Q1 2021 Axos Financial Inc Earnings Call
Ladies and gentlemen, we thank you for your patience. Please could you just stand by the Axis Financial conference call will begin shortly again, we thank you for your patience and please could you just stand by the access financial conference call will begin shortly thank you.
[music].
All participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator, especially during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now.
My pleasure to introduce your host Johnny Wright, Vice President corporate development and Investor Relations. Thank you you may begin.
Thank you <unk> and good afternoon, everyone. Thanks for your interest in access joining us today for the access financial Inc. first quarter 2021 financial results Conference call, the company's President and Chief Executive Officer, Greg care brands.
Second as Vice President and Chief Financial Officer, Andy Micheletti.
Reagan and he will review and comment on the financial and operational results for the three months ended September Thirtyth 2020, and they will be available to answer questions. After the prepared remarks.
Four we 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 and that management may make additional for looking statements in response to your questions.
These forward looking statements are made on the basis of current views and assumptions.
Regarding future events and performance.
One, 6% increase compared to 59 $4 million in the quarter ended September 30th 2019.
Access is return on average equity for our first fiscal quarter of 2021 was 17.26% and the banks efficiency ratio was $39 95%.
212021 earnings per share increased 33, 3% to 88 cents per diluted share compared to 66 cents per diluted share in Q1 2020.
Excluding acquisition related expenses non-GAAP earnings per share increased 33, pointing 2% to a point 91 per share in Q1 2021, According to a non-GAAP row of $17, 78%.
Our book value per share was $20.80 at September 30th 2021 up 14.7% from the prior year.
We had an outstanding quarter was stable that interest margins double digit growth in net interest income and noninterest income positive operating leverage and solid credit performance. The highlights. This quarter include the following.
Ending loans and leases increased by approximately $294 $1 million.
11.1% annualized from the fourth quarter of 2020 and up 11.7% year over year.
<unk> originations in multifamily commercial specialty real estate, a mortgage warehouse or offset by lower production and lender finance and higher payoffs and jumbo single family uncertain C&I loan portfolios.
Net interest margin was 384% for the first quarter of seven basis points from 377% in the first quarter of fiscal 2020 and down slightly from 389% in the quarter ended June 32020.
Lone yields were up three basis points linked quarter to 522% an average interest bearing deposit costs were down 41 basis points to 86 basis points.
Clothing, approximately $900 million of excess liquidity deployed lower yielding cash and cash equivalents arnett interest margin would've been 4.2% of 13 basis points from 389% in the quarter ended June 32020.
Our efficiency ratio for the three months ended September 30th 2020 was 46, 3% compared to 50, 244% in the comparable period ended September 30th 2019.
Efficiency for the banking business segment was $39, 95% for the first quarter of 2021, an improvement from $43, 93% of the comparable period last year and 41.2% in the prior quarter.
Earnings per share, where 88 up 33, 3% compared to 66 and the first quarter of 2019, despite the 337% year over year increase in our Loanloss provision and a 31% tax rate this quarter compared to 28% in the prior corresponding quarter a year ago.
Capital levels remain strong with tier one leverage ratio of 883% at the bank and 852% at the holding company, both well above our regulatory requirements.
We issued $175 million a subordinated debt an annual interest rate of four 875% earlier this month and use some of our excess capital to repurchase approximately 582000 shares of common stock at an average price of $21 89.
And the three months ended September 30th 2020.
Credit quality remains strong with no loans and forbearance and only a small percentage that are delinquent on principle and interest payments are conservative underwriting with an emphasis on retained asset values with low loan to values on our balance sheet continues to serve as well as real estate values are holding up in most markets.
Total loan originations for the first quarter ended September 30th 2020 was 178 billion essentially flat from 179 billion in the year ago period Q1, 2021 originations are as follows we had 408 $4 million a single family agency gain on sale production.
$334 $4 million, a single family Jumbo portfolio production.
87, $2 million of multifamily production 26.2 million of small balanced commercial real estate production $25.5 million, a auto an unsecured consumer loan production and 569 $6 million of C&I and specialty real estate production, resulting in the net increase of 127.
$8 million of portfolio growth.
Our gain on sale mortgage banking group had another record quarter generating $19.6 million, a mortgage banking income compared to $2.8 million and the corresponding quarter last year.
Originations increased by approximately 40% linked quarter to $408 million.
Record low interest rates drove demand for refinances and purchase transactions and capacity constraints within a single family mortgage industry resulted in again on sale margin of 394 basis points compared to 321 basis points in the quarter ended June 32022.
The outlook for mortgage banking remains strong our pipeline a single family agency mortgages was $444 million at 10 at the end of this month.
Our mortgage warehouse also benefited from record low interest rates and robust demand for mortgage purchase and refinancing.
Ending balances at our mortgage warehouse portfolio increased by $249 1 million or 52.5% from $474 3 million at 632020.
We took advantage of certain competitors pulling back in mortgage warehouse lending our growth and our mortgage warehouse business came from financing our customers agency in government guaranteed mortgages, our track record of execution and expertise in different types of mortgage is allow us to gain market share in this environment or net interest margin for the banking business was 391 person.
Sent in the first quarter compared to $3, 95% of the prior quarter and 383% in the first quarter of 2020 on.
On the asset side are alone yields continue to hold up well with an average loan yield of 522% compared to 519% in the quarter ended June 32020.
The vast majority of our asset base loans or variable rate loans with 94% of all very relate loans being at their floor right as of September 30th 2020.
We had approximately $900 million of excess liquidity in the September quarter, which negatively impacted our net interest margin by 18 basis points.
Yields for loans originated in the quarter ended 932020 or 485% for Dzhambul single family, 5% for multifamily and $4 73 for sand Islands.
Approximately 55% of our loans for five one arms a single family in multifamily mortgage is the underlying cloud.
And our CNI loan book, our asset base lender finance that commercial specialty real estate loans have rates that are just to an index of the two $8 billion, a lender finance and commercial specialty real estate loans outstanding at 932020, approximately 91% or it therefore, right our equipment leasing portfolio, which accounts for the remaining $148 million a CNI.
Loans outstanding is comprised of fixed rate loans and leases.
Our consumer and commercial deposit businesses continue to benefit from investments, we have made in improving our technology marketing and user experience consumer deposits, representing approximately 46% of our total deposits. At 932020 is comprised of consumer direct checking savings money market and non interest bearing prepaid accounts are checking savings and <unk>.
Money market deposit balances increased by almost $2 billion from 930 19 with strong growth in consumer small business and commercial deposit accounts imbalances.
Ah consumer checking in small business checking accounts were recently named best checking accounts for college students and the best free business checking accounts by Newsweek, a nerd wallet respectively.
Bridge non interest bearing deposits was $1.9 billion and a quarter ended September 32020, essentially flatland quarter. When you exclude prepaid deposit balances, we're making good progress in our specialty commercial on Treasury management businesses, and we expect higher deposit balances in our fiduciary service business next year as the number of bankruptcies rise.
Our critic quality remains good annualized net charge offs average loans and leases was seven basis points this quarter compared to two basis points in the corresponding period last year.
Nonperforming assets, a total assets was 1.131% for the quarter ended September 30th 2020, compared to 68 basis points in the fourth quarter ended June 32020.
The sequential increase in our nonperforming assets is attributed primarily to loans coming off of forbearance and a reclassification of two hotel loans that were previously held for sale, but are currently subject to Oregon's foreclosure moratorium we.
We ended forbearance for all borrowers on July 1st 2020.
Compared to 127 $5 million of loans on forbearance as of June 32020.
The majority of our nonperforming assets are comprised of real estate secured loans with low loan to values, we have $91.2 million a single family loans come officer Forbearance on July 1st 2020.
Of our nonperforming loans, 77% or single family first mortgages, where we've historically had very low realized losses of our nonperforming single family mortgage loans at 932020, approximately 77% had an estimated current loan to value ratio at or below 70% and approximately 92%.
Are below 80% of our best estimate of their current loan to values given the low loan to values of our single family mortgage loans, we do not anticipate incurring material losses on the vast majority of are delinquent lumps.
We had seven multifamily in commercial real estate loans that were delinquent at 932020, consisting of two hotel loans that we previously earmarked for sale with a current loan devalle ratio of 56% and five multifamily loans with an average bond devalue ratio of 48, 9% with no single delinquent multifamily loan with a.
Balanced greater than $2 million or an LTV greater than 57%.
The only nonperforming loans are CNI loan portfolio is a $5.6 million equipment leads to a fracking company. We had no other CNI loans that were delinquent on September 30th 2020.
We have a consistent track record of maintaining low credit losses through multiple economic cycles, given are conservative underwriting guidelines senior structures in our commercial lines and loans and the collateralized nature of our alone book.
Integrate financial crisis, our peak annual net charge offs for loans, we originated with less than one basis point for single family in multifamily loans.
We adopted the Cecil accounting standard this quarter, adding $53 million to our allowance for loan loss consisting of 47 $3 million are allocated loan loss reserves and five $7 million of reserves for unfunded commitments. We further increased our alone what reserve provisions this quarter by 11.8 million.
Up from six $5 million in June 32020 quarter, and two $7 million and a quarter ended September 30th 2019.
$11.8 million alone loss provision this quarter consisted of six $5 million related to HR block refund advanced loans, and five 3 million to non already loans, reflecting growth and our loan balances and economic uncertainty are total allowance for losses was 139 $6 million on September 30th 2020.
Which represented approximately 126% of our total loans and leases and 17.5 times, our annualized net charge offs.
Proximately, 94% of our loans outstanding in September 30th 2020, or collateralized by hard assets with Ltvs in the fifties, including nine 7 billion of real estate assets and $544 million a loan secured primarily by consumer receivables single family mortgages, representing 38% of our loan.
Port Folio had a weighted average loan to value of 58% at the end of September 32020 quarter, 64% of our single family mortgages have low devalue ratios at or below 60, 30% of loan to value ratios between 61, 75% have lawn devalue ratios between 71 and 80 in less than 1% had a loan to value.
Ratio greater than 80.
We have a well established track record a strong credit performance and these asset classes multifamily.
Commercial real estate loans, representing 17% of our total loan portfolio at 932020 had a weighted average lawn devalue ratio of 56% the lifetime credit losses in our originated multifamily portfolio or less than one basis quite originated over the 18 years. We have originated these loans.
At the end of September 30th 2020, 46% of our multifamily mortgages have loan to value ratios at or below 55%, 34% have loan to value ratios between $56, 65%, 19% have learned devalue ratios between 66, 75% and loans with a loan to value ratio grade then 75% or less.
1% of the portfolio.
The average that service cover of our multifamily loans is 178 and 932020 as stated we drafted no deferrals in the multifamily loan book.
Our commercial real estate portfolio $393 million, representing three 6% of our total loans at 932020.
<unk> waited LTV, 52% at the end of September 30th 2020.
49% of commercial real estate loans have lung <unk> races at or below 50%, 23% have loan to value ratios between 51 in 60, 21% of London via ratios between 60, 172% or between 70, 175, and 5% of between 70, 680% loan to value.
And our commercial real estate loan portfolio, we had approximately $77 million of loans to hotels and resorts, representing less than 1% of our total loans outstanding.
The weighted average loan to buy out of the hotel and resort loans is 51%.
That service cover of our small balance commercial real estate portfolio was 165 at 932020, we have no loans and forbearance are delinquencies in our commercial real estate portfolio at 932020 other than the hotel loans, we mentioned and the multifamily loans previously discussed our commercial real estate loan book <unk>.
<unk> slender finance.
And commercial specialty real estate and is comprised and loans and lines of credit secured by single family multifamily commercial real estate land and consumer receivables. The lender finance focus comprised of real estate in non real estate transactions.
The weighted average advanced right on the real estate lender Finance book is 30%.
With no transaction with advanced rate greater than 50% the non real estate lender finance book back by primarily loan consumer loans is approximately $642 million with an average advanced rate of 56% of the outstanding receivables bounces. These structures generally require rapid paydowns in the event of any significant kaladze.
Literary Asian in the receivables and also paid down rapidly in the event of any originates decline.
We have granted no deferrals in our lender finance alone book.
The weighted average loan the cost of our commercial specialty real estate loan portfolio was 39% with strong junior partner supporting the capital structure, we hold the senior position and all of our lender finance and commercial specialty real estate loans and every deal significant capital support from bars and sponsors we monitor performance of the underlying collateral.
<unk> housing bankruptcy remote special purpose vehicles, allowing us to identify credit deterioration and take Swift action to protect our principal and interest.
Are non real estate consumer lending is comprised $274 million, a auto loans $56 million, a personal unsecured loans and 13.2 million innovation or block refund advance loans, we saw Sir auto loans, primarily from dealers located in 10 states and learn to prime borrowers with an average FICO score of 764.
We fully underwriting service every auto lonely hold on our balance sheet and the portfolio continues to perform in line with expectations credit performance, an auto lending us for the supported by value of used cars in general at this point in time, we have manage the credit risk of our personal unsecured loan book by focusing on prime borrowers with an average FICO.
Score of 760, and an average loan size $20000, we have no auto or unsecured consumer loans on forbearance add September 32020.
And our security's business, we ended the quarter with approximately $253 million a margin loans up $46 million from June 32020 at some introducing broker dealer clients became more bullish in the September quarter, Despite elevated price volatility in the stock market. Since we started the pandemic. We have successfully managed our Martian loan business with no losses.
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As I mentioned earlier, we adopted the current expected credit losses methodology or Cecil on July 1st 2020, the original required date for our year and the immediate impact of adopting Cecil otherwise known as the day, one adjustment as an increase in the banks allowance of for current loan losses of $53 million.
The adoption the see saw means we are now considering loan losses will beyond the approximately one year timeframe generally used under the incurred Los method. The after tax impact of the day. One adjustment has recorded directly against stockholders equity in accordance with cap for regulatory purposes, we like to do different phase and the impact on our capital ratio over five.
Five years under this phase in the day, one adjustment does not reduce tier one capital for the first two years and then phases in one third of the impact over the last three years of the five year election.
We continue to generate strong returns with return on average common shareholder equity of 17.26% and 14.85% and the three months ending September 30th 2020, and September 30th 2019, respectively. Our efficiency ratio for the banking business segment was $39 95%.
For the quarter ended September 30th 2020, compared to $43, 93% in the year ago period.
We continue to maintain strong operator patient efficiencies, while investing prudently in each of our business units are capital ratio remains strong at $8, 82% of the bank, 860% of the holding company. Despite the higher provision for loan losses and $12.6 million of common stock repurchases.
Our tier one and C T.
Capital ratios remain healthy at 883, and 11.52% respectively for the bank at September 30th 2021.
We will use the proceeds from our 175 million subordinated debt offering to support the growth in our banking and securities business to retire the existing $51 million of subordinated debt issued in March 2016, when it becomes callable on the fifth anniversary and to opportunists deeply buyback stock or to engage in creative strategic.
Emanate transactions.
Lone pipeline remains solid with approximately $1.2 billion a consolidated loans in the pipeline at September 30th 2020.
With a healthy liquidity position and diverse set of funding sources on balance sheet deposits increased by 14.6% year over year with checking and savings deposits increasing by 28, 2%.
Our consumer commercial cast and Treasury management small business and specialty deposit business continues to show solid growth.
Concurrently we reduced our average interest bearing funding caused by 34 basis points linked quarter, and 108 basis points year over year to 0.91.
Client cash deposits from access Securities currently held other banks was approximately $673 million at 932020, an increase of $186 million from the 632020 balance we have the ability to redeploy our off balance sheet deposits to fund growth attacks those bank, if and when it is.
Economically advantageous to do so we.
We have access to approximately 3 billion of FHL be borrowing 2.8 billion in excess of the 400 and the $243 million. We had outstanding at the end of the first quarter. Furthermore, we had 1.7 billion of liquidity available at the Federal reserve discount window of September 30th 2020.
Our outlook with respect to loan growth and that interest margin remains unchanged from our expectations three months ago demand for single family Jumbo mortgages continues to be reasonably strong as reflected in our $479.2 million pipeline on October 27th.
Pricing on new Jumbo mortgages remain attractive despite some activity in the secondary market for non agency mortgage and the reemergence of a few non-bank lenders the purchase market for single family mortgages remains robust with mortgage rates near record lows and housing inventories rebounding in most markets are efficient digital marketing underwriting and funding <unk>.
Assesses and our direct lending in third party origination teams allow us to provide superior experience for borrowers and partners.
And our two largest CNI lending categories lender finance and commercial specialty real estate, we continue to see new opportunities to partner with respected non-bank lenders unsecured lending transactions with conservative structures in terms of the base of new <unk>.
Commercial specialty real estate transactions has slowed a bit this month as we approached the election, we expect activity to rebound later this year, we continue to see demand for a lending products at our tightened credit standards.
Access clearing continues to benefit from a flight safety with ending deposits increasing by approximately 38% linked quarter to $673 million, we signed a new corresponding clearing clients in the September quarter on board or two of them and signed an onboard in our custody client this quarter, adding incremental fee income and low key.
Cost client deposits.
We see additional upside to providing white label banking services to the more than 100000 high net worth clients of our introducing broker dealers in riaa's and continue to invest in technological integration to offer these services to our correspondent clients like other broker dealers such as suave in television Ameritrade Akzo's clearings profit.
Ability has been temporarily hampered by low rates earned from cash sweep deposits as we develop an rollout additional products and services and access claritin and access invest there's a clear path to higher profitability Frank Some securities. Furthermore, we remain bullish on the medium to long term costs and revenue synergies provided by access clearing and access invest to our bank.
Business.
Overall, we feel good about our ability to maintain annual net interest margin within a range of three 8% to 4% are alone yields remained relatively stable and we intend to reduce the amount of excess liquidity on our balance sheet over the next few quarters, if loan demand does not meaningfully improve.
We started submitting loan forgiveness applications on behalf of our PPP borrowers in early October as.
As of last Friday, we submitted 149 forgiveness applications with a combined loan balance of $15.5 million to the SBA we.
We expect to receive forgiveness for the vast majority of our PPP loans in the first half of calendar 2021.
We've made good progress, reducing our funding cost as a result of our investments and acquisitions, we've made across our consumer commercial and specialty deposit businesses.
Accelerated adoption of digital banking, which is occurring in many of our deposit businesses gives us confidence that will be successful and growing deposits and optimizing funding costs. We have a full pipeline of features and product enhancements that we will rollout over the next 12 months, including free self directed trading Ah streamline account opening system in new user experience.
<unk> for small business banking and significant enhancements to our additional mortgage platform as well as integration of access invest in access Bang functionality and new personal financial management tools in the online and mobile banking platforms. These.
These new products and features will provide incremental value to our customers lower acquisition costs improve retention add an additional source of fee income and deposits for the company.
It is unclear on how quickly the economy will rebound and what potential regulatory and policy changes may take place on whatever political environment. We may find ourselves and we remain focused on positioning our company sustained profitable growth.
Now I'll turn the call over to Andy hoping an additional details on our financial results.
Thanks, Greg first I wanted to note that in addition to our press release.
Supplemental Ek schedule and our 10-Q were all filed with the SEC today and are available online through Edgar or through our website Akzo's financial.
Second provide brief comments on three topics. Please refer to our press release or the SEC filings for additional details.
First as Greg mentioned access financial adopted Cecil effective July 1st 2020, the to implement seasonal we developed six portfolio models, which used Moody's forecast.
<unk> macroeconomic variables to predict the probability of default in the once given default or severity of loss throughout the life of our loans.
The formulas for probability of default were developed from 15 years of this historic wast data and more than 1800, Moody's macroeconomic variables measured historically each quarter.
The historic lost data for single family multifamily and small balance commercial Oregon was sourced from the base Oh, Los history how.
However, the loss history for commercial real estate construction C&I loans auto and consumer loans was based opponent Bank call report data.
Accordingly.
This quarter.
Grouped our loans to a wedding with the industry Historic lost data, we used to develop the sea so models and to match with the sea So model lost output.
The six loan groups are as follows.
One single family mortgage it's combined with single family warehouse.
Two multifamily mortgage is combined with single small balance commercial mortgages.
Number three commercial real estate, which includes Cresyl and real estate lender finian's.
Number for commercial and industrial which includes northern real estate lender finance equipment will you seen securities back lines of credit.
Number five is auto and consumer and number six is other.
While the groupings are different this some categories, making up the group beans are generally the same attached in our 8-K file today is the Powerpoint presentation and on page three you will find the new loan groups and the dollar amount of loans under each of the sub categories at the end of this quarter.
After September 30th 2020, as well as the end of last quarter June 32020.
Second.
I will review the provision for credit losses, which was $11.8 million for the quarter ended September 30th 2020 compared to $2.7 million for the quarter ended September 30th 2019.
The increase of nine $1 million was due to with six and a half million dollars increase in the allowance for uncollectible. Each R. B refund advance loans and $2.6 million at the increase is generally due to the new seasonal methodology, including the impact of Covid.
Based upon collections after quarter and the refund advanced provision of six $5 million should be sufficient to mitigate any plausible additional loss associated with refund advance.
The majority of the remaining net increase of $2.6 million in the provisioning is coming primarily from the equipment lease portfolio.
The third topic is our effective income tax rate.
For the quarter ended September 32020 are effective income tax rate was 30% up from 28% for the quarter ended September 30, 29 and down from 33% for the quarter ended June 32020.
As discussed last quarter. The primary driver of the changes in the income tax rate is the gap accounting for the issuance investing of restricted stock units are is Hughes, which requires us to expense an estimate of the arts you cost and recorded deferred tax benefit before the act.
Fuel income tax compensation deduction is measured.
The actual compensation deduction is dependent upon the final number of shares granted and the best the price of the stock.
If the number of chairs and or the value of this year's is lower than estimated generally and effective income tax rate increase adjustment is required.
Eight one time adjustment for the estimated difference was made in the quarter ended June 32020, causing the increase in the effective tax rate.
Going forward, we expect to be between 29 and 30% based on the current trading range of our common stock.
With that I'll turn the call back over to January.
Thanks, Andy off.
Operator, we're ready to take questions.
Thank you, ladies and gentlemen, if you would like to ask a question.
Please.
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Our first question comes from Andrew Nice with Hyper Sandler. Please proceed with your question.
Hey, good afternoon, everyone how are you.
Yeah.
Hi, I just wanted to look at the at the margin than just on the liability side here costs of the quarter about 91 based upon some nice moved from the corner before I think down 30, something basic points.
Would you have to pay for that to continue to decline that or or what level be figured that probably going to need the floor.
Well if you if you look at the components and I and I am sure you have you will see that the.
Cds, obviously, there at some pretty high rates that unfortunately, nobody is going to be interested in and cashing out early so we have about $1 billion of that in the maturity table maturing in the next 12 months that will obviously be helpful. There is there are further decline.
<unk>.
And.
Other categories that we think we can we can accomplish this quarter, but.
They won't be likely as dramatic so I think that if you. If you look at where that that 91 basis points is coming from it's being.
Pulled up a lot by those Cds, which are just going to have to run off in the natural.
<unk> of things there is Andrew about 1.25 million of CD costs.
This quarter that actually was that right off of.
Broker commissions that we're on brokerage Cds of $150 million that we prepays, so that 125 million woke worker this quarter.
On the C DS, which was pushed pushing up the CD right a little bit. So you can take that amount off of the interest cost next quarter.
For for example.
Okay. Yeah. That's that's really helpful. And then it sounds like lone yields on new production holding up pretty good and you also have some some good for so do you think the margin could why isn't this level or or right. Now are we seeing this week with repricing like with the security.
Looking on the liquidity just maybe this is kind of like the.
Margaret This week before.
I think I think we're comfortable with our margin guidance, obviously, the excess liquidity that we have.
Is impacting margin right now and loan growth, depending on what that will be.
May be able to consume some of that liquidity.
We have the Pvp loans on as well eventually those may roll off, but we just a really uncertain about that the forgiveness is very very slow and there is there is a compression in.
Alone yields that that's not only as a result of the market, but also our warehouse lines tend to be lower right.
Then our other lines, particularly for the agency production, which was almost all the growth. This quarter. So there is a bit of a shift there as well and we see continued growth in and that side. So.
Like I think I think we can definitely feel good about where we are from an ability to maintain margin.
But I'm, a little cautious about saying it's going to go.
Credibly up.
Just given the excess liquidity, we have in the market.
Okay on a couple of B and then just give me the credit for a section for a second it it sounds like you're pretty well reserved I'm alone that have migrated to nonperforming, but also I noticed that the supplements and then put the standard bones are higher and it doesn't seem like a lot of them are in.
On the jumbo side, but maybe some commercial real estate.
Is there some over what Roman concern or is there anything that's kind of unique or common between.
Some of these long that may have been downgraded.
Yes there.
With respect to the the commercial real estate loans.
We have loans that we've downgraded that we think we have effectively.
Incredibly limited chance of having any loss of them, but the underlying bar or may have had a well defined weakness, but the the partner that we have in the transaction.
In the in the mezzanine capacity in a number of cases stepped in even with substantial paydowns this quarter and so we see a lot of those kind of curing up this quarter. We have one pay off that is slated to occur and in other cases.
We we have.
Some a restructuring on those loans were doing so we don't think there's any.
Possibility of loss there, but there may have been a delay and and the and the project completion time frame or something that represented a weakness and so they.
They were downgraded the.
A single family side.
It's really more.
This payment related we're not deferring any anyone's payments and so we're asking that they make the adjustments they need to make now if they're unable to afford their their property.
Understood that's not that that's very helpful. Thanks for taking the questions I hope that's for sure.
Alright next question.
Have some Mary.
Please proceed with your question.
Thanks, Good afternoon take care of your thinking Hey, last quarter U U kind of mentioned that you were preparing for I think it was a significant housing downturn I think it was how you put it that that's <unk> you know.
If you've seen anything or maybe just updated thoughts on how you were thinking about housing given by this hold up really well.
Right well, it's all done fairly well with some notable exceptions I think New York City is a question Mark right now they clearly you're seeing.
The.
Interesting, it's an interesting dynamic because if you. If you went back several years ago, you would've seen Greenwich are the hamptons or whatever kind of being pretty stagnant suffering quite a bit having long sale times those sorts of things the city was really booming.
There was there was obviously some flattening out but there was there was a very significant run up from say 2014 15 until now and so I think the city is going to be giving some of that back so to the extent that.
That would be the caveat that I would make how long that lasts.
Patterns I think on the policy decisions.
That are made in the city, there and and what sort of long term effect you get from any kind of <unk>.
Potential.
<unk> of people, who work from home over longer periods of time things like that but in general you're right, California is doing is doing very well if anything you are seeing increases where we are seeing.
Stress.
Is in.
Dense.
Non single family, New York areas, and it's not I mean, where we are from a loan to value perspective in most cases.
We are fine, but one of the elements about New York that's always.
<unk> is that sometimes the foreclosure time frames can be quite lengthy which adds accrued interest in those sorts of things to loans, which which can.
Which could be something you have to pay attention to.
Okay. Thank you and then kind of flipping over to.
Somebody from the day to give an unimpeded as in terms of the equipment.
Mood and the fracking industry just just.
<unk> that equipment is specific to the fracking industry could it be repurposed, both where they need to color.
It's pretty specific to the fracking industry. So.
That was that that was alone there was an interest only payments they've requested interest only payments.
To continue.
We're in discussions with them right now, but we haven't granted.
They have the ability to continue to make interest only payments so.
That's what it is that's where they are right now with respect to that.
They have a sponsor.
Our views, we want to get him put in some equity in.
What kind of we're kind of in the process with that though but it's it's a relatively small long.
It's it's.
And inside we don't have much oil and gas exposure there so.
Okay, Great and then my next question for me.
In terms of the recent advance kind of lost recognition timing do you think you've kind of resolve this stuff in the calendar fourthquarter or is it really just depends on on on your wrists.
In terms of.
Yeah.
[laughter].
Yeah, we we think we're done.
Basically if you look at what our exposure is after what we took this quarter, we actually saw pretty significant uptick after the quarter ended and collections.
Which was positive.
So we're pretty sure I mean, obviously, we can't be 100% sure, but we're pretty sure we're done in that.
When we go out and paying and see.
What percentage of those loans are.
Are coming in sort of where the tax returns still hasn't been process. There's still a significant number of the tax return stopping process to neither anecdotally through even folks in our own organization who submitted to.
<unk> returns quite early during that timeframe installment gotten their refund and then from some of our data work, we still see that there's.
There's there's funds to collect so we definitely feel like we're done could we be could we have been a little conservative with this possibly we don't think we'll be back to the well.
The entire after this provision then the entire exposure is two and a half million dollars before the collections. We got this month. So it's a very small number.
Alright, thank you.
Thank you. My next question comes from David Feaster with Raymond James. Please proceed with your question.
Alright, good afternoon everybody.
Hi, I just wanted to start on the specialty CRE I, just kind of get a pulse of that I mean, you've seen nice growth. They're just curious what market segments, you're seeing opportunity just your comfort with the segment given the uncertainty have you tightened the underwriting standards and just you know any thoughts on on the pipeline.
And even new production yields in that segment.
Yes so.
Clearly from a category perspective, we're focusing on residential so that means we're focusing on multifamily and we are seeing some industrial as well so.
Last mile warehouses cold storage multifamily those are all categories, we feel good about.
I think obviously, there's limited appetite among most folks for hotel things like that but there's also not a lot of.
Projects that are.
That are that are being started in those in those segments. So I think from a city perspective and from a geography perspective.
We're continuing to focus on markets, where we feel we feel good about the dynamic.
Recently did some things in Nashville.
We're still in the markets that we were in before too and.
We're doing we're doing different things to continue to ensure that we are in good positions from a credit perspective, there. So.
There's there's a there's a variety of of different tradeoffs there made.
The sponsors are usually quite well capitalized.
The.
So we we continue to be at very as we stated on the call where it around a 40%.
Average lawn to value on those loans. So I think that I would be it would be a surprise if any of those loans had any any losses and if they did the severity would be very low because you really have to be digging deeply deeply into the.
The the London loan to value in order for us to ever get touched by something but I think as those as those projects move forward is it possible that sometimes our fund partners may need to step in there I think that's possible I think we're finding in most cases that they're working themselves through but.
Things.
And almost all the loans look pretty good and then there are a few places the fund partners are having to step in and.
And true up some.
Some interest reserves, some budgets and things like that but they've got more than that.
<unk> and wherewithal and we'll do it so so things look pretty good really.
Okay.
Good color and then just on the security business I guess you guys are starting to see some pretty nice grew out there.
<unk> deposit growth I guess.
How do you think about the growth and the account going forward and the <unk>.
How's the cross they'll being.
Some of the other broader product offerings early on.
Yeah, we really are in a stage right now where we're working on the technology to enable and make that happen. So to give you a sense of where we are in the long term plan there.
Access and vast will convert to our clearing company in the first calendar quarter of INR third fiscal quarter of this year. So then what we're going to be doing is will be combining functionality.
From the securities and banking site into a single application so that so that individuals can access.
<unk> features and functionality in our retail retail direct customers some time.
Around the.
The beginning of the second calendar quarter for fiscal quarter of 2021.
And then with respect to our correspondence we.
We have right now.
One of our correspondents testing our account opening software.
That is provided to them for automation of their securities account opening.
And at a certain point that will integrate feature.
Features that allow a customer to open a bank account concurrently with that.
And then.
The the.
The next step in the cross sell process is that when a third party introducing broker dealers and customer.
Operates.
To look at their accounts or communicate with their broker, they're using our technology with a technological integration on the banking side. So all of that has to happen. So this is a this is a pretty complex very long term strategy that involves the acquisition via third.
Parties of high net worth customers and it involves a lot of technological development and work. The good part is is that we have almost all of these items now right. We have an account opening system. We have all of these different products. So it's about the additions in the integral.
<unk> to make it really seamless across across the platform. So it's.
I think that obviously right now with the deposit rates low it doesn't seem like much to have getting up to 700 million a zero cost deposits, but.
But that we expect that to be able to grow dramatically over the next let's say half a decade and be a really important component of our funding costs and low cost deposit growth. So we've got a lot of ways to when they're obviously with low deposit rates it makes it.
Difficult to show a really positive net income in that business and that's something that's an industry wide issue, but we're going to continue to invest in that and and grow that business. Because we think we are a great partner, both on a technology and product perspective for the.
<unk>.
For these these introducing broker dealers in their nra's in there and clients. They really do need integrated technology, and we think we have a way of deploying our technology there but.
It's a pretty long term strategy that we're engaging in here.
Okay that sounds cool and then he just kind of pulling up on that a bit I mean, just.
Curious on the the emanate commentary what kind of turning it back kind of transactions would you be interested in.
More of adding scale in certain lines are there any product offering gaps that you might see that it's easier or.
Or more <unk>, rather than organic growth.
Yeah, they're usually fairly idiosyncratic things that fulfill particular nieces I'm not going to go in too much to the strategies there just for competitive reasons, but.
I don't I don't think there's anything large there's nothing evident, but there's always opportunities.
Given the breath of what we have and the technological capabilities. We can bring the things. So we keep on looking for for things like that and if we find them then we can take.
<unk> of them, but.
It's just.
I would consider that more general commentary on the utilization of proceeds from the offerings and anything that's foreshadowing something imminent.
Okay. Thank you anyway.
Thank you.
Thank you. Our next question comes from Michael Prieto with keeping W. Please proceed with your question.
Hey, guys. Good afternoon, and thanks for taking my question.
Hey, Mike.
I wanted to start on on just the noninterest income and non interest expense line items for the quarter, sorry, if I missed this because if we kind of think about the elevated mortgage <unk>.
<unk> Avenue in the quarter, which I think we're a bit more self explanatory, but if we if we look at the expense side. Uhm are you guys able to break out of provide a little bit more color about what kind of the expense room might look like in.
The more normalized mortgage quarter, you know I I it seems like some of the environmental transferred where maybe a bit you know.
Elevated at least this quarter I'm, just curious what kind of think about the expense I'm going forward you know what some normalization of that might look like.
Sure I'll give you some color I think.
Rod perspective.
When you look at general and administrative expenses at $6.3 million.
For the quarter that's of from 4.6 billion a portion of that is going to be attributable.
Mortgage origination and other other details so that line is probably that change in that line you could use that that kind of normalized things. There are a couple of other lines were.
The numbers were slightly larger than.
Probably the normal run right when you look at professional services.
We came in at about 6 million professional services last quarter was three 1 million.
A good portion of that is variety of consulting fees. Some legal fees, probably the more normal run rate is closer to 5 million on that just going forward with growth.
So there was a little cat that line was a little bit larger than expected but.
Thinking about those two lines those are probably the key elements change the rest represents just general growth.
In our business and.
Verizon of different things that we're doing depreciation and amortization and data processing are impacted.
By some of the technology items, we haven't.
And the timing on capitalizing capitalizing the costs can cause that to change a little bit but in general.
Kind of growth rate.
Cause it continued to see growth in operating expenses.
Plus or minus 1 million or two.
That's helpful anything put put it is safe to say I guess <unk> <unk>.
It's a appointment at this point you know all those equal to the next quarter of transferring me probably will take a step down before before continuing to grow beyond that as you guys continue to grow the bank.
There's a good chance it would but it does depend on a variety of factors part of it is a mortgage banking part of it is technology.
Got it.
Uhm helpful. Thank you and then great you know I think there's been a lot of increased focus at least you know based on headlines read in in conversation you kind of have on on the digital banking aspect of of the U S banking sector. Since the pandemic started here and I guess my question for you and you know obviously this is not something that's new.
You guys Uhm at all but have you noticed any more receptiveness to the ideal banking without you know any branches ruin any physical contact would it be on the commercial side or the consumer direct side or or or or anything along those lines over the past six months that that that's worth noting or where do.
You think it's been fairly steady I mean, obviously the growth has been steady, but but just curious more I'm kind of the customer interest in an openness dealing with with the digital strategy like yours.
Yeah, No I definitely do.
That you were seeing.
A significant shift there we saw it.
In the application volumes and we're continuing to see it although the growth rate of.
These accounts are often they're relatively small accounts both on the small business and consumer side, we've seen record account volumes continuing.
Partially that may be because of improvements on our platform, but we believe that it clearly is making a difference that that people are no longer viewing the lack of branches as as an impediment to doing business with us and in fact, because we have the ability to perform.
Arm.
All the banking functions digitally and we've designed our systems that way.
That many people are communicating that that's a significant advantage for us. So we really I think we're really in charge of our own destiny here and in a really great place because we've spent the money on the technology in our systems. So now is just about perfecting those systems and technology.
<unk> to just get so much better.
What we're doing.
So there's there's customer experience initiatives from a digital perspective, they're going on across the board in the enterprise how to reduce chat calls by using data better.
All of the all of the things that customers talk with US about we have a customer experience committee, we listened to the customers, we we listen to what they're saying about things they like things they don't and that we develop plans that are very targeted fixing.
Those those those pinpoint so I think we've done a really good job with that I think there is a titanic shift ongoing and coming and I think it also is in the nature of if you start looking at we think that we could probably over an extended period of time.
Our technological investments and if we grow the security's business the right way our goal is to get our costs the deposits down to be something that would be at or below.
Branch based institution and I think if you look at where we are in comparison with let's say some of our competitors that are in.
Southern California that May up 30, or 40 branches or something like that I think we're demonstrating improving that out I mean, you got to take out Cds that we're done in advance of thinking about.
Out rate increases and things like that but if you're looking at the core growth perspective.
Kind of the commercial side.
That also I think is also happening as well we have very sophisticated treasury management technology.
We don't and we have great people, we don't have a lot of folks.
That are in particular markets, although we do have some and some of the larger markets and and we're finding that we're able to compete on a technological basis with our API infrastructure and things like that so I think we feel really good about where we are at my private conversations with other Ceos.
Very much focused on them asking.
How do we make this transition because they're stuck with branches, where they're having to play.
Lot of defense and trying to figure out how to deal with these different aspects of things and the reality is people just don't want to come in to those branches anymore. They don't want to do that it's not a valuable.
Interaction, particularly if it's a transactional lee oriented interaction.
Really helpful insights great. Thank you and thanks for taking my questions.
Thank you.
Thank you our final question comes from the line of Edward.
Secret investing.
With your question.
Yeah. Thanks, Greg maybe just one question about your.
Lola.
[noise] provisions you you appear to be.
Pretty conservatively reserved now given your historical nature of losses.
And the fact that you.
We're just a massive based lender will you be able to use in the future.
<unk>.
Excess reserves that you might have now I mean based upon future clarification and some of these loans to.
Provide for the needed reserved for future loans would you make.
Is it gonna be.
You know just it or were you just have to ignore them.
The simple answer is yes.
At allowance.
Can be reallocated.
Or used in other ways.
So there it is possible.
As we spent a little time discussing overseas. So discussion obviously see so requires a little bit more because we're looking at life of loan but in addition, we were conservative in assuming 12 15 months out that we would have additional <unk>.
Nathan price declines in real estate, and that's what's really driving that obviously 12 months out.
We'll see whether that's right or not.
So there's some element of.
Or conservative assumption.
Correct, but assuming it is not.
And that we have reserves, we do have the ability to reallocate reverse or at them in other ways.
It's always going to be a forward looking yeah, it's going to be a forward looking analysis based on what happens with respect to the future of what that loan book looks like on a going forward basis and looking at all these forecasts and all these other things as well so I mean, clearly right now there's more on the.
Certainty then there would be normally as well, which I think makes it wise to be a little more conservative about your assumptions.
Thanks for the clarification and thought that was the case.
And he was great quarter and.
No. Thanks, then thank.
Thank you thanks Ed.
Thank you we have reached the end of our Q&A session. So I'd like to pass this on my back to management for closing comments.
Alright. Thank you everybody appreciate it will talk to you next quarter.
Does that concludes today's teleconference and webcast me. Thank you for your participation and you may disconnect your lines at this time.