Axos Financial Inc (AX) 2022 Q1 法說會逐字稿

Greetings. Welcome to Axos Financial, Inc. First Quarter 2022 Earnings Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Johnny Lai, Vice President, Investor Relations and Corporate Development. Thank you. You may begin.

Thank you, Sherry. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s First Quarter 2022 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; Chief -- Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President, Finance, Andy Micheletti.

Greg and Derrick will review and comment on the financial and operational results for the 3 months ended September 30, 2021. And we will be available to answer questions after the prepared remarks.

Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties.

Therefore, the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

This call is being webcast. And there will be an audio replay 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 the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call. All of these documents can be found on our Investor Relations website.

With that, I'll turn it over to Greg.

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 first quarter of fiscal year 2020 (sic) [2022] ended September 30, 2021. I thank you for your interest in Axos Financial and Axos Bank.

We had an excellent start to our fiscal 2020 (sic) 2022 with double-digit growth in net interest income, loan originations and earnings per share. We bucked the industry trend and increased our net interest margins on a linked quarter and year-over-year basis on a consolidated level and at the bank.

Axos reported first quarter net income of $60.2 million for the 3 months ended September 30, 2021, and earnings per diluted share of $0.99, representing year-over-year growth of 13.6% and 12.5%, respectively. Our book value per share was $24.52 at September 30, 2021, up 17.9% from September 30, 2020.

The highlights this quarter include the following. Ending loan and lease balances were $11.9 billion, up 4.1% linked quarter or 16.3% annualized. Our loan production was strong across a variety of categories, including auto, single-family mortgage, single-family warehouse and various C&I lending types.

Net interest margin was 4.22% for the first quarter, up from 3.92% in the fourth quarter of fiscal 2021 and up 38 basis points from 3.84% in the first quarter of 2021. Net interest margin for the banking business was 4.48% compared to 4.11% in the quarter ended June 30, 2021, and 3.91% for the quarter ended September 30, 2020, up 57 basis points over the prior year's comparable quarter.

We maintained our loan yields at 5.12% and reduced our cost of interest-bearing deposits by 9 basis points linked quarter to 39 basis points.

We continued to make steady improvements in our funding banks, with noninterest-bearing deposits increasing by approximately $1.5 billion from June 30, 2021. Noninterest-bearing deposits now represent approximately 31% of our total deposits at September 30, 2021, a significant improvement from 19% in the corresponding period a year ago.

Axos Securities contributed to overall earnings for a second consecutive quarter. Excluding onetime merger-related expenses associated with the E*TRADE Advisor Services acquisition, Axos Clearing, which includes our clearing and custody businesses, generated $1.5 million of pretax income. Both the clearing and custody businesses were profitable even after accounting for the noncash depreciation and amortization expenses associated with the acquisition.

Our efficiency ratio for the 3 months ended September 30, 2021, was 48.71% compared to 48.84% in the fourth quarter of 2021. The efficiency ratio for the banking business segment was 39.93% for the first quarter of 2021 versus 41.95% in the fourth quarter of 2021 as a result of strong net interest income growth.

Diluted earnings per share was $0.99, up 12.5% from the $0.88 in the year ago quarter.

Our corporate tax rate increased from 28% in the fourth quarter of 2021 to 29.1% this quarter.

We continued to generate strong returns while maintaining excess capital. We generated a return on equity of 16.55% in the first quarter and a return on assets of 1.67%. Capital levels remained strong with Tier 1 leverage ratio of 10.14% at the bank and 9.22% at the holding company, both well above our regulatory requirements.

Our credit quality remained strong with no loans in forbearance and a decline in nonperforming assets. Net annualized charge-offs to average loans was 1 basis point, down from 7 basis points in the first quarter of fiscal 2021.

Nonperforming loans represented 1.12% of total loans at September 30, 2021, compared to 1.26% at June 30, 2021.

Total loan originations for the first quarter ended September 30, 2021, were $2.3 billion, up 28% from $1.8 billion in the year ago period.

The first quarter 2022 originations were as follows: $201 million of single-family agency gain on sale production, $430 million of single-family jumbo portfolio production, $107 million of multifamily production, $25 million of commercial real estate production, $132 million of auto and unsecured consumer loan production and $1.3 billion of C&I and CRESL lending production, resulting in a net increase of $429 million of balances.

Mortgage banking gain on sale generated $5.3 million of mortgage banking income compared to $2.9 million in the fourth quarter of 2021 and $19.6 million in the corresponding quarter last year. Originations decreased by approximately 16.9% linked quarter to $201 million, while gain on sale margins increased slightly to 339 basis points from 323 basis points in the fourth quarter of 2021.

The outlook for mortgage banking remains stable from fiscal 2021 fourth quarter, with a solid pipeline and lower expected gain-on-sale margins.

Our pipeline of single-family agency mortgages was $184 million at October 25, 2021.

Our single-family jumbo mortgage business had a mixed quarter. Loan production was strong at $430 million while high prepayments resulted in a net $63 million decline in ending loan balances as of September 30, 2021.

We're seeing good demand for our jumbo prime product, and the pipeline has risen since September 30 to slightly under $600 million. The combination of slightly lower prepays and solid new loan originations should allow us to stabilize our single-family jumbo loan balances.

C&I lending had a very good quarter. Loan originations were $1.3 billion, reflecting strong growth across CRESL, construction and commercial assets-backed lending. Our growing relationships, knowledge in structuring and selective adjustments in loan pricing on some new deals and a track record of execution have resulted in a steady expansion in loan production and net balances. Demand remains strong with a backlog of approximately $687 million as of September 30, 2021.

Ending balances in our mortgage warehouse portfolio were $656 million, up $42 million from $614 million at June 30, 2021. While our single-family warehouse balances will fluctuate based on underlying demand for mortgage refinancing, our goal is to opportunistically grow with new and existing customers.

We continue to make improvements in our consumer, commercial and securities deposit franchises by investing in our front- and back-end technologies, customer service and product capabilities. Consumer deposits, representing approximately 47% of our total deposits as of September 30, 2021, is comprised of consumer direct checking, savings, money market and noninterest-bearing accounts. The weighted average demand and savings deposit cost was 18 basis points at September 30, 2021, down by 26 basis points compared to 41 basis points as of September 30, 2020. Average noninterest-bearing demand deposits were $3.6 billion in the quarter ended September 30, 2021, up 46.8% from the prior quarter.

Ending time deposits as of September 30, 2021, were down $132 million linked quarter and $532.8 million year-over-year as we replaced higher-cost noncore CDs with lower-cost transactional deposits. Of the approximately $1.44 billion of certificates of deposits as of September 30, 2021, on the balance sheet, approximately $1 billion at a weighted average rate of 68 basis points will mature in the next 12 months with the bulk of the runoff expected to occur in the next 6 months.

Our small business and specialty commercial and treasury management businesses, including our fiduciary service businesses, continued to contribute to low-cost core deposits. Axos Clearing continues to generate low-cost deposits that we're able to put on or off balance sheet. The acquisition of the E*TRADE Advisory Services RIA custody business, which closed on August 2, added approximately $1 billion to our September 30, 2021, ending deposit balances at Axos Bank. We had approximately $714 million of client cash deposits from Axos Clearing at the end of the first quarter of 2022, of which $408 million were placed at partner banks.

The flexibility to keep those lower-cost deposits off balance sheet and generate fee income from other banks or to place them on Axos balance sheets to support our bank's loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase.

Our Q1 2022 net interest margin benefited from several factors, some of which are structural and a few that are transitory in nature. First, we significantly reduced our excess liquidity with average deposits and other financial institutions dropping by approximately $767 million from $1.9 billion in the fourth quarter of 2021 to $1.1 billion in the first quarter of 2022. We do not anticipate meaningful declines in our excess liquidity going forward.

On the loan side, we have successfully held loan yields relatively steady over the past several quarters. However, we have started to selectively reduce pricing on new loans in order to be more competitive for high-quality deals.

Yields on loans originated in our single-family jumbo, multifamily and C&I lending groups were 4.26%, 4.39% and 4.2%, respectively, in the first 3 months ended 9/30 2021 compared to 5.12% average loan yield in the first quarter that just ended last month. We feel it's prudent to price more competitively on certain high-quality deals while maintaining our credit standards and terms given our success reducing our cost of funds.

Lastly, we have dramatically reduced our funding cost across each of our consumer and commercial deposit businesses over the past year in anticipation of having access to over $1 billion of low-cost deposits from the RIA custody acquisition. With new interest-bearing deposits coming in at 18 basis points in the first quarter of fiscal 2022, we have transformed our deposit franchise to be much more in line with that of a traditional consumer or commercial bank. As such, our ability to continue reducing our funding cost is more limited than it was a year ago.

When you consider all these factors, we are confident that our full year net interest margin will be at the high end or slightly above that of our 3.8% to 4.0% range in fiscal 2022.

Our credit quality remained solid. Annualized net charge-offs to average loans and leases, excluding seasonal tax on products, was 1 basis point this quarter compared to 7 basis points in the corresponding period last year. We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021, all of which were fully provisioned for previously.

Nonperforming assets-to-total asset ratio was 9.4 -- 94 basis points for the quarter ended September 30, 2021, down from 107 basis points in the fourth quarter of fiscal 2021. Of our nonperforming loans, 82.94% are single-family first mortgages where we have had historically very low realized losses. Of our nonperforming single-family mortgages as of September 30, 2021, approximately 86% had a current estimated loan-to-value ratio at or below 70% and approximately 94.5% are below 80% of our best estimates of current loan-to-values. Given the low loan-to-values on our single-family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent loans. We had no loans in foreclosure as of September 30, 2021.

Our loan loss provision this quarter was $4 million compared to $1.3 million in the June 30, 2021, quarter and $11.8 million in the quarter ended September 30, 2020. The sequential increase in loan loss provision supports the $464 million increase in ending loan balances. Our total allowance for loan losses was $136.8 million at September 30, 2021, which represents approximately 1.14% of our total loans and leases, which is approximately 48x our total annualized net charge-offs in the 3 months ended September 30, 2021.

Our loan pipeline remained solid with approximately $1.7 billion of consolidated loans in the pipeline at September 30, 2021, consisting of $180 million of single-family agency gain-on-sale mortgages, $514 million of jumbo single-family mortgages, $235 million of multifamily and small balance commercial real estate loans and $687 million of C&I and commercial specialty real estate loans with $94 million of auto and consumer unsecured loans in the pipeline.

With healthy demand for loans across multiple loan categories, the slight deceleration in prepayments, we remain confident in our ability to achieve a high single-digit to low-teens loan growth in fiscal 2022.

We continued to generate strong returns with return on average common shareholder equity of 16.55% and return on average assets of 1.66% in the 3 months ended September 30, 2021, respectively.

Our efficiency ratio for the banking segment was 3 point -- 39.93% for the quarter ended September 30, 2021, compared to 45.2% in the last quarter.

In the short 2 months since we closed the E*TRADE Advisory Services acquisition, we have already identified dozens of cost synergies by streamlining various processes and procedures. We see additional opportunity to generate operating efficiencies from our clearing custody and retail securities business in the next 12 to 24 months as we further integrate systems, processes and personnel.

Our capital ratios remained strong with Tier 1 leverage to adjusted assets of 9.22% of the holding company and 10.14% of Axos Bank. We have access to approximately $1.7 billion of FHLB borrowing, $1.6 billion in excess of the $158 million we had outstanding at the end of the first quarter. Furthermore, we have $2 billion of liquidity available at the Federal Reserve discount window as of September 30, 2021.

Our strong organic growth and returns, coupled with a clean capital structure, allow us to make opportunistic stock buyback and acquisitions, such as the E*TRADE Advisory Service acquisition that we announced last quarter.

Our securities business had a great quarter, with strong growth in fee income and net interest income. Broker-dealer fee income increased 106.4% in the first quarter compared to the corresponding period last year due to the addition of fee income from the AAS acquisition.

Excluding onetime merger-related expenses, Axos Clearing generated $1.5 million in pretax income. Axos Clearing ended the first quarter of fiscal 2022 with approximately $40 billion of assets under custody or administration, including $25 billion of assets under custody and $15 billion of assets under administration in the Clearing business.

Securities margin balances increased 35% year-over-year to $341 million while stock lending increased from $263 million in the first quarter of 2021 to $457 million this quarter. FDIC-insured deposits held at partner banks were $712.5 million at 9/30 2021, up from $672 million at June 30, 2021.

AAS, the RIA custody business, had approximately $1.3 billion of total client deposits in Q1 of fiscal 2022, of which $1 billion was held by Axos Bank and $284 million were held by partner banks.

We completed the acquisition of the E*TRADE Advisory Services business on August 2 and rebranded the business Axos Advisory Services. I want to thank the Axos Clearing, Axos Advisory team and Axos Bank team members who worked tirelessly over the past several months to successfully plan and execute a very complex and rigorous transition and integration plan. The acquisition provides us with a turnkey technology platform and an experienced team of approximately 130 professionals who serve around 190 independent registered investment advisers with approximately $25 billion of assets under custody, including the $1.3 billion of client cash deposits. We see tremendous opportunity to help advisers and their end clients become more successful by growing the scope and volume of custody lending and banking services we do with them.

Axos Advisory Services becoming a part of Axos Security will provide significant cost and revenue synergies over the short, medium and longer term. For example, by converting the RIA custody business from a bank platform to a broker-dealer platform, we will be able to offer additional products, such as margin lending, options trading and securities-based lines of credit, to existing and new custody clients. We have identified and started to implement various process improvements to the Axos Advisory Services group that will further improve our customer service levels and help the business become more efficient and scalable.

In the next 12 to 18 months, we intend to streamline the custody and clearing systems and workflow to further integrate the businesses. We remain on track to meet or exceed our prior guidance for Axos Advisory Services and will be slightly -- that it will be slightly accretive to our fiscal 2022 earnings per share.

We soft launched our Self-Directed Trading platform at the end of June. Version 1 of our Self-Directed Trading platform offering is focused on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online log-in, in our mobile application. We deliberately controlled the rollout and limited the amount of marketing campaigns during this initial phase in order to perfect various client onboarding and servicing workflows. We see Self-Directed Trading as an additional customer acquisition tool that will expand in terms of the scope of products over time. Once we reach a larger base of Self-Directed Trading clients, we will start experimenting with cross-sell opportunities across our lending and fee-based businesses, including our Axos Invest robo advisor.

One product under development is our retail crypto trading service, which will allow Axos Invest customers to easily open a crypto trading account, fund the account quickly by transferring funds from an Axos Bank account, trade a limited number of cryptocurrencies and see their positions and values all in an Axos app. The cost of developing and operating a retail crypto trading business is well controlled. And we will generate incremental fee-based revenue once clients open accounts and trade. We anticipate launching our retail crypto trading business in the next 6 months.

Investments we have made over the past several years across each of our businesses in consumer, commercial and securities have provided significant strategic and financial rewards to our firm and our shareholders. One example is our deposit platform investments, both organic and through acquisition, that have generated meaningful growth in our noninterest-bearing deposits, significantly lowered our cost of interest-bearing deposits and allowed us the flexibility to earn fees from placing certain deposits at other banking institutions or funding our bank's organic loan growth like we did this quarter.

We are making additional investments in the securities business, including adding more talented team members and investing in technology and infrastructure in order to grow the business profitably. As we leverage the expertise and leadership from each of our businesses and further implement cost and revenue synergy initiatives, we see continued opportunity to accelerate top and bottom line growth.

Now I'll turn the call over to Andy and Derrick, who will provide additional details on our financial results.

Thanks, Greg. As recently announced on September 27, after more than 20 years as the Chief Financial Officer of Axos Bank and Axos Financial, I have transitioned my CFO role to Derrick Walsh. Many of you have already met Derrick, who has been with Axos for more than 8 years, 6 years of which were our Chief Accounting Officer. I'm proud to turn over the mic to Derrick, who will cover some additional points on the quarter's results.

Thanks, Andy. To 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 at axosfinancial.com.

I will provide some brief comments on a few topics. Please refer to our press release or our SEC filings for additional details.

As Greg mentioned, our provision for credit losses was $4 million for this quarter ended September 30, 2021, up from $1.3 million for the linked quarter ended June 30, 2021, and down from the $11.8 million in the quarter ended September 30, 2020. The increase in the linked quarter provision was due to the quarterly increase in loan balances and the mix of loan types at September 30, 2021. The decrease in the current quarter from a year ago was primarily due to a $6.5 million reserve for nonrecurring refund advance loans for the 3 months ended September 30, 2020, as well as favorable changes in economic and business conditions between September 30, 2020, and September 30, 2021.

As we look forward to additional loan growth over the next year, we expect the loan loss provisions to generally move with the ending balance loan growth.

Moving to noninterest expense. For the quarter ended September 30, 2021, operating expense was $84.4 million, up $2.6 million or 3.1% from the linked quarter ended June 30, 2021. The primary reason behind the increase in operating expenses is due to the addition of Axos Advisor Services, or AAS, the rebranded E*TRADE Advisor Services business line. AAS was acquired in early August, and the full impact of operations is expected in the second fiscal quarter of 2022 and beyond.

Salaries and related costs increased by $3.5 million on a linked-quarter basis, primarily due to the acquisition of 124 AAS employees and the addition of new employees to support growth in both our banking and securities businesses.

Depreciation and amortization expense decreased $0.5 million from $6.2 million at June 30, 2021, to $5.7 million at September 30, 2021, primarily due to the completion of amortization of previously acquired software during the June quarter. With the addition of amortizing intangible assets for AAS, we would expect depreciation and amortization expense to increase back to the fourth quarter levels.

Occupancy costs decreased $1 million on a linked-quarter basis, primarily due to a $0.9 million onetime charge that was incurred in the June 30, 2021, quarter associated with subleasing the New York City office space.

Finally, turning to capital. Despite deploying a portion of our excess capital this quarter through the addition of AAS, we were still able to grow tangible capital during the quarter as tangible book value per share increased from $21.36 at June 30, 2021, to $21.43 at September 30, 2021. Our capital ratios remained strong with a Tier 1 leverage ratio of 10.14% at Axos Bank and 9.19% at Axos Financial.

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

Thanks, Derrick. Operator, we are ready to take questions.

(Operator Instructions) Our first question is from Michael Petro (sic) [Perito] with KBW.

I want -- Derrick, I want to stick with you on the cost stuff that you just ran through for a second here. So it sounds like adjusted for the merger expense and some amortization that was slightly lower than normal, maybe we're in like that $82 million ballpark on the core expense figure for the quarter.

I guess, just kind of a 2-part question. One, how much more -- I guess I had a little bit higher EAS related expenses than actually came through. I guess how much more of the fourth quarter run rate is there to come into that from EAS?

And then secondly, as we look out over the balance of fiscal 2022 here with some of the initiatives Greg talked about, how should we be thinking about kind of the layer up of expense growth as you start to roll out things like retail crypto trading and others?

Sure. So with the -- I highlighted the depreciation and amortization expense. You'll see the amortization of the intangibles increase and will return back to kind of more the Q4 level on that front. And then we acquired EAS, as a reminder, in early August. So we really only had about 2/3 of those expenses in the quarter for September 30. So you could basically take the -- take those numbers and take 1/3 of that increase from Q4 to Q1. That's generally a safe approach as to how to project the -- going forward, that expense run rate.

And then in terms of the -- any of the upward pressures from some of the initiatives you guys have going on beyond that? I mean is there some thought process around you can maybe guide us to there, whether it's maybe looking at the efficiency ratio in the bank job or something else or...

I think those -- well, the crypto will really come through the securities side of the business and so it won't have a impact on the bank efficiency ratio necessarily. But then the growth from those other initiatives really is baked into our standard growth rate. There may be a little bit additional expense there, but it's not going to be some substantial expense increase related to those.

And the other thing to remember there is a lot of that will also be development as well, which will be capitalized and amortized over a 3-year period most likely. So those are a couple of ways to think about it from that standpoint.

Understood. Helpful. And then secondly for me, just I guess with EAS now onboard, Greg, you talked about the retail crypto trading for consumers. Is it fair to think about the product and also all the lending opportunities that you guys have? I mean is that kind of the full suite of products here on that side of the business? Or is there other things you think you'll need to kind of evolve in the fairly short term here to continue to be competitive?

And assuming that, that's most of what you're going to roll out, do you think that there's -- probably fiscal 2022 could see some decent improvement just in the margins of that business relative year-on-year?

I think it's going to take probably to say significant improvement, I think that's going to be more fiscal 2023 type event. The reason why is that what we need to do is we need to -- we have a lot of technology work we have to do, including integrating UDB into those securities businesses. There's a lot of reengineering on the process side that we need to do. And a lot of those things are linked. So in other words, we have a mailroom opening checks manually and depositing them into accounts, right? That needs to happen through UDB, right?

So there's a -- we're not -- at this time, we're not going to be charging customers more for that. But whenever we can increase those efficiencies, we can go get new clients because our cost will be lower and we'll be able to price better. And this is a price competitive business. The pipelines look good. But then when you get to pricing, you need to work through that.

What really makes -- obviously, our goal, which I think is a aggressive goal but one that we've achieved already and will get better, is to essentially make this business work in a 0 interest rate environment. Now you always have to remember though that there was -- we were paying a couple of basis points when rates were 2.25% on clearing, and we're paying a couple of basis points today. So for every 100 basis points, that's a $20 million drop right there to the bottom line. Obviously, you can debate how you think about that given some of it's on balance sheet, some of it is off.

But this is obviously a rate-sensitive business. So I think it helps us on the asset sensitivity side. But then also, these are great customers and so there's the -- there's 0.25 million high net worth customers that we need to be able to access for banking products through a single platform, which doesn't exist yet. And there's a lot of work to do, and we'll be doing all that work in this next year. And then the next year is about getting adoption and rolling it out and making that happen.

So -- look, these businesses were good businesses. But they are also, from a relative maturity perspective operationally, they just have a lot of room for improvement, which is great because we think we can essentially grow volume and reduce costs at the same time.

Helpful. And then just one last quick follow-up on that point and then I'll step back. Just on the sensitivity, post EAS here, I mean, and everything else you guys have done over the last 2 years, I mean, it certainly feels like the balance sheet is much better positioned for higher rates. Just looking at the deposit mix alone kind of tells the story.

But I was just curious if you could maybe try and put some numbers around that on the short end of the curve here if we start to see some movement? Just any initial thoughts about how this pro forma balance sheet and the NII might react.

Yes. I think from a short-term interest rate movement, I think the securities, cash and the noninterest-bearing deposits don't move too much given that they're from the bankruptcy side, which never gets paid rate, and the security side which doesn't get paid rate. And then we have some commercial and those will be -- those will probably behave like other commercial deposits in the industry.

I think the question is, as we move -- continue to move towards growth, I do see a little bit of tightening, I mean it's little right now, of the deposit market with respect to balances. And so if rates are going up and we're still growing, then I think we would be paying a little bit more for those clients.

I think one of the things that we're obviously trying to do, we just won Money Magazine's Best Online Bank, finally beating Ally. They finally got their -- got it straight, right? I can't -- I'll never know why they possibly picked Ally. But in any event, we have -- if you open a trading account, if you open an invest account, then that collectively results in a better package of benefits, right? So those sort of accounts should result in enhanced stickiness. But we obviously -- we've been through -- haven't been through a rate cycle with all those things together. But I think we're clearly in very good shape.

And then obviously, for growth, we also have a lot of those security deposits off balance sheet as well. And then we're playing with whether we can raise deposits at a lower cost than others are paying us, which is often the case right now. Will it be the case at a higher interest rate environment? I have no idea, so.

Right. And just to be clear, you're basically talking about kind of like something like those reward type programs that we see a lot, like the consumer fintechs out there doing where...

Right.

When you bundle things together, yes.

Right, right, right. Yes. Subscription-type programs where someone is in self-directed trading and they're getting a lot of research. Are they as rate sensitive on a companion checking account, I think the answer is no. But that's -- all those things are there. But look, I think we'll do pretty well probably. Obviously, there's always been correlation between loan growth and deposit rates. But I think we have done -- really transformed and done a ton on our deposit franchise, and it's obviously showing up in the numbers.

Our next question is from Andrew Liesch with Piper Sandler.

A question on the loan growth guidance here, moved it up to -- at the high end, the low teens. It certainly looks like the warehouse business has stabilized. And you're making some moves to help keep the jumbo book from declining too much further with some of the rate competition. So what could trip you up and have the loan growth be at that low end? I know we're only a quarter into the fiscal year, but what could trip you up there?

Prepayments in C&I or on CRESL. There's -- the great part is those loans are very good credit quality. The bad part is they pay off quickly. So that can happen for all sorts of reasons. That would be one area.

Look, I think our jumbo book is looking better, and we have cut prices. So we're definitely trying to defend loan growth and we've done some rate reductions in order to make that happen as -- when we talked about the rates that are in the current pipeline versus the rates on the books.

So look, I feel pretty good about it. I don't -- the pipelines are good. But it doesn't take much in prepaid kickups as the larger book gets to move any individual quarter in a way that would not quite meet the number that you're talking about. I mean, that being said, we feel pretty good about it. We said high single digits, low teens and I think that's conservative probably. But it could be a little bit higher, it could be lower.

Got it. Helpful. And then with the margin here, up to 4.22%, but again with some of the rate movements you guys have made, do you think it's topped out here at least until maybe the Fed does something on the short end or LIBOR moves higher?

Yes. Yes, I think that's a good assumption. We have all -- I think we do have some little benefit from some deposit runoff, but you did see the difference in loan rates between when loan rates are coming on. And given how quickly our book turns, that will start flowing through so.

Our next question is from Steve Moss with B. Riley Securities.

Maybe just following up on the loan pricing here just a little differently. Just kind of curious, I mean, obviously, competitive environment pushing you to cut prices here. But just kind of curious, are you also maybe moving up in terms of loan size? Or has there been any change in terms of some of the loans you're pursuing within the C&I and CRESL buckets?

Not really. I think that's been pretty steady. And on the C&I side, that doesn't -- that's just a rate, right, Derrick? It doesn't include fees. So there's -- obviously, fees get amortized into the rate and things like that, which boost it. But no. I mean, I think that, that business is pretty -- I think our business mix really hasn't changed. It's just a result of where we think we should be for the deals we want and what we can get.

Okay. And then just maybe following up on expenses here. I hear you guys in terms of the investments and some of those investments being capitalized here. Just kind of curious how to think of the expense growth kind of sounds like, call it, an $85 million, $86 million type expense run rate for the third quarter. Just how do we think that kind of off that range for the rest of the year?

The -- so I mean, some things to think of, again, as you look at the salaries and benefits. So you had only a couple of months of the -- 124 employees coming on as part of the AAS acquisition. Those only hit for 2 months of that quarter, a little less than 2 months.

The same idea around the occupancy and equipment. So we assumed an office-based lease in the Denver market. And so that's going to drive that up a hair. And then the data processing and Internet is probably going to be around the range of where it's been this quarter and last quarter roughly. So that's kind of been the run rate recently.

And there's probably -- I mean we raised this with respect to...

Yes. And then -- yes, salaries, yes.

A drop of 5%, 5%, 6% increase on base salary excluding AAS because we didn't -- that's coming in where it is. But we do our evaluations annually and then raises around...

In the end of September, so not much of it hit during the September quarter so you'll see that increase in Q2.

And then we talked about depreciation and amortization and broker-dealer. Clearing charges will increase. Same idea, kind of 1/3 more from the increase from the -- you'll see a tick-up in Q2. There's been some movement, obviously, depending on the market with regards to how many transactions are flowing through and how hot the markets are from clearing charges that we incur as a portion of that.

Our next question is from Gary Tenner with D.A. Davidson.

Just a quick question. In terms of the off-balance sheet deposits, I think I heard the number in total around $1 billion or $1.1 billion. Is that what I heard at quarter end?

Off-balance sheet, we have about $650 million to $700 million.

Okay. So how do -- in terms of thinking about kind of volatility of the on-balance sheet deposits, it sounds like right now, Greg, you're saying that you could get incremental deposits cheaper than what you're getting paid by the other banks. So maybe in the current environment, it's not really an issue or a question in terms of modeling the balance sheet. But is this a daily sweep decision? Or are you modeling sort of cash needs over a period of time as you work the off-balance sheet deposits? Or are they committed to actually some period of time?

There are some -- the way the commitments generally work as people get to participate in the waterfall, and in some cases, we're essentially promising term to the extent that there is money in the waterfall and then we're essentially terming out some of those. But the terms generally aren't too long. We could get a little bit more rate for that. But it's part of our liquidity planning process with respect to that. So yes, there's not -- but what's the longest deal? It's pretty short, right? It's like -- is it.

A couple of years. It's not so long still. But it is tied to -- we can pull it back. If we need to, the default is the rate just gets adjusted. And so that -- so the higher rate falls back. So we still even have the option to pull that money we need to as we look at that.

But Gary, we have more than 10 to 12 banks that we can allocate to and we're adding more. So part of the process depends on which banks are interested. It does take a while to set them up into the system. But we do have flexibility on a daily basis to move money around to do that. But it does require partner banks that are willing to step up.

Okay. And then just to clarify on the talk about kind of the onetime costs associated with E*TRADE. I know that in the past, the way that you all highlight the acquisition-related costs in your Q, in your press release includes at least partially just kind of regular way amortization of intangibles. So the $2.8 million of acquisition-related costs that are highlighted, how much of that is just ongoing amortization of intangibles versus actual nonrecurring costs?

The bulk of it is amortizing intangibles. There was about 3 to -- around $300,000 that was onetime costs.

It's the benefit of being your own investment banker. Sorry. Shouldn't say that in front of a bunch of analysts.

Our next question is from Tim Coffey with Janney.

Greg, the -- I think in the Q, you talked -- there's a line item about the borrowed securities and margin lending, about $900 million average balance, 3% yield, which is obviously better than 20 basis points. I'm wondering, do you have any kind of visibility into those balances going forward?

Yes. I think that when people feel good about the markets, they tend to focus attention on maybe doing a little more borrowing. So we don't -- we think that's a pretty sustainable level. Obviously, some of that -- you see some of the stock borrowed. That's where we're lending stock. And that has a different rate, that's more variable there.

But I think that there's going to be over time, I don't think in this -- this year, this is going to be simply -- it's going to be market driven by the customer base, which is slowly growing and it will be reflective of, in general, sort of demand for margin from other broker-dealers.

There is, however, a lot of opportunity because, over time, we just have to make it happen. And it's interesting because AAS was actually part of E*TRADE Bank. They didn't do margin lending, they didn't at all. So there's a whole set of RIAs with $25 billion of assets under custody with us that want to do margin lending.

So the system right now doesn't accommodate that. So we are working on that. When that happens, we'll have to see how much demand there is. And then also through the platform, the ability to do one-touch SBLOC lending, quick margin from self-direct and other things like that is a part of the strategy, but it's not something that's going to be a fiscal 2022 impactful.

Okay. Got it. And on the rate on those, what's that dependent on?

It's negotiated with our broker-dealer clients who are -- there's 75-plus independent firms, and we're negotiating with them. And they're determining what rate they're going to bring to their customers, how much they're going to keep and how much we're going to keep. We're working it jointly on.

Okay. Great. And then staying on that schedule, is there a target rate or balance or a percentage basis in terms of cash and cash equivalents, liquidity basically, that you need to operate your bank going forward?

Yes. I mean we've -- go ahead.

I think around where we're at this quarter, the kind of the average balance that we had this quarter is probably consistent. It will flux. They can flux by $100 million, $200 million, depending on deposit inflows and outflows and just the timing of some of those. They don't always come in exactly when we expect them to come in. They may get delayed by 15 to 30 days or they may come in earlier 15 to 30 days.

So that's where you'll see that flux. But this quarter is probably a reasonable average, give or take, a couple of hundred million that we'll be at. Yes.

We have, I think, about 5% on balance sheet liquidity, but at sort of a place where we want to not go below. But the interesting thing about the securities type deposits is that they really do provide an additional source as well, particularly when they're off-balance sheet. We don't count those, of course. But they're there as a component of available liquidity.

Okay. And sticking on that point, with the maturities in the CD portfolio in the next 6 months, and obviously, more over the next 12 months, is there a real strong appetite to hold on to some of those at lower rates? Or do you feel like your liquidity in your cash...

Sure. We basically do. I mean we renew about 1/3 of those and they're at much lower rates, and people are just sticking because there's not a lot of other places to go, things to do. We have conversations with each person to the extent that it's -- they're interested in doing that, to talk about other options for them.

And so yes, there's a percentage that get maintained. But we don't have, frankly, the highest rates in the market. So if somebody is very, very rate sensitive and focused, they're going to be able to find something a little more suited to them. But we're competitive, so we do retain a portion.

Our next question is from David Chiaverini with Wedbush Securities.

I had a question on products and development because it seems like you're well on your way to building a super app. You can do banking and savings, Self-Directed Trading and investments, peer-to-peer payments, crypto within the next 6 months. The question is are there any features missing for you guys to compete with, say, Square's Cash App? Is that something you even aspire to?

Well, I think -- yes, I think to the extent that -- I mean, you talked about Square like Square's Cash App, for example, I would say that, I think, frankly, we have a lot of things we do that are much better right? I mean by the time we're done with what we're doing, you'll have small business accounts that can sit right next to your personal account open through a universal enrollment. You'll be able to have your crypto trading, your securities, your robo advisor.

And I think we're going to build -- I think we'll be able to build a much more robust -- let's -- for example, let's just talk about a robo, for example. So with what we have in AAS, they have a model management store. So most robos are really simplistic about what models you can choose. Well, our robo will be built into AAS' store so the client will have a lot more model choices that they can use in order to manage their money through the robo side.

So yes, I think we have all of the pieces we need to do that. And then there's just development to make that happen. And then UDB 2.0 is a -- has a planning tab that essentially works through a variety of features and functionality to help people plan their finances, market products based on specific data algorithms that would be most suited to those clients and things like that.

So yes, I think that the interesting thing for companies like Square is they're not -- they're unburdened from making money at any particular time. They have very small accounts often and they -- but they do have a lot of them, right? So -- but I think our app should be definitely much more functional than theirs, frankly, and much more robust when we're done.

That's great color. And then shifting to a housekeeping item. Can you talk about the tax rate going forward?

This quarter is roughly -- or we usually have around a 29% tax rate, that's where we've generally been at over the last few years. There's been some benefit from time to time as a result of the stock comp as if we have a period where the stock price shoots up and there's vestings of the awards. This relates the accounting nuance that they built rather than -- where it used go through equity, they built it into the tax rate a few years ago ASU 2016-09. Might be somewhat familiar with hearing that on The Street before.

So that's really what we'll -- can shift that rate, but generally 29% has been right around where we expect to be.

And our final question is from Edward Hemmelgarn with Shaker Investments.

Yes. I just got one quick question. The -- you would expect -- you talked about the expenses from clearing being another month, where I would expect that the clearing revenue to go up by an equivalent --- no.

Yes. That's correct. Yes, of course, yes, yes. That's right.

And one more. You were talking about your -- just with the prior caller, with the app will allow one to do all the things and more that Square does. How would you go about marketing it to a broader audience?

Well, I mean, remember, this -- Square's primary business is essentially merchant acquiring, right? So -- and that business is a great business. I mean that's a great, amazing business. Cash App is a sort of -- and I don't want to speak for them. I mean this uses an example because I -- but that's more of a side business that is not related to most of what -- the core of what they do. I don't even know if they disclose that revenue on that business. I mean, frankly, we clear for them. But -- so we clear for Cash App actually and so we're familiar with volumes and things like that. But anyway, I think that, obviously, they have this massive base of consumers because they have this amazing merchant acquiring business.

I think the answer to this more broadly is that there really are 2 primary mechanisms that we will market. One will be by trying to be a great integrated service provider for RIAs and BDs who need an integrated product set from a technological perspective. So the clearing and custody businesses are an accumulation of customers that need services. Those services are noncompetitive because we're not running our own RIA network. We're not running our own broker network. And to the extent that the robo gets of any size, we're going to refer those clients out via referral arrangements to our RIA network. So there's third-party acquisition of customers.

And then there's first-party acquisition of customers, which is through direct marketing, cross-selling and all the things that we do now to get customers.

And so I think the real -- the differential is, right, is if you're selling a customer a checking account, you can pay a certain amount of money on the cost of acquisition. If you're selling that customer loans and checking accounts and securities products, then the cost of acquisition can be reflective of a broader product set and allow more marketing to be done and a greater efficiency when you're measuring that lifetime value and cost of acquisition.

So I think that's really the trick to make that happen. And then you could also balance out which particular product has the lowest customer acquisition cost and which one has the best cross-sell, and you run the models on that and that becomes what the consumer acquisition looks like.

Okay. And great execution on acquisition.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, everyone. We'll talk to you next quarter. And Andy will still be hanging out and Derrick will be doing most of the talking. Are you going to speak to the finance, no? All right. Thanks, everybody. Bye. Take care. Bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.