Axos Financial Inc

NYSE:AX

Earnings Call Analysis

Axos Financial Reports Robust Earnings

Axos completed a major acquisition of loan pools worth $1.25 billion from the FDIC at a 37% discount, positioning the bank to accrue approximately $301 million of discount as income. Deposits grew by $1 billion in the quarter, with 95% represented by checking and savings at an annualized growth rate of 20%. Net interest margin outperformed guidance, hitting 4.55%, with expectations to increase by 40 to 50 basis points due to the purchase. Loan pipeline stood strong at $1.7 billion, and growth is anticipated in the high single digits to low teens. Axos is harnessing market dislocations to hire talents that will drive long-term growth, with noninterest expenses expected to be a few percentage points higher than historically, aligning with loan growth rates or potentially 15-16%, factoring in new hires.

Continued Growth and Strong Performance Mark the Quarter

The company reported a remarkable sixth consecutive quarter of double-digit growth across key metrics, including earnings per share, book value per share, and loan balances. Earnings saw an extraordinary 86% year-over-year increase, while earnings per share jumped by a significant 94%. Net income reached $152 million with earnings per share at $2.62 for the quarter ending December 31, 2023.

Solid Adjusted Earnings Show Underlying Strength

Adjusting for one-time gains and losses, non-GAAP adjusted earnings per share still rose by 15.7% over the prior year to $1.56, highlighting underlying business strength.

Book Value Gains Reflect Rising Intrinsic Value

Investors will be pleased to note a substantial 25% increase in tangible book value per share, now at $33.45, suggesting the intrinsic value of the company is on an upswing.

Robust Loan Portfolio Expansion and Interest Margin Growth

The company's loan portfolio experienced an impressive 8% growth from the previous quarter, equating to a 32% annualized rate, while excluding FDIC loan purchases, nonpurchased loans held for investment increased by 10% annualized. Net interest margin also improved to 4.55%, up 19 basis points from the previous quarter and 9 basis points from the year before, underscoring the company's improving interest income efficiency.

Securities Business Contributes Significantly

The Axos Securities division, primarily custody and clearing businesses, recorded a robust 27.6% year-over-year increase in broker-dealer fee income and a 5.4% rise in advisory fee income. This segment's quarterly pretax income was a strong $10.8 million.

Strategic Acquisitions and Credit Quality Maintenance

The company astutely acquired two commercial real estate and multifamily loan pools, expecting to provide incremental net interest and after-tax income over the coming years. Credit quality remains consistently strong, with a mere 2 basis points of net annualized charge-offs, mainly from insured auto loans.

Strong and Well-regulated Capital Levels

With Tier 1 leverage ratios standing at 10.2% for the bank and 9.4% for the holding company, the company comfortably surpasses regulatory requirements, providing a buffer for operational stability.

Aggressive Share Repurchasing Signifies Confidence

The company aggressively repurchased $59 million of common stock, in response to an 'unwarranted' decline in share price, bringing total fiscal year repurchases to $83 million. This strategy not only signals management's confidence in the business but also provides a return to shareholders.

Loan Portfolio Rebalancing for Optimized Returns

The company is rebalancing its loan portfolio towards commercial, industrial, and other sectors that offer lower duration, floating rates, and better risk-adjusted returns—a prudent move in the current market environment.

Yield Improvement and Competitive Advantage Seen in Lending

A notable uptick in average loan yields to 8.18% reveals a competitive advantage as the company secures wider spreads in lending categories where competitors are retreating. Strong new loan yields across various categories further support this advantage.

Real Estate Loan Performance and Nonperforming Loans Overview

The firm's commercial real estate loans remain robust, with significant downside protection due to senior structures and low loan-to-values. While there's an increased focus on multifamily loans, nonperforming loans have been managed well, with no expected material loss on assets currently categorized as nonperforming. Single-family mortgage delinquencies saw a notable increase to $54.3 million, led by a significant loan becoming delinquent, but a relatively conservative average loan-to-value ratio across the portfolio provides some reassurance.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to the Axos Financial, Inc. Q2 2024 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you, Johnny. You may begin.

[Johnny Lai, executive]

Thanks, Alicia. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial, Inc.'s Second Quarter 2024 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President of Finance, Andy Micheletti.

Greg and Derrick will review and comment on the financial and operational results for the 3 and 6 months ended December 31, 2023, and we will be available to answer questions after those prepared remarks.

Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details.

This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release.

Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call with additional information regarding the FDIC loan acquisition. All of these documents can be found on axosfinancial.com.

With that, I'd like to turn the call over to Greg.

[Gregory Garrabrants, executive]

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 second quarter of fiscal 2024 ended December 31, 2023. I thank you for your interest in Axos Financial.

We delivered outstanding results, generating double-digit year-over-year growth in earnings per share, book value per share and ending loan balances for a sixth consecutive quarter. Strong organic loan growth and deposit growth, coupled with further net interest margin expansion, resulted in double-digit net interest income growth year-over-year and linked quarter annualized.

We grew deposits by approximately $638 million linked quarter. We reported net income of $152 million and earnings per share of $2.62 for the 3-months ended December 31, 2023, representing year-over-year growth of 86% and 94%, respectively.

Excluding the onetime gain and loss provision associated with the FDIC loan purchase, our non-GAAP adjusted earnings per share increased by 15.7% year-over-year to [ $1.56 ]. Our tangible book value per share was $33.45 at December 31, 2023, up 25% from December 31, 2022.

Other highlights for this quarter include the following: Ending loans for investment balance net of discount were $18.5 billion, up 8% linked quarter or 32% annualized. Excluding the FDIC loan purchase ending nonpurchased loans held for investment increased by $443 million linked quarter or 10% annualized.

Growth was broad-based with growth in real estate and non-real estate lender finance, equipment leasing and fund finance, offsetting lower origination volumes in single-family warehouse and higher payoffs in commercial specialty real estate and a deliberate runoff of our auto book.

Net interest margin was 4.55% for the first quarter ended December 31, 2023, up 19 basis points from 4.36% in the quarter ended September 30, 2023 and up 9 basis points from 4.49% in the quarter ended December 31, 2022. Excluding the benefit from the FDIC loan purchase, our consolidated net interest margin was 4.36% in the quarter ended December 31, 2023.

Axos Securities, comprised primarily of our custody and clearing businesses, had another strong contribution to our fee and interest income.

Broker-dealer fee income increased 27.6% year-over-year due to higher interest rates and increased client activity. Advisory fee Income increased 5.4% year-over-year due to higher mutual fund fees and higher average assets under custody. Quarterly pretax income for our Securities business was $10.8 million in the second quarter of 2024.

Our credit quality remains strong, with net annualized charge-offs to average loans of 2 basis points in the 3-months ended December 31, 2023. The majority of the 2 basis points of net charge-offs for this quarter were from auto loans that are covered by insurance policies, with proceeds from those insurance policies accounted for as fee income.

We completed the purchase of 2 performing commercial real estate and multifamily loan pools from the FDIC with a combined unpaid principal balance of approximately $1.25 billion at 63% of par value. We recognized a $65 million after-tax gain and increased our allowance for loan loss by $75 million on the purchase in the quarter ended December 31, 2023.

We believe this opportunistic loan purchase will provide incremental net interest income and after-tax income over the next several years. I'll provide more detail regarding this transaction later on the call.

Our capital levels remain strong, with Tier 1 leverage ratio of 10.2% at the bank and 9.4% at the holding company, both well above our regulatory requirements.

We repurchased approximately $59 million of common stock in the second quarter, in addition to the 24 million we repurchased in the prior quarter, to take advantage of the unwarranted decline in our share price. This brings our total share repurchases in fiscal year 2024 to $83 million at an average share price of $36.49 per share, representing 2.8% of the shares outstanding as of 12/31/2023.

We had strong organic loan originations in our commercial and industrial group, non-real estate lender finance, equipment finance and fund finance lending businesses. We continue to reduce our small-balance commercial real estate, consumer and auto loan balances, given our preference for originating and retaining loans with a lower duration, floating rate and better risk-adjusted return in the current environment.

Average loan yields for the 3 months ended December 31, 2023 was 8.18%, up 33 basis points, from 7.85% in the prior quarter and up 156 basis points from the corresponding period a year ago. Average loan yields for nonpurchased loans were 8.02%. And average yields for purchased loans were 18.51%, which includes the [ accretion ] of our purchase discount.

We continue to see wider spreads in some of our lending categories as competitors have pulled back or exited. New loan yields were the following: single-family mortgages, 8.1%; multifamily, 8.6%; C&I, 9.1% and auto, 10.3%.

Our commercial real estate loans continue to perform well. The low loan-to-value and senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provide us with significant downside protection in the event of a significant deterioration in the borrower's ability or willingness to repay the valuation of our underlying properties or project delays.

Of the $5 billion of commercial specialty real estate loans outstanding at December 31, 2023, multifamily was the largest segment, representing 34% of the total commercial real estate specialty loans, while hotel, office and retail represent 20%, 8% and 4%, respectively.

On a consolidated basis, the weighted average loan to value of our commercial specialty real estate portfolio was 40%. For the retail and office segment of our commercial specialty real estate book, the weighted average LTV is 40% and 38%, respectively.

Total CRESL loans secured by office properties declined by $38 million linked quarter to $418 million. Of the $418 million CRESL loans secured by office properties at the end of the quarter, 69% are A notes, or note-on-note structures, all with significant subordination, with some having recourse to funds or sponsors or cross-collateralization with other asset types from fund partners and mezzanine lenders. These loans have an average loan-to-value of 32%, excluding any recourse across collateralization.

Nonperforming loans in our commercial specialty real estate portfolio were approximately $26 million at December 31, 2023, identical to the September 30, 2023 ending balances, representing 5 basis points of our total CRE loans outstanding. We do not anticipate incurring a material loss in either of these loans.

Nonperforming loans in our multifamily and commercial mortgage portfolio were approximately $37 million at December 31, 2023, down by $1.5 million from the September 2023 balance. The average loan-to-value of our nonperforming multifamily and commercial mortgages is approximately 60%. Although we cannot be certain, we do not expect to incur a material loss at any of the asset-backed loans currently categorized as nonperforming.

Nonperforming single-family mortgages increased from $36.6 million at September 30, 2023 to [ $54.3 million ] at December 31, 2023. The increase was primarily the result of a $14.3 million loan becoming delinquent. The property has an updated loan-to-value of approximately 81%, and the property is listed for sale and for rent. The average loan to value of other single-family mortgages that became delinquent this quarter was 49.5%.

On December 7, 2023, we completed the purchase of 2 loan pools with approximately $1.25 billion of UPB for $786 million from the FDIC at a 37% discount to par value. Of that discount, we recognized $92 million pretax as part of a bargain purchase gain, recorded as [ $70 million ] loan loss. As a result, assuming any loan loss in the pool is at or below the amount allocated in the loan loss, Axos will accrete approximately $301 million of discount over the life of these loans into income.

The loan pools are comprised of approximately $578 million of commercial real estate loans, with a weighted average loan-to-value of 50% and a remaining term of 41 months and $676 million of multifamily loans with a weighted average loan-to-value of 67% and a remaining term of 120 months. All 58 loans are current on principal and interest payments, with a borrower paying an average fixed rate of 3.8%.

As part of the cash purchase, we received a series of back-to-back interest rate swaps that allow Axos to receive a variable note rate of approximately 6.9% without discount. We provided additional details regarding the FDIC loan purchase in our earnings supplement. We also broke out the purchased and non-purchased loans in the rate volume table on Page 35 and 36 of our 10-Q.

This is an extremely accretive transaction from a net interest margin and net income perspective that we expect to remain over the next several years. I'll provide additional details regarding how investors think about the net interest margin impact at the end of my prepared comments.

We had another strong quarter of deposit growth, with ending balances increasing by $1 billion from June 30, 2023, or 12.6% annualized. Checking and savings accounts representing 95% of total deposits at 12/31/2023, grew even faster at 20% annualized.

Our deposits remain well diversified from a business mix perspective, with consumer and small business representing 61% of total deposits, commercial cash, TM and institutional representing 21%, commercial specialty representing 7%, Axos Fiduciary Services representing 6% and Axos Securities, which is our custody and clearing on balance sheet, representing 5%.

Total noninterest-bearing deposits were approximately $2.8 billion, relatively flat quarter-over-quarter. Cash sweep deposits fell by approximately $200 million, offset by $133 million sequential increase in noninterest-bearing commercial deposits. The new commercial deposit teams, including fund finance, are starting to contribute meaningfully to our noninterest-bearing deposit growth. We're also seeing upticks in our Axos Fiduciary Service deposit balances.

Our balance sheet remains asset sensitive, given the shorter duration, variable rate of our loans and the granularity and diversity of our consumer, commercial and securities deposits.

For the quarter ended December 31, 2023, our consolidated net interest margin was 4.55%, while our banking business net interest margin was 4.62%. Our consolidated and banking business net interest margin remained well above our prior consolidated net interest margin guidance of 4.25% to 4.35%, aided by strong organic loan growth, accretion from the FDIC loan purchase and some normalization in our Axos liquidity.

Total ending deposit balances at Axos Advisory Services, including those on and off Axos' balance sheet, declined by $200 million in the quarter, reflecting adviser investing excess cash into risk assets and reaction to the year-end stock market rally. We believe that the pace of cash sorting at Axos Advisory Services has stabilized at or near the bottom, representing 4% of assets under custody as of December 31, 2023, compared to an historic range of 6% to 7%.

In addition to our Axos Securities deposits on our balance sheet, we had approximately $550 million of deposits off balance sheet with partnered banks and another $750 million of deposits held at other banks by software clients in our [ C&F ] accounting and business management vertical.

We expect our net interest margin to be augmented by the FDIC loan purchase. Given that the borrowers pay a fixed rate substantially below current market rates, we expect that these loans will have a relatively low duration -- long duration and prepays will be relatively low, if any. Our baseline assumption is that none of the acquired loans prepay and that we do not sell any of our acquired loans prior to maturity.

Under those assumptions, we expect our consolidated net interest margin will increase by approximately 40 to 50 basis points above our prior 4.25 to 4.35 consolidated targets for the next 4 to 6 quarters.

As we grow net new loans by $500 million to $700 million per quarter, assuming our high single-digit to low-teens loan growth target, the net interest margin boost for the purchased loans will gradually decline over time. In the event that one or more loans prepays, our net interest margin will be further enhanced due to the immediate recognition of the remaining purchase price discount.

With respect to the question of net interest margin sensitivity in the event of a Fed funds decline, several dynamics are worth considering. First, approximately 28% of our loans, representing $5.2 billion, were hybrid ARMs as of December 31, 2023, of which 16% will reprice in one year, 18% will reprice in 2 years and 18% will reprice in calendar 2026, with the remaining 48% repricing in 2027 and beyond.

The repricing of these hybrid loans will provide some offset to reduced index rates on floating rate adjustable loans if and when the Fed starts to reduce interest rates.

The hybrid ARMs consist primarily of 3- to 5-year fixed rate multifamily and 5-year hybrid single-family loans. Of the approximately $2.2 billion of hybrid multifamily loans, yielding approximately 5.15%, 28% adjust in calendar 2024, 28% adjust in calendar 2025, 14% in calendar 2026 and the remaining 30% lower price in 2027 and beyond.

Of the approximately $3 billion of single-family loans, yielding approximately 5.24%, 8% adjust in calendar 2024, 10% adjust in calendar 2025, 21% adjust in calendar 2026, and the remaining 61% will reprice in 2027 and beyond.

At 12/31/2023, approximately 64% of our loans were floating and 21 -- 28% are hybrid ARMs and 8% were fixed. With respect to the 64% of our loans that are floating rate, we work hard to have strong index floors in our loans, but these index floors are generally well below the current index rate.

Therefore, the margin offset to rate reductions in floating rate loans, other than the repricing of hybrid loans, will be a reduction in the rate we pay on deposits. Although it is difficult to predict how quickly we can lower deposit rates when the Fed fund rate goes down, approximately 16% of our total deposits are tied or sensitized to Fed funds, and they should adjust quickly.

Given that more than 90% of our consumer deposits are nonmaturity deposits, we have the ability to lower those rates, depending on deposit competition, loan growth and the sensitivity of our depositors to reduced rates. We continue to invest in front- and back-end systems, IT infrastructure and security and other enterprise software and systems that will further optimize our business and functional units.

After launching our Universal Digital Bank 2.0, the latest version of our consumer and mobile banking applications in September, we are working on transitioning our small business banking platform from a legacy system to UDB. A move that has been completed for new customers, with a transition for most existing small business customers occurring before the end of this current fiscal year.

This platform transition will leverage the investments we have made in UDB and make our [ SDB ] offering more modern and user-friendly.

Our white-label banking for RIAs and IBDs continue to make progress, with the beta launch expected in the next few months. We believe the ability to provide a turnkey banking solution to the hundreds of thousands of our foreign and high-net worth clients of our custody and clearing business will be a differentiator from a service and efficiency perspective.

In our Zenith business management vertical, we are investing to modernize the user experience and add new features to the software. We see tremendous long-term opportunity to grow market share of fee income, deposit and cross-sell other banking products to clients in the business management vertical.

Axos Clearing, which includes our corresponding clearing and our custody business, continues to make steady progress. Noninterest income from the securities business increased 3% year-over-year to [ $67 million ]. The primary driver of growth in the fee income from Axos Securities is higher interest rates, partially offset by lower average balance of deposits held at partner banks.

Total deposits at Axos Clearing were $1.4 billion at December 31, 2023, down from $1.6 billion in the prior quarter. Of the $1.4 billion of deposits from Axos Clearing, approximately $0.8 billion was on our balance sheet and $550 million were held at partner banks.

Net new assets in our custody business increased by approximately $172 million in the 3-months ending December 31. We onboarded with 13 new advisers this quarter. The pipeline for new custody clients remains healthy, comprised of 233 advisory firms, with approximately $22 billion of combined assets under custody.

We have made good progress on the systems and product front, launching a refreshed client portal and securities-based line of credit for RIA clients towards the end of the year.

We see tremendous opportunities to grow our existing businesses and improve operational efficiencies across business and functional units. The market dislocation and corporate restructuring among our bank and nonbank competitors have created a once-in-a-decade opportunity to add talented individuals and teams to access.

Many of the additions we have made over the past 9-months have already contributed meaningfully to our growth, and we're actively recruiting across various commercial deposit, lending and business verticals to help build and accelerate several strategic and operational initiatives on our long-term road map.

With strong liquidity and excess capital, a de minimis unrealized loss in our small -- our investment securities portfolio, a multiyear boost in earnings and margin from the FDIC loan purchase and solid organic growth prospects, given the diverse nature of our banking and securities businesses, we are focused on widening our lead relative to our competitors.

Our returns, credit and margins are best-in-class because we focus on asset-based lending opportunities with the best risk-adjusted returns and we structure deals with low leverage and credit enhancements.

We have a proven track record of repositioning ourselves during pivotal turning points during the banking and economic cycle. We are confident the investments we are making in our business systems, processes and people will generate attractive future returns for our shareholders.

Now I'll turn the call over to Derrick, who will provide additional details on our financial [ performance ].

[Derrick Walsh, executive]

Thanks, Greg. To begin, I'd like to highlight, in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details.

Total noninterest expenses increased by $1.3 million or 1.1% to $122 million in the 3-months ended December 2023 compared to the quarter ended September 30, 2023. Salaries and benefit expenses increased by $3.1 million, primarily due to new team member additions and the first full quarter of the annual merit-based increases that were awarded in September 2023 to our staff. It was also the first full quarter for the LV Marine Finance business being a part of Axos.

Advertising and promotional expenses were down by approximately $0.6 million as we scaled back certain deposit-related marketing expenses. Professional service fees were down $3.8 million on a linked-quarter basis due to the timing of insurance reimbursements, reduction in valuation and audit fees tied to our year-end audit, which occurs in the first fiscal quarter, and legal expenses.

As Greg mentioned earlier, we continue to actively recruit talented individuals and teams across various businesses. We believe that reinvesting a small portion of our expected gains from the FDIC loan purchase is a prudent strategic allocation of capital that will benefit our shareholders.

For those who may not be as familiar with the Axos story, we deployed a similar strategy 7 to 8 years ago by reinvesting a portion of profits from our H&R Block business in long-term strategic initiatives, such as UDB, our commercial banking business and our securities businesses. Those investments have been instrumental in helping us further diversify our lending, deposits and fee income.

We expect noninterest expenses to grow a few percentage points higher than our historical growth rate over the next few quarters as we continue to invest in the people, systems and growth initiatives. We will continue to identify and implement process improvement, automation and other productivity initiatives to maintain a best-in-class operating efficiency.

Following a strong start to the first half of our fiscal year, our loan growth outlook is consistent with what we have guided to in recent quarters. We believe that we will be able to grow loan balances organically by high single digits to low teens year-over-year for the next few quarters, excluding the impact of the FDIC loan purchase or any other potential loan or asset acquisitions.

Our loan growth outlook is based on a broad-based increases in our [ ADL ], lender finance and capital call lines, partially offset by declines in jumbo single-family mortgage, multifamily, CRESL, auto and personal unsecured loan balances.

We continue to see good risk-adjusted opportunities across several of our lending niches. Our market share gains have been partially offset by higher levels of prepayments in certain segments of our C&I book, given the shorter duration for these loans.

Our loan pipeline remained solid at $1.7 billion as of January 26, 2024, consisting of $277 million of single-family jumbo mortgage, $70 million of agency gain on sale mortgage, [ $52 million ] of multifamily and small balance commercial, $23 million of auto and consumer, and $1.3 billion of C&I. Our income tax rate was 30.2% for the first quarter ended December 31, largely in line with our guided range of 29% to 30%.

As a reminder, typically, we have higher employee-related taxes and FDIC assessments in the first calendar quarter. Aside from those seasonal factors and the aforementioned growth investments, we do not anticipate any outside changes in our future income tax rate or noninterest expenses.

With that, I'll turn the call back over to Johnny.

[Johnny Lai, executive]

Thanks, Derrick. We are ready to take questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler.

[Andrew Liesch, analyst]

So question on the margin outlook excluding the loans from the FDIC, trying to look sort of like maybe the guidance to be slightly lower than before, is that -- or would that 225 -- probably 425 to 435 range still hold as appropriate?

[Derrick Walsh, executive]

Yes. That's -- the 425 to 435 will still hold for the calendar year of 2024. [indiscernible] organic.

[Andrew Liesch, analyst]

I mean if you could provide us a little bit more details on some of the expense growth? I mean just looking at -- year-over-year expenses were up 13% this quarter. Last quarter, they were up 20% year-over-year. I guess what -- is there like a year-over-year growth rate that we should be looking at? I know that there's going to be a little bit more investment going on.

[Derrick Walsh, executive]

I think the -- I'd probably say it lines up, generally speaking, with our loan growth rate that has kind of high single digits to low teens. Honestly, different quarters, we'll have some -- there will be lumpy mix. But when you look at it on an annualized basis, I think it will generally align with that loan growth rate that we provide. .

The -- this first quarter -- first calendar quarter, as I highlighted, will have some higher expenses due to payroll taxes. So usually, that's -- if you look back, that's always cyclically a much higher quarter for the FICA and [ FICO ] taxes that are worked through in that January, February month.

[Gregory Garrabrants, executive]

Andrew, I think we are recruiting a decent amount of talent. And sometimes, that talent comes on and then it takes a few quarters for them to do stuff. So I'm not sure I wouldn't pop that up a few percentage points, maybe kind of pop it up -- I mean -- I think maybe [ conservatively ], I'd take it more to the 15%, 16% range or something like that just because I've been -- we've been out doing a lot of recruiting, just hired a couple of really seasoned teams on the treasury management side, some great product managers.

I think they're going to do a lot of great stuff over the long term on our commercial treasury management software integrations, but these teams are not the cheapest, but they're coming, available now in a way that they just wouldn't, and I'm seeing that more and more.

So I think we'll -- we're opportunistically out looking for teams like that. There's a few more in the pipeline, too, that are not cheap. So...

[Andrew Liesch, analyst]

Got it. So is it really driven by new hires? Or are there products that you will advance in and bring on, too?

[Gregory Garrabrants, executive]

Well, I mean, in some cases, it's been new products. Like the fund finance team, it was a new product. Others that might be a new geography. We've been looking up in the [ Valley ] for stuff there.

And in other cases, it's just -- like those 2 teams on the TM side are -- they've got some vertical expertise, but it's more about really refining and developing our TM products to get to the next stage. So it's really a little bit of everything. And there are some teams that are very vertically -- they're lending vertical focus, too. So it just -- it really just depends.

But I would say, in general, there's just a lot of -- a lot of banks have not paid bonuses well, there's a lot of unhappy people around. And so we've just got access to a lot of talent, and that talent wasn't -- probably wouldn't have been accessible to us 18, 24 months ago. So we're probably going to spend some of this windfall on that talent.

And like Derrick said, I think it's a great analogy, we did that with H&R Block. I don't think it's really of that level as that it's a whole new division like we did there, but it's -- we'll have to see. I mean my instinct is that there's going to be more folks sort of shaking out this year that we're going to be interested in.

[Andrew Liesch, analyst]

Got it. Makes sense. And I think you did that with the Trump tax cuts as well. So we certainly...

[Gregory Garrabrants, executive]

Yes, true.

[Operator]

Our next question comes from the line of Edward Hemmelgarn with Shaker Investments.

[Edward Hemmelgarn, analyst]

It looks like you're -- you didn't pay any excess FDIC fees?

[Derrick Walsh, executive]

No. The guidance -- the regulation is generally aimed at larger banks north of $100 billion in assets and with $5 billion or greater uninsured, and we have a much lower uninsured deposit balance. So those are the banks that are experiencing those increases in FDIC fees.

[Edward Hemmelgarn, analyst]

You got about $5 billion threshold. Okay, that makes sense. Just the other thing is I noticed your loan loss provision was higher this quarter. Anything unusual there?

[Derrick Walsh, executive]

Yes, I can walk through that. So yes, there's a couple of different aspects to that $13.5 million number. About $5 million of it was related to the loan purchase. So while for the purchased credit deteriorated assets, we took $70 million straight to the allowance without going through the income statement. .

For the nonpurchase credit deteriorated assets, we did have to add loan loss provision. So that was about $5 million. And then as a reminder, the unfunded commitment provision also is included in that line item, so that was another $1 million for unfunded loans as our unfunded balances grew by a couple of hundred million this past quarter. And so the net remaining, once you back those out, was about $7.5 million, which is generally consistent with our allowance on the whole.

[Edward Hemmelgarn, analyst]

Great. And good luck on finding talented people.

[Operator]

Our next question comes from the line of Gary Tenner with D.A. Davidson.

[Gary Tenner, analyst]

Derrick, you just addressed part of my question as it relates to the amount of the gain and the build into the allowance. Given -- I wonder if you could go into any detail or thoughts about kind of specifics around why that number was so high, given the relative LTVs of the underlying credits and the status of those credits from a current and performing?

[Derrick Walsh, executive]

Sure. Sure. I'll start on that. And so the -- when we look at the loan portfolio, what we did was a loan-by-loan analysis and classification in accordance with the accounting guidance as far as the purchase credit deteriorated assets.

So for those that we determined were the purchase credit deteriorated assets, we then go and look at what is the likelihood of the -- over the life of those loans and what are the different aspects of them. There's a couple of office in there. There are a couple of land. And so take an analysis through that and say, what is the likelihood of loss based on all the different attributes that are funneled into the allowance model?

And that, of course, includes a variety of different things about locations within the U.S. GDP, economic scenarios and extremely stressed economic scenarios and say, what's that risk of loss on those loans? And come up with our -- what we believe is the reasonable estimate for that allowance. And so based on those number of factors and kind of that process, that's how we ultimately got to the $70 million on that subset of loans.

[Gregory Garrabrants, executive]

But it's -- look, I mean, these -- obviously, we've always performed well better than our loan loss. And so it's best to be conservative on these things, right? So...

[Gary Tenner, analyst]

So as we're thinking about kind of the [ vision ] going forward, given that backdrop of those [ PCD ] loans and the allowance for that, is this -- are those balances -- and that's kind of allowance out there for the duration of those specific credits as long as they're -- or unless something thoroughly changes in your expected performance of the credits?

[Derrick Walsh, executive]

We will be monitoring them quarter-by-quarter in the same way that monitor our entire loan portfolio, including new originations. The whole portfolio gets analyzed on a quarter-to-quarter basis, depending on the different individual attributes of the loan, if certain aspects are changing, such as delinquencies, credit downgrades and then as well as the, of course, economic aspects of the -- in the broader environment and the different inputs that tie into the model there.

So the 70 is, of course, the initial number, right, but that could certainly change. Also, obviously, if any of the loans were to prepay that would remove an allowance from it. So that's another factor that, that could change.

[Operator]

[Operator Instructions] There are no further questions at this time. I'd now like to turn the floor back over to Johnny Lai for closing comments.

[Johnny Lai, executive]

Thanks, everyone, for your interest. If you have any additional follow-ups, please contact me. And for those who are going to the [ JD conference ], we'll see you tomorrow and Thursday. Thanks.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.