Q4 2023 Axos Financial Inc Earnings Call
[music].
Greetings and welcome to the actual financial fourth 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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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. Thanks for your interest in <unk>, joining us today for Axa as financial Inc. Fourth quarter 2023 financial results Conference call are the company's President and Chief Executive Officer, Greg Garrett brands, and Executive Vice President and Chief Financial Officer.
Derek Walsh and executive Vice President Finance, Andy Micheletti.
Greg and Barrick will review and comment on the financial and operational results for the three and 12 months ended June 32023, and we wont 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 that are subject to risks and uncertainties and that management may make additional forward linking statements in response to your question.
Please refer to the Safe Harbor statement found in today's earnings press release and in our <unk>.
Investor presentation for additional detail.
This call is being webcast and there will be an audio replay available in the Investor Relations section of the company's web site located at Axa as financial Dot Com for 30 days.
Details for this call were provided on the conference call announcement and in today's earnings press release for.
Before handing the call over to Greg I'd like to remind our listeners that in addition to the earnings press release and 8-K. We also issued an earnings supplement for this call. All of these documents can be found on the axis mutual.
Dot com website with what with that I'd like to turn the call over to Greg. Thank you Johnny Good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access financials conference call for the fourth fiscal quarter ended June 32023, I. Thank you for your interest in access financial and access bank.
We delivered double digit year over year growth in earnings per share book value per share and ending loan and deposit balances.
As a strong results were broad based with strong net interest margins and double digit net interest income growth.
Grew deposits approximately 23% year over year, despite an expected normalization in cash sorting deposits from our custody business. We reported net income of 87 million and earnings per share of $1 46 for the three months ended June 32023, representing year over year growth of 51% and 52% respectively.
Our book value per share was $32 53 at June 32023 up 18% from June 32022.
The highlights this quarter include the following net interest income increased by 2.4% linked quarter and 23, 2% year over year to $203 8 million. We continue to generate strong net interest income growth through a combination of loan growth and solid net interest margin for the fiscal year ended June 32023.
We grew net interest income by $176 million or 29%.
Ending net loans for investment balance was $16 6 billion up three 9% linked quarter or 15, 7% annualized loan growth was broad based with growth in single family warehouse asset base lending and C&I loans, partially offset by our deliberate pullback in auto and personal unsecured multifamily and leasing.
Ending deposits increased by approximately 384 million linked quarter, driven primarily by consumer deposits our diverse source of funds enable us to grow deposits despite industry wide competition for consumer and commercial deposits.
Net interest margin was 4.19% for the third quarter down 23 basis points from 4.42% in the quarter ended March 31, 2023, and comparable to the $4 one 9% in the quarter ended June 32022.
The impact of excess liquidity on our net interest margin accounted for approximately 20 basis points of the sequential net interest margin decline, resulting in only a three basis point sequential quarterly declines not attributed to the excess liquidity.
Net interest margin for the 12 months ended June 32023 was $4 three 5% up 22 basis points from four 3% in fiscal year 2022. Unlike most other banks, we have successfully increased our net interest margin in the past 12 months.
Securities comprised primarily of our custody and clearing businesses made positive contributions to our fee and net income broker dealer fees increased 103% year over year due to higher interest rates and increased client activity quarterly pre tax income for our securities business was $15 5 million and $59 6 million for the three and 12.
<unk> ended June 32023.
Our credit quality remains strong with net annualized charge offs to average loans of only four basis points in the three and 12 months ended June 32023 of the four basis points of net charge offs. This quarter two basis points were from auto loans that are covered by insurance policies.
Double digit growth in net interest income and positive operating leverage resulted in a 43% year over year growth in our pre tax income and a 52% increase in our diluted earnings per share.
Even if you normalize our fourth quarter 2023 tax rate to 30% our diluted earnings per share were up 44% year over year, we generated a 1.73% return on assets and an 18.6% return on equity for the quarter ended June 32023.
Our capital levels remained strong with tier one leverage ratio of nine 7% at the bank and 9% at the holding company, both well above our regulatory requirements, we repurchased approximately $17 7 million of common stock in the fourth quarter. In addition to the $31 6 million, we repurchased in the third quarter to take advantage of the unwarranted.
Decline in our share price in reaction to the turmoil in the banking industry.
This brings our total shares repurchased in fiscal 2000 $23 million to $49 million at an average share price of $37 28 per share we have approximately $104 million remaining in our share repurchase authorization at the end of fiscal year 2023.
Our profitability liquidity balance sheet positioning and growth outlook, all remain favorable from a liquidity and capital perspective, we emerged from the turmoil even stronger we increased deposits by almost $400 million this past quarter and by over $3 billion in the past 12 months with approximately 90% of our total deposits being FDIC insured are collateralized.
We had $2 4 billion of cash and cash equivalents at 632023 equal to 141% of our uninsured deposits. We have no outstanding borrowings from the fed discount window or the bank term loan funding program. We had no overnight borrowings from the federal home loan Bank as of June 32023, and we have three.
<unk> 7 billion of Undrawn capacity at the discount window and an additional $3 1 billion of immediately available undrawn capacity as a federal home loan bank at quarter at the combined cash and Undrawn liquidity available at approximately $9 billion at quarter end equals to over 500% of our uninsured and uncollateralized deposits.
Unlike many other banks with a significant unrealized loss in their securities and loan portfolio, we had a de minimis $9 $3 million unrealized loss on our available for sale securities portfolio as of the end of our fiscal year, we reduced our available for sale portfolio from $280 million last quarter to $232 million the fair value.
If our loans held for investment was a negative $40 million at June 32023 equal to only 2% of our stockholders equity.
Our favorable liquidity and capital position are a result of our deliberate decisions not to extend the maturity in our securities and loan portfolios and to reposition our loan Max from hybrid FSFR, our single family mortgages and multifamily mortgages to variable rate C&I loans, where interest rates were near zero. We have always maintained a disciplined policy of pricing our loan.
As with the appropriate rate fee structure and terms commensurate with our risk and return objectives. We also proactively established channels, where we can sell or pledge our loans as quickly as a contingency plan should any adverse events arise.
Shifting to interest rate risk management, we continue to generate an above average net interest margin and grow deposits, while maintaining a neutral to slightly asset sensitive balance sheet. This quarter. Our consolidated net interest margin was 419%, while our bank only net interest margin was $4 two 6%, excluding the full quarter impact from the <unk>.
As liquidity, we built the start of the banking crisis in March our consolidated net interest margin would have been $4 three 9% above our guidance.
Range of $4, two 5% to 435% our ability to maintain a net interest margin above our historic range as a function of the diverse lending and deposit franchise. We have built over the past decade, we built our commercial and industrial lending verticals organically and scale them over time as more banks and nonbank competitors pulled out from selected asset based commercial.
Lending verticals, we have been able to originate high quality loans, while maintaining even better terms and pricing that we had prior to the bank failures. This dynamic as allowed us to offset rising deposit costs and the cyclical decline in our of our access.
Advisory services deposits.
At 632023, approximately 59% of our loans are floating rate, 34% were hybrid five one arms and only 7% were fixed.
The average duration of our commercial loan portfolio was two years with multifamily being our longest at an average of two six years and the vast majority of our commercial real estate lender finance loan portfolio, having contractual maturities of less than three years with all as floating rate other than the equipment leasing portfolio the average yield on our <unk>.
For investment loans was 7.51% in the fourth quarter up 44 basis points from 7.7% in the prior quarter New loan yields were 10, 2% for auto eight 3% for multifamily seven 4% for jumbo single family and nine 4% for C&I.
Well, we have seen a general decline in loan demand in our single family mortgage product, we continue to selectively take market share in our other lines of business ending.
Ending deposit balances increased $384 million or two 3% to $17 1 billion as of June 32023.
Our deposits at quarter end were comprised of the following 36% demand deposits, 56% savings and money markets and 8% certificates of deposit.
Our depositors remained well diversified from a business mix perspective, with consumer and small business, representing 57% of total deposits commercial cash Treasury management, and institutional represent 21% commercial specialty deposits, representing 6% <unk> fiduciary services, representing 6% and <unk>.
Excess securities, which includes our custody and clearing business representing another 6%. We grew deposits this quarter. Despite divesting approximately $71 million as deposits related to the operating and institutional accounts for digital asset companies due to recent changes in the regulatory landscape for U S banks and digital asset companies, we've decided to exit our small incubator.
Deposit gathering for digital asset companies that includes exchanges brokers and firms engaged in activities related to non fungible tokens, the granularity and diversity of our deposits, particularly consumer savings and money market accounts provides us the flexibility to match the duration and cost of funds to the duration and cost of our adjustable on hybrid.
Yes.
Ending noninterest bearing deposits, excluding fluctuations and access advisory services cash were down slightly from March 31, 2023 to June 32023, with the ending period balances down approximately $275 million to $2 9 billion, reflecting almost entirely the reduction of day as cash.
And the exit of the digital asset deposits total ending deposit balances at access advisory services, including those on and off access as balance sheets declined by $188 million in the quarter, while non interest bearing essentially remained flat.
The pace of cash sorting and are a as deposits as slowed significantly declining sequentially in the last quarter, we believe that the pace of cash sorting and the advisory service business has stabilized at or near the bottom representing approximately four 6% of assets under custody as of June 32023, compared to the historic range of 6% to seven.
Percent in addition to our access security as deposits on our balance sheet, we had approximately $660 million of deposits off balance sheet partner banks and another $700 million of deposits held at other banks by software clients in our zenith accounting and business management vertical we are beginning to make progress transitioning deposits from Z as clients too.
Bank through June 32023, we have successfully transitioned deposits from a few accounting firms to access so far we continue to believe that the business management market represents an attractive long term strategic opportunity for deposits and fee income.
We continue to refine our marketing strategies and add new accounts across many of our deposit businesses, our strong liquidity and capital position makes us an ideal banking choice for consumers small businesses and commercial deposit clients.
Our prospect pipeline for <unk> fiduciary services has increased with the rise of bankruptcy filings. Additionally, we have added new team members and existing and new commercial deposit verticals. We expect those new team members to contribute more meaningfully to our deposit growth in the next six to nine months.
Our low loan to value asset based lending philosophy continues to serve as well from a credit perspective as witnessed in the sequential decline in our nonperforming assets to total loan ratio and our low net charge off ratio this quarter, our single family Jumbo mortgage and multifamily term loans, which represent 25% and 13% of our total loans outstanding.
Landing at the end of this year have a weighted average loan to value ratio of 56%, 54%, respectively. Our single family Jumbo mortgage as a concentrated along the coast in markets, where new and existing housing inventories are constrained and demand generally exceed supply.
Our lifetime losses in our originated single family Jumbo multifamily mortgages or four basis points in less than one basis point respectively.
Our commercial real estate as specialty lending business comprised of low loan to value lending to non bank lenders and well capitalized sponsors is secured by single family multifamily and commercial real estate properties in attractive markets and locations.
Of the $5 3 billion of commercial specialty real estate loans outstanding at June 32023, multifamily was the largest segment representing 33% of total commercial specialty real estate loans, while hotel office and retail represent 17%, 10% and 5% respectively on a consolidated basis, the weighted average loan to value of our commercial.
As the real estate portfolio is 40% for the retail and office segment of our commercial specialty real estate books, a weighted average loan to value was 41% and 36% respectively of that 552 million commercial real estate loans secured by office properties at the end of the quarter, 75% or a notes or note on note structures with <unk>.
Significant subordination from funding partners and mezzanine lenders, resulting in a 36% loan to value ratio. The majority of our commercial real estate loans secured by office properties are located in metro volatile areas that have not seen a meaningful negative impact from work from home and other dynamics, we have no office exposure in downtown Los.
Angela San Francisco downtown Seattle or Austin.
We have incurred no lifetime losses in our entire commercial specialty real estate loan book.
Under finance business is comprised of lines of credits of nonbank lenders. The total lender finance loans outstanding were approximately $2 6 billion as of June 32023, with real estate lender finance accounting for approximately 33% of total lender finance portfolio and non real estate lender finance accounting for the other 67% we have a <unk>.
Correct, and a debt fund partnership business and lender finance and the weighted average loan to value for the lender finance portfolio was 54% loan structure and our senior position in the payment waterfall provides us with confidence that our lender finance portfolio can withstand the stresses and not result in any material loss to the bank.
Our auto lending business is comprised of direct and indirect lending to prime and Super Prime lenders ending balances declined by $42 million linked quarter to $476 million, representing only 3% of our total loans outstanding we continue to price according to our risk appetite, but new auto loans, yielding 10, 2% this quarter the average FICO score for <unk>.
Ours in our auto lending business as 759 with lower FICO loans being secured by credit insurance with an overwhelming majority of our total loans outstanding secured by some form of collateral we believe our credit will perform better through the cycle.
We continue to run an efficient company with high returns, while investing in new products technologies and businesses the efficiency ratio for our banking business was 45, 1% in the fourth quarter of 2023, and an improvement from 46, 7% in the corresponding period a year ago from a product perspective, we have hired a few teams to help us incubate new land.
And deposit verticals, we added to our fund finance team. This quarter. We ended the quarter was $74 million of capital call loans outstanding our pipeline for capital call lines continues to increase as borrowers look for robot reliable lenders in the marketplace, we like the credit and duration risk profile for the capital call lines, and we anticipate generating deposit.
Our relationships with those borrowers.
From a technology perspective, we continue to invest in the next version of our consumer banking platform, what we're calling universal digital bank to point out to add new features and functionalities and a better more integrated user experience across all consumer lending deposits and securities products, we envision that providing a more holistic financial services platform will lead to better user engagement.
So on client retention.
Label banking for registered investment advisors, and introducing broker dealers continued to make progress with a beta launch expected in the next six to nine months.
Most universal core our proprietary securities clearing platform is also moving forward. This as a complex multi year development that as the potential to significantly reduce costs in our securities operations and enhance our ability to win new business. We recently added a new senior executive from Pershing to augment the clearing sales team and execution.
Initiatives that we have it acts as a clear we're excited about the long term cost savings and expanded capabilities that acts as universal core could provide once it is fully developed and implemented.
As those clearing which includes our correspondent clearing and registered investment advisor custody business continues to provide a positive contribution to access fee income from the securities business doubled year over year and this quarter, while pretax income increased by $16 million. The primary driver of growth in fee and pre tax income from <unk> securities as higher inter.
As rates total deposits that acts as clearing were $1 6 billion at the end of the quarter down from $1 9 billion in the prior quarter. The decline is consistent with our client cash sorting, but other competitors have experienced in response to rapid increases in the fed funds rate of the $1 6 billion for Max those clearing approximately one.
1 billion was on our balance sheet and $600 million was held up partner banks.
Pipeline for new <unk> clients remains healthy comprised of 43 advisory firms with $2 1 billion as a combined assets under custody the number size and combined assets under custody of the access advisory service pipeline all more than doubled from a year ago once cash balances stabilize and grow as those clearing will become an even more valuable asset.
Uh huh.
Our loan pipeline remains solid with approximately $1 2 billion as a consolidated loans as of July 24, 2023, consisting of approximately $50 million of single family agency gain on sale mortgages $345 million of Jumbo single family mortgages $66 million of multifamily and small balance commercial real estate term loans.
$751 million of C&I, and commercial specialty real estate loans and $12 million of unsecured consumer loans.
We remain confident that we'll be able to grow loan balances by high single digits to low teens year over year and maintain our net interest margin in the range of $4 two 5% to four 3% to 5% for the next few quarters. Our loan growth outlook is based on broad based increases in our asset backed lending lender finance commercial specialty real estate and capital.
All lines, partially offset by declines in multifamily small balance commercial auto and personal unsecured loans.
Our net interest margin guidance reflects loans repricing higher offset by rising deposit cost. It also assumes that access advisory service deposits are relatively flat for the next few quarters, plus or minus $100 million. We also expect to gradually reduce our excess liquidity over the next few quarters, which will reduce the 20 basis points of Consol.
Sedated net interest margin drag this quarter to between only 10 to 15 basis points of net interest margin drag in this coming quarter, we believe maintaining some excess liquidity as prudent given the uncertain economic and industry environment. The combination of solid loan growth and relatively stable net interest margin gives us confidence that we.
We will generate moderate sequential net interest income growth in the second half of calendar 2023.
I am proud of the results we delivered over the past year during an uncertain and volatile backdrop, we overcame expected and unexpected challenges by staying focused on executing our strategic and operational initiatives are highly profitable and diverse enterprise with strong liquidity capital and returns allows us to reinvest in our business, while having the optionality to take.
<unk> of market dislocations through organic and inorganic means we will deploy our capital judiciously between internal investments accretive acquisitions of business and talent and opportunistic share buybacks now I will turn the call over to Derek who will provide additional details 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 as 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 our website for additional details.
Total noninterest expenses increased by $1 4 million or.
Or one 3% to $112 $5 million in the three months ended June 32023, compared to the quarter ended March 31 2023.
Salaries and benefits increased by $1 $5 million, primarily as a result of new team member additions that Greg alluded to earlier.
Advertising and promotional expenses were down by $3 7 million or 31% on a linked quarter due to a reduction in deposit marketing expenses from elevated levels in the March quarter.
We expect noninterest expenses to grow sequentially at our historical average growth rate prior to the fourth quarter of 2023.
Our income tax rate was 25, 3% for the fourth quarter ended June 32023 down from 34% in the third quarter of 2023 and.
29, 2% in the fourth quarter of 2022.
Our income tax expense in the fourth quarter of 2023 included $5 $2 million of primarily onetime tax credits equal to approximately eight.
Per diluted share.
Going forward, we continue to expect our annual income tax rate to be between 29 and 30%.
Lastly, our return on equity was 18, 6% and our return on average assets was 173% for the three months ended June 32023.
For fiscal 2023, our ROE and ROA or 17, 2% and 164% respectively.
Tier one leverage capital to average assets was 896% at June 32023, compared to $9 two 5% at June 32022.
Excluding the $1 2 billion of excess cash held at June 30, the ratio would have been nine 5%.
Tier one capital to risk weighted assets for access Bank was 11 six 3% at 632023 up from 11, two 4% in the corresponding period a year ago.
We continue to hold excess capital of Axa as financial and access bank, even after our opportunistic share repurchases solid loan growth and continued investments in fiscal 2023, our strong liquidity and high returns position us well to maintain consistent profitable growth.
With that I will turn the back call back over to Johnny.
Thanks, Derek operator, we're ready to take questions.
Thank you.
At this time, we'll conduct a question and answer session.
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Our first question comes from Andrew Liesch with Piper Sandler. Please state your question.
Good afternoon guys.
Greg just wanted to talk about the fund finance team that you are.
Members that you picked up I guess, how well what sort of growth are you expecting out of this business. I mean, these are pretty safe loans. So what sort of concentration would you like it to be as far as the overall portfolio overtime.
Yes.
We put in our business plan that we would achieve a.
$1 billion of Outstandings over this fiscal year.
The pipeline is very strong obviously because of the nature of the competition in that business.
Obviously, having unrelated issues. So there's a lot of opportunity in the market right now we're.
We're getting a lot of looks.
And frankly, we are we know a lot of the folks that are involved here because we.
We lend to them on the asset level side. So it's a very familiar relationship they're familiar with us.
The difference is as that frankly, those facilities often had.
Economics were not favorable but with the exit of so many.
Competitors in that market.
It allows the economics to move to a place that reference rate the fed funds rate plus the exit as allowed that business to come into a place where we believe that it is clearly a low risk business and now the return as in a place that makes it desirable.
Got it.
And then just shifting gears to the margin a little bit just looking at asset betas as well as deposit betas and how they tracked over this tightening cycle based are versus your initial expectations as the as.
As a beta of one stronger than the other and how do you think they're going to perform here with this latest rate hike.
I think I think we're going to be essentially flattish with respect to that so I think we've almost gone.
We really have we obviously have had NIM expansion in the rate cycle. So that would I mean, obviously not telling anything you don't know, meaning that we had higher level asset betas, but I think that also.
That also as reflective of our continued shifting Max right and so we yes we.
Obviously have us on the side of asset betas that are.
That are lower obviously, the five one arms single family.
And then the multifamily side now in each case, what we had done on the multifamily side as we started doing three one arms several years ago. So we have.
A very significant portion of that portfolio repricing next year, it's about $1 billion as that that's going to reprice and we've given data on that before so that that is a drag that will help and then obviously almost all of the new loans of course, and we're still growing our coming in at much higher rates and in most of.
Or floating as well so I think we yes, we gave NIM guidance.
Where where that was and I don't really expect that to change.
Significantly.
With respect to the.
This recent raise hike.
Look we have been adding dip.
Deposit oriented sales teams that are focused on treasury management side and cap call facilities do come with side as the depository relationships and they can be more or less heavy depending on the type of fund youre dealing with but.
We are actually having.
Good success in some of the commercial deposit verticals too so it really.
All those good things get blended together, but I think we feel we feel pretty good about where we are and I don't think were expecting.
A lot of NIM compression there may be a few basis points here and there, but but I don't think anything particularly substantive.
Got it though as multifamily loans that reprice higher next year any credit concerns with.
The new rates are going to be going to.
Generally no and we've been going through them, but one of our strategies was that what we did as we were.
We basically chose to.
Do those loans at lower loan to values that average in the market. Those loans are in that portfolio are all personally guaranteed so I know that the standard in the market for a lot of banks were to do those loans are non recourse, we never did those loans as non recourse.
And so and then what we also did as we often we're involved in.
And where there is substantial property improvements and those so what we were trying to do as find loans that after the improvements happened.
And the low Ltvs that we had that we would still have double digit debt yields so.
Look it's possible that some folks have.
Cash flow constraints in other parts of their portfolio, we feel pretty good about that.
It doesn't mean there'll be zero.
But obviously you know our notes are very saleable and Theres, a very active market.
Four.
For folks that want mulch.
Multifamily properties that are.
Fixed up and and.
We're at 50% of prior value so.
I don't I don't I expect that if there is there as constrained people will sell that and the other thing we're doing as we're offering swaps.
Swaps to folks too so we're going in proactively saying to borrowers.
The long part of the curve is.
As significantly lower we have an active in and.
Reasonably sophisticated swap capability so.
If a borrower wants to actually save money, so I'll have to lock themselves into a lower but longer rate, but that often can make a difference and help with that with cash flow as well. So we're looking at that and we feel we feel pretty good about where we are just based on the nature of how we structured those deals.
We really did not.
Hey in the.
That three high threes, low, 4%, 70% LTV five one arms space, we shortened everything up we lowered the ltvs, we always had personal recourse. So I think all those things should make it hold up better than than average.
Got it thanks for taking the questions I will step back thanks.
Sure.
Your next question comes from Gary Tenner with D. A Davidson. Please state your question.
Thanks, a couple of questions.
I missed your comments in terms of the Zenith business management product did you say how much you've successfully brought over to date.
In the product and in the past have you as you've talked about it have you talked about.
Any deposit amounts that are currently kind of linked to that product.
Yes, there's about there's about $700 million that are just simply accounts that that or.
Our noninterest bearing accounts at other institutions that flow through the software.
And so the software is really that as those accounts are really just sort of I don't know calling them dummy accounts, maybe thats not the right word, but theyre, just sort of completely and only accessible to the software and they just happen to be at other institutions.
We bought that software, we've probably got.
30, $40 million of that now, but but.
But we also have gotten some pretty big commitments from as the firms some of the firms to move the issue as the timing of the moves are there.
They're just they're slow.
The software we got it for.
I think a good price.
We're spending time kind of printing it up and but I think it as it's an interesting market opportunity and then.
And then we've got to move the clients in those and the <unk>.
As sub accounts in those.
That are at those other institutions are extensive so any one client might have hundreds of accounts. So just the process of moving all of it is as pretty extensive but we're hoping to accelerate at this this year.
And we think we think over time the product as a pretty neat product maybe even the offer.
To some of the registered investment advisors, who might want to take over some of the administrative functionality for some of their high net worth clients and they'll have a software to do it that's that.
That's helpful and effective.
Thanks, and then in terms of kind of balance sheet management, you talked about reducing excess liquidity a bit AUM.
The next few quarters.
You gave kind of an outlook for.
Low double digit loan growth for the full year, So I guess.
Two questions to that one as.
In terms of reducing liquidity are you are you thinking of it as it could be the kind of throttling back of deposit generation.
Or other use of some of that cash because you'll have any debt.
Pay down.
Yeah, I think that's it.
We just have we've run it at a very significant excess liquidity, we're not talking about any significant scaling back.
Maybe a couple hundred million dollars, but we will still be well above.
Where we were prior to the.
The recent events at banks.
Okay got it and then the funds finance business.
I'm thinking about $1 billion outstandings over fiscal 'twenty four.
Is that a meaningful contributor this calendar year.
Yes.
But to the outlook.
Yeah, We think we'll we think it'll be obviously.
Alright to judge this exactly but we forecast there could be several hundred million dollars.
Closings and fundings this current quarter and that business, where we're in we're in the documentation phase for hundreds of millions of dollars of that business now and so the timing of that as those are fairly complex deals to paper, but it's also a very well differ.
Find.
Set of documentation and whatnot, so I'm pretty sure they will close this quarter they won't be they won't contribute much from a average.
Income, but they will be I think on the books by quarter end.
Great if I could ask one last question.
Access as obviously over the last several years, but a lot of resources into kind of building its own core in the Universal Digital bank.
Strategically longer term with all the talk about AI.
Could you talk about any kind of applications within the banking industry and anything you've thought of.
Even though it may be way out there down the road in terms of how it could be applied in your company for sure.
The way I talk about AI with respect to how we think about it as a company as the first.
<unk> of any AI oriented process as the digitization of the process. So everything has to be digitized from a data perspective, and it has to be stored in a way that's accessible.
And then the next component usually as to create rules based engines that are associated with that and essentially those are much more of the traditional a series of if then statements right. So take a simple process.
Depositing a check and holding the check.
Our real estate as Tien Tsin, who will say well. This client has been here for a period of time their behavioral scoring as is at this level. They have as they have a very high balance they have a securities account they can clear a check without it being held up to a certain amount.
Then what you do as you take the AI or machine learning model and you run that model in parallel to the rules based engine and the real estate as Tien tsin as being updated and modified by risk analysts and they're predicting trying to predict what that is once the machine learning AI model starts to.
Get better then there was a question whether you run both or you turn one off and so that's one way of looking at these decisions, which tend to be these heavy data Orion decisions from a from a risk modeling perspective and so.
That really much more applies to homogenous type of oriented decisions right, where there's there's a set of transactions I mean transaction approval. As another example, right rules based engines are replaced by by artificial intelligence that has.
As a much more unstructured data set and allows you to do that.
There as there is obviously the ability to utilize.
Certain of these products to create the frameworks for certain kinds of reports and things like that.
Internally I view those as as much of a danger as a help because frankly I've I've had a few discussions with everyone about how.
There is there as the information security concern with certain elements of those software as if you don't if you use them properly and then also they often are just simply aggregated information so they have to be really checked.
That way and then obviously over time marketing analytics can also be impacted by those sort of tools. So anything that really hasnt analytics capability can be utilized to look at that.
I will say that I don't expect over the next couple of years to have some amazing cost savings associated with that but.
But I do.
I do think that the nature of how we think about preparing for all of these elements, which is digitization of all activity and then rules based engine that apply there then allow the AI decision, making to come in behind that.
Thank you.
Thank you.
Our next question comes from David Feaster with Raymond James Please state your question.
Hey, good afternoon, everybody Hi, David David.
Maybe just looking.
Looking at its great to see the increase in originations appreciate your commentary on the growth outlook. If I was kind of hearing you correctly.
Just curious on what Youre seeing on the demand front it almost sounds like some of this growth as maybe competitors pulling back because they have liquidity issues versus a real increase in demand I'm just curious.
How are you seeing it from your perspective, and then maybe within Crystal just are there any specific asset classes or regions that youre seeing notable strength.
So the first question I would say as absolutely. Yes, we are seeing very much that way, where borrowers had term sheets at institutions that are subject to.
Liquidity issues or.
Things like that that are saying, we are basically shrinking and so that is absolutely happening and so I would say that the benefits that we have I mean, obviously, we're relatively small in fact, where we're growing but our competitors in certain areas like lender Finance for example, where Pac west and Western Alliance right.
So.
Those that type of.
That type of <unk>.
Competitive dynamic as obviously beneficial to us.
Pac West sold that book that was their best book.
And those clients are all now those are clients that we all competed for and Theyre. All now add a private debt fund alright, including so private debt funds that have businesses are now at other being learned to buy other private debt funds, who are there competitors right, who bought loans at a discount and <unk>.
Don't even intend to renew them right. So there is that sort of dynamic that's going on at the mine at that smaller.
Segment level.
Yes.
I would say on the commercial specialty real estate side that multifamily is still going very strong but this the competitors that are out there are just fewer right. So the ability to.
Yes, just be able to take and basically get better terms is really.
There and.
We're doing a deal it was I've got 40% loan to cost deal in a great area.
<unk>.
Yes, we're looking at it and I went back and just said you know what.
We're just going to get.
We normally wouldnt get we'd be at that 40% loan to cost there.
As a potential for recourse from.
A party that normally you wouldn't get it and we normally if you ask for that you would have been our competed by many other banks, we asked for it and they came back and after a little haven't been Han gave it to us so.
Even though we were we were just able to secure that above and beyond and I thought the 40% loan to cost was good but I wanted to make sure in case there was some liquidity issues that we had this extra guarantee and we're able to get it. So that's sort of happening all the time and so it's actually I think a really.
As there is always the case right when when nobody when people can't land, that's always a good time to be a lender.
I think it's actually a really good time to be a lender right. Now now you obviously have to be careful because.
We're embedding in our assumptions that there is going to have to be a significant reactivation of most all commercial real estate.
And so that's just something that you know.
You've got to take into consideration as you're looking at these things.
Okay. That's helpful. And then maybe just kind of looking at your deposit.
The breakdown by lines of business. It looks like we saw pretty decent decline in the commercial Treasury management I was just curious what are you seeing there in some of the underlying dynamics behind that and would you expect I mean as that stabilized here thus far in in.
In the quarter.
Yes.
Just curious what you're seeing there yes.
As we did if you if you look the Aaas deposits, we put a slide in the supplement with respect to that and then we did we had an incubator effort around the digital asset side, and we decided not to pursue that so there were there was deposits as left.
There for that quarter.
And then there is also there is also I think actually if you look at it the rates actually have been actually stable to going down in that commercial deposit side. So to the extent that there are folks they've got too aggressive with their <unk>.
<unk> rate request, we've been allowing them to exit so we actually have been growing and improving the quality of that base, but we also that sometimes as a rate volume trade off so we feel pretty good about the ability to continue to grow.
As deposits some of it some of these things are idiosyncratic, we had a big bankruptcy case that it sat with us for years.
That was it.
As a million dollar swing so it's nothing there's nothing systemic and.
We're actually having really good traction on.
On the commercial deposit side and in HOA and a variety of other verticals.
Okay. That's great and then last quarter, we had talked about some potential opportunities coming out of out of the March failures.
I know you've done some hiring I'm. Just curious is there still anything that you are considering or as that kind of shelved for now and just are there any types of portfolio acquisitions or even beyond the bank failures that you are considering as maybe a way to accelerate expansion or segment build out.
We're still.
We're still interviewing lots of folks and different segments that we like.
We hired some folks in the fund finance side, we hired some folks in the premium finance side, we like those segments. We think those are very high.
Safe and good segments from a just from a risk perspective.
<unk>.
We are building our.
Are slowly building, our offering around what our private wealth side would look like and I think we've we've spent a lot of time around looking at some of their first Republic models and things like that and.
We're working through the question of how successful those models be if theyre not.
Giving away.
<unk>.
Mortgages and I think that's a very interesting question. So there's been some we've been frankly, we've been close to some teams where we thought we had a shot at and bringing them on and then there's been some very aggressive competitive.
Competitive guarantees that have come out of the market that we think we're overly aggressive sort of things like two year earnings guarantees.
On prior earnings and a model that as we feel like as broken like the model of will give you a two 5% mortgage and you put a 30 year deposits with US right. So if you're a guarantee two years of earnings to folks who had that model I think youre going to be sorry, So we're taking on.
More measured approach and a lot of the clients, particularly on the lending side and on the deposit side are gradually coming to our existing team, but we are we are increasing.
<unk>.
The team both on the deposit and the lending side.
And we're going to continue to do that I think.
Frankly, the opportunities not over because what everybody is doing now right as.
Well, we've always offered people is the ability to have a very entrepreneurial institution with great technology that can quickly attend to.
Unique client problems and and basically work with clients and be very proactive that way and a lot of the institutions that had failed frankly had components of that and they failed for reasons completely unrelated to those components. So those clients are those people are now at places.
Where I talked to a lot of them and they're very unhappy where they are but they've been giving guarantees and so some of the discussions are hey look I'm going to stick. This out because I am getting paid a lot to do nothing right now, but no seriously, but yes.
Got it got lapping in here, but that's as discussion, but what I, what I don't get paid to do nothing anymore. Then I want to talk to you. So I think theres going to be a continued.
Movement, but.
We're not going to be coming out I don't think in saying, we hired 100 people or something like that I think we're going to be hiring threes, and fives and tens, maybe tens and and moving along.
To do that I mean, frankly, we really we really don't want to grow I mean, we're growing assets at a level that we think is prudent given the size of.
The diversity of what we're doing so if you actually look at each individual line of business. It is not growing that much in the quarter or even the year, we have a bunch of new stuff, we're doing and we have a lot of new deposit folks coming onboard to who are making an impact so we'll be doing.
More I think more aggressive hiring than we normally would but not the type of hiring do you have seen.
From some other institutions.
That's helpful color. Thank you.
Sure.
Thank you. Our next question comes from Michael Perito with <unk> W. Please state your question.
Mike Michael Perito double your line is open. Please go ahead.
Yes.
Hey can you guys hear me okay.
Hey, Mike Yeah, Yeah, sorry about that.
Thanks for taking my.
My question good afternoon.
I don't want to.
Take it too far here you guys answered a lot of my questions are already maybe just two quick quick ones.
Just on the digital asset group.
Just to make sure I heard you correctly did you say that you have exited that business or exiting that business.
We've basically we started a little incubator that was looking at a few clients and we had done some software related work to it.
We brought a few clients onboard but.
We've collectively just decided that it's in.
Until there is better regulatory framework around it we're not going to really pursue it further and so we're kind of exiting a few clients that we had there.
So theres a little bit those were all noninterest bearing.
Werent, particularly as substantial but.
We really didn't plan to lever those deposits anyway, given their volatility and I.
I just think it's just with everything going on with how the FCC as looking at these things and stuff the exchanges and everything at this we really need to just get.
We need to get better clarity around what the future is going to look like there from a regulatory perspective and.
And then maybe look at it but I don't know.
That makes sense, yeah, no that makes sense and does that include like operating accounts to for digital as the companies are.
Operator.
As a whole asset excluded all of it basically perfect.
Thank you for clarifying.
And then secondly, as just a really simple question.
Yes, I appreciate the kind of the micro guide provided.
I look at where your consensus expectations were for fiscal 'twenty, four I think coming into the quarter. It was like $5.18. Obviously, you guys earn more than that this year I mean environment aside as your expectation to grow EPS in fiscal 'twenty four year on year at this time either.
I mean I'm guessing the answer is yes.
No nothing.
That's a good question I mean, I know given how frankly that might that would normally be an easy answer, but I think maybe a lot of banks don't give that answer yes, I certainly intend to.
You know obviously you can't make promises with respect to those answers there's a lot to work out but I do expect that to be the case I think the environment is very very good for us right now and I think that.
We're positioned with probably some of the desk relationship with nonbank lenders, who are interested in continuing to work with us as they are becoming more and more relevant in the market. They are taking share.
We are a part of that.
We are getting great people, who otherwise were embedded in organizations that they wouldn't have left.
And we're having really good momentum on the deposit side, we've done a lot on the attack.
Side, and I think that we can do do that.
This quarter was obviously the tax rate.
You guys have to pay attention to that because that tax rate is going to go up next quarter.
So I would say that.
Frankly, the next court next quarters, you're going to have to be careful with forecasting but I think we've said we think we can grow.
Net interest income.
Moderately throughout the year and.
And yes, so I think that that's that's that's certainly as that expectation and then if we get rid of the drag as we get rid of the drag of some of those hybrid loans re pricing then I think we're going to be in.
In really good shape, because that is the only thing that would prevent us from really taking getting the full advantage of the asset growth that we think we're going to have.
Great. Thanks, and then maybe just one last one just on liquidity just to follow up on an earlier question.
I mean.
I dare to say that that's great clarity, maybe as a little bit better than it was a year ago right, but I mean, I think we could probably all agree that we're probably closer to the top of this cycle.
Then then the bottle and then at some point does do you guys you talked about your mix of loans and how it is geared towards hybrid as variable. Obviously you guys carry a lot of cash in the bond books fairly small this as surgery incredibly well.
18 months.
But does it get to a point, where you maybe look to shift the duration a little bit I mean, nothing major but is that something that conversation you guys have given.
Given where we are in the cycle or or or now.
I would say that what our approach would be more to have floors on on variable rate loans, and then you might say well those loans will pay off.
If if rates go below those floors.
And I think then that's a very defined problems that we can deal with we have good origination capabilities and obviously the ability to negotiate floors.
So I think that's a better approach.
Look I think it's it's a very difficult is the reason why it's a very difficult question from my perspective about look I in general believes that rates will stabilize or that were more at the end of the tightening cycle, then we're not but theres also.
It depends on what happens from a physical perspective right. If we had if we had a change where the fiscal stimulation started to come back in as fighting the fed which it already has been right.
It's still there you could end up I don't think it's it would be outside the realm of what should be prepared for that you end up with.
Longer higher for longer now.
And I think we have to prepare for that probability so I'm not a big fan I look and I get it I mean, I think you could be the big hero.
If you did that but I think what we've decided to do as have have shorter duration assets and we also have the ability to move our with a very limited CD book, we have the ability to reprice deposits really quickly and so.
We're going to try to manage it.
More that way rather than try to guess.
Top of the interest rate.
Cycle.
Our clients they want to do it we will obviously have the opportunity for them to use the swaps and they can take advantage of the lower part of the yield curve as they want so if somebody wants a 10 year fixed rate loan now they can get it as a cheaper price than a variable rate fair enough. They can do that here. They are just going to be stuck with that rate, which may not be too bad.
As for 10 years, but it depends.
And their mindset.
But we won't have that will have a variable rate.
Yeah Okay.
No that's great I appreciate all the color thanks, guys.
Thanks, Mike.
Thank you there are no further questions at this time I'll hand, the floor back to Johnny Lai for closing remarks.
Great. Thanks for Everyones interest, we'll talk to you next quarter.
Thank you and with that we conclude today's call all parties may disconnect.