Earnings Call
Axos Financial, Inc. (AX)
Earnings Call Transcript - AX Q1 2022
Operator, Operator
Greetings. Welcome to Axos Financial, Inc. First Quarter 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 Johnny Lai, Vice President of Investor Relations and Corporate Development. Thank you. You may begin.
Johnny Lai, Vice President of Investor Relations and Corporate Development
Thank you, Sherin. 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; 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 three 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 the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company’s website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today’s earnings press release. Before handing it 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 the Investor Relations website. With that, I'll turn it over to Greg.
Greg Garrabrants, President and Chief Executive Officer
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 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 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 three 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 in 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 commercial and industrial 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 continue to make steady improvements in our funding mix with non-interest-bearing deposits increasing by approximately $1.5 billion from June 30, 2021. Non-interest-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 one-time merger-related expenses associated with the ETrade Advisory Services acquisition, Axos Clearing, which includes our clearing and custody businesses, generated $1.5 million of pre-tax income. Both the clearing and custody businesses were profitable even after accounting for the non-cash depreciation and amortization expenses associated with the acquisition. Our efficiency ratio for the three 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 were $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 continue 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 remain strong with a 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 remains strong, with no loans in forbearance and a decline in non-performing assets. Net annualized charge-offs to average loans was 1 basis point, down from 7 basis points in the first quarter of fiscal 2021. Non-performing 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 commercial and industrial 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 next 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 prepayments and solid new loan origination 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 commercial real estate, construction, and commercial asset-backed lending. Our growing relationships, knowledge and structuring, 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 at $656 million, up $42 million from $614 million at June 30, 2021. While our single-family warehouse balances will fluctuate based on underlying demand from 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 non-interest-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 non-interest-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 non-core CDs with lower-cost transactional deposits. Of this 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 a bulk of the runoff expected to occur in the next six months. Our small business and specialty commercial and treasury management businesses, including our fiduciary service businesses, continue to contribute to low-cost core deposits. Axos' clearing continues to generate low-cost deposits that we are able to put on or off balance sheet. The acquisition of the ETrade 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 banks' 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 did 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 slightly 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 commercial and industrial lending groups were 4.26%, 4.39%, and 4.2%, respectively in the first three months and at September 30, 2021, compared to a 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 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 traditional consumer and commercial banks. As such, our ability to continue reducing our funding costs 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 remains solid, with annualized net charge-offs to average loans and leases, excluding seasonal tax on products being one basis point this quarter, compared to seven 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. Non-performing assets to total asset ratio was 94 basis points for the quarter ended September 30, 2021, down from 107 basis points in the fourth quarter of fiscal 2021. Of our non-performing loans, 82.94% are single-family first mortgages, where we have had historically very low realized losses. Of our non-performing 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% were 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 lending 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 48 times our total annualized net charge-offs in the three months ended September 30, 2021. Our loan pipeline remains solid with approximately $1.7 billion of consolidated loans in the pipeline as of 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 continue to generate strong returns, with a return on average common shareholder equity of 16.55% and return on average assets of 1.66% in the three months ended September 30, 2021, respectively. Our efficiency ratio for the banking segment was 39.93% for the quarter ended September 30, 2021, compared to 45.2% in the last quarter. In the short two months since we closed the ETrade 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 remain strong with a Tier 1 leverage ratio of 9.22% at Axos bank and 10.14% at Axos financial. We have access to approximately $1.7 billion of FHLB borrowing, $1.6 billion in excess of the $150 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 buybacks and acquisitions such as the ETrade Advisory Service acquisition that we announced last quarter. Our securities business has an excellent 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 EAS acquisition. Excluding one-time merger-related expenses, Axos clearing generated $1.5 million pre-tax income, and 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 worth $712.5 million at September 30, 2021, up from $672 million at June 30, 2021. EAS, 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 some key technology platforms and an experienced team of approximately 130 professionals who serve around 190 independent registered investment advisors with approximately $25 billion of assets under custody, including the $1.3 billion of client cash deposits. We see tremendous opportunity to help advisors and their end clients become more successful by growing the scope and vibe of custody lending and banking services we deal with them. As those advisory services become a part of Axos security, we will provide significant cost and revenue synergies over the short, medium, and longer term. For example, by converting the IRA 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 businesses. We remain on track to meet or exceed our prior guidance for Axos advisory services, and it will be slightly accretive to our fiscal 2022 earnings per share. We launched our self-directed trading platform at the end of June. Version 1 of our self-directed trading platform offering focuses 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 login or mobile application. We deliberately control 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 from their 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 application. 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 six 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 non-interest-bearing deposits, significantly lowered our cost of interest-bearing deposits, and allowed the flexibility to earn fees from placing certain deposits that other banks or institutions are funding our banks' organic loan growth like we did this quarter. We're 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.
Andy Micheletti, Executive Vice President, Finance
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 eight years, six years of which were as 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.
Derrick Walsh, Executive Vice President and Chief Financial Officer
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 as of September 30, 2021. The decrease in the current quarter from a year ago was primarily due to a $6.5 million reserve for non-recurring refund advance loans for the three 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 non-interest 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 level. Occupancy costs decreased $1 million on a linked quarter basis, primarily due to a $0.9 million one-time 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 are 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 remain 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.
Johnny Lai, Vice President of Investor Relations and Corporate Development
Thanks, Derrick. Operator, we are ready to take questions.
Operator, Operator
Our first question is from Michael Perito with KBW. Please proceed.
Michael Perito, Analyst
Hey, good afternoon, guys. Thanks for taking my questions.
Greg Garrabrants, President and Chief Executive Officer
Hey, Michael.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Hey, Mike.
Michael Perito, Analyst
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 expenses, 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 to kind of a two-part question. One, how much more, I guess I had a little bit higher EAS related expenses than actually came through, is how much more of the 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, you know, 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?
Derrick Walsh, Executive Vice President and Chief Financial Officer
Sure, so with the – I highlighted the depreciation and amortization expense, you'll see the amortization of the intangibles increase and we'll return back to kind of more of the Q4 level on that front. And then we acquired EAS as a reminder in early August. So we really only had about two-thirds of those expenses in the quarter for September 30. So you could basically take the – take those numbers and take one-third 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.
Michael Perito, Analyst
And 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 on the bank or something else, or…
Derrick Walsh, Executive Vice President and Chief Financial Officer
I think those – well, the crypto will really come through the security side of the business. And so it won't have an 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 three-year period most likely. So those are a couple of ways to think about it from that standpoint.
Michael Perito, Analyst
Understood, helpful. And then secondly for me, just I guess was with EAS now on board. 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 a fiscal 2022 could see some decent improvement and just in the margins of that business, relative year-on-year?
Greg Garrabrants, President and Chief Executive Officer
I believe significant improvements will likely be seen in fiscal 2023. We have a considerable amount of technology work to undertake, particularly in integrating UDB into our securities businesses. This includes reengineering many of our processes, which are interconnected. For instance, our current method of manually opening and depositing checks needs to transition through UDB. At this point, we are not planning to increase charges for customers, but enhancing efficiency will allow us to attract new clients by lowering our costs, which will enable us to offer more competitive pricing. The competitive nature of this business is evident, and while our pipelines appear strong, pricing will require careful navigation. Our ambitious goal is to operate successfully in a zero-interest-rate environment. It's worth noting that in the past, when rates were at 25 basis points, we were paying a few basis points for clearing, and this remains true today. For every 100 basis points, there’s a $20 million impact on the bottom line. This highlights our business's sensitivity to interest rates. However, we have many valuable clients, including a quarter million high-net-worth individuals from whom we wish to offer banking products, but we need a unified platform to achieve this, which is still in development. We have a substantial amount of work ahead of us in the coming year focused on improving adoption and rolling out these services. The businesses we are involved with have significant operational maturity gaps, which presents a great opportunity for us to grow volumes while simultaneously reducing costs.
Michael Perito, Analyst
Helpful. And just one last quick follow-up on that pointing out step back, just on the sensitivity post EAS here I mean, and everything else you guys have done over the last two years. I mean, it certainly feels like the balance sheet is much better positioned for higher rates, looking at the deposit mix alone kind of tells the story. But it's just curious if you can 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.
Greg Garrabrants, President and Chief Executive Officer
I think in terms of short-term interest rate movements, securities, cash, and non-interest-bearing deposits remain relatively stable since they originate from the bankruptcy sector, which does not pay interest, and from the securities side, which also does not pay interest. We do have some commercial accounts, and those will likely behave similarly to other commercial deposits in the industry. The key concern as we continue to grow is that I do notice some tightening in the deposit market regarding balances. If rates rise while we are still growing, we may end up paying a bit more to attract those clients. One thing we have achieved is winning Money Magazine's Best Online Bank, finally surpassing Ally, which has always puzzled me. If customers open a trading or investment account, this will provide them with a better package of benefits, enhancing client retention. We haven't overcome a rate cycle with all these factors combined, but I believe we are in a very strong position. Additionally, for growth, we have many of those security deposits off-balance sheet. We are exploring the possibility of raising deposits at relatively low costs, which is often the case now. Whether this will hold true in a higher interest rate environment, I cannot say.
Michael Perito, Analyst
Right. Just to clarify, you're essentially referring to some of the reward-type programs that many consumer FinTech companies are implementing, where you effectively combine various elements.
Greg Garrabrants, President and Chief Executive Officer
Yes, subscription-type programs where individuals are self-trading and receiving a lot of research are likely not as sensitive to interest rates on a companion checking account. I believe the answer is no. However, I think we'll probably perform quite well. Historically, there has been a correlation between loan growth and deposit rates. But we have significantly transformed our deposit franchise, and it's clearly reflected in the numbers.
Michael Perito, Analyst
Great. Thank you for the insights. I'll let someone else jump in, appreciate it.
Greg Garrabrants, President and Chief Executive Officer
Sure.
Operator, Operator
Our next question is from Andrew Leisch with Piper Sandler. Please proceed.
Andrew Leisch, Analyst
Hey, good afternoon, everyone.
Greg Garrabrants, President and Chief Executive Officer
Hey, Andrew.
Andrew Leisch, Analyst
Question on the loan growth guidance here, moved it up to at the high end the low teens. Certainly looks like the warehouse business is 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?
Greg Garrabrants, President and Chief Executive Officer
Prepayments in commercial and industrial loans are on the rise. The positive aspect is that these loans are of high credit quality, but the downside is that they tend to pay off quickly for various reasons. One area to note is our jumbo book, which is showing improvement, and we have implemented price cuts to support loan growth. We've made some rate reductions to align the rates in the current pipeline with those on the books. Overall, I feel optimistic about it. The pipeline looks good, but significant prepaid pickups can impact any individual quarter's performance, potentially making it challenging to meet the anticipated figures. That said, we remain confident in our projections. We mentioned expectations of high single digits to low teens, which I believe is a conservative estimate, though there could be slight variations.
Andrew Leisch, Analyst
Got it. That's helpful. With the margin now at 422, considering the recent rate movements, do you believe it has peaked, at least until the Federal Reserve makes a move that impacts short-term LIBOR rates?
Greg Garrabrants, President and Chief Executive Officer
Yes. I think that's a good assumption.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Yes, I think – yes, we do have some little benefit from some deposit runoff. But you did see the difference in loan rates between what loan rates are coming on. And given how quickly our book turns that that'll start flowing through.
Unidentified Analyst, Analyst
Good afternoon.
Greg Garrabrants, President and Chief Executive Officer
Hi, Steve.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Hi, Steve.
Unidentified Analyst, Analyst
I wanted to follow up on loan pricing. In this competitive environment, I'm curious if you are also increasing the size of the loans you're pursuing within the C&I and commercial categories.
Greg Garrabrants, President and Chief Executive Officer
Not really. I think that's been pretty steady. And you know, 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 that get, you know, amortized into the rate and things like that, which boosted. But no, I mean, I think that that business is pretty, you know, I think our business max really hasn't changed. It's, you know, it's just the result of, you know, where we think we should be for the deals we want and what we can get.
Unidentified Analyst, Analyst
Okay. Following up on expenses, I understand your perspective on the investments and some of those being capitalized. I'm curious about how to approach the growth in expenses, which seems to be around $85 million to $86 million for the third quarter. How should we consider that range for the remainder of the year?
Greg Garrabrants, President and Chief Executive Officer
Some factors to consider regarding salaries and benefits include that we only had a couple of months reflecting the 124 employees from the AAS acquisition, which impacted less than two months of that quarter. The same principle applies to occupancy and equipment expenses; we took on an office space lease in the Denver market, increasing those costs slightly. Additionally, our expenses for data processing and internet should remain consistent with what we've experienced this quarter and the previous one, indicating that this has been our recent trend.
Derrick Walsh, Executive Vice President and Chief Financial Officer
And that was probably – I mean, we raised this with respect to salaries.
Greg Garrabrants, President and Chief Executive Officer
A drop of 5% to 6% increase on base salary excluding AAS this as we did.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Correct.
Greg Garrabrants, President and Chief Executive Officer
…for us coming in, where it is, but we do our evaluations annually and then raised around in the.
Derrick Walsh, Executive Vice President and Chief Financial Officer
End of September. So there wasn't much impact during the September quarter. Therefore, you'll see that increase in Q2. We also mentioned that depreciation, amortization, and broker-dealer acquisition charges will rise. The same concept applies, with about one-third more expected in Q2. There's been some fluctuations based on the market regarding the volume of transactions and the intensity of the markets, influencing the clearing charges we incur as a part of that.
Unidentified Analyst, Analyst
Okay, great. That's very helpful. Thank you very much, guys. Good quarter.
Greg Garrabrants, President and Chief Executive Officer
Thank you.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Thank you.
Operator, Operator
Our next question is from Gary Tanner with D.A. Davidson. Please proceed.
Gary Tanner, Analyst
Thank you. Good afternoon.
Greg Garrabrants, President and Chief Executive Officer
Hi, Gary.
Gary Tanner, Analyst
Hey, in terms of the off-balance sheet deposits, I think I heard the number in total around the $1 billion or $1.1 billion. Is that what I heard at quarter end?
Derrick Walsh, Executive Vice President and Chief Financial Officer
Off-balance sheet, we have about $650 million to $700 million.
Gary Tanner, Analyst
Okay. So, in terms of thinking about volatility of the on-balance sheets 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 sweet decision, or are you modeling for cash needs over a period of time as you work the off-balance sheet deposits? Are they committed, there's actually some…?
Greg Garrabrants, President and Chief Executive Officer
The way commitments typically function is that participants are involved in the distribution of funds. In certain situations, we are essentially guaranteeing a term based on the availability of funds, and we are formalizing some of those terms, although they are usually not very lengthy. We can achieve slightly better rates for this. It's part of our liquidity planning approach. So, what’s the longest duration for these deals? They're generally quite short, correct?
Derrick Walsh, Executive Vice President and Chief Financial Officer
It's a couple of years, which is our longest deal, but we have the option to pull it back if necessary; the default is that the rate simply gets adjusted. We can still withdraw that money if needed as we evaluate the situation. We have more than 10 to 12 banks available for allocation, and we're adding more. The process depends on which banks are interested. Setting them up in the system takes time, but we have flexibility to move money around on a daily basis, provided we have partner banks willing to participate.
Gary Tanner, Analyst
Okay, thank you. And then to clarify on the talk about the one-time cost 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 regular way amortization of intangibles. So of the $2.8 million of acquisition-related costs that are highlighted, how much of that is just ongoing amortization of intangibles versus actual non-recurring cost?
Derrick Walsh, Executive Vice President and Chief Financial Officer
The bulk of it is amortizing intangibles. There was about $300,000 that was one-time costs.
Greg Garrabrants, President and Chief Executive Officer
The benefit of being your own investment banker.
Gary Tanner, Analyst
All right guys, thank you.
Operator, Operator
Our next question is from Tim Coffey from Janney. Please proceed.
Tim Coffey, Analyst
Thanks. Good afternoon, everybody.
Greg Garrabrants, President and Chief Executive Officer
Hi Tim.
Tim Coffey, Analyst
Hey, Greg, I think in a Q you talked, there's a line item about the spiral 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?
Greg Garrabrants, President and Chief Executive Officer
I believe that when people feel positive about the markets, they are more likely to increase borrowing. We consider this level to be sustainable. Some of this involves stock borrowing, where we lend stock, which comes with a different and more variable rate. Over time, I don't anticipate this year to be purely driven by the market dynamics; it will largely depend on the customer base, which is gradually expanding, and will reflect the general demand for margin from other broker-dealers. There is considerable opportunity, and we need to make it a reality. It's noteworthy that AAS was originally part of E*Trade bank, which did not engage in margin lending. There are numerous RIAs with $25 billion in assets under custody with us that are interested in margin lending, but the current system does not support that. We're actively addressing this issue, and it remains to be seen how much demand there will be when we make it possible. Additionally, our strategy includes enhancing platform capabilities for quick margin access and one-touch block lending for self-directed clients, but this won't significantly impact fiscal 2022.
Tim Coffey, Analyst
Okay, got it. And on the rate on those, what's that dependent on?
Greg Garrabrants, President and Chief Executive Officer
It's negotiated with our broker-dealer clients who are over 75 independent firms, and we're currently in discussions with them. They are deciding what rate to offer their customers, how much they will retain, and how much will come to us. We are collaborating on this matter.
Tim Coffey, Analyst
Okay. Great. And then staying on that schedule, is there a target rate or balance or percentage basis in terms of cash and cash equivalents, liquidity, basically, that you need to operate your bank going forward?
Greg Garrabrants, President and Chief Executive Officer
Yes, the average balance we had this quarter is likely to remain consistent. It may vary by 100 million to 200 million due to deposit inflows and outflows and their timing. These deposits don't always arrive exactly when we anticipate; they might be delayed by 15 to 30 days or arrive earlier by the same amount. Therefore, you can expect this quarter's average balance to be a reasonable estimate, give or take a few hundred million.
Derrick Walsh, Executive Vice President and Chief Financial Officer
We have, you know, think about 5% on balance sheet liquidity, but at that 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.
Tim Coffey, Analyst
Okay. Regarding the maturity of the CD portfolio in the next six months and even more so over the next 12 months, is there a strong desire to retain some of those at lower rates, or do you believe your liquidity...
Derrick Walsh, Executive Vice President and Chief Financial Officer
Sure. We typically renew about a third of those accounts at much lower rates, and customers are sticking with us because there aren't many alternatives available. We engage in conversations with each individual who is interested to discuss other options. So, yes, a certain percentage is retained. We don't have the highest rates in the market, so if someone is very focused on rates, they might find something better suited to their needs. However, we are competitive, and we do retain a portion of our customers.
Tim Coffey, Analyst
Okay, great. Well, I appreciate those were my questions. Thank you.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Thank you.
Operator, Operator
Our next question is from David Chiaverini with Wedbush Securities. Please proceed.
David Chiaverini, Analyst
Hi. Thanks for taking the question. I had a question on products in 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 six months. The question is, are there any features missing for you guys to compete with Square's Cash App? Is that something you even aspire to?
Derrick Walsh, Executive Vice President and Chief Financial Officer
I believe that when it comes to Square's Cash App, we offer many features that are superior. By the time we're finished with our developments, users will have small business accounts alongside their personal accounts through a universal enrollment. They will be able to manage their cryptocurrency, trade securities, and access a Robo-advisor. For instance, our Robo will integrate with our Model Management store, offering clients a wider selection of models for managing their money compared to the more basic options available from most other Robo services. Importantly, Square can afford to operate without immediate revenue, as they tend to have many small accounts. However, I am confident that our app will be significantly more functional and robust by the time we launch.
David Chiaverini, Analyst
Great color. Thanks for that. And then shifting to a housekeeping item, can you talk about the tax rates going forward?
Derrick Walsh, Executive Vice President and Chief Financial Officer
This quarter is roughly where 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 best things of the awards this relates the accounting nuance of a builds rather than where it used to go through equity, they built it into the tax rate a few years ago, I assume 2016, 2009 might be somewhat familiar with hearing that on the street before. So that's really what will and can shift that rate. But generally, 29 has been right around where we've expect to be.
Operator, Operator
And our final question is from Edward Hemmelgarn with Shaker Investments. Please proceed.
Edward Hemmelgarn, Analyst
Yes. I have a quick question. You mentioned that the expenses from clearing have been delayed by another month. I would expect that the revenues would increase accordingly, right?
Greg Garrabrants, President and Chief Executive Officer
Yes. Yes, that's correct. Yes. Yes. Yes. Yes, that's right.
Edward Hemmelgarn, Analyst
Okay. One more question related to the previous caller's comments. How would you approach marketing to a wider audience considering the capital will enable you to do everything that Square does and more?
Greg Garrabrants, President and Chief Executive Officer
Square's main business is merchant acquiring, which is a strong area for them. Cash App, while significant, is more of a secondary focus and not central to their core operations. I'm not certain if they disclose the revenue from that segment since we handle clearing for them. We do have insights into their volumes. They have a substantial consumer base because of their robust merchant acquiring operations. When considering broader marketing strategies, we have two main methods. First, we aim to be a top-notch integrated service provider for Registered Advisors (RAs) and Broker-Dealers (BDs) who need comprehensive technological products. Our clearing and custody services meet the needs of customers requiring those services, and these are non-competitive since we don't operate our own RIA or broker networks. As the Robo business grows, we'll refer clients to our RIA network through referral partnerships. The second method involves directly acquiring customers through marketing, cross-selling, and our existing customer acquisition efforts. The key difference in acquisition costs comes when you're selling multiple products. If a customer is buying just a checking account, the acquisition cost is straightforward. However, if they're also getting loans, checking accounts, and investment products, the acquisition costs can leverage a wider range of offerings, leading to more efficient marketing and better lifetime value measurements. It’s essential to analyze which products offer the lowest acquisition costs and which ones perform best for cross-selling, as this analysis will shape our customer acquisition strategy.
Edward Hemmelgarn, Analyst
Okay. And great execution on acquisition.
Greg Garrabrants, President and Chief Executive Officer
Thank you.
Derrick Walsh, Executive Vice President and Chief Financial Officer
Thanks, Ed.
Operator, Operator
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.
Greg Garrabrants, President and Chief Executive Officer
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. Andy, you do deep about next finance. No? All right. All right. Thanks everybody. Bye. Take care. Bye.
Operator, Operator
Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.