Axos Financial Inc

NYSE:AX

Earnings Call Transcript 2022-Q2

[Operator]

0:09 Greetings. Welcome to Axos Financial, Inc. Q2 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

0:30 I will now turn the conference over to your host, Johnny Lai, VP of Corporate Development and IR. Thank you. You may begin.

[Johnny Lai]

0:38 Thanks, Alex. Good afternoon, everyone. And thanks for joining us today for today’s Axos Financial Inc.'s second quarter 2022 financial results conference call. Joining us today are the company's President and Chief Executive Officer, Greg Garrabrants; Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President, Finance, Andrew Micheletti. Greg, Derrick, and Andy will review and comment on the financial and operating results for the three and six months ended December 31, 2021. And we will be available to answer questions after the prepared remarks.

1:17 Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore, the company claims the Safe Harbor protection pertaining to the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will be an audio replay 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. All of these documents, including the 10-Q and an earnings supplement are now available on our investor relations website.

2:22 With that, I'll turn it over to Greg for opening remarks.

[Gregory Garrabrants, President & Chief Executive Officer]

2:26 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 year 2022 ended December 31, 2021. I thank you for your interest in Axos Financial and Axos Bank.

2:40 We had an excellent quarter with double-digit growth in loan originations, net income, book value per share and earnings per share. Our strong results were broad based with net-interest margins exceeding the high end of our target and balance net interest income and fee income growth across our consumer banking and commercial banking segments. securities, which is comprised of the direct-to-consumer securities trading business, manage portfolios, and our B2B security, clearing and custody business, maintain solid client assets and sweep deposit balances, despite a challenging quarter for the industry.

3:13 Axos reported second quarter net income of $60.8 million for the three months ended December 31, 2021, and earnings per diluted share of $1, representing year-over-year growth of 11% and 9.9% respectively. Our book value per share was $25.60 at December 31, 2021 of 17.5% from December 30, 2020. The highlights for this quarter include the following. Ending loan balances were $12.6 billion, up 6.1% linked quarter, or 24.4% annualized. Strong loan originations on our auto and various C&I lending loan types, more than offset a small decline in our single family mortgage warehouse lending business.

4:01 Net interest margin was 4.1% for the second quarter, down from 4.22% in the quarter ended September 30, 2021, and up 16 basis points from 3.94% in the quarter ended December 31, 2020. Net interest margin for the banking business was 4.3%, compared to 4.48% in the quarter ended September 30, 2021 and 4.11% in the quarter ended December 31, 2020. We have successfully maintained a strong net-interest margin and generated loan growth toward the higher end of our annual target through the first six months of our fiscal 2022. We continue to make steady improvements in our funding max, with non-interest bearing deposits increasing by approximately $215 million from September 30, 2021.

4:51 Non-interest bearing deposits represented approximately 31% of our total deposits at December 31, 2021, a significant improvement from 19% in the corresponding period a year ago. Our efficiency ratio for the three months ended December 31, 2021 was 48.78%, compared to 48.71% in the first quarter of 2022. The efficiency ratio for the banking business segment was 39.39% for the second quarter of 2022 was 39.93% in the first quarter of 2022.

5:26 We achieve positive operating leverage in our banking business as a result of strong net-interest income growth year over year, and continuous focus on managing our operating costs. Diluted earnings per share of $1 or up 10% from $0.91 in the year ago quarter. Excluding one-time operating costs and non-cash merger related depreciation and amortization expenses, our diluted earnings per share was $1.4 for the three months ended 12/31/2021 and increase at 10.6% year-over-year.

5:59 We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 16.29% in the second quarter, and a return on assets of 1.63%. Capital levels remain strong with Tier 1 leverage of 10.13% of the bank and 9.42% of the holding company, both well above our regulatory requirements. Our credit quality remains strong with annualized net charge offs to average loans of 1 basis point down from 16 basis points in the second quarter of fiscal 2021. We added $4 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was $140.5 million at December 31, 2021, representing 121 times our annualized net charge-offs, and 1.1% of ending total loans.

6:50 Total loan originations for the second quarter ended December 31 2021, or $2.8 billion of 15.8% from the $2.4 billion in the year ago period. Loan originations for investment were approximately $2.6 billion and increase the 35% from the corresponding quarter a year ago. Q2 2022 originations were as follows, 179 million of single family agency gain on sale production, 385 million of single family jumbo portfolio production, 132 million of multifamily production, 26 million of commercial real estate production, 85 million of auto and unsecured consumer loan production, and $2 billion of C&I loan production resulting in a net increase in C&I lending loan balances of $758 million.

7:43 Mortgage banking gain on sale income generated $4.6 million, compared to $5.3 million in the quarter ended December 31, 2021 and $10.6 million in the corresponding quarter last year. Originations decreased by approximately 11% linked quarter to $179 million, while margins were down due to normalization in the single family mortgage gain on sale market across the industry. We anticipate lower mortgage banking gain on sale in the next few quarters as rising interest rates reduced demand for mortgage refinancing. Our pipelines single families agency mortgages was $141 million at January 25, 2022.

8:23 Our jumbo, single family mortgage business continues to be stable. We generated $385 million of loan production offsetting elevated prepayments. Ending the loan balances at December 31, 2021 were flat in line with expectations. Demand for purchase transactions continues to be solid, as reflected in our jumbo single family mortgage pipeline of approximately $600 million at January 25, 2022. We are working on a few initiatives that could potentially generate the income in our jumbo single family lending business in the second half of calendar 2022.

8:58 C&I lending had a tremendous quarter, loan originations were $2 billion, reflecting strong growth across our commercial specialty real estate business, lender finance and construction lending. Our strong relationships, knowledge and structuring and track record of execution have resulted in a steady expansion in loan production and that balances. Demand remains strong across loan types and geographies, with a backlog of approximately $572 million at January 25, 2022. Given the large average loan size for C&I versus our jumbo, single family and multifamily loans, and competition from banks and non-bank lenders, a few deals can have an outsized impact on our ending C&I loan balances.

9:39 Ending balances in our mortgage warehouse portfolio were $595 million, down $60 million from $655 million at September 30, 2021. Our single family warehouse business continues to focus on growing with existing and new customers. While balances will fluctuate based on underlying demand for mortgage refinancing. We continue to generate strong returns in this business. We have maintained operational efficiency while investing in upgrading our technology, infrastructure, leadership and team members and incubating new businesses. Our business banking segment efficiency ratio was 39.4% and 39.7 for the three and six months ended 12/31/2021.

10:19 Salary and benefit expenses were up 4.7% and 5.1% for the three and six months ended December 31 2021. With merit based increases in additional staffing hiring expenses in calendar 2022, we anticipated the year-over-year increase in salaries and benefits expenses will likely be up a few points around the 7% to 8% range, in line with what we've seen in prior years. We have a series of operational efficiency initiatives across each business unit that will result in cost savings as we grow, and various businesses become more mature. Additionally, we continue to incur incremental expenses related to the integration and modernization of our tech infrastructure and our clearing and custody business. Once we complete transition of Axos Advisory Services to self-clearing, and sunset, redundant conversion related workflows, we expect to more meaningful – make more meaningful improvements in the overall efficiency of our securities business.

11:14 We grew the deposits by 4.4% linked quarter to $12.3 billion with broad-based growth across our small business, commercial and security deposits. Checking and savings representing 90% of total deposits at 12/31/2021, grew at the fastest clip increasing by 5.9% linked quarter. Consumer deposits representing approximately 30% of total deposits at 12/31/2021 is comprised of Consumer Direct checking savings and money market accounts. The weighted average demand and savings deposit costs were 17 basis points at December 31, 2021, down 18 basis points compared to 35 basis points as of December 31, 2020.

11:55 We strategically repriced our consumer deposits 6 months ago in advance of closing the access advisory service acquisition. Since then, we've focused on increasing the share of wallet with existing consumer banking clients and on adding new consumer deposit relationships through affiliate marketing and cross sell. We're optimistic that additions of new features in the online and mobile banking platform, including the upcoming release of what we're calling UDB 2.0, and further product enhancements that are self-directed trading and managed portfolios will generate incremental growth and consumer deposit balances.

12:29 Average non-interest bearing demand deposits was $3.7 billion in the quarter ended December 31, 2021, up from $3.5 billion in the quarter ended September 30, 2021. Growth in non-interest bearing deposits came from our securities and commercial deposit businesses. Axos clearing continues to generate low cost deposits that we were able to put on or off balance sheet. Total client deposits from our custody and clearing business was approximately $2.2 billion at December 31, 2021. We kept $1.5 billion of that $2.2 billion on Axos’ balance sheet. The flexibility to keep these low cost deposits off balance sheet and generate fee income from other banks, or on Axos’ balance sheet to support our banks loan growth will be an even bigger advantage when interest rates rise and competition for deposits increases.

13:18 Our small business and specialty commercial and treasury management business, including our fiduciary service business continues to contribute to low cost core deposit growth. We continue to opportunistically hire commercial bankers to our team and leverage our low cost high service model to attract new commercial banking customers from branch base competitors. We remain slightly acid sensitive to changes in interest rates. Yield on loans originated in our single family, jumbo, and multifamily and C&I loans were 3.94%, 4.26% and 4.55% respectively in the three months ended December 31 2021, compared to the 4.93% average loan yield in the second quarter, that just ended last month. We tactically reduced pricing on high quality lending opportunities while maintaining our credit standards in terms given our success reducing our cost of funds.

14:09 Competition and demand remains high across most of our lending categories. Approximately 46% of our loans are five one arms, with a rated average duration of 3%, three years, all of our C&I loans with the exception of our $96 million equipment leasing portfolio have rates that adjust to changes in the underlying index rate. While we're not currently seeing any meaningful changes in deposit competition, our ability to continue reducing our funding costs is more limited than it was a year ago, particularly in periods when we have loan growth at or above the high end of our target.

14:43 We have additional funding flexibility with our $2.2 billion clearing and custody deposits. Currently approximately $725 million of that $2.2 billion of deposits from our securities businesses are held at partner banks, earning an average interest rate of 44 basis points. Depending upon our organic loan growth and our incremental funding costs for new deposits. We may decide to bring more of those deposits on our bank's balance sheet or push more of the deposits off to partner banks.

15:12 For internal modeling purposes, we assume the marginal benefit from the first Fed funds rate increase to be slightly north of 50%. With a higher beta on each successive rate increase, we will continue to evaluate the trade-off between maintaining a strong net interest margin and a healthy rate of growth on our loan portfolio. With a strong start in the first six months of our fiscal 2022, we are confident that our full year net interest margin will exceed the top end of our 3.8 to 4.0 range for the full year of fiscal 2022.

15:42 Our credit quality remains healthy, annualized net charge off to average loans was one basis point same as September 30, 2021 quarter. Non-performing assets and total assets was 94. basis points for the quarter ended December 31, 2021, same as the quarter ended September 30 2021. Our non-performing loans at 83.8% are single family first mortgages, where we've had historically very low realized losses, of our non-performing single family mortgage loans at December 31, 2021, approximately 91.8% have an estimated current loan to value at or below 70% and approximately 98.9% are below 80% of our best estimate of current loan to value.

16:26 Given a low loan to value on our single family mortgages. We did not anticipate incurring material losses on the vast majority of our delinquent single family loans. We had no loans in forbearance at December 31, 2021. Our loan loss provision this quarter was $4 million, which is the same as the loan loss provision of $4 million in the quarter ended September 30, 2021 and down from the last revision of $8 million in the quarter ended December 31, 2020. The decrease in loan loss provision from one year ago reflects adjustments in loan portfolio max and changes in macroeconomic factors impacting our credit loss models.

17:03 The 4 million of loan loss provision for each of the past two quarters reflect strong loan growth and our overall loan balances led by C&I lending. Our total allowance for loan losses was 140 point 5 million at December 31 2021, approximately 1.1% of our total loans and approximately 121 times our total annualized net charge-offs in the three months ended December 31, 2021. Our loan pipeline remains solid with approximately $1.7 billion of consolidated loans in our pipeline as of January 25, 2022, consisting of $141 million the single family agency gain on sale mortgages, $600 million of jumbo single family mortgages, $284 million of multifamily and small balance commercial real estate loans, $572 million of C&I and commercial specialty real estate loans, and $71 million of auto and consumer unsecured loans.

17:57 With healthy demand for loans across multiple loan categories and growth above our target range for the first six months of fiscal 2022. We remain confident in achieving low teens loan growth in fiscal 2022. We continue to generate strong returns, with return on average common equity of 16.29% and a return on average assets of 1.63% in the three months ended December 31, 2021, respectively. Our overall banking and business efficiency ratios are 48.8% and 39.4% for the three months ended December 31, 2021, respectively.

18:35 We're making good progress with the integration of Axos Advisory Services, the RIA custody business we acquired from Morgan Stanley approximately five months ago. overall profitability for Axos Securities into December 2021 quarter was negatively impacted by lower average margin lending balances and lower transaction based revenue and Axos clearing. Due to industry wide declines and trading volume. We see meaningful opportunities to improve the profitability of our security business over time as we consolidate systems, automate manual processes, eliminate redundant workflows and transition to a more efficient, more scalable tech infrastructure.

19:11 We remain on track to generate slight accretion for the AAS acquisition in fiscal 2022. Our capital ratios remain strong, with Tier-1 leverage to adjusted assets of 9.42% of the holding company, and 10.13% at Axos bank, we have Axos to approximately $1.9 billion of Federal Home Loan Bank borrowing, $1.8 billion in excess of $158 million, we had outstanding at the end of the second quarter.

19:37 Furthermore, we have $2.4 billion of liquidity available at the Fed discount window as of December 31, 2021. Our capital priorities remain unchanged with a focus on using our capital to support organic loan growth, reinvest in our existing and emerging businesses and deploying excess capital for opportunistic buybacks and creative M&A. Our securities business had a next quarter with stable assets under custody and higher client deposit balances and lower trading fees and margin lending. Broker dealer fee income increased 128.5% in the second quarter, compared to the corresponding period last year to the addition of fee income from the AAS acquisition excluding one-time related merger expenses and non-cash depreciation and amortization.

20:21 Axos clearing generated $1.8 million of pre-tax income for the quarter ended December 31, 2021. Axos clearing ended the first quarter of 2022 with approximately $37 billion of assets under custody or administration, including $26 billion of assets under custody and $11 billion of assets under administration and the clearing business. Transaction based fees for Axos clearing in the second quarter of fiscal 2022 were negatively impacted by lower transaction volumes from introducing broker dealer clients and reducing security lending.

20:54 We completed the RA custody acquisition approximately five months ago when we're excited as ever about the long-term opportunity to grow the combined Axos cleaning business. We see four primary strategic and financial benefits from this business, which we rebranded Axos Advisory Services. First, we see significant opportunity to gain wallet share from existing RAs and broker dealers declare custody some or all of their assets with another custodian other than Axos today. As a non-competitive custodian with a high touch service centric model and strong capital base were an active communication with dozens of RIA firms about adding Axos as their custodian.

21:31 Second, we’re laying the foundation to become a more integrated clearing custodian by streamlining back end systems and processes and completing some important and needed conversion activities. One example of a deferred conversion activity is to make Axos Advisory Services self-clearing. Doing so will eliminate redundant processes reduce operating costs, and potentially free up capital is required to run the business particularly during times of extreme market volatility.

21:56 Third, we see strategic opportunities to add banking, lending and other services to RIA a broker dealer and their end clients. Competition for advisory clients and advisors and fears and we can provide a comprehensive set of banking, clearing and custody services to help our advisors retain and grow their practices. Whether it's integrated banking, tech integration to third party service providers, succession and or M&A financing or mortgage lending for advisors wealth management clients. Axos is committed to serving our advisors.

22:25 Finally, the integration of our clearing and custody teams systems and operations will expand the product and revenue opportunities for both. For example, Axos Advisory Services has not historically offered margin lending or options trading because it operated as a bank custodian. Now that we're operating as a broker dealer custodian, we intend to make the necessary technological investments to enable custody clients to Axos margin and option trading. We have a healthy pipeline of technology and product enhancements that we intend to roll out over the next four to six quarters. First, we intend to add new features such as multi-owner, multi signer enrollment for Small Business Banking, and convert our digital small business banking platform to the universal digital bank. We will further integrate ourselves dredger trading and manage portfolio user experience into UDB. And by refining the front end back end processes and making it easier to transition and open new accounts through UDB, we hope to increase cross sell of consumer lending, trading and deposit products.

23:21 Second, we're exploring a few new businesses that would generate incremental fee income. As I mentioned earlier, we're expanding our capabilities in single family mortgage lending to add securitization for agency and non-agency mortgages. This will generate incremental fee income and help offset the expected normalization in our mortgage banking gain on sale agency business. Another product under development is our retail cryptocurrency trading service, which will allow Axos invest customers to easily open a cryptocurrency trading account. Find the account quickly by transferring funds from an Axos bank account. Trade a limited number of cryptocurrencies and hold their digital assets in a secure Axos digital wallet and see positions and values all in the Axos application.

24:04 Many individuals lack the understanding and confidence to open a separate crypto brokerage account. And while there, they're interested in diversifying and yield benefits from owning cryptocurrencies. They are fearful of the security complexity and lack of transparency in trading and holding these assets, either in a private or exchange hosted wallet. Our initial direct-to-consumer crypto offering will reduce the friction complexities and costs associated with trading and owning crypto for retail clients.

24:29 We anticipate launching our retail cryptocurrency trading in the next two to three months. Finally, we're making good progress building out our white label banking solutions for introducing broker dealers and RAS. Our vision is to enable advisors, broker dealers and their reps to offer checking, savings, mortgages and others consumer banking products to the mass affluent and high net worth clients through an easy to use digital app that is powered by Axos, at the same time will provide us with a new low cost acquisition channel for our Consumer Bank. I'm proud of the performance we've achieved and excited about the opportunities we have to further grow our securities, consumer and commercial banking business. We have successfully navigated through multiple credit and interest rates cycles, various regulatory policy changes, periods of intense and benign competition, and shifts in technology and user behavior by maintaining a consistent focus on product development, operational efficiency and human capital management.

25:23 Our future success will depend on our ability to execute our strategic and operational initiatives in Thailand productive manner. The great news is we have a strong foundation that includes a season management team, diverse businesses that generate above average returns, and a tech enable model that provides the potential for positive operating leverage. We'll continue to invest in our platforms, teams and processes and strike the optimal balance between near term profitability and long-term growth.

25:48 Now I'll turn the call over to Derrick who'll provide additional details on our financial results.

[Derrick Walsh]

25:53 Thanks, Greg. So start, I'd like to highlight that in addition to our press release, an 8-K with supplemental schedules and our 10-Q were filed with the SEC today and are available online through Edgar or through our website 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.

26:21 Turning to our quarterly performance, I'll start by focusing on select areas of our non-interest income. Our prepayment penalty fee income was $3.3 million for this quarter ended December 31 2021, up from $3 million for the linked quarter ended September 30, 2021. An up from $1.6 million for the quarter ended December 31, 2020. This quarter marked a high point for us. As we continue to grow our commercial lending the likelihood of fluctuations in this category, will also increase dependent upon dealer fee structures and prepayment activity.

27:02 Next, our broker dealer fee income increased $2.6 million to $14.4 million for the quarter ended December 31, 2021 Compared to $11.8 million in the linked quarter ended September 30, 2021. As the advisor business was added in August 2021. This December quarter was the first full quarter of revenue production from AAS recognized in the broker dealer fee income line and constituted the majority of the increase over the linked quarter. In banking and service fees, we had income of $8.5 million this quarter ended December 31, 2021, up from $6.7 million for the quarter ended – from the quarter ended September 30, 2021 and down from $10 million in last year's December quarter.

27:53 The increase in the linked quarter's is due to annual fees for certain IRA products in the December quarter. The decrease year-over-year is related to the exit of the H&R block relationships that formerly ended in December 2020. In that December 2020 quarter in completing our contractual commitments with HRV. We earn $2.5 million, which did not recur in the December 2021 Quarter.

28:20 Moving to non-interest expense for the quarter ended December 2021. Operating expense was $86 million, of $1.6 million from the linked quarter ended September 30 2021. The primary reason behind the increase in operating expenses is due to the full impact of operations from AAS in the December quarter, compared to the September quarter, which only had an operational expense for two months of the quarter.

28:53 Salaries and related costs decreased $0.7 million on a linked quarter basis. This was primarily due to merger related efficiencies and increased outsourcing. Depreciation and amortization expense increased $1.1 million from $5.7 million at September 30, 2021 to $6.8 million at December 31, 2021. primarily due to the addition of advertising and tangible assets from the Advisor Services Acquisition. Shifting to our interest rate management, we are well-positioned for increased rates as our net interest income parallel shock of 200 basis points up, at December 31 2021, shows us asset sensitive and generates increased income of 8.8% for the first 12 months.

29:47 Our asset sensitivity has improved over the last few years due to the following reasons. First, we've added high quality, core, interest bearing demand and savings accounts that have an average rate of 20 basis points, and combined with time deposits are the lowest they've ever been at 32 basis points. Second, we have added businesses in recent years, that provides significant levels of non-interest bearing deposits, including our bankruptcy trustee business, advisor business and clearing business. Third, our growth and commercial lending brings an increased level of monthly Adjustable Rate products. And lastly, the higher prepaid rates on our single family jumbos shorten the duration of our single family loan portfolio.

30:37 With that, I'll turn the call back over to Johnny.

[Johnny Lai]

30:40 Thank you, Derrick and Alex, we're ready to take questions.

[Operator]

30:45 Thank you. [Indiscernible] Our first question comes from the line of Andrew Leisch with Piper Sandler, please proceed with your question.

[Andrew Leisch, Piper Sandler]

31:13 Hey, good afternoon, everyone. My question, Greg, for you. I think you mentioned the marginal benefit from the first Fed rate hikes to slightly north of 50%. Are you talking about the deposit beta there? Or what did you mean by that?

[Gregory Garrabrants, President & Chief Executive Officer]

31:30 Yeah, he was talking about the deposits that we keep off the balance sheet at the other partner banks. So that's the clearing and advisor sweep deposits, of which we have a little over $700 million that sit at those partner banks. So that's recognized as fee income, non-interest income. So as rates move up, we expect to receive a good chunk good increases as those north of that 50% data as we move forward.

[Derrick Walsh]

32:04 Right. Yeah. And I think that, yeah, that Andrew, with respect to your question, we looked at, we obviously, we have a lot of floating rate loans now and they have various floor rates. So for some guidance there, we looked at it, say for the first 25 basis points increase, we had about, it was about a $3 million increase annually, and net interest income, and then another $8 million bucks roughly, for the second increase. And that's, that's just on the income side, that's not making any assumptions on the deposit side and then, so that's, that's just the first couple of increases what the benefit would be. And then obviously, once you're hitting the floors, we tried to be thoughtful about floors, but there are floors that, 50 and 75 basis point levels and such that prevent summer pricing even on the variable portfolio.

[Andrew Liesch]

33:04 Got it? Okay. Thanks for the clarification there on the, what’s that, balance sheet funds too. What are you assuming for a deposit beta in your modeling, with the accounts with a deposit that you have on your balance sheet? My sense is that it's going to be much less than the last rates upcycle. And I'm just curious what you're using now versus what was the beta back then?

[Gregory Garrabrants, President & Chief Executive Officer]

33:29 I think one good way to think about it would be that, you know, given that we have deposits that can be off balance sheet and we have a six by to grow those deposits. We're hopeful that we could get some, meaningful offset with respect to those off balance sheet deposits. We expect it to be a lot better. I don't know if we're prepared right now to give you a specific number. But, I don't think we're going to have to be doing a lot of movement in the first couple of, of rate hikes. I really don't. So we were for all the securities deposits, and for the bankruptcy deposits, when rates were 175, they – their rates were 3 basis points and zero on those deposits. So all of that's going to stay, we think we've done a lot on the commercial side, it depends somewhat on what happens to the competition. We have a great checking and savings with gauge checking account base on the small business side, very diverse accounts, very transactional in nature. So I think we're in pretty darn good shape, but we'll also have to see how the market reacts to, I think that might make a difference.

[Andrew Liesch]

34:48 Right, right. And then just on the C&I growth, you mentioned that a few deals can have an effect on ending period balances or just the larger size that they that they have, is that what happened here in this quarter or so…

[Gregory Garrabrants, President & Chief Executive Officer]

35:05 It's, I think that I think that's in there. I think that's in there as a caveat that I don't, I don't really see, I see C&I balances doing very well, there were, the growth was actually spread across a wide variety of loans this quarter. So the production was great across the board and in a number of different businesses. I think that's more about a forward-looking way of looking at that, that there's just a little more variability in that growth. Given the size of those laws, we still expect the growth to be quite good. There's just more variability. And I think maybe another way to say that is don't pencil in $700 million of loan growth this next quarter. Maybe that's easier to say.

[Andrew Liesch]

35:56 Yes. Makes sense. All right. Thanks for taking the questions. We'll step back.

[Operator]

36:02 Thank you. Our next question comes from a line of Steve Moss with Riley Securities. Please proceed with your question.

[Steve Moss, B. Riley Securities]

36:11 Good afternoon, is just following up. Maybe just following up on loan growth here. I think the guide for the fiscal year is low teens growth. Guys are about north of 10% here on loan growth, kind of curious, that seems a little bit conservative and kind of curious to think about maybe upside to that number.

[Gregory Garrabrants, President & Chief Executive Officer]

36:32 Yeah, I think there will be upside to that number. I think it is conservative. Look, I, we don't – we don't give exact guidance on this. But we don't expect it to be, let's put it this way. If I was to give a range where it's, I don't expect it to be 700 and I don't expect it to be 350. either. I expect it to be somewhere, in between those numbers and, with, with the commentary that, obviously, there's a lot of things moving around. So any one quarter can obviously move, but we do think there'll be upside from that we I certainly would expect the teams to perform it at a higher level for this remaining six months, given what we've done in the first six months of the fiscal year.

[Steve Moss, B. Riley Securities]

37:18 Okay, appreciate that. And then on expenses, I hear you on the, I think was 70% comp growth, but maybe just more specifically for the securities business. There's talked about duplication earlier, in the building has cost size, but the same time a number of different investments to be made and ongoing. Just kind of curious, how we think about, expenses for that business, and different movie drivers, and maybe just, stepping back from that also expense growth overall for where you guys were meant to protect now?

[Gregory Garrabrants, President & Chief Executive Officer]

37:55 Yeah, I think…

[Derrick Walsh]

37:59 Gregory, sir, I can take that. Yeah, so a couple a couple of different considerations there. One is definitely going to be on the clearing side security side, something we're going to be driven by the market and transactions. If there's, pullback in the market, we see a lot less transaction based fees and transaction activity and so that reduces a couple of different areas, the base clearing fees, the SEC borrow, SEC lending will reduce a little bit margin lending, we'll reduce a little bit when the markets humming, those are all areas that are up higher. So that that has one impact on fees on the on the integration aspect. So there's going to be kind of from a numbers standpoint, you'll see fits and starts from that in a sense nothing from a significant manner, but there'll be periods where we may have some higher expense, nothing significant but those will be kind of stabilized over time and then you'll have periods where we have some lower expensive part because we are able to capitalize a lot of the integration and software development that we are doing. So, in the – as we look forward in that business, we don't expect necessarily significant swings of expenses by any means. There'll be kind of incremental growth as we grow that business to summarize it.

[Gregory Garrabrants, President & Chief Executive Officer]

39:28 Yeah, I think, I think that's right, that, there's, over the long-term, there's so much opportunity to make that business more efficient. If you look at the operations staff, and there's hundreds of people together in that business, as we get white labeled UDB out to the clients, the ability to deal with to increase straight through processing, for example, which makes our costs cheaper, and it makes the experience better is there and available, and if there's so much opportunity, there's opportunities across the board, really, to make that business more efficient, it's taken us we've been at, we've been at a very disciplined operational structure at the bank for, more than a decade, right. And, and that just is something that the securities business is getting access to tools, technologies, and so it's improving all the time, and we are getting benefits from it immediately, because we're knocking down the low hanging fruit. But there's just so much opportunity there over the longer-term.

40:40 In the short term, I think, you know, Derrick’s explanation is quite good, because the reality is there's, their short-term opportunities, but their short-term additions and where it's going to shake out, I don't, I don't expect it really, to that business to be driven so much by an the shorter-term, a lot of increases or decreases in operating costs, and it's more driven by the market and then it's also driven by sunlight, it's interesting, because our deposit balances have shot up quite a bit in this volatile environment. So when people go to cash, we benefit from that those deposits are extremely low cost or essentially zero. So, that's an offset as well, depending upon how we use that money and if it's a higher rate environment, and we're bringing it off, that that'll be helpful as well. So, the long-term benefits of the business are going to be there. We were already seeing it, because we have so much in deposits, that are lower cost, and we're continuing to grow those businesses, it also gives us pricing power across our deposit portfolio, and a lot more power to price our commercial and consumer deposits more aggressively, because we do have that backstop and that off balance sheet potential that we can use for our own organic loan growth.

[Steve Moss, B. Riley Securities]

42:16 Okay, that that's helpful and, obviously, with the liquidity you have off balance sheet. It kind of the drivers, you have to support lower deposit beta, any thought about, formally moving up your NIM guidance range from the 3% to 4% to new higher level?

[Gregory Garrabrants, President & Chief Executive Officer]

42:35 No, and the reason why is that, if you saw you look at the numbers we did, we gave you the rates on the loans, we basically decided that we wanted to increase loan growth a little bit. And I think I think I think that interest rates will be stave on, on our loans will be stable to up from where they were this quarter. But there's still a difference between the average rate that we have in the portfolio and the average rates that we are originating loans that so to the extent that we don't get price increases on the loans, I think it's better guidance to stick with that NIM, and not increase it. Given that. So I think, I look – we're obviously always interested in taking pricing where we can, but frankly, we, having good loan growth is also – is important, and probably more important than quibbling over 10 basis points here and there, although we do our share, we do our fair share of quibbling too.

[Derrick Walsh]

43:46 And let me bifurcate that or clarify that a little bit because we do expect to be north of that 3.8% to 4% for this fiscal 2022. What our long-term guidance is 3.8% to 4%. So we don't see a point in kind of changing that for this individual year. But given obviously, where we've been the six months to the year, we expect will be slightly north of that 4% mark.

[Steve Moss, B. Riley Securities]

44:13 Right. Okay. I appreciate all the color. Thank you very much.

[Operator]

44:19 Thank you. Our next question comes from a line of Michael Perito with KBW, please proceed with your question.

[Michael Perito, KBW]

44:26 Hey, good afternoon. Thanks for taking the questions. I wanted to follow up on Steve's question on the AAS business. If we look at this, the full quarter impact here on the securities business segment reporting in the 10-Q has about $16.5 million of non-interest income about $21.6 million of non-interest expense, I guess, as we think about those figures going forward is I guess, obviously, the revenue piece, you guys have been pretty clear, you expect to grow as you scale, but on the expense side is there, room for that, to move down or moderate just because of investments you guys are making they're making that elevated? Or is it more going to kind of level out and grow, but you just expect the revenue growth, to outpace the rate that grow that expense figure.

[Gregory Garrabrants, President & Chief Executive Officer]

45:16 I think that it's going to be relatively level two, slightly up for, let's say, the six, six to nine months, but not materially and then there's real opportunities to make that business more efficient. They're really big and it just has to, but it is there, it's complicated, because it involves, it involves some software investments and things like that. But the opportunity for straight through processing there, the opportunity to increase volumes and maintain the personnel structure is massive. It's really big. Think of it like taking over like, the most inefficient branch bank that exists and then basically making it like what we are what we are on that side, it's just a lot, right. But it's, but it's gonna take time. So it's not, it's not a six months thing. It's just, and it's not the fault of the teams there, those businesses were not massive, they didn't have the capabilities we have, they don't have the experience in driving operational efficiencies and things like that and so there's just a lot, there's a lot there, which is great, right? It's, it's, we want it as fast as we can. But there's a lot of things that have to happen, it's really about a lot about changing customer workflows, and things like that. And those take time, because they're not only technology changes, they're also a behavioral changes in the way customers interact, how they're used to doing things and how to – and how to increase those, those efficiencies. And, there's also there's, there's opportunities on the core processing side, which I don't want to spend a lot of time on, but those opportunities are quite significant. And we have some really cool plans there. But those are longer-term, those like two to three years out, but those are going to be big. And then there's some shorter term stuff like that. We mentioned the – that way, as we, obviously, we had a very short timeframe to close this acquisition and so there are pieces that are resulting in duplicated processing charges, we're not even self-clearing area, so we're paying a third party clearing firm, which we don't need to do. So there's stuff like that that's going to happen, and that's going to offset some of the investments were making in the shorter term. But I think you've got a really for the next year, I wouldn't be pencilling in big savings or big increases, it's just, it just gonna take some time to make this – to make this work. And, and obviously, the biggest benefit right now is we just have, we're just such a better liquidity position than we've ever been. And, but this is going to generate fi as well and cross sell. It's a great group of clients. And then we have, we're talking, you know, 300,000, high higher net worth individuals that, you know, we ought to be able to be able to get banking services out to we can get all the platforms integrated in the right way and everybody's excited about that. So it's an exciting future for sure.

[Michael Perito, KBW]

48:37 Helpful, thank you. And then as you guys think about that next phase of kind of scaling, a lot of the investments you guys making, not just an AAS, but on UDB 2.0 and just the general platform. I mean, how do you think, obviously, on the lending side, the sales group is pretty strong. I know you guys constantly add there and it's kind of the proof is in the pudding. But if you think about kind of marketing and selling, the ability to offer those cross banking products to AAS customers and things of that nature, kind of how far out? Are you in building out that type of effort? And, where do you guys think that will head in the next 12, 18 months?

[Gregory Garrabrants, President & Chief Executive Officer]

49:17 I think I think there are different pieces of it that are further than some we have, we have our beta version of our account opening system in with our clearing clients. So with a clearing client that we're going through, and so it's a white label account opening system that can be offered to two broker dealers that that clear through Axos clearing, that helps in a lot of different ways. It helps them be more efficient, and helps us be more efficient, right, because those accounts go right into the system, they don't require manual touch. That's an example of those sort of things. The white labeled UDB, on clearing is probably a little bit further along than it is on custody, because that means UDB has to be integrated into the custody core, which is probably a maybe a year exercise, something like that and then you also have to get the adoption, but, nobody's really done this well yet. Right? So this is a this is a pretty, it's a pretty interesting strategy. Pretty good one, I think. And, and then you've got to obviously, see the uptake. But it's there's a lot of real benefits and synergies that can be created. I mean, obviously just give you a very simple example. So, if you're trying to get a check into the market, right now, our customers are sending, let's say, if they're using a cheque, they're sending that cheque, to their RIA, that RIA is often forwarding that cheque to us. Right? I mean, that's kind of, and you look at that and say, what's that, and then that project is manually processed, right?

51:05 There's somebody has UDB, and they have a bank account and that happens immediately, you can use your risk engine and clear that check instantaneously, right? So that's so much better across the board, and our IA doesn't want to be mailing a check, they don't want to be using an RDC machine for a check by filling out right, none of that stuff should make sense. But without the integration, you take a very simple process and you make it more complicated a disbursement, right? When you're cutting a check for a disbursement when somebody wants to take money out or sending a wire to a third party account, as opposed to make an instantaneous transfer. So there's just there's so many things like that. And when you break down all the, the, the individual activities, you just see so much synergy there on the operation side and on the cross sell side. So yeah, but I mean, partly the way that that ends up is, you see it in, the low – lower beta, you see it and lower deposit costs, and we've really transformed the deposit franchise in a very meaningful way, as you can see, right with, with the amount of non-interest bearing deposits and everything else, and we just think that's gonna be a continued focus and something that will really benefit from having those businesses.

[Michael Perito, KBW]

52:27 That's, that's helpful. Thanks. Thanks for talking through that. And then on the, one last question for, for me, just on the right, regulatory capital side, I apologize. I missed something on this in the prepared remarks. But it looks like the risk based assets were up pretty significantly quarter-on-quarter if I'm looking at it, right and there were some movement down in the reg cap ratios. I mean, obviously, you guys still a capitalist versus curious, what was kind of going on there, was it that just some re mixing it look like obviously, securities were lower on the average balance sheet C&I loans. Were up relative, but just curious if there's anything else kind of going on that drove that that variance?

[Gregory Garrabrants, President & Chief Executive Officer]

53:08 Yeah, I mean, I think that we had, single family Jumbo was stable, but didn't grow. And the growth was in the 100%, risk-weighted asset category, mostly. So, that does bring to bear the question over the longer-term of, if you're growing and it only 100% of risk weighted assets, which we pretty much did this quarter, or you have increased commitments, which is sort of, you know, part and parcel to the C&I business, which requires some capital, then obviously, that is less capital efficient than single or qualified multifamily loans. So that's something we're keeping an eye on and, just have to, be focused on. ,So like you said, we're still very well capitalized, and obviously, the leverage ratios are great. But as the as the business shifts that way, that's something that So we have to pay attention to.

[Michael Perito, KBW]

54:05 Great. Thank you guys, appreciate it.

[Gregory Garrabrants, President & Chief Executive Officer]

54:09 Thank you.

[Operator]

54:11 Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Johnny Lai for closing remarks.

[Johnny Lai]

54:18 Great. Thanks, everyone for your interest and for joining us. We will talk to you next quarter. Thank you.

[Operator]

54:25 This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.