Earnings Call Transcript - AX Q2 2022

Operator, Operator

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. Please note this conference is being recorded. 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, VP of Corporate Development and IR

Thanks, Alex. Good afternoon, everyone. And thanks for joining us today for 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. 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. All of these documents, including the 10-Q and an earnings supplement, are now available on our Investor Relations website. With that, I'll turn it over to Greg for opening remarks.

Greg Garrabrants, CEO

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I would 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. 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 balanced 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, managed portfolios, and our B2B security clearing and custody business, maintained solid client assets and sweep deposit balances despite a challenging quarter for the industry. 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, up 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 in our auto and various C&I lending loan types more than offset a small decline in our single-family mortgage warehouse lending business. 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 towards 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 mix, with noninterest-bearing deposits increasing by approximately $215 million from September 30, 2021. Noninterest-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 versus 39.93% in the first quarter of 2022. We achieved 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 were 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 $1.04 for the three months ended December 31, 2021, an increase of 10.6% year-over-year. 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 remained strong with Tier 1 leverage of 10.13% at the bank and 9.42% at the holding company, both well above our regulatory requirements. Our credit quality remained strong, with annualized net charge-offs to average loans of one 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. Total loan originations for the second quarter ended December 31, 2021 were $2.8 billion, up 15.8% from the $2.4 billion in the year-ago period. Loan originations for investment were approximately $2.6 billion, an increase of 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. 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 reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $141 million at January 25, 2022. Our jumbo single-family mortgage business continues to be stable. We generated $385 million of loan production, offsetting elevated prepayments. Ending 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 fee income in our jumbo single-family lending business in the second half of calendar 2022. 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 in structuring, and track record of execution have resulted in a steady expansion in loan production and net 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. 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 December 31, 2021. 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 and additional hiring expected in calendar 2022, we anticipate that the year-over-year increase in salaries and benefit 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 in our clearing and custody business. Once we complete the transition of Axos Advisory Services for self-clearing and sunset redundant conversion-related workflows, we expect to make more meaningful improvements in the overall efficiency of our securities business. We grew deposits by 4.4% linked quarter to $12.3 billion, with broad-based growth across our small business, commercial, and securities deposits. Checking and savings, representing 90% of total deposits at December 31, 2021, grew at the fastest clip, increasing by 5.9% linked quarter. Consumer deposits, representing approximately 30% of total deposits at December 31, 2021, are 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. We strategically repriced our consumer deposits six months ago in advance of closing the Axos advisory service acquisition. Since then, we focused on increasing the share of wallet with existing consumer banking clients and 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 in our self-directed trading and managed portfolios will generate incremental growth in consumer deposit balances. Average noninterest-bearing demand deposits were $3.7 billion in the quarter ended December 31, 2021, up from $3.5 billion in the quarter ended September 30, 2021. Growth in noninterest-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 bank's loan growth will be an even bigger advantage when interest rates rise and competition for deposits increases. 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-based competitors. We remain slightly asset-sensitive to changes in interest rates. Yields on loans originated in our single-family jumbo, 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 and terms, given our success in reducing our cost of funds. Competition and demand remain high across most of our lending categories. Approximately 46% of our loans are 5/1 ARMs, with a rated average duration of 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 cost 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. 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. For internal modeling purposes, we assume that 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. Our credit quality remains healthy. Annualized net charge-off to average loans was one basis point, the same as the September 30, 2021 quarter. Nonperforming assets to total assets was 94 basis points for the quarter ended December 31, 2021, the same as the quarter ended September 30, 2021. Of our nonperforming loans, 83.8% are single-family first mortgages, where we've had historically very low realized losses. Of our nonperforming single-family mortgage loans at December 31, 2021, approximately 91.8% had 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. Given the low loan-to-value on our single-family mortgages, we do 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 loss provision 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 mix and changes in macroeconomic factors impacting our credit loss models. The $4 million of loan loss provision for each of the past two quarters reflects strong loan growth in our overall loan balances, led by C&I lending. Our total allowance for loan losses was $140.5 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 of 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. 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 a 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. 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 in the December 2021 quarter was negatively impacted by lower average margin lending balances and lower transaction-based revenue with Axos Clearing due to industry-wide declines in 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, scalable tech infrastructure. 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% at the holding company and 10.13% at Axos Bank. We have access 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. 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 accretive M&A. Our securities business had a mixed 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 due to the addition of fee income from the AAS acquisition. Excluding one-time related merger expenses and noncash depreciation and amortization, Axos Clearing generated $1.8 million of pretax 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 in 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 reduced security lending. We completed the RIA custody acquisition approximately five months ago, and we're excited about the long-term opportunity to grow the combined Axos Clearing 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 RIAs and broker-dealers that clear or custody some or all of their assets with another custodian other than Axos today. As a noncompetitive custodian with a high-touch service-centric model and a strong capital base, we're in active communication with dozens of RIA firms about adding Axos as their custodian. 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 that is required to run the business, particularly during times of extreme market volatility. Third, we see strategic opportunities to add banking lending and other services to RIA broker-dealer and their end clients. Competition for advisory clients and advisers is fierce, and we can provide a comprehensive set of banking, clearing, and custody services to help our advisers retain and grow their practices. Whether it's integrated banking, tech integration to third-party service providers, succession or M&A financing, or mortgage lending for advisers and wealth management clients, Axos is committed to serving our advisers. 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 access margin and options 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 our small business banking and convert our digital small business banking platform to the Universal Digital Bank. We will further integrate our self-directed trading and managed portfolio user experience into UDB. By refining the front- and back-end processes and making it easier to transition and open new accounts through UDB, we hope to increase the cross-sell of consumer lending, trading, and deposit products. Second, we are 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, fund 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 their positions and values all in the Axos application. Many individuals lack the understanding and confidence to open a separate crypto brokerage account. While they are 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. 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 RIAs. Our vision is to enable advisers, broker-dealers, and their reps to offer checking, savings, mortgages, and other consumer banking products to their mass affluent and high-net-worth clients through an easy-to-use digital app that is powered by Axos. At the same time, it 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 businesses. We have successfully navigated through multiple credit and interest rate cycles, various regulatory policy changes, periods of intense and benign competition, and shifts in technology and end-user behavior by maintaining a consistent focus on product development, operational efficiency, and human and capital management. Our future success will depend on our ability to execute on our strategic and operational initiatives in a timely and productive manner. The great news is we have a strong foundation that includes a seasoned management team, diverse businesses that generate above-average returns, and a tech-enabled 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.

Derrick Walsh, CFO

Thanks, Greg. To start, I would 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 and our SEC filings for additional details. Turning to our quarterly performance. I'll start by focusing on select areas of our noninterest 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 and 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 deal fee structures and prepayment activity. 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 adviser 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 September 30, 2021 and down from $10 million in last year's December quarter. The increase in the linked quarter 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 relationship that formerly ended in December 2020. In that December 2020 quarter, in completing our contractual commitments with HRB, we earned $2.5 million which did not recur in the December 2021 quarter. Moving to noninterest expense. For the quarter ended December 2021, operating expense was $86 million, up $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 AAS operational expense for two months of the quarter. 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 amortizing intangible 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 as asset-sensitive and generates increased income of 8.8% for the first 12 months. 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 provide significant levels of noninterest-bearing deposits, including our bankruptcy trustee business, advisor business, and clearing business. Third, our growth in commercial lending brings an increased level of monthly adjustable rate products. Lastly, the higher prepaid rates on our single-family jumbos shorten the duration of our single-family loan portfolio. With that, I'll turn the call back over to Johnny.

Johnny Lai, VP of Corporate Development and IR

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

Operator, Operator

Our first question comes from the line of Andrew Leisch with Piper Sandler, please proceed with your question.

Andrew Leisch, Analyst

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?

Greg Garrabrants, CEO

Yes. He was referring to the deposits that we maintain off the balance sheet at the other partner banks. This includes the clearing and adviser sweep deposits, with just over $700 million held at those partner banks. This is recognized as fee income, which is noninterest income. As interest rates increase, we anticipate substantial improvements, with increases exceeding that 50% beta as we advance.

Derrick Walsh, CFO

Yes, Andrew, regarding your question, we have a significant amount of floating rate loans with various floor rates. For guidance, with the first 25 basis points increase, we anticipate about a $3 million annual increase in net interest income, followed by approximately $8 million for the second increase. This is based solely on income, without considering any effects on deposits. These figures reflect the initial increases. Once we reach the floors, we are cautious as there are floors at the 50 and 75 basis point levels that can limit pricing on the variable portfolio.

Andrew Liesch, Analyst

Got it. Okay. Yes. Thanks for the clarification on the balancing funds. What are you assuming for a deposit beta in your modeling with the deposits on your balance sheet? I believe it will be much lower than during the last rate increase cycle, and I'm curious about your current figures compared to what the beta was back then.

Greg Garrabrants, CEO

I believe a good way to approach this is to consider that we have deposits that can be off-balance sheet, and we expect to grow those deposits. We are optimistic about achieving a significant offset regarding those off-balance sheet deposits, and we anticipate improvements. While I can't provide a specific number at this moment, I don't foresee needing to make substantial adjustments with the initial rate hikes. Previously, when rates were at 1.75, the rates for securities deposits and bankruptcy deposits were 3 basis points and 0 respectively, and that will remain the same. We've made considerable progress on the commercial side, but it is somewhat contingent on the competitive landscape. We have an excellent checking account option for small businesses, featuring diverse and highly transactional accounts. Overall, I think we're in a strong position, but we will also need to observe how the market responds, as that could influence our situation.

Andrew Liesch, Analyst

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 have, is that what happened here in this quarter or so…

Greg Garrabrants, CEO

No, I think there is a cautionary note that I don't really agree with. I see commercial and industrial balances performing well. The growth this quarter was actually spread across a variety of loans, so the production was strong across several different businesses. Looking ahead, I believe there is some variability in that growth due to the size of those loans. We still anticipate good growth, but there's just more unpredictability. In simpler terms, it might be best not to estimate $700 million in loan growth for the next quarter.

Andrew Liesch, Analyst

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

Operator, Operator

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

Steve Moss, Analyst

Good afternoon, is just following up. Maybe just following up on loan growth here. I think the guide for the fiscal year is a low-teens growth. You guys are about north of 10% here on loan growth. Kind of curious that seems a little bit conservative and kind of curious to see how you're thinking about maybe upside to that number.

Greg Garrabrants, CEO

Yes. I believe there will be an increase to that figure. It seems conservative to me. While we don't provide specific guidance, I don't anticipate it to be 700, nor do I expect it to be 350. I expect it to be somewhere in between those values, keeping in mind that many factors can fluctuate, so any single quarter can vary. However, we do anticipate there will be growth beyond that. I certainly expect our teams to perform at a higher level in the next six months based on our performance in the first half of the fiscal year.

Steve Moss, Analyst

Okay. I appreciate that. Regarding expenses, I understand your point about the 70% comp growth. Specifically for the securities business, you mentioned earlier about duplication and the potential for cost savings, but there are also a number of different investments that need to be made and are ongoing. I'm curious about how we should consider expenses for that business and the various factors influencing them. Additionally, what are your thoughts on overall expense growth for the second half?

Greg Garrabrants, CEO

Yeah, I think…

Derrick Walsh, CFO

Sure, I can take that. There are a couple of considerations. First, most of the effects will come from the clearing and security sides, which are influenced by market conditions and transaction levels. If the market experiences a downturn, we will see fewer transaction-based fees and less activity, leading to a decrease in various areas such as base clearing fees, SEC VaR, SEC lending, and margin lending. When the market is performing well, these areas typically see an increase. Regarding integration, you might notice fluctuations, but nothing significant. There will be times when we incur higher expenses, though these are manageable and will stabilize over time. Conversely, we will also experience lower expenses due to our ability to capitalize on the integration and software development efforts we are making. Looking ahead in this business, we do not anticipate major expense fluctuations; rather, we expect gradual growth as we expand.

Greg Garrabrants, CEO

Yes, I think that's correct. Over the long term, there are significant opportunities to enhance efficiency within that business. Looking at the operations staff, there are hundreds of people involved, and as we implement white-labeled UDB for our clients, we can improve processes, like increasing straight-through processing. This not only reduces our costs but also enhances the client experience. There are numerous opportunities to enhance effectiveness across the board. For more than a decade, we have maintained a disciplined operational structure at the bank, and now the securities business has access to various tools and technologies. This is leading to continuous improvements, and we are already seeing immediate benefits as we tackle easier tasks. However, there is still plenty of potential for further growth in the long term. In the short term, Derrick's explanation makes sense because there are immediate opportunities, but it's uncertain how things will ultimately unfold. I don't expect the business to be significantly influenced by fluctuations in operating costs in the near term. Instead, market conditions will play a bigger role. Interestingly, our deposit balances have increased substantially in this volatile environment, so when people shift to cash, we gain from that. Those deposits are very low-cost, nearly at zero. This serves as an offset, depending on how we manage that capital. In a higher rate environment, reducing that will also be beneficial. The long-term advantages of the business remain intact. We're already experiencing this because we have a significant amount of lower-cost deposits and are continuing to grow these offerings, which gives us greater pricing power across our deposit portfolio. We can also price our commercial and consumer deposits more competitively, thanks to the support and off-balance sheet potential available for our organic loan growth.

Steve Moss, Analyst

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

Greg Garrabrants, CEO

No. The reason is that if you look at the numbers, we provided the rates on the loans. We decided to increase loan growth slightly. I believe that interest rates on our loans will remain stable or increase from where they were this quarter, but there is still a difference between the average rate in our portfolio and the average rates at which we are originating loans. Therefore, unless we can secure price increases on the loans, it’s better to maintain that NIM and not raise it. We are always interested in adjusting pricing where possible, but having good loan growth is also crucial and likely more important than debating minor basis points, even though we do engage in that discussion as well.

Derrick Walsh, CFO

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. But our long-term guidance is the 3.8% to 4%. So we don't see a point in changing that for this individual year. But given, obviously, where we've been, the six months through the year, we expect it will be slightly north of that 4% mark.

Steve Moss, Analyst

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

Operator, Operator

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

Michael Perito, Analyst

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 just the full quarter impact here on the securities business segment reporting in the 10-Q has about $16.5 million of noninterest income, about $21.6 million of noninterest 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 there are 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 you grow that expense figure?

Greg Garrabrants, CEO

I believe that in the next six to nine months, the situation will remain relatively stable or see slight improvement, but not significantly. There are significant opportunities to enhance the efficiency of that business. The scale of these opportunities is considerable, but it is complex due to the need for software investments and similar factors. There is great potential for streamlined processing, along with the ability to increase volumes while keeping the existing personnel structure. I liken it to taking over an exceedingly inefficient branch bank and transforming it into what we aim to achieve in that area. However, it will require time, so this is not something that will resolve within six months. It's important to note that the teams are not at fault; those businesses were not large and lacked the capabilities and experience we possess in driving operational efficiencies. There’s a lot to manage, which is positive. We desire to move quickly, but several things need to occur first. It primarily involves altering customer workflows, and these changes take time since they encompass both technological advancements and shifts in customer behavior regarding their interactions and efficiency improvements. Additionally, there are significant opportunities in core processing that I won’t delve into deeply, but we have exciting long-term plans that will span two to three years and will be impactful. In the shorter term, as we’ve noted, our rapid acquisition closure has led to some duplicated processing costs. Currently, we’re not self-clearing at AAS, so we are incurring fees from a third-party clearing firm unnecessarily. These factors will offset some of our short-term investments. Looking ahead to the next year, I wouldn’t expect substantial savings or increases immediately; it will require time to effectively implement these changes. Right now, the most significant advantage is our much-improved liquidity position compared to the past.

Michael Perito, Analyst

That's helpful. As you consider the next phase of scaling and the investments you are making, not only in AAS but also in UDB 2.0 and the overall platform, how do you assess the strength of the sales group on the lending side? I know you are continuously expanding that area, and the results are evident. How far along are you in developing marketing and sales strategies to provide cross-banking products to AAS customers? What are your expectations for this effort in the next 12 to 18 months?

Greg Garrabrants, CEO

I believe there are various components that are at different stages of progress. We have the beta version of our account opening system implemented with our clearing clients. This is a white-label account opening system designed for broker-dealers who clear through Axos Clearing. It enhances efficiency for both them and us because these accounts are directly integrated into the system without needing manual intervention. The white-labeled UDB for clearing is likely more developed compared to its custody counterpart since UDB needs to be integrated into the custody core, which might take around a year to complete. Adoption is also essential. However, no one has executed this well yet, making it an intriguing and promising strategy. We need to monitor the uptake as well. There are significant real benefits and synergies that can be realized. For instance, if a customer is trying to get a check into the market now, they typically send it to their RIA, which often forwards it to us. This process results in the check being manually processed. However, if someone has UDB and a bank account, this allows for immediate use of the risk engine to clear that check instantly, which is a major improvement. RIAs prefer not to mail checks or use RDC machines, as it complicates a simple process. This also applies to disbursements, where cutting a check for withdrawals or sending wires to third-party accounts could be replaced by instant transfers. There are numerous opportunities like this, and when analyzing the individual activities, you can see a lot of operational and cross-sell synergies. As a result, this leads to lower beta and reduced deposit costs. We have significantly transformed our deposit franchise, as evident from the increase in noninterest-bearing deposits, and we believe this focus will continue to yield benefits from these businesses.

Michael Perito, Analyst

That's helpful. I have one last question regarding the regulatory capital side. I apologize for missing something in the prepared remarks. It seems that the risk-based assets increased significantly from the previous quarter, and there were some declines in the regulatory capital ratios. Clearly, you are still well-capitalized, but I'm curious about what was happening there. Was it just some remixing? It appeared that securities were lower on the average balance sheet while C&I loans increased. I'm just wondering if there was anything else that contributed to that variance.

Greg Garrabrants, CEO

Yes. I think that while single-family jumbo loans remained stable, they did not grow, and the growth was primarily in the category of 100% risk-weighted assets. This raises the question over the longer term about whether growth in only 100% risk-weighted assets, which is what we experienced this quarter, or increased commitments related to the commercial and industrial business, which requires capital, is sustainable. This approach is less capital-efficient compared to single or qualified multifamily loans. We are monitoring this situation closely and need to stay focused on it. As you mentioned, we are still very well-capitalized, and our leverage ratios are strong. However, as the business shifts in that direction, it is something we must keep an eye on.

Michael Perito, Analyst

Great. Thank you guys, appreciate it.

Greg Garrabrants, CEO

Thank you.

Operator, Operator

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, VP of Corporate Development and IR

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

Operator, Operator

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