or anything of that nature.

Gregory Garrabrants: We will deploy our capital judiciously between internal investments, accretive acquisitions of businesses and talent and opportunistic share bybacks. We are well positioned to maintain strong profitability in EPS growth irrespective of the interest rate regulatory or economic environment.

And is that being kind of amortized in and this is kind of a new run rate going forward.

Derrick Walsh: Now I'll turn the call over to Derek who will provide additional details on our financial results. Thanks, Greg. To begin, I'd like to highlight that in addition to our press release in 8K with supplemental schedules and our 10Q, we're filed with the SEC today and are 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 and our SEC filings for additional details.

There is there is always some kind of level, but now that the capitalization that will be amortized comes through the depreciation and amortization line. So that that will be recognized going forward.

I forget candidly, whether there was one one third of it in the September quarter that wasn't in the professional <unk>.

Services line the fractional services had had a couple of insurance reimbursements in prior quarters.

Derrick Walsh: Following a strong start to our fiscal year, our outlook remains consistent with what we have guided to in recent quarters. We believe that we will be able to grow loans by high single digits to load teens year over year and maintain our net interest margin in the range of 4.25 to 4.35 percent for the next few quarters. Our loan growth outlook is based on broad-based increases in our asset-based lending, lender finance, and capital call lines.

Related to legal matters. This quarter are the primary thing related to the yearend activities was that we have our audit that occurs over the July and August period. So there's always.

Not only are the audit fees, but then there's there's the tax work on me.

Legal work that goes in line with that so it usually causes a slight what Bob during that during the September quarter. When you look at it kind of almost a slight seasonality to it.

Derrick Walsh: Partially offset by its clients and single-family warehouse, multi-family, small-balance commercial, auto, and personal unsecured loan balances. We continue to see banks and non-banks pull back for exit many lending areas we are in, such as lender finance and node-on-note commercial lending. Our market share gains have been partially offset by higher levels of prepayments in our CNI book, given the shorter duration for these loans. We are also seeing a more pronounced pullback in loan demand as developers and borrowers reassess the return objectives in a higher rate environment and a slowing economy.

Got it thanks for that and then the last one for me as a follow up on the credit quality.

Question is on the special mentioned in the substandard I was curious any common themes that you're observing is it that you know.

Lease ups are going slower than expected or is it really driven by higher rates and pressure on D. S. E. R. Any common themes that you're observing.

Not really it is fairly idiosyncratic I mean, I think that.

I think it's just really it's it's it's it's really pretty de Minimis and it's nothing.

Derrick Walsh: That said, we continue to identify strong credits and our loan pipeline remains solid at $1.6 billion as of October 20, 2023. Consisting of $238 million of single-family residential jumbo mortgage, $20 million of agency gain-on-span mortgage, $44.2 million of multi-family and small-balance commercial mortgage, $63 million of auto and consumer, and $1.28 billion across the commercial platform. Our NIM guidance reflects higher yields from new loans replacing lower yielding hybrid loans, offset by rising deposit costs.

It's a relative.

It's a very small amount and frankly, if you look at it it's a little bit up from the prior quarter, but it's down from a year ago right. So if you look at Npls. For example single family is down significantly from last year and so they really are idiosyncratic with respect to.

Yes, just different elements I mean, I do think that I think the office sector is under pressure, but I think fundamentals in multifamily and industrial and lease up activity.

Industrial it looks fantastic.

Condos are still selling very very well a single family is still holding up.

Derrick Walsh: It also assumes that AAS deposit balance is bottom at current levels and grow gradually driven primarily by net new asset growth, not a material reversal in cash sorting. One factor that could impact on an interest margin in the December 2020-23 quarters, the timing of expected loan payoffs and new loan originations. Our base case assumes the majority of loan payoffs occur earlier in the quarter, and new loan originations ramped throughout the quarter.

Yes, so I think all of those all of the fundamentals are I think definitely.

Pretty pretty good we don't really see.

Some sort of deterioration on the operating our cash flow side if any.

No.

Significant Israeli.

Great. Thanks very much.

Thank you.

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

Derrick Walsh: We expect to maintain some excess liquidity given the uncertain economic, geopolitical, and industry environment. Total non-interest expenses increased by $8 million or $7.2 per cent to $120.5 million in the three-month Professional Services expenses are up by $3.8 million or 64% on a linked quarter basis as we return to a more normal run rate with additional seasonal impacts and Q1 tied to supporting fiscal year end reporting activities. Advertising and promotional expenses are up by $2.3 million or 28% from the linked quarter due to an increase in deposit marketing expenses as competition remains strong for deposits.

Thanks, Good afternoon.

Gary I wanted to I want to ask you a little bit about the the advisory services.

His business and the White label banking I know you kind of mentioned it a bit in your prepared remarks, Greg, but I think during the quarter. There was reported at the sizeable advisor network that was going to move over to access at least part of their business and I know over over the last couple of years, you've talked a lot about kind of going after some of these larger I'll raise et cetera. So I was just.

For any sort of.

Thoughts around kind of how that pipeline and how that sales process is developing and as you look out over the next 12.

18 months or pick a timeframe.

Any any thoughts on how.

How much growth you could see in that business.

Right yes.

Yes, we've.

The pipeline of new advisers and those joining our very good the net I would say is was not magnificent this quarter in comparison with what.

Derrick Walsh: Salary and benefits expenses increased by $1.3 million, primarily as a result of new team member auditions as we continue to take advantage of broader dislocations in the industry and attract top talent in key growth areas and in small part due to merit increases, which will have a full rate next quarter. We expect non-interest expenses to grow sequentially at our historical average growth rate as we continue to invest in people and growth engines of our business.

It should have been given the amount of new clients. We won what happened and that is that the business. The legacy business has some pretty significant camps in it.

And those tamps, we're seeing them.

Have have net asset losses as advisors breakaway.

Derrick Walsh: Our income tax rate was 30.05% for the first quarter ended September 30 of 2023, up from 25.3% for the fourth quarter ended June 30 of 2023 and up from 29.5% in the first quarter of 2022. As we discussed last quarter, our income tax expense in the fourth quarter of 2023 included $5.2 million of primarily one-time tax credits equal to approximately 8 cents per diluted share. Going forward, we continue to expect our annual income tax rate to be between 29 and 30%.

So.

What would have been I think a very nice.

You know quarter of a of asset growth and that a S business ended up being still a net growth, but I would say relatively mediocre in comparison with what I would like to see.

But the pipeline is really good and the activity is great and so I think the question, which I have a hard time.

Being able to to.

To be able to estimate is how much is the existing business on the.

Derrick Walsh: Lastly, our return on equity was 16.9% and our return on average assets was 1.64% for the three months ended September 30 of 2023. Even amidst our sharey purchases over the quarter, tier one leverage capital to average assets was 9.27% as September 30 compared to 8.96% at June 30. Total capital to risk weighted assets for access financial was 14.06% at 9.30, 2023, up from 13.82% at 6.30, 2023. We continue to hold access capital at access financial and access bank even after our opportunistic sharey purchases solid loan growth and continued investment in our business. We are confident that our model of strong liquidity and high returns positions and high returns positions as well to generate consistent profitable loan growth.

On that Tam side is kind of moving around and that's what's that's what's kind of keeping growth down right now what.

What I'm hopeful happens is that that there was.

Frankly, the performance on that side for a lot of those guys.

You know that's kind of driven certain things.

Obviously idiosyncratic to each key.

Each tab, but.

But thats whats really going on so back to the question of what that looks like.

I think conservatively, we ought to be able to do several billion dollars of growth in the remaining.

Several quarters on a net basis that probably looks more like four five on a gross basis.

Which is nice and if you could guess four to five and getting a six on a.

On a net basis than that.

That would be a really nice kind of run rate.

Johnny Lai: With that, I'll turn the call back over to Johnny. Thanks, Terrick.

I've told the team that I would like to see them and kind of staff.

Operator: Operator, we're ready to say questions. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad and a confirmation tone will indicate your line as in the question queue. You may press star two if you'd like to remove your question from the queue. For this one choosing speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please will be pulled for questions. Thank you.

Sales function to double that business in the next five years and the conversations are great.

We you know we released the.

And we had our client advisory Board, where we released our.

Our demo at our our first.

Operational a white label platform that has the advice on the App as the advisory side of the banking together had great feedback on it people are excited to get using that so that'll start happening in the first quarter of the next calendar year. So there's a lot of good things happening.

Andrew Liesch: Thank you, and the first question today comes from the line of Andrew Lace with Piper Sandler. Please excuse me. Hey guys, good afternoon.

The activity is really good and you.

Derrick Walsh: On the expenses here, sounds like I'm not going to see any costs or anything because it's a quarter to two a little bit outside but I guess it's kind of like the new run rate. The efficiency ratio did take up to 49%. I guess how should we be looking at X1 forward? Is revenue going to be growing fast enough to get that back down to that maybe 48% number? Or is it kind of where we should be looking at?

When I was sitting around with the head of that business I said, well Gee you know looks like sales are great. But you know you got to figure out how to deal with the back door. So.

But it's I.

I think that I think that will that on a turnaround hopefully, but it's hard to say with respect to whether it will and how many more quarters that'll that'll go on.

Okay I appreciate the color and so you are saying, though on the white label banking side that you talked to are already live on that in the first quarter of 'twenty four.

Derrick Walsh: I think the efficiency ratio should generally be between kind of 48 and a half to 50% would be that's the range that it'll operate. Very interior point, it will depend on the, from quarter to quarter as far as some of the timing of the, as we referenced some of the loan growth and the timing of the interest income recognized related to that. We also have merit out across this. Our merit increases are in June so that this quarter is in December.

Yes, I do and then and then so what what what will happen with that is I'd say by the end of first quarter of 'twenty for every new account.

We will be offered a bank account in that bank that bank account will come with the the advised account and there'll be significant benefits associated with having that account together such as the ability to immediately deposit a check and have it available that that incident.

Derrick Walsh: Yeah, so they have the rate of September. Yeah, we value it in the month of June but by that time they roll through their late September. So that's what I was referencing. And so that's what's going to kind of probably keep us towards that 49 end of the range. But the, is that that salaries and benefits we do expect to increase as the full merit increase comes in in the second quarter? Got it. All right, yeah, that's helpful.

You know, where we have other elements on the platform that are going to take a while longer.

Securities based lines of credit, which we want to be one click securities baseline of credit Securities based credit cards things like that and those are in the works but.

There's a there's a lot of wood to chop there.

Thank you.

Thank you thank you Sir.

Thank you we've reached the end of the question and answer session I will now turn the call over to Johnny Lai for any closing remarks.

Derrick Walsh: And then just looking into the 10Q, just like there was some credit migration with an increase and special mention and some standards, looks like there was come in multi-family, commercial real estate and some C and I just send any comments there on what, what might be causing this and yeah, I'll leave it there. Yeah, no, it's not significant, but you know, we, you know, those things are often moving in and out.

Great. Thanks, everyone for your interest and we'll talk to you next quarter. Thank you.

This concludes today's conference. Thank you for your participation you may now disconnect your lines at this time.

Derrick Walsh: And anytime we see anything that, you know, for example, on the, you know, on some of the, the substandard side, it just may be if a project is slightly delayed or something like that. So there's nothing really that we see that's, you know, of any significant, you know, set of concerns with respect to any actual loss content and, you know, we've been, as I said, on the, in the prepared remarks, you know, we're getting on the, on every crystal that is, there's two that are, that are actually delinquent there.

Derrick Walsh: One, UBSO Connor is the mess and they're still supporting it. And so we've decided to sit still and let them continue to support the property. It's very close to being finished. It's some very nice condominiums and drainage village in New York. You know, I don't think we'll have any loss there. Is it possible? You know, little maybe, but nothing much. And then the other one is also, is that being supported by the mess and they're going to put more money in and they're working with a bar or at this time.

Derrick Walsh: And so we're just kind of hanging out there. And so, you know, obviously we could take more aggressive action in those cases, but given the fact that everybody's behaving nicely who has much more at risk than we do, you know, we think it's the right thing to sit on that. And so it just really depends because most of the time our notes are quite sellable. So if we feel like we want to sell a note or something we usually can, and I don't think that's changed. So this is just, you know, nothing of any real significance or anything that I'm looking at and saying, wow, this may translate into some significant loss content. Got it. Very helpful.

Derrick Walsh: Thank you for taking the question, dear.

Derrick Walsh: Thank you. Our next questions come from the line of Tim Fizer with KBW. Let's see with your question. Gary, I'm on from Mike Dorito. Thank you for taking my questions. Hey, Jim. I had a couple of questions about your access sensitivity here at the stage of the cycle. I was looking at slide 300 guys earning presentation and you guys do good job putting up here at your maternity's over the next few years.

Derrick Walsh: Are you able to help us that quantify maybe what the loan yields are on these maternity loans over the next year? So, that you guys call out? Yeah. Well, I don't know if you have the... I can give you generalized numbers. You have the exact ones, Derrick. I'm going to give sort of general. Yeah, I don't know if I'm right. So, they really are... So, let's talk about of the loans that are hybrid loans, those consist of two primary categories.

Derrick Walsh: One is single family and the other is the sort of multi-family, smaller bouts commercial. We shorten those, the multi-family and small bouts commercial up from five one-arms to three one-arms several years ago for new originations. So, that book is really repricing relatively quickly. In general, you might take loans that are sort of in mid-fives and you're repricing them all the way up to eight and a half or nine. Now, you know, we're looking a lot of times they'll run off at that point in time and they simply pay off.

Derrick Walsh: We've done an analysis of looking at those and where they're coming through. So, there is a net benefit to us that will accrue associated with that, particularly that portfolio repricing because I think we made the right move to shorten those deals up and generally competitor banks were more on that five to seven to ten range and we were more on that three range with a little creep to five and that five was really kind of sunsetted more years ago.

Derrick Walsh: So, I think that's pretty good and then on the single family side, those were all five one-arms. I wanted to shorten them but you actually can't because if they're not at least five years you have to price them at the rate cap from a DTI perspective which is kind of a regulatory thing that doesn't make a lot of sense but in any event it kind of precludes you from doing shorter than five one-arms.

Derrick Walsh: You can sort of see it in the chart there but to give you some flavor of it let's say those would be like another five two five point three stats sort of thing and they're repricing and they'll repricing into the eights and nines as well and that will they're a little bit heavier in out years though because we had so many prepays in that really low rate that low rate environment in the COVID period that some of the new originations are a little more stacked so you might make an argument that let's say that five one-arms there's 20% repricing a year every year that you can think of it but that's not right it's much more pushed towards those sort of out years. Now, I think that being said and then auto auto is just the auto loans are a little bit longer duration but they're prepaying rapidly and those are prepaying and let's say they're let's say they're five ish percent and then we're just letting that book drop and when we're originating we're originating at you know above ten.

Derrick Walsh: So, I think what is good about this is that if sometimes there's this worry that I hear analysts talk about that you know that what happens is you end up at the end of the rate cycle where all your all your adjustable loans have reprised and then your then the only thing that's left is for your deposits to sort of creep up and sort of reduce your name but that's not what we have to look forward to actually. We actually have something different to look forward to we have to look forward to the fact that we're going to get these hybrids to reprise pretty quickly because we made reasonably good decisions about the structure of those loans and so those will reprise and then additionally as we grow almost all the new loans that are coming on are adjustable rate loans and so they do have floors often those floors sometimes are good and sometimes they're not as good as far as for us but but they do have some floor usually embedded in them with respect to sofa to limit our downside risks.

Derrick Walsh: I think if where your questions going is for a little bit of flavor around are we going to have this sort of end of rate cycle compression in NIMS I think we might but I don't think it's going to be significant and I don't and I think we have a lot of offsetting factors associated with that that can aid us and I think it's going to really be more about credit spreads on new originations given that we have such a relatively quick cycle time for our existing commercial books.

Derrick Walsh: Okay, yeah, that makes sense on your last point. And I was actually going to maybe take this a step further along the cycle if we get to where, you know, maybe the Fed begins to cut rates sometime in the, you know, in the next year. So, it's that occurs. Like, how do you think you guys are positioned? Like, what's your sensitivity to rate cuts? Well, it depends on the, it depends on the, the, the asset.

Derrick Walsh: So, all single family loans have a floor at the start rate that are originated. So, if you're originated in the eights, they're not going down. I think let's take, let's talk about floors for a second, then we'll talk about borrower behavior. So, we do put floors in certain things, but a cap call facility, for example, is going to have a 1% so-for-floor. Others, other loans, let's say certain crystal deals might have a four or three and a half percent so-for-floor.

Derrick Walsh: So, there's, there's some compression that occurs immediately in a reduced short-term rate environment associated with those loans. We've kept our deposit base, you know, in a way that we can reprise it. The question is always, what's the demand for deposits at that time, and what does that repricing do to your ability to grow deposits at Statterer, right? Now, we're pretty diverse business. You know, we did, we did grow, you know, non-interest bearing deposits by over 200 million in this quarter if you exclude the runoff that we, that we pushed out on the digital asset side.

Derrick Walsh: So, you know, there is good stuff happening there, and that all blends together. And if, you know, if you look at that, and you say you grew that by that amount of money and grew loans by 500, that's kind of pretty good, actually, right? So, you know, there's, there's good stuff happening there, so these things are all kind of going to come together. But if somehow there was a massive demand for deposits and we weren't able to cut any deposit rates and still grow, and rates came down on that short side, we might see a little compression.

Derrick Walsh: But I think the other question that the other issue that could arise is you have floors on these loans, if the, if the market rate falls very much below the floor rate, that you could see prepayments too, right? So, I mean, I think realistically we've thought, we've thought pretty hard about how to deal with this, and it's sort of, part of the issue is that I've had, I've had some different folks, of course, they kind of haven't brought this up lately, but there were investment bankers in such approaching saying, hey, you should extend duration when they thought the long rate was sort of where it was going to be, which was about 100 basis points below where it was now.

Derrick Walsh: And we firmly didn't do that, and their commentary was, well, you're taking a risk on the other side in a short term environment. And I don't really think so, because the tough part is, unless you're extending loans with absolutely, you know, hard lockouts where they can't prepay, you're really taking a symmetrical risk there. So I think we've positioned to the bad as best as we can with, you know, and so if somebody who has a higher floor wants to prepay, and the market's there for them, then that loan will have to be replaced, and then it's up to our origination engines, which are pretty, you know, good, and they're continuing to grow with our, with our CAF call business, with our floor plan business, et cetera, to be able to replace those vassettes.

Derrick Walsh: But for what it's worth, I'm not saying rates are not ever going to come down, but I think all the folks that were so optimistic that we're going to get rate cuts next year, we were not in that camp and we've been right so far, and I don't think it's something eminent.

Derrick Walsh: Great, thank you, that was a good color. I'm done. Sure. Thanks. Thank you.

David Chiaverini: For this question, it's from the line of David Chiaverini with Wedbush, please excuse your question. Hi, thanks. I wanted to ask about the digital asset business and how you guys exited, I was curious, did your regulators bring up any concern with your involvement in the digital asset business or was this entirely voluntary and has there been any legal action at all related to this? No, well thoughts are all the questions, I'll ask the last one first, no there's no legal action related to it at all, and nothing pending or anything we're aware of.

David Chiaverini: The only reason I even mentioned it is because there's been some short seller tweets that have deliberately confused evidently, there was a couple of transactions related to Binance dot com that were widely reported to be involved with the various characters, and then there was an attempt to link us to Binance dot com, which was a false statement, so I just wanted to be able to get a statement out about that. So the short answer is no legal and regulatory action, we're not involved in any elements of that.

Gregory Garrabrants: From a regulatory perspective, we spent a long time with the regulators seeking a variety of not objections going through a bunch of different risk reviews associated with these assets, and ultimately the exit we decided to do was really based on when the SEC came out and essentially said that most crypto currencies were securities, and therefore the exchanges would have to be licenses, securities, exchanges, and so even though we were only doing operating accounts for these businesses, essentially allowing them to do payroll and whatever it, we weren't doing any wallet transactions, we weren't doing retail transactions, we just decided that it was, we wanted to pause until we got more regulatory clarity, and by the way, I don't want what we did to disparage anyone particularly in the crypto business, there's obviously good players and bad players in that business, and I would still retain the optionality at some point in time to look at some sort of involvement in the future, but that would wait until we get better regulatory clarity around what the treatment of these exchanges are going to be and what's the overall landscape so that there's just more certainty associated with it. We thought we weren't doing anything there until after Singapore gave collapse, we looked at how they've had their rulings, there's been obviously, they've been aggressive in that space, but then they've also kind of put that push back by courts and certain instances and things like that, but at the end it was our own decision and it was just in relation to what we saw, not anything particular with respect to us, and this doesn't have, there's nothing impacting us with respect to this, this is just attempts by folks who were short at the stock to try to make something out of nothing, and that's why we said something about it. I got a very helpful thanks for that.

Derrick Walsh: And then I had to follow up on the professional services expenses. You mentioned that it was related to the fiscal year-end process. That was curious. Was any of it related to the latest release of UDB 2.0? Was there any capitalized software expenses in there, anything of that nature? And is that being kind of amortized in? And this is kind of a new run rate going forward? There's always some kind of level, but now the capitalization that will be amortized comes through the depreciation and amortization line.

Derrick Walsh: So that will be recognized going forward. I forget candidly whether there was one third of it in this attempt record. That wasn't in the professional services line. The professional services had a couple of insurance reimbursements in prior quarters related to legal matters. This quarter, the primary thing related to the year-end activities was that we have audit that occurs over the July and August period. So there's always not only the audit fees, but then there's the tax work and the legal work that goes in mind with it. So it usually causes a slight blip up during that September quarter when you look at it kind of almost a slight seasonality to it. God, it thanks for that.

Derrick Walsh: And then the last one for me is a follow-up on the credit quality questions on the special mention in the substandard. I was curious, any common themes that you're observing? Is it that lease ups are going slower than expected? Or is it really driven by higher rates and pressure on DSCR? Any common themes that you're observing? Not really. It's fairly idiosyncratic. I mean, I think that I think it's just really pretty diminimous and it's nothing.

Derrick Walsh: It's a very small amount. And frankly, if you look at it, it's a little bit up from the prior quarter, but it's down from a year ago. So if you look at NPLs, for example, single families down significantly from last year. And so they really are idiosyncratic with respect to different elements. I mean, I do think that I think the office sector is under pressure, but I think fundamentals in multi-family and industrial and lease up activity and industrial looks fantastic.

Derrick Walsh: Condos are still selling very, very well. A single family is still holding up. So I think all of the fundamentals are, I think, definitely pretty good. We don't really see some sort of deterioration on the operating or cash flow side of any significance. Really. Great.

Gary Tenner: Thanks very much. Thank you. The next question comes from the line of Gary Tenner with the A-Davidson.

Gregory Garrabrants: Please excuse you two questions. Thanks, Gary. Thanks for the afternoon. I wanted to ask a little about the advisor services business and the white label banking. I know you have kind of mentioned a bit in your prepared remarks, Greg, but I think during the quarter, there was a report of the sizable advisor network that was going to move over to Axos, at least, part of their business. I know over the last couple of years you have talked a lot about going after some of these larger RAs, et cetera.

Gregory Garrabrants: Looking for any sort of thoughts around how that pipeline and how that sells process is developing, and as you look at over the next 12, 18 months, or pick a timeframe, any thoughts on how much growth you could see in that business.

Gregory Garrabrants: Right. Yeah, the pipeline of new advisors, and those joining are very good. The net, I would say, was not magnificent at this quarter in comparison with what it should have been given, the amount of new clients we won. What happened in that is that the business, the legacy business, has some pretty significant tamps in it, and those tamps were seeing them have net asset losses as advisors break away. What would have been, I think, a very nice quarter of asset growth in that AES business ended up being still in net growth, but I would say relatively mediocre in comparison with what I would like to see.

Gregory Garrabrants: But the pipeline is really good, and the activity is great, and so I think the question, which I have a hard time being able to estimate is how much of the existing business on that ham side is moving around, and that's what's keeping growth down right now. What I'm hopeful happens is that there's, frankly, the performance on that side for a lot of those guys, that's driven certain things. It's obviously idiosyncratic to each tamp, but that's what's really going on.

Gregory Garrabrants: Back to the question of what that looks like. I think conservatively, we ought to be able to do several billion dollars of growth in the remaining several quarters on a net basis that probably looks more like four or five on a growth basis, which is nice, and if you could get four to five and get in the six on a net basis than that would be a really nice kind of run rate.

Gregory Garrabrants: I've told the team that I'd like to see them and kind of staff the sales functions of double net business in the next five years, and the conversations are great. We released the, I think we had our client advisory board where we released our demo and our first operational, a white label platform that has the advisory side of the banking together, had great feedback on it, people are excited to get using that, so that'll start happening in the first quarter of the next calendar year.

Gregory Garrabrants: So there's a lot of good things happening. The activity is really good, and when I was sitting around with the head of that business, I said, well gee, looks like your sales are great, but you got to figure out how to deal with the back door. But I think that will, that ought to turn around, hopefully, but it's hard to say with respect to whether it will and how many more quarters that will go on.

Gregory Garrabrants: I appreciate the color, and so you're saying, though, on the white label banking side that you thought that RAs live on that in the first quarter of 24? Yeah, I do, and then what will happen with that is that by the end of the first quarter of 24, every new account will be offered a bank account. That will come with the advised account, and there will be significant benefits associated with having that account together, such as the ability to immediately deposit a check and have it available that instant.

Gregory Garrabrants: We have other elements on the platform that are going to take a while longer, securities-based lines, the credit, which we want to be one click, securities-based lines, credit, securities-based credit cards, things like that. And those are in the works, but there's a lot of wood to chop there.

Gary Tenner: Thank you. Thanks, Gary. Thank you.

Operator: We've reached the end of the question and answer session.

Johnny Lai: I'll now turn the call over to John E. Lee for any closing remarks. Great.

Johnny Lai: Thanks, everyone for your interest, and we'll talk to you next quarter. Thank you.

Operator: This includes safe conference. Thank you for your participation.