Earnings call: Axos Financial reports robust Q3 growth, plans strategic expansion

Axos Financial, Inc. (NYSE: NYSE:AX), a banking and financial services company, has reported significant growth in its third-quarter earnings for fiscal 2024.

The company announced a 38.7% year-over-year increase in net income, reaching $111 million, and substantial growth in earnings per share, book value per share, and ending loan balances—marking the seventh consecutive quarter of double-digit growth in these areas.

Axos Financial’s deposit growth exceeded net loan growth by approximately $900 million, and the company’s net interest margin improved to 4.87%, up from 4.42% in the same period last year.

Key Takeaways

Axos Financial’s net income surged by 38.7% year-over-year to $111 million.Earnings per share, book value per share, and ending loan balances achieved double-digit growth for the seventh consecutive quarter.Deposits grew by roughly $900 million, surpassing net loan growth.Net interest margin increased from 4.42% to 4.87% compared to the previous year.Axos Clearing’s assets under custody reached $35 billion.The company is focusing on expanding its small business banking platform and piloting a white-label banking solution.

Company Outlook

Axos Financial expects the FDIC loan purchase to enhance net interest margin by 35 to 45 basis points over the coming years.The transition of the small business banking platform to the universal digital bank is underway, with plans to migrate all existing small business deposit customers in the upcoming quarters.The company is piloting a white-label banking solution with selected RIAs and introducing broker-dealers.

Bearish Highlights

Axos Advisory Services experienced a decline in deposit balances due to advisors shifting cash into risk assets and higher yielding alternatives, although the rate of decline has stabilized.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Bullish Highlights

The company is investing in systems, product features, and service offerings to enhance processes and capabilities.Axos Financial is well-positioned for growth and expects its investments to yield attractive returns for shareholders.

Misses

There has been a significant decrease in TAM assets, with over 20% running off, although these have been replaced with net new assets.The attrition of current customers has led to performance falling below expectations.

Q&A Highlights

The CEO discussed openness to M&A opportunities in various sectors, including securities, banking, and insurance premium finance.Margin compression is expected in the commercial specialty real estate side, but loan growth should maintain at organic margins.The company is adjusting its loan book strategy in a low-rate environment, potentially lowering spreads on commercial specialty real estate loans to secure safer deals.Despite challenges in the single-family market, the company sees potential in the auto market and geographical shifts in the CRESL market.

Axos Financial reported a robust performance in the third quarter, signaling a strong trajectory for its financial services and banking operations. With strategic investments in technology and product development, the company is enhancing its customer offerings and operational efficiency.

Axos Financial’s focus on maintaining a diversified and stable client base, alongside its careful management of interest rate risks, positions it favorably for sustained growth. As the company navigates market dynamics and explores new opportunities, stakeholders anticipate its continued success in the evolving financial landscape.

InvestingPro Insights

Axos Financial, Inc. (NYSE: AX) has demonstrated remarkable financial performance in the third quarter of fiscal 2024, with a notable uptick in net income and consistent double-digit growth across key financial metrics. Let’s delve into some insights that could further inform investors about the company’s current valuation and future prospects.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

InvestingPro Data shows that Axos Financial has a market capitalization of $2.88 billion, indicating a significant presence in the banking and financial services sector. The company’s price-to-earnings (P/E) ratio stands at a modest 7.5, suggesting that its stock could be trading at a low earnings multiple relative to near-term earnings growth. This aligns with one of the InvestingPro Tips indicating that Axos Financial is trading at a low P/E ratio, which may appeal to value-oriented investors.

Another key metric to consider is the company’s PEG ratio, which is currently at 0.13 for the last twelve months as of Q2 2024. This low PEG ratio could signal that the stock’s price is undervalued relative to its earnings growth potential. Moreover, the revenue growth of 19.85% over the last twelve months further underscores the company’s solid performance and potential for future expansion.

Axos Financial’s recent price uptick of 35.68% over the last six months reflects investor confidence and market recognition of the company’s growth trajectory. However, it’s worth noting that Axos Financial does not pay a dividend, which might be a consideration for income-focused investors.

For those interested in a deeper analysis, InvestingPro offers additional tips to further evaluate Axos Financial’s performance and potential. With the use of the coupon code PRONEWS24, readers can get an extra 10% off on a yearly or biyearly Pro and Pro+ subscription, unlocking valuable insights that could help in making more informed investment decisions. There are currently 6 additional InvestingPro Tips available for Axos Financial, which can be accessed through the following link: https://www.investing.com/pro/AX.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Full transcript – BofI Holding (AX) Q3 2024:

Operator: Hello, and welcome to the Axos Financial, Inc. Third Quarter 2024 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Please go ahead, Johnny.

Johnny Lai: Thanks Kevin. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial, Inc.’s third quarter 2024 financial results conference call are the company’s President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the three and nine months ended March 31, 2024, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements 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 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 axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release. Before handing over the call to Greg, I’d like to remind listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call. All of these documents can be found on the Axos Financial website. With that, I’d like to turn the call over to Greg.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Greg Garrabrants: Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I’d like to welcome everyone to Axos Financial’s conference call for the third quarter of fiscal 2024, ended March 31, 2024. I thank you for your interest in Axos 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 seventh consecutive quarter. Balanced organic loan and deposit growth coupled with further net interest margin expansion resulted in double-digit net interest income growth year-over-year in linked quarter annualized. We grew deposits by approximately $900 million linked quarter, outpacing our ending net loan growth by approximately $430 million. Strong loan originations were partially offset by higher than expected payoffs. We reported net income of $111 million and diluted earnings per share of $1.91 for the three months ended March 31, 2024, representing year-over-year growth of 38.7% and 45%, respectively. Our tangible book value per share was $35.46 at March 31, 2024, up 27% from March 31, 2023. Other highlights this quarter include the following. Ending loans for investment, net of allowance for credit losses were $18.7 billion, up 2.6% linked quarter, or 10.4% annualized. Growth was broad-based with growth in non-real estate lender finance, single-family warehouse and fund finance, offsetting lower origination volumes and single-family jumbo mortgages, higher payoffs in commercial specialty real estate, multifamily, and deliberate runoffs in our auto book. Net interest margin was 4.87% for the first quarter ended March 31, 2024, up 32 basis points from 4.55% in the quarter ended December 31, 2023, and up 45 basis points from 4.42% in the quarter ended March 31, 2023. One loan acquired from the FDIC paid off this quarter, boosting our net interest margin by approximately 3 basis points. Excluding the one-time gain associated with the FDIC loan purchase last quarter, non-interest income was up 4.5% from Q2 to Q3 due to higher mortgage banking income and prepayment fees. Our credit quality remains strong with net annualized charge-offs to average loans of 7 basis points in the three months ended March 31, 2024. The 7 basis points of net charge-offs this quarter includes 4 basis points of net charge-offs from auto loans covered by insurance policies with proceeds from those policies accounted for as fee income. We continue to generate strong returns with a 20.71% average return on equity and a 1.98% return on average assets in the three months ended March 31, 2024. We had balanced loan originations in our commercial and industrial non-real estate lending, including asset-based lending, non-real estate lender finance, and fund finance balances. Ending balances for our small, balanced commercial real estate and commercial real estate specialty lending businesses declined by approximately $19 million and $180 million, respectively in the third quarter. We continue to reduce our consumer and auto loan balances given our preference for originating and retaining loans with lower duration, floating rates, and a better risk-adjusted return in the current environment. Average loan yield for the three months ended March 31, 2024 was 8.65%, up 47 basis points from 8.18% in the prior quarter, and up 158 basis points from the corresponding period a year ago. Average loan yields for non-purchase loans were 8.19%, and average yields for purchase loans were 17.05%, which includes the accretion of our purchase price discount. New loan interest rates were the following. Single-family mortgages 8.7%, multifamily, 8.3%, C&I 9.2%, and auto, 10.2%. Our commercial real estate loans continue to perform well. It’s worthwhile to point out that the structure, duration, and exit strategies for our commercial specialty real estate loans are significantly different from traditional CRE term loans that most other banks originate and hold. The low loan-to-value and senior structure we have in place for an overwhelming majority of our commercial specialty real estate loans provides us with significant downside protection in the event of significant deterioration in the borrower’s ability or willingness to repay, the valuation of the underlying properties, or any construction delays. Our commercial real estate loans are floating rate with contractual maturities generally between two and three years compared to fixed-rate loans with contractual maturities of seven or longer years for most commercial real estate loans. Of the $5.2 billion of commercial specialty real estate loans outstanding in March 31, 2024, multifamily was the largest segment representing 38% of total commercial real estate loans, while hotel, office, and retail represent 28% and 4% respectively. On a consolidated basis, the weighted average loan-to-value ratio of our commercial real estate portfolio is 40%. Our retail and office segments of our commercial real estate book are well secured with weightage average LTVs of 46% and 36% respectively. Total commercial real estate loans secured by office properties declined by $8 million linked quarter to $410 million. Of the $410 million commercial real estate loans secured by office properties at the end of the quarter, 67% are A notes or note-on-note structures, all with significant subordination, with some having recourse to funds or cross-collateralization with other asset types, fund partners, and mezzanine lenders. These loans have an average loan-to-value of 37%, excluding any recourse or cross-collateralization. Non-performing loans in our commercial specialty real estate portfolio were approximately $26 million at March 31, 2024, identical to the 12/31/2023 ending balance, representing less than 4 basis points of our total commercial real estate loans outstanding. There are two loans, one condo building in New York for $15 million and the student housing building at Berkeley for $11 million, which make up the non-performing loan totals for commercial specialty real estate. 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 $38 million at March 31, 2024, roughly consistent with the December balance. Of the $38 million, there is one loan on an assisted living property for $25 million that has been reserved for more than a year. There is interest in the property that could result in a sale which would produce minimal or no additional loss. The rest of the multifamily term loans are for lower-balanced properties located in California with recourse and personal guarantees. The average loan-to-value of our non-performing multifamily and commercial mortgages is approximately 60%. We do not expect to incur a material loss on any of the other multifamily loans categorized as non-performing. We closed the purchase of two loan portfolios with a UPB of $1.25 billion from the FDIC in December of 2023. Ending balances were roughly flat, declining by approximately $10 million from the December quarter end to the March quarter end. All loans purchased from the FDIC are current. Non-performing single-family mortgage loans decreased from $54 million at December 31, 2023 to $51 million at March 31, 2024. The weighted average loan-to-value of our non-performing single-family mortgage portfolio was 55% at March 31, 2024. Given that home values continue to increase in the majority of markets where these properties are located, we did not foresee much loss content, if any, in our delinquent single-family mortgages. We increased deposits by $900 million, or 20% annualized in the third quarter. Checking and savings accounts representing 80% of total deposits in March 31, 2024 grew even faster at 25% annualized. Our deposits remain well diversified from a business perspective with consumer and small business representing 59% of total deposits, commercial cash, treasury, management, and institutional representing 24%, commercial specialty representing 7%, Axos fiduciary services representing 6%, and Axos securities, which is our custody and clearing business, representing 4%. Total non-interest bearing deposits were approximately $2.8 billion, relatively flat quarter-to-quarter. Our balance sheet remains slightly asset sensitive given the shorter duration, variable nature of our loans, and the granularity and diversity of our consumer, commercial, and securities deposits. At March 31, 2024, approximately 66% of our loans were floating, 27% were hybrid arms, and 7% were fixed. Term deposits were only 5% of our total deposits at quarter end providing us flexibility to decrease interest costs if and when rates decline. For the quarter ended March 31, 2024, our consolidated net interest margin was 4.87%, while our banking business net interest margin was 4.92%. Our consolidated and banking business NIMS remain above our guidance of 4.25% to 4.35%, despite holding excess liquidity due to strong deposit growth. We indicated last quarter that the FDIC loan purchase would boost our net interest margin by 35 to 45 basis points for the next several years. In addition to the amortization of our purchase discounts in the acquired loan portfolio, we recognized accelerated purchase discount accretion on one loan that paid off this quarter. The timing and amount of loan payoffs are unpredictable. We break out the average balances and loan yields for the purchase and non-purchase loans in our 10-Q for readers to separate the impact of the loan purchase on net interest margins. Total ending deposit balances at Axos Advisory Services, including those on and off Axos’s balance sheet, declined by $32 million in the quarter, reflecting advisors investing excess cash into risk assets and higher yielding cash alternatives. The rate of decline has decelerated, and we believe that the pace of cash sorting at Axos Advisory Services stabilized at or near the bottom, representing 3.6% of assets under custody at March 31, 2024, compared to the historic range of 6% to 7%. 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 Axos Securities deposits on our balance sheet, we had approximately $550 million of deposits off balance sheets at partner banks and another $700 million of deposits held at other banks by software clients in our Zenith Accounting and Business Management vertical. Non-interest expenses increased $11.3 million linked quarter, driven by a seasonal increase in payroll expenses, higher FDIC insurance expenses, and an increase in headcount. We have successfully onboarded several new leaders and teams in our commercial deposits, commercial lending, and our Axos Securities businesses. We believe these additions will help us grow and diversify our business from an operations capacity and product perspective. While we continue to evaluate adding talented individuals to our team, we expect the pace of hiring to slow significantly from the pace we’ve experienced so far year-to-date. Our focused investments in front and back-end systems, product features and service offerings, and other enterprise software and systems will further optimize our processes and capabilities. We started the initial transition of our small business banking platform to our universal digital bank with the goal of migrating all existing small business deposit customers to UDB in the next few quarters. This platform transition will leverage the investment we have made in UDB and make our small business banking offering more modern and user-friendly. We started piloting our white-label banking with selected numbers of RIAs and introducing broker-dealers. While the initial version does not have all the capabilities that an Axos consumer deposit customer has today, we believe the ability to provide a turnkey banking solution to the hundreds of thousands of affluent clients of our custody and clearing business will provide another potential low-cost acquisition channel for deposits and loans. Axos Clearing, which includes our correspondent clearing and RIA custody business, continues to make steady progress. Total deposits at Axos Clearing were $1.3 billion at March 31, 2024, down only slightly from $1.4 billion at December 2023. Of the $1.3 billion of deposits from Axos Clearing, approximately $762 million were on our balance sheet and $533 million were held at partner banks. The decline in off-balance sheet deposits is the primary reason for the sequential decline in non-interest income for Axos Securities. Total assets under custody were $35 billion at March 31, 2024, up from $34.4 billion at December 31, 2023. The pipeline for new custody clients remains healthy, comprised of 237 advisory firms with approximately $24 billion of combined assets under custody. We are prioritizing various front and back-end upgrades to our technology platforms for Axos Advisory Services. We believe the addition of new features and functionalities will improve our operating efficiency, scalability, and potentially expand the type of advisors we’re able to service. This is a multi-year initiative that will be implemented in stages, with a majority of the costs being offset by ongoing efficiency initiatives and additional revenue. We continue to outperform a majority of our peers from a loan, deposit, and earnings growth perspective, including margin and profitability. We remain well-positioned to maintain our outperformance given our strong liquidity and excess capital, a de minimis unrealized loss in our small investment securities portfolio, a multi-year boost in earnings and margin from our FDIC loan purchase, and solid organic growth prospects given the diverse nature of our banking and securities business. Our asset-based lending philosophy with conservative loan devalues and prudent structures makes us confident that we will be able to manage our credit through this cycle. While many uncertainties exist with respect to the economy, inflation, interest rates, and geopolitics, we are focused on managing our risk and investing in our future. We have a proven track record of capitalizing on market dislocations, as we’ve already demonstrated with our FDIC loan purchase and stock buybacks. We are confident the investments we are making in business systems, processes, and people will generate attractive future returns for our shareholders. Now I’ll turn the call over to Derrick, who will provide additional details on our financial results.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Derrick Walsh: Thanks, Greg. To begin, I’d like to highlight that in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Following a strong start to the first nine months 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. Our ending loan balances will continue to be impacted by the pace and timing of payoffs in any given quarter. Demand in our ABL, lender finance, and capital call lines and select C&I lending categories remain solid, while higher interest rates continue to put downward pressure on our origination volumes in jumbo single-family mortgage, multifamily, small-balance commercial real estate, auto, and personal unsecured lending. Our loan pipeline remains solid at $1.7 billion as of April 26, 2024, consisting of $226 million of SFR jumbo mortgage, $53 million of SFR gain on sale mortgage, $17 million of multifamily and small-balance commercial, $23 million of auto and consumer, and $1.4 billion of C&I lending. Our provision for credit losses was $6 million in the three months ended March 31, 2024, compared to $5.5 million in the corresponding period a year ago. Our allowance of credit losses to total loans held for investment was 1.36%, compared to 1.01% at March 31, 2023. We remain well-reserved relative to our historical and current credit loss rates. Lastly, our income tax rate was 28.8% for the third quarter ended March 31, 2024, slightly below the lower end of our guided range of 29% to 30%. Our tax rate in the third quarter benefited from the recognition of certain tax credits. We expect our annual tax rate to remain in the 29% to 30% range for the remainder of calendar 2024. With that, I’ll turn the call back over to Johnny.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Johnny Lai: Thanks, Derrick. Kevin, we are ready to take questions.

Operator: [Operator Instructions] Our first question is coming from Eric Spector from Raymond James. Your line is now live.

Eric Spector: Hi, this is Eric on the line for David Feaster. Thanks for taking the questions.

Greg Garrabrants: Hi, Eric.

Eric Spector: Just wanted to touch on the. Hi, good. I just want to touch on the hiring side to start. Like even after recruiting and adding talent. Just curious, what’s the pipeline and appetite for additional hires and where you’re focused on adding talent? Just curious how the pipelines are trending, too, for the treasury management and capital call teams you’ve recently added?

Greg Garrabrants: The capital call team, we’re not doing a lot of additional hiring there. There may be additional analysts and those sorts of positions. But right now we’ve got a great team. They’re doing a great job. And so things are pretty stable there. On the deposit side, we are in the process of recruiting more talent. I would say that it’s less from just a number of people than we’ve had historically. So, we’re continuing to look for deposit talent. And – it can be difficult to find. Sometimes we have a particular type of person, we’re looking for with a particular business max. But there are folks out there and there is a pipeline. I would expect, though, that the increases that you’ve seen in personnel expense would be moderating a bit in the next several quarters, relative to what they were, as far as from an increase perspective.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Eric Spector: Okay. I think we talked about maybe that running in line with loan growth. Is that a good way to think about it…?

Greg Garrabrants: Yes, I think that’s not a bad way.

Eric Spector: Yes. Okay. That’s helpful. And then just curious, I mean, maybe on capital and capital priorities, capital ratios remain strong. You continue to create capital at an elevated pace. Just even the expanded authorization, how do you expect to be active in buybacks here going forward? Or do you expect to kind of focus on organic growth, and take a more opportunistic approach like you did last year when shares were discounted? Just curious kind of more broadly how you think about capital?

Greg Garrabrants: Yes. Well, I think our stock price is still quite low relative to the earnings that we’re producing. But we also regularly look at acquisition opportunities, and I still think we have reasonable prospects for loan growth. So, we did a very little bit of buyback, I mean a very little bit this quarter, just based on some anomalies in the share price that occurred as a result of different exogenous events. But we’re ready to be active in the market there, and balance all three of those priorities. And it just depends really on what we see. There may be loan purchases or loan pools out for acquisition. Certain banks are getting out of certain business lines. Those are opportunities we look at. So it’s really difficult to say, with respect to how that will work itself out.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Eric Spector: Yes. Great. Thanks for answering the questions. I’ll step back. Thank you.

Greg Garrabrants: Thank you.

Operator: Thank you. Next question is coming from Andrew Liesch from Piper Sandler. Your line is now live.

Greg Garrabrants: Hi, Andrew.

Andrew Liesch: Hi, thanks for taking the questions here. Hi, just to stick it on M&A, I guess it sounds like you’re looking at maybe some certain business lines that maybe banks might be getting out of, or loan pools, anything specific, anything if you look at your franchise and your product suite that you might want to add that you don’t currently offer?

Greg Garrabrants: You know, we have – we’re always looking for a variety of different opportunities, and that includes going across the securities businesses and the banking business. I think that just this is the type of market that you often see banks start to pare back businesses, or people. And so, there’s been some different opportunities that arose, whether it was in the insurance premium finance business on the life side, things like that. So, there’s different areas that we like and we just remain opportunistic and just want to make sure we have the capital to do that. So, our capital ratios are very strong, and give us the opportunity to look at those types, of options that arise in these kind of markets.

Andrew Liesch: Got it. All right. That’s helpful there. And then on the margin, obviously, you’re coming in well above the guide. I mean, is there any reason to think that it’s going to trend back below here now that you have the full quarter effect of the accretion, from those loan pools? Kind of, there was a little bit of one timer in there, but it’s a good level to build off of?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Greg Garrabrants: Yes. It is interesting. I think that the commercial specialty real estate side, I think there’s a bit of margin compression there. So I think if we want to grow that, or maintain balances, that probably some of the newer loans are going to come on a little, maybe a little more, with a reduction in spread from what they’ve come on before. But I don’t think there’s a feasible way for us to get back to that guide range. I think that guide range, just has to be adjusted for the differential that we discussed, with respect to the Signature purchase. And that just has to be added onto it, for now. I mean, and over time, I mean, it’ll be an extended period of time, years, but that Signature benefit will gradually decline as a percentage of the overall volume. But right now, the pool is performing extraordinarily well. There’s no delinquencies in the pool. That obviously is a long-durated pool. So – the behavior on payoffs is generally consistent, with what we thought. So the guide range needs to obviously be updated for that increment. And then I think there might be a little margin pressure, if we want to grow CRESL. But overall, I think we’re going to be able to continue our loan growth at the kind of organic margins that we have. And then we always have the benefit of some of the hybrid loans running off. And even if it’s only, I think, in the next six months, it was $600 million or $700 million or something, which is $691 million in the next six months. So that’s not nothing either. And that obviously helps with respect to increasing loan yields.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Andrew Liesch: Got it. That’s really helpful. Thanks for taking the questions, Derrick. I’ll step back.

Derrick Walsh: Thank you, Andrew.

Operator: Thank you. [Operator Instructions] Our next question is coming from Kelly Mota from KBW. Your line is now live.

Kelly Mota: Hi. Thanks so much for the question.

Greg Garrabrants: Hi, Kelly.

Kelly Mota: I thought maybe I would kick it off on the deposit side. Growth was quite strong, and the actual incremental increase in deposit costs actually wasn’t that large. Just wondering if you could provide additional color and commentary around the business lines driving that, where you’re seeing the greatest opportunities. And I appreciate the color on loan pipelines and growth there, but just wondering, with a 100%, or so loan to deposit ratio, how we should be thinking about the incremental funding of that and the parts of the business that’s coming from?

Greg Garrabrants: Sure. I think that some of the commercial lines of business are doing a good job on the cross-sell side, and we’re continuing to gain traction there, which I think helps offset the deposit cost. The cap call business running at a good loan to deposit ratio, the regular C&I business doing a good job on the cross-sell side. We’re having small levels of growth in a variety of different segments, small business on the consumer side. So it really is more a little bit of everything with a balance towards that commercial side continuing to add lower-cost deposits there. So, we had an overshoot, I guess, if you were looking at the increase in deposits versus loans. I think we expected loan growth to be a little higher than it was, but ended up having some unexpected payoffs, which reduced it a little bit below where we expected it to be. But it just gives us the opportunity to be able to grow a little bit more this quarter.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Kelly Mota: Got it. That’s super helpful. And then, just trying to put some things together with the margin. I know on a core basis, ex the accretable, you’re talking 425 to 435, and I know there was about three basis points of accelerated accretion in there on that one payoff that, you were discussing. Just wondering, do you have the total amount of accretable yields that was the contribution to March in this quarter, just to round out the conversation?

Greg Garrabrants: Derrick, do you want to take that?

Derrick Walsh: Yes, I think what you’re asking for may be in the rate volume table in the Q, Kelly. So we break out the purchased loans in that rate volume table. So you can see the average balance for the three months ended March was around $979 million, contributing $41.7 million for the quarter for a yield of 17.05 of those specifically the FDIC purchased loans. Was that your question?

Kelly Mota: That’s not – that $41 million isn’t 100% the accretion, right? I’m getting from the cash flow statement that it’s putting together?

Derrick Walsh: Got you, got you. The accretion was about half of that, $41 million, yes.

Kelly Mota: Okay. All right.

Derrick Walsh: I think over time, and obviously a long time, because if you’re looking at $20 million of accretion and you’re looking over the number of years, we broke that up so you’ll eventually be able to model out that. Because over time, that balance will obviously decline as a percentage of the total loans, right? As loans grow and as those loans pay off. But it’s a long time when you run that out, given the relatively long duration of those loans.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Kelly Mota: Got it. That’s helpful. And then, I know in your prepared commentary you gave the mortgage loan pipeline for sale. It looked like mortgage banking income was up a bit quarter-over-quarter. Just wondering how we should be thinking about gain on sale of loans, and any other sort of put their takes with the fee income here?

Greg Garrabrants: Yes, I think I’d probably say that flat-ish from this quarter is the right sort of way to think about that. I don’t expect that it’ll grow significantly. There’s a chance it might grow a bit, but I think flat is a reasonable and most likely assumption.

Kelly Mota: Got it. Thanks so much for the color tonight. I’ll step back.

Greg Garrabrants: Thank you.

Operator: Thank you. Next question is coming from Edward Hemmelgarn from Shaker Investments. Your line is now live.

Edward Hemmelgarn: Yes, hi, Greg.

Greg Garrabrants: Hi Edward, how are you?

Edward Hemmelgarn: I’ve got a couple of questions. Good. One, I’ve always noticed about how low your deposit fees are that you’re charging your customers. Does that help you at all? I mean, or is that something that’s really customers find important?

Greg Garrabrants: Yes, I think it’s a good question. I think that our customers, we’ve generally focused on telling customers that we do provide them lower fees. We’ve never been much of an overdraft or NSF player, just with respect to our customer base. Our customer base generally tend to be a little sort of more to the higher end, so they don’t generally have those sorts of fees charged to them. I think on one side, it’s reduced sort of regulatory style risk. I think over time, our goal, and it is, I have to admit, you’ve been with us a long time, a longer term goal, is to really try to bring that robo-advisor, and others into a much more integrated way of providing customers value. So, I think a lot of the traditional types of deposit fees that, make up a lot of traditional bank fee income on that deposit side, really aren’t that conducive to growing deposits – at the pace that we’d like to grow them. And so, I think it is important to consumers when they’re looking at their checking account, or their small business accounts, whether or not they’re charged a lot of wire fees, or things like that. And I think so a lot of our small business customers are attracted to that. So, I think it’s our job, and it’s not an easy one, to add value-added services there and to find ways of seeing if we can get fee income out of those value-added services. They’re just a little bit different, I think, than a lot of the types of fees that other banks charge.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Edward Hemmelgarn: Good. Then moving on to loans, I was surprised by the extent of the loan repayment, I guess, but perhaps given the high rates that customers or your borrowers are now facing, do you expect that’s going to be something that more turnover that you’ll be seeing more and more of? I mean, it’s just over this time period, will rates remain high until they stabilize?

Greg Garrabrants: Yes. I think it depends on the loan category. I think with the commercial specialty real estate side, by the very nature of those loans, they do come to endpoints where they generally get permanent refinancing. I think that if you look back more broadly, what we tried to do, which was very successful, was we wanted to keep our loan book very short in a low-rate environment in order, to not take interest rate risk, or have marks on our portfolio. And obviously, that’s been very successful. I think the downside of that, is you do have a bit of a treadmill, particularly in certain areas, which is why I think on the commercial specialty real estate side, we may end up lowering spreads a bit, because we want to work on that, get the safest deals. And I think some of the volume there, obviously, there are fewer lenders, but there’s also fewer projects, and fewer loans that are just in the market generally. So, look I think, I feel comfortable with the diversity of our loan origination platform such that I believe we can still continue to grow loans at that $500, $600 plus level per quarter, but that composition will move a little bit quarter-to-quarter. And I think it will be more challenging than it otherwise was, let’s say, last year, just given the nature of the markets.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Edward Hemmelgarn: Are you seeing any areas that are really giving you more opportunities now for loan growth?

Greg Garrabrants: Yes, I mean, I think our C&I verticals broadly are performing well. I think commercial specialty real estate is having good origination quarters. I just think if you look at the payoffs there, they’re quite strong. I think the positive side of that is that we’re continuing to turn that book, getting new credit evaluations, at higher cap rates and all those things. I think it speaks very well to the performance of the book. So, I don’t really see anything other than single family, which is just much more difficult, because just the volume of transactions is just so relatively low and the credit standards are relatively loose. So, we’re selling a lot of those loans through our conduit. And then, in auto we’re just – I think there’s opportunity there. I just would like that market to settle out a little bit, with respect to where auto prices go, before we do a lot more there so.

Edward Hemmelgarn: Okay. Great. Great, thanks. And I for one, do appreciate your asset liability duration.

Greg Garrabrants: Thank you.

Edward Hemmelgarn: Thanks a lot. Bye.

Operator: Thank you. Next question is coming from Gary Tenner from D.A. Davidson. Your line is now live.

Gary Tenner: Hi, thanks. Good afternoon. If I could just follow-up first maybe on that line with regard to CRESL. Greg, as you’re talking about there being opportunities there, albeit potentially at some tighter spreads, I’m wondering if within the markets that you traffic in CRESL, which I think is primarily larger metro areas, is there a particular geography that you’re seeing more opportunity than, others right now in that space?

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Greg Garrabrants: I think that there’s been a general shift, because a lot of those loans are with our partners. And I think our partners have de-emphasized certain markets, and increased their activity in other markets. So, I think that would be somewhat reflective of kind of population movement and those sort of things. So more Miami and Nashville and less New York, right that kind of thing. But that doesn’t mean New York still doesn’t have opportunities. If I was going to just baseline it, I think you’re seeing a little bit of movement there, and you’re seeing the funds that we work with kind of change some of what they’re doing as well, sometimes to be a little less concentrated, particularly in New York. So I think, that’s where I would just have it. I think generally that’s what I’m seeing.

Gary Tenner: Got it. Thanks. And then on the fee side, if I look at the line items over the last four or five quarters, broker-dealer and advisory, there’s been some movement broker-dealers a little bit lower, advisories a little bit higher. But on a combined basis, we’re kind of triangulating around $20 million, $21 million per quarter. With the amount of investment you’ve made in the securities business, I’m just wondering, maybe roadblock isn’t the right word, but what are you running up against that, maybe is not allowing for some more accelerated growth in that business?

Greg Garrabrants: Yes, that’s a great question. I agree with that assessment. Really what it is, is if you look underneath the asset growth, what you see is we’re boarding a lot of new firms, getting a lot of new assets, and the existing firms that we have in the AAS business particularly are losing assets. So a lot of them are TAMs, and a lot of what happens with TAMs, is the advisors underlying that TAM structure either outgrow the TAM structure, or they decide to break off and do other things, or they’re being bought. So, we were looking at this, and it was quite significant. There was above 20% of those TAM assets had run off, and we had replaced them and more and generally grew net new assets. But that was a big hole to deal with, right. So if you had flat existing customers there, you would have had really good growth, but we didn’t. And so, I do think that in general that is a disappointing outcome. I think the positive associated with it, is that at some point I believe there’ll be burnout there. I don’t know when exactly that is. And then I think the other element is, that as that happens, the base of clients that we’re getting are much more diverse, much more stable, and they’re growing. So I think, that that does have a natural movement that, will allow it to stabilize. But that being said, I still think I have not – I would say that that’s an area of our performance that definitely should be improved. We just launched the white label product and test, and so that’s still very early stages. I think there’s a lot of opportunity there, not only from the cross-sell side, but also from the ability to streamline the processes. Right now the process that exists, pardon me, with respect to the paperwork, and just the manual nature of working with the broker-dealers is very costly and time-consuming. And so, a lot of the work we’ve been doing with respect to the platform that should allow for cross-sell, will also allow for improved operating efficiency. So, look I think that that business, when it’s built, should have very good longevity. But on the AAS side, it really is the attrition of the current customers that’s causing us, to fall below where I would hope we were.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Gary Tenner: Well, I appreciate the thoughts on that. It sounds like, from what you’re saying as well, Greg, that there’s not necessarily a great line of sight into stabilization there, in terms of the churn. Is that fair?

Greg Garrabrants: Yes, I think that we’ll be able to outgrow any churn, but what I really want to be able to do is come out and say, I’m feeling great about growing the asset 25% next year. And I’m not saying that, because I’m not certain about the churn stabilization. And I think, there’s also something else going on here, too, with respect to a lot of those, just the nature of the investment styles that, some of those firms have in a higher-rate environment. Our shop isn’t as well-positioned maybe from a bond perspective as it should be, because of those clients had sort of a different mix of what they were focused on. And I think that that’s still playing through. That’s not true with the newer advisors we’re bringing on, but I think that’s the reaction that some, of those broker-dealers have with some of those TAMs. So I think that’ll play itself through over time, but I don’t think it’s done yet. I think it’s got a little bit to run.

Gary Tenner: Great. Thank you.

Greg Garrabrants: Thank you.

Operator: Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further closing comments.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.

Greg Garrabrants: Thank you, everyone, for your time, and we’ll talk to you next quarter.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.