Q4 2020 Axos Financial Inc Earnings Call
[music].
Greetings and welcome to the axles financial fourth quarter 2020 financial results.
All participants are in listen only mode.
Question answer session will follow the formal presentation, if anyone should require operator systems. During the conference. Please press star zero on her telephone keypad.
Please note that this conference is being recorded I will now turn the conference over to our hosts Johnny like Vice President Corporate development and Investor Relations. Thank you you may be it.
Great. Thank you good afternoon, everyone. Thanks for your interest in actually.
Joining us today for absent actual Inc.'s fourth quarter 2020 financial results Conference calls are the company's President and Chief Executive Officer break your branch.
Executive Vice President and Chief Financial Officer Handy Nicoletti.
And your review and comment on the financial and operational results.
Three in 12 months ending June 30 of 2020, and they will be available to answer questions. After their prepared remarks.
Once again 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.
Let me make additional for Nike statements in response to your questions.
These forward looking statements are made on the basis of current views and assumptions.
Regarding future events it before [laughter] actual results could differ materially from needs expressed or implied in such forward looking statements.
As a result risks and uncertainties.
Therefore, the company claims the safe Harbor protection pertaining to a forward looking statements contained in the private Securities Litigation Reform Act 1995.
Oh, it's been what counts and there will be an audio replay available in the Investor Relations section of the company's website located at Axis financial Dot Com for 30 days.
Detailed let's call were provided on the conference call announcement and in today's earnings press release at this time I would like to call. It turn the call over to Greg for his opening remarks.
Johnny Good afternoon, everyone and thanks for joining us I'd like to welcome everyone to access axles conference call for the fourth quarter of fiscal year 2020 ended June 30 2020. Thank you for your interest in access fashion want access back [laughter] announced record net income of 183.4 million for the fiscal year ended June.
30 2020.
18.2%.
55.1 million aren't in the fiscal year ended June 30, 29 chain.
Access is return on average equity for fiscal 2020 was 15.65% and the banks efficiency ratio was 39.81 for Scott, especially your 2020 earnings per share increased 20.2% to $2, a 98 cents per diluted share compared to $2.48 per diluted share and that's basically.
Or 29 chain.
Excluding acquisition related expenses non-GAAP earnings per share increased 20.59% to $3.13 per share, especially your 2020. According to a non-GAAP return on equity of 16.49%.
Our book value per share was 20.56 at June 30 2020.
17.7% from the prior year.
We had an excellent quarter with higher net interest margins double digit growth had net interest income noninterest income strong deposit growth positive operating leverage and stable credit performance highlights of this quarter included the following.
Well incident leases increased by approximately 258.4 million.
10% annualized for the first quarter at 2020.
Up 13.3% year over year.
Strong originations in jumbo single family commercial specialty real estate and mortgage warehouse were offset by lower production and non real estate lender finance and higher pay offs in multifamily and certain saying I loan portfolios, excluding P.P. loans ending loan in leases increased by 11.6% year over year.
Net interest margin was 3.89% for the quarter ended June 30 2020.
Eight basis points from 3.81% and the fourth quarter fiscal 2020, and up 10 basis points from March 31st 2020, excluding HRP block related loans.
Our efficiency ratio for the three months ended June 30, 2020 was 49% compared to 51.1 person in the comparable period ended June 30 29 chain.
Earnings per share. It was 75 cents up 13.61st that compared to 66 cents in the fourth quarter of 29 chain. Despite a 132% year over year increase in our loan loss provision and a 33.3% tax rate this quarter compared to 26.6% and the corresponding quarter a year ago.
Capital levels remain strong with tier one leverage of 9.25% at the bank and 8.97% at the holding company, both well above our regulatory requirements.
Our credit quality remains strong with a small percentage up our loans and forbearance or delinquent on principle and interest payments are conservative underwriting with an emphasis on keeping asset based loans with low loan to values on our balance sheet continues to serve us well.
Total loan originations for the fourth quarter ended June 30, 2020 was 1.63 billion compared to 1.78 billion in a year ago period originations for investment were down 12.2% year over year and originations for sale were up 16.4% year over year due to strong gain on.
Sell mortgage banking production in Q4 up 2020.
Our gain on sale mortgage banking group had a strong quarter with originations, increasing 111% linked quarter to approximately 291 million.
Record low interest rates drove strong demand for refinance and purchase transactions and capacity constraints within a single family mortgage lending industry resulted in a gain on sale margin of 321 basis points compared to 222 basis points on a quarter ended March 31st 2020.
Yeah look for mortgage banking remain strong our pipeline of single family Agency mortgages was 309 million at the end of the general corridor.
We participated in the Sps Paycheck protection program originating approximately 167 million well dollars a flows for 848 existing and new clients through June 30 2020.
We built our own P.P. long portal and deployed resources to quickly open deposit accounts and underwriting Fung Pvp lungs. In addition to providing much needed capital to our borrowers participation in the P. P. Also helped generate incremental relationships and deposits for our small business in commercial banking groups were transitioned to helping clients get there.
<unk> loans forgiven instead of making additional loves since we did not expect to recognize the majority of our processing fees associated with G.P.P. loans until we submit a bar was loan forgiveness application to the S.P.A.P.T. loans had an immaterial impact on our fourth quarter net interest margin loan yield that noninterest income.
Our net interest margin for the banking business unit was 3.95% in the fourth quarter compared to 3.85% X HR block in the prior corridor and 3.87% and the fourth quarter of 29 team.
On the asset side, the vast majority of our asset base loans are variable rate with 95% of all variable rate was being at their floor as of June 30 2020.
Excluding P.T. loans the average Reagan our loan book was 5.21% in the 630 2020 quarter compared to 5.56% in the quarter ended June 30 2019.
Yields on loans originated in the quarter ended 630 2020 were 5.311st time for Jumbo single family mortgage has 4.77% for multifamily and 5.26% for saying I loved approximately 58% of our loans are five one arms was single family in multifamily mortgages.
As the underlying collateral.
What's the slowdown in prepayment activity and stability and your jumbo mortgage and multifamily loan yields we expect to maintain overall yields on our residential real estate mortgage loan book.
Giardia of our small balance commercial real estate portfolio, which represents another 3% of our loan balances at 630 2020, our term loan so fixed interest rates and staggered prepayment penalties to the first five years that alone.
And our Standalone book, our asset based lender finance and commercial specialty real estate loan portfolios have rates that are just telling index.
The 3 billion of lender finance and commercial specialty real estate loans outstanding at 630, 2020, approximately 92% or out their floor rate.
Our equipment leasing portfolio, which accounts for the remaining a 156 million of sand I loans outstanding is comprised of fixed rate loans and leases.
We're making steady progress diversifying our consumer and commercial deposits and reducing our weighted average cost of funds through cross marketing initiatives and software enabled platforms.
Consumer deposits, representing approximately 52% of our total deposits at 630 2020 is comprised of consumer direct checking saving money market and noninterest bearing prepaid accounts, our consumer checking savings and money market deposit balances increased by 354 million from 331 2020 with strong.
Growth in small business deposit accounts and balances, we reduced our high yield savings and money market deposit rates in March following the feds rate action and reduce them further in the June quarter and again in early July resulting in a 57 basis points sequential decline in our average interest bearing demand and saving deposit cost.
Average non interest bearing demand deposits was 2.1 billion in the quarter ended June 30, 2020, essentially flat linked quarter. Despite the seasonal decline in our prepaid deposit balances, we're making good progress on our specialty commercial and Treasury management businesses and our involvement with the S.P.A.P.P.P. program provides increase.
All small business and commercial deposits.
Our credit quality remains strong our annualized net charge offs to average loans and leases was 67 basis points this quarter compared to 65 basis flights and the corresponding carried last year.
Excluding charge offs related to Emerald advance refund advance salons are net charge offs to average loans and leases were five basis points for the fourth quarter and eight basis points for the full year 2020.
Nonperforming assets. The total asset ratio was 82 basis points for the quarter ended June 30, 2020, compared to 55 basis points <unk> third quarter ended March 31st 2020.
The majority of our nonperforming assets are comprised of single family in multi family loans with low loan to values of the 82.1 million of nonperforming single family mortgage loans, approximately 71% had along the value at or below 65%.
The vast majority of our single family nonperforming loans are for properties located in prime markets, where housing supply is low and demand is high.
We remain well reserve with our allowance for loan loss, representing 86.2% coverage of our nonperforming loans and leases at June 30 2020.
We have taken proactive measures to matter just Alonso became delinquent whether they are kobin related or not as of June 30, 2020. We are provided no deferrals of payment obligations on commercial loans of any kind of including all commercial real estate multifamily small balance commercial crystal lender finance and leasing.
Except for one of 5.6 million to our lawn and our equipment Finance business unit that was provided three months of interest only payments.
June 30, 2020 access at 58 basis points of its multifamily and small balance commercial loans that were greater than 30 days delinquent or those 11 loans seven loans with a combined balance of 7.3 million have either been sold at par plus a crude or come a current since June 30 2020.
We have two hotel loans held for sale for 24.5 million balance well, the 56.4% LTV at origination.
Oh, the portfolio of single family loans, the ban crabs forbearance on approximately 5% of its portfolio until June 30 2020.
That's 5% say were granted forbearance, 3% brought their loan correct prior to the expiration of the June 30, 2020 forbearance period.
Oh, those loans that were grabs forbearance the LTV breakdown as follows.
19% had a loan to value below 50%, 39% had a loan to value between 50, 160%, 40% had a loan to value between 61, and 70% and 2% of along scratched forbearance had a loan to value greater than 70% with only one law and greater than 75%.
TV at origination, which wasn't 80% LTV purchase, but does the current loan to value of approximately 65%.
The 2% of the loans that were granted forbearance and had not brought themselves current by 630 2020. The LTV breakdown as follows 20% had a loan to value below 50%, 38% had a loan to value between 51, and 60%, 39% had a loan to value between 60 more than 70%.
And 3% of the loans crowd forbearance that had not made current by 630 had a loan to value greater than 70% wouldn't know and greater than 75% LTV.
Auto loan deferrals were 9.7% representing balances of 28 million and 5% for commute consumer unsecured loans, representing balances of $2.7 million of deferrals.
We have a consistent track record of maintaining low credit losses through multiple economic cycles, given our conservative underwriting guidelines senior structures in our commercial lines, along so the collateralized nature of our loan book.
During the great financial crisis, our peak annual net charge offs for loans, we originate it was less than one basis point for single family mortgages and for multifamily loans well the depth and duration of this economic downturn is uncertain. We believe our disciplined underwriting unproductive first management will help us manage through the cycle.
Approximately 94% of our loans outstanding at June 30, 2020, or collateralized by hard assets with an average LTV and the fifties, including 9.5 billion of real estate assets and 550 million of loans secured primarily by consumer receivables single family mortgages, representing 40% of our total loan ports.
Folio had a weighted average loan to value of 60%.
At the end of June 30, 2020 corridor, 62% of our single family mortgages have long duvalier ratios at or below 60%.
32% have loan to value ratios between 61 than 75% Avalon devalue ratios between 71, an 80 and approximately three basis points or 1.3 million of combined balances have an all into the Irish show greater than 80%.
We have a well established track record of strong credit performance in Jumbo single family landing with lifetime credit losses on our originated single family loan portfolio of less than three basis points of loans originated.
Our mortgage warehouse loan book with June 30, 2020 balances of 474 million is secured by single family mortgages that can be sold if the bar is unable to turn the book our initial advance rate on single family mortgage warehouse loans varies between 90 and 100% of the note amount.
Typically curtail an additional 15% on day 45 and day 60.
Our weighted average exposure.
Two loan to value on the 31 million and non agency loan balances outstanding distributed among four warehouse clients was approximately 51%.
We took advantage of competitors scaling back or exiting the mortgage warehouse business warehouse business in group balances by approximately 94 million or 25% compared to March 31st 2020.
Our warehouse clients are benefiting from the elevated level of refinancing activity and higher margins across the industry due to capacity constraints.
We believe that any potential losses in our real estate secured.
Loan book, well be manageable, even on the sharp economic and housing downturn.
Multifamily loans, representing 18% of our total loan portfolio at 630, 2020 had a weighted average loan to value of 56%.
Lifetime credit losses in our originated a multifamily portfolio are less than one basis point of loans originated over the 18 years, we have originated a multifamily loans.
At the end of June 30, 2020 quarter, 44% of our multifamily mortgages have loan to value ratios at or below 55%, 33% have loan to value ratios between 56% to 65%, 20% have loan to value ratios between 66, and 75% and less than 3% greater than 75% loved about.
The average debt service coverage of our multifamily loans was 1.79 at 630 2020.
As stated we have grads it no deferrals in the multifamily loan book.
Our small balance commercial real estate portfolio of 371 million, representing 3% of our total loans at 630, 2020 had a weighted average loan to value of 52%.
At the end of the June 30, 2020 quarter, 51% of our small balance commercial real estate loans have long devaluated shows at or below 50%.
18% have loan to value ratios between 51 and 60%.
24% have long devaluation between 61 and 70%.
4% or between 71 in 75% and 3% or between 76, an 80%.
And our small balance commercial real estate portfolio, we had approximately 66 million of loves to hotels and resorts representing less than one for some of our total loans outstanding.
The weighted average loan to value of this book is approximately 52%, including 51% for the hotel and resort deals. The average debt service coverage of our small balance commercial real estate loan portfolio was 1.71 at 630 2020.
We granted no deferrals from a small balance commercial loan book.
Our commercial.
Loan book, including lender finance and commercial specialty real estate is comprised of lots and lines of credit secured by single family multifamily commercial real estate landing consumer receivables.
The lender finance book is comprised of real estate and non real estate transactions.
The weighted average advance rate on the real estate lender Finance book is 28.1% with no transactional advance right great 50% the non real estate lender finance book backed primarily by consumer loans, approximately $546 million with an average advance rate of 49.6% other receivables balance these structures.
Well they require rapid paydowns in the event if any significant collateral deterioration of the receivables and are also pay down rapidly in the event originations declined we had granted no deferrals and our lender finance loan book.
The weighted average loan to cost of our commercial specialty real estate loan portfolio was 43% was strong during your partner supporting the capital structure will senior positions and all our lender finance a commercial specialty real estate loans and every deal has significant capital support from borrowers and sponsors we monitor their performance of the underlying collateral how's that.
Bankruptcy remote special purpose vehicle, allowing us to identify credits variation and take Swift action to protect our principal and interest.
And our commercial bridge in construction portfolios, we work with experienced developers and well capitalized sponsors such as the related Crippen Blackstone.
The projects are located in gateway cities, such as Los Angeles, New York, San Diego in Denver.
The average Crystal loan size is approximately 18 million. The average remaining term is 15.6 months and the average loan to cost is 43% Weve granted no deferrals and across all loan book.
We have no direct exposure to airlines casinos theme parks oil and gas exploration companies retailers are movie theaters.
Our equipment leasing portfolio represents our entire exposure to the oil and gas sector aircraft or restaurants. The average debt service coverage ratio for the five equipment leases in these higher risk industries was 2.4% at the end of the fourth quarter.
All the above mentioned credits for current as of June 30, 2020, although some of our leases to companies that have cash flow based leverage on their balance sheet. We have no cash flow based leverage loans, we have sold in absolute discretion to approve it tonight draws on all of our real estate lender finance and mortgage warehouse lines.
We had approximately 270 million of hotel and 150 million of retail mixed use exposure, our commercial specialty real estate portfolio, representing 2.5% approximately 1.4% of our total loans outstanding at June 30, 2020, respectively.
The majority of our hotel loans or a b notes, where we all the senior position.
Only one of our hotel borrowers not card on their loan payments the average LTV of the hotel and retail commercial specialty.
I'll stay low, 76% and no deferrals for graph for hotel logs.
Our non real estate consumer lending is comprised of approximately 291 million of auto loans 50 million or personal unsecured loans and 27.5 million innovation our block refund advance laws, we saw us our auto loans, primarily from dealers located and 10 states and lend to prime borrowers with an average FICO of 769, we filled.
They underwrite and service every auto loan we hold on our balance sheet and the portfolio continues to perform in line with expectations. We've managed the credit risk of our personal unsecured loan book by focusing on prime borrowers with an average FICO score of 751 and average loan size of $14000 given the rapid deterioration in the economy.
Hi, unemployment rates nationwide, we temporarily suspended originations and new personal unsecured loans and recently reopened a very small origination bucket and even more conservative underwriting standards, we charged off 1% of the total refund advance loans in the fourth quarter and had an outstanding balance of approximately 27.5 million.
As of June 30, 2020.
Given the processing delays at the IRS related to the 90 day extension and the federal tax filing deadline, we're experiencing more extended repayment timeframe for refund advance slots. This year in comparison with prior years.
And our securities business, we ended the quarter with approximately 207 million of margin loans up 48 million from March 31st 2020, as some introducing broker dealers clients became more bullish and the June quarter, Despite elevated price volatility and the stock market. Since March we've successfully managed our margin business with no card losses.
Provisions for loan losses was 6.5 million in the quarter ended June 30 2020.
3.7 million compared to the same period a year ago.
Approximately 3.4 million the 6.5 million loan loss provision in the fourth quarter was attributable to loan growth and 3.1 million was a triple deterioration in the economy.
For the 12 months ended June 30, 2020, we increased our allowance for loan losses by 18.7 million.
75.8 million of loan loss reserves at June 30, 2020 represents approximately 71 basis points, a total loans and leases at 13.6 times, our annualized net charge offs X block related Emerald advance refund laws and the quarter ended June 30, 20 Twond.
Because our fiscal year ends on June 30, we adopted the current expected credit loss methodology or Cecil on June 1st on July 1st 2020, the original required date for our year end.
The immediate impact of adopting Cecil otherwise known as that they want to adjustment is estimated to be an increase in the banks allowance for current loan losses of between 35 million to 55 million.
The adoption of seasonal means that we are now considering loan losses, well beyond the approximate one year timeframe generally used under the incurred loss method. While we currently see an improving economy and a modest impact you to cope with 19, the additional Cecil reserves reflect long term uncertainty of a variety of events, including a possible or assumed.
And so covet 19 cases are a change or more severe governmental shutdowns additional on extensional extensive governance moratoriums, including real estate foreclosures and kind of those actions and uncertainty of policy changes, resulting from an election year and potential long term changes in certain business models that may impact the valuation.
Commercial and residential real estate values.
The after tax impact to that they want adjustment is expected to be between 24.5 million and 38.5 million and was recorded directly against stockholders' equity.
Right and so the cap.
For regulatory purposes, we elected to defer and phase and the impact of our to our capital ratios over five years.
This phase and the day, one adjustment will not reduce tier one capital for the first two years, and then phase and one third of the impact over the last three years of this five year election.
Andy will provide additional details on sees a loss models and the impact on regulatory capital.
We continue to generate strong returns with return on average common shareholder equity of 14.71% and 15.65% into three months in 12 months ended June 30 2020, respectively.
Our efficiency ratio for the banking business segment was 41% for the quarter ended June 30, 2020, and improvement of more than 200 basis points compared to 43.2% in the year ago period.
We continue to maintain strong operating efficiencies, while investing in a prudent manner for future growth.
Our capital ratios remained strong at 9.25% at the bank and 8.97% at the holding company, despite or higher provision for loan loss reserves, our tier one and see T. One capital ratios remain healthy at 9.25, an 11.89% respectively for the bank at June 30 2020.
Even though the.
Expedient and broad based monetary and fiscal support provided by U.S. government agencies have resulted in a rapid snap back in credit spreads and market liquidity. We believe there will be further rationalization on the competitive landscape among banks and nonbank lenders, our top priority for capital as funding growth of our existing businesses while selectively.
Valuating businesses that can enhance our asset deposit capabilities increase our fee income and returns or reduce our funding cost.
Our loan pipeline remains solid with approximately 1.2 billion of consolidated allowance and our pipeline at June 30 2020.
With a healthy liquidity position and diverse set of funding sources, our on balance sheet deposits increased by 26.2% year over year, what checking in saving deposits increasing by 37.4%.
Our consumer commercial pass and Treasury management small business banking and specialty deposits continue to show strong growth concurrently we reduced our average interest bearing funding cost by 52 basis points linked quarter, and 73 basis points year over year to 1.25% our weighted average interest bearing funding cost at June 30 2020.
Was 90 basis points, reflecting actions, we took toward the end of last quarter.
Client cash deposits from a fs an x. So securities currently held at other banks was approximately 487 million at 630 2020, we have the ability to bring back good portion of our off balance sheet deposits. If it's economically advantageous to do so we also have access to approximately 3.8 billion of FHLB borrowing.
3.6 billion in excess of the 243 million, we had outstanding at the end of the fourth quarter. Furthermore, we had 1.8 billion of liquidity available at the fed discount window as of June 30, 2020.
But many banks brokers and fintechs, reducing rates on all deposit products, including consumer online savings in money market deposits and commercial deposits, we have more flexibility than ever to fund our balance sheet growth at attractive rates.
We have a relatively stable outlook with respect to loan growth in net interest margins and jumbo single family mortgage as many banks and not back so told that they aggressive lending terms and conditions. They offered in the prior 12 to 18 months pricing on new jumbo mortgages remain attractive. Despite some activity in the secondary market for non agency mortgages and the reemerged.
So a few nonbank lenders the purchase market for single family mortgages has rebounded strongly since most states relax their health related restrictions to the pent up demands and mortgage rates near record lows.
The multifamily in small balance theory dynamics vary by geographic market and property type.
Rent payments and our primary markets.
Where we land are holding up relatively well the stimulus checks forbearance programs federal subsidies on unemployment shirt and the Sps Paycheck protection program provided short term cash flows for owners and borrowers the diverse nature of our local economy on the West coast and our limited exposure to urban markets have resulted in relatively stable value.
And our multifamily and commercial real estate markets.
We continue to see opportunities to grow our multifamily and small balance theory portfolios on a selective basis for high quality borrowers that low leverage points.
And our two largest cnine lending categories lender finance and commercial specialty real estate, we continue to evaluate new opportunities, but our pivoting to leveraging real estate assets it even more conservative advance rates.
And our credit underwriting standards with respect to all our lending products.
We continue to see demand for our lending products at these higher credit standards.
I suppose clearing continues to benefit from a flight to safety with ending deposits, increasing by approximately 9% linked quarter to far to 15 million.
These client deposits held in approximately 90000 individual brokerage accounts provides a stable low cost source of funding.
We have chosen to keep the majority of the 450 million and other banks, earning interest income for the securities business. We have the ability to bring these deposits back to our bank on relatively short notice to fund our loan growth.
Like other broker dealers, such a swab any trade axles clearings rates earned from cash deposits has significantly compressed to do the says zero interest rate policy.
Well, then pending consolidation in this industry and the ability for declaring a custody business to generate incremental fee income sticky low cost deposits, a new retail relationships to the bank. We continue to be bullish on X those securities long term strategic value to our organization given the banks long term loan growth prospects that can be funded by these low cost.
Deposits generator from the security business.
Overall, we feel good about our ability to maintain an annual net interest margin within a range of 3.8% to 4%.
We anticipate being more opportunistic with respect to loan growth until we get more clarity on the sustainability of economic and housing recovery.
We see stability in our new loan rates across most of our largest lending categories. In CNS side, we may have some degradation and new loan yields as we enter new institutional lending relationships that provide high quality loans with strong works protection at marginally lower rates compared to our lender finance and commercial specialty real estate loans the excellent liquidity NPV.
The loans will have a short term drag on our NIM until they are no longer on the balance sheet with excess deposits and some longer term Cds that can be called prior to maturity, we see additional downward pricing flexibility on some of our deposit categories, which should help us keep our net interest margins stable now I'll turn the call over to Andy Who'll provide a dish.
And all details on our financial results.
Thanks, Greg first I wanted to know that in addition to our press release, an 8-K was filed with the FCC today is available online through maker or through our website at X those financial.
Second provide brief comments on two topics. Please refer to our press release or the 8-K for any additional details.
First as Greg mentioned access financial has adopted Cecil effective July Onest 2020, and expects its day one entry to increase the allowance for current loan losses by between 35 million and 55 million.
We do not expect a significant impact from c., so well any other balance sheet category other than our loan portfolio.
Like many banks, we elected to provide a range for day, one entry since that increase pending review and testing in the normal course of our quarter ended September 30 2020.
To implement Cecil we develop six portfolio models, which use Moody's forecasts that he macroeconomic variables to predict the probability of default and the loss given default or the severity of loss throughout the life of our loans.
Formulas for probability of default were developed from 15 years of historic Bastedo and more than 1800 movies macroeconomic variables measured historically each quarter.
The Moody's historical variables were systematically tested then eliminated using our square regression with back testing, leaving those Moody's variables most predictive of historical default results.
The severity of loss in our seasonal model is primarily based upon low level collateral values adjusted for liquidation cost and estimated changes in value over future periods of the loan life.
Correct liquidation collateral values, our adjusted for value decreases or increases by using price indices. For example, key Schiller's monthly home price index, and Moody's RC a commercial property price index.
When the adjusted value the loan collateral falls below the loan balance at 18 month end in the future a loss severity percentage is generated.
Our seasonal model so for each future monthly period in which a default rate is forecast a lost as estimated by multiplying the default rate the severity rate and the loan balance at the time.
All monthly estimated losses or discounted back to the reporting period using the effective interest rate of alone.
Macroeconomic models by their very nature are designed to accommodate historical averages across Moody's variable parameters. They worked well for your historical depression said recoveries, but the macroeconomic models do not predict that will be U shaped recoveries, meaning.
Now make improvement which has been dramatically reverse.
For example, Moody's current forecast data for the unemployment rate generally shows improvement between one year to five years out, but no really consideration is significant events reversing that trend.
Access believes as Greg mentioned earlier that while we see forecast, an improving economy and a modest impact due to cope with 19 over the next 15 months there our long term credit impacts associated with a variety of events, including the resurgence of cobot 19.
A return to more severe government governmental shutdowns addition, additional.
Extensions of government moratoriums, including real estate foreclosure moratoriums and tenant evictions, we have uncertainty of policy changes, resulting from an election year and changes in certain business models that will adversely impact the U.S. workforce, all leading to another.
Significant downturn.
Yes, we added to our seasonal models residential and commercial real estate value downward adjustments, averaging 30% to 40% starting in October 2021.
15 months from now.
This level of real real estate price decline is based on the actual housing industry average price index declines between 2006 and 2011 in the last great recession, I period with high unemployment in a large volume of real estate borrower to falls.
For all the reasons highlighted our estimated current lost during the life of our loan portfolio includes the collateral value price declines between 2006 in 2011, starting 15 months from now.
The collateral value decline as described is the primary driver for our day, one adjustment between 35 million to 55 million.
They want adjustment will not impact our regulatory capital ratios in the short term because we have elected to phasing in.
Over five years. This means that the full reduction to stockholders equity you from the day, one adjustment will be added back to stockholders equity eliminating the need negative impact to regulatory tier one capital.
Capital each quarter for the next two years.
After two years the add back the capital will be reduced by one third for each of the next three years fully CZ now the add back benefit by the end of year five.
The second topic is our income tax rate.
For the quarter ended June 30, 2020, our effective income tax rate was 33.3% up from 29.8% for the quarter ended March 31, 2020, this increases associated with deferred tax or as you got county, which requires us to expenses.
Estimated the RSU cost before the actual income tax compensation deduction is measured.
Actual compensation tax deduction is dependent upon the final remember shares granted and our stock price at vesting.
If the number of shares and or the value of this year is lower than estimated genuinely an income tax rate increase adjustment is required.
Due to our lower stock prices and fewer grants, we made a onetime adjustment.
Going forward, we generally expect our tax rate to be between 29% 30%.
With those two quick items I turn the call back over to John in line.
Thanks, Andy operator, we're ready to take questions.
Thank you.
As a gentleman at this time, we will conduct a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Information family in the case that your line is in the question Q.
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My first question comes from Andrew Lee with Piper Sandler. Please state your question.
Hey, good afternoon, everyone.
Hi, Andrew.
Hi.
First on the margin here.
From interest bearing liabilities at one in the quarter. It sounds like there's more room to go down a further here this quarter given the movement do made even this month.
And recognizing that the 3% to 4% margin has been a good guide now for the last several years.
When you get to the point, where it out its near the higher end of that on a core basis, it's given the room on the funding side of the great nature of the loan book.
Hi, I think theres the potential for it but you know given at least another quarter to see how that plays out I think.
Yeah, we are very focused on credit quality and so when we look at.
Some of the institutional relationships that were interested in developing we we think they're a very high quality and at times, we're making some rate concessions with respect to certain.
Loan products, just given the nature of the index rate. So I do believe that there is an opportunity to lower our funding cost.
But I, but I also.
We we do tend to have reasonable levels and prepayments and we have reasonable levels of originations so depending upon the nature of those and.
Our.
The fact that we've tightened credit criteria across the board we have to be thoughtful about where loan rates go now that being said, we don't have obviously the issues. The other banks do with respect to margin compression.
Ill, so given where we are with respect to our.
Fixed rate our floating rate loans adjusting the vast majority of those adjustments are behind us.
Okay.
All right. That's helpful and then on the nonperforming loans its own pardon me remembered like 82 million of them are a single family mortgages, but the total and you end up to 94 from 65 billion a quarter ago was the bulk of the increase related to single family mortgage.
Yes.
Yeah. It was there was there anything unique or not I guess not unique but anything common between all of them.
Drove the increase.
No I think it's I think that it's its related to the economy. There was nothing particular with respect to it or particular geography, it's it's not really it's not a particularly high number and when we go through when we look at our collateral valuations, we think we're very well secure.
Third.
So yeah, I think its and I think that with respect to.
Folks are coming current their rejiggering their business models.
Some of them got confused and thought that you everything was for free and they didnt have to pay and so we're helping them with that confusion and so I think I think its it'll it'll be okay, but obviously.
The longer the economy grinds on the more folks are gonna have to adjust and not everybody is going to be able to we tend to Latin to folks who have.
Fairly nice home significant assets and.
Yes, there will be a few of those folks who will probably have to adjust you know how they live in their lifestyle and things like that and I think they have equity and they can do that in the markets pretty good. So you know to the extent they have issues were encouraging them to.
Until this their home and get the equity from it.
Got it.
Very helpful I'll step back thanks.
Thanks Peter.
Our next question comes from Michael Perito with KBW. Please state your question.
Hey, good afternoon guys.
Good afternoon Michael.
I had a few things I wanted to touch on I used one on.
Helpful color kind of on the jumbo mortgage side, but I think I was curious have you started to see if we look out here, though I mean I know in for example in New York area by me and I I imagine and some others too there's been big moved out to the city and the suburban real estate market. The picked up tremendously in some of these kind of wealthy more.
Densely populated areas are you starting to see kind of an increasing accelerated demand I know, California, New York what are some of your bigger markets and that product just curious what you've actually seen if you look for today.
Yes, I think that's I think that's right now we have exposure in in the you know the urban core in New York and we have exposure in the Hamptons then.
If you had asked me what I was more worried about six months ago that tells you that happens and that's now its reversed.
Think that you know, we don't try to but to be.
To be perfect with respect to these sort of trends, we try to build and enough cushion that we are able to to deal with side to the deal with these trends I think we're in reasonably good shape with respect to that but I definitely think you're seeing a movement towards a little bit greater space.
And certain markets that were.
Less attractive I think have currently become quite attractive including.
Certain areas for example, in Florida, which we were always we're always we were there, but we were caused more cautious on and we're seeing.
Things appreciate their quite well.
Well I guess the <unk>. The next people that is I mean over the last few years now I think you know kind of the.
Evening of that portfolio and the size of it is kind of <unk> eliminate a little bit on net role on an annual basis. I mean, how do you think those dynamics still kind of old as we think about but not next fiscal year and kind of net growth opportunities in the mortgage side or what are some of these forces have enough power to kind of pulled the tied up so to speak a little bit in that portfolio.
I, certainly think were expecting growth and our single family Jumbo business and that really would be as you.
Today, the first growth in a while there.
Being said, we've also tightened LTV is credit standards reserve requirements and those sorts of things. So we do think that there's there's a there's that theres a demand benefit a secular demand benefit there is a reduced competition and then we've tightened credit standards and that that brew, we hope altered.
Turn up some growth I don't think it's going to be Oh, absolutely. What it was in that in our heyday, but it's going to still be growth and I think it'll be decent and certainly that'll be an improvement from the last lets say prior six quarters, which had experience I think competitors.
Got it way ahead of themselves and people doing 90% LTV Jumbo mortgages for example, which is always an error.
As always in any market.
Makes sense and on the side no I think you referred to a lot of thank you know.
Landfills and things of that nature, and obviously you either years ahead of that trend.
Yes, I think about kind of your acquisitive nature of the last few years I do think you back picked up.
Office space like if I recall I think nationwide there were some office space you guys occupied and with the pandemic can stay at home orders do you I think a lot of Workforces <unk> remotely I mean, if are you guys seen any opportunities in kind of this little bit more challenging revenue environment on the cost side that you think might be able to take advantage over the over the near term here.
Not really I think that are big focus over the next 18 months is going to be really on a continuing to take advantage of the accelerant that this pandemic and changing consumer behavior as broad.
But.
Two banking so.
We have.
For example, not fully incorporated all our small business clients in our Universal digital banking architecture, and we only have the account opening system. The best our newest and got account opening system available to small businesses for sole proprietors that product has.
Scott Gang Busters, and we can't keep up with the demand.
And we have a lot of opportunity there. So the short answer is we're going to invest in technology take advantage of the dislocations in the industry, there and we believe that to be competitive over the longer term that the banking and securities products need to be seamlessly integrated and delivered so.
Obviously, you see a small drag from the security side of the business that drag may actually increase a little bit.
As we hire.
Folks with respect to.
That does not although we are also continuing to bring our management framework in operational effectiveness programs into that organization and that's resulted in very strong.
Cost reductions and an ability to improve the operations. So im sure. Yeah, I think I think it's the right way this to see it for US is that we are out where you got to make targeted investments in continuing to make ourselves a digital leader and.
We've just done so much and it just paid off.
So incredibly well with the seamless nature of everything that we've been able to go to in our business and the investments that we've made in each one of them. If we hadn't made them whether it's in telephony, our IDR chat bots and robotic process automation and all these things.
Those those will continue.
To to benefit us and your sort you're seeing that in a little bit of operating leverage, but we're also going to really do some really neat stuff on the security side, and that's going to take awhile and it's going to take some investment insiders I wouldn't bake that into the models.
I'd also add that from a.
Compensation and people growth perspective, we do continue to look at mortgage banking as additional possible growth that does require additional bodies. So these are all good things that we would scale with the revenue and the business, but I think the big picture is.
We're not looking for operating expenses to come down into next quarter.
Yeah, I think and what we really have is really have to two items operating we have a lot of really great operating efficiencies that are coming into play through the RP A's and all that all the the.
Is it straight through processing type of activities were doing the interactions.
Great and interactions that we're going through and ruthlessly pushing those interactions into more controlled and better environments for the customer and also more efficient for us because we have the TV platform. So we can add every type of interaction that's required through that but then within that we're also looking to.
Dramatically improve the service the personalization and to make ourselves a much better place for consumer and small business to be that branch pace bank, because we're anticipating the customer's needs. We're personalizing the experience and all those things. So there's really a massive amount of technology investor.
And going on here and it's going to play says in good stead for the next decade, but we're in this is not going to be a I think that.
<unk> for us focusing on deal one quarter of expense reductions. This is not how we see things are not Fortunately, we're not getting quite the valuation we.
Sure deserve for the investment, we're making but that'll that'll be caught unclear not only as we get through I think with flying colors. This.
Credit.
I'm sorry, the credit concerns people have but also as we emerge on the other side was incredibly strong consumer small business in commercial products.
That's helpful. And then lastly from me off the back is on capital you on that kind of just a follow up to that last point you made there Greg I mean, obviously, it seems like you're deferral numbers or or very low when do you guys feel pretty good about the portfolio and I I know the answer is probably not today, just because you have the seasonal adjustment coming in and you probably want to work through that but.
Yeah at some point because it does it make sense to maybe get a little bit more offensive again with the capital deployment, maybe whether its later this calendar year early next calendar year or just any updated thoughts on how you guys thinking about that.
You mean with respect to share buybacks or dividends or something.
I guess or even in a more aggressive Jeremy good acquisition option or something like that I know today that that's kind of hard about them, but just.
Yes, I guess in short.
Yeah, No I don't I don't think it's hard to Adam I think we tend to try to buy capabilities, we like to build our own businesses, because then culturally they fit well in there.
There.
You know built into our framework or systems, but we are always looking around at a for the right opportunities and I don't think said we're out of the acquisition game there's nothing.
Currently out there that's significant but we're not out of that game and yeah, well, we'll continue to look at it we have.
The we have an ambitious strategic plans and we're going to execute on those plans that nothing in this environment is impacting those plants I think everybody's.
Motivating and on task and we'll look at our capital levels and see if there's something I think obviously, we've been very conservative here with respect to the seasonal adjustment and frankly, if we took Moody's worst case model. It resulted in a reduction of of our loan loss reserves. So we obviously are planning for very.
Severe housing downturns and if those housing downturns happen, we'll be well reserved enough work. We won't be then we'll be over reserve, but that's not a horrible problem either.
No.
No. It's not I'm very helpful. I think take my question and say well.
Thank you.
I think your next question comes from the Moss with B. Riley FBR. Please state your question.
Good afternoon.
Well, let's start with the Greg you mentioned the news since your institutional loan products here I just kind of wondering how large you envision is getting over next 12 months in kind of what the clientele. Your cunard due to give more color there.
And when you talk about I'm sorry.
He was ones I'm side I'm, sorry, we talk about institutional loan products are you talking about crisil institutional long products or.
Which ones are you kind of referring specifically to well I wouldn't say then adding on.
Yes, no. It's just it's the same exact type of products, it's just that.
That you as you work with them you know more institutional sponsors.
That have you know just enhanced.
Financial wherewithal, you're lowering advance rates.
You ensuring sequences of funding or different essentially all these tightening credit characteristics.
Loan rates can go down that was my only point I think the broader point was that Andrew kind of hit on it of course, he's looking any saying Gee your deposit costs are going down your loan rates are pretty much fixed so of course I'm going to put my model that you should have a much higher NIM and what I'm.
Trying to say is don't do that yet.
We are because we're tightening credit standards and there may be additional competition for the best loans, we may have lower loan rates, that's really the broader point there to just be very direct about it.
Okay.
Great and then just in terms Oh to loan growth you're going to clarify I think you mentioned stability in loan demand. So still thinking you know more or less low double digits high single digits in terms of loan growth.
I think about that.
Yes.
Okay.
<unk>.
Good question just on equipment I mean, I know, it's small you had to $1.6 million a more challenging peas in a few other banks with challenges there just kind of wondering how you're thinking about that portfolio. If your any possible because he never <unk>.
And then what goes on.
No the biggest industry there is the insurance industry actually so the actual expose your too.
Industries that are sensitive.
Clearly you know we yeah, we have.
A small.
A lease on equipment in our restaurant business. For example, we kind of highlighted what that is we probably won't be doing a lot of those on a going forward basis, but the the credit those those leases or hell or high water on their often inside and I mean inside what I said, when I say inside what I mean, as there's often a.
Term loan that as you know the typical 1% am or that goes on for an extended period of time and our leases short term highly amortizing and honest central use equipment in a basket inside that term loan. So theres a lot of structure around that that can make it very.
Painful for I think it a lot of cases, not all cases, but a lot of cases there'd be the senior lenders often these bigger banks would end up coming in and saying, okay. The small little leases more problematic that's worth and if you come out and Rip out this piece of equipment My all.
Cash flow loan die. So you know look I think I think that clearly we scaled back on originations, they're waiting to see impacts of what happens that's a viable business. There are industries that are doing well.
And those industries or industries will concentrate on and then the industries that are are subject to.
You know stress in the new environment will simply not too.
Alright, Thank you very much appreciate that.
Thank you.
I think your next question comes from Gary Tenner with D.A. Davidson. Please state your question.
Hey, we're going to bigger bigger hey, I'm just curious.
In terms of the.
Commercial real estate lender finance business I know one of the features there's the you know the underlying assets were held in a bankruptcy see removed.
Yes.
I'm just wondering if over the course of the last quarter have you seen a lot of movement over the underlying assets.
During those those loans in other words have gotten underpants customers that the replace.
Any of those assets.
Yes, there has been there's definitely been some of that there's been instances, where I you know the the junior participants have taken us out or paid us down the or things like that so you definitely see that there's clearly some stress and certain types of assets.
And but the structures are you know taken care of that and we don't see.
Yeah, we don't see anything, particularly concerning there right now given the loan to value ratios in the structures I basically the part the partners or the borrowers that we have are stepping up.
And making sure that either they're paying us down or doing the things, we want them to do and being very cooperative and I think it's.
It's you know cordially, making sure that everybody's, particularly house are safe and secure and it's working pretty well for us.
Okay. Thanks, My other questions were answered.
Okay. Thank you.
Our next question comes from Edward Hemmelgarn with Shaker investments. Please state your question.
Yeah, just one question, but you left the your bank deposit balances grew you know rather significantly <unk>.
Uh huh.
Mm talk a little bit about what your plans or better over the next.
Your.
Yeah, we probably overshot a little bit a with respect to that it's always a little bit difficult to know each each each stress.
That you see in an economic concern is a little bit different. This this what appears to not have histrionics around banking failures and stress, which is always interesting to think about and so having a little bit of extra liquidity running and to.
This timeframe wasn't bad.
We probably had probably ended up being a little heavier than we would've liked and we had people, bringing more money to us and so we probably could have been a little more aggressive about cross the cost of funds reduction and we definitely don't need to run at this level. This was an overshoot overshooting and not.
Particularly intentional but.
So it's not doesn't represent a new norm with respect to.
Our loan to deposit ratio I mean, I think said, where we were historically, it's probably more of the target given.
The nature of our assets, particularly given the FHLB borrowing capacity that we have we usually like to have a little bit of Maxim.
Thanks, Toby borrowings out there that a longer term the rates are very good that's important from an asset liability perspective, and so we don't have a lot of that now, but there's a lot of opportunities to borrow longer term and and lock in funding there at really attractive rates. So we have to think about that as well. So I mean, we're also.
Well well growth is in certain as the comments today have indicated we have some view toward growth. So were we would be set for that as well.
Okay. Thank longer.
Thank you that concludes the question answer session I'll turn it back to management for closing remarks.
Thank you everyone for joining us this afternoon and that concludes this session. Thank you.
Thank you all parties may disconnect have a great.