Q3 2023 Axos Financial Inc Earnings Call
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Thank you for your patience. This conference will begin momentarily. Please continue to hold thank you.
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Good afternoon, and welcome to the actual financial third quarter 2023 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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Please note that this conference is being recorded.
I will now turn the conference over to our host.
Johnny Lai Senior Vice President corporate development and Investor Relations. Thank you you may begin.
Thanks, Diego and good afternoon, everyone and thanks for your interest in <unk>, joining us today for access Natural Inc. Third quarter 2023 financial results Conference call.
Company's President and Chief Executive Officer, Greg Gear brand.
Negative price, Vice President and Chief Financial Officer, Eric Walsh Gregor.
Greg and Eric will review and comment on our financial and operational results for the three and nine months ended March 31, 2023 and will be available to answer questions. After the prepared remarks.
Again, I would like to remind listeners that prepared remarks made on this call may contain forward looking statements.
Subject to risks and uncertainties.
May make additional forward looking statements in response to your questions.
These forward looking statements are made on the basis of current views and assumptions of management regarding future events and performance.
Actual results could differ materially from those expressed or implied in such forward looking statements as a result.
And uncertainty there.
Before the company claims the safe Harbor protection pertaining to forward looking statements.
Private Securities Litigation Reform Act of 1995.
This call is being webcast and there'll be an audio replay in the Investor Relations section of the company's website.
Thanks, a lot Tom.
Nate.
Details for this call were provided on the conference call announcement and in today's earnings press release.
I'd like to hand, 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 XO financials conference call for the third fiscal quarter ended March 31 2023.
Interest in access Faisel and access bank.
We delivered double digit year over year growth in earnings per share book value per share ending loan and deposit balances are consistently strong results were broad based with stable net interest margins and double digit net income and non interest income growth and bring deposits by approximately 32% year over year. Despite an expected normalization on cash sorting deposits from our <unk>.
The business did.
Diversity and Optionality of our deposit franchise is a valuable differentiator as it will allow us to maintain a strong net interest margin and a highly competitive market for deposits. We reported net income of $80 million and earnings per share of $1 32, SaaS for the three months ended March 31, 2023, representing year over year growth of 29% in 'twenty.
8% respectfully our book value per share was $31 seven at March 31, 2023 up 17% from March 31 2022.
Highlights for this quarter include the following <unk>.
Ending deposits increased by approximately $1 billion linked quarter, driven primarily by consumer deposits. We took advantage of anxiety in the marketplace. Following the three bank failures in March and added new consumer and commercial banking clients.
Clothing, the reduction of access advisory service deposits ending period commercial and consumer noninterest bearing deposits were flat from the end of the prior quarter.
Net loans for investment balances were $15 8 billion up 2% linked quarter or 9% annualized loan growth was broad based with growth in single family mortgage multifamily in C&I loans, partially offset by our deliberate pullback in auto small balance CRE and leasing.
Net interest margin was 4.42% for the third quarter down seven basis points from 44, 9% for the quarter ended December 31, 2022, and 40 basis points from four point out 2% a quarter ended March 31, 2022, the impact of excess liquidity on our net interest margin accounted for approximately five of them.
Seven basis points decline in net interest margin.
Net interest margin for the banking business was four 5% compared to $4 six 5% in the quarter ended December 31, 2022, and $4 two 1% in the quarter ended March 31, 2020 to higher loan yields partially offset the increased funding costs and negative impact from holding excess liquidity.
So security is comprised primarily of our custody and clearing business made positive contributions to our net income broker dealer fees increased 40% linked quarter and 166% year over year due to higher interest rates and increased client activity quarterly pre tax income for our securities business improved by $3 nine.
Linked quarter to $19 5 million, our credit quality remains strong with annualized net charge off to average loans of four basis points for a five basis points in the third quarter of fiscal 2022.
The four basis points of net charge offs. This quarter three basis points were from auto loans that are covered by insurance policies that will be subject to subsequent recovery.
Double digit growth in net interest income and noninterest income resulted in a 29% year over year increase in our diluted earnings per share we generated $1 seven one return on assets and a seven 4% return on equity for the quarter ended March 31, 2023, our strong capital levels improved further with tier one leverage ratio of 10.
2% at the bank and nine 3% of the holding company, both well above our regulatory requirements, we repurchased approximately $32 million of common stock in the third quarter to take advantage of the unwarranted decline in our share price in reaction to the turmoil in the banking industry.
Given what has transpired in the banking industry since early March I'd like to spend some time discussing what makes access different and why we believe we are operating from a position of stability and strength from a liquidity and capital perspective, we emerged from the turmoil even strong we increased deposits by $1 billion. This past quarter to $16 7 billion with approximately 90%.
Of our total deposits being FDIC insured are collateralized, we had $2 5 billion of cash and cash equivalents as of 331 2023 equal to 138% of our uninsured deposits.
We had no outstanding borrowing from our fed discount window or from their bank term funding program. We had no overnight borrowings from the federal home loan Bank as of March 31, 2023, and we had $3 1 billion of Undrawn capacity at the discount window and $2 5 billion of immediately available undrawn capacity with the FHA will be at core.
At the combined cash and Undrawn liquidity available was $8 1 billion at quarter end equal to 450% of our uninsured and uncollateralized deposits.
Unlike many other banks with significant unrealized losses on their securities and loan portfolio, we had a de minimis $7 million of net unrealized losses on our $280 million available for sale security portfolio at 331, 2000 $23 million to $7 million of unrealized loss represents less than 50 basis points of our shareholder equity.
The end of the third quarter.
Additionally, the fair value of our loans held for investment was a positive $30 million at the end of the quarter.
Way to say this is that if you mark our entire securities portfolio of loans held for sale and exclude entirely the positive mark on our entire deposit base or equity would increase.
Our favorable liquidity and capital position as a result of our deliberate decision not to extend maturity in our securities or loan portfolio and to reposition our loan backs from hybrid single family and multifamily mortgage loans to variable rate commercial and industrial allowance when interest rates were near zero.
We have always maintained a disciplined policy of pricing our laws with the appropriate rate fee structure on terms commensurate with our risk and return objectives. We also proactively established channels, where we can sell or pledge our loans quickly at or above par as a contingency plan should any unexpected adverse events arise.
Shifting to interest rate risk management, we continue to generate an above average net interest margin and grow deposits. Despite the fed's aggressive rate increase and deposit outflows for the banking industry. This quarter, our consolidated net interest margin was 4.42%.
<unk> net interest margin was four 5%.
We maintain a strong net interest margin. Despite the decline today, yes sweep deposits and I was holding excess liquidity during the quarter, our ability to maintain our net interest margin above our historical range is a function of the diverse lending and deposit franchises, we have built over the past decade.
We built our C&I lending verticals organically and scale them over time to ensure we have the appropriate operational compliance and risk management infrastructure and processes in place we acquired the clearing custody and bankruptcy deposit business was when rates were at or near zero and deposit balances. When they are the cyclical lows over time, we integrated systems and processes added talent and really.
<unk> shifts and increased sales and marketing to grow these businesses profitably. The net result is our loan and deposit franchises are much more robust diverse and aligned from a duration on margin perspective than they've ever bad at the end of the quarter approximately 57% of our loans were floating rate, 36% were hybrid five one arms and 7% were fixed.
The average duration of our loan portfolio was two years with multifamily loans, having an average of 2.6 years duration and the vast majority of our commercial real estate specialty lines and lender finance portfolios with a contractual maturity of less than three years. The average yield on our held for investment loans was seven 7% in the third.
Third fiscal quarter up 45 basis points from 662% in the prior quarter, New loan yields were 10, 1% for auto seven 9% for multifamily seven 2% for single family Jumbo mortgages and nine 2% for commercial and industrial we continue to see bank and non bank competitors pull back in many of our.
Our lending businesses and we feel good about our ability to grow our loan portfolio in a secure way with pricing and terms that meet our risk and require and return requirements. Our deposits in the quarter around and were comprised of 43% demand deposits, 46% savings and money market and 11% Cds, we issued more Cds this quarter to align that.
<unk> of our loans given the growth in net balances and a slowdown in prepayments in our single family and multifamily loan portfolios, our deposits remain well diversified from a business mix perspective, with consumer and small business, representing 48% as opposed to total deposits commercial treasury management, and institutional representing 26% commercial specialty representing.
<unk> seven <unk> fiduciary services, representing seven access security is which is our custody and clearing represented another seven and distribution partners, representing 4% the granularity and diversity of our deposits, particularly consumer savings and money market accounts provide us with tremendous flexibility to match the duration and cost of our funding to the duration and cost of art.
First of all on hybrid loans.
Ending non interest bearing deposits excluding fluctuations in access advisory services cash balances were approximately flat from December 31 to March 31, with the ending period balances down approximately 269 million to $3 2 billion, reflecting almost entirely the reduction of the Aaas cash.
Total ending deposit balances today, including those on an opex those balance sheet declined by approximately $380 million in the quarter, while noninterest bearing commercial and specialty deposits were flat, we believe that the pace of cash sorting in aaas have stabilized at or near the bottom representing five 6% of assets under custody at the end of the quarter.
Compared to the historical range of 6% to 7%.
Those advisory services as a healthy and growing pipeline of new advisory clients with 15, New deal signed with a combined assets under custody of $1 billion. This quarter. In addition to the access securities deposits on our balance sheet, we had $1 1 billion of deposits off balance sheet partner banks, approximately $680 million of deposits.
Is it other banks by software clients in our CNS business management vertical.
We continue to add new accounts across each of our deposit businesses, including consumer checking consumer savings money market and Cds commercial and Treasury management and access security since the banking failures in early March we have aggressively increased our outreach to existing and prospective clients across every deposit vertical with our experience.
The <unk> Ics product and a competitive set of Treasury management offerings, we are saying a lot of interest from clients, who are moving deposits to us our low loan to value asset based lending philosophy continues to serve us well from a credit perspective, our single family Jumbo mortgages, and multifamily loans, which represented 24 and 19% of our.
Total loans outstanding at the end of the quarter have a weighted average loan to value of 57%, 53%, respectively. Our jumbo single family mortgages are concentrated along the coast and markets, where housing inventories continue to be constrained the lifetime loss in our originated single family Jumbo mortgages, and multifamily mortgages or four basis points in less than one day.
One point respectively.
Our commercial real estate lending business comprised of low LTV lending to nonbank lenders and well capitalized sponsors is secured by single family multifamily and commercial real estate properties in attractive locations of the $5 billion of commercial specialty real estate loans outstanding at the end of the quarter multifamily was the largest segment representing 31%.
Total loans condominiums in single family, representing 23% with hotel office, and retail representing 16%, 14% and 5% respectively. We included a slide in our earnings supplement detailing the deposit balances loan to values and nonperforming loans for our commercial specialty real estate portfolio.
On a consolidated basis, the weighted average loan to value of our commercial real estate portfolio was 42% for the retail and office segment of our commercial real estate books, the weighted average loan to value was 42% and 37% respectively.
673 million commercial specialty real estate loans secured by office properties at the end of the quarter, 77% or a notes or note on note loan structures with significant subordination from fund partners and mezzanine lenders, resulting in a 37% loan to value ratio. The office exposure that isn't a day note with a strong funding partner.
<unk> is almost entirely a pairing of simplicity participation for one Madison in New York One of the best office buildings in the city. That's building a 57% pre leased and has a 50% recourse guarantee for muscle grain subject to conditional the leases based on certain leasing cashcall and other milestones.
Ultimately $80 million of the commercial specialty real estate office book repaid after the end of the March 31 quarter, we have no lifetime losses in our entire commercial specialty real estate loan book.
Our lender finance lending is comprised.
All lines of credit to non bank lenders that total lender Finance book Outstanding was $2 4 billion at the end of the quarter with real estate lender finance accounting for approximately 35% of the total lender finance portfolio and non real estate lender finance accounting for the other 65% we have a direct and our fund business and lender finance and a weighted average.
Loan to value for the lender finance portfolio was 54%, we actively monitor the cash flow and credit performance of our lender finance borrowers for loan structure and our senior position in the payment waterfall provides us with confidence that our lender finance portfolio can withstand significant stress and not result in material loss to the bank, we've never lost any money in.
The latter finance portfolio.
Auto lending business comprised of direct and indirect lending into prime and Super Prime lenders had an ending balance of $518 million at the end of the quarter, representing only 3% of our total loans outstanding.
We have reduced originations meaningfully on the auto lending due to our cautious outlook on the broader economy in used car values, resulting a net auto loan balances following by approximately $37 million in the third quarter of 2023 with an overwhelming majority of our total loans outstanding being secured by some form of collateral we believe our credit book performed.
Well through the cycle.
One of the key Differentiators that allows us to grow revenue allowance in earnings and a consistent and Safeway is a way operate a software based high touch service model for clients nationwide, whether it's through our Universal Digital Bank online and mobile platform that provides consumers a convenient and secure way to access all deposit lending and securities trading and wealth management service.
Digitally or our proprietary front end back end custody platform that simplifies the trading reporting marketing and back office functions friend of powder dry as we acquire onboard underwriting service customers efficiently east deposit lending and fee based business vertical is supported by our robust risk management infrastructure and a team of dedicated members with subject matter.
Our expertise in their business and functions the diversity and in certain instances the counter cyclicality of our businesses allow us to shift capital and resources quickly and efficiently when competitive and economic conditions change as we've demonstrated throughout our history, especially during periods of distress such as the dotcom boom and bust the great financial crisis, and most recently the Cove.
Stomach being able to pivot quickly to capitalize on market dislocations as a significant competitive advantage, particularly in a highly cyclical industries such as banking.
I'm excited about the strategic initiatives, we have across our businesses, our strong capital liquidity and profitability allows us to maintain investments in technology people and products, while others pullback, we see improved loan pricing that will help offset lower demand in some lending categories as rates continue to rise and the economy Decelerates further we will continue.
To execute and expand various operational efficiency initiatives, including business process automation offshoring.
The value manual tasks, we have already 16 significant opportunities to hire talented individuals and teams to help us incubate new businesses are augmenting existing businesses. We have also reviewed opportunities to purchase assets loans and businesses from fails or less well capitalized institutions looking to exit non core businesses and are to shrink their balance sheet.
Lastly, we will take advantage of opportunities to return capital to shareholders through share buybacks, when our stock becomes irrationally undervalued.
And now I'll turn the call over to Derek now thanks.
Thanks, Greg.
To begin 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 at access financial Dot com.
I will provide some brief comments on a few topics.
Please refer to our press release, our SEC filings and on our website for additional details.
Loan originations for investment for the quarter ended March 31, 2023, or $1 $8 billion down from $2 4 billion in the comparable quarter a year ago.
We tightened our pricing and underwriting guidelines and auto unsecured consumer and small balance commercial real estate and had lower demand in single family Jumbo, resulting in a decline in loan originations.
Q3, 2023 originations were as follows.
$178 million of single family Jumbo portfolio production $148 million of multifamily production.
$797 million of commercial real estate production $20 million of auto and unsecured consumer loan production and.
$588 million of C&I loan production, resulting in a net increase in ending C&I loan balances of $246 million.
Credit quality remains good with four basis points of net annualized charge offs to average loans three basis points of which were from auto loans that are covered by insurance policies.
Our nonperforming loans and leases were 60 basis points at March 31, a.
Basis points improvement from the December quarter.
Single family multifamily and small balance commercial mortgages represented over 75% of our nonperforming assets at the end of the third quarter.
Given our low loan to values and our low historical losses in these lending categories, we do not anticipate.
Material increases in our net credit losses.
We added $5 5 million of provision for credit losses, this quarter to support our loan growth.
Total allowances for credit losses represented 168% of our nonperforming loans at March 31 2023.
Noninterest income for the three months ended March 31, 2023 was $32.2 million, an increase of 12% compared to $28 8 million and their corresponding period a year ago.
Broker dealer fee income increased by $8 6 million.
Year over year to $13 $7 million in Q3 2023.
Due to due primarily to higher interest rates and mortgage banking income was.
Down approximately $5 million year over year to $1 $1 million as a result of the industry wide downturn in single family agency mortgage refinancing activity.
Prepayment penalty fee income was down by zero point $7 million to $2 $1 million as the increased rate environment led to decreased levels of prepayments on multifamily and commercial loans.
Lastly on equity our return on equity was 17, 4% and our return on average assets was one 7% for the three months ended March 31 2023.
Tier one capital to risk weighted assets for access Bank was 11, 6% at $3 31 up from 11, 3% in the prior quarter.
Since June 32022, net capital that axon is clearing is increased by approximately $41 million to $79 5 million due primarily to higher profitability in our securities business.
We have excess capital at the holding company available for opportunistic share repurchases and contribute to our subsidiaries if needed after.
After buying back approximately $32 million of common stock in the third quarter, we had $41 2 million remaining availability in the stock repurchase program.
That was before yesterday when the board of directors approved an additional $100 million of availability for the stock repurchase program.
It allows us further optionality and the management of our capital between internal investment accretive acquisitions and share buybacks.
Additional commentary on our loan pipeline.
Our.
That we have $33 million of single family agency gain on sale of mortgages.
$273 million of Jumbo single family mortgages $83 million of multifamily and small balance commercial real estate term loans.
Yeah.
Okay.
And then given the dynamics.
We now expect loans to grow by high single digits to low teens year over year and our net interest margin in the range of four to five to $4 three 5% for the next few quarters.
Our loan growth outlook is based on a gradual rebound in single family Jumbo mortgage originations, coupled with low prepayments in that business.
Double digit growth in our cross sell and lender finance businesses and flat to declining auto and unsecured lending.
I believe that moderating our pace of loan growth and building capital levels until the economy and the banking industry rebound is a prudent tradeoff.
Our NIM guidance reflects loans repricing higher offset by rising deposit costs.
We also expect to maintain a higher average deposit balance in the next few quarters, which will have a 10 to 15 basis point drag on our consolidated NIM.
We believe maintaining excess liquidity is prudent given the uncertain economy and industry environment.
That said we are excited about the opportunities ahead and feel that axis is well positioned to continue its strong financial performance.
With that I'll turn the call back over to Johnny.
Thanks Derek.
Greater we're ready to take questions.
Thank you and ladies and gentlemen at this time well conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Andrew Liesch with Piper Sandler. Please state your question.
Thanks, Derek you just answered most of my questions.
But on this liquidity that's on the balance sheet right now the 10 to 15 basis point drag how does that affect.
NII is that neutral right now.
Yeah, I think it's fairly neutral because we just put that money with the fed rates there may be a slight benefit from.
From it but if you look at the average cost of the marginal cost of the highest cost deposit.
I think a neutral assumption is roughly correct correct yeah.
Got it.
And then.
Just looking at the queue didn't look like there was too much change in substandard or special mention but is are you seeing anything.
And those loans that giving you any pause right now and your commentary was that you're not expecting much material losses in <unk>.
Our loan book, So I'm guessing no I'm just curious if theres anything out there that that you are looking at more closely.
No we're not really seeing anything that are that we find concerning and where we're looking pretty carefully.
I think where we are and our attachment points are still very very strong and so we're not really seeing anything that.
We feel we should be concerned about.
Got it and then Greg you mentioned that you were able to take advantage of some of the turmoil in the markets here and add more consumer deposits and probably some commercial deposits too but are there any businesses that you think you might want to expand into or anything that you see attractive out there.
Take advantage of some of what's gone on with some other banks.
Yes, we think so.
There is that we've got some some team hires that we're working on some that have accepted in certain areas that we really like.
What kind of kind of let those materialize over the next few quarters before we make announcements given that they're kind of in process and we don't want to have people getting ahead of us and things like that but.
But yes, I think there is theres not only theres not only team acquisition. So let's talk about the opportunity set there is definitely team acquisitions on the deposit and lending side in areas that previously had been probably precluded.
By the nature of the competition in that area in those areas and so those are those are are those are clearly open there's opportunities for bulk loan purchases.
In a few cases that we might be interested in we'll have to see how that goes those are very.
Boolean right you either win them or you lose them, but that could change the loan growth prospects. So we would we gave you kind of organic loan growth.
Views and so if we buy a portfolio of that would be bigger.
And.
And then there is just simply the fact that customers are looking.
More than ever.
For diversity in their deposit relationships and so we're seeing.
Very high rates of increase in the applications on both consumer and commercial deposit categories, and we're having conversations with clients that then.
It previously had been ensconced at other institutions fairly.
Fairly strongly and are now interested in either moving or diversifying. So we think we actually feel really good about our deposit pipeline right now too. It's just it just looks very good and the teams have been working weekends to open accounts and they're sort of.
We've been adding personnel there so we feel really good about those three areas.
Got it that's that's good to hear thanks for taking my questions I will step back.
Thanks, Andrew.
Our next question comes from David Feaster with Raymond James Please state your question.
Hey, good afternoon everybody.
Hey, David.
Maybe just starting on the loan growth side I appreciate the the high single digit guidance.
And that kind of jives with the slowdown in originations we saw I'm just curious how much is this by design or is this a function of just less demand in the market and just so just kind of curious some of the drivers of that and then maybe where are you still see good risk adjusted returns at this point in the cycle I mean, you you alluded to.
Do some some opportunities of jumbo single family and in some some in crystal and lender for needs, but I'm. Just curious you know as you dig into it where are you still seeing good risk adjusted returns as well.
So yeah with respect to the loan growth side clearly on the on the consumer side.
It's it's intentional.
We're just.
Well look we don't really see anything, particularly problematic happening in that book.
The insured book has a little higher delinquency, but that's also well covered by the insurance, but it's still quite de Minimis.
We just really don't want to deal with the servicing type issues, there as much and in.
And our kind of pulling back a little bit there deliberately on the other side I think it's just really a matter of more of us continuing to tighten what we're doing and so as that happens.
We're holding pricing terms, and then often tightening those terms and so that kind of lends itself fall out, but I really do think that well.
I feel reasonably good about loan growth I think we're being.
I think that's probably that's our best estimate.
At $5 $600 million a quarter of growth ish, something like that I think that's where we're forecasting next quarter, but could it be a little higher a little bit lower potentially and.
And we also are seeing some interesting opportunities that are arising and very low risk areas. As a result of some of the exits and movement. That's been happening in the banking business. So I actually think that there are good deals across the board. They just have to be structured properly and.
I mean, when we're when we're doing cross sell deals now we're looking at 12 and 13 that yields right for attachments to Rfps. Those are good deals right with great sponsors. So you know I think that the pullback in the market that we're seeing from a lot of other law.
Anders is enabling us to get better to get better sponsors better borrowers.
Later crowded at better pricing, so it's really there.
It's really a good time and a lot of ways to be a lender because you can get ahead of a of what of what those value changes are in an environment, where there's just reduced competition.
That makes it makes a ton of sense.
And then obviously there theres a hyper focus on CRE with investors at this point you know I'm just curious what you're seeing more broadly there you touched on it a little bit you know youre seeing other competition kind of pull back and you've always you bought.
Always had extremely tight underwriting standards, obviously, there's low ltvs as you can see in the presentation, you depreciate that but maybe just more broadly as you look out is there anything that you're watching from a market perspective, or a segment, maybe that you're avoiding or pulling back in and in and how are you tightening standards.
Just just curious kind of what you're seeing more broadly there.
Sure. So let me talk about it in two ways. The first way it would be how is the cash flow of the property is doing and what's the underlying economic fundamentals of each of the property types than just talk about the impact of interest rates or other valuation issues. So what's interesting about it is that the housing market just in general.
Italy, including what you see on the condo sales side, even in places like New York Miami. All these places they have essentially held in or actually gotten better in some respects. So right now the single family or condo sort of.
Issues that people thought might arise so far had been a big bust now again, when you're at 40% loan to values on those things.
It doesn't really matter that much if you get some decline in value, but we're not seeing it's not there and in fact, if it's if it's a good product and it's well place in New York, It's flying off the shelves actually so thats sort of interesting. The next office it depends on what you have on the office side to the extent we've.
Ever done that.
Done office there is if we're not doing it in an extremely structured way, where we're 15% loan to value for an office conversion with a fund guarantee from fortress or something like that then we're looking at the best buildings. So that I gave that example that one Madison building, which is pre leased to.
All of these fortune 500 companies its the best building in New York, If you want to be in an office and you got to have people come in to work you want to be there.
I think.
Office clearly in many cities and places that we stayed away from for a long time is doing terribly obviously in San Francisco L. A particularly markets that have been subject to the sort of.
The criminal negligence that you have associated with how those cities are run right from a crime perspective, or whatever people don't want to be in those places I don't Wanna be in L. A downtown.
Even our office our team wants to move because the people can't walk around the building without being bothered right. So is this sort of that kind of stuff is causing in some of those markets those problems. So.
Yes, I think you have to be obviously very careful there.
The hotel side frankly, the hotels are doing incredibly well I mean, they are blowing out their projections gangbusters et cetera, blah blah blah right. So it's just really good and industrial the same way. So the question is so you've got cash flow and those sorts of things and we always have.
Cut these projections, so you know, but theyre, even hitting their own projections right. So it's sort of interesting that looks really good now. So then the question is so you've got those cash flows theyre looking good obviously, they might not stay that way forever, but right now you're not seeing problems. Then the question is what's the value.
So then the interesting question is.
Well, so cap rates clearly in asset classes that are performing well haven't increased from a trade perspective anywhere near the way interest rates have increased. So then the question becomes well why is that and one answer is that the yield curve is obviously inverted.
When you buy these properties you are buying them over extended periods of time and there is maybe potentially over optimism not only on that cap rate, but also on the potential for increased cash flows. So what we've done in order to deal with that is basically say, we're making the assumption that all of these.
Cap rates have gone up by that and a lot more and we're going to get a significant reduction in the cash flows even though we're not seeing it right and so that results in new deals being written at 11 and 12.
From a cap from a dead yield attachment perspective, which allows us to have a saleable piece of paper at <unk>.
Cap rates that are nearly double what the appraisals are right and so and that comports with those loan to value ratio. So.
I think I think when you look at these sort of things and then obviously, we you know we cultivate a very robust set of folks that are interested in.
Being able to buy those properties in whatever form they are at and you know our opportunistic and so we have a very broad base of opportunistic clients that are always interested in taking advantage of those opportunities and so how we deal with that is we just simply.
I, just what we expect to target debt yields are we adjust.
The the advance rates and you know, we and we look for recourse and all those other things that we can do and in a market. Like this you just have more market power to do that.
So.
I think look I think that I think that is a fundamental issue is if you look if you land on us on our San Francisco Office building and you are 70% non recourse, which is something that you could have easily gotten and you basically had tenants and you.
Underwrote it at a three and a half or 4% cap rate, which is what the appraisal is that's that's a tough one right, but that's a very different thing from the type of stuff that we did so.
Now.
We were never really in that kind of market because we never really believed the cap rates right. So we had to choose kind of a different approach and I think that approach is turned out to ultimately be correct and I believe it will turn out to be correct over the <unk>.
Michael.
Okay. That's extremely helpful color and then maybe just switching gears I would I was hoping to get a status update on the security segment. I mean, you guys. It's nice to see really the earnings power of that's that business starting to shine.
I'm, just curious where are we yet and the build out there and the kind of the process.
Improvements in all of those types of things and kind of what's the road map near term for that business and any other initiatives that you have it on the horizon.
Yeah sure. So so where we are in the build out is it is great to see progress there and there hasn't been a lot of progress made but it's still it's still very early innings with the sets of opportunities we have there so.
We kind of talked about this in a number of different calls and stuff, but I'll kind of summarize it to kind of give you.
My perspective on where we are.
First on the clearing side.
What are the impediments. We have is we have a very expensive core processor that kind of charges us by transaction that we pass all those transaction costs on to the clients.
You know were decent way through the development of what we've called access Universal core which is a system that would replace that securities core.
And that would then give us the opportunity to to basically partner with a variety of different clients often larger clients in materially different ways and so part of our pricing stops us really from going out and getting bigger clearing clients. Because we just we don't have the <unk>.
Pricing to do it in a company like Pershing owns it sounds system. So we're looking to have much greater parity there on a modern system at the level of the core.
Then the other elements that are progressing nicely is that were also taking the eye. The front end application for consumers and integrating that fully with the systems that we have for the for the clearing and custody business. So that there is one application that can be utilized.
<unk> for the end clients of the <unk> and the brokers and so those clients would that.
Be incentive to bank with us through a variety of different backend resumes so that when we're.
Boarding and RIAA were boarding that that account not only on the security side, but we're also boarding at on the banking side, where boarding it for our securities based line of credit and then working to serve that entire customers need.
That's ongoing as far as development and doing well we are projecting that.
Round ended July we'll have the white label.
Platform built out entirely for the consumer.
And that will have the white label account opening as well.
For the RIAA.
And then we do have we have some test clients on the on the on the white label enrollment for the broker side, but what we really need to do there is get our ut be embedded in that but the only problem is if we basically code that up to the old core.
Than that.
That doesn't help that much so we're kind of going to roll out.
The <unk> platform to the clearing clients at the same time, we roll out the <unk>.
Russell core so I think that.
Theres some fundamental cost changes that can occur from the universal core and then a lot of opportunities on the cross sell side for.
For banking, because we get very very positive feedback with respect to our age that often last these bigger wire houses and they don't like their clients banking at their old Theyre old employer, because it just generates a connectivity that then.
That then stops that.
That hurts that potential retention of the client.
On the on the op side, we've done a lot, but theres still a lot to do.
Is that the.
The security segment is nowhere near as efficient as the banking segment, there's a ton of straight through processing opportunities. Some of those are related to.
To the the ability to get access directly to the client because through through the app right because when that happens then all of a sudden communications are made easier.
Money movement is made easier and all of those things just sort of fall in place. So those are somewhat connected but not entirely. So because there is plenty of back office stuff that are that can be improved on that side. So.
Yes.
And there's a lot of great opportunity.
Client reception is extremely good people want another choice other than schwab and with the merger and they've just been forced into schwab entirely so so.
So yes, there is.
There is a lot of there's a lot of opportunity on the on the custody side there.
For sure.
That's terrific.
Great color and are excited to see this all play out thanks.
Thank you.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, I just wanted to follow up on.
The comment you made on the prepared remarks on the <unk> 15, <unk> I think Sean AUM of 1 billion, what's the what's the timing for the for the on boarding of the dog food.
It's a little bit variable, but I think six months is a reasonable kind of view, but.
It's.
Some of this depends on their own pace.
And.
Also building better processes to move that along but I think a six month timeframe as a fair kind of.
Representation of the time it usually takes from the time a contract is signed at the time that the clients get on boarded.
I know in the past you've talked about the ability to really attract larger.
Individual raise once you kind of complete the integration of the full suite.
So are those is that kind of slowed the perspective that there are some yes.
Yes, well well so both on the on the clearing side I think that the bigger fish.
Precluded from getting into bigger fish by the current cost structure, we have I think on the RIAA side, we are having those discussions and getting decent traction with and we have been.
Plus ria's signing up part of it is the question is there often are committing 100 million of maybe several billion that they have and theyre sort of trying us out and some of it is we've sold them on not only what we're doing now, but what we're doing in the future. So.
This is there is there a multi custodial they're coming over with a certain proportion of their business. They are larger. So we are winning those and then theyre going to have us prove ourselves out and that's what we have to do and then we can increase the market share from there because a lot of.
Times it isn't like clearing is different you basically I mean, you can dual clear, but it's much it's more rare, particularly for firms in and around the size that we have but for RIS, they're often multi custodial. So when we are winning where we are winning business, but we maybe we're only counting.
The assets that they've allocated to us not the entire firm if it isn't pledged to us.
Got you. Thank you and then just really one more question on the custody side.
The commentary about the cat starting balances kind of down to.
You know a low level at this point, which I know it was expected to come off the high from a couple of quarters ago I'm curious to the degree you you kind of see the numbers.
Behind the numbers work.
Has already has put more client funds back into equities or are you seeing some of those cash balances.
<unk> invested into treasuries kind of the same way that we're seeing.
Bank.
Deposits move out of the bank system into its treasuries or otherwise to get a sense for kind of where those funds are growing.
Some of it is that but a lot of it is we have these we have some tactical allocators, who moved in and out of the market when they get different signals and so that kind of makes that movement, but there clearly has been some.
Allocations away.
From the cash side through and we control with money market funds. They are allowed to use and things like that and so what we do monitor that and there clearly is some of that but frankly.
A lot of a lot of what is that isn't the majority of what it was it really was much more market there.
Their market timing frankly.
I think they did a pretty good job of it and when the market was really going down they they basically took their money out of sat on it and then they put it back in.
So.
But look it's we haven't seen this environment for some time. So the question is is this even in a much higher rate environments. This percentage of the.
Cash assets has been sort of the low so I think it's unlikely to go lower given the tactical nature of the trading and in it it isn't a perfect substitute right. Because you do end up having to having to wait to be able to allocate a lot of those <unk> are fairly active so they don't like to wait to allocate.
They've got to wait for those trades to clear it out there's costs associated with doing that so.
Isn't a perfect substitute, but theres some of it but not most of it.
Thank you.
Thank you. Our next question comes from David <unk> with Wedbush. Please state your question.
Hi, Thanks for taking the questions. The first one is a follow up on the CRE discussion have the rating agencies, specifically Moody's expressed any concerns about your your CRE growth.
Yeah that you know Moody's did I did mention that in their most recent report.
On us.
And.
That was pretty much.
You've kind of taken that pretty much industry wide.
And yes. So we went through that we went through that with them and.
We had.
Folks that were.
There were a little bit new to the business Todd that we were talking with but yes. They did express something and you can read that.
Report that they had.
And have they been receptive to for instance, your discussion around how conservative your underwriting standards are split you know around crystal and lender finance and how of how receptive have they been to to that conversation.
I think that it was I think they were receptive to it but I think it was somewhat maxed I mean, you never know exactly how they stay at the people that were close to US said, yes, we completely understand we're going to talk to folks about it then they go up and they and they go up and they say, we don't care, where trading all banks the same way with respect to this.
Whatever so I mean, you know look I don't.
I don't put much faith in what rating agencies say or do in my investments or anything else.
You know they they basically move with.
They move with that.
The tide in the press and whatever else, but yeah. So.
Understood. Thanks for that shifting gears on the deposit side, you guys have that nice lever of having.
Off balance sheet deposits that you could you know enticed to bring on balance sheet can you remind me what the number was for comparing the fourth quarter to the first quarter in terms of off balance sheet deposits.
So it was pretty consistent it's been around the <unk>.
700 million or so for a couple of quarters.
Specifically talking about the on the security side of the business and then there is another 680 million connected to the zenith business, that's not necessarily off balance sheet.
It's not an access bank, but it is an opportunity for us that is why I think the customer base for right right. I think it is important to differentiate between those two that we control.
The securities off balance sheet those.
The pause that are through our software are at other banks and it takes an affirmative set of movement and work to move those on balance sheet and we've got some decent commitments for that but those are more it's more of a commercial pipeline opportunities, yes, there as Derek said.
Great. Thanks very much.
Yes.
Our next question comes from Edward Hemmelgarn with Shaker investments. Please state your question.
Yeah, just a couple of questions. One is what is the timeframe again on on finishing the improvements to our securities business.
You indicated numerous times.
I mean, there is so many different things going on I mean, the universal core is a is a multiyear project I mean, we will start putting clients on.
Well, hopefully we will start putting well put.
Cost city on it in six months, which will save money, but that's a massive massive projects. That's a multiyear project and then.
And then we have to get a bunch of it's a really a huge change management process, because you've got to get everybody to adopt a new systems and all of those kind of things. So it's a multi year.
Tayo, saying I mean, this and then and then I take umbrage at.
Any manager ever thinking they're done improving their operations, either so but I mean, I think just with respect to that it's a multiyear project.
No but I'm.
I'm, assuming that it's impacting sales if you are.
Your costs are higher than.
Your competitors well, yes, well the cost so all of this.
Just be clear on.
On the clearing company.
It is impacting sales.
And but there's really not a lot you can do about it if you've got a switch out your core because that's a really complex thing. So it is implemented impacting south on the custody side.
That's not impacting sales so much.
Core side of it we own the system there.
You know I think with respect to if youre talking about Gee you have so many customers that on the P&L.
You know you could onboard them faster that sort of stuff will get that sort of stuff will get worked out a couple of months, but.
Yeah, I mean, and then and then you know look we have a good system now I. Just also it's also about profitability right because each of these clients that get on boarded you bought board in RIAA it'll come with a thousand high net worth clients, we may be able to bank almost all of them.
Certain level and I think that that timeframe is the white label will be out in test beta at the end of July and then we will start working on that but then it'll be easier to put new clients on it and then you gotta get all clients to change that to.
The incentives there you know all that kind of stuff.
But probably then we've also got to get integrated asset block, we're going to watch it S block credit card into that platform as well so.
Clients can utilize their securities book to have a very low rate high reward credit card because it will essentially be it should be unless we make an operational error zero loss credit card right. So those kind of things. Those are those are long term things they are still multi year initiatives.
So, but you know what did you get anything out you've had you've hung out a long time, you can be patient a couple of more years.
You're still you're still the youngest Fry guy I mean come on.
[laughter].
Alright.
The other thing is.
I'm a.
Two part question, but I I've been I was curious about your comments about the it looks like there is there may be blocks of loans available for sale I mean, that's that's interesting.
Is it really coming from more from the blood.
Yeah.
We suspects that have failed.
Failed or yeah, yeah. Some of it now some of them have announced them.
Some of them how are the suspects that have failed I mean, there is some that are probably you could guess who they are but they are not I don't think they've made them all public.
So there's like four or five shooting around I think a couple have some possibility.
But yes, so that that could that could.
You know change.
The loan growth projections, a little bit if we did stuff there.
But you know, we'll see I mean, we bid we bid for one loan pool and got smoked spot.
I thought it was I was surprised I took it I was happy they did at that price. We wouldn't have bought it. So you know so look I mean that you don't know those things you basically do your diligence you put in your bid and it could be pulled away you could win it so.
Hum.
And lastly, I mean, you know in the past had been I.
I mean very opportunistic at least in the Oh, we have the time to read the recession that was in southern Illinois.
In taking advantage of the opportunities are out there.
Do you are right.
What's your curious about your academic outlook I mean are you.
Assuming a recession and where do you think.
Good to be a lot worse, and maybe the opportunities getting to be a lot better and if so do you have the capital to to really take advantage of all of its prison.
Yeah, I mean, I think that clearly with the profitability we have.
And the capital we have I think we have the ability to take advantage of the personnel.
That are out on the street for the businesses that we want to grow because we want to grow them in a controlled and methodical manner.
I am not really.
Projecting that.
<unk>.
That we're going to go out and you know I guess, if somebody is willing to sell me signatures book at $10 billion of loans at 50 cents on the dollar then we will have to go raise capital in the past and whatever else, but that's not on the table and that's not going to happen. So I think.
We have we've had some funds and firms approach us and say if you need.
Equity, we like to be a part of anything youre doing so there are those kind of opportunities out there I think that probably the right approach to this is to take.
Things like we always do in <unk>.
Reasonably digestible chunks without taking any one that that's so large that you know.
A deviation from the plan as.
It's something that.
Gets you into any kind of significant issue.
So, yes, I think we do.
And if we don't we'll we'll be able to find capital to partner on those things, but as I kind of said before I think of this.
<unk> items that I'm, most excited about I think that the opportunity of just the personnel who are looking to move around and our clients and are looking to move around or pretty good and then some of the loan.
Loan kind of purchase things Theres, a couple that are interesting others that are not so much and trying to see if you can couple those with people that would be interesting.
As these things kind of move around.
It could be something there but.
Look we have obviously, we have very strong earnings and so that allows us to have.
The opportunity to grow or to look at these kinds of opportunities as they as they arise.
Okay, well and once again congratulations on a good job.
Thank you.
Thank you there are no further questions at this time I'll hand, the floor back to management for closing remarks.
Right so before.
Thanks again for everyone. Joining I just wanted to kind of reiterate the loan pipeline numbers, because I think we got cut off a little bit there when Europe was talking so.
Total loan pipeline was $1 1 billion at April 24, 2023, and that was comprised of $33 million of single family agency gain on sale.
$273 million of Jumbo single family mortgage.
<unk> 3 million of multifamily and small balance commercial.
$709 million of C&I and Crystal loans.
And $15 million of auto and unsecured.
So that's it for this quarter thanks for your interest.
Thank you. This concludes today's conference all parties may disconnect have.
Have a good day.