Q3 2021 Axos Financial Inc Earnings Call
[music].
Greetings and welcome to <unk> Financial Inc. Fiscal three.
2021.
Earnings call and webcast at this time, all participants are in a listen only mode.
And this special followed from presentation. So and you once you require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This accomplished is being recorded I would now like to turn the conference over to your host Mr. Johnny Lai Vice President.
Elements and Investor Relations. Thank you you may begin.
Thank you Devin.
Good afternoon, everyone. Thanks for your interest and access.
Joining us today for access financial third quarter 2021 financial results Conference call are the company's President and Chief Executive Officer, Greg Dear friend and access.
And as Vice President and Chief Financial Officer, Andy Micheletti.
Greg and Andy will review and comment on the financial and operational results for the three and nine months ended March 31, 2021, and there will be available to answer questions. After the prepared remarks.
Before I begin and I would like to remind listeners that prepared remarks made on this call may contain forward looking statements that are subject to risks and uncertainties and that management may make additional forward looking statements and response to your question is for looking statements are made on the basis of current views and assumptions and management regarding future events and performance.
Actual results could differ materially from those expressed or implied and such forward looking statements as a result of risks and uncertainties and.
Therefore, the company claims for Safe Harbor protection pertaining to the forward looking statements contained in the private securities.
Litigation Reform Act of 90 95.
This call is being webcast and there'll be an audio replay available on the Investor Relations section of it.
And the company.
Site located at assets net dot com for 30 day.
Details for this call were provided on the conference call announcement and in today's earnings press release before handing over the call Greg I'd like to remind our listeners that in addition to the earnings press release and 10-Q. We also mentioned on an earnings supplement for this call.
All of these documents can be found on the access financial.
Dot com website, and with that I'd like to turn the call over to Greg. Thank you Johnny and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access Financial's conference call for the third quarter and fiscal year 2021 and at March 31, 2021, and thank you for your interest and access Faisel and access bank.
We delivered another strong quarter with positive sequential growth and ending loan balances and net interest income net interest margin expansion and solid credit performance and year over year comparison is distorted by the seasonal H&R block's tax products, which we no longer provide access and now third fiscal quarter and net income for $53 6 million.
For the three months ended March 31, 2021 and earnings per diluted share of 89 cash.
Excluding net interest income and non interest income related to the discontinued H&R block relationship net interest income and fee income increased by 21, 9% and 43, 7%, respectively, reflecting solid growth and mortgage banking and access securities assets as return on average equity for the third quarter.
On <unk> 2021 for 16 and find one 2% and the bank's efficiency ratio was 42.33 per se.
Tangible book value per share was $20 40 for science at March 31, 2021.
17, 1% from March 31, 2020.
The highlights this quarter included the following.
And then the loan and leases increased by approximately 102 million up $3 five annual per cent annualized from the first quarter of 2021 and.
12, 9% year over year.
Putting mortgage warehouse ending loan balance has increased by approximately $318 million up 12, 4% annualized from the first quarter of 2020, what strong originations and multifamily commercial real estate and CNI were offset by higher pay offs and jumbo single family loan balances and.
Net interest margin was $3 96 per cent for the third quarter up two basis points from 394 per cent of the second quarter on fiscal 2020, one excluding the impact of H&R block related refund advance and Emerald advance loans and the prior years third quarter overall net interest margin was up nine basis points year over year.
Loan yields continue to hold up well at 5.1% essentially flat from five 6% and our quarter ended December 31, 2020. The cost of interest bearing deposits is 81 basis points down four basis points from the quarter ended December 30, 31 2020.
Net interest margin for the banking business unit was for two three per cent compared to 4.11% and the quarter ended December 31, 2020, PPP loan fees continue to have a negative and loan balance is considered to have a negligible impact on our overall banking business unit now.
Our efficiency ratio for the three months ended March 31, 2021 was 56, 4% compared to 46, eight and 6% and the second quarter of 2021, the efficiency ratio for the banking business segment was 42 and three three percentage for the third quarter of 2021 first 40 point for a 5% on this.
Second quarter of 2021.
Sequential increase and overall banking business efficiency was a result of higher professional service expenses related to onetime legal costs and higher marketing costs related to mortgage banking.
Capital levels remain strong with tier one leverage ratio of 956% at the bank and $8 99 per center at the holding company, both well above our regulatory requirements on.
And 331 in 2020, one we redeemed all of the outstanding 6.25 per cent of subordinated notes due February 'twenty, eight 2020 six representing an aggregate principal balance of 51 million for redemption was principally funded with proceeds from the issuance of $175 million of sub debt that was completed in September of 2020.
Our credit quality remains strong with no loans in forbearance nonperforming assets fell by 20% linked quarter, representing one one for a percent of total loans and leases at March 31, 2021, compared to one point for 4% at December 31, 2020, our focus on retaining asset based on.
Loans with low loan to values on our balance sheet has contributed to the low loss content on a small number of loans that become delinquent.
Total loan originations for the third quarter ended March 31, 2021 was $1 8 billion down 36, 8% from $2 9 billion and the year ago period, excluding H&R block related loans and the year ago period total loan originations increased by 47, 9% year over year.
Q3, 2021 and originations were as follows $381 million of single family Agency gain on sale production 251 million from single family Jumbo portfolio production.
97 million of multifamily production 46 million of commercial real estate production 37 million of auto and unsecured consumer loan production and $956 million on C&I loan production, resulting in a net increase of $420 million.
Our gain on sale on mortgage banking group had another strong quarter generating $9 million of mortgage banking income compared to $10 7 million and the second quarter of 'twenty, 'twenty, one and $3 million and the corresponding quarter last year.
Nations to create by approximately 16, 3% linked quarter to 381 million due to a steady increase and interest rates from the end of 2020 to March 31, 2020 one yes.
The outlook for mortgage banking remains solid although the overall industry slowdown and refinancing activity may result in either lower loan originations and our lower margins are both relative to what we have been experiencing over the past two or three quarters. Our loan pipeline of single family Agency mortgages was $229 million at $4.
22 2021.
Our mortgage warehouse continued business continues to benefit from strong demand for agency mortgages, and then balances and our mortgage warehouse portfolio was up significantly from $380 million and March 31, 2020, and down $217 million from the elevated 12, 31, and 2020 balance of $1 2 billion.
We continue to expand our relationships with existing mortgage warehouse customers and establish new relationships or single family warehouse business generate strong risk adjusted returns for us and provides a countercyclical balance to a more asset sensitive commercial lending businesses.
Net interest margin for the banking business unit was for point to 3% and the third quarter compared to four point and one 1% on the prior quarter and for 9% and the third quarter of fiscal 2020, excluding the impact of H&R block our net interest margin for the banking business unit was up 12 basis points linked quarter and up 38 basis points.
Year over year on the asset side and the banking business our loan yields continue to hold up well with average loan yields of five 1% compared to five point and one 6% and the quarter ended December 31, 2020.
The vast majority of our asset based loans are variable rate loans with 95% of all variable rate loans being up a for as of March 31 2021.
For loan originations and the quarter ended March 31, 21 were $4 eight 1% for jumbo single family mortgages five point of one per cent for multifamily and $5 seven per cent for C&I loans, approximately <unk> 48 per cent of our loans are five one arms with single family and multifamily mortgages and the underlying collateral.
And our C&I loan book, our asset based lending facilities and commercial specialty real estate loan portfolios have rates that are just too and index of the $3 4 billion of lender finance and commercial specialty real estate loans outstanding at March 31, 2021, approximately <unk> 94 per center out there for rates, our equipment leasing portfolio, which accounts.
For the remaining $120 million of C&I loans outstanding is comprised of fixed rate loans and leases.
Our checking and savings and money market balances increased by approximately $3 billion from March 31, 2020, with strong growth and consumer small business and commercial deposit accounts and balances our consumer checking and small business checking accounts continue to receive accolades for profit and the best value and services for our customers benefiting from our <unk>.
<unk> enabled service models, ending non interest bearing demand deposits were $2 6 billion and the quarter ended March 31, 2021 up by approximately 19% from the prior quarter.
We're making good progress on our specialty commercial and Treasury management businesses, including our fiduciary services businesses <unk> clearing and continues to generate low cost deposits that we were able to put on or off balance sheet, and then cash deposits balances with Axa securities were approximately $800 million with approximately $480 million.
And of those balance was placed at other banks at March 31 2021.
Our credit quality remains solid and it.
Net charge offs to average loans and leases was three basis points this quarter compared to three basis points from the corresponding period last year non.
Nonperforming assets to total assets or 114 basis points for the quarter ended March 31, 2020, one down from 144 basis points and the second quarter of fiscal 2020 one.
Our non performing loans 60 per cent for single family mortgages, where we have had historically very low realized losses of our nonperforming single family mortgage loans at March 31, 2021, approximately 85% head and estimated current loan to value ratio at or below 70% and approximately 95 per cent are below 80%.
And of our best estimates of current loan to values given this low loan to value on our single family delinquent mortgages, we do not anticipate incurring material losses on the vast majority of these wallets and.
Other than single family delinquencies and the remaining delinquencies consists of two hotel loans. We previously discussed which are around $24 5 million of unpaid principal balance and we had six multifamily loans that were 30% to 59 days delinquent for a total value of around $3 $1 million that are and origination ltvs of around 46% on average.
<unk> one multifamily loans that is 60 to 90 days delinquent for a million dollars with and origination on the value of 44 per cent.
And you need to work with borrowers to bring delinquent loans are current and we have no loans on forbearance as of March 31 2021.
Our loan loss provision for this quarter was $2 7 million compared to 8 million and December 31, 2020 quarter and $28 5 million and the quarter ended March 31 2020.
The primary reason for the sequential decline in loan loss provisions are lower loan growth and a sequential improvement and our nonperforming loan balances and our total allowance for loan loss was $143 8 million at March 31, 2021, which represents 1.1 and 6% of our total loans and leases, while we have seen steady improvement and the economy.
And since COVID-19 related restrictions have been rolled back and resilient housing values and the vast majority of markets, where we lead and that continues we do not anticipate and making significant changes to our loan loss provisions and calendar 2021.
Approximately 95 per cent of our loans outstanding at March 31, 2021, and were collateralized by hard assets with an average loan to value and the fifty's, including 10.6 billion by real estate assets and $523 million of loans secured by commercial receivables.
We continue to generate strong returns with average return on common equity of $16, one and 2% and $18 six 5% and the three months ended March 31, 2021, and March 31, 2020, respectively. Our efficiency ratio for the banking business segment was $42 33 per cent for the quarter ended March 31 2021.
Compared to 44, 5% on the last quarter, we continue to invest in people and infrastructure technology and processes and each of our businesses. So that we can continue to grow at a similar percentage on our ever larger asset base.
Our capital ratios remain strong with tier one leverage to adjusted assets and $8, 99% at the holding company and 956% of the Axis Bank.
Also have access to approximately $2.8 billion of federal home loan bank borrowings and $2 6 billion and excess of $173 million. We had outstanding at the end of the third quarter. Furthermore, we have $2 3 billion of liquidity available at the Federal reserve discount window as of March 31, 2021, our strong organic growth and returns coupled with X.
And as capital and ask those financial allows us to make opportunistic acquisitions, such as the trade Advisory services acquisition that we announced last week I will discuss the strategic and financial benefits of this transaction later on the call.
On pipeline remains solid with approximately $1 8 billion of consolidated loans and our pipeline at March 31, 2021, consisting of $229 million of single family agency gain on sale of mortgages $473 million of jumbo single family mortgages and $192 million of multifamily and small balance commercial real estate term loan.
<unk> 845 million and CNI and other commercial specialty real estate loans and $45 million of auto and unsecured loans.
We expect to be able to grow loans and the high single digits to low double digit percentages and maintain our net interest margin and the mid to high end of our three eight to 4.0 target range for the remainder of this calendar year.
Although we are above this net interest margin range. It's a bank currently and we do expect to be able to lower our cost of funds significantly, particularly given our recent acquisition of Eas and the run off of our acquired book of higher rate certificates of deposits from nationwide, we anticipate the loan competition and certain segments will require us to land at rates that would result in.
Gross margin expansion and this coming year and a reduction on our cost of funds might otherwise indicate.
Sure. These businesses continue to make steady progress and those clearing increased total tickets processed by almost 52% linked quarter to almost 2 million tickets and ending deposits grew by approximately 3% linked quarter.
We signed three new correspondent clearing clients for the December quarter, and signed three new clients this quarter, which will add incremental fee income and low cost deposits for that two to three quarter lag between signing and on boarding.
On prior calls and on our most recent Investor day in 2019, we were talking about the importance of growing our securities clearing and custody business last week, we announced an agreement to acquire certain assets and liabilities E Trade Advisory service Eas as they are called.
<unk> is a top five IRA and cause RIAA custodian with proprietary technology platforms that hundreds of independent <unk> and.
And taps you used to serve their wealthy management clients with approximately $23 billion of assets under custody, including $1 2 billion of client cash deposits significantly increases our scale total addressable market and capabilities.
<unk> is focused on providing high touch services to ria's with assets under management between $50 million and 1 billion as a per.
Perfect complement to the clearing services, we provide to independent broker dealers.
And believe that our entrepreneurial culture commitment to servicing clients with no conflict of interest and our ability to provide additional technology and banking services to our as advisers and their and clients makes us a credible alternative to the largest competitors and the custody space. What makes me. Most excited about this transaction is that the team of custody experts who are.
Dedicated to serving independent <unk> and turnkey asset management program managers and the Liberty technology platform, we are purchasing the.
And the Eas team headquartered and Centennial, Colorado is comprised of approximately 180 team members, including over 50 software engineers application and system support and other technology infrastructure and service Ftes and over 100 client facing operations and business strategy Ftes Liberty is a proprietary and <unk>.
Current facing technology platform that interfaces with a variety of third party middle and back office systems.
<unk> is used for portfolio management and tax reporting transaction processing marketing and client service functions, adding a flexible technology platform and experience relationship management and operations team dramatically accelerates, our time to scale and credibility and this business.
E S as model and market opportunity share similarities and differences with those from ex those clearing and.
Independent Ria's continue to grow and number and AUM is <unk>.
For advisers leave wire houses to gain greater control over their practices and enhance their economics. We believe <unk> is well positioned to gain market share and this growing market as more advisors look for alternatives to large custodians like the clearing business securities custody generate significant amounts of no to low cost deposits that day.
From substantially more valuable as interest rates rise offsetting the effect of businesses such as mortgage banking as it benefited from a lower rate environment.
Clients sweep deposits from clearing and custody also provide optionality for us as we have sole discretion and determining whether we use for deposits to fund the bank's asset growth or hold them off balance sheet as a partner bank to optimize our capital efficiency.
Deposits from the custody business will provide us with a new source of low cost funding that can scale dramatically faster and more cost effectively and consumer deposits.
Thanks for clearing business, where fee income is generated primarily transaction based ticket charges that have corresponding operating expenses. The custody business generates both transaction based fees and asset based fees. For example, EES charges a custody fees based on the amount of assets under custody when AUC balances increase either from <unk>.
And the net new assets from new or existing custody clients or from market appreciation.
<unk> fees paid to Eas also increases and.
And this respect the financial model is very similar to that of asset and wealth management businesses that charge and annual management fee based on assets under management.
Yes also collect commissions from third party mutual funds and ETF providers, where advisors, who custody with Eas use those mutual funds and Etfs and their investment portfolios.
<unk> generates transaction based fees related to paper statements and other ancillary services and total es generates about $58 million of net revenue and 2020 with approximately half of that coming from net interest income going forward, depending on how much of the client deposits are held off balance sheet at par.
And our banks and on Axis bank's balance sheet and the rate paid on those deposits to Etfs and the net revenue from Eas will vary from year to year.
We expect to extend offers to all Eas team members and invest to grow this business from an operating expense perspective about 70% of the 2020 noninterest expenses or compensation and benefits and sales commissions. If you exclude some one time expenses related to prior initiatives and E trade has discontinued the annual operating expense.
Run rate is approximately $39 million. The operating expenses are offset largely by fee income generated from asset and transaction based revenues. When we consider the net operating cost of the RA custody business and the low cost and stable funding, we are able to generate from client cash sweeps. We believe this provides us with another attractive and relatively <unk>.
[noise] and source of core deposits, we are confident that we'll identify cost synergies, particularly with respect to incremental costs and <unk> clearing that might otherwise have been incurred as we grow our customer are clear and customer base to be conservative we are not assuming meaningful cost synergies in year, one and only incremental cost synergies.
<unk> of between one and $1 5 million starting in year two.
And this is an attractive transaction from a strategic and financial perspective, we will find the entire $55 million cash purchase price with excess capital from the holding company using fairly conservative assumptions, we expect the acquisition to be at least 1% accretive on our EPS and your one and 5% accretive to our EPS and you are too.
Over the next few months, we will be transitioning the business from a bank on custody platform to our broker dealer platform prior to their projected calendar Q3, 2020 one close.
We will unlock potential cost and revenue synergies, which we have not modeled and our EPS accretion and tangible earn back forecasts. Once <unk> is fully integrated with access and we see meaningful revenue opportunities with ask those clearing access and vast and access bank.
We believe that the consumer technology, we have developed as a front end banking and securities platform.
There are account opening technology will be valuable to ice custody with access and they will have the benefit of partnering with us for the provision of banking products for their clients for the custodians and does not compete with them.
For whether it's on proprietary wealth management arm as is typical with other large custodians.
The combination of a broker dealer compliant RA custody and clearing platform and our host of White label banking products and services that our consumer and commercial bank makes us extremely excited about the long term cross sell potential across our entire organization.
We have not modeled additional bank and cross sell opportunities into our estimated accretion numbers. However for.
Furthermore, the flexibility of being able to move these low cost deposits on or off balance sheet has the potential to increase our annual net interest margin above the three eight to four range.
Accelerate our loan growth above the low teens rate, while maintaining our three 8% for pointed out NIM range.
This transaction will require a FINRA approval and we submitted our application to FINRA last week.
We continue to beta test our self directed trading platform. The preliminary launch date will be sometime in the June quarter for.
And one point and all of our self directed trading offering will focus on existing clients, who value the simplicity and convenience of being able to see and transact across various access banking and investment products to one online and mobile application more importantly, it will allow us to experiment with various pricing models and do more detailed customer segmentation.
With the goal of delivering a more customized client experience. It's the beginning of an ambitious and exciting journey that would be much more cost prohibited. If we did not on our own clearing company the ability to have a direct to consumer managed portfolio of products through our robo advisor self directed trading and banking should enable us over time to reduce the cost of customer acquisition.
<unk> increased revenue per customer and enhance retention.
We are also actively working on adding crypto currency custody and trading and to our self directed platform and I expect that that will begin beta launched by the end of this calendar year.
More excited than ever about the opportunities, we have and each of our businesses. Some of the investments we have made like mortgage banking and C&I lending are generating meaningful profit today and others, such as access clearing and access and vast if only scratched the surface relative to the long term potential.
Our future losses of self directed trading and crypto currency trading has the opportunity and drive significant consumer account growth for.
For operating a diversified set of lending funding and fee based businesses across our consumer Bank commercial bank securities and investments subsidiaries by continuing to make improvements on our user experience some technological capabilities and creating product offerings that are cultivated through direct and indirect customer acquisition channels, we are better positioned than most to me.
And consistent profitable growth irrespective of economic regulatory and competitive changes now I'll turn the call over to Andy who will provide additional details on our financial results.
Thanks, Greg.
First I wanted to note debt. 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 on line through Edgar or through our website at access financial Dot com.
I will provide some brief comments on two topics. Please refer to our press release or our SEC filings for additional details.
As Greg mentioned, our provision for credit losses was $2 7 million for this quarter ended March 31, 2021 down from each million dollars for the last quarter ended December 31, 2020 debt.
The decrease and the linked quarter was due to the quarterly change in point and time loan growth as.
As we look forward to additional loan growth over the next year, we expect the loan loss provisions to generally move with the ending balance loan growth for the quarter and based on the mix of loan types.
As discussed previously we exited our relationship with H&R block and deep.
Non issue refund advance loans this quarter, which is a large portion of the $25 8 million decline in the loan loss provision. This quarter ended March 31, and 2021 compared to last year's quarter ended March 31 2020.
Although we exited the H&R block relationship they agreed to continue to pass through our E payments through April 32021, due to the IRS tax return processing delays.
As of March 31, 2021, there was approximately $7 3 million.
<unk> loans left 100% of which is covered by and allowance for credit losses.
Next quarter, we expect to charge off any uncollected portion of the $7 3 million or a balance however that charge offs is not expected to impact our loan loss provision for the period.
Moving to our securities business, the pre tax operating results for the security segment for the quarter ended March 31, 2021 compared to last quarter ended December 31, and 2020 improved by zero point for million when excluding a one time.
Cost of $1 million incurred this quarter.
The adjusted results for the security segment would be about breakeven this quarter compared to a pretax loss on 0.5 million last quarter.
The improvement is primarily due to a $1 7 million increase and broker dealer fee income and access Cleary, resulting from the transaction growth this quarter compared to the last quarter ended December 31 and 2020.
So fee income benefit was partially offset by higher clearing costs and lower net interest income.
<unk>.
With that I'll turn the call back over to Johnny Lai.
Thanks, Andy and Kevin we are ready to take questions.
Perfect.
Conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
And ladies and gentlemen indicate your line is and the question queue. You may per start you if you'd like to remove your question from the queue for participants using speaker equipment, and b would be necessary to pick up your handset before Christmas from keys.
Our first question comes from the line of David.
With Raymond James. Please proceed with your question.
Hi, good afternoon everybody.
Hey, Hello there.
I just wanted to start and appreciate all the color where with <unk>.
I was just curious about maybe some of the integration of that and when do you think you'll be able to really start driving market share is the integration and conversion at a pretty quick process and and when do you think you could start a direct and some of the platform on the places that you talked about kind of and that supplement.
Yeah.
Well, so we expect that.
The integration that we're creating with the broker dealer is.
We expect that to be done.
By July 31st.
We also think that Liberty is a strong product.
We have a or a.
Custody sales team that sits and the clearing company already.
A pipeline, we already have a obviously much smaller or a custody business. So we don't think that there is a.
Impediment with respect to the Liberty technology that we need to fix in order to grow and in fact, we think it's it's a good platform. It actually is best in class in many areas.
Hows multiple models and a single account things like that so it actually is great and many ways. There is a few things on the technology Road map like every technology roadmap that we want to work on but we're hitting the ground running.
Eas has a pipeline with respect for for growth that will carryover. After the acquisition closes we have a pipeline from a growth perspective. So we'll be we'll be looking to to get that momentum going there may be a little bit of just.
Just a slowdown from a from a perspective of just having to make sure that we're taking care of the current customers properly and debt the transition goes well, but I think it's something that should be able to grow almost immediately.
Okay. That's good.
Great.
And then just just looking at the loan growth. It was it was good to see the strength and the special and CRE just curious how that the pipeline and that business is trending and what are you seeing strength what kind of project.
Youre more interested and and then whether this is one of those segments that you talked about a competitive new rates, maybe pressure and you know.
The margin itself.
And so that the projects are mostly residential projects.
Say the most significant are multifamily are related off and projects that are in lease up.
Like that.
And really residential and some condo type of loans.
And what you are performing very well frankly.
They are doing so well debt before by the time you make the alone.
The units are getting leased up and sold and obviously the market on the residential side is very very strong with respect to rates there were holding our own there I do expect debt.
And that there will be compression and those rates going forward as we continue to look to grow balances there, but we also do not expect that single family is going to have the decline and balances. It had this quarter, we did adjust rates and single family and the <unk>.
Pipeline is up significantly and so we believe that we ought to be able to hold our own at least may not get much growth, but we don't believe that a single family will be dragging loan growth down in a way that it did this quarter on and going forward basis based on what we're seeing with respect to the pipe.
And so it's it may not be the grower that we expected it and we've had historically, but it but I don't think it'll be the negative there and then obviously warehouse lending is really much more of a variable.
And so we expected that the temporary high balance we had at the high growth, we added and warehouse lending.
And that we that we rolled through and the December 31.
2020 quarter was going to adjusted debt and it did which resulted in lower loan growth this quarter.
Almost entirely as a result of that adjustment, but but but we have a lot of new clients. There. We're still we're still holding our own there as well so hopefully that'll that'll continue to be a much bigger business than it was four quarters ago.
Okay.
That's good color and then maybe just more of a higher level strategic question. We've seen several other banks enter into some crypto partnerships and investments just given the securities business and and.
Kind of your innovative mindset.
And you all have any interest there and then I guess do you see opportunity to participate in that side of things the cryptocurrency side of things at all.
So how.
Yes, we do the way that we're going to incorporate it is and the trading platform we will allow.
Our clients to custody.
Crypto assets and then.
And trade those crypto assets for other crypto assets and then if they would like to monetize those assets than they can and they can spend that off with with.
And a card. So we don't really have a plan right now to us to have those crypto assets used for.
For actual transactions.
And there's just there's not a lot of I think benefit right now there I mean there is.
BMW came out and said well, we will take crypto assets for a car.
But if you exchange those crypto assets and.
Write a check or send a wire and they'll also take that too so.
And I think that it is it is increasingly becoming something that even more.
A more conservative Iras are recommending some percentage of portfolio is being held and crypto assets. So that capability is being added to the clearing company assets. We can trade that and I think it will be something to have that integrated service I think it will be something that.
The customers will value.
Given away on consolidated.
Okay, that's great color. Thanks.
Thank you.
Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.
Hey, good afternoon, everyone.
And.
So obviously I mean, excluding Budd.
On warehouse loan growth pretty solid here margin.
Margin up nicely, but I guess focusing on just on the NII number $1.
And.
Is this a good level to build from here on the margin is going to be what it's going to do based on liquidity flows, but it was 136 million repeatable going forward.
Yes, I think yes.
I mean, we and look we expect we expect to have loan growth pipelines are good as I said single family.
I think that I think that the.
I think that with respect to new asset growth I think you should expect it to come in at a lower rate just in general.
And but not by a significant amount and.
And we expect to have good loan growth and.
Yes, I think to the extent you may have had higher loan growth and your model given what happened and on warehouse you have to do it yet obviously going on with just that for this quarter and roll that actual and to that but yes, I think that I think that's a fair statement.
Alright, you guys actually had better loan growth and I was looking for this quarter okay.
Okay.
Sure.
Well, yes.
Yeah.
Our guidance.
For our guidance really didn't change I mean, we still are and that's kind of that's kind of why I'm still right around this.
10% growth or so, but I guess, maybe shifting over just to your provisioning comment.
Is there anything justifying the allowance up near this level. Many historical losses, three is much better, but it sounds like youre going to try to keep the reserve.
And this level or maybe drift, Florida adjusting for loan growth, but.
Arguably you could make a case for for much lower than where it is right now and how do you think how do you see the provision playing out not just for next couple of quarters, but over the next couple of years.
Yeah.
Well, yes, a couple of years is way out there let me let me cover a couple of quarters I think our guidance was for for now we're comfortable that we're.
We're going to move that provision around growth and so obviously, we had a little bit smaller growth this quarter.
And time.
And if that point and time growth goes up which we do expect it depending on where it happens on.
The loan loss reserves for commercial are closer to between one and half and two so its all day if all the net growth comes in commercial.
Commercial real estate or commercial Youre looking more at 2% on growth.
Would you could bring that number back up.
And that's that.
Our broader point is that we don't necessarily expect it to go down from here.
If we've got good loan growth obviously, a single family grows that growth rate is that loan loss rate is a little bit smaller.
But the mixed rates that we have.
<unk> put out there on a release or kind of what we expect to run going forward.
Got it okay.
For that day that detail that was my question and I'll step back.
Thank you.
Our next question comes from the line of Michael Perito with CDW. Please go with your question.
Okay.
Hey, good afternoon, guys. Thanks for taking my question.
Michael Hey, Mike.
On the yes, Greg on the $1 2 billion of deposits and loans.
Mike.
And I apologize because I missed the bureau operating accounts with the rise in sales.
No no there their client cash that is held and those individual customer accounts.
That is subject to a sweep agreement and those.
Yes.
And as manage that cash and they have.
It's different.
Level of.
<unk> is.
There's about 150000 accounts there and then.
And <unk> has its own asset allocation profile and risk tolerance and does things like that and.
But in general on that side.
That's the way to think about that.
And is there so is there opportunity to Oh and I'm, just trying to think of how kind of the cross sell of all this.
And.
And I mean do they have a lot of the cluster.
Customers of these or I have a lot of access to credit type products today.
You know on the plant.
And I'd like your securities based lending I'm, just looking on slide eight of the EIA aspect you got cut out on me. If that's what they have access to is that potential upside that that could be rolled out relatively quickly and your thoughts there.
That's a great question and I think that's a very that's a very relevant and we didn't put that and the accretion numbers, but you make a lot of good points. So given that this wasn't on our broker dealer platform. They had zero margin lending.
And with these clients, which was something that was concern and limited the ability of the IRI as to maybe place all the assets. Other particular client so they may be dual custodian things or.
They just don't have that so you don't have so with once that's integrated to a broker dealer you can have the margin lending next the security space.
Line of credit idea, which is it's a very secure form of lending.
But the ability for the bank to automate for locking up of liquid assets for personal loans or connecting that to a very low interest rate credit card.
These are the type of things that are out there and then finally.
Obviously.
If you're and RIAA and Youre competing against you just left Morgan Stanley and you you're at a 40% split there and now you are keeping everything and you're paying you're paying access.
Custody and all of a sudden.
Your client needs of mortgage loans well.
And if Morgan Stanley's, saying, well, Hey, Gee, it's really too bad you left and I know you'd like your advisor but.
Here and if you just had your money over here, we can give you this mortgage loans and Thats a significant problem. So one of the.
Sets of services that are loss by a breakaway advisors from wire houses as they lose access to banking products. So we believe and we've already proven it out we have some we have some IRI custody business now and there has been some RIS, who have really taken to this and during the refinance boom.
And they said well part of my value is going through every one of my clients portfolios and introducing and ask us a mortgage product to those clients because.
And they were.
And we're giving them and we give them a better deal. We said we would waive the lender fees. So that was a significant benefit for their customers and.
And they went out and said look you guys need to do this and there is no payments there it was just.
Look this is a good opportunity to get a to get a mortgage. So that is that is I think definitely and opportunity and then the way we're integrating the technology as we built.
A really strong front and platform that front and platform.
And I can also be utilized for all of these and clients, both clearing and custody to see their statements and whatever else and then to the extent that our banking product is applied for and it gets applied for and that customer is then a.
Core banking customers so.
We we have work to do there because liberty has its own app and so we have our app and so we have to work through those sort of things, but those things are not hard to do and we will get it we'll get it moving and it'll it'll take a bit, but but we will get it right and I think there.
There's there's a lot of opportunity and I and and when we talk to the <unk>, there's different levels of enthusiasm about this but there universally concerned mostly universe and may be an overstatement, but a wide majority are concerned that without these products theirs and angle created by competitive wealth manager.
And two.
To gain access to that client.
Alright, well I mean, if you just think about who's going after these types of clients and it's probably a lot like crazy private wealth like things like back and have all these things right. So I mean, if you can.
Can't compete with that channel can I mean, it would seem like beyond securities backed lending mortgages and you could even possible like money market type deposit accounts and I mean, it would seem like there's a pretty full suite of services that debt you could offer that I imagine they werent really.
Well to cross sell previously I guess, yes.
Yes, great I think that's I think that's absolutely right and we have the technology to deliver that seamlessly.
Because all the applications for our products are all API enabled and.
And so whether they are a facilitates that or whether it's facilitated through a mobile application or online.
We have the ability to make that a relatively seamless process. So I think that that's.
Something thats really exciting and frankly, the big custodians have not done that well, but we have because of our obviously, our history and how where we've come from.
We have great account opening technology that account opening technology is something that it would take a very large raw to be able to generate and.
And make that work so how much does our account on opening technology come into play and.
And how much does the consumer platform come into play those will be Inc.
Sting opportunities on a going forward basis.
Got it and you think about the.
So clearly there's actually we've just talked about right, there's a lot of opportunity and a lot of waste and tighten up and and.
And see that there's cross selling opportunities as we think about the kind of the <unk>.
And rich that conflict and it goes up.
Yeah, It's fair to think that a lot of other risk would look similar to that and look at core clearing when you guys broke out onto the platform and need in terms of kind of like for like fraud, and things of that nature, there and anything else that we should be considering for for <unk>.
Those of US bank, guys, I guess better yeah.
I think that this is yes I think this is this is this is a much lower risk.
It is much lower risk from a standpoint on why you're worried about obviously fraud or those sort of things and the reason why is just.
The type of clients and the Max at our eyes have these are you know.
Just simply.
Domestic relatively high net worth individuals that have hired somebody to manage a balanced portfolio of mutual funds Etfs and some listed equities right. So it's really not.
It's not something where you've got you know.
A lot of massive trading.
Through or specific trading through these platforms.
There's not and access clearing you'll have people that short right and so obviously managing.
On the liquidity positions of those shorts, and making sure that they're doing it with the REIT stocks and all those kind of risks that just really isn't coming up and and RIAA custody business. So this.
I would I would say that this is a much easier business to manage from the market risk perspective.
It makes sense and then just lastly for me and if I can just high level from your guys right. The entrants potentially by the end of the year to the crypto space for one way shape or form and I. Thank you.
And obviously kind of have a dual pronged strategy with a lot of what you do right. There's kind of a consumer element and then theres. The commercial element and is it is it fair to say that the crypto side will likely evolve overtime and I mean, it sounds like it's more consumer out of the gate here, but is there you know theres, a really kind of institutional adoption.
Cryptos and such and early stages with some banks do a lot there already I mean is that and opportunities that you're considering as well. If you kind of go down this path or any other thought there would be great.
Yes, I think it is an interesting I think that it will it will it will inevitably lead there.
With respect to that and I think I'd say.
Those are interesting opportunities.
Got it well. Thank you guys I appreciate it.
Thank you thanks, Mike.
Our next question comes from the line of Tim <unk> with D. A Davidson. Please proceed with your question.
Hey, guys good afternoon.
Hey, Gary I wanted to ask a couple of questions. The first one on the Aaas.
You talked about going to $59 million, I think or 50 automobile on a run rate of 2020.
About half of that was from net interest income, so and I couldnt quite square kind of what those trailing numbers looked like relative to your earnings accretion assumptions and I just wanted to get a sense of what you're kind of working assumption is with regard to maybe the incremental margin on those deposits that come over and obviously as you pointed out there is going to be a mix of whether you keep them.
On balance sheet or offs, just trying to get a better sense for how you think so so here's the way we thought about it and those are the assumptions and you can see them on page seven of the earnings supplemental we said, we're going to assume that eas as client cash or and 75 basis points and then we have a $3 six.
Our interest expense savings from our four to five basis point reduction and.
And access banks interest bearing cost now.
The other.
The reality of it is is we already have we have now we have an extra $1 $2 billion of deposits, we have 400 million outside access and clearing and we're going to aggressively manage down our deposit cost as a result of this so we sort of picked up pretty I think are pretty conservative.
And I've estimated and said okay, let's assume we can only take our deposit cost for all interest bearing checking savings and money markets across consumer and commercial down by four to five basis points now.
That's that's I think that's a pretty conservative assumption, but that's what we have in there.
And then we have eas client cash earning that.
And when you think about it it's actually interesting from a conceptual perspective, when you try to come up with these numbers because what youre supposed to be doing and saying well when my economics be with and what would my economics be without and the reality of this business as it generates a lot of zero cost very sticky deposits add and all in costs debt lowered our service then.
And then let's say consumer checking accounts, which although they may have they have obviously, we have ones that have interest rates and those interest rates are coming down as we as we continue to mature, but we also have a lot of operating costs associated with those accounts and those accounts are smaller obviously on average than that high net worth accounts from <unk>.
Alright and custody. So that's why we've made the assumptions around I think how that actually looks sort of going forward is that it's gonna look like aggressive reductions and cost of funds.
You know pretty quickly here in order to make room for those deposits and then also.
And then also enables and enables our growth at maybe competitive more competitive on rates as well right. So that is another element that assists as we think about balancing this.
This loan loan yields NIM asset growth set of variables. This just gives us a lot bigger tool and we've.
Given the assumptions that we've made with respect to the accretion and the supplement deck.
Okay, Yes fair enough.
And we're looking at it and a vacuum versus commingled and.
Ladies and talk to other parts of the business are two different animals that I missed the second line added on that slide seven versus the slide deck last.
And last week.
And I appreciate that in terms of the.
Nationwide deposits.
And if you just kind of remind us what the kind of remainder is of those deposits and youre going to work down and what the prevailing ratio.
And Thats just the Cvs I mean, there is lots of niche and there was nationwide check Inc shares whenever that debt.
Adjusted and is there and good start yes, let me give you let me give you a couple of snippets.
There is a big piece in July of this year $114 million at 229%.
There is a $60 million a piece.
In August at 185.
There is a $39 million piece and 157.
In September so debt.
As you can see that quarter is where the bigger pieces start to start to amortize off.
Across that and so the whole.
Book within the CD group.
As you look at.
Ross nationwide, we're probably looking at about.
And.
About 700.
Call it $710 million.
And of the 331 balance is just nationwide.
Okay and.
Some of those were high they were long term CRE loans that were that are coming due that were higher rate from a different environment.
Obviously, theres excess deposits across the both of the the securities businesses.
And we are renewing some of these but frankly, obviously the rates are going to adjust significantly to the extent people off for renewal, yes, and let me give you two more numbers I know a total of a lot of numbers out there, but you want them.
$55 million.
And that group is coming off in May.
For that for that group at 188, and then another $55 million in June.
Also at 188.
So that gives you a kind of a flavor of how fast it's coming down and I.
And I think maybe a broad conceptual way to think about this and I know, it's a lot of movement, but.
With what we've been doing on the cost of fund side, it's going to get a lot better right. We asked you obviously of course, we're adding cost with what we're doing and these businesses, we will get more scale there as we get into these businesses and put our process improvements and place and things like that but.
Lee having lower funding cost also allows you to have loan growth.
Because you have more flexibility on loan rates and so within the target ranges that we're trying to get to so all of those kind of move around a bit.
But they end up getting you a little more flexibility with respect to.
Loan growth as a result of and ability to offer.
And more flexible.
Set of run rates.
Got it and then just I'm going to bounce back for a second.
I don't think I missed this but.
In terms of.
Goodwill or any intangibles and customer relationship intangibles or anything like that.
And talk about that at all or can you give us any incentive and sites.
Right.
Yes.
Well, that's obviously super early Gary So we're just giving you a very rough estimate this could change one way or another.
And I've got Derek here, but Derek and the and what we ended up using his total intangibles.
Total and tangibles would be between 40 and $50 million.
And which about $5 million to $10 million of that 40 to 50 is.
And internally developed software.
So a large portion of it is.
Yeah.
Okay.
Yeah.
Okay.
Our next question comes from the line of Steve Moss with B Riley Securities. Please proceed with your question.
Good afternoon.
Okay, Steve maybe if they stay on the.
And maybe just following up in terms of just in terms of yields just wondering to start where are new money yields coming in for.
For loans these days.
Yeah.
On the single family is probably down the pipeline.
And is up just the yields are probably new money yields I think are down.
The 25 to 30 basis points, something like that I think thats about right and then.
And the C&I stuff is the Max right now it really isn't down much maybe.
And maybe down a little bit every now and then but not much and then <unk>.
The family depends on the Max and say say, maybe from you know from this quarter I don't think it's I think the pipeline is pretty stable share. So I, just I don't want to overstate.
My concern about that or that there is going to be some massive cut but I just think I, just think looking forward and thinking about the competitive environment.
Where it could go.
That is just.
And offered and option associated with.
What's happening with our funding cost.
Single family, though is something where we have cut rates and the result is and we have enough run time, I think to see that kind of play out of debt and our pipeline and so that's kind of where that's coming out.
Okay. That's helpful and then and.
And the quarter here your S block lending.
It took off pretty good good growth there.
And our balance, but just kind of curious how you're thinking about hedge losses.
For 12 months and any color you can give there.
Yeah, I mean, there really is.
And there really is on just the S block side.
Theres a couple of I mean, there's a consumer integration that occurs for both.
The and clearing and the.
Alright custody clients and then and is also and institutional integration that occurs.
For the brokers and the <unk>, so that they can offer those to their clients.
That's not.
Our system it ties right now and exactly the way it needs to be but it's on the tech roadmap and so.
So right now these deals are being done.
More manually and and sourced as the demand comes up and people asked for them and things like that and they are much more of a on the broker has a client who needs this and that kind of thing.
But over time, and then obviously the assets of custody and clearing and they're locked up and Theyre monitored and the same way a margin would be monitored to ensure the collateral there. So.
So yeah. So that's.
Yes, I think I think that.
Right now it would probably be a little more sporadic but over time I think those loans will become smaller and more granular and much more utilized I think one of the goals would be that much more utilized and overdraft line of credit or something almost or just a liquidity management tool. So a customer could avoid.
And selling assets and kind of just bridge those gaps and just sort of sit there and one click and they were on account kind of thing and I think thats that would be I think that's going to be a pretty neat.
Synergy with respect to everything we're doing.
Right absolutely.
Any idea in terms of timeline as to when that could be rolled out on the on the test side.
Yes, I think self directed trading is coming.
And.
This this this june quarter, but we're taking this is these are very kind of targeted rollouts with.
Slow sort of we're not looking to try to.
Blowout some massive number of customers we are going through will put some customers on there we'll make sure everything is working and the way we expect it to and everything is functioning well I think probably the <unk> side and stuff would probably more.
And that sort of one click kind of deal I think it would probably be more and the first calendar quarter of 'twenty two probably just given what we've got on the plate so far.
Okay. That's helpful and then just.
On expenses here, just kind of curious as to how you guys are thinking about total expenses going forward.
The continued growth and data processing.
But overall turns on curious about.
Sure Yes no.
We do expect.
<unk> has to come up.
Next quarter.
General and I would think about $1 5 million or thereabouts.
Potentially a little bit more.
And that adds up.
Of course, there are always pluses and minuses latest is.
Salaries area, we had a couple of offsets.
And we will have higher FICA.
And so I'm expecting a little bit over $1 million to 1 million and a half more.
There.
On that side and that sense professional services. We did have some one time items I'm expecting net actually come down by about 500000.
Data processing up 500000 isn't that mostly that clearing and clearing running through because that would be the cost of the transactions right.
The cost.
And its action and the other legal stuff.
And the processing is going on that's yes.
Yes, no and data processing.
We just have a number of items that are that are coming through their day.
Ultimately.
Project oriented and not capitalized.
Those are the big things.
And the rest are smaller numbers and the other area. Other G&A was up primarily because last quarter was down.
And one 1 million Bucks.
On.
This is where the actual allowance associated with the uncommitted liability runs through.
So not this quarter, but last quarter, we reversed a $1 million of it.
And which reduced last quarter's other G&A expense.
And so there is a 1 billion debt you would you would add back.
That would do that but it all and all we do expect other G&A to be down slightly so when you add up all those numbers. It's about around one 5 billion increase maybe in operating expenses consolidated.
Great I appreciate all the color. Thank you very much.
Thank you.
Our final question comes from the line of Tim Coffey with Janney Montgomery Scott. Please proceed with your question.
Great. Thank you.
Got it.
Hey, just one day.
And if we can just stick on expenses for a little bit real quick do you anticipate any acquisition expenses going through and the June quarter.
No nothing nothing material.
Okay.
And then within the banking and service fee.
Line item and noninterest income was there a onetime item and the quarter to quarter change.
On on Youre, saying on the linked quarter change.
Yes.
Okay, So where we see our stuff coming down about from 10.
For the other things so I know too a little bit over two is associated with theirs and I see that as a statement fee that gets.
Third one time per year at December 31, that's not repeated in the March quarter.
And that's.
And that's going to be call that to $2 5 million. So that's the majority of.
The piece there.
Other than that and the other pieces.
And that's.
Same thing and yes, it might be there might be a little more a fee on that.
For bankruptcy side.
Access fiduciary services side, probably up a little bit and then yeah for for that relative to the piece, but there.
There is block income and Q2, yes. So the final right. There was block had some tailing fees that we earned in India.
And the December quarter, that's now gone and so.
So yes it was.
The number you are seeing this quarter based on those things is closer to the run rate.
Okay and separately, except for the fourth quarter next year.
For the fourth quarter and engineered.
Yes, we can cover that one later in the year.
And then Greg is it too far afield to think that as you start to integrate your customers across the ecosystem for with a yes.
Yes.
The legacy access that.
And that you might see fewer payoffs and maybe potential slowdown and low pay offs loan pay offs as people stay on the ecosystem.
I think there's a possibility there with respect to some element of loans.
Loans, but.
Commercial specialty real estate stuff. It really is designed to pay off right I mean thats the nature of the of a lot of the product.
So that's potentially right I think I think that I think that is.
I think we can do a much better job I think where it probably have the biggest impact is on all the consumer stuff and then single family I think that could be.
And impacted we are doing retention and stuff now, we're getting better and better at it but I do think that a customer that has as and RIAA.
On a relationship and a custody relationship and all these different things I think that is going to help over time with respect to that and.
So, yes, I think thats a possibility.
And try to model it but right now and it's certainly a longer term type of a potential benefit.
Right now and that makes sense alright, those are my questions. Thank you.
Thank you Steve.
And with that ladies and gentlemen. This concludes our question and answer session and I would like to turn the floor back over to management for closing remarks.
Thank you everyone I appreciate the time and listen to US and we'll talk to you next quarter.
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.
Yes.
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Okay.
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