Q4 2021 Axos Financial Inc Earnings Call
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The question.
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Hello, and welcome to the <unk> financial Q4, 2021 earnings call and webcast at this time all participants are they listen only mode.
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Question and answer session.
Session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over for Johnny Lai Investor Relations. Please go ahead.
Thanks, Kevin and good afternoon, everyone and thank you for your interest in access of joining.
Joining us today for action of financial Inc. 's fourth quarter of 2000.
21 of financial results Conference call are the company's President and Chief Executive Officer, Greg Gear Branch, and Executive Vice President and Chief Financial Officer, Andy Micheletti, Greg and Andy will review and comment on the financial and operational results for the 3 and 12 months ended June 32021, and there will be available to answer questions. After the prepared.
For your remarks.
Before I begin I would like to remind listeners that prepared remarks made on this call may contain forward looking statements that are subject to risks and uncertainties and that management may make additional forward looking statements in response to your questions.
These forward looking statements are made on the basis of current views and assumptions of management regarding future events.
And performance.
Actual results could differ materially from those expressed or implied in such forward looking statements.
As a result of risks and uncertainties. Therefore, the company claims the safe Harbor protection pertaining to forward looking statements contained in the private Securities Litigation Reform Act of 1995.
This call is being webcast and there will be an audio replay a replay available in the Investor Relations section of the company's web site located at access financial Dot Com for 30 days.
Details for this call were provided on the conference call announcement and in today's earnings press release.
Before handing it over to Greg I would like to remind.
I remind our listeners that in addition to the press release, we also issued an earning supplement and 8-K with the financial.
Disclosures.
All of these documents can be found on the access financial website 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 financials conference call for the fourth quarter of fiscal year 2021 ended June 32021.
<unk> for your interest in access financial and <unk> Bank.
We ended fiscal 2021 was strong net income and loan origination growth stable net interest margins excellent credit quality and industry.
The street leading returns.
<unk> reported fourth quarter net income of $54.3 million for the.
3 months ended June 32021, and earnings per diluted share of <unk> 90.
For the 12 months ended June 32021, net income and earnings per share increased by 17, 6% of 19, 5%.
$2.215.7 million and $3.56, respectively. Our book value per share was $23.62 at June 32021 up 14, 9% from June 32020.
The highlights for this quarter include the following net interest.
$3.92 for the fourth quarter down slightly from $3.96 in the third quarter of fiscal 2021, and up 3 basis points from 389% of the fourth quarter of 2020.
Net interest margin for the banking business was for $1.6 compared to for 2.3 in.
<unk> was the ended March 31, 2021, and $3.95 for the quarter ended June 32022 of 2020 up 21 basis points over that prior year's comparable quarter.
For all of the fiscal 2021 net interest margin for the banking business was for 1.1 down slightly from.
For 0.19 in fiscal 2020, excluding tax related H&R block loans, which we discontinued in the fiscal 2021 net interest margin for the banking business was up year over year.
Excess liquidity accounted for all of the small sequential decline and both of our earning asset yield and net interest.
Margin this quarter over the prior linked quarter.
<unk> yields continue to hold up well at 5.5% a 5 basis point increase from 5.1% in the quarter ended March 31, 2021, we continue to reduce our funding cost by replacing higher cost deposits with noninterest bearing demand deposits.
Noninterest bearing deposit balances grew by approximately 28% over the prior fiscal year and end of period cost of interest bearing demand and savings accounts went from 58 basis points at June 32020 to 18 basis points at June 32021.
Our efficiency ratio for the 3 months.
As of June 32021 was 50, 166% compared to 56, 4% of the third quarter of 2021, the efficiency ratio for the banking business segment was 45, 2% for the fourth quarter of 2021 versus <unk> 42, 33% in the third quarter of 2000.
<unk> ending 1 the sequential increase in overall and banking efficiency was the result of higher data processing expenses related to our software initiatives and enhancements to our banks operating systems.
Diluted earnings per share was <unk> 90 up 19, 2% from the 75 in the year ago.
<unk> quarter, our corporate tax rate decreased from 29, 5% of the third quarter, 2021% to 28%. This quarter, we continue to generate strong returns while maintaining excess capital we generated a return on equity of 15, 5% to 6% of the fourth quarter and $16.5 1%.
Of the fiscal year ended June 32021 capital levels remained strong with tier 1 leverage ratio of 9.4 of 5 at the bank and 882% of the holding company, both well above our regulatory requirement.
Our credit quality remains strong with no loans in forbearance nonperforming assets represent 1.2.
The 6% of total loans and leases at June 32021, compared to 1 point of 1.4% at March 31, 2021 charge offs, excluding tax related products were 1 basis point annualized of average loan and lease balances this quarter.
Excluding mortgage warehouse in the single family Jumbo mortgages and our bulk.
Sale of $31.5 million of PPP loans, ending loan balances increased by approximately 270 million up 15, 5% annualized from the third quarter of 2021 for the quarter strong originations and multifamily auto in C&I lending were offset by record high pay offs.
Some of both single family loan balances lower period, ending balances in single family mortgage warehouse and $31.5 million of PPP loans sales ending.
Ending loan and leases were up 7.4% year over year, but decreased by approximately $296 million from the third quarter of 2020.
Total loan originations for the fourth quarter ended June 32021 were $2.1 billion of 27, 6% from $1.6 billion in the year ago period Q for 2021 originations were as follows.
$242 million of single family agency gain on sale product.
<unk> $380 million of single family Jumbo portfolio of production.
$186 million of multifamily production $37 million of commercial real estate production $83 million of auto and unsecured consumer loan production and $1.1 billion of C&I loan production, resulting in the net increase of 200.
$32 million.
Mortgage banking gain on sale generated $2.9 million of mortgage banking income compared to $9 million in the third quarter of 2021 and $12.7 million in the corresponding quarter of last year originations decreased by approximately 36, 3% linked quarter the 240.
<unk> million, while gain on sale margins dropped slightly to 323 basis points from 333 basis points from the third quarter of 2021.
The outlook for mortgage banking remains relatively stable from the fiscal for the fiscal 2021 and fourth quarter.
Our pipeline of single family agency mortgages with net.
$193 million at 792021.
Ending balances in the mortgage warehouse portfolio.
We're up $43 million from the $570.8 million of June 32020, and down $354 million from the elevated of March 31, 2021 balance.
$268 million highlighting sensitivity to overall volumes in the mortgage market, we continue to expand our relationships with existing mortgage warehouse customers and the established new relationships are single family warehouse business generate strong risk adjusted returns for us and remains a small part of our overall loan book representing approximately 5%.
Of our June 32021, ending loan balances.
Our diversified consumer and commercial deposits and securities businesses continue to benefit from the secular shift towards digital banking.
Sumer deposits, representing approximately 42% of our total deposits at June 32021 is comprised of consumer direct checking.
<unk> savings money market and noninterest bearing accounts.
The weighted average interest bearing demand and saving deposit cost was 18 basis points at June 32021 down by 40 basis points compared to 58 basis points at June 32020 average noninterest bearing demand deposits was.
1.6 billion in the quarter ended June 32021 up 17, 5% from the prior quarter.
Ending time deposits at 632021, we're down $180 million linked quarter and $834 million year over year as we replace higher cost non core.
All of our time deposits with lower transactional deposits.
Of the total of 1.5 billion of certificates of deposit of outstanding on June 32021 in the next 12 months approximately $1 billion at a weighted average rate of 117 basis points will mature.
Our small.
Business, the specialty consumer and Treasury management businesses, including our fiduciary services businesses continue to contribute to our low cost deposit growth.
That was clear and continues to generate low cost deposits that we will be able to put on or off balance sheet ending.
The ending cash deposit balances that acts of securities was $730.2 million.
With approximately $320 million on access of the balance sheet at June 32021, the pending acquisition.
Position of E trade Advisory services will add over $1 billion of incremental cash sweep deposits that we can use to fund loan growth replace maturing certificates of deposits or keep off balance sheet and generate fee income.
Our credit quality remains solid.
<unk> net charge offs, the average loans and leases excluding seasonal tax products was 1 basis point this quarter compared to 5 basis points in the corresponding period last year.
We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021 all of which.
We fully provisioned for in the prior quarters.
Nonperforming assets. The total asset ratio was 107 basis points for the quarter ended June 32021 down from 114 basis points in the third quarter of fiscal 2021 of.
Of our nonperforming loans, 73% are single family mortgages worry of.
Typically had very low realized losses.
Of our nonperforming single family mortgages at June 32021, approximately 89, 5% of an estimated current loan to value ratio at or below 70% and approximately 99% are below 80% of our best estimate of current loan to values.
Of the store of relatively low loan to values on our single family mortgages, we did not anticipate incurring material losses on the vast majority of our delinquent loans, we had no loans in forbearance at June 32021.
Other than single family delinquencies the remaining real estate delinquencies consists of 1 hotel loans, we previously discussed which is around 2%.
Given the $1 million of <unk> that was sold subsequent to the end of the quarter.
We had 7 multifamily loans that were 30% to 59 days delinquent for a total value of around $8 million that are at and origination LTV of around 42% on average and 2 multifamily loans that are 60 to 90 days delinquent for 1.
<unk> $8 million with an average 55% origination LTV.
Our loan loss provision this quarter was $1.3 million compared to $2.7 million in the March 31, 2021 quarter and $6.5 million in the quarter ended June 32020.
The primary reason for the sequential decline in loan loss provisions.
<unk> decline in average and ending loan balances our total allowances for loan loss was 133 million of June 32021, which represents approximately 1.2% of our total loans and leases contrasted with 1 basis points of annual annualized charge offs. This quarter, excluding refund advances and the related charge offs and greater than.
The 17 times, the total annualized charge off rate, excluding refund advance loans.
Our loan growth outlook for fiscal 2022 remains essentially unchanged of high single digits to low teens demand and production in all of our lending areas continued to be solid although elevated prepayment rates in our single family mortgage.
Book May continue to represent a risk to maintenance and growth in that portfolio. We continue to add personnel in our lending areas to bolster the loan growth.
Our loan pipeline remains solid with approximately $1.7 billion and our consolidated pipeline of June 32021, consisting of 190.
<unk> million dollars of single family agency gain on sale of mortgages $484 million of Jumbo single family mortgages $237 million of multifamily and small balance commercial real estate term loans $683 million of C&I and Chris of loans and.
And $97 million of auto.
In consumer unsecured loans, we continue to generate strong returns with the return on average common shareholder equity of 15, 5% to 6% and $16.5 1% in the 3 months of 12 months ended June 32021, respectively. Our efficiency ratio for the banking segment was 45, 2% for the quarter ended June.
The 32021 compared to <unk> 42, 33% of the last quarter, the slight uptick of our efficiency ratio reflects lower mortgage banking income and continue investments across our businesses are.
Our capital ratio remains strong with tier 1 leverage to adjusted assets of 882 at the holding company at 9.4 of 5 at <unk> Bank.
We have access to approximately $2.5 billion of FHL, the borrowing $2.3 billion in excess of the $186 million, we had outstanding at the end of the fourth quarter. Furthermore, we had $2.1 billion of liquidity available at the fed discount window as of June 32021, our strong organic loan growth and returns.
<unk>, coupled with the clean capital structure allows us to make opportunistic stock buybacks and acquisitions such as the E Trade Advisory services acquisition that we announced last quarter.
Our securities business had an excellent quarter for strong growth in fee income and net interest income broker dealer fee income increased 12, 6% of the fourth quarter compared.
Expanding period last year due to higher client activity.
Securities margin balances increased 58% year over year to $327 million, while stock lending increased $256 million in the June 32020 quarter $2 million to $729 million in the June 30.
For the core of 'twenty, 1 quarter, although ending deposits of <unk> clearing decreased by approximately 8.1% linked quarter to $730 million as clients increase their risk tolerance deposit balances are up 62% year over year due to growth in access of <unk> assets under custody.
In April.
<unk> announced the signing of an agreement with Morgan Stanley to acquire their RIAA custody business E trade advisory services with approximately $23 billion of assets under custody, including $1.2 billion of client cash deposits at the time, we announced the deal provides the turnkey RA platform for independent of our eyes and tamps.
We have an experienced team of custody specialist with decades of experience working with our eyes and advisors incremental fee income and low cost deposits.
We believe that our entrepreneurial culture commitment to servicing clients with no conflict of interest and our ability to provide additional technological and banking services to these ria's advisors.
Visors and their end clients make us an ideal strategic acquire for Aaas we.
We have made significant progress over the past 3 months across the variety of conversion and integration activities, having already received FINRA approval to convert the Aaas business 2 of broker dealer platform, we feel good about achieving the remaining milestones required to club.
<unk> position in August of 2021.
We remain committed to smooth the client transition and to invest to grow the RA custody business. As a reminder, the business generates fee income from asset and transaction based revenue and net interest income from client sweep deposits held on or off balance sheet, we will provide an update.
On the expected financial impact, including EPS accretion expense and revenue run rate and deposit balances when the deal closes we soft launched our self directed trading platform at the at the end of June.
Version, 1 of the self directed trading offering is focused on existing clients, who value of the simplicity and convenience of.
The Apple the CN transact across various access banking and investment products through 1 online login and mobile app.
We see lots of cross sell opportunities across our lending and fee based businesses, including access invest over time, while it's too early to draw any meaningful conclusions from our self directed trading of launch it provides another customer acquisition.
And monetization tool on our growing list of lending deposits and fee based services to our customers.
I am proud of the access team for staying focused on serving our clients and delivering strong earnings growth and returns to our shareholders over the last 12 months during a challenging and uncertain environment, our strong organic capital generation of affords us the ability to invest in existing.
Being a business of this technology and our team.
Our deposit platform investments of generated meaningful increases in noninterest bearing deposits significantly lowered our cost of interest bearing deposits and allowed us to earn fees from placing deposits at other banking institutions I for.
We believe that our investments in our security business will pay meaningful dividends.
The new support future fee income deposit and loan growth our technological investments we have made in our banking platform of generating strong interest from Eas advisory clients..1 of the many indications that strong technology and product synergies of <unk> just across these businesses I'm excited about the cross sell potential across each of our 3 business.
<unk> consumer banking commercial banking and securities the pending Eas acquisition will accelerate our time to scale and profitability and a growing market segment and provided excellent source of customers for access banking products. Despite the challenging interest rate and competitive environment, we are better positioned than ever to maintain consistent profitable growth.
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 the supplemental schedules was also filed with the SEC today and is available online through Edgar or through our website.
Net access financial.
I will provide some brief comments on several topics. Please refer to our press release of our SEC filings for additional details.
As Greg mentioned, we expect to close the acquisition of E Trade Advisory services of our Eas in August of 2000.
'twenty 1.
In anticipation of the Eas closing, we took steps to prepare the bank balance sheet for an increase of up to $1.2 billion in cash and deposits at closing.
Average deposit balances increased this quarter compared to last quarters average for.
Months ended March 31, 2021, however, with targeted rate decreases in certain savings and money market customers. We ended the quarter with a decrease in deposits of $796.7 billion.
With the decline of primarily higher rate.
For the 3 harnesses the bank was able to reduce its point and time deposit rate for all interest bearing checking and savings accounts to 18 basis points at June 30, 'twenty, 1.2021 compared to 31 basis points at March 31.2020.
Right.
While making room on the balance sheet for some or all of the Eas deposits expected in the quarter ended September 32021.
The deposit decrease was funded in part with the bank's excess liquidity at the Federal reserve.
The resulting in a $432.4 million decline in low yielding cash and cash equivalents at June 32021, compared to March 31, 2021, the <unk>.
Bank is in a position to maximize the use of eas deposits weighted.
The <unk> and does not expect the acquisition to adversely impact the bank's net interest margin, where its tier 1 leverage capital ratio next quarter we.
We will provide an update on all of the full financial impact of the Eas acquisition when it closes.
Moving.
Any color on interest expense for the quarter ended June 32021, operating expense was $81.9 million up 1.050 million or 1.3% from the linked quarter ended March 31.2021 the.
The following detailed discussion excludes any.
The future impact from the Eas acquisition.
Salaries and related costs declined by $1.3 million on a linked quarter basis, primarily due to favorable adjustments to compensation costs.
<unk> to loan production and other compensation estimates next.
Next quarter, we would expect salaries to increase back to the third quarter level.
Occupancy costs increased $1.1 million on a linked quarter basis, primarily due to a 900001 time charge associated with sub leasing the New York City office space.
Next.
We would expect the occupancy cost decreased to approximately $3.2 million.
Data processing cost have been impacted by growth in customers product enhancements and by initiatives to move legacy network equipment into the cloud.
On a linked quarter basis.
<unk> processing costs increased $2.8 million approximately $1.2 million of that increase was project related and will not recur next quarter.
FDIC and other regulatory fees on a linked quarter basis declined 900.
The state housing as expected primarily due to the FDIC insurance formula adjustments going forward, we expect next quarter's costs to approximate this quarter.
Moving to income taxes, our effective book tax rate for the year ended June 32021 was.
<unk> 79 for 5% down 70 basis points from the 31, 5% effective tax rate for the year ended June 32020.
The largest driver of the changes in our income tax rate is the timing of our employee <unk> vesting.
And the market price of our common stock at the time of that vesting.
If the common stock price at the vesting date is higher than the price of our common stock at the time of the <unk> agreement. There is a favorable impact on the book tax rate the.
The reverse is true if the stock price is lower.
The vesting date.
A large portion of the Rs used previously issued our scheduled divest during our fourth quarter of the fiscal year, making the effective tax rate more volatile in the fourth quarter, depending on our common stock price.
For this quarter ended June 32021 are.
Our effective tax rate was a favorable 27, 99% while last year the effective tax rate for the fourth quarter was 30, 331%.
With that I'll turn the call back over to Johnny Lai.
Thanks, Andy.
Kevin we are ready to take questions.
Thank you for.
Now taking ducking your question and answer session.
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Our first question today is coming from Andrew Liesch from Piper Sandler Your line is now live.
Hey, good afternoon everybody.
Thanks for the detail on the debt.
Moving the Transat.
Transactions here near the end of the quarter.
But I guess absent bringing anything on from.
Yes.
How should we look at the size of the the average earning asset base here, but yet.
Intra quarter of securities borrowed in margin lending was.
The higher than it.
It has been recently.
And then it's also been higher at the.
The end of last quarter at different of a new run rate for that line and can you explain what may be causing some of the flows here.
Sure Yeah, No I think we continue to have strong growth in our.
Of our stock lending.
Of the pause.
And we are expecting that average should continue to creep up.
And so as a run rate it is not a bad bad place to start.
Okay.
Got it and then.
<unk>.
It looks like then.
Grant interest bearing deposits.
The liquidity and for quarter some of the been reduced tier.
To start this just for this.
First quarter.
I mean have you guys is there anything you can share on what you do expect to bring on from Eas or is it still true.
To be determined.
Yeah, No we'll make a final call as we get closer in and of course, we may even change that mix throughout the quarter, but I think the operative thing Andrew is that that excess liquidity is.
Yielding only 15 basis points so the ability.
<unk> down.
And they get the better effective use from our deposits.
We will be strong for the for the.
<unk> for the use of capital use of the bank.
Got it okay. So it would be.
The sitting here with the margin of $3.92 for you or for the fourth quarter.
Quarter with this less liquidity that you've had for managing some of the deposits out of ahead of the closing of the deal.
The safe to assume the margin should rise from this level.
Yes.
That makes sense.
Okay.
That helps a lot of I'll step back thanks for taking the question.
Thank you and that's the question today is coming from all of the Becker from Sidoti. Your line is now live.
Sorry about that yes.
So I'm wondering you know obviously.
There was.
Very strong quarter.
And.
I guess, you know where do you see perhaps of certain.
Categories, where you see potential for continued.
Growth based on just what you've seen.
So quinn to the quarter end.
Sure so on the lending.
The <unk> side.
Single family I think is definitely going to either be stable or down a lot less than it was in the prior quarter that's been obviously.
The Jumbo book has dragged down loan growth, which has been very strong on the C&I side, the C&I side, including cross.
It looks good.
The auto and unsecured side also looks good.
Our warehouse lending really will be more stable now I think there may be of flight path given that rates have come back down a little bit and mortgage banking.
<unk> is maybe a little bit stronger, it's not substantially stronger, but a little bit stronger there. So.
Loan growth side I think it.
It's hard to know because the prepaid side generally where you might expect to see is from a refinance perspective. When you have these rate drops and you have a lot.
Is the name of credit which happened post the.
The COVID-19 kind of normalization or the Covid concern of the tightening of the normalization that you might see enhanced prepays. It looks like prepays are slowing down a little bit in this month, but its still hard to tell it's still early so.
So that's so I think forecast obviously are the.
Of the C&I side has been strong auto has been strong.
We won't we won't have the same challenges we had with PPP loan reduction with with the same level of adjustment on warehouse and then single family the pipeline is very.
I will lose its up from the quarter.
There's a lot going on there in a very positive way.
I don't want to say that its going to absolutely grow this quarter, but it's certainly I think it's fair to say that it should be more stable.
Mortgage banking, probably will have the chance to be up.
But also.
I wouldn't say, it's going to be up.
Incredibly materially obviously, you've got the the Cds run off that helps on the margin side, but that also.
The loan rates in general are lower in <unk>.
Some categories than they were in <unk>.
Continuing to expand our business the.
The loan rate side, I think I'd be careful about forecasting too much margin growth because we are.
And then in an effort to grow loans, we are probably having lower average rates on production that come through so I think you have to watch that.
Card.
So and then on the security side.
Of that business continues to grow obviously, we expect to close Eas and the fourth quarter theirs.
There's a lot of opportunity there to make that business more efficiency.
At the end to end to grow it we have a lot of good client activity, but that activity is going to take several quarters at a minimum to be able to to realize because we have to go in there and really add and operating efficiency of discipline, that's going to take some time to do that.
So those are.
The contribution that's really going to happen there is going to be more frankly of a.
It's going to take almost this year to be able to go through all of that and really get that humming and the way that it could still should be accretive.
But I don't think materially accretive this.
This next 6 months.
Okay. Thanks, very much for that color.
Thank you.
Thank you next question is coming from <unk> from D. A Davidson your line is now live.
Hey, good afternoon, it's Gary Tenner.
1 of those.
A couple of questions Greg just to clarify the point you just made in terms of mortgage banking.
Essentially being.
Are you talking about the fee income line.
Mortgage banking net mortgage banking fees.
I think it could be I wouldn't.
I'll look it could be of 1 million bucks for something like that.
Million of assets.
It's not going to be back to where it was but yes. There is there's a little more activity, but margins are also maybe a little compressed too so.
Yeah got you I just wanted to clarify the that's what you're referencing.
In terms of the the broker deposits.
His thoughts about the.
Is the activity of a little bit in the quarter, but broker deposits down to about $600 million.
Cut in half year over year.
As you get the additional deposits coming in from from Eas would you expect to work the broker deposits down even further from the period of number or is it just kind of balancing the.
Other aspects that you mentioned in terms of the loan growth or keeping some of it off balance sheet.
Yes, so I think.
The good portion of the brokered deposits, let's say around the world. It's about 300 million is <unk>. So clearly we're looking forward to the CD repricing.
Kind of it's hard to the $1 billion number that was a great script, where he said, we've got $1 billion coming off over the next year. So.
That from a rate perspective, a good portion of that is well above 1%.
So that will that will be effective whether we bring in from time.
The other liquids broker deposits, that's still entirely possible as you know that the pricing on that product is still very favorable so depending on our needs we might consider using it but in general I expect the Cds come down and then the non Cds to be around.
To tell the same or maybe up a little bit.
I think obviously.
We have more than enough off balance sheet liquidity, even without the.
Of the Eas acquisition, but when we have that we have that liquidity, but I think part of this is that.
Because of this broker sweeps or non brokered.
Around this to others, we have a lot of demand from other institutions for those deposits and that demand could be at a higher rate than this relatively de minimus amount of brokered deposits, which some of them were half of them more than half of them are termed out right. So sometimes we use broker deposits.
That's too.
Look at and look at interest rates and term out certain types of lending that we think.
May deserve that and we think the rates are favorable in that market. So we obviously are in a very good liquidity position. We can also think about how to convert some of that liquidity.
Third into fee income and over an extended period of time over years as we grow.
The Eas business in the clearing business that that doesn't only.
That's the that's a significant opportunity if rates rise, but even without it there is still a lot of banks that.
That are willing to.
To pay up for those deposits.
Yeah.
Okay. Thanks for the color and then last question for me on the broker dealer fee income line sequentially lower is there a seasonality of that business that perhaps I didn't appreciate or is there anything else.
But kind of pushed that number of lower from fiscal third quarter to fourth quarter.
Sure it depends on a number of things part of it is.
The market pricing.
Of the stock loan and the stock borrow side that all transactions are equal in terms of spread.
With with regard to that so that that can be a factor in that obviously our deposits came down slightly.
During the period, so less fee income from off balance sheet deposits, but those of the primary factors.
That of that weigh into that side.
For it.
Thank you.
Thank you next question today is coming from Michael Perito from key PW. Your line is now live.
Okay.
Hey, good afternoon, guys. Thanks for taking my questions.
Thank you.
Hi, Matt.
2 of comment you made just about making more.
More efficient.
And I was just hoping that it's been a little bit more time on that is that what does that look like exactly that on the cost side is that on the revenue side and maybe putting some of those deposits to work on your earning asset base.
For a blend.
I'm just curious if maybe you could expand I know you guys aren't updating numbers per se, but just expand a little bit about what that might look like post close.
Yes.
We have we are of consulting team that focuses on operational efficiencies and the institution broadly.
Morgan Stanley was.
Or is the kind enough to let that team get in and do a lot of work around just core operation the straight through processing and essentially the technologies that we bring.
From an interaction perspective with the the advisors with our existing.
The applications and banking platforms, and then all of the internal types of.
Robotic process automation of our way that we use our customer ticketing systems all of those kind of things are in great need there. So I think there is real opportunities.
So just to improve the core operational.
Nature of that business and we.
We're going to get after it pretty quickly so what that should result in is an ability to.
Grow the.
Assets, there without adding significant incremental cost.
And to the extent that there is.
Turnover, there, we may be able to shift the.
The cost will reduce it but also shifted to more highly value added activities.
Like product development for.
Activity.
Activity that can be more automated like customer experience and service I mean to make this very tangible.
The the way that money gets into the market as somebody male customer mails the advisor of check the advisor miles of the check right. So.
If you have of applications.
In the banking application that lets the customer take a picture of the check that everybody is happy right and believe me of the advisor doesn't want to touch the check we don't want to touch the checked off the types of Jack rate.
The advisor needs to send.
You know of disclosure to the client well for client our app can do that right. So.
It's none.
Acacia is sort of it's not rocket science, but it is it's just a process of going in there and in doing that they don't have an automated account opening system. We do right. So it's about hooking that up and rolling it out and making sure it works and the change management process.
And those kind of things right. So there's a lot of technological synergies that we can bring to the business, it's not going to be overnight, but it will be I think very meaningful over time.
Very helpful.
And I know, it's anyone's guess about interest rates these days.
None of it perhaps the stupid question, but can you Gregory Andy give us cause of birth.
Comment on how the securities business.
I'll react.
And of higher if we enter a higher rate of rising rate environment.
My hope would be that it would be pretty positive and thats the deposits would.
We're pretty low cost and some of the larger lending itself would increase but just want to confirm that and see if you of any other parameters around it that that might be helpful.
I think thats right.
We expect that and we saw this frankly.
The the rate on the deposits at X those clearing was 3 basis points when the fed.
Funds were $2.50, it's how do we kind of from 3 I don't know is whatever it's it's I think it's 3 today right or something so it's really.
There is essentially the.
These businesses I don't want to promise.
A a beta of zero or something right.
It's very very small and this is <unk>.
Direct to the bottom line sort of revenue. So these businesses.
Have a.
Our goal is to make these businesses run essentially valuing those deposits.
At no cost.
And then when they when rates rise that's all pure profit to the business I think we can get there.
We're not quite there yet, but it's not that far away. So so that's and I think that we can get there frankly, just purely on operational efficiencies over time, it's going to take a while.
And.
And there's a lot of obviously growth in revenue opportunities to there so.
Yes.
It creates a very favorable profile for the institution broadly and that the operating environment.
And I think swamps any potential.
The negative impacts that we would have from higher rates.
Wait until let's say mortgage banking.
Income going down or something.
Entity of any comments I think the.
For the whole point is it will be favorable.
It will increase our ability to make choices as well in terms of where we put deposits. So.
<unk>.
It is clearly favorable rate, yes, our long term goal is to continue to really push very hard on all of our deposit businesses, which are doing well and growing and growing good low cost core deposits.
The securities business is than it was.
The choice, how how long should we.
You need how much we place other places and that decision then becomes of fee income lever.
More tangible and a high rate environment.
For a higher rate environment.
Got it and then.
That's really helpful color of this kind of a close the loop on the securities.
Questions here just for me anyway.
Any thoughts Greg for myself.
Our M standpoint, like in terms of how big you're willing to let this business get as a portion of the play I mean, obviously, it's taken a lot of effort. Today, you guys broke even which is great, but I'm at I imagine you have grander aspirations of map, but just is there any.
Yeah, the parameters around kind of the growth of this business, how big of a piece of.
So if you think it could be or are you comfortable with it being or I was probably a little too early but just any general thoughts on that.
Yes look I think that the.
The Eas business is an incredibly safe business I mean the debt.
Right now I mean, frankly from a lending perspective, what's interesting is that's another opportunity there because I didn't say, we're not a broker dealer compliant business.
They didn't do margin lending for those customers or for S block lending.
We intend to really seamlessly integrate those.
<unk> products into that offering for those <unk> I think I think that debt. This business in general is a significant a risk reducer for the business overall and here is why it gives us a steady source of high net worth customers. These high net worth customers.
Net.
Sticking to their adviser the advisors sticky to us and we're not competing with the advisor we're just helping the advisors. So the.
The advisor needs.
For the advisors customer comes and ask for a mortgage.
They don't want them of Morgan Stanley looking for that mortgage we have.
Have that if they need of Carla and if they need the integrated checking account if they if they need an S block alone of 1 touch S block law and off of off of an app.
Hey, that's pretty good too right all of those things keep assets, what the advisor Theyre really save some of the loans that will come out of this will be.
S block and margin those are very safe.
The the.
The risk associated with the clearing business is a little different it's really it's it's operational risk around short selling things like that so we have very defined limits with respect to those aspects. So.
So I think when you think about limits and risk I think it's the absolutely wrong way to think about it as.
The overall size of the business or something and the right way to think about it is there a specific risks within the business those specific risks like any business has to be managed and.
They're they're higher quickly ranked and we pay a lot of attention to the ones that.
Can can can bite us and I think we've done a much better job and we had that 1 issue right when we.
It was 2 weeks after we bought.
The business and we didn't have the access to that business that we've had the eas and we've gone in there and made sure that those risk controls are in good shape. So now this is overall a.
A really really positive thing I mean, let's face it right. If you look and you would have said predicting 3 years ago would we have a 15.
15 basis points average cost of deposits on all of our.
Demand deposits and then all of these are the excess liquidity that we have and we're farming that excess liquidity out of the banks, even though we have had pretty good loan growth.
I think that Thats. Another example of how.
So it reduces the overall risk.
To the institution. So yes, it's not it's not really any different.
The risk management exercise and that.
That's really all but it's nothing to do with the overall sizes and just a point of clarity Mike debt.
Obviously assets under custody, which is the primary.
Grower.
Not on the books of the broker dealer so it's.
Assets under custody can grow rapidly and it will cause some balance sheet growth, but it's not a dollar for dollar at all so it gives us a lot of off balance sheet leverage.
Yeah.
Got it.
Really appreciate all of that color, Greg and Andy. Thank you guys for taking my question.
Yes. Thank you.
Thank you Ben for the question is coming from Steve Moss from B Riley Securities. Your line is now live.
Good afternoon.
Greg mentioned earlier that rates were lower just kind of.
Curious you know how much lower where you seen loan pricing.
Yeah.
I think we I think it was somewhere around I think I've said before is like a 35 to <unk> 35 to 40 basis points lower on single family.
Maybe I carry that.
That over on the auto side too I think is probably a reasonable and then the C&I side I think I'd use like.
The maybe sort of all in in the low fives.
As a as an average rate, but look I think.
We.
It depends right I mean, you know things are moving around and I can tell just by the nature of the discussions there is more competition in certain areas. So we continue to have to adapt to that but I think reasonable color.
Okay.
Okay.
Yes, No go ahead I just.
Our guidance still on the NIM is in the 3.8% to 4% range. So I think we're just we're cautious that we could have some pressure to continue to grow but that's.
I think from a low rate perspective.
<unk>.
We're.
We're.
Still feeling good about.
Our NIM and our ability to keep it.
And part of the reason when you saw that the fact that loan rates went up over the quarter was that that was the remax because the warehouse lending business has.
Probably 1 of the lower average rates in the bank and so when that strong kind of move that around a little bit. So I don't think I don't think you should use that as indicative of the idea that that would carry forward next quarter.
Right.
Okay.
Helpful and then just.
In terms of a little more color maybe on the the types of businesses and properties that are driving.
In Crystal growth.
These days.
Yes, it's a lot of multifamily repositioning construction self storage some of that.
And that's primarily that's that's the.
A lot of it.
Okay great.
Great.
Most of my other questions have been answered thank you.
Yes.
Thank you. That's the question today is coming from Tim Coffey from Janney. Your line is that of life.
Great. Thank you good afternoon gentlemen.
Okay.
Good afternoon.
Hey, Greg looking at origination activities in the quarter, there of about 50% quarter over quarter and the pipeline. I think you said was around the same level because of the originations this quarter for the quarter. So I'm wondering are you seeing greater participation of what kind of your general ecosystem by clients or is this more of the.
Arrive to find a home for the excess liquidity.
And it takes that Anthony.
It's going to be a little bit of both I think clearly.
We're looking at originations.
At a level to ensure that we can.
Can cover pay offs.
And so the origination machine frankly, when you have higher levels of pay offs has to work harder. So so targeted wise, we're looking at our customers as we go through we have a lot of options.
We'll touch bases with all of our existing customer.
Customers of course, who provide us guidance on where we need to be yes.
Yes look I think I think theyre, just as far as where originations have to go.
The math is right the bigger your loan book if the pre pay rate is steady your originations have to go up.
Up in order to grow loans. So I think that every 1 of the business has.
Higher targets.
There is.
Good possibilities they can hit those targets, but they're not they're not slam dunks and we have a fairly diverse set of lending platforms. So none of those funding.
Platforms have too.
Bear the full burden of this debt.
The real the real element with the.
The warehouse lending side of it right when the when we went up so much and we tend to be higher price than some of the other line. So we know we're going to fall when there is when there.
When there is a reduction in demand for for mortgage loans, particularly on the agency refinance side. So we knew that was going to happen I think the key is that we've been spending a lot of time, making sure we can stabilize and grow the single family business and I think we are of good plan for that we're seeing lots of progress the pipeline is up.
<unk>.
All of those things, but it really depends on what happens with the prepayment side I mean, we we saw we had reached the high and we thought we were in a good shape because of the originations of pretty good and then it got higher it seems to be slowing down a bit but we really don't have I don't have enough time in this quarter to really be able to get a perfect assessment.
Estimate of that.
But yes, there is a lot of things we can do to grow that business and we are doing them I mean part of part of what happened to and this is that when Covid happened, we really pulled back a lot. We basically had some growth plans and immediately when that happened.
We tightened up credit we really pulled back we didn't do some of the sales initiatives. We had some other things that we intended to do some sales force expansion and so when when the single family market came back. So strongly I think were a little flat footed with what we needed to be.
We really <unk> I think we've righted that ship now so now it just.
How long does it take to to have all of those things sort of flow through.
For example, we had markets that were really good for us where.
When we were more conservative of the originator might've gotten frustrated and decided that this wasn't the right.
The place and we just said okay, well, we will leave this for now and to see how this goes so things like that obviously, I frankly think that the market came back.
More quickly than we expected clearly I don't think people would have looked and said Gee home prices are going to be where they are if you were sitting there in March 2000.
<unk>. So I think I think that we have a good plan there everything is going in the right direction.
Does it take.
Another quarter to get there that's possible, but I definitely think as I've said previously that we're going to be more stable either will be slightly.
Slightly growing slightly down maybe.
More than slightly down, but but it'll it'll be in that range of it won't be where it is this side of this prior quarter.
Okay. Thanks, I appreciate it that's good color.
And then.
I don't know if I'm thinking about this rate 1 of the great things about bringing on all of these deposits and the cash.
Cash from from Eas is that it gives you a lot more optionality and things you can do on your funding side and 1 of the big benefits of it is that it's 1 of them.
Likely lower your deposit beta.
Going into next year or whatever for.
For next year for sure and definitely its going to show up when rates rise is that the right way to think about this.
Yes, absolutely.
Okay, great. Thanks, those are all my questions.
Thank you.
Thank you next question today is coming from David <unk> from Wedbush Securities. Your line is now live.
Hi, Thanks, I wanted to ask a clarification question about the expense guidance, you gave a pretty detailed guidance.
So for instance, the the salaries you mentioned about 39 million of it in the third quarter I'm, assuming that includes that's inclusive of Eas and the other expense items you gave it it is not so all of my guidance.
Does.
Without.
Yes.
So, yes, we're going to when we close when we close Eas.
Going to release, a presentation that we will provide guidance that would.
Whether I think it will.
The allow <unk> sufficient information to make reasonable.
And thats about what what that will look like there sure.
We've given early estimates if you go back to our original presentation. So operating expenses will move up significantly. So yes. So these numbers are small relative to once.
We at Eas, but so revenue so yes.
Just to the killer.
Yes, no debt.
It makes sense because I was modeling you know much higher than than what you had mentioned so thats why I was asking about the clarification and then on the deposit side of things given how much of the kind of.
Stepped down we saw which is clearly a good thing with the improving deposit mix shift, but it almost seems like based on the trend that the new deposits coming on board would essentially just replace what the client is and it seems as if there was those balances could still be declining here in the in the third quarter is that the way to think of it into.
So the loan to deposit ratio may be somewhat kind of stable ish here in the around 105.
So, yes, so theres a number of moving pieces 1 of the pieces on the loan to deposit ratio is how much of grow.
Greg is just giving guidance on kind of where we think we are we think theres a chance.
As we grow.
The next quarter so.
With growth in filling that hole of.
Obviously deposits will grow from the current level.
That we have the decline of 700.800 million can be instantly be filled with other deposits.
Clearly, we expect deposits to grow.
After the Eas closing.
Yes, I think that I think that with respect to this rate. So the moving pieces are we've got good momentum.
Our commercial deposits.
So at very low cost for they have nice pipelines small business continues to grow. So we have that organic growth of the deposits side. We obviously have excess deposits of declaring way of actually we will have excess deposits at eas, even with growth. So the question is what we do with those there is demand at good rates.
Business from other institutions. So we've got to figure that out and look at what that looks like in the side, we may end up bringing them on balance sheet and then.
And then placing them thoughtfully over a period of time.
In.
And other institutions of that May take several months so.
<unk>.
Those are those of the those of the variables that we will be looking at.
Yes that makes sense, thanks very much.
Thank you. Our next question is coming from Edward Hemmelgarn from Shaker investments. Your line is now live.
Yeah, Greg again.
Yes.
The question of.
How are you doing good.
You're for me.
Yes.
<unk>.
What do you view the potential for margin lending there what kind of routes.
Okay.
I.
I really I don't want to speculate on that right now.
Now because there is several factors that have to come into play in the first and foremost.
We have to assess the core operating system of that business doesn't yet have the capability of actually doing margin lending now.
Have that ability and we basically.
Basically.
Mimicked the data in our system that does but we're still working through the timing of that.
Then it's it's.
The.
There is there has definitely been.
The <unk>, who have been precluded from working with.
Aaas, because they didn't have either asked blocker margin lending and we talk to them through the existing sales team and so.
<unk> clients that would never come before if they have the product clearly represent an opportunity by the very nature of the fact that they wont kind of if they don't get the product.
So and I, just don't have a sufficient feel for.
For what what that will look like although I can say that think about like a 4.5% rate for the clearing ibd's if thats helpful with respect to what.
What that looks like on the rate side, but but again.
Theres also sharing there and other things and the <unk> share and so you know.
Look it's.
Think that those those sort of things may also end up being part of the overall discussions of profitability.
<unk>, when we board clients and things like that so I just think we have to wait before.
For <unk>.
Enough to really give guidance on that.
Okay.
The.
Do you expect to merge your existing business into.
Yes.
I'm sorry.
The merge merge the business of you mean.
Okay. Thanks.
The actual transaction is.
That.
That access clearing is buying the business. So I guess that but that's I think that's what you mean by that.
Yeah, but I mean, it's yes, a lot larger.
And so I would assume there's.
Expected.
Alright, I would assume surviving institution.
In terms of clearing and stuff it could be yes.
Well I think I think it's I think I'd be careful and.
Oh.
How that how that looks I mean, so you say well how are you comparing it.
You know of clearing has more.
And different and diverse.
Your lines of business and revenue stock lending they do margin lending. They obviously have the clearing side of the business.
There are $16 billion of assets. There there is let's say 23 of $25 billion and the.
Syed.
The number of people actually not as different as you might think.
There.
I guess maybe of what you're asking is are we going.
To have these teams work together to do things together, yes, but that.
We're also going to pile on an incredible number of new things right. So there is this transition period, where.
We're getting all of the technology in place.
Going those things and then we have quite big plans for this.
For these businesses.
We gotta go and do them so yes.
Yes, I think that's maybe where you're going.
I guess I'm just it's also for them.
The asking I mean, do you envision down the road I realize you can't do it immediately.
But just operating the 2 businesses out of 1 location.
No no we don't we don't envision that at all no.
Thank God.
We intend to maintain.
The Colorado office for Aaas.
Like that.
That location and we think it's.
A favorable place to live in a good location.
<unk>.
And then Omaha also has had good.
Pool of Securities talent, frankly that office is.
Our schwab.
Swaps rate close to.
So theres just a lot of folks who are familiar with the custody business.
And our Centennial So no I don't think thats the.
That's where we're going and I'm not thinking about.
If maybe what I think what you should do with respect of this is more focused on but there's there's clearly.
Of that R&D is to reduce cost in the business.
And that will have 2 of car technologically overtime and then with the pipelines. We have we intend to grow that business and hopefully as we grow we can get operating leverage there.
Okay.
Yes.
It's been over a year now since you really introduced the.
Enhanced.
The customer.
Software and experience at the bank.
What's the.
What has been your.
I guess what have you.
Operating income from like cross selling opportunities and things like that I mean, what's the percentage of loans that you're now, making the existing deposits customers or vice.
I mean, it seems real benefits to this.
Well I mean, obviously when youre looking at the cost of funds that we have and where.
You know sort of approaching the you.
You know I'm not going to say, we're best in class, yet, but as we run off the C. DS, we're gonna get be getting closer and closer to it clearly the ability to simply have customers who are valuing.
Your services rather than your interest rate is obviously a.
Incredible benefit that you see in the in the numbers and then with respect to.
The let's say mortgage banking wave of income that we made here.
Was very very significant cross sell to our deposit customers.
That.
Of that.
Was assisted by this now I think that was very good and it made us a lot of money the.
The problem with mortgages is that they are onetime in nature right. So if you look at what consumer products that we have that we're really.
Retail.
Focused and they are very developed the mortgage product really is.
The 1 right and the cross sell on both sides, both from a mortgage customer coming in and getting a checking account that was very high and from checking account customers that were re financeable.
The mortgage side, so that worked very very well.
The question with respect to where should it go over time and the product development that we're working on is <unk>.
How many of these.
How many self directed trading customer.
<unk> will we have who have checking accounts the dominant checking account customers will have cell types of trading accounts and how many.
Checking account customers will have.
<unk>.
Our robo advisory offerings and how many will eventually have S block loans in all of those things, but it really is.
I mean this is obviously as you all know.
And incredibly long term strategy and as these products roll out then.
We'll have to determine.
What the what the cross sell levels are relative to.
2.
You know what.
Whats just simply of the product profitability on a single product basis. So for the for the products that are mature the cross selling has been really really good and for and the question of how many of.
Of the customers are going to take banking products or.
Take mortgage products.
I think that that clearly remains to be seen but right now.
We don't own the business and we don't.
<unk> even have the we're going to have to go through a process to take the banking platform and integrated.
Into the.
The.
The eas platforms, so that it actually can.
Perform the services that we needed to and so we're not going to know the answer to that question for a while.
I'll answer.
Well I guess, maybe all of Alaska.
Lately.
Some of you you've clearly done a great job I mean of maintaining net interest margin, which has been somewhat rare amongst the banks.
And so that's obviously something is working well for you.
I guess I'm just curious is it you know since you've had some time now.
Are you.
Are you satisfied with the progress that you're making and being able to.
You know deepen the customer relationship because of the.
These improvements and you know I mean can you quantify that at all I mean is it are the.
The likelihood is just the show that your.
Hi.
Making progress and it's something that you can really build off.
Yes.
I, just I think I did just quantify it so.
And I thought I'd get it fairly clearly.
Clearly, but maybe that's the disagreement that we will have debt.
Thank God for another time.
But but but I think the with respect of satisfaction of anyone who works with me and for me I understand the.
Im not satisfied very much of it maybe.
That's maybe a good.
Good thing for shareholders of bad thing for your own personal happiness or something but so you know look I think I think that we've made very significant progress I think if you look back and said you know how much of the mortgage.
They can gain were able to capitalize on because of the ability to you know have rate watch which is in the application that help you understand exactly where our customer is from a mortgage for start to see you can micro target them immediately when rates drop rate that generated enough money to completely overcome that H&R.
<unk> band lock.
The whole that we add right, which was not nothing right I don't think people would have expected we were able to do that now the eye.
Think the the reality and all of this all sort of restate again just slightly.
And tried to be shorter this time is the.
When you look at our product mix.
And our product mix is developing simultaneous with the distribution channel and with the technology right. So.
You have to have all of those things together and they have to weave together right and I think that's so yeah for the existing products, we have we've been doing.
Our easing job of cross selling them and it's had real benefits. The question is as you know.
<unk>, we really don't we don't have a.
We don't have a credit card for example, we don't we don't have the.
You know we had self directed trading is in.
Beta and it's 2 weeks old right and it's an immature platform. So we don't yet have numbers on those things but.
The strategy is clearly there and the and I think the desire of our customers to use those products.
We'll be there but.
And we have to go out and do that and I know that it's obviously.
Shareholders, I always want everything faster and less it costs money to do it and I completely understand that but look this is a pretty complex long term strategy, but if you if you look at it properly.
We see is that you have.
This really really great set of of.
Of funding structures that have been put in place with.
Significant fee opportunity and cross sell opportunity and that there is.
Different actors that need.
It's different pieces and there's a set of technologies that are utilized the ball across the.
That can be built once and utilized many times and so yes, so but.
You did provide some.
The good humor, because everyone's now kind of go running around asking them from satisfied.
But.
Other than other than other than that.
Right.
I was aware of the difficulty of.
The satisfied.
Okay, Yes.
So anyway I just was trying to get a little better feel for some of the because you put it made progress but I didn't.
The weighted understand.
Yes.
Sometimes tough to you've got the individual silos of loan book.
Apartments versus book.
What was the.
The.
Some of the parts of it was just the well we didn't even talk about the commercial side of the business right. So now.
The commercial side of the business has been a really significant contributor not only of the loan growth, but also to deposits and the.
The.
The commercial side of the business I think the average deposit rates like 11 basis points or something and it's a massive book rate and that book is filled with customers.
Now of ours, who are loan customers right. So yes.
Talked about the consumer side, but that's a good example, and I think the cross sell rate is.
Our near 100% on deposits on the commercial side, because it's a requirement right. So.
So thats.
Yes.
Sort of the.
Duplicated that yeah, yeah yeah.
Alright.
Good job.
Look forward to the new year.
Okay. Thank you I said take care bye. Thank you we reached the end of our question answer session I'd like to turn the floor back over to management for any further.
<unk> comments thank.
Thank you everybody, we'll talk to you next quarter.
Thank you that does conclude today's teleconference and webcast you may disconnect. The line at this time and have a wonderful day.
For your participation today.