Axos Financial, inc (AX) Q1 2022 Earnings Call Transcript

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Axos Financial, inc (NYSE: AX)
Q1 2022 Earnings Call
Oct 28, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

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

Johnny Y. Lai -- Vice President, Corporate Development & Investor Relations

Thank you, Sharon. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s first 1uarter 2022 financial results conference call, are the Company's President and Chief Executive Officer, Greg Garrabrants; Chief Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President, Finance, Andy Micheletti. Greg and Derrick will review and comment on the financial and operational results for the 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-liking 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 will could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties. Therefore the Company claims the Safe Harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release and 10-Q, we also issued an earnings supplement for this call. All of these documents can be found on our Investor Relations website.

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

Gregory Garrabrants -- President, Chief Executive Officer & Director

Thank you. Johnny. Good afternoon, everyone and thank you for joining us. I'd like to welcome everyone to Axos Financials conference call for the first quarter of fiscal year 2020 ended September 30, 2021. I thank you for your interest in Axos Financial and Axos Bank. We had an excellent start to our fiscal 2020 with double-digit growth in net interest income, loan originations in earnings per share. We booked 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% 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 6% annualized. Our loan production was strong across a variety of categories including auto, single-family mortgage, single family warehouse and various C&I lending types.

Net interest margin was 4.22% for the first quarter, up from 3.9% 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 E Trade Advisor 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 was $0.99, up 12.5% from the $0.88 in the year ago quarter. Our corporate tax rate increased from 28% in the fourth quarter of 2021 to 29.1% this quarter.

We 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 Tier 1 leverage ratio of 10.14% at the bank and 9.22% at the holding company, both well above our regulatory requirements. Our credit quality remained strong with no loans and 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, we're $2.3 billion, up 28% from $1.8 billion in the year ago period. The first quarter 2022 originations were as follows: $201 million of single family agency gain on sale production, $430 million of single family jumbo portfolio production, $107 million of multifamily production, $25 million of commercial real estate production, $132 million of auto and unsecured consumer loan production, and $1.3 billion of C&I and commercial lending production, resulting in a net increase of $429 million of balances. Mortgage banking gain on sale generated $5.3 million of mortgage banking income, compared to $2.9 million in the fourth quarter of 2021 and $19.6 million in the corresponding quarter last year.

Originations decreased by approximately 16.9% linked quarter to $201 million while gain on sale margins increased slightly to 339 basis points from 323 basis points in the fourth quarter of 2021. The outlook for mortgage banking remains stable from fiscal 2021 fourth quarter with a solid pipeline and lower expected gain on sale margins. Our pipeline of single family agency mortgages was $184 million at October 25, 2021. Our single family jumbo mortgage business had a mixed quarter. Loan production was strong at $430 million, or high prepayments resulted in a net $63 million decline in ending loan balances as of September 30, 2021.

We are seeing good demand for our jumbo prime product and the pipeline has risen in September 30th to slightly under $600 million. The combination of slightly lower prepays and solid new loan originations should allow us to stabilize our single-family jumbo loan balances. C&I lending had a very good quarter. Loan originations were $1.3 billion, reflecting strong growth across Trestle, construction and commercial asset-backed lending. Our growing relationships knowledge and structuring and selective adjustments in loan pricing on some new deals and a track record of execution have resulted in an steady expansion in loan production and net balances.

Demand remains strong with a backlog of approximately $687 million as of September 30, 2021. Ending balances in our mortgage warehouse portfolio were $656 million, up $42 million from $614 million at June 30, 2020. While our single-family warehouse balances will fluctuate based on underlying demand for mortgage refinancing, our goal is to opportunistically grow with new and existing customers. We continue to make improvements in our consumer, commercial and securities deposit franchises by investing in our front-end, backend technologies, customer service and product capabilities. Consumer deposits representing approximately 47% of our total deposits as of September 30, 2021, is comprised of human 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. And in time deposits as of September 30 of 2021 we're 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, approximately $1.44 billion of certificates of deposits as of September 30, 2021 on the balance sheet, approximately $1 billion at a weighted average rate of 68 basis points will mature in the next 12 months with the bulk of the run-off is expected to occur in the next 6 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 were able to put on or off balance sheet. The acquisition of the E Trade Advisory Services RIA a custody business, which closed on August 2nd, 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 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 at other financial institutions dropping by approximately $767 million from $1.9 billion in the fourth quarter of 2021 to $1.1 billion in the first quarter of 2022. We do not anticipate meaningful declines in our excess liquidity going forward.

On the loan side, we have successfully held loan yields relatively steady over the past several quarters. However, we have started to selectively reduce pricing on new loans in order to be more competitive for high quality deals. Yields on loans originated in our single-family jumbo, multifamily and C&I lending groups were 4.26%, 4.39% and 4.2% respectively in the first three months ended 09/30/2021, compared to 5.12% average loan yield in the first quarter that just ended last month. We feel it's prudent to price more competitively on certain high quality deals, while maintaining our credit standards and terms, given our success, reducing our cost of funds.

Lastly, we have dramatically reduced our funding cost across each of our consumer and commercial deposit businesses over the past year in anticipation of having access to over $1 billion of low cost deposits from the RIA custody acquisition. With new interest bearing deposits coming in at 18 basis points in the first quarter of fiscal 2022, we have transformed our deposit franchise to be much more in line with that of a traditional consumer commercial bank. As such, our ability to continue reducing our funding cost is more limited than it was a year ago. When you consider all these factors, we are confident that our full year net interest margin will be at the high end or slightly above that of our 3.8% to 4.0 range in fiscal 2022.

Our credit quality remains solid. Annualized net charge-offs to average loans and leases, excluding seasonal tax on products was 1 basis point this quarter, compared to 7 basis points in the corresponding period last year. We charged off the remaining $7.3 million of refund advance loans outstanding in the fourth quarter of 2021, all of which were fully provisioned for previously. Non-performing assets for 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% our single-family first mortgages, where we have had historically very low realized losses. Of our nonperforming single-family mortgages as of September 30, 2021, approximately 86% had a current estimated loan to value ratio at or below 70% and approximately 94.5% are below 80% of our best estimates of current loan to values.

Given the low loan to values on our single-family mortgages, we do not anticipate incurring material losses on the vast majority of our delinquent loans. We had no loans in foreclosure as of September 30, 2021. Our loan loss provision this quarter was $4 million compared to $1.3 million in the June 30, 2021 quarter and $11.8 million in the quarter ended September 30, 2020. The sequential increase in loan loss provision supports the $464 million increase in ending loan balances. Our total allowance for loan losses was $136.8 billion 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 at September 30, 2021, consisting of $180 million of single family agency gain on sale mortgages, $514 million of jumbo single-family mortgages, $235 million of multifamily and small balance commercial real estate loans and $687 million of C&I and commercial specialty real estate loans with $94 million of auto and consumer unsecured loans in the pipeline. With healthy demand for loans across multiple loan categories, the slight deceleration in prepayments, we remain confident in our ability to achieve a high single-digits 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 E Trade Advisory Services acquisition, we have already identified dozens of cost synergies by streamlining various processes and procedures, we see additional opportunity to generate operating efficiencies from our clearing custody and retail securities business in the next 12 to 24 months, as we further integrate systems processes and personnel.

Our capital ratios remain strong with Tier 1 leverage to adjusted assets of 9.22% at the holding company and 10.14% at Axos Bank. We have access to approximately $1.7 billion of FHLB borrowing, $1.6 billion in excess of $158 million we had outstanding at the end of the first quarter. Furthermore, we have $2 billion of liquidity available to Federal Reserve discount window as of September 30, 2021. Our strong organic growth and returns, coupled with a clean capital structure, allow us to make opportunistic stock buyback and acquisitions, such as the E Trade Advisory Service acquisition that we announced last quarter. Our securities business had a great quarter with strong growth in fee income and net interest income. Broker dealer fee income increased to106.4% in the first quarter, compared to the corresponding period last year due to the addition of fee income from the AAS acquisition.

Excluding one-time merger related expenses, Axos Clearing generated $1.5 million in pre-tax income. Axos Clearing end of 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 of 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 in this quarter. FDIC-insured deposits held with partner banks were $712.5 million at 09/30/2021, up from $672 million at June 30, 2021, AS, the RIA custody business had approximately $1.3 billion of total client deposits in Q1 of fiscal 2022 of which $1 billion was held by Axos Bank and $284 million were held by partner banks.

We completed the acquisition of the E Trade Advisory Services business on August 2nd and rebranded the business Axos Advisory Services. I want to thank Axos Clearing and Axos Advisory team at 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 turnkey technology platform 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 volume of custody lending and banking services we do with them. Axos Advisory Services becoming a part of Axos Security will provide significant cost and revenue synergies over those short, medium and longer term. For example, by converting the RIA custody business from a bank platform to a broker-dealer platforml, 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 through the Axos Advisory Services group that will further improve our customer service levels and help the business become more efficient and scalable. In the next 12 to 18 months, we intend to streamline the custody and clearing systems and workflow to further integrate the businesses. We remain on track to meet or exceed our prior guidance for Axos Advisory Services and will be slightly -- that it will be slightly accretive to our fiscal 2022 earnings per share. We saw offline store self-directed trading platform at the end of June. Version 1 of our self-directed trading platform offering is focused on existing clients who value the simplicity and convenience of being able to see and transact across various Axos banking and investment products through one online log and our mobile application.

We deliberately control the rollout and limited the amount of marketing campaigns during this initial phase in order to protect various client on-boarding 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 access 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 the account quickly by transferring funds from an Axos Bank account, trade a limited number of crypto currencies and see their positions and values all in an Axos app.

The cost of developing and operating a retail crypto trading business is well controlled and we will generate incremental fee-based revenue once clients open accounts and trade. We anticipate launching our retail crypto trading business in the next 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 a lot of the flexibility to R&Ds and placing certain deposits at other bank institutions are funding our banks organic loan growth, like we did this quarter. We are making additional investments in the securities business, including adding more talented team members and investing in technology and infrastructure in order to grow the business profitably. As we leverage the expertise and leadership from each of our businesses and further implement cost and revenue synergy initiatives, we see continued opportunity to accelerate top and bottom line growth.

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

Andrew J. Micheletti -- Executive Vice President-Finance

Thanks, Greg. As recently announced on September 27th, 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 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 K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Thanks, Andy. To start, I'd like to highlight that in addition to our press release and 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 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 are the $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 Advisory Services or AAS, the rebranded E Trade Advisory 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 subways in 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, the $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 will turn the call back over to Johnny.

Johnny Y. Lai -- Vice President, Corporate Development & Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Michael Perito with KBW. Please proceed.

Michael Perito -- KBW -- Analyst

Hey, good afternoon, guys. Thanks for taking my questions.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Hi, Michael.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Hey.

Michael Perito -- KBW -- Analyst

They're going to stick with you on the cost out that you just ran through for a second here. So it sounds like adjusted for the merger expenses from 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, then actually came through. I guess, how much more of the full quarter run rate is there to come into that from EAS? And then secondly, as we look out over the balance of fiscal 2022 here with some of the initiatives Greg talked about, how should we be thinking about kind of the layer up of expense growth as you start to roll out things like retail, crypto trading and others?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Sure. So, I highlighted the depreciation and amortization expense. You will see the amortization of the intangibles increase and will 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 30th. So you could basically take those numbers 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 rates.

Michael Perito -- KBW -- 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 of the bank or something else?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

I think the crypto will really come through the security side of the business. And so it won't have a impact on the bank efficiency ratio necessarily, but then the growth from those other initiatives really is baked into our standard growth rate. There may be a little bit of 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 -- KBW -- Analyst

Understood. Helpful. And then secondly, for me, just I guess 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 is -- probably fiscal 2022 could see some decent improvement in just in the margins of that business relative year-on-year?

Gregory Garrabrants -- President, Chief Executive Officer & Director

I think it's going to take probably to say significant improvement. I think that's going to be more of fiscal 2023 type of that. The reason why is that what we need to do is, we know that we have a lot of technology work we have to do, including integrating UDB into those securities businesses. There is a lot of reengineering on the process side that we need to do and a lot of those things are linked. So in other words, we have a mailroom opening checks manually and depositing them into accounts, right, that needs to happen through UDB, right. So there is -- at this time we're not going to be charging customers more for that. But whenever we can increase those efficiencies, we can go get new clients, because our cost will be lower and we'll be able to price better and this is a price competitive business. The pipelines look good. But then when you get to pricing, you need to work through that. What really makes obviously our goal, which I think is the aggressive goal, but one that we've achieved already and we'll get better is to essentially make this business work in a zero interest rate environment. Now, you always have to remember, though, that there was -- we were paying a couple of basis points when rates were 225 on clearing and we're paying a couple of basis points today. So for every 100 basis points, that's a $20 million drop right there to the bottom line, obviously you can debate how you think about that given some of its on balance sheet, some of it is off, but this is obviously a rate sensitive business, so I think it helps us on the asset sensitivity side. But then also these are great customers and so there is a quarter million high net worth customers that we need to be able to access for banking products in a single platform, which doesn't exist yet. And there's a lot of work to do and we'll be doing all that work in this next year and then the next year is about getting adoption and rolling it out and and making that happen. So these businesses were were good businesses, but they're also from a relative maturity perspective operationally, they just have a lot of room for improvement, which is great because we think we can essentially grow volume and reduce cost at the same time.

Michael Perito -- KBW -- Analyst

Helpful. And then just one last quick follow-up on that point. Then I'll step back, just on the sensitivity post EAS here, I mean and everything else, you guys have done over the last few years, I mean, it certainly feels like the balance sheet much better positioned for higher rates. Just looking at the deposit mix along kind of tells the story, but I'm just curious if you could maybe try to put some numbers around that on the short-end of the curve here if we start to see some move, just any initial thoughts about how this pro forma balance sheet and the NII might react?

Gregory Garrabrants -- President, Chief Executive Officer & Director

Yeah, I think from a short-term interest rate movements, I think the securities, cash and the non-interest bearing deposits don't move too much given that they're from the bankruptcy side, which never gets paid rate and the security side, which doesn't get paid rate, and then we have some commercial and those will be that those will probably behave like other commercial deposits in the industry. I think the question is as we continue to move toward growth, I do see a little bit of tightening. I mean it's little right now of the deposit market with respect to balances and so if rates are going up and we're still growing, but I think we would be paying a little bit more for those clients. I think one of the things that we're obviously trying to do, we just won Money Magazine's Best Online Bank finally bidding Ally they finally got there, got it straight, right. I never know how hide and possibly the Ally. But in any event, f you open a trading account, if you open invested account, then that collectively results in a better package of benefits, right. So those sort of accounts should result and enhance stickiness, but we obviously -- we've beenn't through a rate cycle with all those things together, but I think we're clearly in very good shape. And then obviously for growth, we also have a lot of those security deposits off balance sheet as well. And then we're playing with whether we can raise deposits at a lower cost than others are paying us, which is often the case right now. Will it be the case at a higher interest rate environment? I have no idea, so.

Michael Perito -- KBW -- Analyst

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

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

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

Michael Perito -- KBW -- Analyst

Great, thank you for the insights. I'll let someone else jump in. Appreciate it.

Operator

Sure. Our next question is from Andrew Liesch with Piper Sandler. Please proceed.

Andrew Liesch -- Piper Sandler -- Analyst

Hey, good afternoon, everyone.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Hey, Andrew.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Hey, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

A question on the loan growth guidance here moved it up to at the high and 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 great competition. So what could trip you up and have the loan growth be that low end? I know we're only a quarter into the fiscal year, but what could trip you up there?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Prepayments and C&I and Trestle. The great part of those loans are do you know very good credit quality, the bad part of the pay-off quickly. So that can happen for all sorts of reasons, that would be one area. Look, I think our jumbo book is looking better, I mean we have cut prices. So we are definitely trying to defend loan growth and we've done some rate reductions in order to make that happen, but you know when we talked about the rates that are in the current pipeline versus the rates on the books. So, look, I feel pretty good about it. I know the pipelines are good, but it doesn't take much in prepaid hiccups as there's larger book gets to move any individual quarter in a way that would not quite meet the number that you're talking about, I mean, that being said we feel pretty good about it. We said high-single digit low teens and I think that's conservative, probably, but it could be a little bit higher, could be lower.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. Helpful. And then with the margin here up before 22, but again with some of the rate movements you guys have made, do you think it's topped out here at least until maybe the Fed does something on the short under LIBOR moves higher?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

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

Andrew Liesch -- Piper Sandler -- Analyst

Great. I'll come back. Thanks.

Operator

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

Steve Moss -- B. Riley Securities -- Analyst

Good afternoon.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Hi, Steve.

Gregory Garrabrants -- President, Chief Executive Officer & Director

HI, Steve.

Steve Moss -- B. Riley Securities -- Analyst

Maybe just following up on the loan pricing here, just a little different way. I'am kind of curious, I mean obviously competitive environment pushing it to cut prices here, but just kind of curious, are you also may be moving up in terms of loan size or has there been any change in terms of some of the loans you're pursuing within the C&I and across all buckets.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting 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 there, it doesn't include fees. So there's obviously fees get amortized into the rate and things like that which boosted it. But now, I mean I think that that business is pretty -- I think our business max really hasn't changed. It's just their result of where we think we should be for the deals we want and what we can get.

Steve Moss -- B. Riley Securities -- Analyst

Okay. And then just maybe following up on expenses here you guys, in some of those investments have been capitalized here, just kind of curious how to think off the expense growth kind of sounds like card and $85, $86 million type expenses in our third quarter, just how do we think, that's kind off that range for the rest of the year?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

So I mean, some things to think of again, as you look at the salaries and benefits. So you had on the -- a couple of months of 124 employees coming on as part of the AAS acquisition. Those was only hit for two months of that quarter, a little less than two months. The same idea around the occupancy and equipment, so we assumed an office space lease in the Denver market and so that's going to drive that up a hair. And then the data processing and Internet is probably going to be around the range of where it's been this quarter and last quarter roughly, but that's kind of been the run rate recently.

Gregory Garrabrants -- President, Chief Executive Officer & Director

And that was probably, I mean, we raise this with respect to salaries, drop of 5%, 6% increase on base base salary excluding AAS, because we did it, that's coming in where it is, but we do our our evaluations annually and then raised this around

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

The end of September, so not much of a hit during the September quarter, so we see that increase in Q2. And then we talked about depreciation, amortization and broker-dealer, clearing charges will increase same idea kind of one-third, more from the increase, you'll see a pick up in Q2. There has been some movement obviously depending on the market with regards to how many transactions are flowing through and how hot the markets are from clearing charges that we incur as a portion of that.

Steve Moss -- B. Riley Securities -- Analyst

Okay, great. That's very helpful. Thank you very much guys. Good quarter.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Thank you.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Thank you.

Operator

Our next question is from Gary Tenner with DA Davidson. Please proceed.

Gary Tenner -- DA Davidson -- Analyst

Thanks, good afternoon.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

HI, Gary.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Hey. Gary.

Gary Tenner -- DA Davidson -- Analyst

In terms of the off-balance sheet deposits, I think I heard the number in total around the billing or billing one, is that what I heard at quarter end?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

No. Off-balance sheet, we have about $650 million to $700 million.

Gary Tenner -- DA Davidson -- Analyst

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

Gregory Garrabrants -- President, Chief Executive Officer & Director

There are some commitments generally work as people get to participate in the waterfall and in some cases where essentially promising term to the extent that there is money in the waterfall. And then we're essentially terming out some of those, but the terms generally aren't too long. We can get a little bit more rate for that, but it's part of our liquidity planning process with respect to that. So yeah, there's not, but what's the longest deal, it's pretty short, right, let's say it is couple of years. Couple is opening still, but it is tied to -- we can pull it back if we need to. The default is the rate just gets adjusted and so that, the higher rate falls back. So we still even have the option to pull that money if we need to, as we, as we look at that. But Gary, we have more than 10 to 12 banks that we could allocate to and we're adding more, so part of the process depends on which banks are interested. It does take a while to set the into the system. But we do have flexibility on a daily basis to move money around to do that. But it does require partner banks that are willing to step up.

Gary Tenner -- DA Davidson -- Analyst

Okay, thank you. And then just to clarify on, let's talk about kind of the one-time costs associated with E Trade. I know that in the past, the way that you all highlight the acquisition-related costs in your Q, in your press release, includes always partially just kind of regular way amortization of intangibles, so the $2.8 million of acquisition related costs that are highlighted, how much of that is just ongoing amortization of intangibles versus actual non-recurrent cost?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

The bulk of it is amortizing intangibles. There was around 300,000 that was one-time costs.

Gary Tenner -- DA Davidson -- Analyst

So benefit of being on investment banker?

Operator

Our next question is from Tim Coffey with Janney. Please proceed.

Tim Coffey -- Janney -- Analyst

Thanks. Afternoon, everybody. Hey, Greg. I think in the queue, there is a line item about the biosecurity and margin lending by $900 million average balance, 3% yield, which is obviously greater than 20 basis points. I'm wondering, do you have any kind of visibility into those balances going forward?

Gregory Garrabrants -- President, Chief Executive Officer & Director

Yeah. I think that when people feel good about the markets, they tend to focus attention on maybe doing a little more borrowings. So we think that's a pretty sustainable level. Obviously some of that -- you see some of the stock borrow that's where we're lending stock and that has a different rate, that's more variable there, but I think that there is going to be over time. I don't think this year, this is going to be simply it's going to be market-driven by the customer base, which is slowly growing and it will be reflective of in general sort of demand for margin from other broker dealers. There is however a lot of opportunity because over time, we just have to make it happen. And it's interesting because AAS was actually part of E Trade Bank. They didn't do margin lending, they didn't at all. So there is a whole set of our IAEs with $25 billion of assets under custody with us that want to do margin lending, so the system right now doesn't accommodate that. So we are working on that. When that happens, we'll have to see how much demand there is. And then also through the platform, the ability to do one touch S block lending, quick margin from self-directed and other things like that is a part of the strategy. But it's not something that's going to be our fiscal 2022 impactful.

Tim Coffey -- Janney -- Analyst

Okay, got it. And on the rate on those, what that dependent on?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

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

Tim Coffey -- Janney -- Analyst

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

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Yeah, I think around where we're at this quarter, the kind of the average balance that we had this quarter is probably an annual, it will flux, then can flux by $100 million and $200 million depending on deposit inflows and outflows and just the timing of some of those. They don't always come in exactly one we expect them to come in, they may get delayed by 15 to 30 days or they may come in earlier 15 to 30 days. So that's where you'll see that that flux. But this quarter is probably a reasonable average give or take a couple of hundred million, that will be..

Gregory Garrabrants -- President, Chief Executive Officer & Director

We have I think about 5% on balance sheet liquidity, but at that 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 are off balance sheet, so we don't count those of course, but it's there as a component of available liquidity.

Tim Coffey -- Janney -- Analyst

Okay and sticking on that point with the maturities in the CD portfolio in the next six months and I see more over the next 12 months. So is there a real strong appetite take hold on the some of those at lower rates? Or do you feel like you're liquidity quickly [indiscerible]

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Sure. We basically do, I mean we renew about a third of those and they are much lower rates and people are just sticking because there's not a lot of other places to go things to do. We have conversations with each person to the extent that it's -- they're interested in doing that to talk about other options for them. And so, yes, so there is a percentage that gets maintained. But we don't have frankly the highest rates in the market. So if somebody is very, very rate sensitive and focus, there going to be able to find something more, little more suited to them. But we're competitive, so we do retain a portion.

Tim Coffey -- Janney -- Analyst

Great. Well, I appreciate. Those are all my questions. Thank you.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Thank you.

Operator

Our next question is from David Chevron with Wedbush Securities. Please proceed.

David Chevron -- Wedbush Securities -- Analyst

Hi, thanks for taking the question. I had a question on products and development, because it seems like you're well on your way to building a super app you can do banking and savings, self-directed trading and investments peer to peer payments, crypto within the next six months. The question is, are there any features missing for you guys to compete with shapes, squares, cash up? Is that something you we've been aspire to?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Well. I think, yeah, to the extent that, I mean you talk about square like square cash out for example, I would say that I think frankly, we have a lot of things we do that are much better, right. I mean, by the time we're done with what we're doing, you all have small-business accounts that can sit right next to your personal account open through a universal enrollment, you'll be able to have your crypto, trading, your securities, your robo advisor, and I think we're going to build -- I think we'll be able to build a much more robust -- for example, let's just talk about robo, for example. So with what we have in AAS, they have a model management store, so most robots are really simplistic about what models you can choose. While our robot will be built into AAS store, so the client will have a lot more model choices that they could use in order to manage their money through the robot side. So yeah, I think we have all the pieces we need to do that. And then there's just development to make that happen. And then, EDP 2.0 has a planning tab that essentially work side, works through a variety of features and functionality to help people plan their finances, market products based on specific data algorithms that would be most suited to those clients and things like that. So yeah, I think the other thing that I think the interesting thing for companies like square as they are not unburden from making money at any particular time. They have very small accounts often and they -- but they do have a lot of them, right. So I think our app should be definitely much more functional than theirs frankly and much more robust when we're done.

David Chevron -- Wedbush Securities -- Analyst

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

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

This quarter is roughly where we usually have around a 29% tax rate. That's where we have generally been at over the last few years. There has 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 is best things of the awards, this relates is they accounting nuance that they builds rather than we're used to go through equity, they've built it into the tax rate, a few years ago. ISU 2016 0.9, might be somewhat familiar with hearing that on the street before. So that's really what can shifts that rate, generally 29 has been right around where we expect to be.

David Chevron -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Operator

And our final question is from Edward Hemmelgarn from Shaker Investments. Please proceed.

Edward Hemmelgarn -- Shaker Investments -- Analyst

Yeah. I just got one quick question. You talked about the expenses from clearing being another month. I would expect that the clearing revenue to go up by equivalent?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Yes, that's correct.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Yes, of course, yes.

Edward Hemmelgarn -- Shaker Investments -- Analyst

And one more, you were talking about -- just to with the follow up, with the Apple will allow one to do all the things and more that square does, how would you go about mark to a broader audience?

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Well, I mean remember the squares primary business is essentially merchant acquiring, right, so and that business is a great business. I mean, that's a great amazing business Cash app is sort of I don't want to speak for them. I mean this used as an example, but that's more of a side business that is not related to most of what the core of what they do, I don't even know if they disclose that revenue on that business. I mean, frankly we clear for them, but we clear for cash app actually. And so, we're familiar with what volumes and things like that. But anyway, I think that obviously they have this debt is massive base of consumers, because they have this amazing merchant acquiring business. I think the answer to this more broadly is that they really are two primary mechanisms that we will be market, one will be by trying to be a great integrated service provider for RAs and DDs, who need an integrated product set from a technological perspective. So that clearing and custody businesses are in accumulation of customers that need services. Those services are non-competitive, because we're not running our own RIA network. We're not running our own broker network and to the extent that the robot gets of any size. We're going to refer those clients out via referral arrangements to our RIA network. So there is third party acquisition of customers, and then there's first party acquisition of customers, which is through our direct marketing cross selling and all the things that we do now to get customers. And so I think the differential is right is if you're selling a customer a checking account, you can pay a certain amount of money on the cost of that acquisition, if you're selling that customer loans and checking accounts and securities products, then the cost of acquisition can be reflective of a broader product set and allow more marketing to be done and a greater efficiency when you're measuring that lifetime value and cost of acquisition. So I think that's really the trick to make that happen. And then you can also balance out which particular product has the lowest customer acquisition costs in which one has the best cross-sell and you run the models on that and that becomes what the consumer acquisition looks like.

Edward Hemmelgarn -- Shaker Investments -- Analyst

Okay. And great execution of acquisition. Thank you.

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Thanks, Ed.

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.

Gregory Garrabrants -- President, Chief Executive Officer & Director

Thank you, everyone. We'll talk to you on our next quarter. And Andy will still be hang it out there, but we do most of the talking at age of to part next time. Thanks everybody. Bye.

Operator

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

Duration: 61 minutes

Call participants:

Johnny Y. Lai -- Vice President, Corporate Development & Investor Relations

Gregory Garrabrants -- President, Chief Executive Officer & Director

Andrew J. Micheletti -- Executive Vice President-Finance

Derrick K. Walsh -- Executive VP, Chief Financial & Accounting Officer

Michael Perito -- KBW -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Steve Moss -- B. Riley Securities -- Analyst

Gary Tenner -- DA Davidson -- Analyst

Tim Coffey -- Janney -- Analyst

David Chevron -- Wedbush Securities -- Analyst

Edward Hemmelgarn -- Shaker Investments -- Analyst

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