Q2 2024 Axos Financial Inc Earnings Call
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Greetings and welcome to the Axon financial incorporated Q2, 2024 earnings call and webcast.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Johnny Lai Senior Vice President corporate development and Investor Relations. Thank you Johnny you may begin.
Thanks, Alisha and good afternoon, everyone and thanks for your interest in absentia, joining us today for the actual financial Inc. Second quarter 2024 financial results Conference call are the company's President and Chief Executive Officer, Greg <unk> branch.
Executive Vice President and Chief Financial Officer, Karen Walsh, and exactly executive Vice President and Finance Andy Micheletti.
Greg and Jeff will review and comment on the financial and operational results for the three and six months ended December 31 2023.
And we won't be available to answer questions. After that his 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 looking statements in response to your questions.
Please refer to the Safe Harbor statement found in today's earnings press release and in our 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 access financial Dot Com.
These days.
Details for this call were provided on the conference call announcement and in today's earnings press release.
Before handing over the call to Greg I'd like to remind listeners that in <unk>.
And to the earnings press release and 10-Q, we also issued an earnings supplement for this call with additional information regarding the FDIC.
On an acquisition.
All of these documents can be found on access financial Dot com.
With that I'd like to turn the call over to Greg.
Thank you John and good afternoon, everyone and thank you for joining us I'd like to welcome everyone to access Financial's conference call for the second quarter of fiscal 2024, and then December 31 2023. Thank you for your interest in access financial we.
We delivered outstanding results generating double digit year over year growth in earnings per share book value per share ending loan balances for a sixth consecutive quarter.
Strong organic loan growth and deposit growth coupled with further net interest margin expansion resulted in double digit net interest income growth year over year and linked quarter annualized we grew deposits by approximately $638 million linked quarter. We reported net income of 152 million and earnings per share of $2.62.
Three months ended December 31, 2023, representing year over year growth of 86% and 94% respectively.
Excluding the one time gain and loss provision associated with the FDIC loan purchase our non-GAAP adjusted earnings per share increased by 15, 7% year over year to $1, 56%, our tangible book value per share was $33 45.
At December 31, 2023, 25% from December 31, 2022.
Highlights for this quarter include the following.
Ending loans for investment balance net of discount or $18 5 billion up 8% linked quarter from 32% annualized.
The FDIC loan purchased ending non purchase loans held for investment increased by $443 million linked quarter or 10% annualized growth was broad based with Chris for real estate and non real estate lender finance equipment leasing and fund finance offsetting lower origination volumes in single family warehouse and higher payoffs in <unk>.
Commercial specialty real estate, and then deliberate run off of our auto book.
Net interest margin was $4 $4 five 5% for the first quarter ended December 31 2023.
<unk> 19 basis points from 436% in the quarter ended September 32023.
Nine basis points from 449% in the quarter ended December 31 2022.
Excluding the benefit from the FDIC loan purchase our consolidated net interest margin was 436% in the quarter ended December 31 2023.
So security is comprised primarily of our custody and clearing businesses had another strong contribution to our fee and interest income.
Dealer fee income increased 27, 6% year over year due to higher interest rates and increased client activity advisory fee income increased five 4% year over year due to higher mutual fund fees and higher average assets under custody quarterly pre tax income for our securities business was $10 8 million in the second quarter of 2020.
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Our credit quality remains strong with net annualized charge offs to average loans of two basis points in the three months ended December 31, 2023, the majority of that two basis points of net charge offs. This quarter from auto loans that are covered by insurance policies with proceeds from those insurance policies accounted for as CFO.
We completed the purchase of two performing commercial real estate and multifamily loan pools from the FDIC with a combined unpaid principal balance of approximately 100 125 billion up 63% of par value.
We recognized a $65 million after tax gain and increased our allowance for loan loss by $75 million on the purchase in the quarter ended December 31, 2023, we believe this opportunistic purchase will provide incremental net interest income and after tax income over the next several years I will provide more detail regarding this transaction.
And later on the call.
Our capital levels remain strong with tier one leverage ratio of 10, 2% at the bank and nine 4% at the holding company, both well above our regulatory requirements, we repurchased approximately $59 million of common stock in the second quarter. In addition to the 24 million, we repurchased in the prior quarter to take advantage of the unwashed.
The decline in our share price. This brings our total share repurchases in fiscal year 2000, $24 million to $83 million at an average share price of $36 49 per share representing two 8% of the shares outstanding as of 12 31 2023.
We had strong organic loan originations in our commercial and industrial group non real estate lender finance equipment Finance and fund finance lending businesses, we continue to reduce our small small small balance commercial real estate consumer and auto loan balances given our preference for originating retaining loans with a lower dura.
<unk> floating rate and better risk adjusted return on the current environment.
Average loan yields for the three months ended December 31, 2023, with 818% up 33 basis points from seven 5% in the prior quarter and up 156 basis points from the corresponding period a year ago average.
Average loan yields for non purchase loans were eight 2% and average yields for purchase loans were $18 five 1%, which includes the accretion of our purchase discount we continue to see wider spreads in some of our lending categories as competitors have pulled back our exited new loan yields were the following single family mortgages eight one.
Percent multifamily eight 6% C&I nine 1% in auto 10, 3%.
Our commercial real estate loans continue to perform well the low loan to value and senior structures. We have in place for an overwhelming majority of our commercial specialty real estate loans provide us with significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay the valuation of our underlying properties or project delays of the.
$5 billion of commercial specialty real estate loans outstanding at December 31, 2023 multifamily was the largest segment representing 34% of the total commercial real estate specialty loans, while hotel office and retail represented 20%, 8% and 4% respectively on a consolidated basis, the weighted average loan to value of our commercial.
Specialty real estate portfolio was 40% for the retail and office segment of our commercial specialty real estate books, a weighted average LTV is 40% and 38.
Percent, respectively, total cressa loans secured by office properties declined by $38 million linked quarter to $418 million of the 418 million cross sell loans secured by office properties at the end of the quarter, 69% or a notes are node on node structures all of significant subordination.
Having request of funds or sponsors are cross collateralization with other asset types from pump fund partners mezzanine lenders. These loans have an average loan to value of 32%, excluding any recourse or cross collateralization.
Nonperforming loans in our commercial specialty real estate portfolio were approximately $26 million at December 31, 2023 identical to the September 32023, ending balances representing five basis points of our total CRE loans outstanding we do not anticipate incurring a material loss in either of these loans.
Nonperforming loans in our multifamily and commercial mortgage portfolio or approximately $37 million at December 31, 2023 down by $1 5 million.
Number 2000, Twenty's rebalance the average loan to value of our nonperforming multifamily and commercial mortgages is approximately 60%, although we cannot be certain we do not expect to incur a material loss of any of the asset back loans currently categorized as non performance.
Nonperforming single family mortgages increased from $36 6 million at September 30 of 2023 to $54 3 million at December 31, 2023. The increase was primarily the result of a $14.3 million loan becoming delinquent. The property has an updated loan to value of approximately 81%.
<unk> is listed for sale and for rent the average loan to value of other single family mortgages that became delinquent this quarter was 49, 5%.
On December seven 2023, we completed the purchase of two loan pools with approximately $1 5 billion of <unk> for $786 million from the FDIC at a 37% discount to par value of.
Of that discount, we recognized $92 million pre tax as part of our bargain purchase gain.
The $770 million loan loss as a result, assuming any loan loss in the pool is at or below the amount allocated in the loan loss access will create approximately $301 million of discount over the life of these loans and to incur the law.
Loan pools are comprised of approximately $578 million of commercial real estate loans with a weighted average loan to value of 50% and remaining term of 41 months and $676 million of multifamily loans with a weighted average loan to value of 67% and remaining term of 120 months all 58 loans are.
Current on principal and interest payments with a borrower paying an average fixed rate of three 8% as part of the cash purchase where we received a series of back to back interest rate swaps that allow access to receive a variable note rate of approximately $6, 9% without discount we provided additional details regarding the FDIC loan purchase.
Earnings supplement we also broke out the purchased and non purchased loans and our rate volume table on page, 35% and 36 of our 10-Q.
This is an extremely accretive transaction from a net interest margin and net income perspective that we expect to remain over the next several years I will provide additional details regarding how investors should think about the net interest margin impact at the end of my prepared comments.
We had another strong quarter of deposit growth with ending balances increasing by 1 billion from June 32023, or 12, 6% annualized checking and savings accounts, representing 95% of total deposits at 12, 31, 2023 grew even faster at 20% annualized.
<unk> remained well diversified from a business mix perspective, with consumer and small business, representing 61% of total deposits for Marshal cash T. Abbott institutional representing 21 commercial specialty representing seven access fiduciary services, representing six access securities, which is our custody and clearing on balance sheet representing five.
Total noninterest bearing deposits were approximately $2 8 billion relatively flat quarter over quarter cash sweep deposits fell by approximately $200 million offset by $133 million sequential increase in noninterest bearing commercial deposits, the new commercial deposit teams, including fund finance or starting to contribute meaningfully.
Our noninterest bearing deposit growth. We're also seeing upticks in our access fiduciary service deposit balances.
Our balance sheet remains asset sensitive given the shorter duration variable rate of our loans and the granularity and diversity of our consumer commercial and securities deposits for the quarter ended December 31, 2023, our consolidated net interest margin was 455%, while our banking business net interest margin was 462%.
Operator: Greetings and welcome to the AXOS Financial 2024 Earnings Column. At this time, all participants are in a listening mode. The brief question-and-answer session will follow the form... If anyone should require assistance..., press star zero on your telephone.
Our consolidated and banking business net interest margin remained well above our prior consolidated net interest margin guidance of $4, two 5% to 435% aided by strong organic loan growth accretion from the FDIC loan purchase and some normalization and our excess liquidity.
Operator: As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you, Johnny.
Total ending deposit balances with access advisory services, including those on and off access as balance sheet declined by $200 million in the quarter, reflecting advisor investing excess cash into risk assets in reaction to the year end stock market rally, we believe that the pace of cash sorting at access advisory services has stabilized at or near there.
Johnny Lai: You may begin. Thanks, Alicia. Good afternoon, everyone.
Johnny Lai: And thanks for your interest in Axios. Joining us today for the Axios Financial Inc. second quarter 2024 financial results conference call is the company's president and chief executive officer, Greg Garrabrants. Executive Vice President and Chief Financial Officer, Derek Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Derek will review and comment on the financial and operational results for the three- and six-month-ended December 31, 2023, and they will be available to answer questions after those 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-looking statements in response to your questions.
Bottom, representing 4% of assets under custody as of December 31, 2023, compared to our historic range of 6% to 7%. In addition to our access securities deposits on our balance sheet, we had approximately $550 million of deposits off balance sheet partner banks and another $750 million of deposits held at other banks by.
Software our clients are seeing us accounting and business management vertical we expect our net interest margin to be augmented by the FDIC loan purchase given that the borrowers pay a fixed rate substantially below current market rates. We expect that these loans will have a relatively low duration long duration and prepays will be relatively low if any.
Our baseline assumption is that none of the acquired loans prepay and that we do not sell any of our acquired loans prior to maturity under those assumptions. We expect our consolidated net interest margin will increase by approximately 40 to 50 basis points above our prior four to five to $4 35 consolidated targets for.
Johnny Lai: Please refer to the Safe Harbor Statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast, and there will be an audio replay available in the investor relations section of the company's website, located at accessfinancial.com, for 30 days. Details for this call were provided in the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that, in addition to the earnings pressure late in the 10-Q, we also issued an earnings supplement for this call with additional information regarding the FDIC loan acquisition. All of these documents can be found on AxiosFinancial.com. With that, I'd like to turn the call over to Greg. Thank you, Johnny.
The next four to six quarters as we grow net new allowance by $5 million to $700 million per quarter, assuming a high single digit to low teens loan growth target for net interest margin boost from the purchase loans will gradually decline over time in the event that one or more or less prepays. Our net interest margin will be further enhanced as the immediate recognition of the <unk>.
<unk> purchase price discount.
With respect to the question of net interest margin sensitivity in the event of a fed funds declined several dynamics are worth considering first approximately 28% of our loans, representing $5 $2 billion or hybrid arms as of December 31, 2023 of which 16% will re price in one year 18.
Gregory Garrabrants: Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to AXS Financial's conference call for the second quarter of fiscal 2024, ended December 31, 2023. Thank you for your interest in AXS Financial. We delivered outstanding results, generating double-digit year-over-year growth in earnings per share, book value per share, and ending loan balances for a sixth consecutive quarter. Strong organic loan growth and deposit growth, coupled with further net interest margin expansion, resulted in double-digit net interest income growth year-over-year and linked quarter annualized. We grew deposits by approximately $638 million linked quarter. We reported net income of $152 million and earnings per share of $2.62 for the three months ended December 31, 2023, representing year-over-year growth of 86% and 94%, respectively. Excluding the one-time gain and loss provision associated with the FDIC loan purchase, our non-GAAP adjusted earnings per share increased by 15.7% year-over-year to $1.56. Our tangible book value per share was $33.45 at December 31, 2023, up 25% from December 31, 2022. Other highlights for this quarter include the following.
<unk> percent lower price in two years and 18% will replace in calendar 2026, with the remaining 48% repricing in 2027 and beyond.
Pricing of these hybrid allowance will provide some offset to reduce index rates on floating rate adjustable loans, if and when the fed starts to reduce interest rates. The hybrid arms consist primarily of three to five year fixed rate multifamily and five year hybrid single family loans of approximately $2 2 billion of hybrid multifamily loans yielding.
Approximately 51, 5%, 28% adjusting calendar 2024, 28% adjusted calendar 2025, 14% in calendar 2026, and the remaining 30% lower price in 2027 and beyond.
Approximately $3 billion of single family loans, yielding approximately $5 two 4%.
Adjusting calendar 2024, 10% adjusting calendar 2025, 21% adjusted in calendar 2020 section remaining 61% over price in 2027 and beyond that.
Gregory Garrabrants: Ending loans for investment balance net of discount were $18.5 billion, up 8% from the previous quarter, or 32% annualized. Excluding the FDIC loan purchase, ending non-purchase loans held for investment increased by $443 million from the previous quarter, or 10% annualized. Growth was broad-based, with growth in real estate and non-real estate lender finance, equipment leasing, and fund finance, offsetting lower origination volumes in single-family warehouse and higher payoffs in commercial specialty real estate, and a deliberate runoff of our auto book. Net interest margin was 4.55% for the first quarter ended December 31, 2023, up 19 basis points from 4.36% in the quarter ended September 30, 2023, and up nine basis points from Excluding the benefit from the FDIC loan purchase, our consolidated net interest margin was 4.36% in the quarter ended December 31, 2023. ExoSecurities, comprised primarily of our custody and clearing businesses, had another strong contribution to our fee and interest income. Broker-dealer fee income increased 27.6% year-over-year due to higher interest rates and increased client activity. Advisory fee income increased 5.4% year-over-year due to higher mutual fund fees and higher average assets under custody.
At 12, 31, 2023, approximately 64% of our loans were flooding and 21, 28% of our hybrid arms at 8% were fixed with respect to the 64% of our loans that are floating rate. We work hard to have strong index floors in our loans, but these index, Florida generally well below the current index rate therefore, the margin offset.
To rate reductions in floating rate loans other than the repricing of hybrid loans will be a reduction of the rate we pay on deposits. Although it is difficult to predict how quickly we can lower deposit rates when the fed fund rate goes down approximately 16% of our total deposits are tied are sensitized to fed funds and they should adjust quickly given that more than 90 <unk>.
Cent of our consumer deposits are non maturity deposits, we have the ability to lower those rates, depending on deposit competition loan growth and the sensitivity of our depositors to reduced rates.
We continue to invest in front and backend systems infrastructure and security and other enterprise software and systems that will further optimize our business and functional units.
You're launching our Universal digital bank to point out the latest version of our consumer and mobile banking applications from September we are working on transitioning our small business banking platform from a legacy system to UCB a move that has been completed for new customers with a transition for most existing small business customers occurring before the end of this current fiscal year.
This platform transition will leverage the investments we have made in UTP and make our STB offering more moderate and user friendly.
Gregory Garrabrants: Quarterly pre-tax income for our securities business was $10.8 million in the second quarter of 2024. Our credit quality remained strong, with net annualized charge-offs to average loans of two basis points in the three months ended December 31, 2023. The majority of the two basis points and net charge-offs this quarter were from auto loans that are covered by insurance policies, with proceeds from those insurance policies accounted for as fee income. We completed the purchase of two performing commercial real estate and multifamily loan pools from the FDIC with a combined unpaid principal balance of approximately $101.25 billion at 63% of par value. We recognized a $65 million after-tax gain and increased our allowance for loan losses by $75 million on the purchase in the quarter ended December 31, 2023.
Label banking for RIS in IBD is continue to make progress with a beta launch expected in the next few months, we believe the ability to provide a turnkey banking solution to the hundreds of thousands of asphalt and high net worth clients of our custody and clearing business will be a differentiator from a service and efficiency perspective, and our CNS business management vertical we are investing tomorrow.
<unk> user experience and add new features to the software we see tremendous long term opportunity to grow market share of fee income deposit and cross sell other banking products to clients and their business management vertical.
Access clearing which includes our correspondent clearing and custody business continues to make steady progress noninterest income from the securities business increased 3% year over year to $67 million. The primary driver of growth in our fee income from <unk> Securities is higher interest rates, partially offset by lower average balance of deposits held at partner banks.
Gregory Garrabrants: We believe this opportunistic loan purchase will provide incremental net interest income and after-tax income over the next several years. I'll provide more detail regarding this transaction later in the call. Our capital levels remain strong, with a Tier 1 leverage ratio of 10.2% at the bank and 9.4% at the holding company, both well above our regulatory requirements. We repurchased approximately $59 million of common stock in the second quarter, in addition to the $24 million we repurchased in the prior quarter to take advantage of the unwarranted decline in our share price.
Total deposits at <unk> were $1 4 billion at December 31, 2023 down from $1 6 billion in the prior quarter of the $1 4 billion of deposits from Max those clearing approximately <unk> 8 billion was on our balance sheet and 515 million were held at partner banks net new assets in our custody.
Business increased by approximately $172 million in the three three months ending December 31, we are in BARDA 13, New advisors. This quarter the pipeline for new custody clients remains healthy comprised of 233 advisory firms with approximately $22 billion of combined assets under custody. We have made good progress on the systems and.
Gregory Garrabrants: This brings our total share repurchases in fiscal year 2024 to $83 million, at an average share price of $36.49 per share, representing 2.8% of the shares outstanding as of 12-31-2023. We had strong organic loan originations in our commercial and industrial groups, non-real estate lender finance, Equipment Finance, and Fund Finance Lending Business.
Front launching a refresh client portal and securities based line of credit for our clients towards the end of the year.
We see tremendous opportunities to grow our existing businesses and improve operational efficiencies across business and functional units the market dislocation of corporate restructuring among our bank and nonbank competitors have created a once in a decade opportunity to add talented individuals and teams to access many.
Gregory Garrabrants: We continue to reduce our small balance commercial real estate, consumer, and auto loan balances given our preference for originating and retaining loans with a lower duration, floating rate, and better risk-adjusted return in the current environment. Average loan yields for the three months ended December 31st, 2023 were 8.18%, up 33 basis points from 7.85% in the prior quarter, and up 156 basis points from the corresponding period a year ago Average loan yields for non-purchase loans were 8.02%, and average yields for purchase loans were 18.51%, which includes the accretion of our purchase discount.
The additions we have made over the past nine months have really contributed meaningfully to our growth and we are actively recruiting across various commercial deposit lending and business verticals to help build and accelerate several strategic and operational initiatives on our long term roadmap with strong liquidity and excess capital de Minimis unrealized loss in our small investments.
Securities portfolio, a multiyear boosted earnings and margin from the FDIC loan purchase as solid organic growth prospects given the diverse nature of our banking and securities businesses. We are focused on widening our lead relative to our competitors our returns credit and margins are best in class because we focus on asset based lending opportunities with the best risks.
Gregory Garrabrants: We continue to see wider spreads in some of our lending categories as competitors have pulled back or exited. New loan yields were the following: single-family mortgages 8.1%, multifamily 8.6%, CNI 9.1%, and auto 10.3%. Our commercial real estate loans continue to perform well.
Adjusted returns, how we structure deals with low leverage and credit enhancements, we have a proven track record of repositioning ourselves giant pivotal charging points during the banking and economic cycle. We are confident the investments we are making in our business systems processes and people will generate attractive future returns for our shareholders now I'll turn the call over to Derek.
Gregory Garrabrants: The low loan-to-value and senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provide us with significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay, the valuation of our underlying properties, or project delays. Of the $5 billion of commercial specialty real estate loans outstanding at December 31, 2023, multifamily was the largest segment, representing 34% of the total commercial real estate specialty loans, while hotel, office, and retail represented 20%, 8%, and 4%, respectively. On a consolidated basis, the weighted average loan-to-value of our commercial specialty real estate portfolio is 40%. For the retail and office segments of our commercial specialty real estate book, the weighted average LTV is 40% and 38%, respectively. Total Crestle loans secured by office properties declined by $38 million in the linked quarter to $418 million.
I'll provide additional details on our financials.
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 access financial Dot com.
I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details.
Total noninterest expenses increased by $1 $3 million or one 1% to $122 million in the three months ended December 2023, compared to the quarter ended September 32023.
Salaries and benefit expenses increased by $3 $1 million, primarily due to new team member additions in the first full quarter of the annual Merit based increases that were awarded in September 2023 to our SaaS.
It was also the first full quarter for the Lv Marine finance business being a part of access.
Appetizing and promotional expenses were down by approximately zero point $6 million as we scaled back certain deposit related marketing expenses professional service fees were down $38 million on a linked quarter basis due to the timing of insurance reimbursements reduction in valuation in audit fees tied to our yearend.
Gregory Garrabrants: Of the $418 million Crestle loans secured by office properties at the end of the quarter, 69% are A-notes or note-on-note structures, all with significant subordination, with some having recourse to funds or sponsors or cross-collateralization with other asset types from fund partners and mezzanine lenders. These loans have an average loan-to-value of 32%, excluding any recourse or cross-collateralization. Not performing loans in our commercial specialty real estate portfolio were approximately 26 million at December 31, 2023, identical to the September 30, 2023 ending balances, representing five basis points of our total CRE loans outstanding.
Got it which occurs in the first fiscal quarter and legal expenses.
As Greg mentioned earlier, we continue to actively recruit talented individuals and teams across various businesses. We believe that reinvesting a small portion of our expected gains from the FDIC loan purchase is a prudent strategic allocation of capital that will benefit our shareholders.
For those who may not be as familiar with the access story, we deployed a similar strategy seven to eight years ago by reinvesting a portion of profits from our H&R block business and long term strategic initiatives, such as <unk>, our commercial banking business and our securities businesses those investments have been instrumental in helping us further.
Diversify our lending deposits and fee income.
Gregory Garrabrants: We do not anticipate incurring a material loss on either of these loans. Non-performing loans in our multifamily and commercial mortgage portfolio were approximately $37 million at December 31, 2023, down by $1.5 million from the September 2023 balance. The average loan-to-value of our non-performing multifamily and commercial mortgages is approximately 60%. Although we cannot be certain, we do not expect to incur a material loss on any of the asset-backed loans currently categorized as non-performing.
We expect noninterest expenses to grow a few percentage points higher than our historical growth rate over the next few quarters as we continue to invest in the people systems and growth initiatives.
We will continue to identify and implement process improvement automation and other productivity initiatives to maintain a best in class operating efficiency.
Following a strong start to the first half of our fiscal year, our loan growth outlook is consistent with what we have guided to in recent quarters.
We believe that we will be able to grow loan balances organically by high single digits to low teens year over year for the next few quarters, excluding the impact of the FDIC loan purchase or any other potential loan or asset acquisitions.
Gregory Garrabrants: Non-performing single-family mortgages increased from $36.6 million at September 30, 2023 to $54.3 million at December 31, 2023. The increase was primarily the result of a $14.3 million loan becoming delinquent. The property has an updated loan-to-value of approximately 81%, and the property is listed for sale and for rent. The average loan-to-value of other single-family mortgages that became delinquent this quarter was 49.5%
Our loan growth outlook is based on a broad based increases in our ABL lender financing capital call lines, partially offset by declines in jumbo single family mortgage multifamily cross sell auto and personal unsecured loan balances. We continue to see good risk adjusted opportunities across several of our lending niches.
Our market share gains have been partially offset by higher levels of prepayments in certain segments of our C&I book given the shorter duration for these loans.
Our loan pipeline remains solid at $1 $7 billion as of January 26, 2024, consisting of $277 million of single family Jumbo mortgage $70 million of agency gain on sale mortgage.
Gregory Garrabrants: On December 7, 2023, we completed the purchase of two loan pools with approximately $1.25 billion of UPB for $786 million from the FDIC at a 37% discount to par value. Of that discount, we recognize $92 million pre-tax as part of a bargain purchase gain and record a $70 million loan loss. As a result, assuming any loan loss in the pool is at or below the amount allocated for the loan loss, Axios will accumulate approximately $301 million of discounted cash over the life of these loans into income. The loan pools are comprised of approximately 578 million in commercial real estate loans with a weighted average bond value of 50% and a remaining term of 41 months, and 676 million in multifamily loans with a weighted average loan to value of 67% and a remaining term of 120 months.
$52 million of multifamily and small balance commercial.
$23 million of auto and consumer and $1 $3 billion of C&I.
Our income tax rate was 32% for the first quarter ended December 31, largely in line with our guided range of 29% to 30%.
As a reminder, tip.
Typically we have a higher employee related related taxes, and FDIC assessments in the first calendar quarter.
Aside from the seasonal factors and the aforementioned growth investments, we do not anticipate any outside changes and our future income tax rate are not interest expenses.
With that I'll turn the call back over to Johnny.
Thanks, Derek we are ready to take questions.
Great. Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Gregory Garrabrants: All 58 loans are current on principal and interest payments, with the borrower paying an average fixed rate of 3.8%. As part of a cash purchase, we received a series of back-to-back interest rate swaps that allow access to receive a variable note rate of approximately 6.9% without discount. We provided additional details regarding the FDIC loan purchase in our earnings supplement. We also broke out the purchased and non-purchased loans in the rate volume table on pages 35 and 36 of our 10-Q.
The confirmation.
Your line is in the question queue, you May press Star Q, 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 snarky.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.
Gregory Garrabrants: This is an extremely accretive transaction from a net interest margin and net income perspective that we expect to remain over the next several years. I'll provide additional details regarding how investors should think about the net interest margin impact at the end of my prepared comments. We had another strong quarter of deposit growth, with ending balances increasing by $1 billion from June 30, 2023, or 12.6% annualized. Checking and savings accounts, representing 95% of total deposits at 12-31-2023, grew even faster at 20% annualized. Our deposits remain well diversified from a business mix perspective, with consumer and small business representing 61% of total deposits, commercial cash, TM, and institutional representing 21%, commercial specialty representing 7%, Axios fiduciary services representing 6%, and Axios securities, which is our custody and clearing on the balance sheet, representing 5%. Total non-interest-bearing deposits were approximately $2.8 billion, relatively flat quarter over quarter Cash sweep deposits fell by approximately $200 million, offset by a $133 million sequential increase in non-interest-bearing commercial deposits.
Thanks, Good afternoon guys.
So question on the margin outlook, excluding the loans from the from the FDIC.
Trying to look through like maybe the guidance be slightly lower than before or is that or would that two to $24 95 to 435 range still hold as appropriate.
Yeah, that's the 425 to $4 35 wells will still hold.
For the calendar year of 2024.
Got it.
Yes, yes, I think it provides a little bit more details on some of the <unk>.
<unk> growth I mean, just looking at.
Year over year expenses were up 13% this quarter last quarter. There were they were up 20% year over year I guess, what is that like a year over year growth rate that we should be.
Now that there can be a little bit more investment going on.
Okay.
Thank you.
<unk>.
I'd, probably say it lines up generally speaking with our with our loan growth rate that as kind of high single digits to low teens, obviously different quarters will have some.
There'll be lumpiness, but when you look at it on an annualized basis I think it will generally align with that that loan growth rate that we provide.
This first quarter first calendar quarter as I highlighted we'll have some higher expenses due to payroll taxes. So usually thats. If you look back that's always cyclically, a much higher quarter for the guidance here to taxes that are.
Gregory Garrabrants: The new commercial deposit teams, including Fund Finance, are starting to contribute meaningfully to our non-interest-bearing deposit growth. We're also seeing an uptick in our Axios Fiduciary Service deposit balance. Our balance sheet remains asset sensitive given the shorter duration and variable rate of our loans and the granularity and diversity of our consumer, commercial, and securities deposits. For the quarter ended December 31st, 2023, our consolidated net interest margin was 4.55%, while our banking business net interest margin was 4.62%. Our consolidated and banking business net interest margin remains well above our prior consolidated net interest margin guidance of 4.25 to 4.35 percent, aided by strong organic loan growth, accretion from the FDIC loan purchase, and some normalization in our excess liquidity. Total ending deposit balances at Axios Advisory Services, including those on and off Axios' balance sheet, declined by $200 million in the quarter, reflecting Advisor investing excess cash into risk assets in reaction to the year-end stock market rally.
Works through in that in that January February months, Hey, Andrea I think we are recruiting.
Yes, a decent amount of talent and sometimes that talent comes on and then.
Yes, and then it takes a few quarters for them to do stuff. So I'm not sure I Wouldnt pop that up a few percentage points, maybe kind of pop it up I mean, I think maybe.
Conservative is that I'd take it more into the 15 16 range or something like that just because I.
We've been out doing a lot of recruiting.
Just hired a couple of.
Really seasoned teams on the Treasury management side, some great product managers are they going to do a lot of great stuff over the long term on our commercial Treasury management.
Software integrations, but these teams are not the cheapest, but theyre coming available now in a way that they just wouldnt and I am seeing that more and more so I think we will.
Or opportunistically out looking for teams like that.
Yes, there's a few more in the pipeline to that are not cheap so.
Got it so is it really driven by new hires.
Gregory Garrabrants: We believe that the pace of cash sorting at Axios Advisory Services has stabilized at or near the bottom, representing 4% of assets under custody as of December 31, 2023, compared to an historic range of 6% to 7%. In addition to our Axios Securities deposits on our balance sheet, we had approximately $550 million of deposits off balance sheets at partner banks and another $750 million of deposits held at other banks by software clients in our Zenith Accounting and Business Management vertical. We expect our net interest margin to be augmented by the FDIC loan purchase. Given that the borrowers pay a fixed rate substantially below current market rates, we expect that these loans will have a relatively low duration, long duration, and prepays will be relatively low, if any.
Yes.
Thank you.
Well I mean, it's.
In some cases, it's been new products like the fund finance team was a new product others that might be new geography, we've been looking at in the valley.
Our stuff there.
And in other cases, it's just.
Those two teams on the TM side or they've got some vertical expertise, but it's more about.
We're really refining and developing our T M products to get to the next stage so.
It's really a little bit of everything and there is there is some teams that are very vertically.
They're lending vertical focus too so it just it really just depends but I would say in general.
Just a lot of a lot of banks have not paid bonuses well theres a lot of unhappy people around and so we've just got access to a lot of talent and that talent wasn't probably wouldn't have been accessible to us 18 to 24 months ago. So we're probably going to spend.
Gregory Garrabrants: Our baseline assumption is that none of the acquired loans prepay and that we do not sell any of our acquired loans prior to maturity. Under those assumptions, we expect our consolidated net interest margin to increase by approximately 40 to 50 basis points above our prior 4.25 to 4.35 consolidated targets for the next four to six quarters. As we grow net new loans by $500 to $700 million per quarter, assuming our high single-digit to low-teens loan growth target, the net interest margin boost for the purchase loans will gradually decline over time. However, in the event that one or more loans prepays, our net interest margin will be further enhanced with the immediate recognition of the remaining purchase price discount. With respect to the question of net interest margin sensitivity in the event of a Fed fund's decline, several dynamics are worth considering.
Some of this windfall on that talent.
Like Derrick said I think it's a great analogy, we did that with H&R block I don't think its really of that.
Level at that as a whole.
New division like we did there but it's.
We'll have to see how much my instinct is that theres going to be more.
Folks sort of shaking out this year that we're going to be interested in.
Got it makes sense I think you did that with the Trump tax cut well.
Yes.
True.
I will step back thanks for taking the questions.
Thanks, Ed.
Thank you.
Gregory Garrabrants: First, approximately 28% of our loans, representing $5.2 billion, were hybrid arms as of December 31, 2023, of which 16% will reprice in one year, 18% will reprice in two years, and 18% will reprice in calendar 2026, with the remaining 48% repricing in 2027 and beyond. The repricing of these hybrid loans will provide some offset to reduced index rates on floating rate adjustable loans if and when the Fed starts to reduce interest rates. The hybrid arms consist primarily of three- to five-year fixed-rate multifamily and five-year hybrid single-family loans.
Next question comes from the line of Edward Hudlin Graham with Seeker investments. Please proceed with your question.
Yes.
Hi, Greg.
Hey, Ed.
Couple of questions.
It looks like your you didn't pay any excess FDIC fees.
Okay.
No the guidance that regulation is generally aimed at larger banks north of $100 billion in assets and with 5 billion or greater of uninsured.
And we have a much lower uninsured deposit balance so those are the.
The banks that are experiencing those increases in FDIC fees.
Yes.
We got about $5 billion.
Gregory Garrabrants: Of the approximately $2.2 billion of hybrid multifamily loans, yielding approximately 5.15%, 28% adjust in calendar 2024, 28% adjust in calendar 2025, 14% in calendar 2026, and the remaining 30% will reprice in 2027 and beyond. Of the approximately $3 billion of single-family loans, yielding approximately 5.24%, 8% adjust in calendar 2024, 10% adjust in calendar 2025, 21% adjust in calendar 2026, and the remaining 6 At 12-31-2023, approximately 64% of our loans were floating, 28% were hybrid arms, and 8% were fixed. With respect to the 64% of our loans that are floating rates, we work hard to have strong index floors in our loans, but these index floors are generally well below the current index rate.
Okay.
That makes sense just said the other thing is I noticed your.
Your loan loss provision was higher this quarter anything unusual there.
Yes, I can walk through that so yes, theres a couple of different aspects to that $13 $5 million number about $5 million of it was related to the.
To the loan purchase so while for the purchased credit deteriorated assets, we took 70 million straight to the to.
To the allowance without going through the income statement for the non purchase credit deteriorated assets. We did have to add loan loss provision. So that was about $5 million and then as a reminder, the unfunded commitment provision also is included in that line item. So that was another one.
Dollars for unfunded loans as our unfunded balances grew by a couple of hundred million this past quarter.
The net remaining once you back those out was about seven 5 million, which is generally consistent with our allowance.
On the whole.
Great and good luck on finding talented people.
Gregory Garrabrants: Therefore, the margin offset to rate reductions in floating rate loans, other than the repricing of hybrid loans, will be a reduction in the rate we pay on deposits. Although it is difficult to predict how quickly we can lower deposit rates when the Fed Fund rate goes down, approximately 16% of our total deposits are tied or sensitized to Fed Funds, and they should adjust quickly.
Thank you exit thanks Ed.
Thank you.
Our next question comes from the line of Gary Tenner D. A Davidson. Please proceed with your question.
Thanks, Good afternoon everybody.
Derek can you just address part of my question as it relates to the amount of the <unk>.
The gain in the build.
Gregory Garrabrants: Given that more than 90% of our consumer deposits are non-maturity deposits, we have the ability to lower those rates depending on deposit competition, loan growth, and the sensitivity of our depositors to reduced rates. We continue to invest in front and back-end systems, IT infrastructure and security, and other enterprise software and systems that will further optimize our business and functional units. After launching Universal Digital Bank 2.0, the latest version of our consumer and mobile banking applications in September, we are working on transitioning our small business banking platform from a legacy system to UDB, a move that has been completed for new customers, with a transition for most existing small business customers occurring before the end of this current fiscal year.
The allowance given I wonder if you could go into any detail or thoughts about kind of specifics around why you have that number was so high given the relative.
Ltvs of the underlying.
Credits and the status of those credits.
Current and performing.
Sure sure I'll start on that and.
So the when we look at the loan portfolio. What we did was a loan by loan analysis and and classification in accordance with the accounting guidance as far as the purchase credit deteriorated assets. So for those that we determined or the purchase credit deteriorated asset.
We then go and look at what is the what is the likelihood of the.
Over the life of those loans and what are the different aspects of them. There is a couple office and there there are a couple land.
Gregory Garrabrants: This platform transition will leverage the investments we have made in UDB and make our SBB offering more modern and user-friendly. Our white-label banking for RIAs and IBDs continues to make progress, with a beta launch expected in the next few months. We believe the ability to provide a turnkey banking solution to the hundreds of thousands of affluent and high-net-worth clients in our custody and clearing business will be a differentiator from a service and efficiency perspective. In our Zenith Business Management Vertical, we are investing to modernize the user experience and add new features to the software. We see tremendous long-term opportunity to grow market share of fee income, deposit, and cross-sell other banking products to clients in the Business Management Vertical. Axios Clearing, which includes our corresponding clearing and RIA custody business, continues to make steady progress. Non-interest income from the securities business increased 3% year-over-year to $67 million.
<unk> taken analysis through that and say what is the likelihood of loss based on all of the different attributes that are funneled into.
The allowance model.
And that of course includes all variety of different things about.
Locations within the U S GDP economic scenarios and stress extremely stressed economic scenarios and say, what's that what's that risk of loss on those loans.
And come up with our what we believe is a reasonable estimate for that for that allowance and so based on those number of factors and kind of that process Thats, how we ultimately got to the $70 million for us on that subset of loans.
But it came.
Came in.
These obviously, we've we've always performed well better than our loan loss and so it's best to be conservative on these things right. So.
Gregory Garrabrants: The primary driver of growth in the fee income from Axios Securities is higher interest rates, partially offset by a lower average balance of deposits held at partner banks. Total deposits at Axios Clearing were $1.4 billion at December 31, 2023, down from $1.6 billion in the prior quarter. Of the $1.4 billion of deposits from Axios Clearing, approximately $0.8 billion was on our balance sheet, and $550 million were held at partner banks. Net new assets in our custody business increased by approximately $172 million in the three months ending December 31. We onboarded 13 new advisors this quarter. The pipeline for new custody clients remains healthy, comprised of 233 advisory firms with approximately $22 billion of combined assets under custody.
So as we're thinking about the provision going forward given that backdrop of the of the CCD.
Loans and the allowance for that.
Is this.
Are those balances and thats kind of whats out there for the duration of those specific credits as long as they are.
Unless something really changes in your expected performance of the credits.
We will be monitoring quarter by quarter in the same way that that we monitor our entire loan portfolio, including new originations. The whole portfolio gets gets analyzed on a quarter to quarter basis, depending on the.
The different individual attributes of the loan.
Certain.
Aspects are changing such as delinquencies credit downgrades.
And then as well as the of course economic.
Gregory Garrabrants: We have made good progress on the systems and product front, launching a refreshed client portal and a securities-based line of credit for RIA clients toward the end of the year. We see tremendous opportunities to grow our existing businesses and improve operational efficiencies across business and functional units. The market dislocation and corporate restructuring among our bank and non-bank competitors have created a once-in-a-decade opportunity to add talented individuals and teams to access. Many of the additions we have made over the past nine months have already contributed meaningfully to our growth, and we are actively recruiting across various commercial, deposit, lending, and business verticals to help build and accelerate several strategic and operational initiatives on our long-term roadmap. With strong liquidity and excess capital, a de minimis unrealized loss in our investment securities portfolio, a multi-year boost in earnings and margin from the FDIC loan purchase, and solid organic growth prospects given the diverse nature of our banking and securities business, we are focused on widening our lead relative to our competitors. Our returns, credit, and margins are best in class because we focus on asset-based lending opportunities with the best risk-adjusted returns, and we structure deals with low leverage and credit enhancement.
Aspects of the.
In the in the broader environment and the different inputs that tie into the model there so the.
Saturday is of course, the initial number right, but that could certainly change also.
Obviously, if any of the loans were to prepay that remove that would remove an allowance.
So that's another.
Factor that that could change.
Got it thank you.
Thank you.
As a reminder, press star one to ask a question at this time.
Okay.
Okay. That's it.
There are no further questions at this time I would now like to turn the floor back over to Johnny Lai for closing comments.
Thanks, everyone for your interest.
Have any additional follow ups. Please contact me and for those who are going to the Janie Conference will last you Tomorrow and Thursday.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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Derek Walsh: We have a proven track record of repositioning ourselves during pivotal turning points during the banking and economic cycle. We are confident the investments we are making in our business, systems, processes, and people will generate attractive future returns for our shareholders. Now, I'll turn the call over to Derek, who will provide additional details on our financial assets. Thanks, Greg.
Okay.
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Yeah.
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Derek Walsh: To begin, I'd like to highlight that, in addition to our press release, an 8K with supplemental schedules and our 10Q were filed with the SEC today and are available online through EDGAR or through our website at accessfinancial.com. I will make some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Total non-interest expenses increased by $1.3 million, or 1.1%, to $122 million in the three-month end of December 2023, compared to the quarter end of September 30, 2023.
Okay.
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Derek Walsh: Salaries and benefit expenses increased by $3.1 million, primarily due to new team member additions and the first full quarter of the annual merit-based increases that were awarded in September 2023 to our staff. It was also the first full quarter for the LV Marine Finance business being a part of Axos. Advertising and promotional expenses were down by approximately $0.6 million as we scaled back certain deposit-related marketing expenses.
Yeah.
Okay.
Okay.
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Okay.
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Derek Walsh: Professional service fees were down $3.8 million on a linked quarter basis due to the timing of insurance reimbursements, a reduction in valuation and audit fees tied to our year-end audit, which occurs in the first fiscal quarter, and legal expenses. As Greg mentioned earlier, we continue to actively recruit talented individuals and teams across various businesses. We believe that reinvesting a small portion of our expected gains from the FDIC loan purchase is a prudent, strategic allocation of capital that will benefit our shareholders. For those who may not be as familiar with the AXOS story, we deployed a similar strategy seven to eight years ago by reinvesting a portion of profits from our H&R Block business in long-term strategic initiatives such as UDB, our commercial banking business, and our securities businesses.
Okay.
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Mhm.
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Derek Walsh: Those investments have been instrumental in helping us further diversify our lending, deposits, and fee income. We expect non-interest expenses to grow a few percentage points higher than our historical growth rate over the next few quarters as we continue to invest in the people, systems, and growth initiatives. We will continue to identify and implement process improvement, automation, and other productivity initiatives to maintain best-in-class operating efficiency.
Derek Walsh: Following a strong start to the first half of our fiscal year, our loan growth outlook is consistent with what we have guided to in recent quarters. We believe that we will be able to grow loan balances organically by high single digits to low teens year over year for the next few quarters, excluding the impact of the FDIC loan purchase or any other potential loan or asset acquisition. Our loan growth outlook is based on broad-based increases in our ABL, lender finance, and capital call lines, partially offset by declines in Jumbo Single-Family Mortgage, Multi-Family, Crestle Auto, and Personal Unsecured loan balances. We continue to see good risk-adjusted opportunities across several of our lending niches. Our market share gains have been partially offset by higher levels of prepayments in certain segments of our C&I book given the shorter duration of these loans.
Derek Walsh: Our loan pipeline remains solid at $1.7 billion as of January 26, 2024, consisting of $277 million of single-family jumbo mortgage, $70 million of agency gain-on-sale mortgage, and $52,000,000 of multifamily and small balance commercial. $23 million of auto and consumer and $1.3 billion of C&I. Our income tax rate was 30.2% for the first quarter ended December 31st, largely in line with our guided range of 29 to 30%.
Derek Walsh: As a reminder, typically, we have higher employee-related taxes and FDIC assessments in the first calendar quarter. Aside from those seasonal factors and the aforementioned growth investments, we do not anticipate any outside changes in our future income tax rate or non-interest expenses. With that, I'll turn the call back over to Johnny. Thanks Derek, we are ready to take questions. Great, and I'll be conducting. I would like to ask a question. Press Star 1 on your telephone.
Johnny Lai: Confirmation Tones will indicate your line, you may press start. I'd like to. It may be necessary to pick up your handset before pressing the button. One moment, please, while we pull. Thank you. Our first question comes from the line of Andrew. Piper, Sam, proceed with the hearing. The hearing is now closed.
Andrew Liesch: Please proceed with the hearing. Guys, question on the margin outlook and from the FDA. I'm trying to look through, like, maybe the guidance would be slightly lower than before, or is that... Irving, 425 to 430, poblano. Yeah, that's the 425 to 435 will still hold for the calendar year of 2020. That's not even for the organic.
Derek Walsh: Yeah, and they can provide us with a little bit more details on some of this. I'm just looking at, year-over-year expenses are up. I think the... I'd probably say it lines up, generally speaking, with our loan growth rate, that as kind of high single digits to low teams. Obviously, different quarters will have some, there'll be lumpiness, but when you look at it on an annualized basis, I think it will generally align with that loan growth rate that we provide. This first quarter, first calendar quarter, as I highlighted, will have some higher expenses due to payroll taxes. So usually, if you look back, that's always cyclically a much higher quarter for the FICA and FUTA taxes that are worked through in that January and February month.
Gregory Garrabrants: Hey, Andrew, I think we are recruiting a decent amount of talent, and sometimes that talent comes on, and then... You know, then it takes a few quarters for them to do stuff. So, I'm not sure I wouldn't pop that up a few percentage points, maybe kind of pop it up. I mean, maybe, you know, conservatively, I'd say I'd take it more to the 15-16 range or something like that just because I, you know, we've been out doing a lot of recruiting. You know, just hired a couple of really seasoned teams on the treasury management side, some great product managers. They're going to do a lot of great stuff over the long term in our commercial treasury management, you know, software integrations, but you know these teams are not the cheapest, but they're coming available now in a way that they just wouldn't, and I'm seeing that more and more so I think we'll we're opportunistically out looking for teams like that. You know, there's So is it really driven by new hires, or are they? product, and Vance Brion, too.
Gregory Garrabrants: Well, I mean, in some cases, it's been new products, like the fund finance team was a new product. In others, it might be new geography. You know, we've been looking in the Valley for stuff there. And in other cases, like those two teams on the TM side, they've got some vertical expertise, but it's more about, you know, really refining and developing our TM products to get to the next stage. So, you know, it's really a little bit of everything. And there are some teams that are very vertically focused; they're lending a vertical focus, too.
Gregory Garrabrants: So it just, it really just depends. But I would say, in general, there's just a lot of banks that haven't paid bonuses. Well, there's a lot of unhappy people around. And so we've just got access to a lot of talent that probably wouldn't have been accessible to us 18, 24 months ago.
Gregory Garrabrants: So we're probably going to spend, you know, some of this windfall on that talent. And, you know, like Derek said, I thought it was a great analogy. We did that with H&R Block. I don't think it's really of that level that's a whole new division like we did there, but it's a you know We'll have to see. My instinct is that there are more people sort of shaking out this year that we're going to be interested in. It makes sense. I think you did that with the Trump tax cuts as well. Yes. True.
Operator: But I will step back. Thank you. The next question... Thank you. Thank you. Lines, Hemingway. Thank you.
Edward Paul Hemmelgarn: It looked like you didn't pay any excess FDIC fees. No, the guidance, the regulation is generally aimed at larger banks north of $100 billion in assets and with $5 billion or greater of uninsured deposits, and we have a much lower uninsured deposit balance. So those are the banks that are experiencing those increases in FDIC fees. Yeah, I forgot about that.
Derek Walsh: Um, that makes sense. Just the other thing is I noticed your loan loss provision was higher this quarter. Anything unusual there? Yeah, I can walk you through that.
Derek Walsh: So, yes, there are a couple of different aspects to that $13.5 million number. About $5 million of it was related to the loan purchase. So, for the purchase credit deteriorated assets, we took $70 million straight to the allowance without going through the income statement. For the non-purchase credit deteriorated assets, we did have to add loan loss provision.
Derek Walsh: So, that was about $5 million. And then, as a reminder, the unfunded commitment provision also was included in that line item. So, that was another million dollars for unfunded loans as our unfunded balances grew by a couple hundred million this past quarter. And so, the net remaining once you back those out was about $7.5 million, which is generally consistent with our allowance on the whole. Great, and good luck finding talent.
Edward Paul Hemmelgarn: Thank you. Thanks, Ed. Our next question is... Hello. Hello, on the line for Gary Tenner. J. A. Thanks. Good afternoon, everybody. Hi, Gary.
Gary Peter Tenner: Derek, you just addressed part of my question and the build into the allowance. I wonder if you could just go into any detail or thoughts about that, why that number was so high given the role, you know, LCDs of the underlying. Crudit.
Derek Walsh: Sure, sure. I'll start on that. When we look at the loan portfolio, what we did was a loan-by-loan analysis and classification in accordance with accounting guidance as far as the purchase credit deteriorated assets. For those that we determined were the purchase credit deteriorated assets, we then go and look at what is the likelihood over the life of those loans and what are the different aspects of them. There's a couple offices in there, there are a couple of acres of land, and so we take an analysis through that and say, what is the likelihood of loss based on all the different attributes that are funneled into the allowance model?
Derek Walsh: That, of course, includes a variety of different things about locations within the U.S. GDP, economic scenarios, and extremely stressed economic scenarios, and say, what's the risk of loss on those loans, and come up with what we believe is the reasonable estimate for that allowance. Based on a number of factors and that process, that's how we ultimately got to the $70 million on that subset of loans. But it's... look, I mean... Obviously, we've always performed well better than our lung loss, and so it's best to be conservative on these things, right?
Derek Walsh: So, as we're thinking about... originally going forward, given the backdrop of loans and the allowance for that. Are those balances and that kind of allowance out there for the duration? Not unless something materially changes in your expected performance. We will be monitoring them quarter by quarter in the same way that we monitor our entire loan portfolio, including new originations. The whole portfolio gets analyzed on a quarterly basis, depending on the different individual attributes of the loan if certain aspects are changing, such as delinquencies, credit downgrades, and then, of course, economic aspects in the broader environment and the different inputs that tie into the model there.
Derek Walsh: Seventy is, of course, the initial number, right, but that could certainly change. Also, obviously, if any of the loans were to prepay, that would remove an allowance from it, so that's another factor that could change. Got it. Thank you. As a reminder, press star 1 to ask a question at, Okay, that's it. All right, there are no further questions at this time. I'd now like to turn the floor back. Johnny Lai for closing.
Johnny Lai: Thank you everyone for your interest. If you have any additional follow-ups, please contact me, and for those who are going to the JANI conference, we'll see you tomorrow and Thursday. Thanks. This concludes today's teleconference. Disconnect your lines at this time. Frieder.