Q1 2023 Axos Financial Inc Earnings Call
[music].
Greetings and welcome to the <unk> Financial Inc. Q1, 2023 earnings call. At this time all participants are in a listen only mode. A 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. Please note. This conference is being recorded.
Now I'll turn the conference over to you.
Johnny Lai you may begin.
Yeah.
Thank you and good afternoon, everyone and thanks for your interest in <unk>, joining us today for <unk> Financial Inc. First quarter 2023 financial results Conference call are the company's President and Chief Executive Officer, Greg <unk> Branch, and Executive Vice President Chief Financial Officer, Eric <unk>.
Walsh and executive Vice President of Finance Andi Nikolay.
Greg and Eric will review and comment on the financial and operational results for the three months ended September 32022, and we will be available to answer questions. After the prepared remarks.
Before I begin I would like to remind listeners that prepared remarks made on this call may contain forward looking statements and are subject to risks and uncertainties and that management may take.
Additional forward looking statements in response to your questions each.
These forward looking statements are made on the basis of current views and assumptions.
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'll 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 over the call to Greg I'd like to remind our listeners that in addition to the earnings press release, We also issued an earnings supplement for this call.
All of these documents can be found on <unk> financials.
Web site.
With that I'd like to turn the call over to Greg.
Thank you John and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access financials conference call for the first fiscal quarter ended September 32022, and thank you for your interest in access financial and access bank.
Had another excellent quarter with double digit growth year over year and book value per share ending loan and deposit balances. Our strong results were broad based with net interest margins exceeding the high end of our target and double digit net interest income growth year over year, we grew deposits by approximately 29% year over year led by strong growth in consumer deposits and deposits.
<unk> Securities.
Living a one time legal reserve as I'll discuss later, we reported adjusted net income of $69 6 million for the three months ended September 32022, representing year over year growth of 15, 6%. Our book value per share was $28 35 staff at September 32022, also up 15, 6% for <unk>.
Remember 30 of 2021 highlights.
Highlights for this quarter include the following.
Deposits increased eight 8% linked quarter and 29, 2% year over year to $15 2 billion, we continue to make steady improvements in our funding mix with noninterest bearing deposits increasing by approximately 1 billion.
Remember 30 of 2020 was noninterest bearing deposits represented approximately 30% of our total deposits at September 2022, the diversity of our funding Max compared to the last rate cycle positions us well to maintain our best in class net interest margin.
Net loans for investment balances were $15 2 billion up 8% linked quarter or 28, 1% annualized despite rate increases rapidly.
Started the year, we continue to see good demand for well secured C&I and commercial real estate loans net interest margin was 4.26% for the fourth quarter up seven basis points from 41, 9% in the quarter ended June 32022, and up four basis points from 4.22% in the quarter ended September 32021 net.
As far as well for the banking business unit was four 5% compared to 4.45% in the quarter ended June 32022, and $4 four 8% in the quarter ended September 32021, higher loan yields more than offset the increase in funding costs.
So security is comprised primarily of our custody and clearing businesses made positive contributions to our fee income deposits and net income total deposits from Akzo Securities were approximately $3 3 billion as advisor and broker dealer clients continue to hold higher cash balances somebody the validated elevated market volatility quarterly pre tax income improved by.
$9 million year over year to $8 9 million due primarily to higher interest rates.
Diluted earnings per share was 1.1 was $1.18 up 15% from a dollar and three cents in the year ago quarter capital levels remained strong with tier one leverage ratio of 10, 3% of the bank and $8 nine 8% of the holding company well above our regulatory requirements, our credit quality remains strong.
Annualized net charge off to average loans of five basis points, one basis point in the first quarter of fiscal 2022.
I'm, taking our net charge offs was from very low.
Solely due to losses on our personal unsecured and auto loan portfolios. Some of which are later offset on the auto side by collection of credit insurance, we have pressures on certain auto FICO bands.
We added $8 $75 million to our loan loss provision this quarter to support our strong loan growth total allowance for credit losses.
Oh, It was $155 5 million at September 32022, representing 21 times, our annualized net charge offs and one.
Percent of Alright, and then along total outs loan.
Loan originations for our investments for the quarter ended September 32022, well $2 5 billion up approximately 19% from $2 1 billion in the comparable quarter one year ago.
First quarter 2023, firstly originations were as follows.
$12 million of single family Jumbo production of $129 million of multifamily production $59 million of commercial real estate production at $25 million of auto and unsecured consumer loan production and one 9 billion of C&I loan production, resulting in a net increase in ending C&I loan balances of $960 million.
Ending loan balances in our jumbo single family business increased by 124 million to $3 8 billion, marking a second consecutive quarter of over $100 million of net growth in our jumbo single family mortgage portfolio, we generated $313 million of loan production in the first quarter of 2023 benefiting from dislocations in jumbo single.
Family mortgage securitization market prepayments in our jumbo single family mortgage business were $184 3 million in the three months ended.
September 32022 down from $390 million of prepayments in the prior quarters.
While rising interest rates have resulted in reduced overall market demand for jumbo refinances of purchase transactions, we are better positioned than most of our competitors to capture a greater share of the available market given our efficient operations and established track record of execution, our jumbo single family mortgage pipeline was approximately $311 million.
As of October 24, 2022.
C&I lending had another tremendous quarter demand remains strong across long types and geographies with a backlog of approximately $790 million.
At October 24, 2022, we are positive momentum across multiple C&I lending verticals and we remain confident that we will be able to sustain strong growth in our net balances, while maintaining our credit quality and loan yields our loan pipeline remains solid with approximately $1 4 billion of consolidated loans in our pipeline.
Over 24 of 2022, consisting of approximately $20 million of single family agency gain on sale of mortgages.
$11 million of Jumbo single family mortgages higher $55 million of multifamily and small balance commercial real estate term loans $790 million of C&I and commercial real estate specialty loans and $170 million of auto and unsecured clause.
We're off to a strong start to our fiscal year with over $1 billion of net loan growth in the first quarter of fiscal 2023, while the near term outlook remains good we expect loan growth to moderate from the elevated pace. We've seen in the past two quarters as the impact of higher interest rates began to have a more pronounced effect on loan demand in the first half of calendar.
2023, Nevertheless, we remain confident that we will achieve that mid teens loan growth target for our fiscal 2023.
<unk> increased eight 8% linked quarter and 29, 2% year over year growth in small business and consumer deposits were offset by declines in certain commercial banking and clearing and custody deposits from elevated levels at the end of the prior quarter competition for deposits has increased across most of our deposit categories. We have been successfully right.
Gaining and growing consumer checking savings and money market deposits do cross selling relationship pricing initiatives in commercial banking, our low cost nationwide deposit gathering and specialized servicing approach has allowed us to be more competitive in maintaining and growing deposits from existing clients, our investments and cash and treasury management capabilities and teams have increased the pipeline of <unk>.
Specter of new Treasury management clients.
<unk> fiduciary services, our bankruptcy trustee business total deposits were approximately $1 1 billion at the end of the first quarter, we expect a gradual pickup in chapter seven and non chapter seven cases in deposits over the next 12 months as the economy, Decelerates and bankruptcy filings rebound from multi decade lows.
Those clearing continues to generate a significant source of low cost deposits. We had approximately $3 3 billion AUM clearing and custody deposits at September 30 of 2022, including $2 4 billion that was on our balance sheet and <unk> 9 billion that was placed at partner banks, while the level of cash sorting by advisors and broker dealer clients has increased.
The cash held at access clearing remains elevated at approximately 11% of total assets under custody and administration. The weighted average cost of our clearing and custody deposits remained very low even with the rapid rise in the fed fund rates, we have a healthy pipeline of new custody and clearing clients that will help offset the eventual normalization in cash holdings if.
And when advisors and broker dealers become less risk averse, we maintained a net interest margin well above our long term annual target of three 8% to 4% once again this quarter with consolidated and bank only NIM of 4.26% and four 5%, respectively, new loan yields during the quarter, whereas follows a single family.
Jumbo mortgages, 6.3% multifamily mortgages, 592% auto six 5% CNI, 733%.
Remains slightly asset sensitive with 38% of our loans comprised of five one hybrid arms in the jumbo single family and multifamily portfolio at 53% of our loans.
Comprised primarily of floating rate C&I loss with the exception of a small portfolio of prime jumbo mortgages. We have no. Other 30 year fixed rate jumbo single family loans are multifamily loans on our balance sheet. The overwhelming majority of our C&I loans are variable rate, excluding the 138 million to our equipment leasing portfolio.
8% of our variable rate C&I loans, just to LIBOR and the other 42% of Justice Sofa marrow bar or other indexes at September 30 of 2022, approximately 93% of our sandal of Io loans, where I love their floors with another 75 basis point increase in fed funds expected in November all the CNI loans will be above.
Their floor rates demand for our commercial specialty real estate and other C&I loans remained strong as reflected in the $790 million C&I loan pipeline as of October 24, 2022.
So securities, which includes our securities clearing and custody self directed trading a managed portfolio of businesses generate $10 million of pre tax income excluding noncash amortization expense in the first quarter of fiscal 2023, an improvement from adjusted pre tax income of $8 million in the linked quarter our securities businesses.
<unk> from rising interest rates, partially offset by declines in asset based fees as a result of market depreciation.
<unk> advisor services held its first in person advisor conference since 2019 in Denver last month over 100 existing and prospective advisers attended reflecting strong interest from independent seeking an alternative noncompetitive tech forward custodians, who can help them grow their practice.
Advisory services are seeing good momentum, adding approximately $200 million of net new assets in the quarter ended September 30 of 2022, and a pipeline of 10, new advisers. So those are $500 million of new client assets that is committed to transfer to access over the next 12 months the pipeline for <unk> remains robust with active discussions with several multimillion.
Dollar firms, who are looking to move portions of their assets from their existing custodian, we are making good progress with various operational and infrastructure initiatives and our clearing and custody businesses. We continue to make progress on the build out of our proprietary securities core that will reduce operational costs in our securities business by reducing third party vendor costs.
Allow greater levels of straight through processing and enable us to pursue more cost competitive business opportunities higher fee income from actual securities was instrumental in helping offset expected declines in mortgage banking gain on sale as rates continue to rise. We expect this dynamic to continue with higher fee income from off balance sheet deposits offsetting lower mortgage banking income.
We expect higher margin businesses, such as stock borrow margin lending to rebound from current levels when market conditions improve.
Additionally, we have several initiatives today as an access clearing that will optimize and grow the fee income from new and existing sources, such as mutual funds Etfs, our model management marketplace and alternative assets.
Our efficiency ratio was 55, 9% for the three months ended September 32022 up from 54.4% in the prior quarter, excluding a $16 million of one time legal reserve our efficiency ratio was 48, 2% in the first fiscal quarter of 2023.
Yesterday, we received an unfavorable outcome in the litigation initiated by Union Bank related to our purchase of our access fiduciary services business. This litigation pertained to issues related to the sale of the business to access by epic systems and the termination of our prior contract between Union Bank and access.
This relationship with Union Bank entered a number of years ago and this matter has no impact on any aspect of the <unk> fiduciary services business going forward.
The jury awarded the Union Bank.
Damaged the jury award Union bank damages totaling $18 $3 million, which is offset by a prior amount received by union of approximately $8 million for a net amount of $10 $3 million plus estimates of prejudgment interest while the company strongly disagrees with the verdict and plans to appeal the decision and the damages awarded I suppose took.
A $16 million pre tax reserve in the quarter ended September 32022.
Our diverse lending and deposit businesses and modest sport for securities portfolio position us well for a rising interest rate environment. Our securities book with approximately 258, nine and ending balances is less than 2% of the total assets as of 932022.
<unk> 2022, representing approximately 26% and 19% of our total loans outstanding.
Lower than they were in prior upgrade cycles, while we expect deposit betas to rise at the end of the fed tightening cycle, we have more tools from a loan to deposit perspective to help alleviate some of the expected funding pressure.
Looking forward our outlook is that our net interest margin for the fiscal year ended June 32023 will remain above our long term target of three 8% to 4%.
Biggest factors impacting our net interest margin will be how fast our loan portfolio grows and where our access advisory services deposit balances are relative to their September 30 of 2022 levels. As we stated previously our expectation is that net loan growth will moderate from the high level seen in the prior two quarters and grow by a mid teens in fiscal <unk>.
2023, if loan growth exceeds our mid teens based target that any incremental cost to fund our loan growth will be on the higher end of expectations with respect to our access advisory service deposits. The biggest source of incremental low cost deposits will come from our existing clients the amount of cash held by our A's and their client it costs fluctuate.
On advisor risk appetite, which can change quickly another factor impacting access advisory is clearing cash balances is the relative rates paid by money market funds and other liquid cash alternatives historically advisors and broker dealers have not viewed cash sweeps as an asset class and have not actively look to maximize the return on that cash.
However, given the fed's aggressive tightening some advisers are starting to evaluate higher yielding cash alternatives. We have started to engage in productive discussions with custody and clearing clients to come up with solutions that are mutually beneficial for the or as in their clients' needs were.
Also actively exploring relationship based pricing that could accelerate the transfer of new custody assets to access.
Our baseline assumption is that the percent of cash held by access advisory services clients will normalize to 7% of our assets under custody in fiscal 2023 from 11% at September 32022, if clients become more risk averse and continue holding a higher cash balance than our full year NIM will be higher than our base.
Find target however, if clients reduce their cash percentages and we had to replace those low cost deposits was relatively higher cost deposits than our full year net interest margin would come in towards the lower end of our target of 4% or higher.
Credit quality remains healthy and we're not seeing any signs that our borrowers are struggling to finance their debt obligations with us net charge offs to total loans remains low and our asset base low LTV lending makes us extremely comfortable about our credit outlook, even in adverse economic scenarios nonperforming assets to total assets was 68 basis points for the quarter ended.
At September 32022, no change from 68 basis points for the quarter ended June 32022 of our nonperforming loans, approximately 55% or single family mortgages or have had historically very low realized losses of our nonperforming single family mortgage loans at September 30th approximately <unk> 95.
<unk> had an estimated current loan to value at or below 70% and approximately 97% are below 80% of our best estimates of current loan to value given the low loan to value of our asset backed loans, we remain confident that our incurred credit losses will remain manageable, even if asset values decline, we had an excellent start to our fiscal 2023.
With loan growth and net interest margin well above our full year guidance, while the uncertain environment presents short term challenges, we will continue to manage the aspects of our business that we have direct control over credit operational efficiencies capital liquidity and strategic investments are strong profitability excess capital and ability to be nimble positions us well to take advantage of them.
Market dislocations similar to what we've done in prior cycles I am excited to execute on our various strategic initiatives. We have in place across each of our businesses now I will turn the call over to Derek who will provide additional detail on our financial results.
Thanks, Greg.
To begin I'd like to highlight that in addition to our press release and 8-K with supplemental schedules was filed with the SEC today and is available online through Edgar or through our website at access financial Dachau I'll provide some brief comments on a few topics. Please refer to our press release, our SEC filings.
And our web site for additional details.
I'll lead off with an overview of our deposits at September 30, compared to June 30.
Our noninterest bearing deposits declined $407 million from 5 billion at June 30 to $4 $6 billion at September 30th.
Our total interest bearing demand and savings deposits increased $1 $4 billion from $7 9 billion at June 30 to $9 $3 billion at September 30.
Our time deposits increased $187 million from $1 $1 billion at June 30th two $1 $2 billion at September 30th.
Our weighted average interest rates at the end of the period for our total deposits increased 60 basis points from 0.54% at June 30th% to 114% at September 30th.
Next I'll turn to our noninterest expense, which for the quarter ended September 2022 was $116 million.
$7 million in the linked quarter ended June 2022.
$32 million in the quarter ended September 2021, as Greg discussed the primary reason for the increase was a $16 million accrual for an adverse legal judgment that has not been finalized I'll provide some additional information on a few specific expense areas.
Salaries and related expenses for the quarter were $47 million up $3 $5 million from the linked quarter and $6 $3 million from the year ago quarter. The.
The $3 $5 million linked quarter increase is primarily attributable to our annual salary compensation increases taxes for semi annual bonuses and increased head count.
Professional services for the quarter ended September 32022.
$8 1 million, an increase of half a million dollars from the $7 6 million for the three months ended June 30th and $3 5 million dollar increase from the $4 5 million for the quarter ended September 32021.
The primary drivers of the increases were legal expenses and fiscal year end audit expenses.
Advertising and promotional expenses increased to $6 $4 million for $3 4 million in both the June and prior year September quarters to support growth in our deposit businesses given the competitive landscape for deposits, we expect to maintain a higher level of spending on marketing.
Grow our consumer and commercial deposits.
Lastly, despite strong asset growth our capital ratios remain in a strong position with our total risk weighted capital ratio access and agile ending the period at 12, 9% net capital access clearing increased 26% on a linked quarter due primarily to higher.
Profitability in our securities business.
We continue to maintain additional cash reserves at the holding company available to contribute to our subsidiaries and with unexpected moderation of asset growth, we expect to organically grow our capital throughout the enterprise.
With that I'll turn the call back over to Johnny.
Thanks Darren.
Right or were ready to take questions.
And at this time, we'll be conducting a question and answer session.
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Please while we poll for questions.
And our first question comes from the line of Gary Tenner with D. A Davidson.
Please proceed with your question.
Thanks, Good afternoon everybody.
Hey, guys couple of questions.
The segment reporting section of the supplement.
Just looking at the fee income securities business and the corporate eliminations. It strikes me as a particularly large delta. They are certainly much more than the year ago period. So I'm just wondering if.
If you could kind of walk us through the moving parts, there and how to think about it.
Seven basis.
Yes, certainly that's the cash sorting deposits so.
We just try to add some language about the table that that covers that.
The vast majority of that are those deposits from the access clearing and Aaas.
Cash sorting deposits that are held at the bank. So obviously, we have a portion of those held off balance sheet and a portion that are held.
On the banks balance sheets, and so the elimination is that the bank pays a security business securities business for those transactions for those deposits at a roughly.
Roughly market interest rate and that's what's getting eliminated and that noninterest income line item and in the noninterest expense line item.
Okay. Thank you Jonathan Rosen went through the feedstock.
Okay that helps and then just in terms of the loan deposit ratio.
The increase this quarter.
A lot of banks, you are running a little bit higher than typical.
That metric right now is just wondering how you're kind of monitoring that thinking about that going forward.
Yes, certainly we always as you know run a little bit north of one given the diversity of our deposit sourcing opportunities we feel comfortable.
In and around kind of a one point O five give or take a few percentage points there, but I don't think thats. When you go back in our history were not necessarily outside our normal kind of band of where we live within that we feel good about our.
Capabilities continue we're seeing a lot of strong demand on our consumer deposit.
Business lines as well as making some inroads as Greg highlighted with regards to some.
Customer base relate.
Our relationship based.
Saying with regards to the.
Aaas are new customers and so it's it's pretty overall I think we feel good about where we can go with the deposit franchise.
But we will certainly to get the best Bang for the Buck because we know we have these different areas different levers that we can pull in sourced deposits from that we will run slightly.
One or slightly above.
Thank you very much.
Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for taking the question.
Derek can I was taking the notes did you give.
What a good run rate would be for expenses here it sounds like it could be a little bit higher but did you give a total number of where we can build off going forward.
Yeah, I think not too dissimilar from what we provided last quarter. Obviously, there is a little bit of noise with the legal charge, but when.
When we think about 42% as the right. What we previously provided the bank efficiency ratio in and around in and around that by one percentage point would be I think the best way to pencil out the expenses.
And that usually equates to a from a consolidated.
Ratio from kind of a band of 48% to 50% and are in the consolidated ratio.
Got it alright.
That's really helpful.
And then just on the on the margin guide in the range of $3 80 to four eight.
It sounds like to get below that high and you need to have a natural.
But the cash level at.
At actual securities come down to a normal level, maybe if the fed stops raising rates than funding class catch up but even so it's still probably going to be.
And at the high end of that range at worse I mean is it time to update your range just given all the different.
The deposit base over the last several years.
Yeah.
It's a reasonable question Kevin of course, sitting so far above it so it's not a it's not without merit.
Look I think.
I think that there is there's a couple of things going on obviously.
The.
The loan side, there's a lot more variable than it ever was but theres still a set of loans that.
Although there are five one arms and they've been originated in different periods given the level of Prepays that we had previously that tends to skew towards relatively recent vintages.
But he is going anywhere it really with respect to those also prepay is lower so as opposed to the regular.
2.9 average year weighted life, I think thats pushing out longer. So obviously, we are the new assets are coming on at higher rates, but even though they're coming on let's say on the jumbo side in that in that low to mid sevens.
You know if if if let's say the fed fund rates goes up five and above.
That obviously squeezes that net interest margin on a couple of those portfolios you have the potential that there could be more cash sorting associated with that.
Or is that deposit betas pick up so look but I do think that it's up.
Don't think it's reasonable to assume in the fiscal year that we're going to have.
Massive collapse of NIM to 4% either that I don't think that makes sense. So.
So yes look I think that those are those are.
Long term targets that may be a little low on the three eight to four side.
But we do get a lot of benefit from the security side in that segment.
Does have variability with respect to what happens with cash balances based on risk tolerances and the market. So.
Inc. I think that we definitely shouldnt be modeling a lot of upside from here on those really high Nims and.
And I think we kind of outlined.
What we were thinking about with respect to what could happen with the cash percentages, giving that the differences between the 11% and 7% on where we are and so you can see where those ranges are and frankly, we don't re.
Really have a lot of control or.
You know that it really depends on what happens with the market and what views are with respect to those individual advisors, what they do with those balances.
Got it alright.
That's really helpful.
Ill step back thanks, Greg.
Our next question comes from the line of David Feaster with Raymond James. Please proceed with your question.
Hey, good afternoon everybody.
Hi, Jeff.
Yes, I wanted to touch on.
And they asked for a second and just maybe I was hoping you could talk about the competitive landscape you talked about a pretty good pipeline. There just curious I guess first weathered a volatile or uncertain environment. Like this is that conducive for you guys to continue to take market share in.
And expand and then I guess could you just help us.
Where are we on the roadmap for the growth there and I guess, what's on the docket next in terms of the build out of your capabilities.
Sure No those are all really good questions. So with respect to the competitive dynamic obviously I think the biggest dynamic going on there is the purchase.
Of that TD by Schwab in that conversion, which is going to happen I believe towards the end of 2023 calendar year and so a lot of the discussion is that folks wanted to be multi custodial or.
They are concerned about schwab's sort of footprint from a competitive standpoint, and so theyre looking for alternatives. So I think that there's a real opportunity there and the level of conversations and discussions we have and the enthusiasm is very very high and the capabilities of the business are not are certainly.
Fairly strong and so there's not a lot of capabilities that we often run into there is a few.
And then I'll talk about those in a minute, but that's so that's pretty good. So that's driving it I think the question of the switch and the volatility I think on balance it's probably.
Countervail to some extent the otherwise very favorable dynamic with respect to the acquisition of T. D. Because I think advisers really don't want to approach sometimes for repay bearing when they've got to talk to their client about how far the market's down or whatnot, but I don't think that that's.
Really.
Something that's that anywhere near outweighs the otherwise favorable dynamic.
With respect to the question of Roadmaps.
A very robust technology roadmap.
One element on the backside of the us.
The operation is that we have built our own securities core, which actually has been something that has taken a lot of effort, but the potential reward is massive from a standpoint of about $10 million plus expense.
That we expect to.
Essentially go to zero in about three years and will start migrating folks.
Off of that next year and that will reduce volumes. There's obviously I think we've already borne the expenses associated with that but there's a lot of real benefit from that because then there's no incremental cost of transactions and things like that so it allows us to sort of price everything that we're doing with clients in a way.
That said that that is helpful. It can win more business.
So that's ongoing that's on the back side and on the front side of it the real integration of UBB.
That conference, we presented a tax vision that involved.
Integration of banking into every client that opens their account so that they can eliminate the check processing work associated with having advisers take checks and all of the different elements of this and universally we didn't have one advisor tell us that they would be absolutely happy to just have.
Deposit paperwork.
<unk> with the paperwork to move the client over so that every client we get a deposit account.
And that that would facilitate the operational complexities that are associated with getting money in and outs and all those other sort of things. So we.
We call that the white label, UDP component, which is essentially allowing the adviser to be able to interact with our system and theres a lot of resources being spent on that right now and that's going well so that should be rolled out some time in its first version.
By June of 2023, so that's that's.
That's a very exciting vision.
Are very excited about and believe it's really additive to their clients and we.
Also believe it's additive to the overall banking franchise, we have.
So theres a lot of.
Really good stuff going on.
In the end the capabilities build as we can basically take all of the technology that we have that we've built at access with respect to customer service straight through processing and really bring that through to the securities firm the securities firms have gotten more efficient but.
They still have both of them clearing and custody both have a long way to go to be able to meet the sort of standards that we've established for ourselves from operational excellence perspective, as a bank and it just takes time because some of.
The movements are really system related so.
So yes, I think the good news is that these client relationships are very sticky.
So what that means on the other side is that they take a little bit of time to want to move but the market demand for an alternative custodian I don't think <unk> ever been better right now I mean, there really is incredible excitement across the board about having an alternative provider that also.
It can be responsive because at a certain point right it's not.
Just if you are as big as as a schwab.
Even a 1 billion dollar firms kind of.
As far as how youre going to be serviced its going to be in relationship to the overall.
Overall portfolio that they have but for us that's a that's a very important client and they're going to have access to senior leaders and things like that and so I think that makes a difference.
That's great color.
And I was hoping maybe you could you could touch on the specialty CRE market you talked about.
Higher rates impacting demand did I'm, just curious where youre still made both by product and geography, and just your outlook and kind of appetite for growth in the.
Specialty CRE.
Segment.
So we're still seeing demand for multifamily construction projects.
Think that aligns well with what our appetite is.
Remember we're in a.
50% loan to cost range with respect to these products with.
The partners that we're working with.
Funds that were working with so.
I think still remains.
Quite quite robust I think the question is is demand is good now I think this is really more about our forecast with respect to.
People are now, they're they're going out and doing.
Financings for projects that had been in the pipeline for extended periods of time and so I think the question really will be more in and around what.
What happens with respect to newer projects as they look at an interest rate and a cap rate environment that.
Has changed significantly from 12 months ago, and then look at what they're interested in and going forward with I will say, though that.
Frankly.
With the securitization markets generally and.
NSS you're in a state that's lacking dependability.
It really does.
Tend to benefit.
Banks and other companies with more stable funding sources. So for example, we had really good growth in our real estate lender finance business. Those loans typically were securitized and because they've got much higher advance rates and frankly better pricing. Some of those loans are ending up now on our lines.
And we like that they are discretionary we get to look at every loan but.
That kind of movement I think is going to allow us to continue to have good loan growth. We're also seeing in certain cases certain types of loans that just we would kind of not focus on as much due to spreads maybe asset back line things like that straight.
Things like that widening out in ways that make them things that we would be more likely to be a part of so I actually think that the asset side, obviously I think really from our perspective.
We arent in a position, where we want to go out and sort of overrun.
We don't want to go raise capital right. So we are growing a little faster in the last couple of quarters then.
It will sustainably do just given our ROE, which really has to essentially match asset growth.
Within a range over some reasonable period of time, and so that is really where we're targeting but I think we feel pretty good given the massive diversity that we have across our asset businesses that we're not going to be in a situation, where we're going to be without asset growth.
I think even though certain markets have gone down the competition has also disappeared let's.
Let's say single family for example, conduit operations that were kind of.
Messing with the credit side of things and messing with pricing up just Dave just blowing up left and right and are not there anymore.
That makes a lot of plant.
And then just last one from me you know you've done a great job proving out your rate sensitivity.
Driving margin expansion and you talked about adding more floating rate loans than you've ever had I'm. Just curious how you think about managing rate sensitivity going forward. Obviously, we're about to get another 75, probably next week and another 75 next month, but just curious whether youre considering locking in some rate sensitivity and how you'd approach that.
Whether through floor is more fixed rate lending or even potential synthetic opportunities.
Yeah, no. So I think those are really interesting questions and we are looking at some of those things I don't want to kind of make any.
Firm comments right now I think one element that I would say is that we have we are not utilizing deposits to go out and make.
And go out long from a CD perspective, so I think to the extent that we're going through.
These different elements, we have to make sure they match up and we don't want to obviously be locking in long term funding. If we don't have long term assets associated with that so there's a lot of different opportunities that exist there and we are looking at those actively and.
But I don't really have anything further on that right now specifically.
Alright, that's fair alright, thanks, everybody.
Thank you thanks, David.
Yeah.
Our next question comes from the line of Michael Perito with <unk>. Please proceed with your question.
Okay.
Hey, good afternoon, thanks for taking my questions.
Hey, Michael we've kind of we've kind of run through a lot of it I just had a couple of kind of credit oriented questions more just kind of talking through some of the book. If you guys don't mind, Firstly I wanted to kind of start high level.
Look at the the ACL today, it's just a hair over a percent you know.
The book up the mix of the loan book has changed quite a bit over the last few years, though right I mean jumbo today is only.
26% versus almost 53 years ago, and you know obviously, we went through the pandemic and I'm. Just curious how you guys kind of think about that level of reserve for the mix of business. We have today and maybe you could you know we've seen some other banks increased their qualitative.
Pumpkins around the economy and their ACL couch. This quarter just was wondering if you could quickly run through what you guys are assuming there today generally.
Yes, certainly.
I'll also refer you to the supplement that was filed.
With the SEC earlier slide four gives a good three and four gave a good summary of the additions we've made to the allowance 8.8 during this current quarter.
And where we sit.
As you referenced the 1% just above 1% of total loans, but obviously, that's when you break that apart amongst the things like single family warehouse single family mortgage multifamily and commercial mortgage where we have ltvs that are at 57 and 52% on a weighted average.
Across those portfolios respectively.
That youre going to see a lower percentage of ACL of 45 bps and 49 beds.
Respective way, but as you look at the commercial real estate, which contains some of the construction loans. The C&I non real estate that youre going to be a well above 1% there and as you go to the auto and consumer you're well above 2%. So it's really a dynamic across the.
When you look at each slice of the loan portfolio, but the one theme across the entire loan portfolio. As a reminder, is the low loan to value approach. The structured a b note on no type of approach that brings us to extremely low sub 50 and in many of the <unk>.
<unk> products are.
LTV LTC ratio and so that's considered as part of that allowance analysis and when we stress the portfolio as part of that process that really comes into play and it take some extreme it's a pretty significant stress to result in losses given those loan.
Collateral, there's low collateral values.
I think I think that if you looked at.
The averages.
Typically what we're doing is we're competing with a bank and we're competing with a partner and if we had loan to value ratios like those banks are matrices and our loan loss models would result in significantly higher loan loss levels as well. So if we were taking 70% or 65%.
Loan to value risks on construction lending or something then we would have a lot higher loss rates in there. We're just not really our loan loss provisions against that we're just not really doing that but I think if you look at it and break it down you are in the 100, fifty's and above range with respect to those portfolios esque.
Actually zero losses in history with none.
Foreseeable so you know.
Obviously.
These things aren't always forward looking and so you know that you have to but we've been we've been at this a long time, obviously COVID-19 kind of went away quickly it's been a while since we've had.
You know our long term.
Deep recession, but I mean, when you look at these products I mean, they're there.
Our loans are breakeven at 10, 11, 12 cap rate type valuations. So its a long way to go before you are starting to get into where where we are.
Got it and that kind of.
That's helpful. Thank you and kind of dovetails into my second question here, which is a follow up to an earlier question, but just if we look at in the supplement on slide I guess slide.
Slide one technically to the loan breakout you know most of the growth this quarter with CRE specialty and lender finance.
I was wondering if you could just remind us I know you discussed the ltvs, but can you remind us a little bit more about how low into those buckets is structured and what the typical collateral like physically looks like as it developed properties is at sites is it a mix just just would love a little refresh there as those buckets kind of kicks in.
To grow here at a nice clip. Thank you, yes sure. So so the commercial specialty real estate business consists of several types of products. So one would be completed buildings.
That are that are either cash flowing or involved in some sort of repositioning or sell out so completed condominiums for example.
That are being involved in a sell out the structure would be typically there would be a total debt stack of 70% of cost with around 65% to 70% of that stack.
Taken by Us with a fund that would be.
Holy subordinate to us that <unk> may have certain levels of recourse with respect to that matter.
And they would be required to cure any deficiencies.
Whether interest or any.
Any kind of principal and interest efficiencies heading kind of cost efficiencies of the bar was unable to do so and they have to do so quickly.
And.
If they don't they would essentially.
For FID there.
Their loan to us they could turn over that piece to us if they had to but so what that would involve us essentially a 50% plus our loss of auto loan to cost basis and that is also would be also capped at the estimated value associated with it.
Property as well on a stressed basis. So that's kind of the way these loans look that each of them.
Have a strong partner that bears the risk of loss and even in the Timeframes.
The Covid Timeframes and whatnot.
It's been extremely rare that even the partner.
Has any loss whatsoever every now and then if there is some stress they may not get a full default interest rate. They may waive some of the default interest.
Or kind of waivers and thats to get back on track, but.
Yes, you really do you have you have what's great about the structures as you have partners that you can spend time with.
Collaboratively talking about things and they generally also we look at their liquidity very carefully.
And so their funds often have very significant liquidity. So they are able to kind of work on on these projects to the extent there is any issues that occur and they really haven't been many but to the extent there are.
There it's good to have the structure there. So that's really what that looks like and we actually think that's one of the.
We think thats, a lot frankly safer than straight multifamily right now because even if you're at low levels on multifamily.
Loan to value I think part of the issue is that cap rates have been so low for so long and rents have increased for so long.
Some of these individual borrowers.
May have extended themselves a little bit.
At low cap rates and so we feel good about that too, but it doesn't have the protection associated with having these large institutional sponsor partners.
And those loans by the way that the CRE, especially lots often have really really strong underlying sponsors. So those are those sponsors also have significant liquidity and obviously they have to be ready to forfeit an interest a significant economic interest in the property as well.
So that's really why.
You end up with sort of no loss portfolio there.
Thanks.
Alright I appreciate you spent some time on it and thanks guys for taking my questions.
Thanks, Mike.
Our next question comes.
Regard with secret investment. Please proceed with your question.
Yeah, Hi.
Great.
Just a couple of things could.
Could you talk a little bit more about the the legal judgment.
A little surprised by that and I'm, just trying to understand it a little bit better.
And.
And then lastly, the other thing is just about how you know what.
I know you are you running into some limits now.
Raising additional capital.
You can grow to.
You mentioned that your ROA, but do you have any cushion left in the balance sheet.
You can.
Can you kind of go over that.
Well, so I'll take the last question first.
Yes, I mean, obviously there is some cushion we still we've raised capital we we still have.
We still have access capital in a number of respects depending upon the nature of the risk weighting of certain assets, the 50 and 100%. So its not theres, obviously excess capital right now, but the ability to use that in a systemic way to grow above our return on.
Equity this isn't something that I think investors should count on so yeah of course.
And there'll be.
Quarters, where we will outgrow.
That return on equity, but they won't be at once to stomach lead be above that.
At this time and.
I think that it makes sense and look I think it's a good growth rate and I think you know.
Okay, and obviously, it's yes, we do have excess capital right now and it kind of depends exactly on how the loan mix is between the 50 and 100% risk weighted assets and then with respect to the first question.
I think I'd just say in general that we've had some of these things are these some of the legal matter sitting out for a long time there was that the.
The years ago class action suit related to that.
Kind of stuff.
That ultimately got settled within the insurance limits, there's really no other substantive business disputes. We have this one kind of arose out of a pretty idiosyncratic.
Element where essentially.
The complaint was mostly a guest epic.
And I think there was.
There was the complaint was against the seller of the <unk>.
Business and we ended up getting caught up in that that complaint through a variety of complex.
Machinations and.
We don't we don't think that that is an appropriate outcome, but nevertheless, we are accruing for it.
But I think this and that particular matter at least with respect to <unk>.
Our exposure on it and.
Substantive ways I can't ever say that with absolute certainty in the sense that I mean.
<unk>.
If somebody can always petition to add damages from the judge or something but that's the likelihood of that is extraordinarily small.
And so yes, so we'll we will or we were looking at appeal options with respect to that matter.
And but I think that in general I would say that.
Some of the things that with respect to some of those legal aspects of.
Some of that stuff that's been weak.
Had to go through over the last couple of years I think we're kind of moving through most of that and obviously you can't forecast the future but.
Yes, I think most of that stuff behind us and we.
We can look forward to focusing on running the business.
Okay.
Alright. Thanks.
Sure.
And we have reached the end of the question and answer session I will now turn the call back over to Johnny Lai for closing remarks.
Great. Thanks, everyone for joining and we will talk to you next quarter. Thank you.
Yeah.
This concludes today's conference and you may disconnect your lines at this time. Thank you.
You for your participation.
[music].
Okay.