Greetings. Welcome to the Axos Financial, Inc. Q3 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Senior Vice President of Corporate Development and Investor Relations, Johnny Lai. You may begin.
Thanks, Kyle. Good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s third quarter 2022 financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants, and Executive Vice President, Chief Financial Officer, Derrick Walsh, and Executive Vice President of Finance, Andy Micheletti. Greg and Derrick will review and comment on the financial and operational results for the three and nine months ended March 31st, 2022, and they 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 a safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the investor relations section of the company's website, located at axosfinancial.com, for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. All of these documents can be found on the Axos Financial website. With that, I would like to turn the call over to Greg for his opening remarks.
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 third quarter of fiscal year 2022, ended March 31st, 2022. I thank you for your interest in Axos Financial and Axos Bank. We had an excellent quarter with double-digit growth in loan originations, net income, book value per share, and earnings per share for the third consecutive quarter. Our strong results were broad-based, with net interest margins exceeding the high end of our target and balanced net interest income and fee income growth across our consumer and banking segments. Axos Securities increased client accounts and deposit balances despite a challenging quarter for the industry due to headwinds caused by macroeconomic and geopolitical turmoil. Axos reported third quarter net income of $61.8 million for the three months ended March 31st, 2022.
Earnings per diluted share of $1.02, representing year-over-year growth of 15.3% and 14.6% respectively. Our book value per share was $26.58 at March 31st, 2022, up 17% from March 31st, 2021. The highlights for this quarter include ending loan balances of $13.1 billion, up 3.9% linked quarter or 15.4% annualized. Strong early loan originations in our auto, commercial real estate, and various C&I lending loan types more than offset an expected decline in our single-family mortgage warehouse loans. Excluding single-family jumbo and single-family mortgage warehouse, ending loan balances increased by 9.5% linked quarter.
Net interest margin was 4.02% for the third quarter, down from 4.10 in the quarter ended December 31, 2021, and up 6 basis points from 3.96 in the quarter ended March 31, 2021. Net interest margin for the banking business was 4.21% compared to 4.3% in the quarter ended December 31st, 2021, and 4.23% in the quarter ended March 31st, 2021. Counter to most of our peers, we have successfully maintained a strong net interest margin and generated loan growth toward the higher end of our annual target through the first nine months of fiscal 2022. We continue to make steady improvements in our funding mix, with non-interest-bearing deposits increasing by approximately $287.8 million from December 31st, 2021.
Non-interest-bearing deposits represent approximately 33% of our total deposits at March 31st, 2022, a significant improvement from 23% in the corresponding period a year ago. The steady growth of non-interest-bearing deposits positions us well in a rising rate environment. Our efficiency ratio for the three months ended March 31st, 2022, was 51.21% compared to 48.78% in the second quarter of 2022. The efficiency ratio for the banking business segment was 39.79% for the third quarter of 2022 versus 39.39% in the second quarter of 2022. We achieved positive operating leverage in our banking business as a result of strong net interest income growth year over year and continuous focus on managing our operating costs.
Diluted earnings per share were $1.02, up 15% from $0.89 in the year ago quarter. Strong growth in our pre-tax, pre-provision income more than offset a $1.8 million or 67% year-over-year increase in our provision for loan losses. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 15.89% in the third quarter and a return on assets of 1.59%. Capital levels remain strong with a Tier 1 leverage ratio of 10.51% at the bank and 9.43% at the holding company, both well above our regulatory requirements. In February, we raised $150 million of subordinated debt at the holding company to further augment our capital.
Our credit quality remains strong, with net annualized charge-offs to average loans of 5 basis points versus 3 basis points in the third quarter of fiscal 2021. We added $4.5 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was $143 million at March 31st, 2022, representing 22 times our annualized net charge-off and 1.1% over ending total loans. Total loan originations for the third quarter ended March 31st, 2022, were $2.5 billion, up 57% from $1.6 billion in the year ago period. Loan originations for investment were approximately $2.4 billion, an increase of 99% from the corresponding quarter a year ago.
Q3 2022 originations were as follows: $136 million of single-family agency gain on sale production, $378 million of single-family jumbo portfolio production, $194 million of multifamily production, $147 million of commercial real estate production, $105 million of auto and unsecured consumer loan production, and $1.7 billion of C&I loan production, resulting in a net increase in ending C&I loan balances of $584 million. We generated $5.7 million of mortgage banking income compared to $4.6 million in the quarter ended December 31st, 2021, and $9 million in the corresponding quarter last year when refinancing activity was near record high levels.
Originations decreased by approximately 24% linked quarter to $136 million, while margins were down due to a normalization in single-family mortgage gain on sale across the industry. Our MSR valuations generated a $3.1 million gain this quarter, benefiting from the rapid increase in mortgage rates since the end of 2021. We anticipate lower mortgage banking gain on sale in the foreseeable future, partially offset by MSR valuation gains as rising interest rates reduce demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $59 million at 4/25/2022. Our jumbo single-family mortgage business appears to have stabilized. We generated $378 million of loan production offsetting elevated prepayments. Ending loan balances at March 31st, 2021, were reduced by $58 million as a result of prime jumbo loans we sold during the quarter.
With this location in the secondary market for jumbo single-family mortgages, we expect to gain market share while repricing our loan rates up. Our jumbo single-family mortgage pipeline was approximately $761 million at 4/25/2022. C&I lending had another tremendous quarter. Loan originations were $1.7 billion, reflecting strong growth across commercial specialty real estate, asset-backed lending, and construction lending. Our strong relationships, knowledge in structuring, and track record of execution have resulted in steady expansion of loan production and net balances. Demand remains strong across loan types and geographies with a backlog of approximately $886 million at 4/25/2022. We have positive momentum across multiple C&I lending verticals and remain confident that we'll be able to sustain strong loan growth in our net balances while maintaining our credit and loan yield standards.
Ending balances in our mortgage warehouse portfolio were $423 million, down $172 million from $595 million at December 31st, 2021. We continue to look for opportunistic ways to grow our single-family warehouse business with existing and new customers. We continue to focus on generating good returns while maintaining an efficient operating structure. Our core banking business continues to generate strong and positive operating leverage. Our business banking efficiency ratio was 39.79% and 39.79% for the three and nine months ended 3/31/2022. We have a series of operational efficiencies across each business unit that will result in cost savings as we grow and our securities business becomes more mature.
We continue to incur incremental expenses related to the growth initiatives such as crypto trading, tech infrastructure upgrades for the bank and our securities business, and new products and feature enhancements in consumer and commercial banking. We'll be carefully balancing investments in the future while maintaining best-in-class operating efficiency ratios at the bank. We grew deposits by 3.8% linked quarter to $12.7 billion, with broad-based growth across our small business, commercial, and securities deposits. Checking and savings accounts, representing 92% of total deposits at the end of the quarter, grew at a faster clip, increasing by 6.5% linked quarter. Consumer deposits, representing half of our total deposits at 3/31/2022, are comprised of consumer direct checking, savings, and money market accounts.
The weighted average demand in savings deposits were 22 basis points of cost at March 31st, 2022, compared to 38 basis points of cost as of March 31st, 2022. We strategically repriced our consumer deposits nine months ago in advance of closing the AAS acquisition. Since then, we've focused on increasing the share of wallet with existing consumer banking clients and on adding new customer deposit relationships through affiliate marketing and cross-sell. Our small business banking and cash and treasury management businesses continue to generate solid deposit growth, providing granular low-cost deposits to fund our organic loan growth. Average non-interest-bearing deposits were $4.2 billion at March 31st, 2022, up from $3.7 billion at December 31st, 2021. Growth in non-interest-bearing deposits came from securities and commercial deposit businesses.
Axos Clearing continues to generate low-cost deposits that we're able to put on or off-balance sheet. Total client deposits from our custody and clearing businesses were approximately $2.9 billion at March 31st, 2022, as advisors increased their cash holdings as a percentage of client assets in reaction to elevated stock market volatility. We kept $2.1 billion of the $2.9 billion. Ability to keep these low-cost deposits off balance sheet and generate fee income from other banks or on Axos Bank's balance sheet to support our loan growth will be an even bigger advantage when interest rates rise and competition for deposits increase. Our diverse lending and deposit businesses and modest securities portfolio positions us well for a rising interest rate environment.
Our securities book with approximately $230 million in ending balances is less than 2% of total assets at March 31st, 2022. About half of our securities are floating rate, and the average duration of our securities portfolio is only 2.4 years. Our single-family jumbo and multifamily loan portfolio with $3.5 billion and $2.1 billion of loan principal outstanding at March 31st, 2022, representing approximately 27% and 16% of our total loans outstanding, is much lower than what it was in the prior rate cycle. These loans are 5/1 ARMs and adjust after five years. With the exception of prime jumbo mortgages, we originated and less than $50 million of agency mortgages we purchased last quarter for the CRA purposes, we have no other 30-year fixed-rate jumbo single-family or multifamily loans on our balance sheet.
The weighted average duration of the jumbo single-family mortgages and multifamily mortgages on our balance sheet were approximately three and four years, respectively. Note rates on loans originated in our single-family jumbo, multifamily, and C&I loans were 4.12%, 4.24%, and 4.86% respectively in the three months ended March 31st, 2022, up 18 basis points, down 2 basis points, and up 31 basis points from the prior quarter. We raised rates for our newly originated 5/1 jumbo single-family and multifamily loans in April, and demand remained solid. C&I loans have been the biggest contributor to our overall loan growth over the past several years. For the quarter ended March 31st, 2022, C&I loans increased by $584 million linked quarter to $6.1 billion, representing nearly half of our gross loans outstanding.
With the exception of $107 million of equipment finance loans, all of our other C&I loans are adjustable rate. 84% of our variable rate C&I loans adjust to LIBOR, and the other 16 adjust to SOFR, Ameribor, or other indexes. At March 31st, 2022, approximately 24% of our C&I loans are above their floor, and 73% of our C&I loans will be above their floor with another 100 basis points up, and 97% will be above their floor at 200 basis points up. While competition for well-secured C&I loans from high-quality borrowers remain elevated, we expect upward pricing on new loans as rates continue to rise, putting further pressure on non-bank competitors.
We have transformed our deposit franchise since the last uprate cycle and feel good about our ability to fund our robust loan growth with a variety of deposits from our consumer commercial banking and securities businesses. Our core Axos consumer checking accounts continue to offer tremendous value with a state-of-the-art, easy-to-use mobile app and no fees. We have made further progress cross-selling consumer checking and savings accounts to our agency mortgage and jumbo mortgage customers with an increasing percentage of our new customers opting for direct deposit and Bill Pay with our deposit products. Our cash and treasury management teams are winning operating accounts by offering superior customer service and API integrations for middle-market clients that are already transacting digitally without the need for a branch location. Our specialty deposit groups, including HOA and Axos Fiduciary Services, continue to add sticky no-cost deposits.
We have additional funding flexibility with our $2.9 billion clearing and custody deposits. With approximately $0.8 billion of the $2.9 billion from our securities businesses are held at partner banks, earning an average rate of 45 basis points. Approximately 70% of the $800 million of deposits at partner banks reprice immediately to changes in Fed funds, while another 30% reprice within three months. While we expect deposit betas to rise as competition for deposits increases in the back half of calendar 2022 and beyond, our deposit betas will be meaningfully lower than they were in the prior Fed tightening cycle due to the granularity and diversity of our tech-enabled customer-centric deposit services model. Our credit quality remains healthy.
Net charge-offs to total loans remain low, and our asset-based low LTV lending makes us extremely comfortable about our credit outlook even in adverse economic scenarios. Non-performing assets to total assets was 87 basis points for the quarter ended March 31st, 2022, a decrease from 94 basis points for the quarter ended December 31st, 2021. Of our non-performing loans, 81.7% are single-family first mortgages where we've had historically very low realized losses. Of our non-performing single-family mortgages at March 31st, 2022, approximately 93.6% had an estimated current loan to value at or below 70%, and approximately 98.8% 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.
Our loan loss provision this quarter was $4.5 million, which is up by half a million dollars higher from the last quarter and up $1.8 million year-over-year. The increase in loan loss provision primarily reflects changes in loan mix, with C&I and auto accounting for a greater percentage of our total loans. Our total allowance for loan loss was $143.4 million at March 31st, 2022. This is approximately 1.1% of our total loans and approximately 22 times our total annualized net charge-offs in the three months ended March 31st, 2022.
Our loan pipeline remains solid with approximately $2.2 billion of consolidated loans in our pipeline at April 25th, 2022, consisting of $59 million of single-family agency gain-on-sale mortgages, $761 million of jumbo single-family mortgages, $402 million of multifamily and small balance commercial real estate term loans, $886 million of C&I and commercial specialty real estate loans, and $89 million of auto and consumer unsecured loans. With healthy demand from loans across multiple loan categories and growth above our target range for the first nine months of fiscal 2022, we remain confident in achieving the higher end of our low teens loan growth target in fiscal 2022. We are making good progress with the integration of Axos Advisor Services, the RIA custody business we acquired from Morgan Stanley approximately eight months ago.
Overall profitability for Axos Securities in March 2022 were negatively impacted by lower average margin lending balances and lower transaction-based revenue at Axos Clearing due to industry-wide declines in trading volume. We see meaningful opportunities to continue to improve the profitability of our security business over time as we consolidate systems, automate manual processes, eliminate redundant workflows, and transition to a more efficient, more scalable tech stack. We successfully converted Axos Advisor Services from JPMorgan to Axos Clearing this quarter. This will provide us with more flexibility and reduce operating costs by approximately $1 million per year. We have dozens of operational efficiency initiatives for our clearing and custody businesses that are in various phases of implementation. We remain on track to generate slight accretion for the AAS acquisition in fiscal 2022, with or without the benefit of future Fed funds rate increases.
Our capital ratios remain strong with Tier 1 leverage to adjusted assets of 9.43 at the holding company and 10.51 at Axos Bank. We have access to approximately $1.8 billion of FHLB borrowing, $1.6 billion in excess of the $154 million we had outstanding at the end of the third quarter. We took advantage of favorable market conditions to augment our capital through a $150 million subordinated debt raise in February. Furthermore, we had $2.8 billion of liquidity available at the Fed discount window as of March 31st, 2022. Our capital priorities remain unchanged, with a focus on using our capital to support organic loan growth, reinvest in our existing and emerging businesses, and deploy excess capital for opportunistic buybacks and accretive M&A.
Our securities business had a mixed quarter with higher client deposit balances and lower securities and margin lending activity as broker-dealer clients reduced risk. Broker-dealer fee income increased 62.6% in the third 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 and non-cash depreciation and amortization costs, Axos Clearing generated $2.1 million of pre-tax income for the quarter ended March 31st, 2022. Axos Clearing ended the third quarter of 2022 with approximately $36 billion of assets under custody and assets under administration, including $25 billion of assets under administration at AAS and $11 billion of assets under administration in the clearing business. Total client relationships and underlying accounts were up, and client assets were down slightly due to the decline in equity markets overall.
Transaction-based fees for Axos Clearing in the third quarter of 2022 were negatively impacted by lower transaction volumes from our introducing broker-dealers and reduced securities lending activity. We completed the RIA custody acquisition approximately 8 months ago, and we're making good progress on a variety of tactical and strategic initiatives. With a self-clearing conversion behind us, we have pivoted our focus to growing new assets for existing and new clients. As a non-competitive custodian with a high-touch service-centric model and a strong capital base, we are in active communications with dozens of RIA firms about adding Axos as their custodian. Second, we're expanding our capabilities and investing in the necessary infrastructure to add banking, lending, and other services to RIAs and broker-dealers and their end clients.
In conversations with advisors large and small, we have heard that integrated banking, tech integration into third-party service providers, succession or M&A financing, or mortgage lending for advisors' wealth management clients are important value-added services that would benefit their practice and their end investor clients. We are expanding the number of relationships we have with third parties to introduce RIAs and advisors who are interested in using Axos for their clearing, custody, and banking needs. One last important strategic initiative for Axos Securities is upgrading our core clearing infrastructure to improve our flexibility and scalability. It's a multi-pronged, multi-year process that will generate incremental benefits over each stage of implementation. While market volatility and turmoil may adversely impact our business in the short term, they present tremendous opportunities for our securities business as well as those of our clients.
As clients reassess their needs from a product and technology perspective, we see exciting opportunities to gain market share by becoming their strategic partner for banking and security services. We look forward to sharing more details at our Investor Day in Centennial, Colorado, next week on initiatives we have underway and plan to implement over the next 12-18 months to help Axos and our clients grow and scale. We've successfully overcome the loss of H&R Block and other Durbin-related revenue and navigated through periods of competitor pressure in our jumbo single-family and multifamily businesses by building and scaling our commercial bank and securities business. Our ability to generate double-digit loan growth and maintain a 4% net interest margin is a testament to the diversity and resiliency of our business model.
We continue to invest in initiatives such as our Universal Digital Bank 2.0, retail crypto trading, commercial real-time payments, and a modern core for Axos Clearing that will make us more competitive from a cost, product, technology, and scale perspective. Not only are these initiatives will generate short-term benefits, but they'll help us become even more differentiated and competitive with Fintech and other non-bank competitors. Our strong profitability, excess capital, and ability to be nimble position us well to take advantage of market dislocations. We'll aggressively deploy resources when we see these opportunities to accelerate our growth. Now I'll turn the call over to Derrick, who will provide additional details on the quarter.
Thanks, Greg. To begin, 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 and our SEC filings for additional details. Turning to our quarterly performance, I'll start by covering some movements in our non-interest income.
Overall non-interest income for Q3 fiscal 2022 was consistent with Q2 fiscal 2022 when removing the annual fees of $1.9 million for certain bank IRA products recognized once per year in the December quarter, and up $4.9 million from Q3 fiscal 2021, primarily due to the addition of custody and mutual fund fees from our AAS division, which was acquired this past summer. Greg highlighted the $3.1 million benefit recognized this quarter from our MSR valuation that we do not expect to recur next quarter for mortgage banking, as well as the off-balance sheet sweep deposit fee income that generally tracks interest rate movements.
Next, I'll highlight that our bank efficiency ratio was 39.79% for the three months ended March 31, 2022, significantly improved when compared to 42.33% for the three months ended March 31st, 2021, and a small change when compared to 39.39% for the last quarter ended December 31st, 2021. The strong efficiency ratio is a reflection of loan growth, prudent expense management, and our scalable business model. Our non-interest expense for the quarter ended March 2022 was $86.8 million, up $0.8 million from the linked quarter ended December 2021, and up $6 million from the quarter ended March 31st, 2021.
The primary reason behind the increase in the linked quarter operating expenses is due to $3.1 million increase in salaries and related costs from $40 million in the quarter ended December 2021 to $43.1 million in the quarter ended March 2022. Over $2 million of the increase is due to the reset of the calendar year and related payroll taxes and 401(k) contributions. Salaries and related costs increased $4.6 million from $38.5 million in the quarter ended March 31, 2021 to $43.1 million in the quarter ended March 31, 2022, which is due to increased staffing levels, including the addition of the AAS personnel. Lastly, I'd like to touch on capital.
Our risk-weighted capital ratios have been declining in past periods due to shifts in our loan growth as backward-looking loan origination opportunities moved away from our 50% risk-weighted single-family assets and towards 100% risk-weighted commercial assets. We closely monitor our capital levels in conjunction with market data and various other key performance indicators, including our return on average equity. This past quarter, we determined the timing was appropriate for a regulatory capital raise and successfully completed a $150 million subordinated debt raise at a 4% interest rate just ahead of the March Fed rate increase. As a result, our total risk-weighted capital ratio at Axos Financial increased 114 basis points from 12.16% at December 31, 2021, to 13.30% at March 31, 2022.
We contributed a portion of the capital to Axos Bank, and its total capital ratio increased from 11.73% at December 31, 2021, to 12.24% at March 31, 2022. With that, I'll turn the call back over to Johnny.
Thanks, Derrick. Kyle, we're ready to take questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question is from David Feaster with Raymond James. Please proceed with your question.
Hey, good afternoon, everybody.
Hi, David.
Good afternoon.
You guys have been able to take a ton of expenses out of that AAS business. I would have thought most of the savings would have been realized just given what you guys have done, but it sounds like there's still more to come. Just curious, you know, the scalability of this business and the expense growth that we might see as you continue to onboard new clients and activity increases. Just, you know, how you think about what a good efficiency ratio for this business is as you continue to operate that.
Right. Well, first of all, thank you. I think you're right. The team's done a good job working on process improvement and increasing its efficiency. There is still so much opportunity. You know, we've been at it for a long time at the bank.
Of opportunity in clearing, and there's a lot of opportunity in custody as well. I think with respect to what the efficiency should look like over the longer term, it's bound up a little bit, and I'll try to disaggregate it with respect to interest rates. If you just take the securities business as a whole and you have $3 billion and you have a 100 basis point increase, let's say that the transfer pricing and whatever, you know, obviously some of that's off balance sheet, some of that's on, and you look at that and you do that's, you know, $30 million of extra pre-tax income that goes to that business, obviously impacting the efficiency ratio. That's not really the way I like to look at it.
What I like to say is that I think, you know, we should be able to target having positive income, assuming that the deposits don't generate anything. We actually have some interesting opportunities. It's gonna take a little while, but we're working on a modern core project that could take $6 million-$7 million out of the collective securities business on a cost side. It'll probably take two-three years to get there fully, and it'll require some investments, but that'll be an ongoing number. There's really a lot of benefit. It's gonna take a little time though because it's a lot of different elements together. It's training clients to interact with us differently using portals and automated processes.
It's some system related work that's very manual. It really is sort of a grinded out approach to that kind of stuff. Yeah, there's a lot of opportunity in that business to take out cost and grow. I think there is a scalability to it as well, once that sort of stuff gets done, then you can add a lot more clients without having commensurate levels of cost. You know, I think without having to kind of.
I don't know, Derrick, if you have a different answer, but putting it on paper, the issue really is this business is so interest rate dependent that to get the efficiency ratio, you almost have to peg an efficiency ratio at different levels of interest rates.
Right. You'd have to say that as of today, that the efficiency ratio won't be as good as it would be up 200 basis points.
Right.
Regardless, to your point, we're carving out a lot of expenses there and have a lot of strategic plans to make the business much more efficient.
There's a lot of manual stuff. Our tech stack is just that we've been able to implement is so useful for those businesses, and that, you know, it's really exciting and it's something that, you know, folks are really focused on.
Yeah. No, that is. That's helpful color. Then just curious on the conversation with new clients within the securities business. How are they going? Where are your clients seeing, you know, AAS as, you know, what are they really driving as the key differentiator between y'all and the competitors. Then just, does the volatility in the market create a catalyst for some of these RIAs to make a change, or would that make some of them stickier? I was just curious how market volatility might play into an opportunity for you to accelerate growth.
Yeah. I think from a standpoint of catalyst to make change, I think the TD acquisition is really weighing heavily on folks because a lot of the advisors are multi-custodial. They sort of wanted some choices with respect to their custodial relationships, and then when TD gets purchased, that then really pushes them into a behemoth. There's really not a lot of firms that are focused on the smaller firms that grow. If you look at the history of AAS, they often brought in smaller firms that over time grew and the businesses grew together, which is why sort of the full facilitation of all those financial products is helpful to have those groups grow.
I think that the key differentiator right now is that the system itself allows an RIA to, instead of having a lot of tech integrations for their office, where they have to have performance reporting and they're trying to glue all this stuff together, it comes as an out-of-the-box package that you can run your full business on and do it very effectively. There's other kind of interesting sort of sub-elements that some folks are really excited about. You can run multiple models in a single account. There's a bunch of that kind of functionality that that is unique and others haven't caught up in the industry. I think there's that.
Obviously also really the service levels that a smaller advisor is gonna be able to get relative to having to go through what they have to go through with Schwab when Schwab is just so big and it just naturally the ability to concentrate on every client in that business is difficult. The good part about all of these businesses is that it's hard to lose clients because it's a real pain in the butt to switch. You've got to do repapering, all these kinds of things . The tougher part is it is a big deal for someone to switch. They have to do a lot of work. It's these sales cycles tend to be long.
There's a tech roadmap that needs to be implemented in AAS, and I think it'll be important there. To be able to serve the Fintech market over time. That business has historically been dominated by others in the industry, and it's partly because of the cost structure that we have, including our core cost. We have a very cool plan for that's gonna make us very competitive there. It's gonna take a bit to get there, maybe 18 months, but it will definitely put us in a really good place there. That'll be an area of potential. As I think...
You know, I think the interesting thing about the business is that you see folks that are traditional broker becoming hybrid, and you also see, obviously, the rise of Fintechs, who want not only securities APIs, they also want banking APIs too. That's a position that most, I don't know if there's anybody else who's in a position to deliver exactly that way. You know, those are some of the things we're working on right now.
That's exciting. That's great, Color. I appreciate it. Maybe just shifting more broadly to the banking side to just the competitive landscape and what you're seeing. Obviously, pricing is competitive. Just curious how new loan yields are trending. I know you talked about being more willing to compete on pricing to drive growth. Sounds like you're seeing pricing increases, at least on the mortgage front, like you talked about. Just curious, you know, how new loan yields are trending the competitive landscape, and whether you're starting to see more aggressiveness in from competitors just in terms of standards or structure or terms or anything.
Well, on the single-family side, the disruption in the securitization market, which has been significant, it has been really helpful. We actually think we're pretty certain we'll be back to growing the single-family book, certainly this quarter, probably nicely. And with having essentially taken rates up significantly. You know, I think the new originations are gonna be in the mid fives, let's say, in the first fiscal quarter of fiscal year 2023, so that June to September quarter. We that's a significant increase. You know, we've tightened up standards a bit. I think the securitization market's kinda kicking back on some of the stuff that has been coming out.
I mean, it was rough competing with those conduits and those sorts of things, but you've just seen all of those conduits pull back. There is disruption there, and that's definitely benefiting us. I think we're excited to be back to some single-family growth, from having really had to, you know, watch our competitive position deteriorate, you know, over the last couple years due to where the securitization market was and where 30-year rates were. There just wasn't really enough of a difference between a 30-year and a five-year. We never wanted to go there. Ultimately, it made a lot of sense. We dabbled our toe in it. We started a conduit, and we had about $60 million of that 30-year low-rate fixed paper. We were strategically looking to sell it.
We ended up getting out at a gain, which was great because, you know, frankly, those loans would be worth a lot less now, because they were the only real 30-year stuff on the balance sheet. I think on the other side, we feel good about our ability to reprice. I think we've done a lot to add capacity across so many lines that we have the ability to say no to loans. I think we're gonna be. You know, I don't wanna predict that our net interest margin will go up because I don't think that's the case, but I definitely don't see any kind of material deterioration as a result of the rates upside. I think we're.
You know, we have that gap, a little bit of a gap in some of the four rates. I think it was. What was it on the 50%, Johnny?
Forty-three.
43% of our variable rate loans will be adjustable assuming the Fed increases 50 basis points, 43%, and then it's in the 70s with another one. There's a little gap before we get a one-for-one on that side, but not too bad. Given the prepays on the hybrid side, I think we're gonna be. If you look at what happened in the last rate cycle and have the team looking at it, I mean, we were okay, and we're gonna be okay here too. With, I think, good loan growth.
That's helpful. That's great, color. Thank you all. Look forward to seeing you all next week at the Analyst Day.
Thank you.
Thanks, David.
Our next question is from Andrew Liesch with Piper Sandler. Please proceed with your question.
Hey, guys. Good afternoon.
Hey, Andrew.
Good afternoon.
Thanks for the commentary there on the jumbo outlook. On the commercial side, you know, it seems like things are firing on all cylinders. I guess the question is, what can disrupt this momentum right now? The loan growth seems like it should beat your guidance. What can disrupt that?
You know, look, things are looking pretty good on the lending side. You know, obviously with single-family coming back as a cylinder, I think that's good for the engine. It's also good, obviously, for risk-based capital, et cetera. You know, look, I guess what's interesting about this is maybe it's a question of how the economy reacts to aggregate loan demand and how that sort of plays out across what other banks do with respect to loan repricing, right? You know, we are seeing some positive signs where banks are getting ahead of stuff, that's good.
You know, we obviously wanna be really cautious about duration here, even though, you know, some will start to argue that stuff will roll over after, you know, maybe it's, you know, wherever the Fed gets to in the next year. I think it's probably more about aggregate economics and what aggregate demand is with respect to how the economy takes interest rates, right? I mean, we've really effectively for a really long time have been in a very low-interest rate environment, and I think that's something we just have to look at. You know, I think it's good. I think things on the loan growth side are looking pretty good.
Good. Just a quick question on credit quality. Are you seeing anything concerning out there at all? The numbers are great, but does anything concern you right now?
No, there's nothing in our portfolio specifically that concerns me, but I think every lender should always just be concerned. It's a disposition, right? I think that. Look, we've had a lot of years of lowering of cap rates based on low interest rates, and so that is going to change, and it's gonna be interesting how that flows through valuations. I think we're in the right place with respect to that, but I just think that, you know, continued caution is warranted. Obviously, you've had very aggressive single family home appreciation. Our loan to values are low, but that home appreciation has also been quite high. You always have to ask your questions about how deep any individual market is with respect to how many transactions are occurring with respect to where prices are.
You know, obviously, I think it would be better for lenders if home price started to moderate, at least from a growth perspective or stabilize because there's just been a lot of that. You know, those are all things that are there. I think, you know, I think, look, we're cautious about our loan to values. We're always focused on that. I do think assets though, do have a potential to reprice on higher rates.
Got it. Thanks for taking the questions. I'll step back.
Thank you.
Thank you. Our next question is from Gary Tenner with D.A. Davidson. Please proceed with your question.
Thanks. Good afternoon.
Hey, Gary.
Hey, I just wanna ask a clarifying question on the securities segment. I think, Greg, you had mentioned a process that will lower annual, I think, expenses by about $1 million. Did I hear that correctly? Could you just state again what that was?
Yeah. That was the JPMorgan conversion. When we brought AAS over, as a reminder, part of the deal of winning that bid was we closed that deal in a matter of four months, or a little less than four months. With that, we brought over their clearing firm, JPMorgan. We have now completed the conversion from JPMorgan to self-clearing for the AAS side of the business. That's expected to save approximately $1 million pre-tax, going forward. That was completed at the end of March.
Okay, great. In terms of the fees on the sweep deposits, what's the threshold or is there an upward threshold to where those, you know, the interest on those ultimately gets shared with the client? Yeah, I know the initial few hikes, the benefits generally accrue to the bank, but what's the cutoff to where that's not the case?
There's no direct kind of number, but usually as you start getting pretty significant kinda triple digit basis point movements that you will start to see some, but even that is on the smaller side. We don't expect especially early on here any significant beta really any beta as rates move up. If we start getting into your 200, 300, 400 basis points type of upward space, that it might start to become a small amounts, but it's still not going to be overly significant, and it's going to be dependent on negotiation to some degree with various customers and the level that they bring to us, right?
'Cause certainly one that can bring $200 million of deposits is different than one that can bring $2 million of deposits.
Yeah, look, I think partially this is all related to I mean, we would have raised pricing, frankly, in AAS if it wasn't for this. They E*TRADE did a you know. Well, I'll just say this. They you know they took a business that was making, the first time we looked at it, $25 million. It wasn't a great environment. They you know in 18 months, they made it lose $5 million, right? They did this through a lot of mechanisms, but one of them was through really hurting pricing discipline in a variety of ways that's not worth detailing. This is just a. We need to be paid for our services, so you know the pricing is probably a little low for what we're providing the clients.
You know, with the overall change in interest rate environment, it's sort of there. This is not. This is cash that has to be there for, you know, the levels of investment in securities. This is not, you know, the goal of providing savings accounts for people. This is part of the way the business works. You know, the deal is that we bear lower profitability and lower rates, and we get higher profitability and higher rates. If that stops becoming the deal, then we have to raise fees and lower rates.
Okay. The prior question kind of talked to this a little bit, but Greg, in terms of the construction business, I mean, that's been driving a lot of growth, you know, drove a big chunk of the industry growth this quarter. As you just think about higher rates and looking at projects, are you seeing anything that gives you pause as kind of, you know, your team models out real estate valuations towards the end of projects timelines? Is there anything that, you know, maybe doesn't look like it would cash flow as well? I guess the question is, are you getting more or have you gotten any more conservative, or are you seeing things that maybe would've fitted better, you know, at a zero rate environment that at 2.50 might not?
Yeah. No, not really with respect to that. I mean, we're in very low leverage positions, you know, sub 45% on these loans. Are certainly the type of rate increases that would have to have for the stabilization of the buildings not to be able to get out at our bases, you know, it's we're two and three times covered and more. You know, I think that there's definitely some. This happened prior to the rate increases during COVID in New York. There's guys who didn't get all their equity back. That's clearly the case.
The mezz lenders and stuff like that, I can't really think of anybody that even got touched there, and they're a significant part of the capital stack and obviously ahead of us from a loss perspective. You know, I think there's stuff that we see that's going around. I wouldn't say it's directly connected to interest rates. I'd say it's connected to a variety of factors. Like, let's say you know, not that we don't do a lot of this, let's say you bought a second-tier office building, and you were gonna rehab it in New York or something, and you're the equity for that. You're not getting your money back, right? I don't think there's anything really. We do stress testing on that stuff. No, it's.
The market's still robust, you know. It's you know, for the takeout side. You know, the projects that we do are really, they're really great projects in very high demand areas with, you know, really premium lenders and sponsors. We're not seeing anything that would be cause for concern there.
Thank you very much.
Thank you.
Our next question is from Edward Hemmelgarn with Shaker Investments. Please proceed with your question.
Hi, Greg Garrabrants. Just a couple of questions. How you doing? Can you talk a little bit about your thoughts on share buybacks now? I mean, you've done a wonderful job of you know, with the debenture offering of raising you know, capital, and its stock price has fallen a lot. You know, if you can share anything, share your thoughts on share repurchases here.
Yeah. You know, look, we always evaluate that. I don't like to rule things out. Obviously, we have to balance it against loan growth. I think one of the things I definitely don't wanna be doing is raising equity, right? I think that my first view is, you know, look, I talk about valuation, but obviously at whatever times earnings we're trading at, you know, that stock price doesn't make a lot of sense to me. But obviously there's been a lot of equity outflows across the board. Yeah, I mean, look, it's in our arsenal, and it's one of the things that we think about.
I wouldn't be any more committal on that except to say that, you know, not too long ago you were saying, you know, you thought we could grow loans a lot faster. You know, I have to have some consistency quarter to quarter. You know, it's, you know, we're fairly flexible over here, but, you know, we-
Oh, I believe that.
No, I'm teasing you. Yeah, look, I think, look, I think we're looking forward to a revival of single family, you know, at low loan to values and good rates. We're looking at, you know, we've spent a lot of time and effort diversifying our business. So, look, you know, there's always. There's certainly that is always a possibility. We do have capital up there sitting at the holding company that can. We can do stuff with if we decide to do it.
Okay. The other one I was wondering, can you know, you clearly indicated, I mean, you feel you're more asset sensitive. I mean, is it so that if your rates go up, you benefit from that. But can you give me, you know, how much. You know, will you try to keep loan rates lower or, and so grow that in sync with your deposit cost or, you know, do you expect is there any opportunity for as rates rise in here. You know, certainly some of your loans will be repriced.
Yeah.
You know, to pick up rate increases or do you expect it to stay pretty much?
Yeah. I mean, that's the million-dollar question or the, I don't know, the twenty-million-dollar question or whatever. It's, yeah, look, I think here's what I see in that. I think, you know, our NIM range, I think is a good target because I think what it allows us to do is we feel comfortable that we can grow loan growth within that, you know, high to mid, you know, mid-teens or low to mid-teens range that we say. Then at that 4%, I think that's a good way to think about it. Is there upside from that? You know, potentially. There also could be some downside from it because we just don't really know how everyone's gonna behave.
It depends on the speed at which other banks adjust and everything else. You know, we've been pretty quick to, you know, to reprice our pipelines. Just quite candidly, you know, we told people, "Look, you want to lock, you want to pay for a lock?" "Oh, no, I don't want to pay for a lock." "Fine. Your rate's up. You know, there you go." Right? Other banks may have not done that exactly that way. That may, you know, result in, you know, some, you know, lower loan production at certain points in time. We're not seeing that now. Frankly, pipelines are great. We're getting good pull through, so we still feel good about that. It is. There's a lot of stuff to balance and all of that.
Clearly, you know, we have these deposit sources and we have stuff off-balance-sheet, et cetera. You know, those are all decisions that we're making in real time and looking at that. You know, there are some of our longtime borrowers, let's say on the multifamily side, you know, we've had guys who've wanted, you know, five-year deals, and they say, "Well, you know, we want 4%." "No." "Fine." "Well, okay, we'll give you 4.25%." "No, I don't want it." "Now, well, now it's 4.75%." "Well, I don't want it." Right? Now, you know, and then they're sitting there, and they need it, right? I think that some of this is psychological, and it takes a little bit of time for folks to kind of adjust to this.
We'll just have to see. I think I feel pretty good about it. I think we're in a much better position. We do have a little bit of a lag, right? Which I think is not insignificant in the sense that we've only got in that, you know, 40th percentile that are gonna, you know, take fully that first 50. But then we get to the next 50, then we're at 70-something%, and we have a much greater percentage of floating rate than we ever had if you went back even, you know, four years ago.
Look, I think I don't wanna get everybody too excited about the idea and start to say, "Well, we're gonna be way above where we are on the NIM side," because obviously the cost of the marginal deposit to get it, we also don't know what that is as well, right? You know, obviously we have these lower cost deposits here now. I feel good about their betas. As you're going out and you're getting deposits as you grow, you end up having to pay higher rates for those deposits because frankly, the commercial client who a year ago would have said, "Great, I love your service and your APIs, I'm not going to ask for a rate," you know, in three months I bet they're gonna ask for a rate.
If they say they're leaving, their other bank may give them a rate because we would say, no. We'd say, "No, look at all the great stuff we have." Maybe now that bank's gonna say, "You know what? I'll give you a little bit of a rate." That's all about that, just competitive dynamic and we just have to let that play out so.
Yeah. Wouldn't you, I mean, or do you feel that, given the amount of excess deposits in the banking industry right now, I mean, way more than loans, that probably the repricing of deposits will move at a slower rate than loan repricing?
You know, I think for existing deposits, absolutely. I think to get people to move, there's always an inducement. If everybody's reading the papers and you're growing loans and you need to grow deposits, I think that deposit cost is gonna be higher on the margin for everybody. Now, if you have excess deposits, you'll absorb it. It may also mean with those excess deposits that some of those banks don't push as aggressively on loan rate increases too, right? All of those different factors are there and, you know, they play out in different ways. I think that's why, you know, we think that, you know, all of those elements together, we kind of have that guidance. It's been right for a long time, and I think it's probably good to stick with it.
Okay. All right. Thanks. A very good quarter and see you next time.
Thank you.
Thanks.
Thank you.
Our next question is from Michael Perito with KBW. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking my questions.
Hi, Mike.
Just-
Hi, Mike.
A quick one. Greg, in the prepared remarks, I think I heard you mention something briefly about the kind of the crypto trading ability on the UDB. I was just curious if there was any more update you could provide us there on launch and whatnot?
Yeah. I think we're probably around the end of this calendar year for a beta on that. We actually have a lot of the plumbing done and stuff. We just got to get the front end out there and make that right. I think that's about the timing of it. It is interesting because I was just looking at this study, and it was incredible the number of new customers to these different self-directed trading platforms that said they were coming specifically to trade crypto. It's actually by far the biggest draw to these platforms. It's an important part of bringing it on. Yeah. There's a lot of pre-work that's been done.
It's partly some of it is about how pretty or how well the interface is gonna look cohesive with UDB. Because then essentially the platforms, it's sort of, you know, you can go in and do the trading now, but you kind of have to jump off to a different software, and it doesn't really look nice and integrated. I think we're kinda working through the questions of exactly, you know, if we really have been trying to focus on the user experience and how much of that, you know, do we want to make sure is sort of fully integrated before we launch it. I think that's a reasonable timeframe to look at.
That's helpful. You kinda touched a little bit on the second part of the question. You know, some of these other kinds of digital platforms that have launched this, it's been a fairly decent driver of profit. I guess just do you guys have any thoughts or views that you can share about how the, you know, the economics will work for you? I know you probably can't make any predictions. It hasn't even launched yet. Just in terms of is it gonna be a flat rate on trading? Is it? Or just any thoughts around how the economics will work for the crypto trading piece?
I think we're still actively debating it. I wouldn't wanna say something that we might change our mind on. I think we are looking at it carefully, and we're going through that process of looking at the competition and seeing how they're doing it. I do think, though, you're right. It's one of the more profitable areas of the business for sure. I think that's, you know, and also, I don't think there's been anybody who's done a particularly good job of integrating it into, you know, the ability just to have your bank and your securities side so closely linked that you can just, you know, your direct deposit comes in.
If you want to invest, you can do that right away. Just even getting the basics of that right with respect to some of these other wallets. I think will be a big driver of it if we can get it out from a market perspective and get people focused on it. That's kind of the debate, right? You know, how good does it have to be before it comes out. Look, I think there's opportunity there. You know, clearly, it'll get tighter over time as more and more folks come out, right?
Right.
Fidelity said they're letting people, you know, buy crypto in their 401(k)s and all that kind of stuff. It's gonna become much more of a mainstream asset class. Yeah, I mean, I think it is an interesting potential for sure.
Great. That's super helpful. Thanks. Just a kind of a bigger picture question. I mean, we talked a little bit about betas on an earlier question, but just how do you kind of bifurcate the strategy, right? And how do you kind of view it overall with who you're competing with, right? Because I mean, you have, for example, UDB. You have this consumer digital platform. You know, I think the expectation from a lot of consumers is on those types of platforms that they're gonna get paid an above average rate, right? And I think you guys are offering like what? 125 basis points standard checking on qualified balances.
You know, I guess, how do you guys kind of take, you know, that competitive force, but marry it to the fact that, you know, relative to last cycle, you guys really are not in kind of as needy of a funding position, I guess, for lack of a better way of putting it, right? You're trying to balance like this competitive dynamic versus the fact that you're just much better positioned today to be more competitive or more slow on raising rates on deposits. Just curious, any thoughts there?
Yeah. Well, you know that rewards checking account, which is some of the checking accounts. In order to get that, you need to have an Axos Invest account, an Axos Securities account, all with certain balances. You need to have direct deposits. You need to do a certain number of transactions every month, right? If you don't have any of those things, right? You basically, if you're coming in and you wanna be the customer that's gonna earn that, we're your primary bank. You have your investment account with us. At least one of your investment accounts with us with a certain dollar amount. You have a certain securities account, right?
that yes, you can get that rate, and it's clearly disclosed, but the reality of that rate is very different in a sense that, you know, you're still getting a great product. We're just telling you, "Look, you need to do all these things in order for that to happen." Right? I think that's part of the power of the platform because once you open all those accounts, you do your direct deposit, you do all that stuff, you're doing a certain number of debit transactions, you're using Bill Pay, all this kind of stuff. If somebody else comes out and says, "Well, I'll give you 1.75% on your account," are you gonna shut down all those accounts, move everything? I think that's sort of.
I think that even on those sorts of products , I think we've done a lot better job of making all of that work together, right? From a platform perspective. I think that's really important. Let's go further. It depends on the business, right? You know, HOA, other HOA banks, right? They're going to have their own dynamic, right? PacWest owns the old Smartstreet Union platform. There are different banks that own that. There are different platforms there. CIT had one. They're gonna do what they're gonna do based on that. You know, the clearing and custody side has its own dynamic that I think Derrick did a good job describing.
Mm-hmm.
The bankruptcy business, you know, essentially these are long-term software agreements that, you know, we operate an entire back office for someone. You know, that traditionally. You know, that's why I would say that's also one of those businesses where in low-rate environments, we're in a you know, eleemosynary capacity where, you know, we do a lot of work for trustees and, you know, and it's very nice of us to do that. Then in the higher rate environment, we take a little bit of that back. I think each of these dynamics really just depend. Clearly, you know, when you're in a better position, then you're also trying to grow. All that stuff together.
That's why I kind of, you know, bring that out to say, "Look, we think we can maintain our NIM. We think we can maintain loan growth." I think that's really the right way to think about it. I do think that each of these all blend together. I also, as I said, think that it's different when you're trying to get people to move, right? Even on the consumer side, the acquisition is gonna be different than somebody who's done all that stuff with you and then, right? They say, "Well, do I wanna bother trying to go chase rates somewhere?" I mean, the other thing is, to the extent you're with us now, we've chased you out if you're a rate chaser a long time ago, right? We really have.
Because we have not been in the top 20, 25 in rates in anything for a really long time. You know, the small business side, whatever. You know, I think that it's just about continuing to add value. What we're trying to do over the longer term, of course, in the platform is, you know, you shouldn't be thinking of us as someone that, you know, is gonna. You should be thinking of us as how great and convenient is, you know, your bank account and your crypto trading to be together, not we're gonna give you a high interest rate. You know, that's certainly a tool, and it's available, and there's dynamics associated with that. There's obviously if you have profitable loan growth you don't wanna miss out on, et cetera.
All those things have to play out together.
That makes sense. Thanks for all of that color, Greg. To the others, looking forward to seeing you all next week.
Thank you.
Thanks.
Thanks, Blaine.
We have reached the end of the question and answer session and now turn the call over to Johnny Lai for closing remarks.
Great. Well, thanks for your interest in Axos. It's been alluded to several times. We are hosting our investor day in our Axos Advisor Services office in Centennial, Colorado next Wednesday, May the fourth. If you have any questions and are interested in attending, please contact me directly. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.