Axos Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Axos Financial Incorporated 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. 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.

Operator

Thank you, Johnny. You may begin.

Speaker 1

Thanks, Alicia. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial, Inc. 2nd quarter 2024 financial results conference call are the company's President and Chief Executive Officer, Greg Garrabrants Executive Vice President and Chief Financial Officer, Derek Walsh and Executive Vice President of Finance, Andy Micheletti. Greg and Derek will review and comment on the financial and operational results for the 3 6 months ended December 31, 2023, and we will be available to answer questions after those prepared remarks.

Speaker 1

Before I begin, I would like to remind listeners that 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 accessfinancial.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.

Speaker 1

All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg.

Speaker 2

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 Q2 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 6th consecutive quarter.

Speaker 2

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 $638,000,000 linked quarter. We reported net income of $152,000,000 and earnings per share of $2.62 for the 3 months ended December 31, 2023, representing year over year growth of 86% 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 percent year over year to $1.56 Our tangible book value per share was $33.45 at December 31, 2023, up 25 percent from December 31, 2022. Other highlights for this quarter include the following: Ending loans for investment balance net of discount were $18,500,000,000 up 8% linked quarter or 32% annualized.

Speaker 2

Excluding the FDIC loan purchase, ending non purchase loans held for investment increased by $443,000,000 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 percent for the Q1 ended December 31, 2023, up 19 basis points from 4.36 percent 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.

Speaker 2

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 Quarterly pre tax income for our securities business was $10,800,000 in the Q2 of 2024. Our credit quality remains strong with net annualized charge offs to average loans of 2 basis points in the 3 months ended December 31, 2023. The majority of the 2 basis points of net charge offs this quarter were from auto loans that are covered by insurance policies with proceeds from those insurance policies accounted for as We completed the purchase of 2 performing commercial real estate and multifamily loan pools from the FDIC The combined unpaid principal balance of approximately $101,250,000,000 at 63 percent of par value. We recognized a $65,000,000 after tax gain and increased our allowance for loan loss by $75,000,000 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.

Speaker 2

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 percent at the bank and 9.4% at the holding company, both well above our regulatory requirements. We repurchased approximately $59,000,000 of common stock in the 2nd quarter in addition to the $24,000,000 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 $83,000,000 at an average share price of $36.49 per share representing 2.8% of the shares outstanding as of Twelvethirty Onetwenty 23. We had strong organic loan originations in our Commercial and Industrial Group, Non Real Estate, Lender Finance, Equipment Finance and Fund Finance Lending Businesses.

Speaker 2

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 better risk adjusted return in the current environment. Average loan yields for the 3 months ended December 31, 2023 was 8.18 percent, 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 purchase loans were 8.02% and average yields for purchase loans were 18.51 percent, 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: single family mortgages 8.1% Multifamily 8.6 percent C and I 9.1 percent and Auto 10.3%.

Speaker 2

Our commercial real estate loans continue to perform well. The low loan to value and senior structures we have in place for an overwhelming majority of our commercial specialty real estate loans provide us with significant downside protection in the event of Of the $5,000,000,000 of commercial specialty real estate loans outstanding at December 31, 2023, multifamily was the largest segment representing 34% of the Total commercial real estate specialty loans, while hotel, office and retail represent 20%, 8% and 4%, respectively. On a consolidated basis, the weighted average loan to value of our commercial specialty real estate portfolio was 40%. For the retail and office segment of our commercial specialty Real estate book, the weighted average LTV is 40% 38%, respectively. Total Cressel loans secured by office properties declined by $38,000,000 quarter to $418,000,000 Of the $418,000,000 Cressel loans secured by office properties at the end of the quarter, 59% are A notes or note on note structures, all with significant subordination with some having recourse to funds or sponsors or cross collateralization with other asset types from Fund Partners and Mezzanine Lenders.

Speaker 2

These loans have an average loan to value of 32% excluding any recourse across collateralization. Non performing loans in our commercial specialty real estate portfolio were approximately $26,000,000 at December 31, 2023, identical to the September 30, 2023 ending balances, representing 5 basis points of our total CRE loans outstanding. We do not anticipate incurring a material loss in either of these loans. Non performing loans in our multifamily commercial mortgage portfolio were approximately $37,000,000 at December 31, 2023, down by 1,500,000 from the September 2023 balance. The average loan to value of our non performing multifamily and commercial mortgages is approximately 60%.

Speaker 2

Although we cannot be certain, we do not expect to incur a material loss in any of the asset backed loans currently categorized as nonperforming. Non performing single family mortgages increased from $36,600,000 at September 30, 2023 to $54,300,000 at December 31, 20 Q3. The increase was primarily the result of a $14,300,000 loan becoming delinquent. The property has an updated loan to value of approximately 81% and the property is listed for sale and for rent. The average loan to value of other single family mortgages that became delinquent this quarter was 49.5%.

Speaker 2

On December 7, 2023, we completed the purchase of 2 loan pools with approximately $1,250,000,000 of UPB for $786,000,000 from the FDIC at a 37% discount to par value. Of that discount, we recognized $92,000,000 pretax is part of a bargain purchase gain, recorded a $70,000,000 loan loss. As a result, assuming any loan loss in the pool is at or Below the amount allocated in the loan loss, Axos will accrete approximately $301,000,000 of discount over the life of these loans into income. The loan pools are comprised of approximately $578,000,000 of commercial real estate loans with a weighted average loan to value of 50% and remaining term of 41 months $676,000,000 of multifamily loans with a weighted average loan to value of 67% and remaining term of 120 months. All 50 8 loans are current on principal and interest payments with a borrower paying an average fixed rate of 3.8%.

Speaker 2

As part of the cash purchase, we received a series of back to back interest rate swaps that allow Axos to receive a variable note rate of approximately 6.9% without discount. We provided additional details regarding the FDIC loan purchase in our earnings supplement. We also broke out the margin and net income perspective that we expect to remain over the next several years. I'll provide additional details regarding how investors think about the net interest margin We had another strong quarter of deposit growth with ending balances increasing by 1,000,000,000 from June 30, 2023, or 12.6 percent annualized. Checking and savings accounts representing 95% of total deposits at Twelvethirty Onetwenty 23 grew even faster at 20% annualized.

Speaker 2

Our deposits remain well diversified from a business mix perspective with consumer and small business representing 1% of total deposits, commercial cash, TM and Institutional representing 21, commercial specialty representing 7, Axos Fiduciary Services representing 6 and Axos Securities, which is our custody and clearing on balance sheet representing 5. Total non interest bearing deposits were approximately $2,800,000,000 relatively flat quarter over quarter. Cash sweep deposits fell by approximately $200,000,000 offset by $133,000,000 sequential increase in non interest bearing commercial deposits. The new commercial deposit teams, including Fund Finance, are starting to contribute meaningfully to our non interest bearing deposit growth. We're also seeing upticks in our Axos Fiduciary Service deposit balances.

Speaker 2

Our balance sheet remains asset sensitive given the shorter duration, variable rate of our loans and the granularity and diversity of our consumer, commercial and securities deposits. For the quarter ended December 31, 2023, our consolidated net interest margin was 4.55%, While our banking business net interest margin was 4.62 percent, our consolidated and banking business net interest margin remain well above our prior consolidated net interest margin guidance of 4.25% to 4.35%, aided by strong organic loan growth, accretion from the FDIC loan purchase and some normalization in our Axos liquidity. Total ending deposit balances at Axos Advisory Services, including those on and off Axos' balance sheet declined by $200,000,000 in the quarter, reflecting Advisor investing excess cash into risk assets in reaction to the year end stock market rally. We believe that the pace of cash sorting at Axos Advisory Services has stabilized at or near the bottom representing 4% of assets under custody as of December 31, 2023 compared to an historic range of 6% to 7%. In addition to our AXO securities deposits on our balance sheet, we had approximately $550,000,000 of deposits off balance sheet at partner banks and another $750,000,000 of deposits held at other banks by software clients in our C and F Accounting and Business Management vertical.

Speaker 2

We expect our net interest margin to be augmented by the FDIC loan purchase. Given that the borrowers pay a fixed rate substantially below current market rates, we expect that these loans will have a relatively low duration Long duration and prepays will be relatively low, if any. Our baseline assumption is that none of the acquired loans prepay and that we do not sell any of our acquired loans prior to maturity. Under those assumptions, we expect our consolidated net interest margin will increase by approximately 40 basis points to 50 basis points above our prior 4.25 to 4.35 consolidated targets for the next 4 to 6 quarters. As we grow net new loans by $500,000,000 to $700,000,000 per quarter, assuming our high single digit to low teens loan growth target, the net interest margin boost for the purchase loans will gradually decline over time.

Speaker 2

In the event that 1 or more loans prepays, our net interest margin will be further enhanced due to the immediate recognition of the remaining price discount. With respect to the question of net interest margin sensitivity in the event of a Fed Funds decline, several dynamics are worth considering. First, approximately 28% of our loans, representing $5,200,000,000 were hybrid arms as of December 31, 2023, of which 16% will reprice in 1 year, 18% will reprice in 2 years, and 18% will reprice in calendar 2026, with the remaining 48% repricing in 2027 beyond. The repricing of these hybrid loans will provide some offset to reduced index rates on floating rate adjustable loans if and when the Fed starts to reduce interest rates. The hybrid arms consist primarily of 3 to 5 year fixed rate multifamily and 5 year hybrid single family loans.

Speaker 2

Of the approximately $2,200,000,000 of hybrid multifamily loans yielding approximately 5.15%, 28% adjusted in calendar 2024, 28% adjusted in calendar 2025, 14% in calendar 2026 and the remaining 30% lower price in 2027 and beyond. Of the approximately $3,000,000,000 of single family loans yielding approximately 5 point 4%, 8% adjusting calendar 2024, 10% adjusting calendar 2025, 21% adjusting calendar 2026, remaining 61% will reprice in 2027 and beyond. At twelvethirty onetwenty 23 approximately 64% of our loans were floating and 28% are hybrid arms and 8% were fixed. With respect to the 64% of our loans that are floating rate, We work hard to have strong index floors in our loans, but these index floors are generally well below the current index rate. Therefore, the margin offset to rate reductions floating rate loans other than the repricing of hybrid loans will be a reduction in the rate we pay on deposits.

Speaker 2

Although it is difficult to predict how quickly we can lower deposit rates when the Fed Approximately 16% of our total deposits are tied or sensitized to Fed funds and they should adjust quickly. Given that more than 90% of our consumer deposits are non maturity deposits, we have the ability to lower those rates depending on deposit competition, loan growth and the sensitivity of our depositors to reduced rates. We continue to invest in front and back end systems, IT Infrastructure and Security and other enterprise software and systems that will further optimize our business and functional units. After launching our Universal Digital Bank 2.0, the latest version of our consumer and mobile banking applications in September, we are working on transition Our small business banking platform from a legacy system to UDB, a move that has been completed for new customers with a transition for most existing small business customers occurring before the end of this current fiscal year. This platform transition will leverage the investments we have made in UDB and make our SVB offering more modern and user friendly.

Speaker 2

Our white label banking for RIAs and IVDs continue to make progress with a beta launch expected in the next few months. We believe the ability to provide a turnkey banking solution to the hundreds of thousands of affluent and high net worth clients of our custody and clearing Business will be a differentiator from a service and efficiency perspective. In our Zenith business management vertical, we are investing to modernize the user experience and add new features to the software. We see tremendous long term opportunity to grow market share of fee income, deposit and cross sell other banking products to clients in the business and Vertical. Axos Clearing, which includes our Correspondent Clearing and RIA Custody business continues to make steady progress.

Speaker 2

Non interest income from the securities business increased 3% year over year to $67,000,000 The primary driver of growth in the The income from Axos Securities is higher interest rates, partially offset by lower average balance of deposits held at partner banks. Total deposits at Axos Clearing were $1,400,000,000 at December 31, 2023, down from $1,600,000,000 in the prior quarter. Of the $1,400,000,000 of deposits from Axos Clearing, approximately $800,000,000 was on our balance sheet and $550,000,000 were held at partner banks. Net new assets in our custody business increased by approximately $172,000,000 in the 3 months ending December 31. We onboarded 13 new advisors this quarter.

Speaker 2

The pipeline for new custody clients remains healthy, comprised of 233 advisory firms with approximately $22,000,000,000 of combined assets under custody. We have made good progress on the systems and product front, launching a refreshed client portal and securities baseline of credit for RAA clients towards the end of the year. We see tremendous opportunities to grow our existing businesses and improve operational efficiencies across business and functional units. The market dislocation and corporate restructuring among our bank and non bank competitors have created a once in a decade opportunity to add talented individuals and teams to access. Many of the additions we have made over the past 9 months have already contributed meaningfully to our growth and we are actively recruiting across various commercial deposit, lending and business verticals to help build and accelerate several strategic and operational initiatives on our long term roadmap.

Speaker 2

With strong liquidity and excess capital, A de minimis unrealized loss in our small investment securities portfolio, a multiyear boost in earnings and margin from the FDIC loan purchase, and solid organic growth prospects given the diverse nature of our banking and securities businesses, we are focused on widening our lead relative to our competitors. Our returns, credit and margins are best in class because we focus on asset based lending opportunities with the best risk adjusted returns and restructured deals with low leverage and credit enhancements. We have a proven track record of repositioning ourselves during pivotal turning points during the banking and economic cycle. We are confident the investments we are making in our business, systems, processes and people will generate a drive to future returns for our shareholders. Now I'll turn the call over to Derek, who will provide additional details on our financial results.

Speaker 3

Thanks, Greg. To begin, I'd like to highlight that in addition to our press release and 8 ks 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. Compared to the quarter ended September 30, 2023. Salaries and benefit expenses increased by $3,100,000 primarily due to new team member additions and the 1st full quarter of the annual merit based increases that were awarded in September 2023 to our staff.

Speaker 3

It was also the 1st full quarter for the LV Marine Finance Business being a part of Axos. Advertising and promotional expenses were down by approximately $600,000 as we scaled back certain deposit related marketing expenses. Professional service fees were down $3,800,000 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 1st 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.

Speaker 3

For those who may not be as familiar with the Axos story, we deployed a similar strategy 7 to 8 years ago by reinvesting a portion of profits from our H and 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 non interest 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 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.

Speaker 3

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, Creswell 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 and I book given the shorter duration for these loans. Our loan pipeline remains solid at $1,700,000,000 as of January 26, 2024, consisting of $277,000,000 of single family jumbo mortgage, dollars 70,000,000 of agency gain on sale mortgage, $52,000,000 of multifamily and small balance commercial, dollars 23,000,000 of auto and Consumer and $1,300,000,000 of C and I. Our income tax rate was 30.2% for the Q1 ended December 30 largely in line with our guided range of 29% to 30%.

Speaker 3

As a reminder, typically, We have higher employee related taxes and FDIC assessments in the 1st 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 non interest expenses. With that, I'll turn the call back over to Johnny.

Speaker 1

Thanks, Derek. We are ready to take questions.

Operator

Great, thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your questions.

Speaker 4

Thanks. Good afternoon, guys. So question on the margin outlook, Excluding the loans from the FDIC, trying to look through like maybe the guidance would be slightly lower than before or Would that $425,000,000 to $435,000,000 range still hold as appropriate?

Speaker 3

Yes, That's the $425,000,000 to $435,000,000 will still hold for the calendar year of 2024

Speaker 4

That's it for the organic. Yes. And then you can provide us a little bit more details on some of this expense growth. I'm just looking at Year over year expenses were up 13% this quarter. Last quarter, they were up 20% year over year.

Speaker 4

I guess what there like a year over year growth rate that we should be looking at now that there's going to be a little bit more investment going on?

Speaker 3

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. Obviously, different quarters will have some there'll be lumpiness, but when you look at it on an annualized basis. I think it will generally align with that loan growth rate that we provide. This first Quarter 1st 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 FUTA taxes that Our work through in that January, February month.

Speaker 2

Hey, Andrew. I think we are recruiting A decent amount of talent and sometimes that talent comes on and Yes. 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 You know conservatively I'd take it more into the 15%, 16% range or something like that just because 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, 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.

Speaker 2

So I think we're opportunistically out looking for Teams like that. There's a few more in the pipeline too that are not cheap, so.

Speaker 4

Got it. So is it really driven by new hires or there are some products that you want to bring on to?

Speaker 2

Well, I mean, in some cases, it's been new products like the Fund Finance team was a new product. Others, it might be new geography. We've been looking up In the Valley for stuff there. And in other cases, it's just like those 2 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. It's really a little bit of everything.

Speaker 2

And there's some teams that are very vertically they're lending vertical focused too. So It really just depends. But I would say in general, there's just 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 let 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.

Speaker 2

And like Derek said, I think it's a great analogy. We did that With H and R Block, I don't think it's really at that level 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.

Speaker 4

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

Speaker 2

Yes. True.

Speaker 4

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

Speaker 2

Thank you. Thanks, Anders.

Operator

Thank you. Our next question comes from the line of Edward Hemmengram with Shaker Investments. Please proceed with your question.

Speaker 5

Yes. Hi, Greg.

Speaker 2

Hey, S.

Speaker 5

A couple of questions. Just it looked like you're you didn't pay any Excess FDIC fees?

Speaker 4

No, the guidance

Speaker 3

the regulation is generally aimed at Larger banks north of $100,000,000,000 in assets and with $5,000,000,000 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.

Speaker 5

Yes. We do. We got about $5,000,000,000 okay threshold. So That makes sense. Just the other thing is I noticed your Loan loss provision was higher this quarter, anything unusual there?

Speaker 3

Yes, I can walk through that. So yes, there There's a couple of different aspects to that $13,500,000 number. About $5,000,000 of it was related to the loan purchase. So while for the purchase credit deteriorated assets, we took $70,000,000 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 $5,000,000 And then as a reminder, The unfunded commitment provision also is included in that line item.

Speaker 3

So that was another $1,000,000 for unfunded loans As our unfunded balances grew by a couple of $100,000,000 this past quarter and so the Net remaining once you back those out was about $7,500,000 which is generally consistent with our allowance on the whole.

Speaker 5

Great and good luck on finding talented people.

Speaker 2

Thank you. Thanks Ed. Thanks Ed.

Operator

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

Speaker 4

Thanks. Good afternoon, everybody.

Speaker 1

Good morning, Derek.

Speaker 4

Derek, you just addressed part of my question as it relates to the amount The gain and the build into the allowance. Given I wonder if you could just go into any detail or thoughts about the 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.

Speaker 3

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?

Speaker 3

There's a couple office in there. There are a couple land. And so take an analysis through that and say, What is the likelihood of loss based on all the different attributes that are funneled into the allowance model And that of course includes all 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.

Speaker 3

And so based on those number of factors and kind of that process, that's how we ultimately Got to the $70,000,000 on that subset of loans.

Speaker 2

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

Speaker 4

So as we're thinking about kind of the provision going Given that backdrop of those PCD loans and the allowance for that, is this 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 truly changes in your expected performance of the credits?

Speaker 3

We will be monitoring them quarter by quarter in the same way That we monitor our entire loan portfolio including new originations. The whole portfolio gets It's 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 $70,000,000 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.

Speaker 3

So That's another factor that that could change.

Speaker 4

Got it. Thank you.

Speaker 2

Okay, that's it.

Operator

All right. There are no further questions at this time. I'd now like to turn the floor back over to Johnny Lai for closing comments.

Speaker 1

Thanks everyone for your interest. If you have any additional follow ups, Please contact me. And for those who are going to the Janney 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.

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Key Takeaways

  • In Q2 FY2024, Axos reported net income of $152 M and EPS of $2.62, up 86% and 94% YoY, driven by double-digit growth in loans (+8% sequential) and deposits (+$638 M sequential) alongside a net interest margin of 4.55%.
  • Axos purchased FDIC loan pools at a ~37% discount, recognized a $65 M after-tax GAAP gain and $75 M allowance increase, and expects a 40–50 bp NIM boost over the next 4–6 quarters from accretion.
  • Credit quality remains strong, with annualized net charge-offs of 2 bp, nonperforming CRE loans at 5 bp of balances and weighted average LTVs ~40%, and management does not anticipate material losses.
  • Capital ratios were robust with Tier 1 leverage at 10.2% (bank) and 9.4% (holding company), and the company repurchased $83 M of stock YTD at an average price of $36.49.
  • Management is investing in strategic growth—recruiting talent across lending and treasury management, upgrading its Universal Digital Bank platform, and expanding white-label and fiduciary services—which will drive near-term non-interest expense growth.
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Earnings Conference Call
Axos Financial Q2 2024
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