Q2 2021 Axos Financial Inc Earnings Call
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Yeah.
Greetings and welcome to actually financial second quarter 'twenty 'twenty One earnings results conference call. At this time all participants are in a listen only mode of question I missed the session will follow the phone the presentation. If the newest require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is recorded I would now like to turn the call.
Over to your host Johnny Lai, Vice President of corporate development and Investor Relations. Thank you you may begin.
Thank you Devin.
Good afternoon, everyone and thanks for your interest assets joining us today for access financial Inc. Second quarter 2021 financial results conference call for the <unk>.
President and Chief Executive Officer, Greg share Bryan.
Second the Vice President and Chief Financial Officer, Andy Micheletti, Greg.
Greg of annual review and comments on the financial and operational results for the three of six months ended December 31, 2020, and they will be available to answer questions. After the prepared remarks.
Before I begin I would like to remind listeners that the prepared remarks made on this call may contain forward looking statements are subject to the risks and uncertainties and the management may make additional forward looking statements in response to your questions.
These forward looking statements are made on the basis of current views and assumptions of management regarding future events and performing.
Actual results could differ materially from those expressed or implied in such forward looking statements of the result of goods.
Certainties.
Therefore, the company claims of the Safe Harbor protection pertaining to forward looking statements.
And the private security litigation for Reform Act of 90 to 95.
This call is being webcast and there'll be an audio replay available in the Investor Relations section of the company's website, okay. The net assets financial Dot Com every day.
Details for this call were provided on the conference call announcement and in today's earnings press release.
Before handing over the call the Greg I would like to remind listeners that in addition to the earnings press release and 10-Q. We also issued an earnings supplement for this call.
All of these documents can be found on the access Anshul website.
With that I would like to turn the call over to Greg. Thank.
Thank you Johnny and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access financial conference call for the second quarter of fiscal year 'twenty 'twenty. One ended December 31, 2020 I. Thank you for your interest in access of financial and Axis Bank.
We had an outstanding quarter with higher net interest margin double digit growth of net interest income and non interest income and positive operating leverage year over year, we combine that with solid credit performance assets announced record second fiscal quarter net income of $54 8 million for the three months ended December 31, 2020 of 32 point.
7% compared to the $41 3 million of Orange for the quarter ended December 31, 2019, despite of $3 $5 million increase in our provision for loan losses, increasing to 8 million from $4 five nine of the comparable period are for.
Pre tax pre provision income was $86 5 million, an increase of 38, 1% compared to the $62 7 million for the quarter ended December 31 2019.
Adjusted return on average equity for Q2, 2021 was 17, 3% and the bank's efficiency ratio was 44 of 5% Q2 2021 diluted earnings per share increased 35, 8% to <unk> 91 per diluted share compared to 67 per diluted share in Q2 'twenty.
'twenty.
Our tangible book value per share was 19 five one at December 31, 2021 of 18% from December 30, <unk> 2019.
The highlights for this quarter include the following.
Ending loans and leases increased by approximately 684 million of <unk>.
25% annualized from the first quarter of 2021, and up 14, 5% year over year strong originations in the multifamily commercial specialty real estate and mortgage warehouse were offset by lower production and lender finance at higher payoffs in jumbo single family and certain C&I loan portfolios.
Net interest margin was 394% of for the second quarter up seven basis points from $3 87 per cent of the second quarter of fiscal 2020, and up 10 basis points from 384% from the first quarter of fiscal 2021.
Loan yields continue to hold up well at an average of 5.16%.
Interest bearing checking and savings deposits as of December 31, 2020, or 45 basis points with $1 billion of certificates of deposits acquired primarily from the nationwide acquisition at a cost of $1 seven 1%, increasing the cost of interest bearing deposits overall 85 basis points, which is still fixed.
This points improvement from the linked quarter ended September 30 of 2020.
Net interest margin for the banking business was for one 1% compared to $3 nine 1% in the quarter ended September 30 of 2020 and 394% in the quarter ended December 31 2019.
The P loans fees had a negligible impact on our net this quarter.
Our efficiency ratio for the three months ended December 31, 2020 was $46, 86% an improvement of 480 basis points compared to $51 six 6% in the comparable period ended December 31 2019.
The efficiency ratio for the banking business segment was 44 of 5% for the second quarter of 2021, an improvement from $43 eight 1% in the comparable period last year the year over year improvement in overall and business banking efficiency was the result of strong mortgage banking income net interest margin expansion and double digit.
And our loan portfolio.
Diluted earnings per share was <unk> 91 up 35, 8% compared to 67 in the second fiscal quarter of 2020, our corporate tax rate increased slightly from 29% in the corresponding quarter of year ago to 32, 2% this quarter.
Capital levels remained strong with tier one leverage ratio of nine point of weight at the bank and $8 68 at the holding company felt well above our regulatory requirements. Our credit quality remains strong with no loans in forbearance and only a small percentage of delinquent on principal and interest payments, our conservative underwriting with an emphasis on retained.
Net loans.
With low ltvs on our balance sheet continues to serve us well.
Total loan originations for the second quarter ended December 31, 2020, with two pointed out of $4 billion up 14, 2% from the $2 1 billion in the year ago period.
Q1, 2021 originations were as follows $455 million of single family agency gain on sale of production $286 million of single family Jumbo portfolio of production of one.
$23 million of multifamily production $46 million of commercial real estate production $34 million of auto and unsecured consumer loan production and $957 million of C&I loan production, resulting in a net increase of $345 million.
Our gain on sale of mortgage banking group had another strong quarter generating $10 7 million of mortgage banking income compared to $2 $2 million in the corresponding quarter last year originations increased by approximately 11, 3% linked quarter to 455 million low interest rates continue to support strong demand for refinancing and purchase.
Transactions and our efficient scalable operating model generated gain on sale margins of 390 basis points compared to 394 basis points for the quarter ended September 32020.
The outlook for mortgage banking remained strong although the march quarter generally of experiences lower volume due to the holiday season, and we expect some compression in gain on sale margins. Our pipeline of single family Agency mortgages was $399 million as of one for 2021.
Our mortgage warehouse also benefited from robust market demand for agency mortgages ending balances in our mortgage warehouse portfolio increased by $461 4 million or 63, 8% from $723 4 million as of September 30 of 2020.
We continue to expand our relationship with the existing mortgage warehouse customers from established new relationships, our track record of execution of expertise and agency of non agency mortgages assist us in growing our warehouse lending business.
Net interest margin for the banking business was four point of one one in the second quarter compared to $3 nine one of the prior quarter and $3 94 per cent of the second quarter of fiscal 2020.
On the asset side of the banking business, our yield loans, our loan yields continue to hold up with an average loan yield of 515 compared to five point to one in the quarter ended September 32020 the.
The vast majority of our asset based loans are variable rate loans with 95% of all variable rate loans being at their floor rate as of December 31 2020.
Yields on loans originated in the quarter ended 12, 31 2020 or for 91 for Jumbo single family for eight five for multifamily and $5 93 for C&I loans.
From a 41% of our loans of five one arms with single family of multifamily mortgages as the underlying collateral and our C&I loan book, our asset based lending and lender finance and commercial specialty real estate loan portfolios have rates of just to an index.
Of the $3 1 billion of lender finance and commercial specialty real estate loans outstanding at 12, 31, 2020, approximately 90% are out there for rate our equipment leasing portfolio, which accounts for the remaining $130 million of C&I loans outstanding is comprised of fixed rate loans and leases, we see minimal future adjustments in our existing lending book.
As a result of floating rate loans adjustments, although some adjustments for loan rates to remain competitive for future originations may be required.
Our consumer and commercial deposit business has continued to benefit from investments we have made in technology marketing and user experience.
Consumer deposits, representing approximately 42% of our total deposits as of December 31, 2020 is comprised of consumer direct checking savings money market of noninterest bearing prepaid accounts are checking savings and money market deposit balances increased by approximately $1 billion from 12, 31 19 with strong growth in consumer.
Small business, the commercial deposit accounts and balances our consumer checking of small business checking accounts continue to receive accolades for offering the best value and services for our consumers with more consumers and small business owners choosing digital as their primary channel for conducting banking transactions, we are well positioned to become their primary bank.
The average noninterest bearing demand deposits for $2 billion in the quarter ended December 31, 2020 up by approximately $136 million from the prior quarter. Despite exiting our prepaid the sponsor relationships with H&R block of net spend we are making good progress on our specialty commercial and Treasury management business and we anticipate higher dip.
The balances in our fiduciary services business in the next 12 months as the number of bankruptcies rise our credit quality remains stable annualized net charge offs. The average loans and leases was 16 basis points this quarter compared to 17 basis points in the corresponding period last year, we charged off of portion of an equipment lease two of fracking company.
We had a specific reserve on this quarter accounting for the entire $2.6 million of net charge off in the CNI non real estate loan category.
Farming assets. The total asset ratio was 122 basis points for the quarter ended December 31, 2020 down from 156 basis points in the first quarter of fiscal 2021 of <unk>.
Nonperforming loans 77 per cent or single family first mortgages, where we have historically had very low realized losses of.
Our non performing single family mortgage loans at December 31, 2020, approximately 85% had estimated current loan to values at or below 70% and approximately <unk> 95 per cent or below 80% of our best estimates of current loan to values given the low loan to values on our single family mortgages, we do not anticipate incurring material.
The losses on the vast majority of the single family of delinquent loans.
Other than the single family delinquencies for the remaining delinquency is consists of two hotel loans, we discussed last quarter, which were around $24 $5 million of U P. B.
We had six multifamily loans that were 30% to 59 days delinquent for a total U P. B of around $3 1 million that are at origination loan to values of <unk> 46 per cent on average one multifamily loans that is 60 to 90 days delinquent for $1 million worth of 44% original LTV.
All of TV.
The only other loans.
So we have the there's still like one of us alone on the condominium building in Tribeca with an aggregate balance of $16 6 million. We have placed on non accrual at 12 31 2020, the long has experienced various delays and startup of legal challenges in getting the units to market and we place to reserve against it for that Andy will discuss later.
Loan loss provision this quarter was <unk> 8 million compared to $11 8 million in the September 32020 quarter and for $5 million in the quarter ended December 31 2019.
The $8 million of loan loss provision. This quarter consisted of $3 9 million related to specific non accrual loans and $4 $1 million related to the change in nature and volume of the portfolio of.
The total allowance for loan losses for the $136 4 million at December 31, 2020, which represents approximately 1.17% of our total loans and leases at approximately seven five times, our annualized net charge offs were well reserved to withstand the protracted decline in residential and commercial real estate values should that occur.
Given the high level of uncertainty regarding the pace and sustainability of the economic rebound potential changes in fiscal and monetary and regulatory policy real estate values in inventories and the success of the vaccine rollout of helping consumers and business has returned to pre pandemic spending levels, we do not anticipate making significant changes to our loan loss provisions in calendar 2020.
What.
Approximately <unk> 95 per cent of our loans outstanding at December 31, 2020 of our collateralized by hard assets with an average loan to value in the fifty's, including $10 5 billion of real estate assets and $510 million of loans secured primarily by the consumer receivables.
The family loans, representing 16% of our total loan portfolio of 12, 31 2020 at a weighted average loan to value of 55, 7% with no loans in forbearance are small balance commercial real estate portfolio of $432 million, representing three 7% of our total loans of 12 31 2020 at a weighted average loan to value of 52%.
The average debt service cover of our small balance commercial real estate portfolio was 152 as of December 31 2020.
We have no loans in the small balance portfolio of in forbearance as of the end of the quarter.
Today, either our commercial loan book, including lender finance and specialty commercial real estate is comprised of loans and lines of credit secured by single family multifamily and commercial real estate Atlanta consumer receivables.
Lender Finance book is comprised of real estate of non real estate transactions.
The weighted average advance rate on the real estate lender Finance book is 28% with no transactions with advanced rates greater than 50 per cent. The non real estate lender finance book backed by primarily consumer loans is approximately $688 million of an average advance rate of 54% of the outstanding receivables balance the structures generally require rapid paydowns.
In the event of any significant collateral deterioration of the receivables and are also paid down rapidly in the event originations decline, we have no loans in forbearance and our lender finance for Crystal book.
Non real estate consumer lending is comprised of approximately $270 million of auto loans $58 million of personal unsecured loans and $7.3 million of H&R block refund advance loans, we learned of prime and Super Prime borrowers with an average FICO score of 765, and our auto production of 760, and our unsecured consumer portfolio, we fully underwrite.
The service every auto loans, we hold on our balance sheet and the portfolio continues to perform in line with expectations.
We continue to generate strong returns for the return on average common shareholder equity of 17, 3% and $14 35 per cent of the three months ended December 31, 2020 in December 31, 2019, respectively. Our efficiency ratio for the banking segment was $40 four of five for the quarter ended December 32020 compared to $43 eight.
The 1% of the year ago period, our year over year of improvement in our banking business segment efficiency ratio that would have been even better if you exclude the the 848000 FDIC credit we received in the three months ended December 31, 2019, we continue to maintain strong operating efficiencies, while investing prudently in each of our business unit.
Yes.
Our capital ratios remain strong with tier one leverage to adjusted assets of $8 68 at the holding company at 9.0 rate at the bank of.
<unk> for capital of remain organic loan growth reinvestment in growth initiatives opportunistic buybacks and accretive M&A, we bought back approximately $4 million of common stock in the December 2020 quarter at an average price of approximately $23 per share.
Our loan pipeline remains solid with approximately $1 7 billion of consolidated the loans in our pipeline at December 31, 2020, consisting of $399 million of single family agency gain on sale of mortgages $347 million of Jumbo single family mortgages $225 million of multifamily and small balance commercial real estate loans.
677, $5 million of C&I, and Crystal loans, and $23 1 million of auto and consumer unsecured loans, we expect to be able to continue to grow loans in the high single digits for low double digit percentage throughout the remainder of this calendar year.
We are of healthy liquidity position of diverse set of funding sources.
The on balance sheet deposits increased by 13, 4% year over year with checking and savings deposits increasing by 26, 5%.
Our consumer commercial cash and Treasury management small business banking of specialty deposits continue to show solid growth concurrently we reduced our average interest bearing funding costs by six basis points linked quarter, and 103 basis points year over year to 85 basis points total client deposits of access clearing where $773 million at <unk>.
12, 31, 2020 up 14, 9% from the September 30th ending balance we have the ability to reap deploy our off balance sheet deposits to fund growth of the OXXO Spank, if and when it is economically advantageous to do so.
That $773 million of low cost deposits of approximately 333 million are all the way at other banks, while the remainder of sit on the bank's balance sheet. We also have access to approximately $2 5 billion of FHL. The borrowing $2 3 billion in excess of $183 million, we had outstanding at the end of the second quarter. Furthermore, we have one.
The $8 billion of liquidity available for fed discount window as of December 31, 2020.
Our securities business continues to make progress access clearing increased total tickets processed by almost 14% linked quarter to $1 3 million tickets and ending deposits by approximately 15% linked quarter, we signed three new correspondent clearing clients from the December quarter, and signed three new clients this quarter, which will.
Add incremental fee income and low cost deposits for the two to three quarters of lag between signing and Onboarding.
We're actively talking to two of introducing broker dealers and independent of all RA firms that are evaluating alternatives to Schwab T. G E trade and Pershing for clearing and custody services the ability of fracs those clearing to generate incremental fee income as well as sticky low cost deposits remains an important and differentiating value over the long term. Furthermore, we.
Main bullish on the medium to long term cost from revenue synergies provided by X those clearing in access of invest to our banking business.
We transitioned to a tiered pricing model based on assets under management of access invest during the December quarter, rather than offering a free basic service and charging monthly for various premium services. We now charge clients of flat 24 basis points of annual management fee and they have access to all financial services offered through our digital wealth and financial management cloud.
For them, we've seen limited attrition of the number of active accounts since we implant of the pricing change and overall AUR myself of approximately 10% for September 30 of 2020 to December 31, 2020, we will transition to a self clearing model later this month with access declaring becoming the clearing firm Fracs us invest this will make our digi.
The wealth management platform more scalable from a cost perspective over the long run and provide us flexibility to enhance our product offering.
We continue the beta test for.
The self directed trading platform.
The preliminary launch day to existing <unk> clients will be sometime in the June quarter. The functionality will also be accessible through the consolidator of mobile application.
By the end of this quarter, we will of integrated access invest functionality into our mobile application. So the DAC Soc invest functionality is available through one consolidated mobile application significantly improving the user experience and cross sell potential. We believe we have only scratched the surface on our long term cross sell and goals and objectives, new products and features with.
Our universal digital banking platform, such as single sign on for access invest X. It was trading in consumer banking will provide incremental value to our customers lower acquisition cost improve retention and add additional sources of fee income and deposits for the company. We believe many of the changes in consumer behavior over the past years of structural and the vast majority of the business and.
Consumer clients will permanently migrate their entire financial lives. The digital interactions are focuses on acquiring customers that value convenience and service and are willing to do more with access over time are low cost nationwide digital platform provides us with the flexibility and agility the mind data and offer consumers the best value for those looking for a superior solution now.
I'll turn the call over to Andy who will provide additional details on the results.
Thanks, Greg first I wanted to note that in addition to our press release and 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through Edgar or through our website at acts of its financial Dot com.
I will provide some very brief comments please refer to our press release for the SEC filings for additional details.
As Greg mentioned, our provision for credit losses was $8 million for this quarter ended December 31, 'twenty 'twenty down from $11 million for the last quarter ended September 32020, and up from $4 5 million for the second quarter last year and in December.
For the 31 2019.
Also this quarter, we decreased our unfunded loan commitment liability by $1 million due to an overall decrease in the amount of unfunded loan commitments. This 1 million dollar of pre tax benefit was included as the reduction to our other G&A.
In our non interest expense for the for this quarter ended December 31 2020.
The $8 million provision for credit losses. This quarter can be summarized as a net $4 1 million related to loan growth at low mix.
And $3 9 million related to specific allowances.
Of that 3.9 specific allowance 3.5 million relates to the condo rehab loan project, Greg discussed earlier.
Last quarter, we provided six in the half million.
Specific allowance related to the H&R block refund advance loans that were made in 2020.
Although we have exited the H&R block relationship they agreed to continue to pass through or any payments through April 30th 'twenty 'twenty, one due to the IRS return processing delays.
This quarter, we continue to collect the RIAA payments such that we were able to reallocate three and a half million of our R. A allowance to cover loan growth this quarter.
As of December 31, 'twenty 'twenty, there was $72 million of already loans left of 100% of which are covered by our allowance for credit losses with that I will turn the call back over to Johnny Lai.
Thanks, Andy Devin, we're ready to take questions.
At this time was the life.
Take any questions that you may have if you would like to ask the question. Please press star one on the telephone keypad come from.
Until the indicate your line is in the question queue. You may start to people like true move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before Christmas turkeys when both of them.
Please as we call for a question.
Okay.
Our first question comes from the line of Andrew Liesch with Piper Sandler Please share with your question.
Hey, guys.
Thanks for all the color I will begin the call I just wanted to cover.
Your loan growth outlook, similar comments before and for high single digit low double digit, but you're kind of already.
The already there in this fiscal year I think I heard you say calendar year. So I mean is there any are there any headwinds ahead that could maybe slow the pace of growth for the pipeline looks great. He's had great growth this quarter, where what's giving you some pause right now.
Well, we don't we don't know how quickly warehouse lending has been a strong contributor the last couple of quarters.
Uncertain.
How that will continue it looks pretty good right now we actually have the good pipeline of new lines, but obviously that's dependent on overall mortgage banking volume and then single family.
Declined this quarter the pipelines okay. It usually comes through the holiday season, and we always have if you look back over time, we do have the seasonal lows, but it's just uncertain how that will pick up.
Frankly, we're being very conservative in New York that was the market for US that we had previously done more business than on the single family side, and we're doing a lot less now.
So those would be the the caveat with with respect to that but.
You said I look I'm looking forward in the calendar year, and also frankly trying to moderate growth expectations out there, they're not going to be what this quarter's loan growth was in subsequent quarters.
So that's more of a way to think about it. So that's I know Andy you of anything out of there.
It's a great summary of getting Andrew it partially depends on warehouse warehouse ends up.
Entirely possible that it will pull back but.
Could be dramatically by the time, we get the June 30 of 2021.
Got it okay.
That's helpful. And then just if you look at the.
The the entire credit quality bucket it seems like a lot of the issues that you've mentioned the more unique sets of weeks since to some of these borrowers. It seems like your strategy of forcing people to pay you rather than.
Don Grantham deferral of is working out really well are there any areas that you have concern on.
The credit beyond what you May have mentioned are you seeing any weakness in the economy beyond what we would've expected as a result of the pandemic.
Well not in the asset classes that we generally work with obviously the two hotels.
The debt that we're there frankly, the only reason there they werent solved or were gone low simply because of this Oregon foreclosure moratorium, we had an agreement to sell those loans at par plus accrued and one of the of moratorium came in place. The the fund that was kind of buy those loans backed out so I think obviously.
To the extent there are hotels there on the multifamily side most of the week.
We had taken some of the multifamily loans, we have we have ready buyers for all of these multifamily loans at par plus accrued and the thing of it is we've been selling them and then David curing in 15 or 30 days. So you know sometimes somebody who's a little late with the payment in.
There are 35 days late and they they cure so not really I don't see anything of particular, there. This New York project is actually a nice building and of great area, but it's.
The interesting sort of legislative things came up the the retail tenant was supposed to be moved out there was a moratorium on moving that tenant out that tenants stopped paying so some of the governmental interference from the private markets is clearly.
I'd say semantically, it's something that can happen, but we don't see it really impacting our book given that we're so focused on asset classes that are really doing pretty well overall.
Got it and then it sounds like to me with the Ltvs. If there was any of it sounds like the U.
For any ones that may of giving you some trouble or for conservation.
Willing buyers at low Ltvs that doesn't really seem like loss content is going to be all of that meaningful yeah. I think that's right I certainly don't think loss content I mean, the type of assets that we generally have the.
There you know you're talking about a little clips at the top end of.
Of the range not some kind of.
Total loss on a company that just is no longer viable or something so I think that's right. So we're feeling really feel we feel quite good about credit and feel very well reserved.
Got it cool.
Lot of step back thanks for taking the question.
Yeah.
Our next question comes from the line of Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good afternoon.
Just wanted to ask about the mortgage warehouse the actually partially addressed this but I'm just wondering given the pace of growth that you've seen and obviously, you're looking to continue to expand those relationships.
It looks like it's right at about 10% of loans today and that May cure itself as you pointed out over the next six months for 12 months, but do you have an internal limit generally for that segment.
With respect to an overall limit we do have one but it's inside of it. It certainly allows us to exceed where we are.
From a risk perspective, I think the.
The right way to think about the risk associated with those loans is.
Absent of loans that we're purchasing ourselves.
For loans to a very secured conduit relationships, they're all government mortgages.
We're doing the work to make sure that those loans qualify for sale where of Fannie Mae direct seller. So to the extent there was never any underlying issue with any of those mortgage companies, we would simply be able to take that collateral in the salad.
The issue in mortgage warehouse is generally fraud.
And Theres a variety of mechanisms, including the systems that we have that are widely shared with other mortgage lenders to make sure that that dual pledging issue doesn't occur. So frankly, it's one of the asset classes that from a safety perspective is.
Is the very good asset class to grow with it.
It exhibits obviously very high levels of liquidity.
It essentially the mortgages are almost entirely guaranteed by the government.
The the weakness in the.
The product as I'm sure you know is that the rate is lower than the average rate in our loans and there is higher levels of volatility.
Associated with those with those loans and so in the event the mortgage lending pulls back.
The calls you get are well would you like to be I am for lines and would you like to be used or not and if you would like to be used the need to be in this range. So you can have.
You can have interest rate compression on those on those lines, if there's a pullback in mortgage.
The lending.
Great I appreciate the <unk>.
Retailer and then it says.
A follow up.
You've mentioned your commission products.
Self directed trading getting ready to launch pretty soon just wondering with all of the noise going on with Robin Hood. The last couple of days any of any thoughts or ramifications positively or negatively from.
Kind of what's what's going on.
Well, so it's interesting because of <unk> clearing has always had retail brokerage accounts and those retail brokerage accounts of Roes and then that they trade directly with clients on but this is so this is really taking this axis clearing product and bring it through the platform.
In a way that would expand the service. So it's it's I think with respect to the question of the the nature of what's going on with Robinhood I would say.
I'll address the two levels one level as more broadly.
Individuals are looking for a consolidated the relationship between a trading and investing account and a banking account and we see the massive growth of the Robin Hudson there attempts to add checking accounts, even if it didn't exactly work out right away right and they'll they'll be back at it.
So the strategic moves we've been taking in my opinion of our absolutely validated by what's happening in the market with respect to the the growth in online trading now.
And then that required also the clearing company given the margins of that business to make sure that you own all of the value stream from them from a from a from a revenue perspective now the question with respect to these the.
The utilization of social media to drive trading is something that because we own our own platform, we're going to be looking at and considering in the event that some of these types of activities.
Her that have occurred over the last several days and thinking about how to deal with those whether it's the it's a speed bump that requires somebody to go through a a warning and a review of of whether they are interested in trading not participate relative basis.
Or are there other remedies associated with that are things that are.
The compliance group would consistently review and and make determinations on so I think.
It is.
Is.
I don't want to comment on whether any of the events would somehow hurt the reputation of one firm and therefore make us more likely to get clients or something I mean, given that this product is six months away I think those things are just too speculative, but I do think overall it's demonstrative.
For the fact that digital financial services and the bundling of them.
Is a strategy that's really important.
Great I appreciate your thoughts.
Thank you.
Our next question comes from the line of Michael Perito with Cape UW. Please share with your question.
Hey, good afternoon, guys. Thanks for taking my question.
Sure.
Hi, Mike.
Greg I was wondering on the on the lender finance portfolio.
If we look back.
Over a couple of billion nine nine plus months ago, obviously came down another $34 million quarter over quarter. Here. Just is is that you kind of expect that trend will that continue to work against your growth. Your near term do you think that's close to bottoming out and can you maybe just give us a quick update of your view on that portfolio.
Clearly it kind of made an effort to run it down here over the last year or so.
I think that the the asset class of will probably shift and it'll become more real estate hard asset focused I think.
The really the reduction I think where we attached ourselves and the structure that we had even given a very severe recession much more severe than it appears the consumer recession is going to be in the U S. I think we were safe I think that the reality of.
Is that the market demand and our underlying customers have simply reduced originations or the demand for those originations are such that the market really isn't there right now however.
There are other lender finance areas sort of.
That are the result of different <unk>.
More of the more real estate oriented lender finance opportunities that are there. So I think that that portfolio will stabilize just overall and probably grow a bit as well. So I think we're probably done with with it being a drag on loan growth.
Helpful and then.
In your prepared remarks, I think you mentioned there was three you know its pretty sizeable clients on the clearing side that you guys are either brought onboard are bringing on board and I was curious if you could maybe give us an update on.
We're kind of the efficiency and the margin of that business is today I mean are these clients and growth from the prior couple of quarters or are you starting to really kind of see it flow through the scalability of the platform you built or are we still maybe six months away from that any any updated thoughts there.
Yeah, I think I think we are away from that whether it's the only six months or not.
<unk>.
I think I think of.
Our goal with respect to what we're doing in clearing is the creation of a of platform.
On the custody side for our eyes and on the clearing side for IBD is the goal then is to take the software that we've developed and utilize that software for the end clients from an acquisition perspective as.
As well as to build on the existing.
The trading platforms for retail that that that the firm has and bring those through.
Very cohesive.
And user experience friendly way and so that's just a lot of stuff to do that's new business is to build where the competitors are large.
And how big head starts so ex.
Of those clearing is.
About a month away from launching of really.
Very nice.
The custody platform, it's quite comprehensive.
And so those of the types of things that are going on and so I'm, just not particularly focused on.
And whether they make a $1 million on the segment of our big looser.
Lose the million dollars, you'll make $2 million right now what I'm focused on is the long term benefits that that will generate and what I hope to do is in a couple of years instead of being sitting on.
Seven 750 of 770 of zero cost deposits I Wanna be sitting on three of $4 billion of zero cost deposits and that's that's really the overall goal and even if right now that the.
Deposit rate that that the clearing gathering those deposits is very low and clearing would be very profitable right now out of two 5%.
The fed funds for two 5% clearing would be super profitable so.
Well, it's not right now, but the reality of this is that the deposit business is has to be built over you know half decades and decades and so the investment is really about that and we're going to continue to invest in it and not be bothered by little drips and drabs there.
Yeah look I'm, not saying that I wanted to increase and I think I think they are doing a really good job of driving the profitability is just not that's not the immediate goal.
No that's absolutely the helpful and makes a lot of sense and I guess on that point you know as we think about kind of deposit platform that you guys are building I'm just curious.
Honestly calendar 2020.
You know thematic we seem to be of big proof of concept for a lot of the kind of digital consumer banks and I'm. Just curious if maybe you can give us a quick recap of of how the the digital consumer bank kind of grew over the past 12 months and do you I imagine it was.
Fairly robust do you think that can continue into this year is just the momentum in the market on that side just to kind of continue to grow the as the consumer digital bank.
Kind of meaningfully we're seeing.
Seeing tremendous growth in accounts and pretty much every month as a record account opening quarter for consumer checking accounts for the utilization of the direct deposit switch kits.
Where.
We're also obviously shifting I think we're improving the Max of that business a lot because we have the USB brand, which is more focused on savings accounts and kind of attracts yield focused folks and that that's sitting at about 20 basis points now and so we really are.
Thank you know where we're in the range of the next couple of years getting to the point, where we have the checking accounts, we're bringing on and the average cost is in the 2025 basis point of 28 basis point range something like that so.
All in so I think it's really working on the small business side is really working the platform is getting a lot of complements the all of the work that's being done internally on the risk engines to make the transactions more seamless the.
Work that is being done to add product is really paying off and so yeah. We.
It is the all of that work that was done on the on the <unk> side is really paying off and it's paying off in the efficiency ratio because we can take activities that are coming through call centers analyze them and then push them through automated fulfillment and so <unk>.
CNC ratio work is never glamour assets always a grinded out sort of deal, but but with this platform. We're able to just digitize so much and it helps it helps with everything it also the compliance it helps with cost and also of the customer experience. So yeah. We're really excited about where we are and were.
Really pleased we made the investments we did even though they were kind of painful in the efficiency ratio is it you look over the long term of kind of ran up and now it's starting to come back down.
I'm just sorry, if I can just sneak one last one of it on that standpoint, and that was of great rundown just the when you think about your kind of target consumer for the the <unk>.
Platform, you know I mean, I think a lot of of the the named generate the headlines clearly havent you know, an underbanked and unbanked kind of focus and and you know, but I'm just curious how you kind of view the target consumer.
Or is it.
Are you really seeing kind of a broad range of of people adopt the platform at this point of any other additional color there would be would be helpful. Yeah. Our consumers do tend to be higher end of those other platforms. They carry a larger balances and those platforms are largely trying to drive durbin exempt transaction revenue and that's where they make.
A significant majority of their money as you know so that's a little bit different for us and also obviously with what we're trying to do on the advisory side with the platforms and.
The the customers of our introducing broker dealers.
Our kind of tend to be different customer segments. So the platform is built to accommodate every one of its open to everyone that we do get a mix of customers.
I think that I think that the trading side will actually shift some to the millennial groups.
You have to be thoughtful about that my 15 year old wanted to know how to trade crypto currencies.
The other day so.
But it is it is an interesting it's an inch.
Kristin set of products that I think will end up with in the wheat.
We do have a different demographic, though then yeah.
Right.
At Cheyenne or something.
Yeah, no that makes sense and you know on the direction of everything's going you'll probably going of to start offering cryptos on the U D D. At some point in the near future.
Yes, it's interesting there is that there's a lot of there's a lot of work being done in that space for sure.
Yeah, great well. Thank you guys I appreciate it.
Thank you thanks, Mike.
But once again, if you would like to ask the question. Please press star one on your telephone keypad. Once again, if you would like to ask the question. Please press star one on your telephone keypad one of them. Please.
Our next question comes from the line of David <unk> with Wedbush Securities. Please proceed with your question.
Hi, Thanks for taking questions and actually I'll start with them on that last point and discussion about.
Your target market and I saw the press release today up from <unk> 26, and the growth that they're generating in the U S and I was curious if you're able to disclose how big this relationship is and what your expectations are going forward.
We don't generally trying to talk about our partner relationships too much except to say that.
It's public information that where their issuer and they hold their deposits with us and.
We like working with them, we think they are an innovative business and.
You could say that well we have of competitive platform, but the reality is is that the market of pet for consumer banking is dominated by large banks and whenever a collaboration that we have it's certainly we don't feel like it runs into them and I think they feel the same way.
Got it thanks for that and then I had some questions on.
The outlook in terms of net interest income and net interest margin and clearly on the margin front given the strong deposit growth.
We're kind of gravitating towards the discussion around net interest income are you able to provide any sort of outlook commentary on what youre expecting over the next couple of quarters or for the full year in 2021.
Well, an aggressive analysts might be inclined to revise their their NIM targets very far up.
And.
I would advise not to do that.
And I think I think the reason why that would be the cases that obviously warehouse growth was lower.
We.
We are continually looking at loan rates. It has as banks sort of adjust for this new environment, we can tell.
Whether we'll have loan rate compression. So that's there we talked about how we're not going to of a lot of compression on the existing book because we're all of it floors. So that's that issue and then also.
Where we're looking to continue to do things like drop draw customers in <unk>.
Through getting them into the transaction platform on the checking side things like that and what kind of incentives and what sort of things we're offering to them. So I don't know Andy do you have other I think our guidance kind of Greg stated is still 338% for you.
You could pick up.
Between three eight and $3 nine kind of where weight of where we would be.
In the long run.
And again I think the only caution here is.
We're in an environment, where rates are really low competitive rates are coming down.
We've done a great job, maintaining our margin, but we're also interested obviously in trying to keep loan volume and so it's a blend between both so for.
For that reason.
We're at between three eight for Yeah, and also some of that now that we have the security of subsidiary of getting this blended rate and.
Some margin in those type of loans and things like that sometimes are not quite at the rates that others are and so you end up with this.
That the end up with a Max question with respect to the overall rate probably most importantly, we up to the bank NIM a little bit the compensate for our sub debt. So as you know we added $175 million of sub debt, which was a big increase but we still improved our NIM a little bit so.
It's a it's a balancing act.
But we're still targeting between that range.
Got it thanks for that and I think I heard in your prepared comments about the loan loss provision being stable and I wanted to clarify.
And I may have just missed misheard all of the all the detail around it but was that kind of stable with the December quarter for the next couple of quarters or could you just kind of reiterate what you were saying in your prepared comments about the loan loss provision outlook.
Sure I mean, I think basic.
Basically we are not seeing any kind of trend that's worrying us that we would expect any kind of prolonged the increase in provisions.
For that piece you've also seen.
The comment that frankly, my view of that I think that's I agree with Andy of then the.
The other comment I would make is I thought there were a lot of banks it released reserves.
With respect to this quarter and I guess my comment the way I method was directed of don't expect us to release reserves, so that might mean that I'm not saying, we're going to have the same reserves for.
These quarters, we'll see obviously, how things turn out look at loan volume, that's going to drive that those sort of things, but I just wouldnt be expecting some.
Reserve releases of something <unk> seen some other banks do.
Got it got it that's helpful and then your comment about self.
Self clearing for access to invest perhaps the mid year, how much of the savings could that generate for you guys.
It was.
It was in the.
It was and is at around 600 grand or something like that is its modest.
For the entire fees yes.
The truth of it right the truth of the matter is is that right yes.
It's interesting because.
Well what of course, we're doing is returning of right around and we're adding products and services into the business and adding people there to two to hit our growth objectives. So I think it's it isn't something that's so overwhelming.
It is helpful from a cost perspective and it also.
Sure is that we have all of those capabilities from an API perspective, so that it also makes us a viable alternative for third party investment platforms that would like to use us.
As a custodian.
The hold their securities and their deposits so.
What it really speaks to is the scalability because now that we've got the pipes in place at a base level of charge now we can scale. It at it yet at a minimal cost rate and then theres. There. There's a there's a lot of product advantages from that too because if we want to add something that we want out of the communication it doesn't have to be.
A work order to of third party firm. It's it's something we can we can work through.
Great. That's really helpful. And then the last one just PPP round two do you have an expectation as to how much you.
Want to do there.
As little as possible.
We're not really going to do we're going to take care of.
Selected clients and and folks that have.
Strong TM relationships with us and.
It's just the the nature of having a one for a potential 1% of loan on your balance sheet. They have extended this.
It was it was fine and we kind of did it frankly more for the purposes of.
Trying to add capacity to our system the needed it and things like that we never really it was it was useful for getting some deposit accounts for when the big banks were clogged up but I feel like the systems of kind of worked through so we're taking care of our clients I wouldn't expect it to be something significant for us.
Got it thanks very much.
Thank you.
And with that this concludes our question and answer session and I would like to turn the call back over the management team for any closing remarks.
Thank you everyone I appreciate your interest and we'll talk to you next quarter.
<unk>.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
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