Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the company’s fiscal first quarter of 2022. The filing is unaudited. Although the request labels this “2021 Q1,” the filing’s stated reporting period is September 30, 2021.
Business context
Axos is a diversified financial services company operating Banking and Securities businesses. Its banking operations provide nationwide consumer and commercial deposits and lending; its securities operations provide clearing, custody, brokerage and investment services. On August 2, 2021, Axos acquired certain assets and liabilities of Morgan Stanley’s E*TRADE Advisor Services business, renamed Axos Advisor Services (AAS), for an initial $54.6 million in cash.
Financial performance and condition
| Metric | Quarter ended September 30, 2021 | Comparable 2020 quarter or prior balance-sheet date |
|---|---|---|
| Net interest income | $146.6 million | $127.3 million |
| Provision for credit losses | $4.0 million | $11.8 million |
| Non-interest income | $26.7 million | $35.9 million |
| Non-interest expense | $84.4 million | $75.5 million |
| Net income | $60.2 million | $53.0 million |
| Diluted EPS | $0.99 | $0.88 |
| Net interest margin | 4.22% | 3.84% |
| Efficiency ratio | 48.71% | 46.30% |
| Return on average assets / common equity | 1.66% / 16.20% | 1.56% / 17.26% |
| Total assets | $14.9 billion | $14.3 billion at June 30, 2021 |
| Net loans | $11.9 billion | $11.4 billion at June 30, 2021 |
| Total deposits | $11.7 billion | $10.8 billion at June 30, 2021 |
| Total borrowings, including FHLB advances | $413.4 million | $574.9 million at June 30, 2021 |
| Stockholders’ equity | $1.46 billion | $1.40 billion at June 30, 2021 |
Net interest income rose 15.2%, supported by loan growth and lower deposit funding costs. The company’s non-GAAP adjusted earnings were $62.2 million, or $1.03 per diluted share, versus $54.8 million, or $0.91, in the prior-year quarter; these measures exclude specified acquisition-related and other costs.
Cash and cash equivalents were $1.00 billion, with an additional $269.4 million segregated for regulatory purposes. Operating cash flow was negative $133.4 million; investing cash flow was negative $398.9 million, including the AAS acquisition; financing cash flow was positive $764.0 million, principally reflecting deposit growth. The reported ending cash-flow balance, $1.269 billion, includes segregated cash.
At quarter-end, the allowance for credit losses on loans was $136.8 million, or 1.14% of gross loans. Non-performing loans were $134.1 million, or 1.12% of loans, down from $145.2 million at June 30. Total non-performing assets were $140.5 million, or 0.94% of assets. The company and bank reported capital ratios above applicable “well capitalized” thresholds.
Material changes and management commentary
- Non-interest income fell $9.2 million year over year, mainly because mortgage banking income declined $14.3 million and certain H&R Block-related banking fees did not recur. Broker-dealer fees increased $6.1 million, partly reflecting AAS.
- Non-interest expense increased $8.9 million, with higher data-processing, staffing and clearing costs. Management attributed the increase in part to AAS and business expansion.
- Non-interest-bearing deposits increased $1.16 billion from June 30, primarily due to AAS-related deposits. Total deposits increased $931.6 million while borrowings fell $161.5 million.
- Loan originations for investment were $2.09 billion, versus $1.33 billion in the prior-year quarter. Commercial real estate loans increased to $3.49 billion from $3.18 billion at June 30.
- Management stated that available liquidity was stable and adequate for anticipated needs for the next 12 months and beyond. It gave no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- The AAS purchase-price allocation was preliminary at quarter-end: $27.1 million of identifiable intangibles and $24.4 million of goodwill were recorded; final working-capital adjustments remained under review.
- Several securities class-action, derivative and related legal matters remain pending or subject to appeal. The company disputes the allegations and states that it cannot reasonably estimate any eventual loss or range of loss.
- At September 30, Axos Clearing’s customer reserve deposit was $214.3 million against a stated $241.0 million requirement. The filing says a $31.0 million deposit was made on October 1, 2021. Investors may wish to verify the subsequent compliance position.
- Interest-rate sensitivity modeling showed estimated net interest income increasing 10.6% in the first 12 months under an immediate 200-basis-point rate increase, but decreasing 2.0% under a 100-basis-point decrease. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments and deposit behavior.
- Management continued to monitor COVID-19-related uncertainty; no loans remained in COVID-19 forbearance at September 30, 2021. The filing also identifies credit quality, real estate markets, rates, regulation, competition and acquisition integration as risks.
Important facts for investors to verify
- Whether AAS delivers expected fee income, low-cost deposits and integration benefits, and how its final purchase accounting affects goodwill and amortization.
- Whether loan growth—particularly in commercial real estate and auto/consumer—affects provisions, delinquencies and the allowance for credit losses.
- Whether deposit growth and funding costs remain favorable as acquired deposits and other balances evolve.
- The status and potential financial effects of pending litigation, which the company says cannot currently be estimated.
- The post-quarter status of Axos Clearing’s customer reserve requirement and the effect of interest-rate changes on margins and economic value.