Yahoo Finance Axos Financial, Inc. (NYSE:AX) Q3 2024 Earnings Call Transcript
Axos Financial, Inc. (NYSE:AX) Q3 2024 Earnings Call Transcript April 30, 2024
Axos Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Axos Financial, Inc. Third Quarter 2024 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Please go ahead, Johnny.
Johnny Lai: Thanks Kevin. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for the Axos Financial, Inc.'s third quarter 2024 financial results conference call are the company's President and Chief Executive Officer, Greg 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 and nine months ended March 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 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. All of these documents can be found on the Axos Financial website. 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 third quarter of fiscal 2024, ended March 31, 2024. 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 seventh consecutive quarter. Balanced organic loan and deposit growth coupled with further net interest margin expansion resulted in double-digit net interest income growth year-over-year in linked quarter annualized. We grew deposits by approximately $900 million linked quarter, outpacing our ending net loan growth by approximately $430 million.
Strong loan originations were partially offset by higher than expected payoffs. We reported net income of $111 million and diluted earnings per share of $1.91 for the three months ended March 31, 2024, representing year-over-year growth of 38.7% and 45%, respectively. Our tangible book value per share was $35.46 at March 31, 2024, up 27% from March 31, 2023. Other highlights this quarter include the following. Ending loans for investment, net of allowance for credit losses were $18.7 billion, up 2.6% linked quarter, or 10.4% annualized. Growth was broad-based with growth in non-real estate lender finance, single-family warehouse and fund finance, offsetting lower origination volumes and single-family jumbo mortgages, higher payoffs in commercial specialty real estate, multifamily, and deliberate runoffs in our auto book.
Net interest margin was 4.87% for the first quarter ended March 31, 2024, up 32 basis points from 4.55% in the quarter ended December 31, 2023, and up 45 basis points from 4.42% in the quarter ended March 31, 2023. One loan acquired from the FDIC paid off this quarter, boosting our net interest margin by approximately 3 basis points. Excluding the one-time gain associated with the FDIC loan purchase last quarter, non-interest income was up 4.5% from Q2 to Q3 due to higher mortgage banking income and prepayment fees. Our credit quality remains strong with net annualized charge-offs to average loans of 7 basis points in the three months ended March 31, 2024. The 7 basis points of net charge-offs this quarter includes 4 basis points of net charge-offs from auto loans covered by insurance policies with proceeds from those policies accounted for as fee income.
We continue to generate strong returns with a 20.71% average return on equity and a 1.98% return on average assets in the three months ended March 31, 2024. We had balanced loan originations in our commercial and industrial non-real estate lending, including asset-based lending, non-real estate lender finance, and fund finance balances. Ending balances for our small, balanced commercial real estate and commercial real estate specialty lending businesses declined by approximately $19 million and $180 million, respectively in the third quarter. We continue to reduce our consumer and auto loan balances given our preference for originating and retaining loans with lower duration, floating rates, and a better risk-adjusted return in the current environment.
Average loan yield for the three months ended March 31, 2024 was 8.65%, up 47 basis points from 8.18% in the prior quarter, and up 158 basis points from the corresponding period a year ago. Average loan yields for non-purchase loans were 8.19%, and average yields for purchase loans were 17.05%, which includes the accretion of our purchase price discount. New loan interest rates were the following. Single-family mortgages 8.7%, multifamily, 8.3%, C&I 9.2%, and auto, 10.2%. Our commercial real estate loans continue to perform well. It's worthwhile to point out that the structure, duration, and exit strategies for our commercial specialty real estate loans are significantly different from traditional CRE term loans that most other banks originate and hold.
The low loan-to-value and senior structure we have in place for an overwhelming majority of our commercial specialty real estate loans provides us with significant downside protection in the event of significant deterioration in the borrower's ability or willingness to repay, the valuation of the underlying properties, or any construction delays. Our commercial real estate loans are floating rate with contractual maturities generally between two and three years compared to fixed-rate loans with contractual maturities of seven or longer years for most commercial real estate loans. Of the $5.2 billion of commercial specialty real estate loans outstanding in March 31, 2024, multifamily was the largest segment representing 38% of total commercial real estate loans, while hotel, office, and retail represent 28% and 4% respectively.
On a consolidated basis, the weighted average loan-to-value ratio of our commercial real estate portfolio is 40%. Our retail and office segments of our commercial real estate book are well secured with weightage average LTVs of 46% and 36% respectively. Total commercial real estate loans secured by office properties declined by $8 million linked quarter to $410 million. Of the $410 million commercial real estate loans secured by office properties at the end of the quarter, 67% are A notes or note-on-note structures, all with significant subordination, with some having recourse to funds or cross-collateralization with other asset types, fund partners, and mezzanine lenders. These loans have an average loan-to-value of 37%, excluding any recourse or cross-collateralization.
Non-performing loans in our commercial specialty real estate portfolio were approximately $26 million at March 31, 2024, identical to the 12/31/2023 ending balance, representing less than 4 basis points of our total commercial real estate loans outstanding. There are two loans, one condo building in New York for $15 million and the student housing building at Berkeley for $11 million, which make up the non-performing loan totals for commercial specialty real estate. We do not anticipate incurring a material loss on either of these loans. Non-performing loans in our multifamily and commercial mortgage portfolio were approximately $38 million at March 31, 2024, roughly consistent with the December balance. Of the $38 million, there is one loan on an assisted living property for $25 million that has been reserved for more than a year.
There is interest in the property that could result in a sale which would produce minimal or no additional loss. The rest of the multifamily term loans are for lower-balanced properties located in California with recourse and personal guarantees. The average loan-to-value of our non-performing multifamily and commercial mortgages is approximately 60%. We do not expect to incur a material loss on any of the other multifamily loans categorized as non-performing. We closed the purchase of two loan portfolios with a UPB of $1.25 billion from the FDIC in December of 2023. Ending balances were roughly flat, declining by approximately $10 million from the December quarter end to the March quarter end. All loans purchased from the FDIC are current.
Non-performing single-family mortgage loans decreased from $54 million at December 31, 2023 to $51 million at March 31, 2024. The weighted average loan-to-value of our non-performing single-family mortgage portfolio was 55% at March 31, 2024. Given that home values continue to increase in the majority of markets where these properties are located, we did not foresee much loss content, if any, in our delinquent single-family mortgages. We increased deposits by $900 million, or 20% annualized in the third quarter. Checking and savings accounts representing 80% of total deposits in March 31, 2024 grew even faster at 25% annualized. Our deposits remain well diversified from a business perspective with consumer and small business representing 59% of total deposits, commercial cash, treasury, management, and institutional representing 24%, commercial specialty representing 7%, Axos fiduciary services representing 6%, and Axos securities, which is our custody and clearing business, representing 4%.
Total non-interest bearing deposits were approximately $2.8 billion, relatively flat quarter-to-quarter. Our balance sheet remains slightly asset sensitive given the shorter duration, variable nature of our loans, and the granularity and diversity of our consumer, commercial, and securities deposits. At March 31, 2024, approximately 66% of our loans were floating, 27% were hybrid arms, and 7% were fixed. Term deposits were only 5% of our total deposits at quarter end providing us flexibility to decrease interest costs if and when rates decline. For the quarter ended March 31, 2024, our consolidated net interest margin was 4.87%, while our banking business net interest margin was 4.92%. Our consolidated and banking business NIMS remain above our guidance of 4.25% to 4.35%, despite holding excess liquidity due to strong deposit growth.
We indicated last quarter that the FDIC loan purchase would boost our net interest margin by 35 to 45 basis points for the next several years. In addition to the amortization of our purchase discounts in the acquired loan portfolio, we recognized accelerated purchase discount accretion on one loan that paid off this quarter. The timing and amount of loan payoffs are unpredictable. We break out the average balances and loan yields for the purchase and non-purchase loans in our 10-Q for readers to separate the impact of the loan purchase on net interest margins. Total ending deposit balances at Axos Advisory Services, including those on and off Axos's balance sheet, declined by $32 million in the quarter, reflecting advisors investing excess cash into risk assets and higher yielding cash alternatives.
The rate of decline has decelerated, and we believe that the pace of cash sorting at Axos Advisory Services stabilized at or near the bottom, representing 3.6% of assets under custody at March 31, 2024, compared to the historic range of 6% to 7%. We are focused on adding new assets from existing and new advisors to grow our assets under custody and cash balances. In addition to our Axos Securities deposits on our balance sheet, we had approximately $550 million of deposits off balance sheets at partner banks and another $700 million of deposits held at other banks by software clients in our Zenith Accounting and Business Management vertical. Non-interest expenses increased $11.3 million linked quarter, driven by a seasonal increase in payroll expenses, higher FDIC insurance expenses, and an increase in headcount.
We have successfully onboarded several new leaders and teams in our commercial deposits, commercial lending, and our Axos Securities businesses. We believe these additions will help us grow and diversify our business from an operations capacity and product perspective. While we continue to evaluate adding talented individuals to our team, we expect the pace of hiring to slow significantly from the pace we've experienced so far year-to-date. Our focused investments in front and back-end systems, product features and service offerings, and other enterprise software and systems will further optimize our processes and capabilities. We started the initial transition of our small business banking platform to our universal digital bank with the goal of migrating all existing small business deposit customers to UDB in the next few quarters.
This platform transition will leverage the investment we have made in UDB and make our small business banking offering more modern and user-friendly. We started piloting our white-label banking with selected numbers of RIAs and introducing broker-dealers. While the initial version does not have all the capabilities that an Axos consumer deposit customer has today, we believe the ability to provide a turnkey banking solution to the hundreds of thousands of affluent clients of our custody and clearing business will provide another potential low-cost acquisition channel for deposits and loans. Axos Clearing, which includes our correspondent clearing and RIA custody business, continues to make steady progress. Total deposits at Axos Clearing were $1.3 billion at March 31, 2024, down only slightly from $1.4 billion at December 2023.
Of the $1.3 billion of deposits from Axos Clearing, approximately $762 million were on our balance sheet and $533 million were held at partner banks. The decline in off-balance sheet deposits is the primary reason for the sequential decline in non-interest income for Axos Securities. Total assets under custody were $35 billion at March 31, 2024, up from $34.4 billion at December 31, 2023. The pipeline for new custody clients remains healthy, comprised of 237 advisory firms with approximately $24 billion of combined assets under custody. We are prioritizing various front and back-end upgrades to our technology platforms for Axos Advisory Services. We believe the addition of new features and functionalities will improve our operating efficiency, scalability, and potentially expand the type of advisors we're able to service.
This is a multi-year initiative that will be implemented in stages, with a majority of the costs being offset by ongoing efficiency initiatives and additional revenue. We continue to outperform a majority of our peers from a loan, deposit, and earnings growth perspective, including margin and profitability. We remain well-positioned to maintain our outperformance given our strong liquidity and excess capital, a de minimis unrealized loss in our small investment securities portfolio, a multi-year boost in earnings and margin from our FDIC loan purchase, and solid organic growth prospects given the diverse nature of our banking and securities business. Our asset-based lending philosophy with conservative loan devalues and prudent structures makes us confident that we will be able to manage our credit through this cycle.
While many uncertainties exist with respect to the economy, inflation, interest rates, and geopolitics, we are focused on managing our risk and investing in our future. We have a proven track record of capitalizing on market dislocations, as we've already demonstrated with our FDIC loan purchase and stock buybacks. We are confident the investments we are making in business systems, processes, and people will generate attractive future returns for our shareholders. Now I'll turn the call over to Derrick, who will provide additional details on our financial results.
Derrick Walsh: 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. Following a strong start to the first nine months 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 ending loan balances will continue to be impacted by the pace and timing of payoffs in any given quarter. Demand in our ABL, lender finance, and capital call lines and select C&I lending categories remain solid, while higher interest rates continue to put downward pressure on our origination volumes in jumbo single-family mortgage, multifamily, small-balance commercial real estate, auto, and personal unsecured lending. Our loan pipeline remains solid at $1.7 billion as of April 26, 2024, consisting of $226 million of SFR jumbo mortgage, $53 million of SFR gain on sale mortgage, $17 million of multifamily and small-balance commercial, $23 million of auto and consumer, and $1.4 billion of C&I lending. Our provision for credit losses was $6 million in the three months ended March 31, 2024, compared to $5.5 million in the corresponding period a year ago.
Our allowance of credit losses to total loans held for investment was 1.36%, compared to 1.01% at March 31, 2023. We remain well-reserved relative to our historical and current credit loss rates. Lastly, our income tax rate was 28.8% for the third quarter ended March 31, 2024, slightly below the lower end of our guided range of 29% to 30%. Our tax rate in the third quarter benefited from the recognition of certain tax credits. We expect our annual tax rate to remain in the 29% to 30% range for the remainder of calendar 2024. With that, I'll turn the call back over to Johnny.
Johnny Lai: Thanks, Derrick. Kevin, we are ready to take questions.
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