Axos Financial, Inc. — Form 10-Q summary
Period: The filing covers the fiscal quarter and nine months ended March 31, 2022. This differs from the request metadata’s “2021 Q3”; the filing itself is for fiscal 2022 Q3. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and results
Axos is a diversified financial services company with Banking and Securities businesses. It provides nationwide banking, lending, clearing, custody and investment services. On August 2, 2021, it acquired Morgan Stanley’s E*TRADE Advisor Services custody business, rebranded Axos Advisor Services (AAS).
| Metric | Three months ended Mar. 31, 2022 | Year-over-year change | Nine months ended Mar. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $149.5 million | +10.2% | $441.7 million | +11.2% |
| Net income | $61.8 million | +$8.2 million | $182.8 million | +$21.4 million |
| Diluted EPS | $1.02 | vs. $0.89 | $3.02 | vs. $2.67 |
| Net interest margin | 4.02% | +6 basis points | 4.11% | +20 basis points |
| Non-interest income | $28.8 million | +$4.9 million | $86.3 million | −$2.2 million |
| Non-interest expense | $86.8 million | +$6.0 million | $257.3 million | +$24.6 million |
Adjusted earnings, a non-GAAP measure, were $63.8 million and adjusted diluted EPS was $1.05 for the quarter; for nine months, they were $189.0 million and $3.12. Adjustments principally exclude acquisition-related costs, including acquired-intangible amortization. The consolidated efficiency ratio was 51.26% for the quarter and 48.72% year to date, compared with 50.64% and 47.91%, respectively.
Financial position, cash flow and capital
- Assets and lending: Total assets were $16.1 billion at March 31, 2022, up 12.7% from June 30, 2021. Net loans held for investment increased 14.7% to $13.1 billion, driven mainly by commercial real estate and commercial-and-industrial lending.
- Deposits and liquidity: Deposits rose 17.7% to $12.7 billion, including a $1.7 billion increase in non-interest-bearing deposits, primarily associated with AAS. Cash, cash equivalents and cash segregated for regulatory purposes totaled $1.25 billion. Management stated liquidity sources were stable and adequate for anticipated needs over the next 12 months and beyond. The filing reported $1.56 billion of immediately available FHLB borrowing capacity, with additional capacity subject to collateral.
- Debt: Total borrowings, including FHLB advances, were $534.2 million, down 7.1% from June 30, 2021. In February 2022, Axos issued $150 million of 4.00% fixed-to-floating subordinated notes due 2032; the rate floats at three-month Term SOFR plus 227 basis points beginning in 2027.
- Cash flow, nine months: Operating activities provided $65.2 million, investing activities used $1.72 billion, and financing activities provided $1.87 billion. Financing inflows principally reflected deposit growth and subordinated-note proceeds; investing outflows mainly reflected loan growth and the AAS acquisition.
- Credit quality: Non-performing loans were $138.8 million, or 1.05% of gross loans, versus 1.26% at June 30, 2021. The allowance for loan losses was $143.4 million, or 1.08% of loans. The nine-month provision fell to $12.5 million from $22.5 million; the quarterly provision rose to $4.5 million from $2.7 million, primarily due to loan growth.
- Capital: Axos Financial and Axos Bank met regulatory capital requirements and were classified as well capitalized. At March 31, the company’s total risk-based capital ratio was 13.30% and the Bank’s was 12.24%. Tangible book value per share, a non-GAAP measure, was $23.51.
Material changes and management commentary
Net interest income growth reflected loan growth, reduced deposit funding costs and higher non-interest-bearing deposits, partly offset by lower yields on earning assets. AAS contributed custody and mutual-fund fees and low-cost deposits, while also increasing staffing, technology, clearing and other expenses. Mortgage banking income declined substantially year to date, reflecting lower activity and a less favorable comparison period; the prior-year period included H&R Block-related banking and service fees that did not recur. Quarterly mortgage banking income included an approximately $3.0 million mortgage-servicing-rights fair-value adjustment associated with expected higher rates and slower prepayments.
The filing provides no specific earnings or growth guidance. Management’s forward-looking discussion identifies risks including interest-rate changes, inflation, economic and real-estate conditions, credit quality, regulation, competition, COVID-19 uncertainty, acquisition integration and litigation. It states that no loans remained on COVID-19-related forbearance at March 31, 2022.
Risks, contingencies and unusual items
- The company reported $2.82 billion of commitments to originate loans and a $10 million unfunded equity-investment commitment. Commitment totals do not necessarily represent future cash needs.
- Available-for-sale securities had $3.34 million of gross unrealized losses at March 31, 2022; accumulated other comprehensive income included a net unrealized loss of $1.63 million. Non-agency mortgage-backed securities were $151.5 million and measured using significant unobservable inputs.
- Several securities-related class and derivative lawsuits remained disclosed. Settlement agreements in two class-action matters had been submitted for court approval; the company said the agreed amounts were not material to the quarter’s financial statements. Approval was not assured, and the filing said eventual losses for other actions could not be reasonably estimated.
- Interest-rate sensitivity modeling estimated first-12-month net interest income would rise 8.7% under an immediate 200-basis-point increase and fall 2.6% under a 100-basis-point decrease. These are model scenarios, not forecasts; management cautioned that actual results may differ.
Important facts for investors to verify
- Confirm the fiscal-period designation: the filing is for the quarter ended March 31, 2022, notwithstanding the request metadata.
- Track loan growth and mix, especially commercial real estate and C&I, alongside non-performing loans, charge-offs and allowance coverage.
- Assess whether deposit growth and AAS-related low-cost deposits persist, and how rising rates affect deposit costs, asset yields and net interest margin.
- Monitor AAS integration, its contribution to fee income and deposits, and related expense growth; distinguish GAAP results from the company’s non-GAAP adjusted measures.
- Review securities valuation and accumulated unrealized losses, liquidity capacity and regulatory capital, as well as court approval and final costs of disclosed litigation settlements.