Earnings Call Transcript - AX Q1 2025

Operator, Operator

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

Johnny Lai, Senior Vice President, Corporate Development and Investor Relations

Thank you, John. Good afternoon, everyone. Thank you for your interest in Axos. Joining us today for Axos Financial, Inc.'s first quarter 2025 financial results conference call are the company's President and Chief Executive Officer, Gregory Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the three months ended September 30, 2024, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. Please refer to the Safe Harbor statements found in today's earnings press release and in our investor presentation for additional details. This call is being webcast and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 8-K with additional financial information for this call. All of these documents can be found on the Axos Financial website. With that, I'd like to turn the call over to Greg.

Gregory Garrabrants, President and Chief Executive Officer

Thanks, Johnny, and good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the first quarter of fiscal 2025 ended September 30, 2024. I thank you for your interest in Axos Financial. We delivered outstanding results in our first fiscal quarter of 2025 generating double digit year-over-year growth in earnings per share and book value per share for the 10th consecutive quarter. We grew deposits by approximately $614 million linked quarter with growth primarily coming in interest bearing demand and savings deposits. Ending loan balances were up 0.3% linked quarter and 13.7% year-over-year to $19.3 billion. Average loan balances were up $269 million linked quarter as origination volumes in some of our C&I and single-family mortgage warehouse lending businesses were offset by prepayments in our single-family jumbo mortgage, multifamily and commercial real estate lending groups. We continue to generate high returns as evidenced by the 19.1% return on average common equity in the three months ended September 30, 2024. Our strong returns contributed to the 28% year-over-year growth in our tangible book value per share. Other highlights include the following: Net interest margin was 5.17% for the quarter ended September 30, 2024, up 81 basis points from the 4.36% in the quarter ended September 30, 2023 and up from 4.65% in the quarter ended June 30, 2024. Net interest margin in Q1 2025 benefited from the payoff of three loans we purchased from the FDIC. Excluding the impact from the early payoff of these three purchased loans, net interest margin was 4.87%. Net annualized charge offs to average loans were 17 basis points in the three months ended September 30, 2024. Excluding the auto loans covered by insurance, net annualized charge offs to average loans were 15 basis points in Q1 2025. Net income was approximately $112 million in the quarter ended September 30, 2024 up 36% from the $82.7 million in the corresponding period a year ago. Earnings per share for the three months ended September 30, 2024 were 1.93% representing year-over-year growth of 40%. Net growth in loans for investment were $49 million for the three months ended September 30, 2024. Growth in single-family mortgage warehouse and C&I loan balances were offset by declining single-family mortgage, multifamily and auto loan balances. Elevated levels of prepayments in multifamily, single-family jumbo mortgage, commercial real estate specialty and real estate lender finance offset solid loan originations across many of our C&I lending groups. Average loan yields for the three months ended September 30, 2024 were 9.01%, up 47 basis points from the 8.54% in the prior quarter and up 116 basis points from the corresponding period a year ago. Average loan yields for non-purchase loans were 8.28% and average yields for purchase loans were 22.82%, which includes the accretion of our purchase price discount. The prepayment of the FDIC acquired loans increased the first quarter 2025 average loan yield by 35 basis points. Excluding the FDIC loan prepayments, average loan yields increased 12 basis points in the quarter. The remaining FDIC purchased loans continue to perform and all loans in that portfolio remain current. New loan interest rates were as follows; SFR mortgages were 8.3%, multifamily 9.2%, C&I 8.5% and auto 9.7%. The credit quality of our loan book continues to be strong despite a few idiosyncratic circumstances that led to an uptick in non-performing assets this quarter. Non-performing assets in our single-family jumbo mortgage portfolio increased by $13.3 million from June 30, 2024 to September 30, 2024. The increase was the result of three loans with an average loan to value of 45%. The properties were located in highly desirable neighborhoods located in Northern and Southern California including one beachfront property in Del Mar. Non-performing assets in our commercial real estate loan book increased by $14.5 million as a result of three loans to one borrower with a weighted average LTV of 29%. We are actively working with this borrower to bring the loan current. We do not anticipate a material loss from loans currently classified as non-performing in our single-family mortgage, multifamily and commercial mortgage or commercial real estate specialty portfolios. Our commercial real estate portfolio continues to perform very well and in line with expectations. Non-performing assets in our C&I asset-based and cash flow lending business increased by approximately $40 million. One indicated cash flow loan with an unpaid principal balance of $34.2 million and one ABL loan backed by accounts receivable of $6.4 million accounted for the increase. The $34.2 million loan is a Shared National Credit to one of the largest logistics companies in the United States. The Axos share of the loan is approximately 4% of the outstanding balance of the original loan. The loan is a sponsor-backed loan with the sponsor contributing $494 million to the purchase of the company at the time the loan was made and subsequently contributing another $30 million of preferred stock in June and another $50 million of equity in October for a total investment of $574 million excluding management's rollover of equity. The September 30th payment was made so the loan is current on its payment at the end of the quarter. However, a restructuring transaction was executed between the borrower and a subset of lenders resulting in new incremental debt of $137 million contributed by a subset of the lender group concurrent with a $50 million equity injection from the sponsor which Axos did not agree to nor participate in. The terms of the restructuring transaction favored the group of new money participating lenders over a set of non-participating lenders. We placed this loan on nonaccrual despite receiving the September 30 payment given the information received about this restructuring and allocated a specific loan provision of approximately $10 million in the quarter ended September 30, 2024 to account for a potential loss. We are currently evaluating the appropriate actions to take as we have been advised by counsel that the restructuring transaction may have violated the terms of the credit agreement. With respect to the other loan, the $6.4 million loan is backed entirely by accounts receivable that have been subject to a recent audit and found by that audit to be collectible. We are actively working with the borrower to pay down a portion of the loan, provide additional collateral and bring the loan current. Non-performing assets in our multifamily and commercial mortgage loan book declined by $3.6 million linked quarter. We increased deposits by $614 million in the first quarter of fiscal year 2025. Demand, money market and savings accounts representing 96% of total deposits at September 30, 2024 grew at 16.3% annualized. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 60% of total deposits, treasury management representing 20%, commercial specialty representing 10%, Axos Fiduciary Services representing 6% and Axos Security, which is our custody and clearing representing 4%. Total noninterest-bearing deposits were approximately $3.1 billion, up $80 million quarter-over-quarter. Total ending deposits at AAS including those on and off Axos' balance sheet were approximately up $41 million compared to the prior quarter. Client cash sorting has stabilized at or near the bottom representing 3% of assets under custody at September 2024 compared to the historic range of 6% to 7%. We are focused on adding new assets from existing and new advisors to grow our assets under custody and cash balances. In addition to our Axos security deposits on our balance sheet, we had approximately $450 million deposits off balance sheet at partner banks. We continue to manage our interest rate risk by making tactical changes in our assets and liabilities. As of September 30, approximately 70% of our loans were floating, 23% were hybrid, and 7% were fixed. Since our hybrid ARMs were originated when interest rates were much lower than they are today, the replacement of these hybrid ARMs with new C&I and consumer loans are generally accretive to our loan yield. Noninterest-bearing deposits account for 15% of total deposits as of September 30. In September we reduced the rate on our consumer high-yield savings by 30 basis points in advance of the Fed cut. Subsequent to the Fed's action in September, we reduced the rate on our consumer high-yield savings products by an additional 25 basis points. We are confident in our ability to maintain our deposit cost and manage it down to maintain our net interest margin in this rate cycle. For the quarter ended September 30, 2024 our consolidated net interest margin was 5.17% while our banking business NIM was 5.21%. Excluding the 30 basis points boost from the FDIC loans purchased that paid off early, our consolidated net interest margin would have been 4.87%, up from 4.65% in the June 30, 2024 quarter. When we announced the FDIC loan purchase in December of 2023, our expectation was that the transaction would boost our net interest margin by 35 to 45 basis points. Given the prepayments in this portfolio, including the three loans that paid off in the September quarter, we now expect our net interest margin benefit to be between 30 and 35 basis points for the remainder of fiscal year 2025. We break out the average balances and loan yields for the purchased and non-purchased loans in our 10-Q which was filed with the SEC today to separate the impact of the loan purchases on our net interest margin. We expect our consolidated net interest margin excluding the FDIC benefit to stay within the 4.25% to 4.35% range we have targeted over the past year. While we tactically adjusted deposit pricing based on future actions by the Fed and our competitors, the pace and mix of loan originations and prepayments will have the biggest impact on our net interest margin. While loan growth in the September quarter was below our high single-digit to low-teens expectation from an annual perspective, we are optimistic that we will return to our targeted range. The combination of higher interest rates, a relatively steeply inverted yield curve, elevated used car values, and slowly adjusting cap rates on multifamily income properties over the past few years made us more cautious in single-family jumbo mortgage, multifamily, and auto lending. Lower originations in these lending groups coupled with elevated prepayments resulted in acceleration of net attrition in these loan categories. In this September quarter, ending balances in these three lending categories represented a $219 million drag on our consolidated net loan growth. These three loan categories are all hybrid loans with weighted average lives in the three-year range and are difficult to profitably originate in the current interest rate environment with a highly inverted yield curve. To match the duration of our growing pipeline of multifamily, single-family, and auto loans, we extended the duration of $600 million of liabilities to the issuance of CDs and interest rate swaps when markets were most optimistic about rate cuts at a weighted average yield of 3.4% for a 30-month average duration. Given recent changes in the yield curve, we have seen a rebound in our loan pipelines for each of these categories that have been reducing loan growth for several quarters. Additionally, we continue to add new clients and balances in our single-family mortgage warehouse business due to competitors scaling back or exiting the business. Finally, demand in our fund finance, ABL, and select C&I lending businesses remain strong with the addition of several new lending and deposit teams in the prior quarter. We grew loans in the first month of this current quarter by $160 million, which is in line with our high single-digit to low-teen expectations. Axos Clearing, which includes our correspondent clearing and RA custody business, had a good quarter. Total deposits at Axos Clearing were $1.3 billion as of September 30, roughly flat from where they were at June 30. Of the $1.3 billion in deposits from Axos Clearing, approximately $800 million was on our balance sheet and $450 million was held at partner banks. Net new assets for our custody business were $559 million in the September quarter. This marks the continuation of positive net new asset growth we have experienced with $100 million or more of net new asset growth at Axos Advisory Services for five consecutive months. Total assets under custody were $37.4 billion as of September 30, up from $35.7 billion as of June 30. The sales team continues to make solid progress onboarding assets from new advisory firms, offsetting the decline in some of Axos Advisory Services' historic turnkey asset management clients. The pipeline from new custody clients remains healthy, and we expect continued organic asset management growth, assets under management growth from AAS. From a product and operational efficiency perspective, we continue to identify ways to generate incremental fee and transaction-based revenues and streamline processes to make our operations more scalable. We believe that sustained net new asset growth, a normalization in cash balances, and operational productivity initiatives will drive positive operating leverage in our clearing and custody business in the medium to long term. We are starting to see some early benefits from investments we have made over the past few years. We have soft launched our white-label banking platform to select advisors earlier this year enabling their clients to access our suite of deposit and lending products as well as new features we rolled out such as enhanced personal financial management. This platform leverages the technology we built in UDB for Axos Bank clients and reduces the cost associated with various interactions with advisors and their end clients, such as mailing a check or getting a paper statement. We have made minor modifications based on advisor and user feedback and have a suite of additional products and features in our roadmap. The team hires we have made across various commercial lending and deposit businesses are starting to contribute to loan and deposit growth. Our commercial cash and treasury management teams generated approximately $400 million in net new deposits in this quarter due in part to new teams we onboarded in the past two years. More recently, we added a technology and a life science banking team in Silicon Valley including a seasoned team that has dedicated experience working together with early-stage growth companies and funds. We also added an experienced leader to build out our middle market lending group. We have over 20 years of experience in specialty lending and a few selected national deposit verticals. These selective team hires allow us to grow a geographic presence and further diversify our lending, deposit, and fee-based franchises based on our existing robust set of products. The addition of key sales and operational team members at AAS has contributed to the acceleration in net new asset growth in our custody business. Our client-centric approach along with our commitment not to compete with our advisor clients makes us highly desirable to alternatives such as Schwab. Our highly profitable and diversified business positions us well to maintain above-average growth and returns in a variety of economic, political, and competitive environments. While higher levels of prepayments are a short-term headwind, our asset-based lending philosophy with conservative loan-to-values and prudent structures and diversified mix of lending and funding affords us more flexibility than most of our competitors. Finally, our excess capital liquidity and loan loss reserves provide more than sufficient cushion to weather an extended economic downturn if that were to occur. We remain prudent with our capital, reinvesting in our business, systems, and people and returning capital to our shareholders through opportunistic buybacks. Now I'll turn the call over to Derek who will provide additional details.

Derrick Walsh, Executive Vice President and Chief Financial Officer

Thanks, Greg. To begin, I'd like to highlight that in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Our provision for credit losses was $14 million in the three months ended September 30, 2024, compared to $7 million in the corresponding period a year ago. $10 million of the $14 million loan loss provision this quarter was a specific provision for a C&I loan that we classified as nonaccrual that Greg discussed earlier on this call. Our allowance of credit losses to total loans held for investment was 1.35% compared to 1.34% at June 30, 2024. We remain well reserved relative to our low historical and current credit loss rates. Non-interest expenses were approximately $147 million for the three months ended September 30, 2024, up by $6.9 million from the three months ended June 30, 2024. Higher salaries and benefits expenses primarily related to the new hires that we've made over the past six months and an increase in data processing expenses drove the sequential increase. As a reminder, our annual merit-based compensation adjustment takes place every September and we expect our salaries and benefits expenses to increase in the December quarter on an organic basis at a similar rate as it has in previous years. Our loan pipeline remains strong with $1.9 billion of total loans in our pipeline as of October 25, 2024 consisting of $345 million of SFR jumbo mortgage, $85 million of gain on sale mortgage, $165 million of multifamily and small balance commercial, $136 million of auto and consumer, and $1.2 billion of commercial. Our loan growth outlook is largely consistent with what we have guided to in recent quarters. We believe that we will be able to grow loan balances organically by high single digits to low teens year-over-year in the fiscal year 2025 excluding the impact of any loan portfolio purchased from the FDIC and excluding any other potential loan or asset acquisitions. Our ending loan balances will continue to be impacted by the pace and timing of payoffs in any given quarter. With that, I'll turn the call back over to Johnny.

Johnny Lai, Senior Vice President, Corporate Development and Investor Relations

Thanks, Derrick. John, we're ready to take questions.

Operator, Operator

Thank you. The first question comes from Kyle Peterson with Needham & Company. Please go ahead with your question.

Kyle Peterson, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

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

Kyle Peterson, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

The issue with the prepayment penalty fees is closely linked to the loan mix, as almost all of those fees originated from multifamily hybrid loans, specifically 5.1 ARMs with a typical step down structure of 5, 4, 3, 2, and 1 prepay. This segment hasn't been a primary focus because pricing accurately has been challenging due to the highly inverted yield curve. We are beginning to observe an increase in this business, with more loans featuring prepayment penalties, but a turnaround is still some time away. Additionally, we have a servicing book that, while not substantial, isn't hedged and is too small to effectively hedge. When interest rates decline, this leads to some negative marks, which for this quarter amounted to a couple of million. Although the relationship isn't perfectly linear, it offers a rough estimation for reductions. As rates decrease, many clients offset transaction management fees based on their earnings credits, and if rates fall sufficiently, we may even begin to charge those clients, though we haven't reached that point yet. Mortgage banking volume has slightly improved, but it remains particularly sensitive to the 10-year rates. There was a brief increase in activity, but long rates subsequently rose again, so we'll have to monitor developments in that area. The best opportunity for growing fee income lies within the securities business, which is dependent on volume. We are starting to move past some attrition from certain clients losing assets, and while we are not entirely through it, we are managing to outpace it now, and I anticipate this trend will continue. This presents a chance for growth, particularly if we consider 10 to 12 basis points on average for net new assets, which aligns with earlier growth rate forecasts. However, it's essential to remember that off-balance sheet deposits are sensitive to falling rates, so any further rate declines will negatively affect that income, which is fee-based. Did I overlook anything?

Derrick Walsh, Executive Vice President and Chief Financial Officer

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

Kyle Peterson, Analyst

Okay. That's all very helpful color. Thank you and nice quarter.

Operator, Operator

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

Andrew Liesch, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

Yes. That's not a bad way to look at it. We have also introduced a new fee schedule that targets certain high-cost activities, like paper statement fees, to encourage behaviors that help us reduce our expenses. This will provide some offset. For instance, if you have 50 to 75 basis points of offset, but if it reaches 150 basis points, that could impact the business significantly. However, the pipeline looks very strong, and if attrition decreases, those net new assets could grow even more rapidly. We've established internal targets for this, though I would say they are ambitious targets.

Andrew Liesch, Analyst

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

Derrick Walsh, Executive Vice President and Chief Financial Officer

It was 30 basis points to 35 basis points.

Andrew Liesch, Analyst

Understood. If you exclude the $17 million of accelerated income, the margin is still slightly lower than expected. What is causing the margin to decrease towards that level? Is it primarily due to asset repricing or the funding cost you mentioned?

Gregory Garrabrants, President and Chief Executive Officer

No, I think we're feeling pretty good about the funding cost. We're currently holding a significant amount of excess deposits. We managed to adjust our pricing effectively with the Fed's rate cut, experiencing less impact than expected. Additionally, we have seen strong deposit growth due to our new hires. However, loan growth has been slower than desired because we declined some deals, made adjustments to club deal pricing, and some clients have been repaying loans at tighter spreads. To capture more volume, we will need to tighten those spreads a bit. Meanwhile, we still have many hybrid loans that are repricing quarterly, leading to a lot of fluctuations. There may be some caution on our part because maintaining a high margin without the anticipated loan growth could affect net interest income. The real uncertainty is in loan growth. We believe there are plenty of positive activities happening, and while we're showing improvement this month, we have some higher average earning assets, though we also faced some pay downs at the end of the quarter. We are engaging with clients in our fund finance business to see if they will adjust their balance sheets in December by calling capital, but responses have been limited. There's a balance to be struck here, and we're noting some market pressure on pricing that seems higher than it was last year or even a couple of quarters ago.

Andrew Liesch, Analyst

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

Operator, Operator

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

Gary Tenner, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

I feel optimistic about our progress because I can see the details at an individual level. Some situations just take time. We have around 20 offers on a property we've been holding for some time and working with a borrower on, and we expect that to finalize by the end of the quarter. There are a few other cases where we've been patient due to final building permit issues, with borrowers or funds subordinate to us still contributing, and those matters are nearing resolution. We view some of these situations as decisions; we have buyers for three loans, but due to their low loan-to-value ratios, we anticipate they will be resolved and pay off as the individuals intend to do so. Overall, on the commercial real estate front, I think things look very positive. We don’t have any significant concerns regarding potential losses. Interest rates may exert some pressure on special mention in multifamily, but we have strong guarantees on nearly the entire portfolio – full recourse from borrowers who own numerous properties. So, that aspect appears solid. On the commercial and industrial side, losses will probably be more average. Historically, in our multifamily book, losses have been minimal over 15 years, and the same goes for single-family. I expect the commercial and industrial sector to be more typical. However, the non-real estate lender finance areas should remain strong, but with Shared National Credit, we are taking on more average risk. Our real low loan-to-value structures and other assets have helped maintain stability. I believe some issues are unique and are clearing up as we start to see positive outcomes from resolutions.

Gary Tenner, Analyst

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

Derrick Walsh, Executive Vice President and Chief Financial Officer

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

Gregory Garrabrants, President and Chief Executive Officer

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

Gary Tenner, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

It's interesting; the fund finance business has always been a bit lower and it came in lower again, but we're still experiencing strong activity there, maybe slightly less but not significantly. It's really in situations where you have a standard club deal, and the company is requesting a 25 basis point reduction across the grid. The three banks consent immediately, and you find yourself deciding whether to stay or leave. This is the type of situation we're encountering, and I don't think it's particularly related to fund finance, which is still niche. We have solid competitive advantages in that area due to our team and the lender finance group that sometimes collaborates with funds in unique ways. I'm not completely advocating for this approach; it's mainly in the club deal scenarios where people feel pressure across the banking industry regarding asset growth, and they're reluctant to lose deals. Personally, I prefer to maintain pricing, as many of you who follow us are aware, and sometimes I feel like I'm the only one considering this, but that's essentially the situation.

Gary Tenner, Analyst

Great color. Thank you.

Operator, Operator

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

David Feaster, Analyst

Hey, good afternoon, everybody.

Gregory Garrabrants, President and Chief Executive Officer

Hey, David. How are you doing?

David Feaster, Analyst

Doing well. I wanted to discuss the deposit situation. You started adjusting deposit rates even before cuts, which is encouraging to see as deposit costs decline. I'm wondering if you've experienced any resistance or loss of clients as you've lowered rates. Additionally, how do you view betas in this cycle and what opportunities do you see for deposit growth? The securities business clearly presents an excellent chance for increasing low-cost core deposits, but I'm interested in which specific areas you are most optimistic about in the near future.

Gregory Garrabrants, President and Chief Executive Officer

The entire C&I set of verticals across the lending businesses and the teams we've hired in the middle market space, the finance business, and venture side which really is going to be much more focused on deposits than lending and we're not doing venture lending. They have typically BL products, cash flow stuff but they don't have any sort of specialty products, but they have they're already bringing a lot of deposits and there's just a real sort of need there. So we're seeing that across the board, and we're seeing really good growth on the business side, which was the plan to do that. It obviously requires some investments in personnel which you'll show up in the operating expense, but I think it's well worth it and the teams are doing a really good job. We did see some attrition in the consumer side but not so much as to be particularly worrisome and it grew it still ended up growing for the quarter. So it makes the marketing a little less efficient, so you end up with a slightly higher cost per new account things like that, but nothing that was particularly concerning and so I've said publicly that we intend to essentially offset on the way down our deposit costs with our reduction in interest income from our floating rate loans and so I think we definitely did that for this period and then we just continue to test ourselves throughout that and I think we're in a much better shape than we ever have been given the diversity and given all the work that's done on the commercial side. Frankly they're so busy in new account openings that we're hiring a lot of service people on the commercial side and stuff like that. So that momentum is there and I think it really feels like it's continuing.

David Feaster, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

The technology and venture capital sector is very new for us. We're planning to release a press statement this week that will highlight the names and backgrounds of our team members, who I believe are very impressive. It was enjoyable to meet their connections, particularly at lunch with experienced venture capitalists whom I've not met before. They are in an interesting position and are in the process of opening deposit accounts. While we are not engaging in venture lending, we see ample lending opportunities with our existing products, which is a fresh endeavor for us. Our new hires are starting to establish accounts. On the middle market front, we have brought on an individual based in San Diego who was an Executive Vice President at a larger bank and led their operations. We are integrating some of our current staff under his leadership, which is another new development, though still in its early stages. The entertainment sector is on boarding numerous accounts. Although they are currently under $100 million on the balance sheet, they are likely to exceed that threshold soon. These accounts tend to be smaller in size but are contributing to zero-cost deposits, and we have a promising pipeline in this area. In software, we are making substantial investments that promise to yield a great product, especially beneficial for Registered Investment Advisors (RIAs). This new software will allow RIAs to manage their clients' accounting and bill payments fully, which has generated excitement among them, and we look forward to integrating this into our RIA-facing platform. Regarding the marine sector, we are gaining traction with our floor plan financing, which has been our focus. We're establishing new floor plan lines and continue to partner with new manufacturers. On the retail side, we aim to create a gain-on-sale business model. Several new banks are interested in purchasing our longer-term 20-year loans. However, we do face some disconnect in how we perceive interest rate risk and what we wish to retain on our balance sheet. We have allocated some resources for the 20-year loans, but we prefer to enhance our gain-on-sale strategy. We see progress in this area as well and are eager to expand our floor plan initiatives into other lending categories, as we believe this can become a valuable niche on a national level.

David Feaster, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

No, it absolutely does. We're starting to absolutely get that where those advisors are acting as salespeople for Axos business deposits, both business deposits and consumer deposits, and so we are seeing that and it is helping deposit growth and it's helping in a lot of different ways and we're also needing to evolve what we're doing up our service game as we make sure that we're serving these clients in a way that they're used to being serviced, which is happening. I'm very excited about it because I think that we are seeing a lot of traction of new advisors come on. They're hungry for banking products and they're interested in working with us. Now what we have done previously is we've tried to essentially offer sort of more zero interest style accounts on the checking side and make them more payment facilitation accounts. We're still going to do that but we're rolling out what we're calling the Axos One product which is if somebody has an active checking account essentially they can get a high yield companion account and we took that out for feedback and getting a lot of incredible feedback from that. So we're continuing to refine the product, but I think it's a great channel and I think it's exciting, and as we onboard these RIAs who we have direct relationships with rather than through TAMPs, we really have an opportunity that's much better than going through the TAMPs.

David Feaster, Analyst

Okay. That's helpful. Thanks everybody.

Operator, Operator

The next question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Kelly Motta, Analyst

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

Derrick Walsh, Executive Vice President and Chief Financial Officer

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

Gregory Garrabrants, President and Chief Executive Officer

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

Kelly Motta, Analyst

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

Derrick Walsh, Executive Vice President and Chief Financial Officer

No. I don't think I can provide a detailed answer about the Y-9C aspect right now. We previously classified many loans from non-depository financial institutions in the reports based on the structure of the loans rather than the underlying collateral. This might explain some of what you're noticing from the past amendments to those reports. However, there hasn't been any significant change recently, and you can see that reflected in the press release, particularly in the supplement regarding the Creswell balance. The balance has remained fairly stable over the last 12 months, although we've faced some repayment challenges in the Creswell portfolio.

Gregory Garrabrants, President and Chief Executive Officer

Yes, the direct answer to your question is that we aim to grow with loans that meet our credit criteria in commercial real estate. We have concentration limits, but we are not reaching them and are actually finding it challenging to maintain the current concentration. This isn't our goal; we simply want to grow. The issue arises from the fact that there are fewer deals in commercial real estate, and we are also noticing that some bridge lenders are beginning to take out loans earlier in certain projects at very low rates, often in partnership with a private debt fund. We are still keen on expanding our commercial real estate portfolio, which is performing well despite the surrounding noise, and we are committed to growing it as best as we can.

Kelly Motta, Analyst

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

Gregory Garrabrants, President and Chief Executive Officer

This wasn't a club deal as I would define it, since typically a club deal involves four or five banks. Instead, this was a very large syndicate, known as Shared National Credit. I'm not sure if we reported a Shared National Credit figure or what part of that may include club deals, as they are different. The total for cash-flow based SNCs is $1 billion. However, it's important to note that this situation is quite unique. Unlike other SNCs where we perform enterprise value calculations and that have strong ratings from other agencies, this one is different and the grading is robust for the majority of those assets.

Kelly Motta, Analyst

Got it. I appreciate the color. I'll step back. Thank you.

Operator, Operator

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

Johnny Lai, Senior Vice President, Corporate Development and Investor Relations

Great. Thanks for everyone's interest. Have a nice afternoon. We'll talk to you next quarter.

Operator, Operator

Thank you for everyone's interest. Have a nice afternoon. We'll talk to you next quarter.