Good afternoon, and welcome to the Axos Financial third quarter 2023 Earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please Press Star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin.
Thanks, Diego. Good afternoon, everyone, thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s third quarter 2023 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 31st March 2023, 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. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance.
Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay 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. Now I'd like to hand the call over to Greg.
Thank you, Johnny. afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's Conference Call for the third fiscal quarter ended 31st March 2023. I thank you for your interest in Axos Financial and Axos Bank. We delivered double-digit year-over-year growth in earnings per share, book value per share, and ending loan and deposit balances. Our consistently strong results were broad-based with stable net interest margins and double-digit net income and non-interest income growth. We grew deposits by approximately 32% year-over-year despite an expected normalization in cash sorting deposits from our custody business. The diversity and optionality of our deposit franchise is a valuable differentiator that will allow us to maintain a strong net interest margin in a highly competitive market for deposits.
We reported net income of $80 million and earnings per share of $1.32 for the three months ended 31st March 2023, representing year-over-year growth of 29% and 28% respectively. Our book value per share was $31.07 at March thirty-first, 2023, up 17% from March thirty-first, 2022. The highlights for this quarter include the following. Ending deposits increased by approximately $1 billion linked quarter, driven primarily by consumer deposits. We took advantage of anxiety in the marketplace following the three bank failures in March and added new consumer and commercial banking clients. Excluding the reduction of Axos Advisory Services deposits, ending period commercial and consumer non-interest-bearing deposits were flat from the end of the prior quarter.
Ending net loans for investment balances were $15.8 billion, up 2% linked quarter or 9% annualized. Loan growth was broad-based with growth in single-family mortgage, multi-family, and C&I loans, partially offset by our deliberate pullback in auto, small balance CRE, and leasing. Net interest margin was 4.42% for the third quarter, down 7 basis points from 4.49% in the quarter ended 31st December 2022, and up 40 basis points from 4.02% in the quarter ended 31st March 2022. The impact of excess liquidity on our net interest margin accounted for approximately five of the seven basis points decline in net interest margin.
Net interest margin for the banking business was 4.5% compared to 4.65% in the quarter ended 31st December 2022, and 4.21% in the quarter ended 31st March 2022. Higher loan yields partially offset the increased funding costs and negative impact from holding excess liquidity. Axos Securities, comprised primarily of our custody and clearing business, made positive contributions to our fee and net income. Broker-dealer fees increased 40% linked-quarter and 166% year-over-year due to higher interest rates and increased client activity. Quarterly pre-tax income for our securities business improved by $3.9 million linked-quarter to $19.5 million. Our credit quality remains strong with annualized net charge-offs to average loans of four basis points versus five basis points in the third quarter of fiscal 2022.
Of the 4 basis points of net charge-offs this quarter, 3 basis points were from auto loans that are covered by insurance policies and will be subject to subsequent recovery. Double-digit growth in net interest income and non-interest income resulted in a 29% year-over-year increase in our diluted earnings per share. We generated a 1.71 return on assets and a 7.4% return on equity for the quarter ended March 31st, 2023. Our strong capital levels improved further with Tier 1 leverage ratio of 10.2% at the bank and 9.3% at the holding company, both well above our regulatory requirements. We repurchased approximately $32 million of common stock in the third quarter to take advantage of the unwarranted decline in our share price in reaction to the turmoil in the banking industry.
Given what has transpired in the banking industry since early March, I'd like to spend some time discussing what makes Axos different and why we believe we are operating from a position of stability and strength. From a liquidity and capital perspective, we emerged from the turmoil even stronger. We increased deposits by $1 billion this past quarter to $16.7 billion, with approximately 90% of our total deposits being FDIC insured or collateralized. We had $2.5 billion of cash and cash equivalents as of 3/31/2023, equal to 138% of our uninsured deposits. We had no outstanding borrowing from our Fed discount window or from the Bank Term Funding Program.
We had no overnight borrowings from the Federal Home Loan Bank as of 31st March 2023. We had $3.1 billion of undrawn capacity at the discount window and $2.5 billion of immediately available undrawn capacity with the FHLB at quarter end. The combined cash and undrawn liquidity available was $8.1 billion at quarter end, equal to 450% of our uninsured and uncollateralized deposits. Unlike many other banks with significant unrealized losses on their securities and loan portfolio, we had a de minimis $7 million of net unrealized losses on our $280 million Available for Sale security portfolio at 3/31/2023. The $7 million of unrealized loss represents less than 50 basis points of our shareholder equity at the end of the third quarter.
Additionally, the fair value of our loans held for investment was a positive $30 million at the end of the quarter. Another way to say this is that if you mark our entire securities portfolio and loans held for sale and exclude entirely the positive mark on our entire deposit base, our equity would increase. Our favorable equity and capital position is the result of our deliberate decision not to extend maturity in our securities or loan portfolio and to reposition our loan mix from hybrid single-family and multifamily mortgage loans to variable rate commercial and industrial loans when interest rates were near 0. We have always maintained a disciplined policy of pricing our loans with the appropriate rate, fee structure and terms commensurate with our risk and return objectives.
We also proactively establish channels where we can sell or pledge our loans quickly at or above par as a contingency plan should any unexpected adverse events arise. Shifting to interest rate risk management, we continue to generate an above average net interest margin and grow deposits despite the Fed's aggressive rate increase and deposit outflows for the banking industry. This quarter, our consolidated net interest margin was 4.42%, while our bank-only net interest margin was 4.5%. We maintained a strong net interest margin despite the decline in AAS sweep deposits and us holding excess liquidity during the quarter. Our ability to maintain a net interest margin above our historical range is a function of the diverse lending and deposit franchises we have built over the past decade.
We built our C&I lending verticals organically and scaled them over time to ensure we have the appropriate operational compliance and risk management infrastructure and processes in place. We acquired the clearing, custody and bankruptcy deposit businesses when rates were at or near 0 and deposit balances were near their cyclical lows. Over time, we integrated systems and processes, added talents and relationships, and increased sales and marketing to grow these businesses profitably. The net result is our loan and deposits franchises are much more robust, diverse and aligned from a duration and margin perspective than they've ever been. At the end of the quarter, approximately 57% of our loans were floating rate, 36% were hybrid 5/1 ARMs, and 7% were fixed.
The average duration of our loan portfolio was two years, with multifamily loans having an average of 2.6 years duration and the vast majority of our commercial real estate specialty loans and lender finance portfolios with a contractual maturity of less than three years. The average yield on our held for investment loans was 7.07% in the third fiscal quarter, up 45 basis points from 6.62% in the prior quarter. New loan yields were 10.1% for auto, 7.9% for multifamily, 7.2% for single family jumbo mortgages, and 9.2% for commercial and industrial.
We continue to see bank and non-bank competitors pull back in many of our lending businesses, we feel good about our ability to grow our loan portfolio in a secure way with pricing and terms that meet our risk and return requirements. Our deposits at the quarter end were comprised of 43% demand deposits, 46% savings and money market, and 11% CDs. We issued more CDs this quarter to align the duration of our loans, given the growth in net balances and the slowdown in prepayments in our single family and multifamily loan portfolios.
Our deposits remain well diversified from a business mix perspective, with consumer and small business representing 48% of total deposits, commercial, treasury management and institutional representing 26%, commercial specialty representing 7%, Axos Fiduciary Services representing 7%, Axos Securities, which is our custody and clearing, represented another 7%, and distribution partners representing 4%. The granularity and diversity of our deposits, particularly consumer savings, and money market accounts, provide us with tremendous flexibility to match the duration and cost of our funding to the duration and cost of our adjustable and hybrid loans. Ending non-interest bearing deposits, excluding fluctuations in Axos Advisory Services cash balances were approximately flat from December 31st to March 31st, with the ending period balance down approximately $269 million to $3.2 billion, reflecting almost entirely the reduction in the AAS cash.
Total ending deposit balances at AAS, including those on and off Axos balance sheet, declined by approximately $380 million in the quarter, while non-interest bearing commercial and specialty deposits were flat. We believe that the pace of cash sorting at AAS has stabilized at or near the bottom, representing 5.6% of assets under custody at the end of the quarter, compared to the historical range of 6%-7%.
Axos Advisory Services has a healthy and growing pipeline of new advisory clients, with 15 new deals signed with a combined assets under custody of $1 billion this quarter. In addition to the Axos Securities deposits on our balance sheet, we had $1.1 billion of deposits off balance sheet at partner banks and approximately $680 million of deposits held at other banks by software clients in our ZNS business management vertical. We continue to add new accounts across each of our deposit businesses, including consumer checking, consumer savings, money market and CDs, commercial and treasury management, AFS and Axos Securities. Since the banking failures in early March, we have aggressively increased our outreach to existing and prospective clients across every deposit vertical.
With our experience with the IntraFi ICS product and a competitive set of treasury management offerings, we are seeing a lot of interest from clients who are moving deposits to us. Our low loan-to-value asset-based lending philosophy continues to serve us well from a credit perspective. Our single-family jumbo mortgages and multifamily loans, which represent 24 and 19% of our total loans outstanding at the end of the quarter, have a weighted average loan-to-value of 57% and 53% respectively. Our jumbo single-family mortgages are concentrated along the coast in markets where housing inventories continue to be constrained. The lifetime loss in our originated single-family jumbo mortgages and multifamily mortgages are four basis points and less than one basis point respectively.
Our commercial real estate lending business, comprised of low LTV lending to non-bank lenders and well-capitalized sponsors, is secured by single-family, multifamily and commercial real estate properties in attractive locations. Of the $5 billion of commercial specialty real estate loans outstanding at the end of the quarter, multifamily was the largest segment, representing 31% of total loans, condominiums and single-family representing 23%, with hotel, office and retail representing 16%, 14% and 5% respectively. We included a slide in our earnings supplement detailing the balances, loan-to-values and non-performing loans for our commercial specialty real estate portfolio. On a consolidated basis, the weighted average loan-to-value of our commercial real estate portfolio was 42%. For the retail and office segment of our commercial real estate book, the weighted average loan-to-value was 42% and 37% respectively.
Of the $673 million commercial specialty real estate loans secured by office properties at the end of the quarter, 77% are A-notes or note-on-note loan structures with significant subordination from fund partners and mezzanine lenders, resulting in a 37% loan-to-value ratio. The office exposure that isn't an A-note with a strong funding partner is almost entirely a pari passu participation for One Madison in New York, one of the best office buildings in the city. This building is 57% pre-leased and has a 50% recourse guarantee from SL Green, subject to conditional releases based on certain leasing cash flow and other milestones. Approximately $80 million of the commercial specialty real estate office book repaid after the end of the 31st March quarter. We have no lifetime losses in our entire commercial specialty real estate loan book.
Our lender finance lending is comprised of lines of credit to non-bank lenders. The total lender finance book outstanding was $2.4 billion at the end of the quarter, with real estate lender finance accounting for approximately 35% of the total lender finance portfolio and non-real estate lender finance accounting for the other 65%. We have a direct and a fund business in lender finance. The weighted average loan-to-value for the lender finance portfolio was 54%. We actively monitor the cash flow and credit performance of our lender finance borrowers. The loan structure and our senior position in the payment waterfall provides us with confidence that our lender finance portfolio can withstand significant stress and not result in material loss to the bank. We've never lost any money in the lender finance portfolio.
Our auto lending business, comprised of direct and indirect lending to prime and super prime lenders, had an ending balance of $518 million at the end of the quarter, representing only 3% of our total loans outstanding. We have reduced originations meaningfully in the auto lending due to our cautious outlook on the broader economy and used car values, resulting in net auto loan balances falling by approximately $37 million in the 3rd quarter of 2023. With an overwhelming majority of our total loans outstanding being secured by some form of collateral, we believe our credit will perform well through the cycle. One of the key differentiators that allows us to grow revenue, loans and earnings in a consistent and safe way is that we operate a software-based, high-touch service model for clients nationwide.
Whether it's through our universal digital bank online and mobile platform that provides consumers a convenient and secure way to access all deposit lending and securities trading and wealth management services digitally or our proprietary front and back-end custody platform that simplifies the trading, reporting, marketing and back-office functions for independent RIAs, we acquire onboard underwrite and service customers efficiently. Each deposit lending and fee-based business vertical is supported by a robust risk management infrastructure and a team of dedicated members with subject matter expertise in their business and functions. The diversity and in certain instances, the countercyclicality of our businesses allow us to shift capital and resources quickly and efficiently when competitive and economic conditions change.
As we have demonstrated throughout our history, especially during periods of distress, such as the dot com boom and bust, the Great Financial Crisis and most recently the COVID pandemic, being able to pivot quickly to capitalize on market dislocations is a significant competitive advantage, particularly in a highly cyclical industry such as banking. I'm excited about the strategic initiatives we have across our businesses. Our strong capital equity and profitability allows us to maintain investments in technology, people and products while others pull back. We see improved loan pricing that will help offset lower demand in some lending categories as rates continue to rise and the economy decelerates further.
We will continue to execute and expand various operational efficiency initiatives, including business process automation, offshoring, low-value manual tasks. We have already seen significant opportunities to hire talented individuals and teams to help us incubate new businesses or augment existing businesses. We have also reviewed opportunities to purchase assets, loans, and businesses from failed or less well-capitalized institutions looking to exit non-core businesses and/or to shrink their balance sheet. Lastly, we'll take advantage of opportunities to return capital to shareholders through share buybacks when our stock becomes irrationally undervalued. I'll turn the call over to Derrick now.
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, our SEC filings, and our website for additional details. Loan originations for investment for the quarter ended 31st March 2023 were $1.8 billion, down from $2.4 billion in the comparable quarter a year ago. We tightened our pricing and underwriting guidelines in auto, unsecured consumer, and small balance Commercial Real Estate, had lower demand in single-family jumbo, resulting in a decline in loan originations.
Fiscal Q3 2023 originations were as follows: $178 million of single-family jumbo portfolio production, $148 million of multifamily production, $797 million of commercial real estate production, $20 million of auto and unsecured consumer loan production, and $588 million of C&I loan production, resulting in a net increase in ending C&I loan balances of $246 million. Credit quality remains good, with four basis points of net annualized charge-off to average loans, three basis points of which were from auto loans that are covered by insurance policies. Our non-performing loans and leases were 60 basis points at 31st March a basis point improvement from the December quarter. Single-family, multifamily, and small balance commercial mortgages represented over 75% of our non-performing assets at the end of the third quarter.
Given our low loan to values and our low historical losses in these lending categories, we do not anticipate material increases in our net credit losses. We added $5.5 million of provision for credit losses this quarter to support our loan growth. Total allowances for credit losses represented 168% of our non-performing loans at 31st March 2023. Non-interest income for the three months ended 31st March 2023 was $32.2 million, an increase of 12% compared to $28.8 million in the corresponding period a year ago. Broker dealer fee income increased by $8.6 million year-over-year to $13.7 million in Q3 2023 due primarily to higher interest rates.
Mortgage banking income was down approximately $5 million year-over-year to $1.1 million as a result of the industry-wide downturn in single-family agency mortgage refinancing activity. Prepayment penalty fee income was down by $0.7 million to $2.1 million as the increased rate environment led to decreased levels of prepayments on multifamily and commercial loans. Lastly, on equity, our return on equity was 17.4%, and our return on average assets was 1.7% for the three months ended 31st March 2023. Tier One capital, the risk-weighted assets for Axos Bank was 11.6% at 3/31, up from 11.3% in the prior quarter.
Since 30th June , 2022, net capital at Axos Clearing has increased by approximately $41 million to $79.5 million, due primarily to higher profitability in our securities business. We have excess capital at the holding company available for opportunistic share repurchases and to contribute to our subsidiaries if needed. After buying back approximately $32 million of common stock in the third quarter, we had $21.2 million remaining availability in the stock repurchase program. That was before yesterday when the board of directors approved an additional $100 million of availability for the stock repurchase program. This allows us further optionality in the management of our capital between internal investments, accretive acquisitions, and share buybacks.
Additional commentary on our loan pipeline are that we had $33 million of single-family agency gain on sale mortgages, $273 million of jumbo single-family mortgages, $83 million of multifamily and small balance Commercial Real Estate term loans. Given the dynamics, we now expect loans to grow by high single digits to low teens year-over-year, and our net interest margin.
In the range of 4.25%-4.35% for the next few quarters. Our loan growth outlook is based on a gradual rebound in single-family jumbo mortgage originations, coupled with low prepayments in that business. Double-digit growth in our CRESL and lender finance businesses and flat to declining auto and unsecured lending. We believe that moderating our pace of loan growth and building capital levels until the economy and the banking industry rebound is a prudent trade-off. Our NIM guidance reflects loans repricing higher, offset by rising deposit costs. We also expect to maintain a higher average deposit balance for the next few quarters, which will have a 10-15 basis point drag on our consolidated NIM. We believe maintaining excess liquidity is prudent given the uncertain economy and industry environment.
That said, we are excited about the opportunities ahead and feel that Axos is well positioned to continue its strong financial performance. With that, I'll turn the call back over to Johnny.
Thanks, Derrick. Operator, we're ready to take questions.
Thank you. Ladies and gentlemen, at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Andrew Liesch with Piper Sandler. Please state your question.
Thanks. Derrick, you just answered a bunch of my questions. On this, liquidity that's on the balance sheet right now, the 10-15 basis point drag, how does that affect NII? Is that neutral right now?
Yeah, I think it's fairly neutral because we just put that money with the Fed.
Right.
There may be a slight benefit from it, but if you look at the average cost of the marginal cost of the highest cost deposit, I think a neutral assumption is roughly correct.
Correct. Yep.
Yeah.
Got it. Then, just looking at the 10-Q, didn't look like there was too much change in substandard or special mentions. Are you seeing anything in those loans that's giving you any pause right now? I mean, your commentary was that you're not expecting much material losses in the loan book. I'm guessing no. I'm just curious if there's anything out there that you're looking at more closely.
No, we're not really seeing anything that we find concerning, and we're looking pretty carefully. You know, I think where we are in our attachment points are still very, very strong. We're not really seeing anything that we feel we should be concerned about.
Got it. Then, Greg, you mentioned that you were able to take advantage of some of the turmoil in the markets here and add more consumer deposits and probably some commercial deposits too. Are there any businesses that you think you might want to expand into or anything that you see attractive out there as you take advantage of some of what's gone on with some other banks?
Yes, we think so. There's we've got some team hires that we're working on, some that have accepted in certain areas that we really like. We'll kind of let those materialize over the next few quarters before we make announcements, given that they're kind of in process, and we don't want to have people getting ahead of us and things like that. Yeah, no, I think there's not only team acquisitions. Let's talk about the opportunity set. There's definitely team acquisitions on the deposit and lending side in areas that previously had been probably precluded by the nature of the competition in that area, in those areas. Those are clearly open.
There's opportunities for bulk loan purchases in a few cases that we might be interested in. We'll have to see how that goes. Those are very, you know, Boolean, right? You either win them or you lose them. That could change the loan growth prospects. We would, you know, we gave you kind of organic loan growth, you know, views. If we buy a portfolio, that would be bigger. Then there's just simply the fact that customers are looking more than ever for diversity in their deposit relationships. We're seeing very high rates of increase in the applications on both consumer and commercial deposit categories.
We're having conversations with clients that previously had been ensconced in other institutions fairly strongly and are now interested in either moving or diversifying. We actually feel really good about our deposit pipeline right now, too. It's just, it just looks very good. The teams have been working weekends to open accounts, and they're sort of we've been adding personnel there. We feel really good about those three areas.
Got it. That's good to hear. Thanks for taking the questions. I will step back.
Thanks, Andrew.
Our next question comes from David Feaster with Raymond James. Please state your question.
Hey. Good afternoon, everybody.
Hey, David.
Maybe just starting on the loan growth side. Appreciate the high single-digit guidance, you know, and that kind of jives with the slowdown in originations we saw. I'm just curious. Is this by design or is this, you know, a function of just less demand in the market? Just kinda curious some of the drivers of that. Maybe where are you still seeing good risk-adjusted returns at this point in the cycle? I mean, you alluded to some opportunities in jumbo single-family and some in CRESL and lender finance. I'm just curious, you know, as you dig into it, where are you still seeing good risk-adjusted returns as well?
Yeah, with respect to the loan growth side, clearly on the, on the consumer side, it's, it's intentional. You know, we're just. Well, look, we don't really see anything particularly problematic happening in that book. The, the insured book has a little higher delinquency, but that's also well covered by the insurance, but it's still quite de minimis. We just really don't wanna deal with the servicing type issues there as much and are kinda pulling back a little bit there deliberately. On the other side, I think it's just really a matter of more of us continuing to tighten what we're doing. As that happens, you know, we're holding pricing terms and then often tightening those terms. That kind of lets itself fall out.
I really do think that I feel reasonably good about loan growth. I think that's our best estimate, you know, that $500 million-$600 million a quarter of growth-ish, something like that. I think that's where we're forecasting next quarter. Could it be a little higher, a little bit lower? Potentially. We also are seeing some interesting opportunities that are arising in very low-risk areas as a result of some of the exits and movement that's been happening in the banking business. I actually think that there are good deals across the board, they just have to be structured properly. You know, I mean, when we're doing CRESL deals now, we're looking at 12 and 13 debt yields, right? For attachments to RPs.
Those are good deals, right? With great sponsors. You know, I think that the pullback in the market that we're seeing from a lot of other lenders is enabling us to get better sponsors, better borrowers, tighter credit, and better pricing. It's really a good time in a lot of ways to be a lender because you can get ahead of what those value changes are in an environment where there's just reduced competition.
That makes, that makes a ton of sense. Then obviously there's a hyper-focus on CRE with investors at this point. You know, I'm just curious what you're seeing more broadly there. You, you touched on it a little bit. You know, you're seeing other competition kinda pull back, and you've always had extremely tight underwriting standards. Obviously, there's low LTVs, as you can see in the presentation. Appreciate that. Maybe just more broadly as you look out, is there anything that you're watching from a market perspective or a segment maybe that you're avoiding or pulling back in and how are you tightening standards? Just curious kinda what you're seeing more broadly there?
Yeah. Sure. Let me talk about it in two ways. The first way would be how's the cash flow of the properties doing and what's the underlying economic fundamentals of each of the property types, then just talk about the impact of interest rates or other valuation issues. What's interesting about it is that the housing market, just in general, including what you see on the condo sales side, even in places like New York, Miami, all these places, they've essentially held in or actually gotten better in some respects. Right now, the single family or condo sort of issues that people thought might arise so far have been a big bust. Now again, when you're at 40-ish% loan-to-values on those things, you know, it doesn't really matter that much if you get some decline in value, but we're not seeing it. It's not there.
In fact, if it's a good product and it's well-placed, it's in New York, it's flying off the shelves, actually. That's sort of interesting. The next Office, it depends on what you have on the office side. To the extent we've ever done that, done office. If we're not doing it in an extremely structured way where we're 15% loan-to-value for an office conversion with a fund guarantee from, you know, Fortress or something like that, then we're looking at the best building. That I gave that example, the One Madison building, which is pre-leased to all these Fortune 500 companies. It's the best building in New York. If you wanna be in an office and you're gonna have people come into work, you wanna be there.
You know, I think office, clearly in many cities, in places that we stayed away from for a long time, is doing terribly. Obviously, in San Francisco, L.A., particularly markets that have been subject to the sort of, you know, the criminal negligence that you have associated with how those cities are run, right, from a crime perspective and whatever. People don't wanna be in those places. They don't wanna be in L.A. downtown. You know, even our office, our team wants to move because the people can't walk around the building without being bothered, right? It's just sort of that kinda stuff is causing in some of those markets, those problems. I think you have to be obviously very careful there. On the hotel side, frankly, the hotels are doing incredibly well.
I mean, they are blowing out their projections, gangbusters, etc., blah, blah, right? It's just really good, and industrial the same way. The question is, so you've got cash flow, you know, and those sort of things, and we always cut these projections, so, you know. They're even hitting their own projections, right? It's sort of interesting. That looks really good. The question is, so you've got those cash flows, they're looking good. Obviously, they might not stay that way forever, but right now you're not seeing problems. The question is, what's the value? The interesting question is, well, so cap rates, clearly in asset classes that are performing well, haven't increased from a trade perspective anywhere near the way interest rates have increased. The question becomes, well, why is that?
One answer is that the yield curve is obviously inverted. When you buy these properties, you're buying them over extended periods of time, and there's maybe potentially over-optimism, not only on that cap rate, but also on the potential for increased cash flows. What we've done in order to deal with that is basically say we're making the assumption that all these cap rates have gone up by that and a lot more, and we're gonna get a significant reduction in the cash flows even though we're not seeing it, right? That results in new deals being written at 11s and 12s, from a debt yield attachment perspective, which allows us to have a salable piece of paper at, you know, cap rates that are nearly double what the appraisals are, right? That comports with those loan-to-value ratios.
you know, I think when you look at these sort of things. obviously we, you know, we cultivate a very robust set of folks that are interested in, you know, being able to buy those properties in whatever form they're at and, you know, are opportunistic. we have a very broad base of opportunistic clients that are always interested in taking advantage of those opportunities. how we deal with that is we just simply, you know, adjust what we expect target debt yields are. We adjust the the advance rates and, you know, we, and we look for recourse and all those other things that we can do. in a market like this, you just have more market power to do that. you know, I think.
Look, I think that the fundamental issue is if you like if you lent on a San Francisco office building and you were 70% non-recourse, which is something that you could have easily gotten, and you basically had tenants and you know, underwrote it at a 3.5% or 4% cap rate, which is what the appraisal is, that's a tough loan, right? That's a very different thing from the type of stuff that we did. You know, we were never really in that kind of market because we never really believed the cap rates, right? We had to choose kind of a different approach, and I think that approach has turned out to ultimately be correct, and I believe it will turn out to be correct over the cycle.
Okay, that's extremely helpful color. Then maybe just switching gears, I was hoping to get a status update on the securities segment. I mean, you guys, it's nice to see really the earnings power of that business starting to shine. I'm just curious where are we at in the build-out there and the kind of the process improvements and all those types of things? Kind of what's the roadmap near term for that business and any other initiatives that you have on the horizon?
Yeah, sure. It is great to see progress there, and there has been a lot of progress made, but it's still very early innings with the sets of opportunities we have there. We kind of talked about this in a number of different calls and stuff, but I'll kind of summarize it to kind of give you my perspective on where we are. You know, first, on the clearing side, one of the impediments we have is we have a very expensive core processor that kind of charges us by transaction, and then we pass all those transaction costs on to the clients. You know, we're a decent way through the development of what we've called Axos Universal Core, which is a system that would replace that securities core.
That would then give us the opportunity to basically partner with a variety of different clients, often larger clients, in materially different ways. Part of our pricing stops us really from going out and getting bigger clearing clients because we don't have the pricing to do it. A company like Pershing owns its own system, so we're looking to have much greater parity there on a modern system at the level of the core. The other elements that are progressing nicely is that we're also, you know, taking the front-end application for consumers and integrating that fully with the systems that we have for the clearing and custody business, so that there's one application that can be utilized for the end clients of the RIAs and the brokers.
Those clients would then be incented to bank with us through a variety of different mechanisms so that when we're boarding an RIA, we're boarding that account not only on the security side, but we're also boarding it on the banking side. We're boarding it for a securities baseline of credit and then working to serve that entire customer's need. You know, that's development and doing well. We're projecting that around end of July, we'll have the white label platform built out entirely for the consumer. That will have the white label account opening as well for the RIA.
we have some test clients on the white label enrollment for the broker side. What we really need to do there is get a UDB embedded in that. The only problem is if we basically code that up to the old core, then that doesn't help that much. We're kind of gonna roll out the UDB platform to the clearing clients at the same time we roll out the Universal Core.
I think that there's some fundamental cost changes that can occur from the Axos Universal Core, and then a lot of opportunities on the cross-sell side for banking because we get very, very positive feedback with respect to RIAs that often left these bigger wirehouses, and they don't like their clients banking at their old employer because it just generates a connectivity that then stops that hurts that potential retention of the client. On the ops side, we've done a lot, but there's still a lot to do. It's the security segment is nowhere near as efficient as the banking segment. There's a ton of straight-through processing opportunities.
Some of those are related to the ability to get access directly to the client because through the app, right? When that happens, then all of a sudden communications are made easier, money movement is made easier, and all of those things just sort of fall in place. Those are somewhat connected, but not entirely so because there's plenty of back office stuff that can be improved on that side. Yeah, it is a lot of great opportunity. The client reception is extremely good. People want another choice other than Schwab, and with the merger, they've just been forced into Schwab entirely. Yeah, there's a lot of opportunity on the custody side there for sure.
That's terrific. That's a great color and excited to see this all play out. Thanks.
Thank you.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. I just wanted to follow up on the comment you made on the prepared remarks on the RIAs. 15 RIAs, I think, signed up, AUM of $1 billion.
Yeah.
What's the timing for the onboarding of that group?
You know, it's a little bit variable, but I think six months is a reasonable kind of view. You know, it's some of this depends on their own pace, and you know, we're also, you know, building better processes to move that along. I think a six-month timeframe is a fair kind of representation of the time it usually takes from the time a contract is signed to the time that the clients get onboarded.
Okay. I know, you know, in the past you've talked about the ability to really attract larger, individual RIAs once you kind of complete the integration of the, of the full suite. Is that kind of still the perspective that there's going to be...
Yeah. I think it is.
-some delay for those bigger folks?
Yes. Well, so both on the clearing side, I think that the bigger fish we're precluded from getting the bigger fish by the current cost structure we have. I think on the RIA side, we are having those discussions and getting decent traction with. We have, you know, billion-dollar plus RIAs signing up. Part of it is the question is they're often committing $100 million of maybe several billion that they have, and they're sort of trying us out. Some of it is, you know, we've sold them on not only what we're doing now but what we're doing in the future. You know, they're multi-custodial. They're coming over with a certain proportion of their business.
They are larger, so we are winning those, and then they're gonna have us prove ourselves out, and that's what we have to do. You know, we can increase the market share from there. Because a lot of times it isn't. Like, clearing is different. I mean, you can dual clear, but it's more rare, particularly for firms in and around the size that we have. For RIAs, they're often multi-custodial. When we are winning, we are winning business, but we're only counting the assets that they've allocated to us, not the entire firm if it isn't pledged to us.
Got you. Thank you. Then just really one more question on the custody side. You know, the commentary about the cash sorting balances kind of down to, you know, a low level at this point, which I know was expected to come off the high from a couple of quarters ago. I'm curious to the degree you kind of see the numbers, you know, behind the numbers as it were. Have RIAs put more client funds back into equities, or are you seeing some of those cash balances?
invested into, you know, treasuries kind of in the same way that we're seeing, you know, bank deposits move out of the bank system into treasuries or otherwise. Do you have a sense for kind of where those funds are going?
You know, some of it is that, but a lot of it is we have some tactical allocators who move in and out of the market when they get different signals. You know, that kind of makes that movement. There clearly has been some allocations away from the cash side through... We control which money market funds they're allowed to use and things like that. We do monitor that, and there clearly is some of that. Frankly, a lot of what That isn't the majority of what it was. It really was much more market. You know, Their market timing. Frankly, I think they did a pretty good job of it.
When the market was really going down, they basically took their money out and sat on it, and then they put it back in then. You know, look, we haven't seen this environment for some time, so the question is this even in much higher rate environments, this % of cash to assets has been sort of the low. I think it's unlikely to go lower given the tactical nature of the trading. It isn't a perfect substitute, right? Because you do end up having to wait to be able to allocate. A lot of those RIAs are fairly active, so they don't like to wait to allocate. They've got to wait for those trades to clear in and out. There's costs associated with doing that.
You know, it isn't a perfect substitute. But there's some of it, but not most of it.
Thank you.
Thank you. Our next question comes from David Chiaverini with Wedbush. Please state your question.
Hi. Thanks for taking the questions. The first one is a follow-up on the CRE discussion. Have the rating agencies, specifically Moody's, expressed any concerns about your CRE growth?
Yeah, the, you know, Moody's did mention that in their most recent report on us. You know, I think that was pretty much they've kind of taken that pretty much industry-wide. Yeah, so we went through that with them and, you know, we had folks that were a little bit new to the business that we were talking with. Yeah, they did express something. You can read that report that they had.
Have they been receptive to, for instance, your discussion around how conservative your underwriting standards are, you know, around Crestle and Lender Finance? How receptive have they been to that conversation?
You know, I think that it was I think they were receptive to it, but I think it was somewhat mixed. I mean, you never know exactly how they say it. The people that were close to us said, "Yes, we completely understand. We're going to talk to folks about it." They go up and they go up and they say, "We don't care. We're treating all banks the same way with respect to this and whatever." I mean, you know. Look, I don't, I don't put much faith in what rating agencies say or do in my investments or anything else. You know, they basically move with, they move with the tide and the press and whatever else. Yeah, so.
Understood. Thanks for that. Shifting gears. On the deposit side, you guys have that nice lever of having, you know, off-balance sheet deposits that you could, you know, entice to bring on balance sheet. Can you remind me what the number was for, you know, comparing the fourth quarter to the first quarter in terms of off-balance sheet deposits?
It was pretty consistent. It's been around $700 million or so for a couple quarters, and that's specifically talking about on the security side of the business. There's another $680 million connected to the Zenith business that's not necessarily off balance sheet, but it's not a Axos Bank, but is an opportunity-.
Yeah.
for us as well.
I think.
We have the customer base for.
Right. Right. I think it is important to differentiate between those two, though. We control the securities off balance sheet. Those deposits that are through our software are at other banks. It takes an affirmative set of movement and work to move those on balance sheet. We've got some decent commitments for that. It's more of a commercial pipeline opportunity.
Right. Yeah.
as Derek said.
Great. Thanks very much.
Thank you.
Our next question comes from Edward Hemmelgarn with Shaker Investments. Please state your question.
Yeah, just a couple of questions. One is, what is the timeframe again on finishing the improvements to the securities business you indicated numerous times?
I mean, there's so many different things going on. I mean, the Axos Universal Core is a multi-year project. I mean, we'll start putting clients on. Hopefully we'll put custody on it in six months, which will save money, but that's a massive project. That's a multi-year project. A huge change management process, because you've got to get everybody to adopt the new systems and all those kind of things. It's a multi-year kind of thing. I mean, I take umbrage at any manager ever thinking they're done improving their operations either. I mean, I think just with respect to that, it's a multi-year project.
No, it I'm assuming that it's impacting sales if you your costs are higher than your competitors.
Yeah. Let's just be clear. On the clearing company, it is impacting sales. There's really not a lot you can do about it if you got to switch out your core because that's a really complex thing. It is impacting sales. On the custody side, that's not impacting sales so much, the core side of it. We own the system there. You know, I think with respect to if you're talking about, gee, you have so many customers that you know, you could onboard them faster, that sort of stuff will get worked out in a couple of months. Yeah, I mean. You know, look, we have a good system now.
It's also about profitability, right? Each of these clients that get onboarded, you onboard an RIA, and it'll come with 1,000 high net worth clients. We may be able to bank almost all of them at a certain level. That timeframe is the white label will be out in test beta at the end of July. You know, we'll start working on that, it'll be easier to put new clients on it. You got to get old clients to change. There has to be incentives there, you know, all that kind of stuff. You know, probably then we've also got to get integrated S Block. We're going to launch an S Block credit card into that platform as well.
RIA clients can utilize their securities book to have a very low rate, high reward credit card because it'll essentially be. It should be, unless we make an operational error, a zero loss credit card, right?
Mm-hmm.
You know, those kind of things. Those are long-term things. They are still multi-year initiatives. You know what, Ed?
So-
You can hang out. You've hung out a long time. You can be patient a couple more years. I mean, You're still.
I'm here indefinitely.
you're still a young, spry guy. I mean, come on.
All right. The other thing is, it's a two-part question, but I've been curious by your comments about the... It looks like there may be blocks of loans available for sale. I mean, that's interesting. Where, where is it really coming from more? Is it from the, like, the, likely, suspects that have failed, or-
Yep. Yeah.
All of them?
Some of them have announced them. Some of them are the suspects that have failed. I mean, there's some that are probably, you could guess who they are, but they're not. I don't think they've made them all public. There's, like, four or five shooting around. I think a couple have some possibility. Yeah. That, that could, that could, you know, change the loan growth projections a little bit if we did stuff there. You know, we'll see. I mean, we bid for one loan pool and got smoked, spot for. I thought it was. I was surprised that whoever took it, I was happy they did at that price, we wouldn't have bought it. You know, look, I mean, you don't know those things.
You basically do your diligence, you put in your bid and, you know, it could be pulled away, you could win it.
Mm-hmm. Lastly, I mean, you've, you know, in the past have been, I mean, very opportunistic, at least in the only other time here we had the recession that was in 2007 to 2009, in taking advantage of the opportunities that are out there. What's your Curious about your economic outlook? I mean, are you assuming a recession or do you think the potential is that things could get to be a lot worse and maybe the opportunity is getting to be a lot better? If so, do you have the capital to really take advantage of all that is presented?
Yeah. I mean, I think that clearly with the profitability we have and the capital we have, I think we have the ability to take advantage of the personnel that are out on the street for the businesses that we want to grow because we want to grow them in a controlled and methodical manner. I'm not really projecting that, you know, if we, you know, that we're gonna go out and, you know. Like, if somebody's willing to sell me, you know, signatures book at, you know, of $10 billion of loans at $0.50 on the dollar, then we'll have to go raise capital and deposits and whatever else. That's not on the table, and that's not going to happen.
I think, you know, we've had some funds and firms approach us and say, "If you need equity, we'd like to be a part of anything you're doing." There are those kind of opportunities out there. I think that probably the right approach to this is to take things like we always do in, you know, reasonably digestible chunks without taking any one bet that's so large that you know, a deviation from the plan is something that, you know, gets you into any kind of significant issue. Yeah, I think we do. If we don't, we'll be able to find capital to partner on those things.
As I kind of said before, I think of the items that I'm most excited about, I think that the opportunity of just the personnel who are looking to move around and the clients that are looking to move around are pretty good. Then some of the loan kind of purchase things. You know, there's a couple that are interesting, others that are not so much, and trying to see if you can couple those with people that would be interesting, as these things kind of move around, you know, could be something there. You know, look, obviously, we have very strong earnings, so that allows us to have, you know, the opportunity to grow or to look at these kinds of opportunities as they arise.
Okay. Well, once again, congratulations on a good job.
Thank you.
Thanks, Ed. Thank you. There are no further questions at this time. I'll hand the floor back to management for closing remarks.
Great. Before, thanks again for everyone joining. I just wanted to kind of reiterate the loan pipeline numbers because I think we got cut off a little bit there when Derrick was talking. The total loan pipeline was $1.1 billion at 24th April 2023, and that was comprised of $33 million of single-family agency gain on sale, $273 million of jumbo single-family mortgage, $83 million of multifamily and small balance commercial, $709 million of C&I and CRE loans, and $15 million of auto and unsecured. That's it for this quarter. Thanks for your interest.
Thank you. This concludes today's conference. All parties may disconnect.