Prepared remarks
Good morning, good afternoon, and welcome to the Axos Financial Second Quarter 2025 Earnings Call and Webcast. All participants are currently in listen-only mode, and a question-and-answer session will take place after the formal presentation. This conference is being recorded, and now I am pleased to introduce Johnny Lai, Senior Vice President of Corporate Development and Investor Relations. Thank you, Johnny, you may begin.
Thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s second quarter 2025 financial results conference call are the company's President and Chief Executive Officer, Gregory Garrabrants, and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the three months ended December 31, 2024, and we will be available to answer questions after the prepared remarks. Before I begin, I would like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. Please refer to the Safe Harbor statements found in today's earnings press release and in our investor presentation for additional details. 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 over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 8-K with additional financial schedules. All of these documents can be found on axosfinancial.com. And with that, I'd like to turn the call over to Greg.
Thank you, Johnny, and good afternoon, everyone. Thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the second quarter of fiscal 2025 ended December 31, 2024. I thank you for your interest in Axos Financial. We delivered solid results this quarter, generating double-digit year-over-year growth in net interest income and book value per share. Ending loan balances were up 1.1% linked quarter and 6.7% year-over-year to $19.5 billion. We continue to generate high returns as evidenced by the 17% return on average common equity and 1.7% return on assets for the three months ended December 31, 2024. Our strong returns contributed to a 21% year-over-year growth in our tangible book value per share. Net interest income was $280 million for the three months ended December 31, 2024, up 22.5% from the $228.6 million in the prior period. Excluding the benefit from the early payoffs of three FDIC purchase loans in the first fiscal quarter of 2025, net interest income was up approximately $5 million linked quarter.
Net interest margin was 4.83% for the quarter ended December 31, 2024, up 28 basis points from 4.55% in the quarter ended December 31, 2023, and down from 5.17% in the quarter ended September 30, 2024. Net interest margin in the first quarter of 2025 benefited from the payoff of three loans which we purchased from the FDIC. Excluding the impact from the early payoff of the three loans purchased in the three months ended September 30, 2024, net interest margin was 4.87%. Total on-balance sheet deposits increased 9.5% year-over-year to $19.9 billion. Our diverse and granular deposit base across consumer and commercial banking in our securities business continues to support our organic loan growth. We managed our operating expenses well this quarter. Total non-interest expenses for the quarter ended December 31, 2024, were down by 1.5% from the prior quarter. The efficiency ratio for the banking business segment was 41% in 2Q25.
Net annualized charge-offs to average loans were 10 basis points in the three months ended December 31, 2024. Excluding the auto loans covered by insurance, net annualized charge-offs to average loans were 8 basis points in the second quarter of 2025. We remain well reserved relative to our low current and historic net credit losses. Net income was approximately $104 million in the quarter ended December 31, 2024, compared to $152.8 million in the corresponding period a year ago. Excluding the gain from the FDIC loan purchase in the prior year period, the adjusted net income and adjusted EPS were $92.5 million and $1.60 per share, respectively. Non-GAAP adjusted earnings per share for the three months ended December 31, 2024, was $1.82. Net growth in our non-purchased loans for investment was $208 million for the three months ended December 31, 2024. The strong loan originations of $3.5 billion and growth in single-family mortgage warehouse and C&I loan balances were offset by declines in loan balances in our 5/1 hybrid ARM, single-family, and multifamily jumbo mortgages by $381 million this quarter.
We believe that we can reduce these significant headwinds to loan growth this quarter in single-family jumbo mortgages, given that the pipeline has risen from $345 million in the prior quarter to $496 million due to recent competitive exits, selective rate reductions, and some assistance from the yield curve. We also believe we have the potential to be flat to slightly up in our multifamily hybrid ARMs this quarter, given that the yield curve isn't working as actively against this product as it has been over the last several years, and we're seeing more rational valuations in the market. Lender finance, fund finance, and equipment leasing had strong originations and net loan growth this quarter. Ending balances in our auto loan portfolio were up slightly at December 31, 2024, representing the first sequential increase since the first quarter of fiscal year 2023. Average loan yields for the three months ended December 31, 2024, was 8.37%, down from 9.01% in the prior quarter, and up 19 basis points from the corresponding period a year ago.
Average loan yields for non-purchased loans were 8.08%, and average yields for purchased loans were 13.92%, which includes the accretion of our purchase price discount. The prepayment of three FDIC-acquired loans increased first quarter 2025 average loan yield by 30 basis points. Excluding the FDIC loan prepayments in the September 2024 quarter, average yields were down sequentially due primarily to loan mix. The remaining FDIC purchased loans continue to perform, and all loans in that portfolio remain current. New loan interest rates were as follows: single-family mortgage 8.3%, multifamily 9.2%, C&I 8.5%, auto 9.7%. Ending deposit balances of $19.9 billion were roughly flat linked quarter and up 9.5% year-over-year. Demand, money market, and savings accounts, representing 96% of total deposits at December 31, 2024, increased by 10.6% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 60% of total deposits, commercial TM and institutions representing 20%, commercial specialty representing 8%, Axos fiduciary services representing 6%, and Axos Securities, which is our custody and clearing, representing 4%.
Total noninterest-bearing deposits were approximately $3 billion at the end of the quarter. Total ending deposit balances at Axos Advisory Services, including those on and off Axos' balance sheet, were up approximately $78 million compared to the prior quarter. Client cash sorting has stabilized at or near the bottom, representing approximately 3% of assets under custody at the end of the quarter compared to the historic range of 6% to 7%. We are focused on adding net new assets from existing and new advisers to grow our assets under custody and cash balances. In addition to our Axos security deposits on our balance sheet, we had approximately $450 million of deposits off balance sheet at partner banks. For the quarter ended December 31, 2024, our consolidated net interest margin was 4.83% compared to 5.17% in the quarter ended September 30, 2024. Excluding the 30-basis point boost from the FDIC purchased loans that paid off early, our consolidated net interest margin would have been 4.87% for the September 30, 2024 quarter.
We continue to hold excess liquidity, which had an 18-basis point drag on our net interest margin in the quarter ended December 31, 2024. Our net interest margin remains above the high end of our target, with and without the benefit from the FDIC purchased loans, largely because of the diversity and granularity of our funding across our consumer banking, commercial banking, and securities businesses. Total interest-bearing deposit costs were 3.95% for the quarter ended December 31, 2024, down 51 basis points from the prior quarter. We have been able to reprice our higher-cost consumer and wholesale deposits while maintaining on-balance sheet deposits roughly flat. We continue to grow our lower-cost and noninterest-bearing deposits in our commercial cash management and treasury businesses, as well as our specialty deposit business. We are also making good progress cross-selling deposits across selected lending businesses such as fund finance.
Cash sweeps in our custody business were $878 million at December 31, 2024, compared to $800 million at September 30, 2024. Continued strong net new asset growth and a normalization in cash sorting will be a tailwind in our ability to grow lower-cost deposit balances going forward. We expect our consolidated net interest margin ex FDIC loan purchases to stay at the high end or slightly exceed the 4.25% to 4.35% range we have targeted over the past year. We have been successfully repricing our higher-cost deposits and will continue to adjust deposit pricing based on future actions by the Fed and by competitors. We see more competition from banks and nonbanks in certain lending categories, and we have selectively adjusted pricing where appropriate to be more competitive for high-quality deals. Our loan pipelines have improved meaningfully in our single-family mortgage and multifamily term lending business over the past few months as a result of strategic actions we have taken.
A steeper yield curve also makes our hybrid single-family and multifamily loan products more economically viable. While it may take a few quarters for the hybrid loans in our pipeline to have a meaningful impact on our balance sheet growth, we believe the level of net attrition in our single-family and multifamily term loans, which have been around $300 million to $400 million per quarter, will subside. The credit quality of our loan book continues to be solid despite a few idiosyncratic circumstances that led to an uptick in nonperforming assets this quarter. The majority of our nonperforming assets are in the real estate-backed loan area where LTVs are conservative and our historical losses have been low. Nonperforming assets in our single-family jumbo mortgages increased by approximately $10.4 million from September to December. The increase was attributed to three assets with a weighted average loan-to-value of 56%.
Nonperforming assets in our multifamily mortgage book increased by $17.8 million in the linked quarter due to two properties where we do not believe we'll incur any additional loss. Nonperforming assets in our commercial real estate loan book increased by $20 million, primarily because of a $14.5 million loan in Brooklyn. The loan was downgraded due to a maturity in October 2024, extension of that maturity to allow the property to be sold. The full recourse guarantors have significant liquidity and net worth and are making principal curtailments while marketing the property for sale at above our loan amount. We are confident that we're not losing any money on this loan, given the value of the property and the strength of the guarantors. We did not anticipate a material loss from loans currently classified as nonperforming in our single-family, multifamily, or commercial real estate loan portfolio.
Our commercial real estate specialty portfolio continues to perform very well and in line with expectations. All C&I loans classified as nonaccrual as of December 31, 2024, but one $6.4 million loan continue to make contractual principal interest and contractual curtailment payments. Nonperforming assets in our C&I lending portfolio increased by approximately $27.3 million, primarily due to one syndicated non-real estate lender finance loan with an unpaid principal balance of $23.9 million. This indicated loan was downgraded due to some credit deterioration in the underlying assets. However, the borrower's current principal balances have been paid down by around 11% since June 30, 2024, and the facility balances are within the collateral pledged to the borrowing base. We're saddened for the families and communities impacted by the tragic wildfires in the Greater Los Angeles area. Thankfully, none of our employees lost their homes.
We've been actively engaging with borrowers of properties in the affected areas since the fires initially started. Based on the information we've gathered so far, with a handful of single-family residential properties that are total losses and others that suffered less damage. Given the low LTVs that we have on most of our single-family residential mortgages, we believe that the insurance coverage maintained by the borrowers is adequate to cover the outstanding loan balances for the majority of properties. For those loans where the insurance coverage does not fully cover our loan amount, we have umbrella insurance from Lloyd's that we believe is adequate to cover the potential shortfalls. Additionally, the value of the land, which may be excluded from insurance coverage, exceeds the value of the property in many cases, particularly those in Malibu and Pasadena. While it's too early to assess how quickly the revitalization effort can commence, we are willing and ready to help the communities and homeowners in the affected areas, we're building by providing loans to rebuild these properties in these neighborhoods.
Axos Clearing, which includes our corresponding clearing and RIA custody business, had a good quarter. Total deposits at Axos Clearing were $1.36 billion at the end of the quarter, up $104 million from the prior quarter. Of the $1.4 billion of deposits from Axos Clearing, approximately $900 million were on our balance sheet and $450 million were held at partner banks. Client margin balances grew by 24.5%, up from $220.5 million at September 30 to $274 million at the end of the quarter. Securities lending increased by approximately 41% linked quarter to $135 million. Net new assets from our custody business were $822 million in the December quarter, up from $559 million in the September quarter. This is a continuation of the positive net new asset momentum we have experienced over the past few quarters with new assets outpacing the runoff in certain legacy adviser assets. The Axos Advisory sales team continues to have traction in the financial planning segment of the RIA space, where our client-centric noncompetitive service model resonates well.
The pipeline for new asset custody clients remains healthy, and we expect continued organic net new asset growth in AAS. From a product perspective, we continue to identify ways to generate incremental fee income and partner with third parties to offer additional services such as access to alternative assets. We are realigning certain back-office servicing functions in our clearing and custody business to leverage the processes and systems we have to more efficiently service broker-dealer and advisory clients. Improvements in our onboarding process for Axos Advisory services have reduced the time required to onboard new advisors. We have started to leverage low-code software development and offshore practices that we have implemented broadly at the bank to facilitate more projects at the securities businesses. This has reduced the amount of time it takes for us to launch and complete projects with fewer resources than it would have taken if we used a more traditional approach.
We're also actively working on artificial intelligence use cases to enhance efficiency. We believe that the economic benefits from sustained net new asset growth, normalization in cash balances, and operational productivity initiatives will more than offset investments we are making in our clearing and custody business in the medium to long term. The team hires we have made across various commercial lending and deposit businesses are contributing to loan and deposit growth. Our commercial cash and treasury management teams generated deposit growth this quarter, with contributions coming from the existing teams and our new hires. We continue to explore different ways we can scale our incubator businesses in various deposit and lending verticals. Some require additional products and features, while others can gain traction more quickly through better, more targeted marketing and client segmentation.
While we remain selective in adding new teams, our focus in calendar 2025 is on scaling the teams we have added over the past year. We have active dialogue with existing and new partners in the private credit space to leverage the rapid growth of that ecosystem. Our proven track record of working with funds and willingness to collaborate on complex deals makes us an ideal partner for nonbank depository institutions looking to deploy capital across a growing number of asset classes. I'm excited about the opportunities we have to grow each of our deposit, lending, and fee income businesses. We have a strong and growing amount of excess capital to continue investing in product and technology development, as well as new capabilities in our team members. While organic loan growth and opportunistic share repurchases remain our preferred use of capital, we are seeing a meaningful increase in the number of inorganic asset and business acquisition opportunities.
Additional clarity from an economic and regulatory perspective could further increase the number of bank and nonbank opportunities that come to market. The $150 million at-the-market shelf we announced today is a proactive step to put us in a favorable position to capitalize on potentially accretive and strategic opportunities that may require additional capital. We do not intend to raise any capital as we have a clear line of sight into an acquisition that would bear additional capital, given the significant excess capital we have today. We remain disciplined in the type and valuation of businesses we acquire; regardless of whether we are successful in consummating an acquisition, our asset-based lending philosophy with conservative loan-to-values and prudent structures and diversified mix of lending and funding will continue to generate profitable growth for our shareholders. Now I'll turn the call over to Derrick, who will provide additional details on our financial results.
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. Our provision for credit losses was $12 million in the three months ended December 31, 2024, compared to $13.5 million in the corresponding period a year ago. The primary reason for the year-over-year decline is due to lower net growth in loans held for investment in Q2 2025 compared to the corresponding period a year ago. Our allowance for credit losses to total loans held for investment was 1.37%, up slightly compared to 1.34% at June 30, 2024. We remain well reserved relative to our low historical and current credit loss rates.
Noninterest expenses were approximately $145 million for the three months ended December 31, 2024, down $2 million from the quarter ended September 30, 2024. Salaries and benefits expenses were down slightly to $74 million, and advertising, promotional expenses, and professional service expenses were down by $3.2 million and $0.8 million, respectively, compared to the three months ended September 30, 2024. We continue to balance investing in products, systems, technology, and people while identifying ways to reduce noninterest expenses through automation, straight-through processing, and other improvements. Our loan pipeline remains healthy with $2.1 billion of total loans in our pipeline as of January 22, 2025, consisting of $496 million of single-family residential jumbo mortgage, $60 million of gain on sale mortgage, $138 million of multifamily and small balance commercial mortgage, $54 million of auto and consumer, and $1.4 billion of commercial loans.
We expect similar loan growth dynamics compared to recent quarters with growth across a broader set of real estate and non-real estate lending businesses, partially offset by payoffs in our single-family mortgage and multifamily lending verticals. We believe that we will be able to grow loan balances organically by high single digits year-over-year in the remaining two quarters of fiscal 2025, excluding the impact of any of the loan portfolio purchased from the FDIC or any other potential loan or asset acquisitions. With that, I'll turn the call back over to Johnny.
Thanks, Derrick. Olivia, we're ready to take questions.
Questions and answers
Our first question comes from Kyle Peterson with Needham & Company. Please proceed.
Great. Good afternoon, guys. Thanks for taking the questions. I wanted to start out on the deposit costs. It's really impressive to see you guys be able to kind of push down the cost rates, although choppy. I just want to see, do you guys see more room for that moving forward if rates are stable for drifting down? Or I guess, how much pressure or kind of rate-sensitive deposits do you guys see at least in the near term that you might have some room to reprice lower?
Yes. With respect to what we were able to do this prior quarter, it really was the result of taking most of the rate-sensitive deposits down. I think it's probably a little difficult to do that. Maybe there's some at the margin unless you get a drop in the reference rate. But we are doing a lot to try to improve the quality of the deposit mix, and that's happening slowly. So, I think that definitely is an opportunity over time to continue to do that. So that would be really where that is. But if we achieve our goal, and I think we can match it, that essentially is to offset any decline in our interest income that we get from having a variable rate loan by repricing our deposits. And I think we were able to do that, as you said, very well this quarter, and that's the goal. So obviously, we want to improve the deposit mix over time, but we want to be able to demonstrate that we could do what we did on the way up, on the way down as well.
Okay. That's really helpful. And then I guess just a follow-up on the net interest margin. I know you guys kind of said towards the high end or slightly above on a core basis for the year, which is great to hear. How much of that is coming from, whether it's the asset side? I know you guys mentioned a competitor exit in mortgage, and the yield curve has gotten a little steeper there, so which should help. How much should we think of between the asset side versus some of these deposit more rate-sensitive benefits that you guys have been able to sell so far?
Yes. I mean, I think it's a little bit difficult to disaggregate that because as we do loans, obviously, we're getting a significant amount of deposits, and those are lower rates. And then in some of the teams we've brought in, some of the middle market stuff may have slightly lower loan rates, but they have much higher deposit balances. So it really depends on the segment. I think what we're doing is we're really looking forward and forecasting as best we can, what we think yields and loan yields are going to be and how we're raising deposits and looking at that maxim, coming up with that. So in order to disaggregate that, I really have to look at each kind of business unit specifically in order to do that. One element is, obviously, we're running at a lot of excess liquidity right now as well. And so the question with respect to your first question around do we reprice deposits, obviously, we think we're going to be able to get back to loan growth because a lot of the headwinds we've had have really been the result of some of these business units where the product just didn't make sense for us to originate, where we didn't like where the 5-year rate was, so we weren't really going to go there.
And that was really a problem for auto. It was a problem for single-family, but a problem for anything with term, and we feel much better about that now. So, we're opening that up. So obviously, we can reprice deposits, and maybe if we lost a little bit because we have a lot of Axos liquidity, that would be okay. But I think what we're going to try to do is we feel good about where we are just trying to grow into the Axos liquidity.
Thank you. Our next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.
Good afternoon, Greg, I was wondering if you could share any thoughts you would have regarding reengaging on the crypto side of the world, given the more positive bias out of Washington?
Yes. No, it's a great question. I really think what we need is more specific clarity and specific rules regarding how different companies are going to be regulated. And so we've had some executive orders and things like that, and we expect that there may be some ability to look at that. And obviously, we built products around that, which we never really even used. But it really is going to have to be a fairly comprehensive view across what our primary regulator thinks and what the SEC thinks, and really getting some good either legislation or at least making some progress on that. I don't really think we have a lot of appetite to kind of jump into that without the proper guidance. Right now, the way it sits out there, too, is mostly we did this anyway, but you have to go through a regulatory process of non-objection to do that, just like it was before. So you have to go through that process. And I don't know exactly how that's going to change. But obviously, there's been some movement right now with some confirmations and whatnot, but there's still probably a lot of changes that are coming in the regulatory agencies and then really kind of figuring out where guidance comes out.
I appreciate it. And then I wanted to ask about NPAs. You kind of ran through some of the issues that moved to nonaccrual in the quarter. If you look back from June 30, total NPAs have doubled or more than doubled a bit. Can you just talk about the level of, I guess, forward analysis you're doing on properties and otherwise to get a kind of bringing stuff forward into nonaccrual and start working on it proactively or how that process works for you?
Yes. It's really been, with respect to a lot of these things, particularly on the C&I side, the question is with respect to something — for example, this one that we have with the value — it's a subprime auto lender finance deal. It's a syndicated deal. We were within the borrowing base, the assets, but it's over-advanced on the advance rate, right? So, if we were able to get a lot better information on that and basically be able to have a better understanding and make sure that we are that the assets are worth what the field exams say they are, we wouldn't have put that on nonaccrual. Some of this is sort of a judgment with respect to some of these things. So, I expect a lot of these to resolve themselves relatively quickly. In some cases, some of the borrowers have gotten used to some of the banks capitulating and making various concessions to them. And so they're sort of almost daring us like, hey, what’s the answer?
And so our response has been fine. We have an ability to sell your loan at par better. And so you need to do what we're asking you to do, and sometimes they've been a little bit slow in doing that. So this is sort of just making sure that happens. But what we're seeing on the real estate side is very positive; we are getting regular valuations looking at it. We feel really good about that. If you look at, let's say, substandard loans, those have gone down. And we have a lot of active sale processes ongoing right now for the real estate side. On the C&I side, since we've had — yes, they've gone up. We've essentially had next to zero nonaccruals there. And so that really is the STG syndicate, which continues to pay; they've continued to pay us. But the reason we put it on nonaccrual is that they did this restructuring; we didn't participate in it. We think that what they did was in violation of the credit agreement, and they're not giving us proper information around what our collateral is.
So, with that kind of uncertainty, I think it's proper to put it on nonaccrual. Now, nonaccruals are not all created equal. So all our nonaccruals, except for that $6 million on nonaccrual in C&I are paying, and so is the lender finance deal. It's hard to know because sometimes timing, for example, like there's one deal, the deal that the guy was a realty guarantor has a multibillion-dollar balance sheet; we didn't get the appraisal back before the end of the quarter. And so that was on nonaccrual. That will probably pop off, right? So it's sort of some of these things where you just are looking at what the standard is, and whatever. But I feel good about it. I don't think there's a lot of loss content there. On STG, they're still paying; they're a massive company, but we're not getting the information we need there. And so we have our lawsuit on file there. And we think we'll be successful there, but that will take a bit of time.
Our next question comes from David Feaster with Raymond James. Please proceed with your question.
Hey, good afternoon, everybody. It's a lot of encouraging conversation around the growth side. It sounds like we're going to stem the runoff in jumbo single-family residential and in the multifamily book. The yield curves also help, which you alluded to, given confidence in accelerating growth. Could you just maybe touch on the pulse of demand in your borrowers, sounds like the pipeline is solid. Curious where are you seeing the most opportunity today? And then are there any segments within the non-lender finance, non-CRE lender finance, and ABL that are seeing any specific strength in the quarter?
Cap call continues to look quite good. The real estate lender finance and Ralph, I mean, they all have decent pipelines. I mean, we did $3.5 billion of originations last quarter, right? So, partly, the handover on the prepay side is, frankly, the result of a deliberate strategy that we made, which was we're not going to do any term lending for three years, right? And that's great from an interest rate risk perspective, and we don't have any mark-to-market on our balance sheet, but it does kind of create that issue, right? And so, as you said, if you look at the term lending component of our business, where it's been running off $300 million or $400 million a quarter, and that's also been intentional because if you were going to lend on the 5-year at a $250 million or $300 million spread or whatever, you were going to be in a rough place, but we wanted to wait for that to adjust. So, if you look at all those spots, you look at auto, if you look at multifamily, you look at single-family that we now have a product that's at least competitive there because we feel good enough about the credit side of where things have stabilized.
Their multifamily borrowers are more realistic; they know their cap rates are not 4%, right? And rates are not going down to 2.50% in 18 months, right? That would be a typical conversation 1.5 years ago, right? It's amazing when people saw it. And then auto, it’s kind of that sort of bubble kind of pops out of the asset value. So, I think if we get all that right, and I see that happening. We've also benefited on the SFR side from some exits, right? I mean, was — loss leg, it will be used to compete with us, and asset competed with us on the multifamily — I mean, sorry, on the single-family jumbo side. They've pushed out. So, it's a little early to tell how this pipeline is going to go. It obviously has increased a lot, and how quickly it closes, what the pull-through ratio is, we really don’t know yet, right? This is a relatively new ramp, and so we've got to see that. But, yes, I feel good about it.
But frankly, I felt good about $3.5 billion of origination, too, right? So, that was a pretty good number. And so we certainly, there's just movement. And frankly, with some of the things like cap calls, they can get paid off. We haven't seen that. So, I'm cautiously optimistic, but there is a level of caution in it. I do believe that, for example, I think mortgage warehouse that kind of popped up; that's not as gangbuster as it was last quarter. So that was some of the growth, right? So, I think if we can stem those $300 million or $400 million that we've been having in the single-family and multi-family, I’m pretty confident about that. I'm pretty confident multi can be at least flat, maybe slightly growing this quarter. And I think single-family can pretty much get there too. And so that's a big benefit and just looking at CRESL, there’s we try to judge where prepays are on CRESL; that's a little bit tough to do.
We have a lot of great new deals there, but sometimes those new deals take a while to fund up because all the equity has got to come in first, and so our funding might be delayed. So, look, I think we'll be able to get back to it, but it's been a slog. It's been a struggle.
Yes. With growth set to accelerate, I want to touch on the side. You've done a tremendous job, like you said, it's been a tough slog. You've done a great job holding the line on expenses. You are still investing in the franchise. How do you think about expense growth going forward? What are some of the key initiatives you've got on the horizon? And how do you think about your ability to drive positive operating leverage as we look into the out year?
Yes. I think we really have to be very, very thoughtful about expense growth. The reality is that over the last two quarters, we have not been able to deliver the sustainable asset growth that we've historically done for the 17 years I've been here. And that's really the first time. Prudence and discipline require that you basically make sure that you get to a sustainable level of asset growth before you expand your expense base. But I think, though that that's very achievable because there are so many tools and opportunities that exist now to make our operations more efficient. Some of the stuff that the artificial intelligence task force is doing is really looking promising, and we're starting to roll some of those things out into the organization. The low-code platform is delivering a new product for our clearing customers that will allow them to do more fee business. That product probably would have taken easily 3x the number of people, 3x longer, but the low-code platform was able to deliver it in around 8 months.
We're seeing a lot of productivity coming from this technological area. We've done a lot of hiring in these teams, and those teams are still getting up to speed and developing. So I think we've really got to be cautious about that. I've been telling the team that we really need to keep the type of discipline we showed this quarter moving forward and really try to enforce that unless there are really great opportunities. And then we can get growth going further, we can continue to do that. But there’s some positive stuff with respect to AAS is growing now. I see that continuing. That’s a good thing. Getting all those engines kind of ramping up together is going to be important. We talked about that on the loan side, where some of that term stuff was just a big headwind; that's starting to go away, at least as a headwind. We've got to see if we can get consistent growth there. Yes, the expense side, we have to be thoughtful about it.
Obviously, it’s not like you just grow your expenses when you're growing your revenue, but you have to be extra thoughtful about it. And we really have done a lot of investment, and with the team we have now, including all the developers, there are a lot of projects we can do. This quarter, we delivered a ton of stuff, and there's a big effort now to go through and prioritize what we want to do next with that team without having to add a lot more people and to get to the next set of strategic priorities. Yes. I think we really have to be very, very thoughtful about expense growth. The reality is that over the last two quarters, we have not been able to deliver the sustainable asset growth that we've historically done for the 17 years I've been here. And that's really the first time. Prudence and discipline require that you basically make sure that you get to a sustainable level of asset growth before you expand your expense base.
But I think that that's very achievable because there are so many tools and opportunities that exist now to make our operations more efficient. Some of the stuff that the artificial intelligence task force is doing is really looking promising, and we're starting to roll some of those things out into the organization. The low-code platform is delivering a new product for our clearing customers that will allow them to do more fee business. That product probably would have taken easily 3x the number of people, 3x longer, but the low-code platform was able to deliver it in around 8 months. We're seeing a lot of productivity coming from this technological area. We've done a lot of hiring in these teams, and those teams are still getting up to speed and developing. So I think we've really got to be cautious about that. I've been telling the team that we really need to keep the type of discipline we showed this quarter moving forward and really try to enforce that unless there are really great opportunities.
And then we can get growth going further, we can continue to do that. But there’s some positive stuff with respect to AAS is growing now. I see that continuing. That’s a good thing. Getting all those engines kind of ramping up together is going to be important. We talked about that on the loan side, where some of that term stuff was just a big headwind; that's starting to go away, at least as a headwind. We've got to see if we can get consistent growth there. Yes, the expense side, we have to be thoughtful about it. Obviously, it’s not like you just grow your expenses when you're growing your revenue, but you have to be extra thoughtful about it. And we really have done a lot of investment, and with the team we have now, including all the developers, there are a lot of projects we can do. This quarter, we delivered a ton of stuff, and there's a big effort now to go through and prioritize what we want to do next with that team without having to add a lot more people and to get to the next set of strategic priorities.
Yes. I think we really have to be very, very thoughtful about expense growth. The reality is that over the last two quarters, we have not been able to deliver the sustainable asset growth that we've historically done for the 17 years I've been here. And that's really the first time. Prudence and discipline require that you basically make sure that you get to a sustainable level of asset growth before you expand your expense base. But I think there are so many tools and opportunities that exist now to make our operations more efficient. The artificial intelligence task force is doing some promising work, and we're starting to roll some of those things out into the organization. The low-code platform is delivering a new product for our clearing customers that will allow them to do more fee business. The product probably would have taken easily three times the number of people and time, but the low-code platform was able to deliver it in around eight months.
We're seeing a lot of productivity from this technological area. We've done a lot of hiring in these teams, and those teams are still getting up to speed and developing. So I think we've really got to be cautious about that. I've been telling the team that we really need to keep the type of discipline we showed this quarter moving forward and really try to enforce that unless there are great opportunities. And once we can get growth going further, we can continue to do that. But the AAS growth is positive, and I see that continuing. Getting all those engines ramped up together is important. We talked about that on the loan side, where that term issue was a headwind, and that's starting to go away now. We have to see if we can get consistent growth there. On the expense side, it's essential to be thoughtful. You can't just expand expenses when you're expanding revenue; we need to be extra considerate.
We've done a lot of investment, and with this team, including developers, we have many projects we can work on. Yes. I think we really have to be very, very thoughtful about expense growth. The reality is that over the last two quarters, we have not been able to deliver the sustainable asset growth that we've historically done for the 17 years I've been here. And that's really the first time. Prudence and discipline require that you make sure that you get to a sustainable level of asset growth before you expand your expense base. But I think that it's very achievable because there are so many tools and opportunities that exist now to make our operations more efficient. Some of the innovations from the artificial intelligence task force look promising, and we're starting to implement some of them in the organization. The low-code platform is developing a new product for our clearing customers that will enable them to increase their fee business.
This product would traditionally require three times the personnel and time, but the low-code platform allows us to deliver it in about eight months. We're seeing significant productivity gains from these technological advances. We've been expanding our teams, and these groups are gradually getting up to speed and contributing. Therefore, it is critical for us to remain vigilant about expenses. I've been encouraging the team to maintain the discipline we've shown this quarter as we move forward, only expanding our spending when we see truly great opportunities. We’re also seeing positive trends in AAS, and I expect that growth to continue. Yes. We have sufficient capital, and we will not continue to build capital at these high levels indefinitely. So it is a sliding scale equation between capital levels, acquisition opportunities, and share repurchase perspectives. We intend to prioritize organic growth first, then share repurchases and opportunistic M&A as we see fit.
Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed.
Hey guys, thanks for taking the questions. You've answered most of mine, but I just wanted to ask about the provision. You mentioned the quantitative impact of the unemployment rate in commercial real estate mortgage rates. The — preliminary has been pretty stable for a while. So I'm curious how that sort of factored into the reserve build this quarter? And then on the CRE mortgage rates, is it more concern over upward repricing as loans hit the variable rate period, just kind of clarity on why the provision was where it was?
Yes. On the provision, it's the long-term unemployment. So the model takes into account long-term unemployment and a number of different economic factors. We use Moody's for a lot of our data, which flows into the model. The long-term unemployment rate in the stressed model went from 9.0 to 9.3. That was a main driver for the provision. Regarding commercial mortgage rates, if you have a loan like a hybrid loan that transitions from a 5% interest rate to 8.5%, the borrower's capacity to pay could be negatively affected, especially in a challenging economic environment and may lead to defaults and potential losses.
Got it. Since the KYC loan purchase, the reserve ratio has been right at like mid-130s level. If you look out, is there anything that would cause that, or do you anticipate it to remain relatively stable at that level?
No, because part of the idea is that we are looking over the life of the loan. As mentioned, we are already kind of stress-testing a certain level. It would have to be something where you either go back to the roaring 20s or the Great Depression of the 30s that would change significantly. The economic scenarios would have to have substantial effects, more independent to our portfolio type.
Yes. On the repricing on the — which is mostly on the term multifamily stuff, we've done a lot of analytical work on that and had — we just finished a big independent review of it. It's really not a material issue. I think one of the things for us that makes it interesting is that our portfolio was so short because we had shortened everything up to mostly 2-year, but some 3-year lengths that we are already experiencing a lot of roles, and that also results in a lot of prepays. In that business because there are others offering 5/1 ARMs to do that. So we don’t really see a lot on the repricing side and the resell side; it's all floating rate. The weighting on the model of really pushing through a lot of the worst economic scenarios is something that allows you to actually get some losses associated with it. I mean, look, I think that the C&I side is one of those areas that you just have less ability to take the collateral and liquidate it, right? So that's always a little more uncertain. But we don't see anything I've talked about a couple of those things, and there's always a possibility; there's something else, but there's not seeing anything systemic or anything like that.
Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.
Hey, good afternoon, thanks for the question. Most of mine have been covered at this point. Maybe turning to the fee income. Greg, I think you mentioned Axos Advisory Services is really hitting its stride and gaining new pipe in ordering. As you look ahead with the opportunity, I know this quarter had some noise with MSR impairment. But just on a core basis, your outlook about on these investments’ ability to grow fee income contribution?
Yes. I mean, I think the securities business is definitely our best hope for that. I believe you'll continue to see decent growth, like this quarter, it looks like that net new asset growth will contribute to fee income growth. The only caveat I would mention is that, obviously, if rates stabilize, that's good. And so what that team's goal was what they were able to do. As I said, I want you to not only grow and make sure your costs are in line so that you can offset the rate decreases that you have, right, because that business is a rate-sensitive business due to the spread income off the free cash balances. So that's the only caveat I would say. I do think you're going to grow the core fee income. If you get stability on the rate side, that will be beneficial for that business. All the other little stuff like the prepay income, when you're not doing term loans, you’re not going to get a lot of prepay income as we start doing some more of those on the multifamily; that may also contribute.
The TM fees, we are obviously doing that, but a lot of that is offset by earnings credits you provide in a higher rate environment. So there’s something there, but it’s not really — it really is the security side that has to get better there. The custody business is also seeing significant growth; the clearing side. We're continuing to work on a strategy for them to do more hybrids, and we've got a new platform rolling out next quarter. It will take time to get going, but hopefully, both of those engines will allow that fee income line to grow a little bit more.
Thank you, everyone, for your interest. We will talk to you next quarter.