Axos Financial, Inc. (AX) Q2 2022 Earnings Call Transcript | The Motley Fool

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Axos Financial, Inc. (NYSE:AX)
Q2 2022 Earnings Call
Jan 27, 2022, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings. Welcome to the Axos Financial, Inc. Q2 2022 earnings call. At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Johnny Lai, VP, corporate development and IR. Thank you.

You may begin.

Johnny LaiVice President of Corporate Development and Investor Relations

Thanks, Alex. Good afternoon, everyone, and thanks for joining us for today’s Axos Financial, Inc.’s second quarter 2022 financial results conference call. Joining us today are the company’s president and chief executive officer, Greg Garrabrants; and executive vice president and chief financial officer, Derrick Walsh; and executive vice president, finance, Andy Micheletti. Greg, Derrick, and Andy will review the — and comment on the financial and operating results for the three and six months ended December 31, 2021, 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. These forward-looking statements are made on the basis of current views and assumptions of management regarding future events and performance. Actual results could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties, therefore the company claims the safe harbor protection pertaining to forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company’s website located at for 30 days.

Details for this call were provided on the conference call announcement and in today’s earnings press release. All of these documents, including the 10-Q and an earnings supplement, are now available on our Investor Relations website. With that, I would like to turn the call over to Greg for opening remarks.

Greg GarrabrantsPresident and Chief Executive Officer

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I would like to welcome everyone to Axos Financial’s conference call for the second quarter of fiscal year 2022 ended December 31, 2021. I thank you for your interest in Axos Financial and Axos Bank.

We had an excellent quarter, with double-digit growth in loan originations, net income, book value per share, and earnings per share. Our strong results were broad-based, with net interest margins exceeding the high end of our target and balanced net interest income and fee income growth across our consumer banking and commercial banking segments. Securities, which is comprised of the direct-to-consumer securities trading business, managed portfolios, and our B2B security clearing and custody business, maintained solid client assets and sweep deposit balances despite a challenging quarter for the industry. Axos reported second-quarter net income of $60.8 million for the three months ended December 31, 2021, and earnings per diluted share of $1, representing year-over-year growth of 11% and 9.9%, respectively.

Our book value per share was $25.60 at December 31, 2021, up 17.5% from December 30, 2020. The highlights for this quarter include the following. Ending loan balances were $12.6 billion, up 6.1% linked quarter or 24.4% annualized. Strong loan originations in our auto and various C&I lending loan types more than offset a small decline in our single-family mortgage warehouse lending business.

Net interest margin was 4.1% for the second quarter, down from 4.22% in the quarter ended September 30, 2021, and up 16 basis points from 3.94% in the quarter ended December 31, 2020. Net interest margin for the banking business was 4.3%, compared to 4.48% in the quarter ended September 30, 2021, and 4.11% in the quarter ended December 31, 2020. We have successfully maintained a strong net interest margin and generated loan growth toward the higher end of our annual target through the first six months of our fiscal 2022. We continue to make steady improvements in our funding mix, with noninterest-bearing deposits increasing by approximately $215 million from September 30, 2021.

Noninterest-bearing deposits represented approximately 31% of our total deposits at December 31, 2021, a significant improvement from 19% in the corresponding period a year ago. Our efficiency ratio for the three months ended December 31, 2021, was 48.78%, compared to 48.71% in the first quarter of 2022. The efficiency ratio for the banking business segment was 39.39% for the second quarter of 2022 versus 39.93% in the first quarter of 2022. We achieved positive operating leverage in our banking business as a result of strong net interest income growth year over year and continuous focus on managing our operating costs.

Diluted earnings per share of $1 were up 10% from $0.91 in the year-ago quarter. Excluding one-time operating costs and noncash merger-related depreciation and amortization expenses, our diluted earnings per share was $1.04 for the three months ended 12/31/2021, an increase of 10.6% year over year. We continue to generate strong returns while maintaining excess capital. We generated a return on equity of 16.29% in the second quarter and a return on assets of 1.63%.

Capital levels remained strong with Tier 1 leverage of 10.13% at the bank and 9.42% at the holding company, both well above our regulatory requirements. Our credit quality remained strong, with annualized net charge-offs to average loans of 1 basis point, down from 16 basis points in the second quarter of fiscal 2021. We added $4 million to our loan loss provision this quarter to support our strong loan growth. Total allowance for credit losses was $140.5 million at December 31, 2021, representing 121 times our annualized net charge-offs and 1.1% of ending total loans.

Total loan originations for the second quarter ended December 31, 2021, were $2.8 billion, up 15.8% from the $2.4 billion in the year-ago period. Loan originations for investment were approximately $2.6 billion, an increase of 35% from the corresponding quarter a year ago. Q2 2022 originations were as follows: $179 million of single-family agency gain-on-sale production; $385 million of single-family jumbo portfolio production; $132 million of multifamily production; $26 million of commercial real estate production; $85 million of auto and unsecured consumer loan production; and $2 billion of C&I loan production, resulting in a net increase in C&I lending loan balances of $758 million. Mortgage banking gain-on-sale income generated $4.6 million, compared to $5.3 million in the quarter ended December 31, 2021, and $10.6 million in the corresponding quarter last year.

Originations decreased by approximately 11% linked quarter to $179 million, while margins were down due to normalization in the single-family mortgage gain-on-sale market across the industry. We anticipate lower mortgage banking gain-on-sale in the next few quarters as rising interest rates reduced demand for mortgage refinancing. Our pipeline of single-family agency mortgages was $141 million at January 25, 2022. Our jumbo single-family mortgage business continues to be stable.

We generated $385 million of loan production, offsetting elevated prepayments. Ending loan balances at December 31, 2021, were flat, in line with expectations. Demand for purchase transactions continues to be solid as reflected in our jumbo single-family mortgage pipeline of approximately $600 million at January 25, 2022. We are working on a few initiatives that could potentially generate fee income in our jumbo single-family lending business in the second half of calendar 2022.

C&I lending had a tremendous quarter. Loan originations were $2 billion, reflecting strong growth across our commercial specialty real estate business, lender finance, and construction lending. Our strong relationships, knowledge in structuring, and track record of execution have resulted in a steady expansion in loan production and net balances. Demand remains strong across loan types and geographies, with a backlog of approximately $572 million at January 25, 2022.

Given the large average loan size for C&I versus our jumbo single-family and multifamily loans and competition from banks and nonbank lenders, a few deals can have an outsized impact on our ending C&I loan balances. Ending balances in our mortgage warehouse portfolio were $595 million, down $60 million from $655 million at September 30, 2021. Our single-family warehouse business continues to focus on growing with existing and new customers. While balances will fluctuate based on underlying demand for mortgage refinancing, we continue to generate strong returns in this business.

We have maintained operational efficiency while investing in upgrading our technology, infrastructure leadership, and team members and incubating new businesses. Our Business Banking segment efficiency ratio was 39.4% and 39.7% for the three and six months ended 12/31/2021. Salary and benefit expenses were up 4.7% and 5.1% for the three and six months ended December 31, 2021. With merit-based increases and additional staffing hiring expected in calendar 2022, we…

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