Axos Financial, Inc. — FY2023 Form 10-K
Period note: The provided filing is for the fiscal year ended June 30, 2023; it is not a 2022 Q4 filing. Unless noted otherwise, financial amounts below are in U.S. dollars.
Business context and reporting period
Axos is a digital financial services company with two operating segments: Banking and Securities. At June 30, 2023, it reported $20.3 billion in assets and approximately $34.8 billion of assets under custody and/or administration at Axos Clearing. Banking offers nationwide consumer and commercial deposits and lending; Securities provides clearing, custody, brokerage and investment advisory services.
Financial performance and position
| Metric | FY2023 / June 30, 2023 | FY2022 / June 30, 2022 |
|---|---|---|
| Interest and dividend income | $1,157.1 million | $659.7 million |
| Net interest income | $783.1 million | $607.2 million |
| Provision for credit losses | $24.8 million | $18.5 million |
| Non-interest income | $120.5 million | $113.4 million |
| Non-interest expense | $447.1 million | $362.1 million |
| Net income | $307.2 million | $240.7 million |
| Diluted EPS | $5.07 | $3.97 |
| Net interest margin | 4.35% | 4.13% |
| Total assets | $20.35 billion | $17.40 billion |
| Loans, net of allowance | $16.46 billion | $14.09 billion |
| Deposits | $17.12 billion | $13.95 billion |
| FHLB advances | $90.0 million | $117.5 million |
| Borrowings, subordinated notes and debentures | $361.8 million | $445.2 million |
- Operating cash flow was $188.0 million; investing activities used $2.39 billion, principally reflecting loan originations, while financing activities provided $3.01 billion, including $3.18 billion of net deposit growth. Cash and cash equivalents, including cash segregated for regulatory purposes, ended the year at $2.38 billion.
- Net interest margin improved, but the interest rate spread narrowed to 3.44% from 3.91%. The consolidated efficiency ratio was 49.48%, versus 50.25%; the Banking segment ratio rose to 47.76% from 41.61%.
- At year-end, 92.3% of deposits were demand and savings accounts. Non-interest-bearing deposits declined to $2.90 billion from $5.03 billion, while interest-bearing deposits increased to $14.22 billion from $8.91 billion. Brokered deposits were $2.03 billion.
- Regulatory capital ratios remained above minimums. The Company’s CET1 ratio was 10.94% and the Bank’s was 11.63%; both were classified as well-capitalized.
Material changes versus FY2022
- Net income increased 27.6%, and diluted EPS rose from $3.97 to $5.07. Interest income growth reflected higher loan balances and yields as well as higher yields on interest-earning deposits.
- Interest expense increased sharply, from $52.6 million to $374.0 million, mainly due to higher rates paid on deposits and growth in interest-bearing deposits. Deposit cost at period-end rose to 3.12% from 0.54%.
- Loan balances grew by approximately $2.4 billion net. Commercial real estate loans increased to $6.20 billion from $4.78 billion, and commercial and industrial loans increased to $2.64 billion from $2.03 billion.
- Non-interest income increased 6.3%, including higher broker-dealer fees, partly offset by lower mortgage banking income and prepayment fees as higher rates reduced originations and prepayments.
- Non-interest expense rose 23.5%, including higher payroll, technology, marketing and regulatory costs. The year included a $16.0 million accrual for an adverse legal judgment that is under appeal.
- Asset quality ratios improved: non-performing loans were 0.52% of loans versus 0.83%, and non-performing assets were 0.47% of assets versus 0.68%. Allowance for credit losses increased to $166.7 million, though it declined to 1.00% of loans from 1.04%.
Outlook, management commentary, risks and unusual items
- Long-term objectives: Management states goals of annualized return on average common equity of at least 17%, annual growth in average interest-earning assets of at least 12%, and a Banking segment efficiency ratio of 40% or lower. These are strategic objectives, not near-term earnings guidance; the filing provides no specific FY2024 forecast.
- Interest-rate and funding risks: Management identifies rate movements, deposit pricing and mix, competition for deposits, and deposit volatility as important uncertainties. The filing reports that the Federal Reserve target range reached 5.00%–5.25% in June 2023 and 5.25%–5.50% in August 2023. Axos reported substantial borrowing capacity at the FHLB and Federal Reserve discount window, subject to collateral and other conditions.
- Credit and concentration risks: A majority of loans are real-estate secured; California and New York are significant geographic exposures. CRE represented 37.2% of loans and commercial and industrial loans 15.8%. Management highlights possible loan losses from economic weakness, lower property values and borrower defaults. The auditor identified allowance-for-credit-loss scenario weighting for CRE and C&I as a critical audit matter.
- Liquidity and deposit composition: Management states liquidity sources are stable and adequate, and reports approximately 90% of Bank deposits as insured or collateralized. Separately, $1.7 billion of deposits exceeded the FDIC insurance limit, and brokered deposits were $2.03 billion; investors should assess concentration, renewal and pricing sensitivity.
- Legal contingency: A jury verdict in MUFG Union Bank, N.A. v. Axos Bank resulted in a judgment for the plaintiff. Axos appealed and recorded a $16.0 million accrual; the appellate outcome and ultimate loss are uncertain. Other ordinary-course proceedings are disclosed, but the filing says they are not expected to have a material adverse effect.
- Other notable matters: Axos repurchased $49.3 million of shares under its existing authorization and announced an additional $100 million repurchase authorization in April 2023, with no purchases under that new authorization by year-end. No common dividends were declared; the company says it expects to retain earnings. On August 23, 2023, it agreed to acquire approximately $62 million of marine floor financing loans at par, plus $2 million for servicing rights and client lists.
- The filing also cites cybersecurity, third-party technology, regulatory, competitive, real-estate, securities valuation and litigation risks. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported controls effective as of June 30, 2023.
Most important facts for investors to verify
- Whether deposit growth can be sustained without further material increases in deposit costs, brokered funding or rate-sensitive balances.
- How loan performance, collateral values and allowance adequacy evolve—particularly in CRE, C&I, multifamily and California/New York exposures.
- The final outcome and potential financial impact of the MUFG Union Bank litigation appeal relative to the $16.0 million accrual.
- Whether net interest margin, efficiency and capital remain consistent with management’s long-term objectives as rates and funding conditions change.
- The sensitivity of reported financial results to Level 3 securities valuation assumptions and to the economic scenarios used in credit-loss estimates.