Q1 2022 Axos Financial Inc Earnings Call
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Greetings welcome to access financial Inc. First quarter 2022 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded I will now turn the conference over to Johnny Lai, Vice President of Investor Relations and corporate development. Thank you you may begin.
Thank you Sharon.
Afternoon, everyone. Thanks for your interest in <unk>, joining us today for access financial Inc. First quarter 2022 financial results conference call on the call.
Companys, President and Chief Executive Officer of Gran Tierra branch.
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Executive Vice President and Chief Financial Officer, Dr. Claus and Executive Vice President Finance, Andy Micheletti, Greg and Eric will review, the cough and comment on the financial and operational results for the three months ended September 32021, and we won't be available to answer questions. After the prepared remarks before I forget.
We'd 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.
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 995.
This call is being webcast and there will be an audio 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 the call over to Greg I'd like to remind our listeners that in addition to the earnings press release and 10-Q. We also issued an earnings supplement for this call.
All of these documents can be found on our Investor relations website with that I'll turn it 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 conference call for the first quarter of fiscal year 2020 ended September 32021. Thank you for your interest in <unk> financial and access bank.
We had an excellent start to our fiscal 2020 with double digit growth in net interest income loan originations and earnings per share. We bucked. The industry trend is increased our net interest margins on a linked quarter and year over year basis on a consolidated level and that's a bank access reported first quarter net income of $60 2 million for the three months ended September 32000.
'twenty, one and earnings per diluted share of 99 cents representing year over year growth of 13, 6% from 12, 5%, respectively. Our book value per share was $24 52 at September 30 of 2021 up 17, 9% from September 32020.
The highlights this quarter include the following lending the loan and lease balances were $11 9 billion up four 1% linked quarter or 16, 3% annualized our loan production was strong across a variety of categories, including auto single family mortgage single family warehouse and various C&I lending types.
Net interest margin was 422% for the first quarter up from 392% in the fourth quarter of fiscal 2021, and up 38 basis points from 384% in the first quarter of 2021.
Margin for the banking business was 44, 8% compared to 41, 1% in the quarter ended June 30th by 'twenty, one and 391% for the quarter ended September 32020.
57 basis points over the prior year's comparable quarter, we maintained our loan yields at five 2% and reduced our cost of interest bearing deposits by nine basis points linked quarter to 39 basis points, we continue to make steady improvements in our funding mix with noninterest bearing deposits increasing by approximately one five.
Billion from June 30 of 2021, non interest bearing deposits now represent approximately 31% of our total deposits at September 32021, a significant improvement from 19% in the corresponding period a year ago.
So securities contributed to overall earnings for a second consecutive quarter.
Excluding onetime merger related expenses associated with E trade advisor services acquisition access clearing which includes our clearing and custody businesses generated $1 5 million of pre tax income both of clearing and custody businesses were profitable even after accounting for the noncash depreciation and amortization expenses associated with the.
Sure.
Our efficiency ratio for the three months ended September 32021 was $48 seven 1% compared to $48 eight 4% in the fourth quarter of 2021.
The efficiency ratio for the banking business segment was 39, 93% for the first quarter of 2021 first 41, 95% in the fourth quarter of 2021 as a result of our strong net interest income growth.
Diluted earnings per share was <unk> 99 cents up 12, 5% from the 88 cents in the year ago quarter, our corporate tax rate increased from 28% in the fourth quarter of 2021 to 29, 1% this quarter.
We continue to generate strong returns, while maintaining excess capital we generated a return on equity of $16 five 5% in the first quarter and a return on assets of 1.67% capital levels remained strong with tier one leverage ratio of 10, one 4% at the bank and $9 two 2% at the holding.
Company, both well above our regulatory requirements, our credit quality remains strong with no loans in forbearance and the decline in nonperforming assets net annualized charge offs to average loans was one basis point down from seven basis points in the first quarter of fiscal 2021 nonperforming loans represented one 2% of total loss.
At September 30th 2021, compared to $1 two 6% at June 32021.
Auto loan originations for the first quarter ended September 32021 were $2 3 billion up 28% from $1 8 billion in the year ago period.
The first quarter 2022 originations were as follows.
$201 million of single family agency gain on sale production $430 million of single family Jumbo portfolio production.
$7 million of multifamily production $25 million of commercial real estate production of $132 million of auto and unsecured consumer loan production and $1 3 billion of C&I and Cressa lending production, resulting in a net increase of $429 million of balances.
Mortgage banking gain on sale generated $5 3 million of mortgage banking income compared to $2 9 million in the fourth quarter of 2021 and $19 $6 million in the corresponding quarter last year, our originations decreased by approximately 16, 9% linked quarter to $201 million, while gain on sale margins.
<unk> slightly to 339 basis points from 323 basis points in the fourth quarter of 2020 what.
The outlook for mortgage banking remained stable from fiscal 2021 fourth quarter with a solid pipeline and lower expected gain on sale margins. Our pipeline of single family Agency mortgages was $184 million at <unk>.
Tober 25 2021.
Our single family Jumbo mortgage business had a mixed quarter loan production was strong at $430 million or high prepayments resulted in a net $63 million decline in ending loan balances as of September 32021.
Seeing good demand for our jumbo prime product and the pipeline has risen since September 30th slightly under $600 million. The combination of slightly lower prepays and solid new loan originations should allow us to stabilize our single family Jumbo loan balances.
C&I lending had a very good quarter loan originations were $1 3 billion, reflecting strong growth across crustal construction on commercial asset back lending our growing relationships knowledge in structuring a selective adjustments in loan pricing on some new deals and a track record of execution have resulted in steady expansion in loan production and that balances.
Demand remains strong with a backlog of approximately $687 million as of September 32021.
Ending balances in our mortgage warehouse portfolio worth $656 million up $42 million from $614 million at June 32020 Watt, while our single family warehouse balances will fluctuate based on underlying demand for mortgage refinancing our goal is to opportunistically grow with new and existing customers.
We continue to make improvements in our consumer commercial and securities deposit franchises by investing in our front end back end technologies customer service and product capabilities consumer deposits, representing approximately 47% of our total deposits as of September 32021 is comprised of consumer direct checking saved.
<unk> money market and noninterest bearing accounts.
The weighted average demand in savings deposit costs was 18 basis points at September 32021 down by 26 basis points compared to 41 basis points as of September 32020.
Average non interest bearing demand deposits were $3 6 billion in the quarter ended September 32021 up 46, 8% from the prior quarter ending.
Pending time deposits as of September 32021, we're down 132 million linked quarter and $532 $8 million year over year, as we replaced higher cost noncore Cds with lower cost transactional deposits.
Approximately $144 billion of certificates of deposits.
As of September 32021 on the balance sheet approximately $1 billion at a weighted average rate of 68 basis points will mature in the next 12 months with the bulk of the runoff expected to occur in the next six months, our small business and specialty commercial and Treasury management businesses, including our fiduciary service.
Businesses continue to contribute to low cost core deposits.
Those clearing continues to generate low cost deposits that we're able to put on or off balance sheet.
The acquisition of the E trade Advisory services are a custody business, which closed on August 2nd added approximately $1 billion to our September 32021, ending deposit balances at access bank, we had approximately $714 million of client cash deposits from access clearing at the end of the <unk>.
First quarter of 2022 of which $408 million were placed at partner banks.
Flexibility to keep those lower cost deposits off balance sheet and generate fee income from other banks or to place them on <unk> balance sheet to support our bank.
Loan growth will be an even bigger advantage.
When interest rates rise and competition for deposits increase.
Our Q1 2022 net interest margin benefited from several factors.
Some of which are structural and a few that are transitory in nature.
First we significantly reduced our excess liquidity with average deposits at other financial institutions dropping by approximately $767 million.
From $1 9 billion in the fourth quarter of 2021 to $1 1 billion in the first quarter of 2022.
We do not anticipate meaningful declines in our excess liquidity going forward.
On the loan side, we have successfully held loan yields relatively steady over the past several quarters. However.
We have started to selectively reduce pricing on new loans in order to be more competitive for high quality deals.
Yields on loans originated in our single family Jumbo multifamily in C&I lending groups.
<unk>, 4.26%.
$4, three 9% and four 2% respectively in the first three months ended 932021.
Compared to five 1%, 2% average loan yield in the first quarter.
Ended last month.
Excuse me.
Sure.
We feel it's prudent to price more competitively on certain high quality deals.
While maintaining our credit standards and terms given our success, reducing our cost of funds.
Lastly, we have dramatically reduced our funding costs across each of our consumer and commercial deposit businesses over the past year in anticipation of having access to over $1 billion of low cost deposits from the custody acquisition.
With new interest bearing deposits coming in at 18 basis points in the first quarter of fiscal 2022, we have transformed our deposit franchise to be much more in line with that of a traditional consumer or commercial bank.
As such our ability to continue reducing our funding costs is more limited than it was a year ago. When you consider all these factors we are confident that our full year net interest margin will be at the high end or slightly above that of our three eight to four point range in fiscal 2022.
Our credit quality remains solid annualized net charge offs to average loans and leases excluding seasonal tax on products was one basis point this quarter compared to seven 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 were fully provisioned for a previously nonperforming assets to total asset ratio was 9.4 94 basis points for the quarter ended September 32021 down from 107 basis points in the fourth.
Quarter of fiscal 2021.
Our nonperforming loans, 80% to 94% are single family first mortgages, where we have had historically very low realized losses of our nonperforming single family mortgages as of September 32021, approximately 86% had a current estimated loan to value ratio at or below 70% and.
94, 5% are below 80% of our best estimates of current loan to values given the low loan to values on our single family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent loans, we had no loans in foreclosure.
As of September 32021.
Loan loss provision this quarter was $4 million compared to $1 3 million in the June 32021 quarter, and 11 8 million in the quarter ended September 32020, the sequential increase in loan loss provisions supports that $464 million increase in ending loan balances. Our total allowance for loan losses was 130.
$6 8 million at September 30 of 2021, which represents approximately 1.14% of our total loans and leases, which is approximately 48 times. Our total annualized net charge offs in the three months ended September 32021.
Our loan pipeline remains solid with approximately $1 7 billion of consolidated the loans in the pipeline at September 32021, consisting of $180 million of single family agency gain on sale of mortgages $514 million of jumbo single family mortgages $235 million of multifamily and small balance commercial.
Real estate loans, and $687 million of C&I, and commercial specialty real estate loans with $94 million of auto and consumer unsecured loans in the pipeline with healthy demand for loans across multiple loan categories.
<unk> deceleration in prepayments, we remain confident in our ability to achieve a high single digits to low teens loan growth in fiscal 2022.
We continue to generate strong returns with return on average common shareholder equity of $16 five 5% and return on average assets of 166% in the three months ended September 32021, respectively.
Efficiency ratio for the banking segment was three point 39, 93% for the quarter ended September 32021, compared to 45, 2% in the last quarter and the short two months since we closed the E trade Advisory services acquisition, we have already identified dozens of cost synergies by streamlining various processes and procedures.
We see additional opportunity to generate operating efficiencies from our clearing custody and retail securities business in the next 12 months to 24 months as we further integrate systems processes and personnel or.
Our capital ratios remain strong with tier one leverage to adjusted assets of 92, 2% at the holding company and 10.14% of the Axis Bank. We have access to approximately $1 7 billion of FH L. V. Borrowing one 6 billion in excess of the $158 million, we had outstanding at the end of the first quarter. Furthermore.
We have $2 billion of liquidity available to federal reserve discount window as of September 32021, our strong organic growth and returns coupled with a clean capital structure allow us to make aftertaste opportunistic stock buyback and acquisitions such as the E Trade Advisory service acquisition that we announced last quarter.
Our securities business had a great quarter with strong growth in fee income and net interest income broker dealer fee income increased 106, 4% in the first quarter compared to the corresponding period last year due to the addition of fee income from the Aes acquisition.
Excluding onetime merger related expenses ex those clearing generated $1 5 million in pre tax income X. Those clearing ended the first quarter of fiscal 2022 with approximately $40 billion of assets under custody or administration, including $25 billion of assets under custody and 15 $1 billion of assets under administration of the <unk>.
During business Securities margin balances increased 35% year over year to $341 million, while stock lending increased from $263 million in the first quarter of 2000 $21 million to $457 million. This quarter FDIC insured deposits held at partner banks or 712.
<unk> 5 million at 932021 up from $672 million.
At June 32021.
Aaas the RA custody business had approximately $1 3 billion of total client deposits in Q1 of fiscal 2022 of which 1 billion was held by Axis Bank and $284 million were held by partner banks.
We completed the acquisition of the trade Advisory services business on August 2nd and rebranded the business access Advisory services I want to thank the access clearing access advisory team at access Bank team members, who worked tirelessly over the past several months to successfully planted execute a very complex and rigorous transition.
Integration plan.
The acquisition provides us with turnkey technology platform and an experienced team of approximately 130 professionals, who serve around 190 independent registered investment advisers with approximately $25 billion of assets under custody, including the $1 3 billion of client cash deposits, we see tremendous opportunity to help advisers in there.
And clients become more successful by growing the scope and volume of custody lending and banking services, we do with them.
Advisory services, becoming a part of <unk>, social security will provide significant cost and revenue synergies over the short medium and longer term for example by converting the IRA custody business from a bank platform to our broker dealer platform, we will be able to offer additional products such as margin lending options trading and securities based lines of credit.
Existing and new custody clients, we have identified and started to implement various process improvements through the access advisory services group that will further improve our customer service levels and helps the business become more efficient and scalable in the next 12 to 18 months, we intend to streamline the custody and clearing systems and workflow to further integrate the businesses.
We remain on track to meet or exceed our prior guidance for access advisory services.
That will be slightly that it'll be slightly accretive to our fiscal 2022 earnings per share.
We soft launched our self directed trading platform at the end of June version, one of our self directed trading platform offering is focused on existing clients, who value the simplicity and convenience of being able to see and transact across various access banking and investment products through one online log in our mobile application we deliberate.
They control the rollout and limited the amount of marketing campaigns. During this initial phase in order to perfect various client onboarding and servicing workflows, we see self directed trading as an additional customer acquisition tool that will expand in terms of the scope of products over time once we reach a larger base of self directed trading clients will start experimenting.
The cross sell opportunities across our lending and fee based businesses, including our access invest robo advisor.
One product under development as our retail crypto trading service, which will allow access to the best customers to easily open our crypto trading account funding account quickly by transferring funds from an access bank account trade a limited number of crypto currencies and see their positions and values all in and access at the cost of developing and operating our retail crypto trading <unk>.
<unk> is well controlled and we will generate incremental fee based revenue once clients open accounts and trade, we anticipate launching our retail crypto trading business in the next six months investments we have made over the past several years across each of our businesses in consumer commercial and securities have provided significant strategic and financial rewards to our firm and our.
Shareholders. One example is our deposit platform investments, both organic and through acquisition that have generated meaningful growth in our noninterest bearing deposits significantly lowered our cost of interest bearing deposits and allowed us the flexibility to earn fees from placing certain deposits at other banking institutions are funding our bank's organic loan growth like we did this.
Sure.
We are making additional investments in the securities business, including adding more talented team members and investing in technology and infrastructure in order to grow the business profitably as we leverage the expertise and leadership from each of our businesses and further implement cost and revenue synergy initiatives, we see continued opportunity to accelerate top and bottomline growth now.
Turn the call over to Andy and Derek will provide additional details on our financial results.
Thanks, Greg.
Recently announced on September 27, after more than 20 years as the Chief Financial Officer of Axis Bank and access financial I has transitioned my CFO role to Derek Walsh. Many of you have already met Derek who has been with access for more than eight years six years of which.
Where our chief.
Accounting officer.
Proud to turn over the mic to Derek who will cover some additional points on the quarters results.
Thanks, Andy.
I'd like to highlight that in addition to our press release and 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through Edgar or through our website access financial Dot com.
Provide some brief comments on a few topics. Please refer to our press release or our SEC filings for additional details.
As Greg mentioned, our provision for credit losses was $4 million for this quarter ended September 32021 up from $1 3 million for the linked quarter ended June 32021, and down from $11 8 million in the quarter ended September 32020.
The increase in the linked quarter provision was due to the quarterly increase in loan balances and the mix of loan types at September 32021.
The decrease in the current quarter from a year ago was primarily due to a $6 5 million reserve for nonrecurring refund advance loans for the three months ended September 32020, as well as favorable changes in economic and business conditions between September 30 of 2020.
At September 32021.
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 of loan growth.
Moving to noninterest expense for.
For the quarter ended September 32021, operating expense was $84 4 million up $2 6 million or three 1% from the linked quarter ended June 32021.
The primary reason behind the increase in operating expenses is due to the addition of access advisory services or Aaas, the rebranded E trade advisor services business line.
Hey, Yes was acquired in early August and the full impact of operations is expected in the second fiscal quarter of 2022 and beyond.
Salaries and related costs increased by $3 $5 million on a linked quarter basis, primarily due to the acquisition of 124 Aaas employees and the addition of new employees to support growth in both our banking and securities businesses.
Depreciation and amortization expense decreased <unk> 5 million from $6 2 million at June 32021 to $5 7 million at September 32021.
Merrily due to the completion of amortization of previously acquired software during the June quarter.
With the addition of amortizing intangible assets for Aaas, we would expect depreciation and amortization expense to increase back to the fourth quarter level.
Occupancy costs decreased $1 million on a linked quarter basis, primarily due to a zero point $9 million. One time charge that was incurred in the June 32021 quarter associated with subway, you're saying, the New York City office space.
Finally, turning to capital despite deploying a portion of our excess capital. This quarter through the addition of Aaas were still able to grow tangible capital during the quarter as tangible book value per share increased from $21 36.
June 32021 to $21 43 at September 30th 2021.
Our capital ratios remained strong with a tier one leverage ratio of 10, one 4% and access bank and $9 one 9% at access financial.
With that I'll turn the call back over to Johnny.
Thanks, Derek operator, we are ready to take questions.
If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
It's using speaker equipment, it may be necessary to pick up your handset before pressing Mr. Keith Our first question is from Michael.
Pietro with <unk>. Please proceed.
Yeah.
Hey.
Good afternoon, guys. Thanks for taking my questions.
Hey, Michael.
I want there are going to stick with you on the cost stuff that you just ran through for a second here. So.
So it sounds like adjusted for the merger expenses from amortization that was slightly lower than the normal you know maybe we're in like that $82 million ballpark on the core expense figure for <unk> for the quarter I guess just to kind of a two part question one how much more I guess I had a little bit higher yes related expenses then.
Really came through I guess, how much more of a.
Quarter run rate is there to come into that from Eas and then secondly, as we look out over the balance of our fiscal 2022 here with some of the initiatives Greg talk about how should we be thinking about kind of the layer up of expense growth as you start to roll out things like retail crypto trading in and and others.
Sure so with the I highlighted the depreciation and amortization expense, you'll see the amortization of the intangibles increased and will return back to kind of more of the Q4 level on that front and then we acquired <unk> as a reminder, in early August So we really only had about two third.
<unk> of those expenses in the quarter for.
For September 30th So you could basically take the take those numbers and take one third of that increase from Q4 to Q1 Thats generally a.
A safe approach as to how to project the.
Going forward that expense run rates.
And then in terms of the.
Any of the upward pressures from from some of the initiatives you guys have going on beyond that I mean is there a.
Some thought process around you can maybe guide us to there whether it's maybe looking at the efficiency ratio in the bank I think job or something something else there.
I think those well the crypto will really come through the security side of the business.
So it won't it won't have a impact on the bank efficiency ratio unnecessarily, but then the growth from those other initiatives really is baked into our standard growth rate there may be a little bit additional expense there, but it's not going to be some substantial expense increase relate.
To those and the other thing to remember there is a lot of that will also be development, as well, which will be capitalized and amortized over a three year period. Most likely so those are a couple of ways to think about it from from that standpoint.
Understood.
Helpful. And then secondly for me just.
I guess with with yes, now onboard Greg you talked about the retail crypto trading for consumers. It is it fair to think about the product and also all the lending opportunities that you guys have I mean is that kind of the full suite of products here on on that side of the business or is there other things you. Thank you.
You'll need to kind of evolve in the fairly short term here to continue to be competitive and assuming that that's most of what youre going to roll out.
Do you think that there's probably fiscal 2022 could could see some decent improvement in just in the margins of that business relative year on year.
I think it's going to take.
Probably to say significant improvement I think that's going to be more of a fiscal 2023 type.
Type of that the reason why is that.
What we need to do is we need that we have a lot of technology work, we have to do including integrating UCB into those securities businesses. There's a lot of reengineering on the process side that we need to do and a lot of those things are linked to someone else.
The words, you know we have a mail room opening checks manually and depositing them into accounts right that needs to happen through UDP right.
So there is that there is.
At this time, we're not going to be charging customers more for that but whenever we can increase those efficiencies. We can go get new clients, because our cost will be lower.
And we'll be able to price better and this is a price competitive business. The pipelines look good but then when you get to pricing.
You need to work through that.
It really makes obviously our goal, which I think is that is a aggressive goal, but one that we've achieved already and we will get better is to essentially.
Make this business work in a zero interest rate environment now you always have to remember, though that you know there was we were paying a couple of basis points when rates were $2 25 on clearing and we're paying a couple of basis points. Today. So for every 100 basis points, that's a 20 million dollar drop.
Right there.
Now to the bottom line, obviously, you can debate how you think about that given some of the some of it's on balance sheet. Some of it is off but this is a this is obviously a rate sensitive business.
I think it helps US side, you know on the asset sensitivity side, but then also these are great customers.
And <unk>.
So there is a you know there's a quarter.
Quarter 1 million high net worth customers that we need to be able to access for banking products through a single platform, which doesn't exist yet and it's and there's a lot of work to do and we'll be we'll be doing all that work in this next year and then the next year is about getting adoption and rolling it out and you.
In making that happen. So if these businesses were.
Were good businesses, but they're also from a relative maturity perspective operationally. They are they just have a lot of room for improvement, which is great. Because we think we can essentially grow volume and reduce cost at the same time.
Helpful. And then just one last quick follow up on that point, and then I'll step back just on the sensitivity post Eas here I mean, and everything else you guys have done over the last two years I mean, it certainly feels like the.
The balance sheet is much better positioned for higher rates just looking at the deposit mix alone kind of tells the story, but I'm. Just curious if you could maybe try and put some numbers around around that on the short end of the curve here. If we start to see some movement just any initial thoughts about how this pro forma balance sheet and ended the NII might react.
Yeah, I think I think from a short term interest rate movements I think the securities.
Cash in the noninterest bearing deposits don't don't move too much given that they're from the bankruptcy side, which which never gets paid rate and the security side, which doesn't get paid right and then we have some commercial and those will be.
Those will probably behave like other commercial deposits in the industry. I think the question is as we move continue to move towards growth I do see a little bit of tightening I mean, its little right now.
The deposit market with respect to.
Balances so if rates are going up and we're still growing.
We would be paying a little bit more.
Four.
For those for those.
I think one of the things that we're obviously trying to do you know we just won money magazine's best online Bank finally, beating ally. They finally got there got there got it straight right I can't I'll never know why they possibly with ally, but but but in any event.
We have if you open a trading account if you open invested cap then that collectively resulted in a better package of benefits right. So those sort of accounts should result in enhanced stickiness, but we obviously.
Been through Havent been through a rate cycle with all those things together, but I think I think we're clearly in very good shape and then obviously for growth. We also have a lot of those security deposits off balance sheet as well and then we're playing with whether we can raise deposits at a lower cost than others are paying us which is often the case right now.
Will it be the case at a higher.
Interest rate environment I have no idea, so right and just to be clear, you're basically talking about kind of like someone like those reward type programs that we see a lot of like the <unk>.
Consumer Fintech out there doing where you're right. When you blend together right right right, Yeah subscription type programs, where someone is in self directed trading and Theyre getting a lot of research are they as much as they are they as rate sensitive on a companion checking account I think the answer is no but.
That's all of those things are there, but I'd say look I think we will I think will do.
Pretty well, probably obviously theres always been correlation between loan growth and deposit rates, but I think we have done.
You know really transformed had done a ton of our deposit franchise and it is obviously showing up in the numbers.
Great. Thank.
Thank you for the insights all I'll, let someone else jump in I appreciate it.
Sure.
Our next question is from Andrew Liesch with Piper Sandler. Please proceed.
Hey, good afternoon, everyone.
Hey, Andrew a question on the on.
On the loan growth guidance here moved it up to at the high end the low teens.
Certainly it looks like the warehouse business has stabilized and youre, making the moves to help keep the jumbo book from declining too much further with some of the rate competition. So what what could trip you up and have the loan growth b.
At that low end I know, we're only a quarter into the fiscal year, but what could trip you up there.
Prepayments in C&I or Trussell you know there is the great part is those those loans or do you know very good credit quality of the bad part is they pay off quickly.
So that can that can happen for all sorts of reasons that would be one that would be one area.
Look I think I think our jumbo.
Book is looking better I mean, we have cut prices.
So we are we're definitely trying to defend loan growth and we've done some rate reductions in order to make that happen is but why don't we talked about the rates that are in the current pipeline versus the rates on the books. So.
Look I feel pretty good about it I don't have the pipelines are good but it doesn't it doesn't take much in prepaid kick ups as the larger the larger a book gets to move any individual quarter in a way that would not quite meet the.
The number that you're talking about.
That being said we.
We feel we feel pretty good about it we said you know.
High single digit low teens, and I think that's conservative probably but but you know it could be a little bit higher it could be lower.
Got it.
And then with the with the margin here a bit for 'twenty, two but again with some of the rate.
Great movements, you guys have made do.
Do you think it puts its topped out here at least until maybe the fed does something on the short end or right.
LIBOR moves higher.
Yes, yes, I think thats a good a good assumption.
Okay.
I think yes, we do have we do have some little benefit from some deposit run off but you did see the difference in loan rates between when long rates are coming on and given how quickly our book turns that'll start flowing through so.
Yep Yep.
Great Oh I'll step back thanks.
Okay.
Our next question is from Steve Moss with B Riley Securities. Please proceed.
Good afternoon.
Steve maybe just maybe.
Maybe just following up on.
No.
Loan pricing here, just a little different way just kind of curious I mean, obviously competitive environment pushing you to.
Cut prices here, but just kind of curious are you also may be moving up in terms of loan size or has there been any change in terms of.
Some of the loans youre pursuing within the C&I and across all buckets.
Not really I think that's been pretty steady and on the C&I side that doesn't that's just a raid right. Derek it doesn't include fees. So there's obviously fees get.
Amortized into their rate and things like that which boosted but now I mean, I think I think that that business is pretty you know I think our business mix really hasnt changed.
Yes.
It's just the result of.
Where where we think we should be for the deals we want and what we can get.
Okay.
And then just maybe following up on expenses here I hear you guys in terms of the investments in some of those investments.
It's been capitalized here, just kind of curious how to think golf.
The expense growth kind of it sounds like call it in.
80 $586 million type.
Something like the third quarter, just how do we think that's kind.
Kind of off that range for the rest of the year.
Yeah.
So I mean, some things to think of again as you look at the salaries and benefits. So you had only a couple of months of the <unk> of a 124 employees coming on as part of the Aif acquisition that was only here for two months of that of that quarter, a little less than two months.
The same idea around the occupancy and equipment. So we assumed an office space leased and the Denver market and so that's going to drive that up a hair and then the data processing and internet is probably going to be around the range of where it's been.
This quarter and last quarter rough way, so that's kind of been the run rate recently and there was probably I mean, we.
With respect to yes, and then salaries salaries.
I drop of 556% and Chris on base.
Base salary excluding.
Just because we didn't perhaps coming in where it is but we do are our evaluations annually.
And then raised around the end of September so not much of a hit during the September quarter, So you'll see that increase in Q2.
And then we talked about depreciation amortization and broker dealer clearing charges will increase same idea kind of one third more from from the increase.
From the Youll see.
Pick up in Q2, there's been some movement, obviously, depending on the market with regards to how many transactions are flowing through and how hot the markets are from a clearing charges that we incur as a portion of that.
Okay great.
That's very helpful. Thank you very much guys good quarter. Thank you. Thank.
Thank you.
Our next question is from Gary Tenner with D. A Davidson. Please proceed.
Thanks, Good afternoon.
Hey, Gary to your questions.
In terms of the you know the off balance sheet deposits I think I heard the number.
In total around <unk> billion or between one is that is that what I heard at quarter end.
No off balance sheet, we have about 650 million to $700 million.
Okay.
So I don't know.
In terms of thinking about kind of volatility of.
The on balance sheet deposits it sounds like right now, Greg Youre, saying that you could get incremental deposits cheaper than what youre getting paid by the other banks. So maybe in the current environment, it's not really an issue or a question in terms of modeling the balance sheet, but.
Got it.
Is this a daily suite decision or are you modeling for Kathy needs over a period of time as you work.
The off balance sheet deposits or the committed there is actually some bigger that's out there is there are some.
The way the commitments generally work as people get to participate in the waterfall and in some cases, where essentially promising term to the extent that there is money in the waterfall and then were.
Sensually terming out some of those but the terms generally aren't too long, we can get a little bit more right for that but it's part of our liquidity planning process.
With respect to that so so yes, there is not but it but what's the longest deal it's pretty short it's a is it.
A couple of years a couple of ways.
So as long as steel, but it is tied to.
We can pull it back if we need to the default is.
Right just gets adjusted and so that so the higher rate falls back. So we still even have the option to pull that money that we need to as we as we look at that but but Gary we have more than.
A good 10 to 12 banks that we can allocate to.
And we're adding more so part of the process.
So on which banks are interested it does take a while to set them up into.
The system, but but we do have flexibility.
On a daily basis to move money around to do that but it does require partner banks that.
Or are willing to step up.
Okay. Thank you and then just to clarify on the truck.
About kind of the onetime costs associated with with each rate I know that in.
The past the way that you would highlight the acquisition related costs in your Q in your press release includes.
Partially just kind of regular way amortization of intangibles. So of the $2 8 million of acquisition related costs that are highlighted how much of that is just the ongoing amortization of intangibles versus actual nonrecurring cost.
The bulk of it is.
Advertising intangibles, there was about three to around 300000 that was one time costs.
The benefit of being or an investment banker.
[laughter] alright.
Alright.
So much of it.
Analysts right.
Yeah.
Thanks, Good afternoon everybody.
Hey, Ken.
Hey, Greg.
I think on the in the.
Q, you're talking there's a line item about the borrower.
Borrowed securities in margin lending.
About $900 million average balance, 3% yield which is better than 20 basis points.
I'm wondering do you have any kind of visibility into those balances going forward.
Yeah, you know I I.
I think it.
I think that when people feel good about the markets they tend to they tend to focus.
Attention on.
Maybe doing a little more borrowings. So we don't we think that's a pretty sustainable level. Obviously some of that you see some of the stock borrow that's where we're lending stock and that is a different rate that's more.
Variable there, but I think I think that there is going to be over time I I don't think in this.
This year this is going to be simply.
It's going to be market, driven by the customer base, which is slowly growing in and it'll and it'll be reflective of in general sort of demand for margin from other broker dealers.
There is however, a lot of opportunity because over time, we just have to make it happen and it's interesting because because.
Aaas was actually part of E trade bank, they didnt do margin lending they didn't.
At all so.
There is a whole set of <unk> with $25 billion of assets under custody with us.
That wants to do margin lending so the.
Our system right now it doesn't accommodate that so we are working on that when that happens we'll have to see how much demand. There is and then also through the platform the ability to do one touch us block lending.
Quick margin from self directed and other things like that is a part of the strategy, but it's not it's not something that's going to be fiscal 2022 impactful.
Okay got it and on the rate on those what is that dependent on.
It's it's negotiated with our broker dealer clients.
Who are.
There is there's 75 plus independent firms and we're negotiating with them.
There they are determining what rate, they're going to bring to their customers how much they're going to keep and how much we're going to keep.
We're working jointly on.
Okay, Great and then staying on that schedule is there a target rate or balance or percentage basis in terms of cash and cash equivalents liquidity basically that you you need to operate your bank going forward.
Yeah.
And you guys I think around where we're at this quarter that kind of the average balance that we had this quarter is probably consistent it'll flocks. They can flux by 100 $200 million, depending on deposit inflows and outflows and just the timing of some of those they don't always come in exactly when we expect them to come in they may get delayed by 15% to 30.
Or they may come in earlier 15 to 30 days, so thats, where youll see that that flocks.
This quarter is probably a reasonable average give or take a couple of hundred million that will be yeah. Yeah.
But you know think about 5% on balance sheet liquidity, but but at that at sort of a place where we want to not go below but the interesting thing about the securities type deposits is that they really do provide an additional source as well, particularly when they're off balance sheet, we don't count those of course, but they're there.
There is a.
As a component of available liquidity.
Okay, and then sticking on that point with the maturities in the CD portfolio in the next six months.
And obviously more over the next 12 months.
Is there a real strong appetite to hold onto some of those at lower rates.
Or do you feel like your liquidity.
Sure Yes.
We basically do I mean, yeah, we renew about a third of those and they are at much lower rates and people are just sticking because theres not a lot of other places to go things to do we have conversations with each person to the extent that it's you know they are interested in doing that to talk about other ops.
<unk> for them and so yes. So there is a percentage that get maintained but we don't have frankly, the highest rates in the market. So if somebody is very very rate sensitive and focus theyre going to be able to find something more.
A little more suited to them, but we are we're competitive so we do retain a portion.
Okay, great well I appreciate those are all my questions. Thank you.
Thank you Tim.
Our next question is from David <unk> with.
Wedbush Securities. Please proceed.
Hi, Thanks for taking the question I had a question on products in development because it seems like you're well on your way to building a super App you can do banking and savings self directed trading and investments peer to peer payments crypto within the next six months.
<unk> is are there any features missing for you.
Guys to compete with say square cash App is that something you even aspire to.
Well I think I think that.
Yeah, I mean, I think if to the extent that you can talk about square like squares cash App. For example, I would say that I think frankly, we have a lot of things. We do that are much better right I mean by the time, we're done with what we're doing.
You all have small business accounts that can sit right next to your personal accounts open through a universal enrollment.
Youll be able to have your crypto trading your securities Your Robo advisor and I think we're going to build I think we'll be able to build a much more robust let's.
For example, let's just let's just talk about <unk>.
<unk> for example, so with what we have.
And yes, they have a model management store. So most robust a really simplistic about what models you can choose while our robot will be built into a store.
So the client will have a lot more model choices that they could use in order to manage their money through their robot side. So yes, I think we have all the pieces, we need to do that and then there's just there's just development to make that happen and then you'd have to point out is a is as it is.
It has a planning tab that essentially work side works through a variety of features and functionality to help people plan their finances.
Market products based on.
Specific data algorithms that that would be most suited to those clients and things like that so yes, I think I think that.
Yes, the interesting I think the interesting thing for companies like square is theyre, not theyre unburdened from making money at any particular time, they have very small accounts, often and they are but they do have a lot of them right. So, but I think our app should be it should be definitely much more functional than theirs.
Frankly.
Much more robust.
When we're done.
Okay.
Well, that's great color. Thanks for that and then shifting to a housekeeping item can you talk about the tax rate going forward.
This quarter is roughly where we usually have around a 29% tax rate, that's where we've generally been at over the last few years, there's been some benefit from time to time as a result of the stock comp as if we have a period, where the stock price shoots up and there is vast things.
The awards as relates to the accounting nuances that they built rather than where it used to go through our equity they built it into the tax rate a few years ago, ASU 2016, O nine might be somewhat familiar with hearing that on the street before.
So that's that's really what will kind of shifts that rate, but generally 29 has been right around where we expect to be.
Got it thanks very much.
And our final question is from Edward.
Graham, let's see three investments. Please proceed.
Yeah I just got one quick question. The you you would expect a you talked about the expenses from clearing.
Another month I would expect with the Oh.
Revenue to go up a coolant.
Yes, yes, that's correct, yes of course, yes, yeah.
Yep.
That's right.
You were you were talking about your your just to protocol or with the.
The capital L wanted to do all the things the more the square does how how would you go about.
To a broader audience.
Well I mean remember square this squares primary businesses essentially merchant acquiring right, so and that business is a great business.
That's a great amazing business cash App is sort of I don't want to speak for for them. I mean, just use as an example, because.
But that's more of a side.
Business that is not related to most of what the core of what they do I don't even know if they disclose that.
That revenue on that business, I mean, frankly, we clear for them but.
So we are clear for cash App actually.
And so we're familiar with.
Volumes and things like that.
But ah, but anyway, I think that obviously they have they have this massive base of consumers because they have this amazing merchant acquiring business I think the answer to to this more broadly is that.
There really are two primary mechanisms that we will market one will be by trying to be a great integrated service provider for our A's and Bds, who need an integrated product set from a technological perspective, so they're clearing and custody businesses are an accumulation of customers.
That need services those services are noncompetitive, because we're not running our own RIAA network, we're not running our own broker network and to the extent that the robo guests of any size, we're going to refer those clients out there referral arrangements too or a network. So there is third part.
The acquisition of customers and then Theres first party acquisition of customers, which is through direct marketing cross selling and all the things that we do now to get customers and so.
The real.
The differential is right is if you are selling a customer checking account you can pay a certain amount of money on the cost of acquisition, if you're selling that customer.
Loans in checking accounts and securities products and the cost of acquisition can be reflective of a broader product set and allow.
More marketing to be done in a greater efficiency, when you're measuring that lifetime value and cost of acquisition. So I think that's really the trick to make that happen and then you can also balance out.
Which particular product has the lowest customer acquisition costs, and which one has the best cross sell and you run the models on that and that becomes what the consumer acquisition it looks like.
Okay and.
Great execution.
Oh, thank you.
Thanks, Ed.
We have reached the end of our question answer session I would like to turn the conference back over to management for closing remarks.
Thank you everyone. We'll talk to you next quarter and Andy will still be hanging out in this tariff will be doing most of the talking I know you gave a speaking part next time around.
Alright.
Alright, thanks, everybody.
Take care bye.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
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