Axos Financial - Earnings Call - Q3 2020
April 29, 2020
Transcript
Speaker 0
Greetings and
Speaker 1
welcome to the AXIS Financial Third Quarter twenty twenty Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Johnny Lai, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.
Speaker 2
Thank you, and good afternoon, everyone. Thanks for joining us for Axos Financial, Inc. Third quarter financial results conference call. With me today are the company's President and Chief Executive Officer, Greg Garabrands and Executive Vice President and Chief Financial Officer, Andy Micheletti. Greg and Andy will review and comment on our financial and operational results for the third quarter and they will be available to answer questions after the prepared remarks.
Before we 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 statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for forward looking statements as contained in the Private Securities Litigation Reform Act of 1995. Forward looking statements related to the business of Axos Financial Inc. And its subsidiaries can be identified by common use forward looking terminology and those statements involve unknown risks and uncertainties, including all business related risks that are more detailed in the company's filings on Form 10 ks, 10 Q and eight ks with the SEC. This call is being webcast and there will be an audio replay available for thirty days in the Investor Relations section of the company's website located at www.axosfinancial.com.
All the details of this call were provided on the conference call announcement and in the press release today. At this time, I'd like
Speaker 0
to turn the call over to Greg, who will provide opening remarks. 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 twenty twenty ended 03/31/2020. I thank you for your interest in Axos Financial and Axos Bank.
We had an excellent quarter with annualized double digit loan growth, stable net interest margins, strong fee income and very low credit losses. Rather than go through the typical rundown of the quarter, I will focus my discussion on three topics, credit, capital and near term business outlook. We have a consistent track record of maintaining low credit losses through multiple economic cycles given our conservative underwriting guidelines, senior structures in our commercial lines and loans and the collateralized nature of our loan book. During the great financial crisis, our peak annual net charge offs for loans we originated was less than one basis point for single family and multifamily mortgages. The vast majority of our credit losses incurred between 02/2012 were for recreational vehicle loans that were discontinued in 02/2007.
We are confident that we will be able to weather the current economic downturn for several reasons. The vast majority of our loan portfolio is collateralized by hard assets at conservative attachment points. Our single family mortgage, multifamily and commercial real estate mortgages have low loan to values, low loan to costs and are located in markets with historically strong demand. The vast majority of our larger real estate exposures are structurally protected by relationships with large funds that are structurally subordinated to us. Our direct exposure to unsecured consumer loans represents approximately 50 basis points of our loan portfolio.
We have no exposure to credit cards and approximately $3,000,000 of home equity lines. Although some of our asset backed facilities and a real estate loan or two are technically classified as shared national credits because of the nature of the syndication which we are a part, we do not have exposure to cash flow based shared national credits. We lend exclusively to prime and super prime borrowers across each of our consumer lending categories, auto, single family mortgages and personal unsecured lending. We have minimal credit exposure to airlines, malls, casinos, retailers, theme parks, hotels, oil and gas, restaurants and small businesses. We do not have mezzanine or subordinated tranches of securities in our portfolio.
We do not have collateralized loans in our portfolio that are junior and rights to other loans other than the previously mentioned $3,000,000 of home equity loans. If we take additional collateral in a second position, it is an abundance of caution and supported by a first lien on other collateral. Approximately 95% of our loans outstanding in 03/31/2020 were collateralized by hard assets with a loan to value ratio in the 50s, including $9,100,000,000 of real estate assets and $787,000,000 of primarily consumer receivables. Single family mortgages representing 40% of our total loan portfolio had a weighted average loan to value ratio of 57%. At the March, 60% of our single family mortgages have loan to value ratios at or below 60%, 33% have loan to value ratios between 6170%, 6% have loan to value ratios between 7180% and less than two basis points or $860,000 of combined balances have greater than 80% loan to value.
We have an established track record of strong credit performance in our jumbo single family mortgage lending book with lifetime credit losses of originated single family loans of less than three basis points of loans originated. While we did not foresee a sharp decline in home prices nationwide on par with levels we experienced in the two thousand and seven and two thousand and eight financial crisis, we believe that any potential losses in our single family real estate secured loan book will be manageable even in the sharp economic and housing downturn given the desirability and low attachment points of our underlying collateral. Multifamily loans representing 21% of our total loan portfolio at threethirty onetwenty twenty had an average loan to value ratio of 51%. The lifetime credit losses in our originated multifamily portfolio are less than one basis point of loans originated over the eighteen years we have originated multifamily loans. At the March, 44% of our multifamily mortgages have loan to value ratios at or below 55% loan to value, 35% have loan to value ratios between fifty six percent and sixty five, 20 have loan to value ratios between sixty six and seventy five and less than 1% greater than 75 loan to value.
The average debt service cover ratio of our multifamily loans was 150 was 1.5 at threethirty onetwenty '20. Our small balance commercial real estate loan portfolio of $410,000,000 representing approximately 4% of our total loans at threethirty onetwenty twenty had a weighted average loan to value ratio of 52%. At the end of the March, 49% of our small balance commercial real estate loans have loan to value ratios at or below 50%, 23% have loan to value ratios between 5160%, 23% have loan to value ratios between 6170%. 4% have loan to value ratios between 7175%. And around 1% between 7680% loan to value.
Those higher loan to value loans are uniquely positioned. One of the largest loan to values one of the largest loans is secured by a state level guarantee under a special program and all loans at that level have strong personal guarantors. In our small balance commercial real estate portfolio, we had approximately $80,000,000 of loans to hotels and resorts, representing less than 1% of our total outstanding loans. We have an active dialogue with each of our CRE borrowers and the weighted average loan to value of this book is approximately 52% including 49% loan to value for the hotel exposures. The average debt service cover of our small balance commercial real estate loan book is 1.69 at ThreethirtyOnetwenty20.
Our mortgage warehouse loan book with March 31 balances of $380,000,000 is secured by single family mortgages that can be sold if the borrower is unable to turn the book. We temporarily suspended accepting non agency mortgages other than those that we intend to fund as collateral for our mortgage warehouse facilities in mid March due to dislocations in the secondary market for non agency mortgages. As of 04/28/2020, we had approximately $88,000,000 in outstanding non agency exposure in our mortgage warehouse book or 19% of total current balances $462,000,000 Our initial advance rate on non agency loans varied between 9095% of the note amount and we typically curtail an additional 15% on day 45. Our weighted average exposure on a loan to value basis on $87,000,000 in non agency loan balances outstanding distributed among eight different warehouse clients was 58%. Our borrowers have been actively reducing their non agency exposure and we have ongoing discussions to sell their remaining non agency loans and reduce their draw on our line.
We do not currently project losses from any non agency exposure on our warehouse lending book, particularly given that the current market execution of trades is higher than our adjusted and curtailed advance rates. Our warehouse clients are benefiting from elevated levels of refinancing activity and higher margins across the industry due to capacity constraints. Our commercial loan book, including lender finance and commercial specialty real estate is comprised of loans and lines of credit secured by single family, multifamily, commercial real estate, land and consumer receivables. The lender finance book is comprised of real estate and non real estate transactions. The weighted average advance rate on the real estate lender finance book is 27.2% with no transaction with an advance rate greater than 50%.
The non real estate lender finance book backed primarily by consumer loans is approximately $732,000,000 with an average advance rate of 27% of the outstanding receivable balances. These structures generally require rapid pay downs in the event of any significant collateral deterioration in the receivables and are also paid down rapidly in the event originations decline. We have sole and absolute discretion to approve or deny draws on all of our real estate secured lender finance and mortgage warehouse lines. The weighted average loan to cost on our commercial specialty real estate portfolio is 44% with strong junior partners supporting the capital structure. We hold a senior position in all of our lender finance and commercial specialty real estate loans and every deal has significant capital support from borrowers and or sponsors.
We monitor the performance of the underlying collateral, housing the bankruptcy remote special purpose vehicle, us to identify credit deterioration and take swift action to protect our principal and interest. In our commercial bridge and construction portfolios, we work with experienced developers and well capitalized sponsors such as Ares, Fortress, Madison and Blackstone. The projects are located in gateway cities such as Los Angeles, New York, San Diego and Denver. The average loan size is approximately 18,000,000 The average remaining term is fourteen months and the average loan to cost is 44%. We have no direct credit exposure to airlines, casinos, theme parks, oil and gas exploration companies, retailers or movie theaters.
Our equipment leasing portfolio represents our entire exposure to the oil and gas, aircraft and restaurant sector. Our equipment leasing portfolio, we had approximately $28,000,000 of leases to four borrowers who provide services to the oil and gas and mining industries, a $13,000,000 lease to the largest provider of emergency medical transportation services in The United States backed by a fleet of helicopters and $5,000,000 of leases to a large fast casual restaurant operator that finances countertop kiosks. The average debt service coverage ratio for the six equipment leases mentioned above was 2.87 times at the end of the third quarter. All of the above mentioned credits were current as of 03/31/2020. Although some of our leases to companies have cash flow based leverage on their balance sheet, We have no cash flow based leverage loans.
We had approximately $263,000,000 of hotel and $97,000,000 of retail next use exposure in our commercial specialty real estate loan portfolio, representing 2.5% and less than 1% of our total loans outstanding at 03/31/2020 respectively. The vast majority of hotel loans are AB notes that we hold a senior position in with strong funds with a strong fund in a junior position. The only two direct hotel deals we have are one in Manhattan at a 55% loan to value at origination with 97% ownership by the son of a Saudi billionaire and the other is also in the New York area for $12,500,000 with a full guarantee from an individual with a net worth of over $50,000,000 The hotel properties are completed and all hotels are current in their loan payments. The average loan to value of the hotel and retail commercial specialty real estate loans were 48%. Our non real estate consumer lending is comprised of approximately $312,000,000 of auto loans, dollars 55,000,000 of personal unsecured loans and $56,000,000 of H and R Block refund advance loans.
We source our auto loans primarily from dealers located in 10 states and lend to prime borrowers with an average FICO score of seven seventy two. We fully underwrite and service every auto loan we hold on our balance sheet and the portfolio continues to perform in line with expectations. We have managed the credit risk of our personal unsecured loan book by focusing on prime borrowers with an average FICO score of 765 and an average loan size of $20,000 Given the rapid deterioration in the economy and the rise in unemployment nationwide, we have temporarily suspended originations of new personal unsecured loans. We originated approximately $1,360,000,000 of refund advance loans this quarter, up 17% from the $1,160,000,000 in the three months ended March 3139. We have received payments for all the $56,000,000 of the principal balances for IRAs as of 03/31/2020, a pacing that is far ahead of the disclosed pacing of others in the industry.
Given the ninety day extension in the federal tax filing deadline by the IRS, we anticipate a more extended repayment timeframe for RIAs this year compared to the prior year and cannot guarantee this extended pace will result in no incremental credit losses. In our securities business, we ended the quarter with approximately $159,000,000 of margin loans, down $67,000,000 from December 3139. Despite record price volatility in the stock market over the past few months, we successfully managed our margin lending business with no incurred losses. Our overall credit risk management approach is to engage in frequent communications with individual borrowers and lending partners and determine the optimal set of actions by each individual credit based on borrower, sponsor, project cash flow and liquidity. Business unit leaders have been working with our Chief Credit Officer and his underwriting and portfolio management teams to evaluate and monitor clients that have requested forbearance and or become delinquent in their loan payments.
We have maintained an elevated cadence of communications with clients through e mail, phone and other channels over the past several weeks and the tenor of the conversations have been productive. Other than as directed by Fannie and Freddie with respect to agency mortgages that we service and hold no other economic interest, we have not and will not make extended blanket loan forbearances or modifications on real estate loans, but we'll work with borrowers on a case by case basis on deferral requests while we help them manage through the negative impact from COVID-nineteen. We believe this approach is more appropriate for our borrowers given the unique circumstance and uncertainty surrounding the near to immediate term outlook on the economy and various government restrictions have been implemented. For single and multifamily real estate loans, we have not yet granted any deferrals or long term modifications, but rather provided one or two months forbearances to allow us to have more time to review individual circumstances. With respect to borrowers who did not make their payment for April 1, which would have been late on April 15, meaning that they would be currently about two weeks late in the single family, multifamily and small balance commercial real estate groups and the number of those borrowers who have requested assistance that have greater than 65% loan to value ratios at origination represents 2.6% of the total single family portfolio and 76 basis points of the combined multifamily and small balance commercial real estate portfolios.
Since many borrowers have been told by some banks that a simple phone call is enough to obtain relatively long term deferrals, there are customers who are calling expecting to be granted long term assistance for no legitimate reason. With respect to the auto lending side, deferral requests were granted for 8.7% of the portfolio and the unsecured lending side about 4.7% of the book have requested deferrals. These are currently short term deferrals with 90% no more than two months and around 10% receiving three month deferrals. We are still developing how we will formulate our policies for each asset class in this regard given that each asset class has its own dynamic. For example, given the level of protective equity as well as the high default rate on our notes of 18% in our multifamily and small balance real estate book, we believe our loans will be saleable quickly to opportunistic buyers if we have borrowers who simply wish to utilize loan deferrals as a temporary liquidity buffer rather than ensuring they prioritize their payment on their first mortgage.
Provisions for loan losses were approximately $28,500,000 in the quarter ended 03/31/2020, up $9,500,000 compared to the same period a year ago. Excluding loan loss provisions for HR Block related loans in both periods, our loan loss provision was $10,800,000 or $8,000,000 or up $8,000,000 from $2,800,000 in the prior quarter. The $69,400,000 of loan loss reserves XRAs for the quarter ended 03/31/2020 represented approximately 105.7% of total non performing assets and 22.3 times our annualized net charge offs. Approximately 4,200,000.0 the $10,800,000 loan loss provision XRAs in the quarter ended 03/31/2020 was attributable to loan growth and $6,600,000 was attributed to the rapid and sharp deterioration in the economy. Our provisions for the March were not impacted by CECL because our CECL adoption will occur by 06/01/2020.
Andy will provide more detail with respect to how we were thinking about the CECL impact in his prepared remarks. One of the benefits of later implementation for CECL is that we will be able to incorporate more updated information in our projections. We are encouraged by the speed and size of various fiscal and monetary actions taken by the Federal Reserve, Treasury and other government agencies and believe that some of these actions will help mitigate the negative ramifications of COVID-nineteen on our borrowers. We participated in the SBA's Paycheck Protection Program, originating approximately $85,000,000 of loans for 149 existing and new clients. Even though we were an approved SBA lender, we had not previously been an originator of SBA seven loans, but our technology credit and deposit team worked quickly to stand up a loan portal and streamline a set of processes to quickly open deposit accounts and underwrite and fund PPP loans.
In addition to providing much needed capital for a subset of our borrowers, participation in the PPP program also helped generate incremental relationships and deposits for our small business and commercial banking groups. Our credit quality remains good. Our annualized net charge offs to average loans and leases was three basis points this quarter compared to four basis points in the corresponding period last year. Non performing assets to total asset ratio was 54 basis points for the quarter ended 03/31/2020, flat from December 3139. The majority of our non performing assets are comprised of single family and multi family loans with low loan to values.
We remain well reserved with our allowance for loan loss representing 150.7% coverage of our non performing loans and leases at 03/31/2020. We continue to generate strong returns with a return on average common shareholders' equity of 18.6515.34% in the three months and nine months ended 03/31/2020 respectively. Our efficiency ratio for the banking business segment was 33.2% for the quarter ended 03/31/2020, down over 200 basis points from 35.26% in the year ago. Our capital ratios remained strong at 8.72% of the bank and 8.55 of the holding company. Despite a higher provision for loan loss reserves and buying back approximately $39,000,000 of common stock at an average price of $19.74 per share this quarter, our tangible common equity to total asset ratio remains healthy at 8.66% at 03/31/2020.
Given that we believe there will be tighter credit standards coming out of these times, our top priority for capital will be to fund growth in our existing businesses. Although we had discussed in previous calls starting to pay a modest dividend, Given the uncertainty surrounding the economy, the global pandemic and impact on various government actions on consumer and corporate behavior, we've decided not to pay a dividend until we get better clarity on the depth and duration of economic and business disruptions. We have a healthy liquidity position and a diverse set of funding. Our balance sheet deposits increased by 10.5% year over year with checking and savings deposits increasing by 16.4%. Our commercial cash and treasury management, small business banking and specialty deposits continue to show positive growth.
Average non interest bearing deposits increased by almost $1,000,000,000 year over year led by our Axos Fiduciary Services Group. Client cash deposits from AFS and Axos Securities currently held at other banks was approximately $455,000,000 at threethirty onetwenty twenty. We have the ability to bring back a good portion of our off balance sheet deposits if it's economically advantageous to do so. We also have access to $3,800,000,000 of FHLB borrowing, 3,000,000,000 in excess of the $771,000,000 we had outstanding at the end of the third quarter. Furthermore, we have $1,400,000,000 of liquidity available Federal Reserve discount window as of 03/31/2020.
With many banks and fintechs reducing rates on their consumer online savings and money market deposit products, we have more flexibility to raise consumer online deposits at relatively lower all in costs compared to three and six months ago. We have a relatively stable outlook with respect to loan growth and net interest margin. In jumbo single family mortgages, many banks and non banks have pulled back on the aggressive lending terms and conditions they offered in the prior twelve to eighteen months. Pricing on new jumbo mortgages has tightened due to dislocation in the secondary market for non agency mortgages and liquidity constraints for most non bank lenders. The purchase market is weakened due to the government stay at home and forbearance measures.
We have tightened our credit underwriting standards with respect to all of our lending products. We continue to see demand for our lending products at our tightened credit standards. The multifamily and small balance CRE dynamics vary by geographic market and property type. Rent payments in our primary markets where we lend held up relatively well in March and April. The stimulus checks forbearance programs, federal subsidies on unemployment insurance and the SBA Paycheck Protection Program should provide short term cash flow for renters and borrowers who unable to work voluntarily or involuntarily.
Supply constraints on housing and relatively diverse nature of local economies on the West Coast make multifamily and commercial real estate markets attractive in the medium to long term. How quickly economies are able to resume normal levels of production and productivity will dictate the short term dynamics in these two loan categories. Also, we do not know whether governmental intervention in rent collection eviction foreclosure processes will impact our willingness to continue to lend or impact our ability to manage our loan book. In our two largest C and I lending categories lender finance and commercial specialty real estate, we continue to evaluate new opportunities, but are pivoting to leverage real estate assets at even more conservative advance rates than previous. Given the current environment, we will be able to deploy capital senior to our funding partners where we can obtain better economics on loans and obtaining higher margins of safety and better structures.
With respect to auto and personal unsecured lending, we have temporarily suspended originations for all the prime borrowers with a minimum FICO of $7.20 and significantly tightened credit standards until we have more information about when employees will be allowed to go back to work and what restrictions on commerce and travel may remain in place before we look to grow either of these consumer lending portfolios. We're actively originating and funding PPP loans for existing customers. These forgivable loans, which are 100% guaranteed by the SBA and carry a 0% risk weighting will remain on our books until we sell them back to the SBA or utilize the Federal Reserve's funding facility. Through April 27, we have originated and funded approximately approximately $85,000,000 of PPP loans and have a backlog of $38,000,000 in various stages of processing. We will receive a one time processing fee between 1% or 5% of the principal amount of PPP loans we originated based on the size of each loan.
We are delighted to be able to help small businesses nationwide stay open and pay their employees during these challenging times. We continue to maintain stable net interest margins despite significant flattening of the yield curve and the shift in competitive dynamics across various lending and deposit categories. Excluding the impact from H and R Block related loans and deposits, our net interest margin for the banking business was 3.85% compared to 3.87% in the prior quarter and 3.9% in the third quarter of twenty nineteen. On the asset side, approximately 61% of our loans are five-one arms with single family and multifamily mortgages as the underlying collateral. With a slowdown in prepay activity and stability and new jumbo mortgage and multifamily loan yields, we expect to maintain overall yields in our jumbo single family mortgage loan book and our multifamily loan book.
The majority of our small balance commercial real estate portfolio, which represents another 4% of our loan balances at threethirty onetwenty twenty are term loans with fixed interest rates and staggered prepayment penalties through the first five years of the loan. Approximately 5% of our multifamily and CRE loan portfolio is currently above their floor rates. With competitors pulling back from small balance CRE, we see opportunities to improve our loan yield while maintaining low loan to values and high debt service coverage. In our C and I loan book, our asset based lender finance commercial specialty real estate portfolios have rates that adjust to the index. Of the $3,300,000,000 of lender finance commercial specialty real estate loans, approximately 70% are at their floor rates.
Our equipment lending leasing portfolio which account for the remaining $162,000,000 of C and I loan outstanding is comprised of fixed rate loans and leases. On the funding side, we are well positioned given the diversity of our consumer and commercial businesses and the optionality of our security based deposits. Consumer deposits representing approximately 55% of our total deposits at threethirty onetwenty twenty is comprised of consumer direct checking, savings, money market and non interest bearing prepaid accounts. Excluding consumer time deposits, our consumer checking, savings and money market balances increased by $960,000,000 from twelvethirty onetwenty nineteen with strong growth in our non interest bearing prepaid and other interest bearing demand deposit balances. We reduced our high yield savings and money market deposit rates in March following the Fed's actions.
We prepaid $200,000,000 of brokered CDs with an average cost of funds of $2.71 and reissued a similar amount at 1.78 in the third quarter. Average non interest bearing deposits was $2,600,000,000 in the quarter ended 03/31/2020, up by almost $1,000,000,000 compared to the same period a year ago. We are making good progress in our specialty commercial and treasury management businesses and our involvement with the SBA PPP program will provide additional momentum for small business and commercial deposits. Axos Clearing benefited from a flight to safety this quarter with ending deposits increasing by approximately 16% linked quarter to $413,000,000 These client deposits held in approximately 90,000 individual brokerage accounts provide a stable low cost source of funding. We have chosen to keep the majority of the $413,000,000 in other banks earning interest income for the securities business.
We have the ability to bring these deposits back to our bank on relatively short notice to fund our loan growth. With the impact of consolidation in this industry, we continue to be bullish on the clearing company's long term outlook. Overall, we feel good about our ability to maintain an annual net interest margin towards the lower end of our 3.8 to four point zero target. With loan growth likely to be slowing in the short term and some additional downward pricing flexibility in some of our deposit categories, we look to hold margins relatively stable. Now I'll turn the call over to Andy, who will provide additional details on our financial results.
Speaker 3
Thanks, Greg. First, I wanted to note that in addition to our press release, our 10 Q was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial.com. Second, I will provide brief comments on several topics. Please refer to our press release or 10 Q for additional details. Axos net income for the third quarter ended 03/31/2020 was $56,100,000 up 44.4% year over year and up 35.7% compared to our last quarter ended December 3139.
The increase in net income this quarter compared to the last quarter ended December 3139 is primarily due to growth in the loan portfolio of 2.3% and additional income from seasonal income tax products, partially offset by our higher loan loss provisions and higher operating expenses. The growth in net income year over year is primarily due to loan portfolio growth of 14% and increased mortgage banking revenue and lower operating expenses. Operating expenses for Q3 of twenty nineteen includes a one time charge of $15,300,000 for an uncollected receivable in our securities business. Increased quarterly net income was the result of operating expense efficiency, improvement both year over year and on a linked quarter basis. The efficiency ratio was 39.85% for the quarter ended 03/31/2020 and an improvement year over year of two ninety two basis points when compared to the 42.77% efficiency ratio calculated without the $15,300,000 one time charge recognized in expense last year.
For the quarter ended December 3139, the efficiency ratio was 51.66% improving to 39.85 for the quarter ended 03/31/2020 primarily due to income from seasonal tax products. Mortgage banking income for the quarter ended 03/31/2020 was $3,000,000 up from $400,000 last year and up from $2,200,000 for the last quarter ended December 3139. The $3,000,000 mortgage banking income for this quarter was net of a write down of the fair value of our mortgage servicing rights of $1,700,000 generally due to the decline in long term U. S. Treasury interest rates.
While future declines in long term U. S. Treasury rates are possible, given the low level of interest rates today, additional large declines in the value of our mortgage servicing rights are not likely. For the third quarter of fiscal twenty twenty, non interest expense was $71,800,000 up $4,800,000 compared to our last quarter ended December 3139. Salaries and related costs increased $2,300,000 primarily due to increased payroll taxes, four zero one ks matching, and a small staffing increase.
FDIC and regulatory fees increased 1,000,000 due to a small bank assessment credit that had been received from the FDIC in the prior quarter. Also general and administrative expenses increased $2,000,000 of which $1,500,000 of that increase related to processing costs associated with the seasonal tax products. As Greg noted earlier, we did not adopt CECL this quarter ended 03/31/2020. And therefore we recorded our loan loss provisions this quarter using the incurred loss method. The FASB's original timetable for adoption for public companies with accounting year ends at June 30 was on or before 07/01/2020.
We currently expect to meet that deadline rather than extend the adoption date as recently permitted in the CARES Act in response to COVID-nineteen. To prepare for CECL implementation, we have created life of loan loss models based upon our portfolio characteristics. Using industry forecasted macroeconomic data, these models produce loan level probabilities of default and loss given defaults to estimate loss over the entire life of the loan. We are currently making modifications to these models based upon the recommendations of our third party consultants. Upon the adoption of CECL, we expect a material increase in our allowance for credit losses and likely increases in future loss provisions.
The amount of the increase will depend in part on changes to forecasted macroeconomic inputs resulting from COVID-nineteen pandemic and its future impact upon the economy. For regulatory capital purposes, when we adopt CECL, we expect to elect the two year delay and the five year total transition period to minimize the impact of the increase in our allowance for credit losses on our capital ratios. With that, I'll turn the call back over to Johnny Lai.
Speaker 2
Thanks, Andy. Operator, we're ready to take questions.
Speaker 0
Thank you.
Speaker 1
At this time we'd like to have a 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 your line is in the question queue. One moment please while we poll for questions. Your first question comes from the line of Michael Perito with KBW.
Please proceed with your question.
Speaker 4
Hey, good afternoon, guys. I'm glad to hear it seems like everyone's doing well under the circumstances. Thanks for taking my questions. I wanted to start on kind of the COVID-nineteen response that you guys laid out in your prepared remarks. I was curious, I mean, it didn't seem like through the quarter end, based on the numbers you laid out, Greg, that there was much deferral activity.
And I know you guys said you're kind of working through it here, it sounds like in the near term. But I was just curious if you could maybe give us a little bit more kind of context around what the decision making process kind of looks like and where you ultimately expected the deferral rate to kind of move to based on the applications or requests you've received thus far?
Speaker 0
So as of the end of the quarter, there really wasn't much of anything at all. Subsequent to that, there have been requests coming in. I gave the numbers for the auto and unsecured lending book, and those are current numbers. With respect to the real estate loan portfolio on the Cressle side with respect to the transactions we work with sponsors on essentially, there's been no requests that are simply deferral oriented requests with respect to things to the extent that someone wants to, in a normal course, extend a loan or that sort of thing. They may be paying something down or working with us to do that, but nothing really substantive there either.
On the single and multifamily side, there's been requests in the agency book that we are following government guidelines on. And then
Speaker 5
for the
Speaker 0
remainders of the loans with respect to this, we're not really doing some maybe very short term deferrals. And then we're going to go back and create a process to really look at each underlying asset and decide exactly what to do. So I think in most cases, these are very desirable properties. They're low loan to values. We expect people in general, obviously, each one is going to have its own dynamic, but we expect them to be working hard to make their payments.
It doesn't mean we're not going to defer or grant some modifications or deferrals. We just haven't really had a lot of time right now to assess the individual circumstances of the borrowers. And so that's what we intend to do. And the level that we actually do this assessment is going to be dependent upon the type of request that they have.
Speaker 4
No, that's helpful.
Speaker 0
So I mean
Speaker 4
it sounds like there is some expectation from you guys that the deferral will increase, but it doesn't seem like there's anything really very significant at this point, I guess, to just put broad terms around it.
Speaker 0
Yes. Look, think that it's certainly hard to tell because at times you get the first what we did at first was to say that we would grant somebody the ability to skip one payment. And a lot of the folks just said, well, I thought I was going to get six months for nothing. And we told them no and they just paid. So it's a little bit difficult to tell because as you're kind of working through this, it's really too early to tell because you don't know how much of this is simply opportunistic behavior and how much of it is a legitimate disruption from a business that will come back, right?
Mean, obviously, the intellectual framework for this is that deferring someone who has no chance of coming back is probably not that useful. Deferring somebody who you want to maintain as a customer who is simply suffering from some temporary impact probably makes more sense. So an assessment is required in order to understand how that works. And as I said, each individual asset class has its own dynamic and that dynamic might be influenced by the nature of government rules with respect to actually execution of remedies with respect to lenders. So for example, if you're a multifamily borrower and you just decided to ask for a blanket set of long term deferrals, there's a lot of people who want those properties and a lot of people are willing to buy notes that have 18% default interest.
So that might not be the right approach. Maybe you'll go get a second lien on that property or something and we'll help facilitate that for you so that you have someone that has an interest in that property and can help you through that. But those are the type of things that are just it's just too early right now. I mean, really, this is very recent. As of March 31, there really wasn't much.
And then there has been there have been folks who have come in and there's been a decent number of requests. We've been working on what we're going to do to evaluate them.
Speaker 4
Got it. And then on the PPP, I think
Speaker 0
it was $85,000,000 that
Speaker 4
you guys have approved, and you said you had another 30,000,000 something in the pipeline. I think you mentioned in your remarks that the fee rate can range from 1% to 5%, but it seems like a lot of your peers are kind of oscillating around that 3% mark. Do you think that's a reasonable assumption for you guys as well at this point given what you've seen?
Speaker 0
Yes. 3% to 3.5, I think, is probably reasonable.
Speaker 4
Okay. A couple other questions. On H and R Block,
Speaker 6
I was curious if there
Speaker 4
it seemed like they had a pretty productive quarter actually. Revenues were up. I mean, refund advances were up rather, as you guys mentioned. But I know there's still some uncertainty about kind of the the duration and and the status of that relationship. Is there any update there that you guys can provide?
Speaker 0
Not at this time.
Speaker 4
Okay. And then just lastly, can you remind us, to the extent that this the COVID-nineteen pandemic rather has material impact on small business. Can you just remind us a little bit about the EPIC bankruptcy business? And if there is an increase in bankruptcies in The United States, how that necessarily would benefit that business and as a result, Axos Financial?
Speaker 0
Yes, certainly. So that business has about 40% of The U. S. Bankruptcy trustee market that runs through and that's the Chapter seven side only, 40% of U. Bankruptcy trustees, roughly give or take a couple of percent, are use our software.
Everyone who uses our software is required to hold their liquidity at Axos Bank right now. And so to the extent that Chapter seven bankruptcies increase and those bankruptcies have significant assets and those assets are subject to liquidations or other types of dispositions. And then there's a timeframe often that is significant in which those distributions need to occur as part of that entire bankruptcy process, those deposits will be held at our institution. That's the Chapter seven part of the business. Now the non Chapter seven part of the business utilizes the software and all its services to deal with a variety of other issues and types of clients, SEC receivers, other types of receiverships, potentially other types of bankruptcies that don't have the more formulaic process of Chapter seven bankruptcies.
And often those firms that deal with the Chapter seven side have other businesses that they're also working through that are related to the types of things the types of activity that would likely be expected to increase in the market. So right now, it's obviously too early. I know that everybody feels like each day is a week now. You have to remember this is relatively short period of time into this. So obviously we do expect bankruptcy filings to increase, But that's going to be something and that will lead to enhanced business.
It's just we don't have a great visibility into that right now. It really is still early.
Speaker 4
Yes. But it is fair to think about that business as kind of a countercyclical banking business that in a period of economic stress could theoretically give you guys some more liquidity and revenue opportunities that would be kind of contrary to what traditional banking businesses would how they would perform?
Speaker 0
Yes, that's correct. I mean, look, in 2010, the deposits were twice what they are now. I would expect that's I mean and then look, sometimes it's interesting, right, because sometimes you have a big if you have a big bankruptcy and it's put on the wheel, meaning who gets it, it could be massive, right? So there's but it definitely is a countercyclical business. I would be shocked if it didn't get bigger and we're preparing for the throughput that we think we'll have.
I think it's very difficult to see a situation where Chapter seven bankruptcies don't increase as a result of all of these lockdowns and various mitigating measures that have been taken.
Speaker 4
Yeah, agreed. Great.
Speaker 0
Thank you
Speaker 4
guys for taking my questions and stay well.
Speaker 0
Thanks, Mike. Thank you.
Speaker 1
Your next question comes from the line of Steve Moss with B. Riley FBR. Please proceed with your question.
Speaker 5
Good afternoon. I wanted to start with the, you know, disruption in the mortgage market and, in particular, just on the non QM and jumbo product that you guys offer. Just wondering, you know, even with tightening standards, Greg, you mentioned that you're still seeing demand. Kind of what is that demand these days and how you're thinking about that?
Speaker 0
Sure. So as you know, we previously had a robust growth business in jumbo mortgages. And over the last, I'll call it, six quarters or almost two years, that has had disappointing growth as a result of the market sort of running away from us in what we felt was an imprudent manner. And that has completely and totally reversed. So all of those competitors are gone.
And not just a little gone, all the way gone. And so we had not compromised our credit standards in order to meet those that competition. We lost a lot of business as a result of it. That business is now all flowing back. But the reality of it is we've tightened our credit standards across all products, including liquidity standards holding twelve months of reserves, six months case we're holding six months of reserves, a bunch of other things, tightened LTV standards.
So we are getting obviously lots of calls. The pipeline is very large. I think the question is going to be, obviously, we try to screen that pipeline before it comes in, but I would also expect that pipeline to have a larger fallout than it otherwise would as the market adjusts to the reality that these loans are going to be lower LTVs. There's going to be adjustments to the appraisals as a result of the market circumstance. There's going to be much more stringent liquidity requirements and standards.
There's going to be escrows for taxes and insurance. And there's just going to be a bunch of things that are appropriate for the environment that we may be heading into, recognizing that we always plan for home values to go down by a lot. And we're still going to make sure that we're doing loans that are safe and secure.
Speaker 5
Okay. That's helpful. And then in terms of the margin here, just want to get some color on funding costs. Curious as to what you're seeing as of March 31 and where funding costs could go over the next six months?
Speaker 3
Yes, there's a couple of just general points I can give you, particularly when you look at our CD side. We have approximately 300,000,000 more in CDs that have callable options on them, which means I can retire them and reprice them at significantly lower rates, typically at least 100 basis points lower for the same duration that we had them on. So that's a key opportunity when you look at reducing it. And in fact, also in the CD costs for this quarter, there was $1,100,000 of early amortization of brokered CDs premiums. So when we call these CDs, obviously any unamortized commission has to be recognized.
So just by taking that $1,000,000 out of this quarter, that should reduce the cost by at least 10 basis points that you see in the rate volume table in the 10 Q. So I think we've plenty of opportunities in the CDs to reprice. Obviously, on just traditional deposits, we're growing both consumer and business. Our rates are attractive. The PPP program is also adding deposit accounts because we are requiring deposit accounts.
So all of that is being added at lower rates and we expect that to continue to drive our costs lower. In the end, I think Greg's guidance was we expect to continue to maintain our traditional non block rate of between 43.8% on our NIM. And his guidance, we're a little bit closer to the lower end of that. And we don't see why we can't continue to maintain that going forward.
Speaker 5
All right. Thank you very much.
Speaker 1
Your next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.
Speaker 6
Good afternoon, guys. Just one follow-up question for me. You covered the rest
Speaker 1
of them. On expenses, I
Speaker 6
know there have been a lot of business development plans that you guys have had in suspending initiatives out there. Like what's the outlook for that in this environment? Are there any plans slow them? And then just then at a high level, recognizing that there are some seasonal costs from the tax business, should we expect to see operating costs fall below, say, 69,000,000 for the quarter?
Speaker 3
Sure. No, I mean, think our increase this quarter on a linked quarter basis really came in a couple of ways. I think as you noted, there's $1,500,000 in other general and administrative costs that you can take out for next quarter since that's exclusively related to the tax season. In our personnel costs, the majority about half of the $2,300,000 increase was simply due to FICA. This is a brand new quarter for FICA expense for employees that the employer pays.
And that's about half the increase. So that will continue, but maybe $500,000 of it was more one time associated with 04/2001. So you can probably look at salaries costs being similar to slightly lower for next quarter. And everything else in there is fairly normalized. We at this point aren't looking at too many huge projects.
So I think but we're always planning and that could change down the road. But in the end, the $69,000,000 you're using is pretty close.
Speaker 0
Right. One clarification, as I said, I said the lender finance plus Cresco book had around 70% of the floor. It's actually 63%. And then with respect to your question, Andrew, I think Andy had it exactly right. We basically have everyone that we need now to do all the things that we need to do pretty much with one or two other folks.
So the improvements in UDB are going well. Opportunities We've got a lot to improve our operating efficiency with respect to a lot of different tools that we've developed over time. And those tools were really incredibly important in our ability to very seamlessly seamlessly adapt to the majority of people work from home and all these other things. So they're everything from ticketing systems throughout the organization, robotic process automations, the ability to have a large team of developers who can develop portals to communicate with borrowers, to enhance our abilities to be able to respond quickly to our customers and all those things. And so there's a lot of really good technology that we've put in.
And now I think a lot of it's really time to benefit from that and to try to start reaping some of the fruits of that hard labor that's happened over the and investments that's happened over the last couple of years.
Speaker 1
Great. Yes, you've covered all my other questions. Thanks.
Speaker 3
Thanks, Andrew.
Speaker 1
Your next question comes from the line of David Chiaverini with Wedbush. Please proceed with your question.
Speaker 7
Hi. Thanks. I wanted to start with a question on credit. It seems most of your loan portfolio is very well secured, but I was curious what loan exposures do you consider the most at risk? Is it the refund advance loans, hotel, other unsecured consumer?
Just curious as to what you're considering the most at risk.
Speaker 0
Right. So with respect to their refund advance loans, they did pay at a slower level than they had in the past. Now when we compare that to the other large players who publicly disclosed that, they were around, was it 7%? They were 7%. 7% out and we're 4% out.
And they typically, I think, do a little bit worse than we do on a credit side, but they're basically in line. So from a pacing perspective, we're better. But that doesn't mean that we're both not going to be worse, right? So I think we put a little loan loss into that. We're looking at that.
We have when we look at it, dissect the data, it appears to be that simply it's just slower payments. But that's unknown. So that's out there. There is a guarantee after our fee. There's a guarantee from H and R Block, so we never lose more than our fee.
But obviously, we like we want to get paid for this. We didn't do this for iliumensory purposes. So we can't lose more than what we earned on this. But well, at least at the level that it's at now, H and R Block guarantees that after that amount up to a certain amount, which we will collect. So that's that piece.
So the fee could be at risk, although we don't think so. This is something different. From an unsecured perspective, it's interesting. Right now there's been a relatively low level of request for deferrals. We've gone through the book and we've looked at where people work.
And we've looked at our exposure to individuals that work in restaurants and work in areas that we think could be negatively impacted or shut down that would be sort of the first line effect of this and it didn't look too bad. Now, right, the impact of this is interesting though. I know some people in the medical profession here, radiologists who have been laid off because in San Diego, there aren't really any COVID-nineteen patients. And so the hospitals are empty. And so our government has decided that the surgeries are bad, so we're laying off medical professionals, right?
So those are the type of folks that we lent to because we looked at each individual loan and there was an actual underwriter who made a decision about it based on employment stability and things like that. So depending upon how that works, you don't expect medical professionals to they might need a deferral, but you don't expect them to actually default over time when they had prime credit scores. So that's that book. With respect to the single and multifamily side, I think the exposure is low, but it will relate to the potential that government action interferes in two places. First will be in the ability to collect rents, where a lot of the folks that frankly are in our housing are going to get more money from unemployment than they would from working.
However, if their neighbor is not paying the bill and they look at the neighbor and they say, Gee, I can wait 12 and I have an eviction moratorium, then I may be opportunistic and take advantage of that. That flows downhill. The other would be if there's an attempt to have a state level interference with the ability to foreclose, thereby rendering the timeframe you have to hold loans longer. Now the reality of that is that our loan to value ratios and at the default rates we have in the commercial lending book, that could be a very profitable enterprise. But that's also not something that generally banks like to do just because it causes noise, right?
And so I think there's obviously the opportunity to sell those notes if that ever came about. These are again, these are all hypothetical situations that aren't currently happening, but they're there. The other book, the CRISL book and those elements are most of
Speaker 8
these
Speaker 0
sponsors are very embedded in these loans. So if you look at a typical loan and you use it as an example, you have about whatever our capital stack is, they've got about half above us, maybe a little bit less. And if they don't take care of that property, they get wiped out on day one. That is a very, very harsh remedy and one that I don't believe that they're going to be interested in partaking in absent dramatic reductions in values and property. If there is 50% long term reductions in property with little hope of recovery, then you might see people start to do things like that.
However, then what is our loss rate going to be when we're at a 50% attachment point? We might lose a little money here or there, but probably not. And the other element is, is each of these funds want to buy the other's paper, right? So they all want if you have one from another fund and they say, wait, if I get the opportunity to buy a note where I can take advantage of this, they want that note, right? So that market is very active.
And these some of the world's biggest funds. I just do not foresee them deciding that they're going to take massive losses at that level. So where does it come from? It comes in drips and drabs in the areas where you get someone that you're trying to work through something and maybe there's a maintenance challenge or they're overwhelmed and there's some sort of issue with the property. In the last crisis we had one where we were in at a pretty good loan to value ratio, But there was a borrower had a maintenance challenge.
The maintenance person had an issue and there was significant property damage. Insurance was problematic with respect to how they wanted to pay and there was some damage that was problematic. And then there was some vandalism. And there was we ultimately didn't take a loss on that but it was close, closer than I thought it would be. So there's those idiosyncrasies.
You have to watch fraud in these markets. We're watching the agency mortgages very carefully in the warehouse lending group. That business is going very well and expanding. But people are always when there's economic pressure other places, you have to be careful with that. I think it's really more about if you get some irrationality from governments or regulators, then you can force things to happen in ways that don't make any sense.
And the reality of things are is everybody is acting like they're going to be rational right now. And that question is, does that last over an extended period And I think that's really the question that you have to look at and you have to be prepared for.
Speaker 7
That's very helpful. And then shifting gears I wanted to ask about I think the next milestone for the Universal Digital Bank was to get it to allow a single integrated enrollment process. And I was curious with everything that's happening with COVID and work from home, has the timeline been impacted at all in terms of building out that next phase? Any disruption there?
Speaker 0
In general, not in any material way. Certainly the work from home element has not impacted anything. In fact, I've been just being perfectly blunt, I've been very clear with everyone and I hold myself at this standard, this is the time that everyone works harder. This is not a time when everyone works less. So everyone is working harder now than they have for the right reasons to take care of the borrowers, to make sure that we're adapting, to make sure that we are living up to our vision of being a truly digital first bank that's a leader in technology.
I don't think that that's changed. I think with respect to the question of your categorization of the goal of universal enrollment, I would say that there really are a variety of goals that UDB had. I would say that that goal of universal enrollment is frankly one I understand what you mean by it, but what we've really been trying to focus most on is I would say universal integration and servicing, meaning that what we're trying to do is ensure that all of the elements that the reasons why someone would contact us in banking are going through our portal. So from a servicing perspective, if there's an insurance update or need or an individual wants to tell us about their travel, the TravelX plans, maybe less so now, but they would like a temporary increase in managing their debit card in a more productive way. The goal is to take and create this self-service environment that allows individuals to have a better experience, not have to go through a call center even though it is available and to make that process more efficient.
And so that's very important. The other is to integrate UDB for small business. We have a small business platform right now that for enterprises that are that have more than one owner, and those don't go through UDB right now. And that experience is nowhere near as good. There's a very robust roadmap.
We have put off a couple of long term goals just intermittently to focus on building out the SBA PPP platform and a few other items that are unique to this environment such as better communications with respect to customer requests through UDB and the ability to upload documents and things like that. But in general, I think by October, we still expect to have the universal digital bank experience available to our clearing clients. And that we think is going to be nice because it's going to enable us to get access to more than 100,000 high net worth customers that we intend to sell banking products to and our clearing company clients are very excited about. And then we will have online trading capacity available and we're testing that in with test accounts and those sort of things and we'll be working on that as well. So it's a very robust plan.
It's very exciting. It gets overshadowed by obviously all the current circumstances. And I think it has a lot of long term benefits for efficiency and for revenue over the intermediate term.
Speaker 7
Great. Thanks very much.
Speaker 0
Thank you.
Speaker 1
Your next question comes from the line of Mitch Hennellgarden with Shaker Investments. Please proceed with your question.
Speaker 6
Edward Himmelgram. But Andy, just one question for you is just with the CECL implementation the next quarter, at the end of the year, will that the original provision, will that go through retained earnings or income?
Speaker 3
Yes. So the way it works, and it's called generally day one and day two, You are on the day you adopt it, you make a direct and assuming you're increasing your allowance, you would apply a tax rate to that increase and then you charge it directly against stockholders' equity on a GAAP basis. So it doesn't run through the income statement. It goes straight into equity. After that day one entry, it becomes your provisions become normal, I.
E. All your provisions run through the income statement as they do today. But the big difference is that for regulatory capital purposes, the rules were changed recently such day one charge, 100% of it is actually added back to your regulatory capital for a period of two years and then phased out for another three years. So you have five years of so called transition before it really impacts your regulatory capital ratios.
Speaker 6
Okay, great. Greg, one more question. Just you've always been very opportunistic about when opportunities present themselves. In terms of lending, you mentioned that the competition has gone away or the aggressive competition has gone away in the first jumbo mortgage area. Any other areas that you think there might be some opportunities?
Speaker 0
Yes. I think that a lot of real estate lender finance had moved away to these gestation lines at very high advance rates that some banks are stuck with now that we never did. And those loans were sometimes they would do these twelve month gestation facilities with securitization exits. Those are all gone. A lot of it's amazing what people put on repo facilities.
Without going into detail on it, it would surprise you. You wouldn't expect that you should put long term, let's say, commercial real estate loans with incremental funding structures on a repo facility, yet it was done. So I think there is we have the same team. We have the playbook. We know how to do this.
We know how to in that crisis, what we took advantage of on all those loan structures are very well developed here. They're very conservative. I think that there's a little bit of an equity gap in the market right now. Funds can fill that equity gap. But if you had an advance rate our old advance rates were $0.45 on the dollar, let's say, and people are interested in that again, which is great.
The problem is if you had gotten $0.85 for a while, you have a transition. And that transition is a difficult one, and it's one that takes some time. So there are opportunities in the market, but we are not always able to sell those opportunities individually. But we do have partners that can assist more globally with that. But obviously, in certain cases, there's need
Speaker 4
So
Speaker 0
I feel good about that. It's early, but there's been a lot of productive discussions. And I think there'll be coming out of this, it should be the case that some of the competition which essentially we had $1,000,000,000 loan books in certain categories that essentially went to zero. And there'll be opportunities in those loan categories again.
Speaker 6
Great. Thanks.
Speaker 0
Thanks Ed.
Speaker 1
Your next question comes from the line of David Feaster with Raymond James. Please proceed with your question.
Speaker 8
Hey. Good afternoon, everybody. Just wanted to start I just wanted to start with the securities business. Volatility like this often creates pretty, pretty significant disruption. And I was just curious whether you've been able to add new broker dealers or investment advisers given all the disruption.
Speaker 0
Yes. We have a pipeline. Candidly, I'd like that pipeline to be bigger. I think that it's coming. For example, that business is in Omaha and TD is in Omaha.
And so getting talent to Omaha has become a lot easier now that obviously you have this merger on the horizon and that has really helped us and we've been able to pick off opportunistic talent. There's lots of good discussions with RIAs from a custody perspective who are very worried. Often they didn't want to be a Schwab or they left Shoahov for TD and now they're being pulled back in. There's obviously folks who were part of some acquisitions that E*TRADE made that are looking at trying to figure out exactly how to be part of an organization where they matter and where someone will return their calls other than through a call center. So I think there is a lot of opportunity there.
With respect to what we're doing on that business on the clearing side, we are trying to bring all the technology that we have into the operational environment to make sure that we can handle additional capacity. So the people there work very hard. They've done an amazing job managing through this liquidity without losses. I mean, obviously, you've there's been Interactive Broker and other things have made have had some interesting disclosures that they've had to make. A lot of companies had issues.
Obviously, we had one, which was a one off last year. So I'm not there's never any rest, but they did a great job this quarter. And so we're working a lot on the operational efficiency side there, making good progress. They're learning to adopt a culture of execution that is a lot sharper than they've had before. And I think there's really great long term opportunities because the disruption in this these markets are massive, and we're just beginning to see the results of that disruption.
So on clearing side, I think we have a pretty good platform and we have interest. We have to get more credibility with larger firms. We've had some looks, but it is a tough it's a tough thing to get somebody to switch. And then on the RIA custody side, we are currently working with some hardy folks who are bringing us assets and frankly helping us make sure that we're working out the kinks with both the onboarding and the platform overall. We have a new software that we're implementing that is going well.
And that platform will develop over time. It's not going to be immediate. It's a longer term initiative. But I think it's if you look out three to five years, I think everybody is going to be very happy that we spent the time to do something unique, bringing a universal platform to the end client, and bringing a great technology servicing system to that business. On the robo advisory, the managed portfolio side as we're calling it, we are I've appreciated the no fee model.
That's been great for a while. It's useful for acquisition. I also, frankly, I've told the team, you've had some opportunities and now you're going to go make money. So we're going to be working on what that model looks like, but they will be making money shortly. They have a nice portfolio of assets and they provide a great service.
And so they're going to go make money on that pretty soon. I've had a bad because the clearing company makes money and the issue is the net loss that you see in the segment is from the managed portfolio side and that's going to end. So we were they had a view that they wanted to try to grow the business with that model. I think we a nice run at that, had some growth, but we can grow it by adding value rather than absolutely being we may still be the lowest cost provider. We just don't have to be the lowest cost provider by that amount.
Speaker 8
Got it. And then just maybe what are you seeing in the specialty CRE segment? I mean, I know you deal with premier developers that are very well capitalized. But just curious your thoughts on this segment, what you're hearing from your clients and just your thoughts on that segment more broadly near term?
Speaker 0
Yes. I think that the nature of that segment is going to be and its activity is going to be determined by junior capital. And so if you think about, let's say, a funding structure for a project, and these obviously are just rough numbers, but if you have a situation where, let's say, there's $100,000,000 project, equity was going to put in $20 the junior was going to put in 40,000,000 and we were going to put in 40,000,000 right? So and what our 40,000,000 is going
Speaker 4
to come
Speaker 0
after all of that 60,000,000 and it's going to come in only after all that is already there. And so that does a couple of things. It obviously makes the hurdle rates with respect to the project higher because the junior capital is looking around saying, gee, I have a lot of interesting opportunities and there's a lot of current developments. So it will be interesting to see how it goes. I think there will be selected projects to get off the ground.
I think Junior Capital is working through what they want to do. I think there's lots of discussions and lots of asking for what term sheets would look like and not a lot of movement. I think the market is really trying to figure out exactly where things are. There clearly are good projects. There clearly are folks that have a lot invested and are going to deliver.
And I think that's good. It's going to be interesting though to see how that develops. And my inclination is that I think the junior capital is going to look for opportunities, some of which they may find more attractive in existing assets and helping others through their problems rather than going after new things. But that's speculation. It's still too early.
Speaker 8
Yes, that makes sense. Last one for me. Just wanted to get your thoughts on your capital priorities near term.
Speaker 0
I mean dividend sounds like it's on hold
Speaker 8
for now, but just thoughts on repurchases or any other opportunistic investments or even potential M and A maybe in the FinTech side given the disruption and being able to pick up a complementary business that you've been eyeing for a while?
Speaker 0
Right. Yes, I think with respect to the dividend side, I talked about that. The share repurchase side, I think look, I think that's something that we've been we haven't we did a little bit. We never we're very thoughtful about our capital. I'm not going to make any prophylactic rules on that, but or make any statement of absolution in either way there.
But clearly, there's a lot of opportunities in the market. We also have uncertainty with respect to what happens in the future. And so you're weighing all those different elements. Clearly, we want to have capital for growth that's prudent when there. We want to support our clients where we have good opportunities.
I think there will be good yielding opportunities at very good credit profiles here. So we want to make sure that we're there for that And also make sure obviously that we're thoughtful about our capital. So with respect to the M and A side, that depends upon what you're getting with the platform. So I think unfortunately a lot of the fintechs with respect to the platform, they're either going to work through it with respect to their existing assets and their debt levels and things like that or they're going to kind of have to wind down for a while and see where they go. There may be one off opportunities like there were with respect to the robo advisory platform that we purchased, where it comes with an asset base that has no negative credit potential credit consequences or not.
But obviously, I think we've tried very hard to be thoughtful about what we put on the books and there were strong credit theses for each one. So there would have to be a very strong credit theses that would have to accompany anything that would involve taking on any credit risk in an M and A right now.
Speaker 1
Okay. All right. That's helpful. Thank you.
Speaker 0
Thank you. Right. I guess So that's thank you very much. We'll talk to you next quarter.
Speaker 1
This concludes today's conference. You may disconnect your lines at this time.
Speaker 4
Thank you
Speaker 1
for your participation.