Q2 2025 Axos Financial Inc Earnings Call
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Speaker Change: Good morning, sorry, good afternoon and welcome to the Access Financial second quarter 2025 earnings call and webcast.
Speaker Change: At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And it is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations.
Thank you, Johnny. You may begin.
Speaker Change: And thanks for your interest in Axios. Joining us today for Axios Financial, Inc.'s second quarter 2025 financial results conference call are the company's president and chief executive officer, Greg Garrabrants.
Speaker Change: and Executive Vice President and Chief Financial Officer of Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the three months ended December 31st, 2024, and we will be available to answer questions after the prepared remarks.
Speaker Change: 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.
Speaker Change: Please refer to the Safe Harbor Statement found in today's earnings press release and in our investor presentation for additional details.
Speaker Change: 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 on the conference call announcement and in today's earnings press release.
Speaker Change: Before handing the call over to Greg, I'd like to remind listeners that in addition to the Earnings Press Relates, we also issued an Earnings Supplement, an AK, with additional financial schedules.
All of these documents can be found on accessfinancial.com
Speaker Change: And 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 AXS Financial's conference call for the second quarter of fiscal 2025 and to December 31, 2024. I thank you for your interest in AXS Financial.
Speaker Change: We delivered solid results this quarter, generating double-digit year-over-year growth in net interest income and book value per share. Adding loan balances, we're up 1.1% linked quarter and 6.7% year-over-year to $19.5 billion.
Speaker Change: We continue to generate high returns, as evidenced by the 17% return on average common equity and 1.7% return on assets in the three months ended December 31, 2024. Our strong returns contributed to a 21% year-over-year growth in our tangible book value per share.
Speaker Change: Net interest income was $280 million for the three months ended December 31, 2024, up 22.5% from the $228.6 million in the prior period.
Speaker Change: excluding the benefit from the early payoffs of three FDIC-purchased loans in the first fiscal quarter of 2025, that interest income was up approximately $5 million linked quarter.
Speaker Change: That interest margin was 4.83% for the quarter end of December 31st, 2024, up 28 basis points from 4.55% in the quarter end of December 31st, 2023, and down from 5.17% in the quarter end of September 30th, 2024.
Speaker Change: Net interest margin in the first quarter of 2025 benefited from the payoff of three loans we purchased from the FDIC, excluding the impact from the early payoff of the three loans purchased in the three months headed September 30, 2024. Net interest margin was 4.87%.
Speaker Change: Total unbalanced sheet deposits increased 9.5% year-over-year to 19.9 million. Our diverse and granular deposit base across consumer and commercial banking and our securities business continues to support our organic loan growth.
Speaker Change: We managed our operating expenses well this quarter. Total non-issued expenses for the quarter ended December 31, 2024 were down by 1.5% from the prior quarter. The efficiency ratio for the banking business segment was 41% in the second fiscal quarter of 2025.
Speaker Change: Net annualized charge-offs to average loans were 10 basis points in the three months ended December 31st, 2024.
Speaker Change: Excluding the auto loans covered by insurance, net annualized charge-offs to average loans were eight basis points in the second quarter of 2025. We remain well-reserved relative to our low current and historic net credit losses.
Speaker Change: Net income was approximately $104 million in the quarter ended December 31, 2024, compared to $152.8 million in the corresponding period a year ago.
Speaker Change: Excluding the gain from the FDIC loan purchase in the prior year period, the adjusted net income and adjusted EPS were $92.5 million and $1.60 per share respectively.
Speaker Change: Non-GAAP adjusted earnings per share for the three months ended December 31, 2024 was $1.82.
Speaker Change: Net growth in our non-purchase loans for investment were $208 million for the three months ended December 31, 2024.
Speaker Change: Strong loan originations of $3.5 billion and growth in single-family mortgage warehouse and C&I loan balances were offset by declines in loan balances in our 5-1 hybrid arm single-family and multi-family jumbo mortgages of $381 million this quarter.
Speaker Change: We believe that we can reduce these significant headwinds to loan growth this quarter in single-family jumbo mortgages given that the pipeline has risen from $345 million in the prior quarter to $496 million due to recent competitive exits, selective rate reductions, and some assistance from the yield curve.
Speaker Change: We also believe we have the potential to be flat to slightly up in our multifamily hybrid arms this quarter, given that the yield curve isn't working as actively against this product as it has been over the last several years, and we're seeing more rational valuations in the market.
Speaker Change: Lender finance, fund finance, and equipment leasing had strong originations in net loan growth this quarter. Ending balances in our auto loan portfolio were up slightly at December 31, 2024, representing the first sequential increase since the first quarter of fiscal year 2023.
Speaker Change: Average loan yields for the three months ended December 31st, 2024 was 8.37%, down from 9.01% in the prior quarter and up 19 basis points from the corresponding period a year ago.
Average loan yields for non-purchased loans were 8.
Speaker Change: .08% and average yields for purchase loans were 13.92% which includes the accretion of our purchase price discount.
Speaker Change: The prepayment of three FDIC-acquired loans increased the first quarter of 2025 average loan yield by 30 basis points. Excluding the FDIC loan prepayments in the September 2024 quarter, average loan yields were down sequentially due primarily to loan MECs.
Speaker Change: The remaining FDIC-purchased loans continue to perform, and all loans in that portfolio remain current.
Speaker Change: New loan interest rates were the following, single family mortgage 8.3%, multifamily 9.2%, C&I 8.5%, auto 9.7%.
Speaker Change: Ending deposit balances of $19.9 billion were roughly flat-linked quarter and up 9.5% year-over-year. Demand, money market, and savings accounts representing 96% of total deposits at December 31, 2024 increased by 10.6% year-over-year.
Speaker Change: We have a diverse mix of funding across a variety of business verticals, with consumer and small business representing 62% of total deposits.
Speaker Change: Commercial, TM, and Institutional representing 20%, Commercial Specialty representing 8%, AXOS Fiduciary Services representing 6%, and AXOS Securities which is our custody and clearing representing 4%.
Speaker Change: Total non-interest bearing deposits were approximately $3 billion at the end of the quarter.
Speaker Change: Total ending deposit balances at Axos Advisory Services, including those on and off Axos's balance sheet, were up approximately $78 million compared to the prior quarter.
Speaker Change: Client cash shorting has stabilized at or near the bottom, representing approximately 3% of assets under custody at the end of the quarter compared to the historic range of 6-7%.
Speaker Change: We are focused on adding new assets from existing and new advisors to grow our assets under custody and cash balances. In addition to our access securities deposits on our balance sheet, we had approximately $450 million of deposits off balance sheet at partner banks.
Speaker Change: For the quarter ended December 31st, 2024, our consolidated net interest margin was 4.83% compared to 5.17% in the quarter ended September 30th, 2024.
Speaker Change: Excluding the 30 basis point boosts from the FDIC purchase loans that paid off early, our consolidated net interest margin would have been 4.87% for the September 30, 2024 quarter.
Speaker Change: We break out the average balances and loan yields for the purchased and non-purchased loans in our supplemental schedules provided as an exhibit to the press release for readers to separate the impact of the loan purchase on that interest margin.
Speaker Change: We continue to hold excess liquidity, which had an 18 basis point drag on our net interest margin in the quarter ended December 31st, 2024.
Speaker Change: Our net interest margin remains above the high end of our target, with and without the benefit from the FDIC purchased loans, largely because of the diversity and granularity of our funding across our consumer banking, commercial banking, and securities businesses.
Speaker Change: Total interest bearing deposit costs were 3.95% for the quarter ended December 31, 2024, down 51 basis points from the prior quarter.
Speaker Change: We have been able to reprice our higher cost consumer and wholesale deposits while maintaining unbalanced sheet deposits roughly flat.
Speaker Change: We continue to grow our lower-cost and non-interest-bearing deposits in our commercial, cash management, and treasury businesses, as well as our specialty deposit business. We are also making good progress across selling deposits across selected lending businesses, such as Fund Finance.
Speaker Change: Cash sweeps in our custody business were $878 million at December 31, 2024, compared to $800 million at September 30, 2024. Continued strong net new asset growth and a normalization in cash sorting will be a tailwind in our ability to grow lower-cost deposit balances going forward.
Speaker Change: We expect our consolidated net interest margin ex-FDIC loan purchases to stay at the high end or slightly exceed the 425 to 435 range we have targeted over the past year.
Speaker Change: We have been successfully repricing our higher cost deposits and will continue to adjust deposit pricing based on future actions by the Fed and by competitors.
Speaker Change: We see more competition from banks and non-banks in certain lending categories. We have selectively adjusted pricing where appropriate to be more compatible for high-quality deals. Our loan pipelines have improved meaningfully in our single-family, mortgage, and multifamily term lending business over the past few months as a result of strategic actions we have taken.
Speaker Change: A steeper yield curve also makes our hybrid, single-family, and multifamily loan products more economically viable. While it may take a few quarters for the hybrid loans in our pipeline to have a meaningful impact on our balance sheet growth, we believe the level of net attrition in our single-family and multifamily term loans, which have been around $300 to $400 million per quarter,
will subside.
Speaker Change: The credit quality of our loan book continues to be solid, despite a few idiosyncratic circumstances that led to an uptick in non-performing assets this quarter. The majority of our non-performing assets are in the real estate-backed loan area, where LTVs are conservative and our historical losses have been low.
Speaker Change: Non-performing assets in our single-family jumbo mortgage is increased by approximately $10.4 million from September to December. The increase was attributed to three assets with a weighted average loan-to-value of 56%.
Speaker Change: Non-performing assets in our multifamily mortgage book increased by $17.8 million in the late quarter due to two properties where we do not believe will incur any additional loss.
Speaker Change: Non-performing assets in our commercial real estate loan book increased by $20 million primarily because of a $14.5 million dollar loan in Brooklyn. The loan was downgraded due to a maturity in October 2024, an extension of that maturity to allow the property to be sold.
Speaker Change: The full recourse guarantors have significant liquidity and net worth and are making principal accounts while marketing the property for sale above our loan amount.
Speaker Change: We are confident that we are not losing any money on this loan given the value of the property and the strength of the guarantors.
Speaker Change: We do not anticipate a material loss from loans currently classified as non-performing in our single family, multi-family, or commercial real estate loan portfolio. Our commercial real estate specialty portfolio continues to perform very well and in line with expectations.
Speaker Change: All C&I loans classified as non-accrual at December 31, 2024, but one, a $6.4 million loan, continue to make contractual principal interest and contractual curtailment payments.
Speaker Change: Non-performing assets in our C&I lending portfolio increased by approximately $27.3 million, primarily due to one syndicated non-real estate lender finance loan with an unpaid principal balance of $23.9 million.
Speaker Change: This syndicated loan was downgraded due to some credit deterioration in the underlying assets. However, the borrower's current principal balance has been paid down by around 11% since June 30, 2024, and the facility balance is within the collateral pledged to the borrowing base.
Speaker Change: We're saddened for the families and communities impacted by the tragic wildfires in the greater Los Angeles area. Thankfully, none of our employees lost their homes.
Speaker Change: We've been actively engaging with borrowers of properties in the affected area since the fires initially started.
Speaker Change: Based on the information we've gathered so far, we have a handful of single family residential properties that are complete losses and others that have suffered less damage.
Speaker Change: given the low LTVs that we have on most of our single family residential mortgages.
Speaker Change: We believe that the insurance coverage maintained by the borrowers is adequate to cover the outstanding loan balances for the majority of properties. For those loans where the insurance coverage does not fully cover our loan amount, we have umbrella insurance from Lloyds that we believe is adequate to cover the potential shortfalls.
Speaker Change: Additionally, the value of the land, which may be excluded from insurance coverage, exceeds the value of the property in many cases, particularly those in Malibu and Pasadena.
Speaker Change: While it's too early to assess how quickly the revitalization effort can commence, we are willing and ready to help the communities and homeowners in the affected areas rebuilding by providing loans to rebuild these properties and these neighborhoods.
Speaker Change: Access clearing, which includes our correspondent clearing and our RIA custody business, had a good quarter.
Speaker Change: Total deposits at Axios Clearing were $1.36 billion at the end of the quarter, up $104 million from the prior quarter. Of the $1.4 billion of deposits from Axios Clearing, approximately $900 million were on our balance sheet and $450 million were held at partner banks.
Speaker Change: Client margin balances grew by 24.5%, up from $220.5 million on September 30th to $274 million at the end of the quarter.
Speaker Change: Securities lending increased by approximately 41% linked quarter to $135 million. Net new assets from our custody business were $822 million in the December quarter, up from $559 million in the September quarter.
Speaker Change: This is a continuation of the positive net new asset momentum we have experienced over the past few quarters with new assets outpacing the runoff in certain legacy advisor assets. The Access Advisory Sales Team continues to have traction in the financial planning segment of the RIA space where our client-centric, non-competitive service model resonates well.
Speaker Change: The pipeline for new asset custody clients remains healthy, and we expect continued organic net new asset growth in AAS.
Speaker Change: From a product perspective, we continue to identify ways to generate incremental fee income and partner with third parties to offer additional services, such as access to alternative assets.
Speaker Change: Improvements in our onboarding process for Access Advisory Services have reduced the time required to onboard new advisors.
Speaker Change: We've started to leverage low-code software development and offshore practices that we have implemented broadly at the bank to more projects at the securities businesses.
Speaker Change: This has reduced the amount of time it takes for us to launch and complete projects with fewer resources than it would have taken if we used a more traditional approach. We're also actively working on artificial intelligence use cases to enhance efficiency.
Speaker Change: We believe that the economic benefits from sustained net new asset growth, a normalization in cash balances and operational productivity initiatives will more than offset investments we are making in our clearing and custody business in the medium to long term.
Speaker Change: The team hires we have made across various commercial lending and deposit businesses are contributing to loan and deposit growth.
Speaker Change: Our commercial cash and treasury management teams generated deposit growth in this quarter with contributions coming from the existing teams and our new hires. We continue to explore different ways we can scale our incubator businesses in various deposit and lending verticals.
Speaker Change: Some require additional products and features, while others can gain traction more quickly through better, more targeted marketing and client segmentation. While we remain selective in adding new teams, our focus in calendar 2025 is on scaling the teams we have added over the past year.
Speaker Change: I'm excited about the opportunities we have to grow each of our deposit, lending, and fee income businesses.
Speaker Change: We have a strong and growing amount of excess capital to continue investing in product and technology development, new capabilities, and our team members. While organic loan growth and opportunistic share purchases remain our preferred use of capital, we are seeing a meaningful increase in the number of inorganic asset and business acquisition opportunities.
Speaker Change: Additional clarity from an economic and regulatory perspective could further increase the number of bank and non-bank opportunities that come to market. The $150 million at the market shelf we announced today is a proactive step to put us in a favorable position to capitalize on potentially creative and strategic opportunities that may require additional capital.
Speaker Change: We do not intend to raise any capital unless we have a clear line of sight into an acquisition that would require additional capital given the significant excess capital we have today.
Speaker Change: We remain disciplined in the type and valuation of businesses we acquire.
Speaker Change: Regardless of whether we are successful in consummating an acquisition, our asset-based lending philosophy with conservative loan-to-values, improvement structures, and diversified mix of lending and funding will continue to generate profitable growth for our shareholders.
Derrick Walsh: Now I'll turn the call over to Derrick who will provide additional details on our financial results.
Derrick Walsh: Thanks, Greg. 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 axosfinancial.com.
I will provide some brief comments on a few topics.
Derrick Walsh: please refer to our press release and our SEC filings for additional details.
Derrick Walsh: Our provision for credit losses was $12 million in the three months ended December 31st, 2024, compared to $13.5 million in the corresponding period a year ago.
Derrick Walsh: The primary reason for the year-over-year decline is due to lower net growth in loans held for investment in Q2 2025 compared to the corresponding period a year ago.
Derrick Walsh: Our allowance for credit losses to total loans held for investment was 1.37%, up slightly compared to 1.34% at June 30, 2024.
Derrick Walsh: We remain well-reserved relative to our low historical and current credit loss rates.
Derrick Walsh: Non-interest expenses were approximately $145 million for the three months end of December 31, 2024, down $2 million from the quarter end of September 30, 2024.
Derrick Walsh: Salary and benefits expenses were down slightly to $74 million, and advertising and promotional expenses and professional service expenses were down by $3.2 million and $0.8 million, respectively, compared to the three months ended September 30, 2024.
Derrick Walsh: We continue to balance investing in products, systems, technology, and people, while identifying ways to reduce non-interest expenses through automation, straight-through processing, and other operational improvements.
Derrick Walsh: Our loan pipeline remains healthy with $2.1 billion of total loans in our pipeline as of January 22, 2025, consisting of $496 million of single-family residential jumbo mortgage.
$60 million of gain-on-sale mortgage.
$138 million of multi-family and small balance commercial mortgage.
Derrick Walsh: $54 million of auto and consumer and $1.4 billion of commercial loans.
Derrick Walsh: We expect similar loan growth dynamics compared to recent quarters, with growth across a broader set of real estate and non-real estate lending businesses, partially offset by payoffs in our CRESL.
Single-Family Mortgage and Multi-Family Lending Verticals
Derrick Walsh: We believe that we will be able to grow loan balances organically by high single digits year over year in the remaining two quarters of fiscal 2025, excluding the impact of the loan portfolio purchase from the FDIC or any other potential loan or asset acquisitions.
With that, I'll turn the call back over to Johnny.
Thanks, Derrick. Olivia, we're ready to take questions.
Great!
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Derrick Walsh: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Kyle Peterson with Needham & Company. Please proceed.
Great. Good afternoon, guys. Thanks for taking the questions.
Kyle Peterson: I want to just start out on the deposit costs, really impressive to see you guys be able to kind of push down the cost to know rates have been.
Kyle Peterson: a little choppy. I just want to see, do you guys see more...
Kyle Peterson: room for that moving forward if rates are stable For reasons they continue to drift down or I guess how much pressure or kind of rate sensitive deposits Do you guys see? At least in the near term that you might have some room to reprice lower
Kyle Peterson: Yeah, with respect to what we were able to do this prior quarter, it really was the result of taking the more, most of the result was taking more of the rate-sensitive deposits down. I think it's probably a little difficult to do that.
Kyle Peterson: a drop in the reference rate, but you know, we are...
Kyle Peterson: So I think that definitely is an opportunity over time to continue to do that. So that would be really where that is. But if we get our goal, and I think we very clearly can match it, that essentially is to have...
to offset any decline.
Kyle Peterson: that we get from having variable rate loans that reprice by repricing our deposits.
Kyle Peterson: And I think we were able to do that, as you said, very well this quarter, and that's the goal. So, obviously we want to improve the deposit max over time, but we want to be able to demonstrate that we can do what we did on the way up, on the way down as well.
Speaker Change: Okay, that's really helpful. And then I guess just to follow up on the net interest margin, I know you guys kind of said towards
Speaker Change: mortgage and And the yield curve's gotten a little steeper there So which should help how much is should we think of between the asset side first, you know, some of these deposit more rate sensitive Benefits you guys have been able to sell so far
loan rates, but they have much higher deposit balances.
So, it really depends on the segment.
Um.
Speaker Change: You know, I think what we're doing is we're really looking forward and forecasting as best we can.
Speaker Change: what we think yields and loan yields are going to be and how we're raising deposits and looking at that mix and coming up with that. So, in order to disaggregate that, I really have to look at each kind of business unit specifically.
In order to do that, I mean, one...
Speaker Change: you know, rate was, so we weren't really going to go there. And that was really a problem for auto. It was a problem for single family. It was a problem for anything with term, and we feel much better about that now, so we're opening that up.
Speaker Change: You know, obviously we could reprice deposits and maybe if we lost a little bit because we have a lot of excess liquidity, that'd be okay. But I think what we're going to try to do is, I think we feel good about our, you know, where we are, just, you know, try to grow into the excess liquidity.
Speaker Change: All right, great. Thank you very much, and nice quarter, guys.
Thank you.
Speaker Change: Thank you. Our next question comes from the line of Gary Tenor with DA Davidson. Please proceed with your question.
Thanks, good afternoon.
Speaker Change: Greg, I was wondering if you could share any thoughts you would have with regard to kind of re-engaging on the crypto side of the world given kind of the more positive bias out of Washington.
Yeah, it's a great question.
Speaker Change: I really think what we need is we need more specific clarity and specific rules with respect to how, you know, specific, different, you know, how specific, different, you know, how
Speaker Change: companies are going to be regulated and so we've had some...
Speaker Change: You know, I've had some executive orders and things like that, and we expect that there may be...
Speaker Change: you know some ability to look at that and obviously we built products around that which we never really even used but it really is going to have to be a fairly comprehensive view across
Speaker Change: primary regulator thinks and what the SEC thinks and really getting some good either legislation or at a minimum rulemaking on that.
Speaker Change: You know, I don't really think we have a lot of appetite to kind of jump into that without the proper guidance. And right now, the way it sits out there, too, is...
Speaker Change: Mostly, and we did this anyway, but you have to go through a regulatory process of non-objection to do.
Speaker Change: to do that, just like it was before. So you have to go through that process. And I don't know exactly how that's gonna change.
You know, obviously there's been some movement right now.
Speaker Change: with BFED being confirmed and whatnot, but there's still probably a lot of changes that are coming in the regulatory agencies, and then really kind of figuring out where guidance comes out there. I think that's the first step.
Speaker Change: Some of the kind of issues that that moved to non-accrual in the quarter If you look back from June 30 total NPAs have doubled or more than doubled by a bit Can you just talk about kind of the the level of I guess forward? You know analysis you're doing on
properties and otherwise to get a kind of
Speaker Change: bring stuff forward into non-accrual and start working on it proactively or how that process works, that access.
Speaker Change: Yeah, you know, it's really been with respect to, like a lot of these, a lot of these things particularly on the CNI side are, they're sort of,
The question is, with respect to something, is that...
For example, this one that we have with...
Speaker Change: It's a subprime auto lender finance deal. It's a syndicated deal.
Speaker Change: We're within the borrowing base, the assets, but it's over-advanced on the advance rate, right? So if we were able to get a lot better information on that and basically be able to have...
a better understanding and make sure that we are...
Speaker Change: You know, that the assets are worth what the field exam says they are, whatever. Maybe we wouldn't put that on nonaccrual. So some of this is sort of a judgment with respect to some of these things.
Speaker Change: So, I expect a lot of these to resolve themselves relatively quickly. In some cases, some of the borrowers have gotten used to, on the real estate side, some of the borrowers have gotten used to some of the banks kind of just capitulating and making...
Speaker Change: various concessions to them and so they're so much sort of almost daring like hey
Speaker Change: Let's you know, let's find out and so, you know, our response has been fine You know, we have an ability to sell your loan at par better And so, you know, you need to do what we're asking you to do and sometimes they've been a little bit slow in doing that so this is sort of just
Speaker Change: Making sure that happens, but what we're what we're seeing on the real estate side is very positive
Speaker Change: We are getting regular evaluations looking at it, we feel really good about that. If you look at, let's say, substandard loans, those have gone down. We have a lot of active sale processes.
Speaker Change: that are ongoing right now for the real estate side. And really the, and then on the CNI side, since we've had...
Speaker Change: Yes, they've gone up, but we've essentially had next to zero non-accruals there. And so that really is the STG syndicate, which continues to pay. They've continued to pay us.
Speaker Change: But the reason we put it on non-accrual is because they did this restructuring. We didn't participate in it. We think that what they did was in violation of the credit agreement, and they're not giving us proper information.
Speaker Change: around what our collateral is. So with that kind of uncertainty, I think it's...
Speaker Change: Proper to put it on non-accrual. Now, you know, non-accruals are not all created equal.
So, you know, all are not accruals except for that.
and six million dollar Donna Krull.
and didn't see an eye or a pang.
And so is the lender finance deal.
Speaker Change: You know it's hard to really it's hard to really know because sometimes timing
Speaker Change: For example, there's one deal, the deal that the guy who's a guarantor...
Speaker Change: has a multi-billion dollar balance sheet, but we didn't get the appraisal back before the end of the quarter, and so that was on non-accrual, that'll probably pop off, right? So it's just sort of...
Speaker Change: It's some of these things where you just are kind of looking at what the standard is and whatever, but I feel good about it. I don't think there's a lot of lost content there.
Speaker Change: You know, on STG, you know, they're still paying, they're a massive company, but we're not getting the information we need there. And so we got our lawsuit on file there, and you know, we think we'll be successful there, but you know, that'll take a bit of time.
All right, Greg, thank you.
Thank you.
Speaker Change: Thank you. Our next question comes from David Feaster with Raymond James. Please proceed with your question.
Hey, good afternoon, everybody.
Hey, you got your net, David.
Speaker Change: Given confidence in accelerating growth, could you touch on the pulse of demand in your borrowers? Sounds like the pipeline is solid. Where are you seeing the most opportunity today? Are there any segments within the non-lender finance?
Speaker Change: are non-CRE lender finance and the ABL that are seeing any specific strength in the quarter?
You know, Cap Call continues to look quite good.
Speaker Change: The real estate lender, finance, NRALF, I mean they all have...
Speaker Change: Decent pipelines. I mean we did three and a half billion dollars of originations last quarter, right? So I mean partly this the the hangover
Speaker Change: on the prepay side is frankly the result of a delivered strategy.
Speaker Change: that we made which was we're not going to do any term lending for three years, right?
Speaker Change: And that's great from an interest rate risk perspective, and we don't have any mark-to-market on our balance sheet, but it does kind of create that issue, right? And so, as you said, if you look at the term lending component of our business, where it's been running off.
Speaker Change: 3 or 400 a quarter and that's also been intentional because if you are going to
Speaker Change: Lend it you know on the five-year at a 250 or 300 spread or whatever You know you are going to be in a in a rough place
Speaker Change: but we wanted to wait for that to adjust. So if you look at all those spots, you look at auto, you look at multifamily, you look at single family, you know, that...
Speaker Change: We now have a product that's at least competitive there, because we feel good enough about the credit side of where things have stabilized there. Multi-family borrowers are more realistic.
Speaker Change: They know their cap rates are not 4%, right, and rates are not going down to 250 in 18 months, right? That wouldn't be a typical conversation.
Speaker Change: you know, a year and a half ago, right? Really. Like that, it's amazing what people thought. And then...
Speaker Change: You know, auto, it's kind of, that sort of bubble has kind of popped out of the asset value. So, I think if we get all that stuff right, and I see that happening, I mean, we've also benefited on the SFR side for some exits, right? I mean, WAFED got...
Speaker Change: Luther used to compete with us and Wafed competed with us on the single family jumbo side.
Speaker Change: They've pushed out And so it's a little early to tell how this pipeline is going to go And it obviously has increased a lot how quickly it closes what the pull-through ratio is in some respects We really don't know yet, right? This is a relatively
New ramp and so we've got to see that but
Speaker Change: You know there's there's movement and frankly with with some of the things like cap call facility stuff They can get paid off. We haven't seen that so you know I'm cautiously optimistic, but there is a level of caution in it
Speaker Change: You know, I do believe that, for example, I think Mortgage Warehouse, that kind of popped up.
Speaker Change: Maybe slightly growing this quarter and I think single-family can pretty much get there too. And so that's a big benefit and
you know, just looking at, you know, Cressel, there's...
Speaker Change: You know, we've got, we try to judge where prepays are on Cressel. That's a little bit tough to do. We've got a lot of great new deals there, but sometimes those new deals take a while to fund up because all the equity has got to come in first, and so our funding might be delayed. So, you know, look, I think...
Speaker Change: We'll be able to get back to it, but it's been a slog, it's been a struggle.
Yeah
with the group set to accelerate.
Speaker Change: yet still investing in the franchise. How do you think about expense growth going forward? You know, what are some of the key initiatives you've got on the horizon? And how do you think about your ability to drive positive operating leverage as we look looking out here?
Yeah, I think we really have to...
Bye.
Speaker Change: Be very very thoughtful about expense growth and the reality is is that if over the last two quarters
Speaker Change: We have not been able to deliver the sustainable asset growth that we've historically done for the, you know, 17 years I've been here. And that's really the first time. And so, you know, prudence and discipline requires that.
Speaker Change: You basically make sure that you get to sustainable levels of asset growth before you expand your expense base.
Speaker Change: There's so many tools and opportunities that exist now to make our operations more efficient. I mean, some of the stuff that the Artificial Intelligence Task Force is doing...
really looking promising.
Speaker Change: and we're starting to roll some of those things out into the organization.
Speaker Change: The low-code platform, we're delivering a new product for our clearing customers that will allow them...
Speaker Change: easily three times the number of people, three times as long, but the low-code platform was able to deliver it in around eight months.
Speaker Change: So we're seeing a lot of productivity coming from the technological area and we've done a lot of hiring
Speaker Change: in these teams, and those teams are still getting up to speed and developing. So, I think we've really got to be cautious about that. I've been telling the team that we really need to keep...
Speaker Change: the type of discipline we showed this quarter. Keep it going forward and really try to enforce that unless there's...
Speaker Change: really great opportunities, and then, you know, we can get growth going further, you know, we can continue to do that. But, you know, we had, there's some positive stuff with respect to, you know, AAS is growing now. I see that continuing. That's a good thing. So, you know, those...
You know, getting all those engines kind of...
Speaker Change: Ramping up together is going to be important so we talked about that on the loan side where some of that that term stuff Was just a very big a headwind you know that's starting to go away at least as a headwind We've got to see if we can get consistent growth there and so
Speaker Change: With the team we have now including all the developers. There's a lot of projects we can do
Speaker Change: I mean this quarter we delivered a ton of stuff and there's a big effort now to go through and prioritize what we want to do next with that team without having to add a lot more folks and to get to the next set of strategic priorities.
Speaker Change: That's great and and you earlier in your remarks you talked about you know an increased opportunity for capital deployment Obviously we got the ATM offering announced today. Maybe reading between the lines. It sounds like there might be
Speaker Change: Again, it sounds like the range of opportunities is pretty wide. I'm just curious, what types of transactions are most appealing to you at this point? Is it enhancing existing lines, expanding new lines? Just kind of curious, within capital deployment, what's most appealing and what's most interesting to you?
Yeah, we like specialty finance businesses.
Speaker Change: that add a unique niche to what we're doing. Obviously, we have the deposit funding, we've got the capital, we've got good technological resources, so we look for businesses like that. You know, we bid...
Speaker Change: We bid on one earlier in the year, ended up losing out to somebody who paid more than I think they should have. But, you know, that's definitely an opportunity.
Speaker Change: We're not actively looking at a lot of whole bank stuff right now, but I wouldn't read too much into the timing of the ATM offering. I think it's more looking forward and saying...
Speaker Change: That gee there's probably going to be an unfreezing of the bank M&A market
Speaker Change: Even if another bank buys another bank, often that results in teams being spun off or components and pieces.
Speaker Change: that are pushed out, so it really is just about having that available, it's not a costly thing to do. Obviously we're not going to draw on it, we've got a lot of excess capital and if we see something...
Terrific. Thanks for all the color. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Andrew Lish with Piper Sandler. Please proceed.
Speaker Change: Hey guys, thanks for taking the questions. You've answered most of mine, but just wanted to ask about the provision you mentioned the quantitative impact of the unemployment rate and commercial real estate mortgage rates The unemployment rates been pretty stable for a while. So curious how that
Speaker Change: Sort of factored into the reserve bill this quarter and then on the CRE mortgage rates are you is it more concerned over upward repricing as loans hit the Variable rate period just kind of clarity on why the provision was what was right where it was
Speaker Change: Yeah, on the provision, it's the long-term unemployment. So the model takes into account the long-term, a number of different economic factors, and so the long-term unemployment rate, and we use Moody's for a lot of our data.
Speaker Change: that flows into the model. And so I think it went up from about 9.0 in a, and this is in the most dour of circumstances too, in their extreme stressed model, that unemployment in the long-term stressed model went from nine to 9.3. So that was one of the main drivers and that's what that reference is encompassing. And then your other question was on the commercial.
Speaker Change: Mortgage real estate rates, is that, can you rephrase that one?
Speaker Change: Well, along with the provision, I'm just curious, did he mean that...
Speaker Change: As loans repriced, as loans at their adjustable rate period on arms, is it repayment concerns based on what you might say the schedule of what's going to be coming due or hitting their repayment period here in the near future?
Speaker Change: Right, yeah, there's a variety of factors that flow in, but one of the things there that the model considers is
Speaker Change: How does, if you have something like a hybrid loan, go from a 5% interest rate and it jumps up to 8.5% or something like that, right, that that would put stress on that borrower and in a downturn economic scenario, that borrower would be more likely to default and potentially have a loss.
So, that's what the model does, but...
Speaker Change: loan-to-value support, right? We have to heavily weight our S3 and S4, and it's in line with some of our kind of, some views that the economic forecast maybe could be a little more dampened than some expect. So we weight that in the models, and that's part of what drives.
Those are the provision.
Speaker Change: Got it. You know, since the FGIC loan purchase, the reserve ratio has been right now at mid-130s level. If you look at it, is there anything that would cause that in your mind? If you look at the portfolio now and look at the modeling now, that would cause it to differ too much from that, either one way or another?
Speaker Change: No, because part of the idea is that we are looking over the life of the loan, and as just mentioned, we already kind of stress in a certain level.
Speaker Change: significant changes in the performance of our portfolio. Those are the types of economic scenarios and more independent to our portfolio type of impacts that would have to happen.
Yeah, I mean on the repricing, on the...
which is mostly on the term multi-family stuff.
Speaker Change: We've done a lot of analytical work on that, and we just finished a big independent review of it, and it's really not a material issue. I think one of the things for us that makes it interesting is that because our portfolio was so short,
Speaker Change: because we had shortened everything up to mostly two-year, but some three-year. We are already experiencing a lot of roll, and that also results in a lot of prepays.
Speaker Change: on the, in that business, because there are others offering 5-1 arms to do that, so we don't really see a lot on the repricing side, and the Crestle side is all floating rates, so.
some losses associated with it, I mean...
Speaker Change: Look, I think that the CNI side, you know, is one of those areas that, you know, you just have, you have less ability to just take the collateral and just liquidate it, right? So that's always a little more uncertain.
Speaker Change: But we don't see anything you know talked about a couple of those things and there's you know always a possibility there's something else, but there's You know not seeing anything that's systemic or anything like that
Very helpful, guys. Thanks so much. I'll step back.
Gary Tenner, Andrew Liesch, Edward Hemmelgarn
Speaker Change: Thank you. Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.
Kelly Motta: Hey, good afternoon. Thanks for the question. I don't think you guys have been covered at this point. Maybe turning to the fee income, Greg, I think...
Speaker Change: You mentioned Access Advisory Services is really hitting its stride with
MarizaciĆ³n Manzano, Editor-in-Chief, Future Of The Mar Sur Poker
you know, these investments' ability to grow.
for Future.
Yeah, I mean, I think...
The securities business is definitely our best hope for that.
You're decent.
Speaker Change: Let's say this quarter's style, it looks like that, net new asset growth, that will contribute to see income growth. And the only caveat that I would say about that is that obviously if rates stabilize, that's good. And so what that teems...
Speaker Change: the rate decreases that you have, right, because that business is a rate-sensitive business because they make a decent bit of spread income off of the free cash balances.
Speaker Change: That's the only caveat I would say I do think you're going to grow the core And so if you get some stability on the rate side That'll be beneficial
you know, for that business.
Speaker Change: You know, all the other little stuff like the prepay income, you know, when you're not doing term loans, you're not going to get a lot of prepay income. As we start doing some more of those on the multifamily, that may be something. The TM fees, we are obviously doing that, but a lot of that is offset by earnings credits.
Speaker Change: that you give in a higher-rate environment, so there's something there, but it's not...
Speaker Change: You know it really is the security side that has to
get better there, and right now the custody business...
Speaker Change: is growing a lot, the clearing side, we're continuing to work on a strategy there for them to be able to do more of the hybrids.
Speaker Change: and we've got a new platform rolling out this next quarter. It'll take a while to get that going, but hopefully both of those engines will start to work and that'll allow that fee income line to grow a little bit more.
Speaker Change: Awesome, thanks for that. And it sounds like you're very optimistic about the prospects of organic growth picking up again. Even so, it seems like given your return, you'll continue to build capital. And I believe you mentioned the buyback in your remarks. Wondering how you're thinking about the buyback here at
and Tina Fall.
Speaker Change: Yeah, well, I mean, obviously, you know, you look at it as a multiple of earnings, you look at it as...
Speaker Change: as sources and uses of capital. I would say that I'm optimistic about loan growth returning. I use that very optimistically. I'd say, I'll just give you a flat optimistic. How about that?
Speaker Change: I mean, again, we did $3.5 billion last quarter and grew a couple hundred. I really do believe we're going to do better than that, but at times, sometimes, it's just hard to know.
Speaker Change: There's a lot of things changing in the market right now.
So there's just a lot of instability of where...
Speaker Change: A lot of competitors are really hurting for loan growth. Sometimes they'll undercut you, things like that. But I think we will. We'll kind of let this play out. Obviously, we're not gonna let capital build forever.
Speaker Change: of acquisition and then, you know, what we see from a repurchase perspective. And so, obviously, we're not going to continue to build capital at these levels.
Speaker Change: you know, for forever. But, you know, we also want to be able to make sure that we can handle our priorities, which, you know, would be primarily organic growth. And then, you know, then at that point, share a purchase is an opportunistic M&A.
Speaker Change: Got it. That's helpful. Maybe just last housekeeping question for me. I believe you...
Speaker Change: now expect margin to come in a bit above the 425, 435 kind of core basis.
Speaker Change: I'm wondering if that 30 to 35 business points of accretion contribution...
contribution was in this quarter.
to help out the discussing office.
Thank you for watching.
Speaker Change: Yeah, the 30 to 35 is still a good number. I believe that's roughly where we were, but I'll get that number refined for you.
Great, thank you so much!
Thank you, Kelly.
Speaker Change: Thank you. Our next question comes from the line of Gary Tenor with D.A. Davidson. Please proceed.
Speaker Change: Thanks. I just had a quick follow-up, Greg. You made the comment that you've got some nice deals, as you put it.
Speaker Change: The Crestle space that maybe take a little time to fund before you know after the equity gets put in Can you talk about kind of the the segments or loan type within Crestle that you're you're seeing demand And you've got kind of you know newer newer money going to work in
Yeah, I mean, mostly it's, uh, it's multi and condo.
Speaker Change: That's mostly weather bridge or construction. That's usually where that is. Not doing a lot on the office side or next to nothing.
Speaker Change: I think actually close to nothing, I mean certainly not anything new, and that's a very small piece of it, and you know the, that's, I think that's...
Speaker Change: That supplement page there really says there's, you know, every now and then there may be a hotel here and there, but it's mostly multi-family and single-family.
Speaker Change: Is there a, is that, I assume it's metro market weighted, is it more east coast oriented or west coast oriented?
Speaker Change: Thank you for joining us. Thank you. It was a pleasure.
Speaker Change: You know, so some of the cities that have kind of come up
Speaker Change: Since, you know, the post-COVID time frame and things like that, but you know, this is
Speaker Change: This is where the projects, where the funds that we work with are together on that because these are almost always partnerships with the funds.
Okay, thank you.
See ya.
Speaker Change: Thank you. There are no further questions at this time. I would like to pass the call back over to Johnny for closing remarks.
Johnny Lai: Great. Thanks everyone for your interest. We'll talk to you next quarter.
Johnny Lai: That concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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