Axos Financial, Inc.
Q2 2024 Earnings Call Transcript

Published: 30 Jan 2024

[Operator:]

Greetings, and welcome to the Axos Financial, Inc. Q2 2024 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you, Johnny. You may begin.

[Johnny Lai:]

Thanks, Alicia. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial, Inc.'s second quarter 2024 financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants; Executive Vice President and Chief Financial Officer, Derrick Walsh; and Executive Vice President of Finance, Andy Micheletti. Greg and Derrick will review and comment on the financial and operational results for the three and six months ended December 31, 2023, and we will be available to answer questions after those 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 statement 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 and 10-Q, we also issued an earnings supplement for this call with additional information regarding the FDIC loan acquisition. All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg.

[Greg Garrabrants:]

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 second quarter of fiscal 2024 ended December 31, 2023. I thank you for your interest in Axos Financial. We delivered outstanding results, generating double-digit year-over-year growth in earnings per share, book value per share and ending loan balances for a sixth consecutive quarter. Strong organic loan growth and deposit growth, coupled with further net interest margin expansion, resulted in double-digit net interest income growth year-over-year and linked quarter annualized. We grew deposits by approximately $638 million linked quarter. We reported net income of $152 million and earnings per share of $2.62 for the three months ended December 31, 2023, representing year-over-year growth of 86% and 94%, respectively. Excluding the one-time gain and loss provision associated with the FDIC loan purchase, our non-GAAP adjusted earnings per share increased by 15.7% year-over-year to $1.56. Our tangible book value per share was $33.45 at December 31, 2023, up 25% from December 31, 2022. Other highlights for this quarter include the following. Ending loans for investment balance net of discount were $18.5 billion, up 8% linked quarter or 32% annualized. Excluding the FDIC loan purchase ending non-purchased loans held for investment increased by $443 million linked quarter or 10% annualized. Growth was broad-based with growth in real estate and non-real estate lender finance, equipment leasing and fund finance, offsetting lower origination volumes in single-family warehouse and higher payoffs in commercial specialty real estate and a deliberate runoff of our auto book. Net interest margin was 4.55% for the first quarter ended December 31, 2023, up 19 basis points from 4.36% in the quarter ended September 30, 2023 and up 9 basis points from 4.49% in the quarter ended December 31, 2022. Excluding the benefit from the FDIC loan purchase, our consolidated net interest margin was 4.36% in the quarter ended December 31, 2023. Axos Securities, comprised primarily of our custody and clearing businesses, had another strong contribution to our fee and interest income. Broker-dealer fee income increased 27.6% year-over-year due to higher interest rates and increased client activity. Advisory fee income increased 5.4% year-over-year due to higher mutual fund fees and higher average assets under custody. Quarterly pre-tax income for our Securities business was $10.8 million in the second quarter of 2024. Our credit quality remains strong, with net annualized charge-offs to average loans of 2 basis points in the three months ended December 31, 2023. The majority of the 2 basis points of net charge-offs for this quarter were from auto loans that are covered by insurance policies, with proceeds from those insurance policies accounted for as fee income. We completed the purchase of two performing commercial real estate and multifamily loan pools from the FDIC with a combined unpaid principal balance of approximately $1.25 billion at 63% of par value. We recognized a $65 million after-tax gain and increased our allowance for loan loss by $75 million on the purchase in the quarter ended December 31, 2023. We believe this opportunistic loan purchase will provide incremental net interest income and after-tax income over the next several years. I'll provide more detail regarding this transaction later on the call. Our capital levels remain strong, with Tier 1 leverage ratio of 10.2% at the bank and 9.4% at the holding company, both well above our regulatory requirements. We repurchased approximately $59 million of common stock in the second quarter, in addition to the $24 million we repurchased in the prior quarter to take advantage of the unwarranted decline in our share price. This brings our total share repurchases in fiscal year 2024 to $83 million at an average share price of $36.49 per share, representing 2.8% of the shares outstanding as of 12-31-2023. We had strong organic loan originations in our commercial and industrial group, non-real estate, lender finance, equipment finance and fund finance lending businesses. We continue to reduce our small-balance commercial real estate, consumer and auto loan balances, given our preference for originating and retaining loans with a lower duration, floating rate and better risk-adjusted return in the current environment. Average loan yields for the 3 months ended December 31, 2023 was 8.18%, up 33 basis points, from 7.85% in the prior quarter and up 156 basis points from the corresponding period a year ago. Average loan yields for non-purchased loans were 8.02% and average yields for purchased loans were 18.51%, which includes the accretion of our purchase discount. We continue to see wider spreads in some of our lending categories as competitors have pulled back or exited. New loan yields were the following

[Derrick Walsh:]

Thanks, Greg. To begin, I'd like to highlight, 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. Total noninterest expenses increased by $1.3 million or 1.1% to $122 million in the three-months ended December 2023 compared to the quarter ended September 30, 2023. Salaries and benefit expenses increased by $3.1 million, primarily due to new team member additions and the first full quarter of the annual merit-based increases that were awarded in September 2023 to our staff. It was also the first full quarter for the LV Marine Finance business being a part of Axos. Advertising and promotional expenses were down by approximately $0.6 million as we scaled back certain deposit-related marketing expenses. Professional service fees were down $3.8 million on a linked-quarter basis due to the timing of insurance reimbursements, reduction in valuation and audit fees tied to our year-end audit, which occurs in the first fiscal quarter, and legal expenses. As Greg mentioned earlier, we continue to actively recruit talented individuals and teams across various businesses. We believe that reinvesting a small portion of our expected gains from the FDIC loan purchase is a prudent strategic allocation of capital that will benefit our shareholders. For those who may not be as familiar with the Axos story, we deployed a similar strategy seven to eight years ago by reinvesting a portion of profits from our H&R Block business in long-term strategic initiatives, such as UDB, our commercial banking business and our securities businesses. Those investments have been instrumental in helping us further diversify our lending, deposits and fee income. We expect noninterest expenses to grow a few percentage points higher than our historical growth rate over the next few quarters as we continue to invest in the people, systems and growth initiatives. We will continue to identify and implement process improvement, automation and other productivity initiatives to maintain a best-in-class operating efficiency. Following a strong start to the first half of our fiscal year, our loan growth outlook is consistent with what we have guided to in recent quarters. We believe that we will be able to grow loan balances organically by high single digits to low teens year-over-year for the next few quarters, excluding the impact of the FDIC loan purchase or any other potential loan or asset acquisitions. Our loan growth outlook is based on a broad-based increases in our ABL, lender finance and capital call lines, partially offset by declines in jumbo single-family mortgage, multifamily, CRESL, auto and personal unsecured loan balances. We continue to see good risk-adjusted opportunities across several of our lending niches. Our market share gains have been partially offset by higher levels of prepayments in certain segments of our C&I book, given the shorter duration for these loans. Our loan pipeline remained solid at $1.7 billion as of January 26, 2024, consisting of $277 million of single-family jumbo mortgage, $70 million of agency gain on sale mortgage, $52 million of multifamily and small balance commercial, $23 million of auto and consumer, and $1.3 billion of C&I. Our income tax rate was 30.2% for the first quarter ended December 31, largely in line with our guided range of 29% to 30%. As a reminder, typically, we have higher employee-related taxes and FDIC assessments in the first calendar quarter. Aside from those seasonal factors and the aforementioned growth investments, we do not anticipate any outside changes in our future income tax rate or noninterest expenses. With that, I'll turn the call back over to Johnny.

[Johnny Lai:]

Thanks, Derrick. We are ready to take questions.

[Operator:]

Great, thank you. [Operator Instructions]. Our first question comes from the line of Andrew Liesch with Piper Sandler.

[Andrew Liesch:]

Thanks Greg. Good afternoon guys. So question on the margin outlook excluding the loans from the FDIC. Trying to look sort of like maybe the guidance to be slightly lower than before, is that -- or would that 225 -- probably 425 to 435 range still hold as appropriate?

[Derrick Walsh:]

Yes. That's -- the 425 to 435 will still hold for the calendar year of 2024…

[Andrew Liesch:]

Yeah. I mean if you could provide us a little bit more details on some of the expense growth? I mean just looking at -- year-over-year expenses were up 13% this quarter. Last quarter, they were up 20% year-over-year. I guess what -- is there like a year-over-year growth rate that we should be looking at? I know that there's going to be a little bit more investment going on.

[Derrick Walsh:]

I think the -- I'd probably say it lines up, generally speaking, with our loan growth rate that has kind of high single digits to low teens. Honestly, different quarters, we'll have some -- there will be lumpy mix. But when you look at it on an annualized basis, I think it will generally align with that loan growth rate that we provide. The -- this first quarter -- first calendar quarter, as I highlighted, will have some higher expenses due to payroll taxes. So usually, that's -- if you look back, that's always cyclically a much higher quarter for the FICA and FICO [ph] taxes that are worked through in that January, February month.

[Greg Garrabrants:]

Hi, Andrew, I think we are recruiting a decent amount of talent. And sometimes, that talent comes on and then it takes a few quarters for them to do stuff. So I'm not sure I wouldn't pop that up a few percentage points, maybe kind of pop it up -- I mean -- I think maybe conservatively, I'd take it more to the 15, 16 range or something like that just because I've been -- we've been out doing a lot of recruiting, just hired a couple of really seasoned teams on the treasury management side, some great product managers. I think they're going to do a lot of great stuff over the long term on our commercial treasury management software integrations, but these teams are not the cheapest, but they're coming, available now in a way that they just wouldn't, and I'm seeing that more and more. So I think we'll -- we're opportunistically out looking for teams like that. There's a few more in the pipeline, too, that are not cheap. So...

[Andrew Liesch:]

Got it. So is it really driven by new hires? Or are there products that you will advance in and bring on, too?

[Greg Garrabrants:]

Well, I mean, in some cases, it's been new products. Like the fund finance team, it was a new product. Others that might be a new geography. We've been looking up in the Valley for stuff there. And in other cases, it's just -- like those two teams on the TM side are -- they've got some vertical expertise. But it's more about really refining and developing our TM products to get to the next stage. So it's really a little bit of everything. And there are some teams that are very vertically -- they're lending vertical focus, too. So it just -- it really just depends. But I would say, in general, there's just a lot of -- a lot of banks have not paid bonuses well, there's a lot of unhappy people around. And so we've just got access to a lot of talent, and that talent wasn't -- probably wouldn't have been accessible to us 18, 24 months ago. So we're probably going to spend some of this windfall on that talent. And like Derrick said, I think it's a great analogy, we did that with H&R Block. I don't think it's really of that level as that it's a whole new division like we did there, but it's -- we'll have to see. I mean my instinct is that there's going to be more folks sort of shaking out this year that we're going to be interested in.

[Andrew Liesch:]

Got it. Makes sense. And I think you did that with the Trump tax cuts as well. So, we've certainly seen this before.

[Greg Garrabrants:]

Yes, true.

[Andrew Liesch:]

But I will step back. Thanks for taking the questions.

[Greg Garrabrants:]

Thank you.

[Derrick Walsh:]

Thanks Andrew.

[Operator:]

Our next question comes from the line of Edward Hemmelgarn with Shaker Investments.

[Edward Hemmelgarn:]

Yeah. Hi, Greg

[Greg Garrabrants:]

Hi, Ed.

[Edward Hemmelgarn:]

It looks like you're -- you didn't pay any excess FDIC fees?

[Derrick Walsh:]

No. The guidance -- the regulation is generally aimed at larger banks north of $100 billion in assets and with $5 billion or greater uninsured. And we have a much lower uninsured deposit balance. So those are the banks that are experiencing those increases in FDIC fees.

[Edward Hemmelgarn:]

You got about $5 billion. Okay, threshold, that makes sense. Just the other thing is I noticed your loan loss provision was higher this quarter. Anything unusual there?

[Derrick Walsh:]

Yeah. I can walk through that, so yes, there's a couple of different aspects to that $13.5 million number, about $5 million of it was related to the loan purchase. So while for the purchased credit deteriorated assets, we took $70 million straight to the allowance without going through the income statement, for the non-purchase credit deteriorated assets. We did have to add loan loss provision. So that was about $5 million. And then as a reminder, the unfunded commitment provision also is included in that line item, so that was another $1 million for unfunded loans as our unfunded balances grew by a couple of hundred million this past quarter. And so the net remaining, once you back those out, was about $7.5 million, which is generally consistent with our allowance on the whole.

[Edward Hemmelgarn:]

Great and good luck on finding talented people.

[Operator:]

Thank you. Our next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

[Gary Tenner:]

Derrick, you just addressed part of my question as it relates to the amount of the gain and the build into the allowance. Given, I wonder if you could go into any detail or thoughts about kind of specifics around why that number was so high, given the relative LTVs of the underlying credits and the status of those credits from a current and performing perspective.

[Derrick Walsh:]

Sure. Sure. I'll start on that. And so the -- when we look at the loan portfolio, what we did was a loan-by-loan analysis. And classification in accordance with the accounting guidance as far as the purchase credit deteriorated assets. So for those, that we determined were the purchase credit deteriorated assets we then go and look at what is the likelihood of the -- over the life of those loans and what are the different aspects of them. There's a couple of office in there. There are a couple of land. And so take an analysis through that and say, what is the likelihood of loss based on all the different attributes that are funnelled into the allowance model? And that, of course, includes a variety of different things about locations within the U.S. GDP, economic scenarios and extremely stressed economic scenarios and say, what's that risk of loss on those loans? And come up with our -- what we believe is the reasonable estimate for that allowance. And so based on those number of factors and kind of that process, that's how we ultimately got to the $70 million on that subset of loans.

[Greg Garrabrants:]

But it's look, I mean, obviously, we've always performed well better than our loan loss. And so it's best to be conservative on these things, right? So...

[Gary Tenner:]

So as we're thinking about kind of the provision going forward, given that backdrop of those PCD loans and the allowance for that, are those balances and that's kind of allowance out there for the duration of those specific credits as long as they're -- or unless something thoroughly changes in your expected performance of the credits?

[Derrick Walsh:]

Correct. We will be monitoring them quarter-by-quarter in the same way that monitor our entire loan portfolio, including new originations. The whole portfolio gets analyzed on a quarter-to-quarter basis, depending on the different individual attributes of the loan, if certain aspects are changing, such as delinquencies, credit downgrades and then as well as the, of course, economic aspects of the -- in the broader environment and the different inputs that tie into the model there. So the 70 is, of course, the initial number, right, but that could certainly change. Also, obviously, if any of the loans were to prepay that would remove an allowance from it. So that's another factor that, that could change.

[Gary Tenner:]

Got it. Thank you.

[Operator:]

Thank you. [Operator Instructions]. There are no further questions at this time. I'd now like to turn the floor back over to Johnny Lai for closing comments.

[Johnny Lai:]

Thanks, everyone, for your interest. If you have any additional follow-ups, please contact me. And for those who are going to the JD conference, we'll see you tomorrow and Thursday. Thanks.

[Operator:]

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