Axos Financial, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited report covers the fiscal quarter and six months ended December 31, 2021, compared with the corresponding 2020 periods. Axos operates Banking and Securities businesses, providing nationwide consumer and commercial banking, lending, clearing, custody and investment services.
Financial performance and condition
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Six months ended Dec. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $145.6 million | $134.1 million | $292.2 million | $261.4 million |
| Net income | $60.8 million | $54.8 million | $121.0 million | $107.8 million |
| Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 |
| Net interest margin | 4.10% | 3.94% | 4.16% | 3.89% |
| Efficiency ratio | 48.78% | 46.86% | 48.74% | 46.58% |
- Quarterly net income rose about 11%; six-month net income rose about 12%. Management’s non-GAAP adjusted diluted EPS was $1.04 for the quarter and $2.06 for six months, excluding acquisition-related costs as defined by the company.
- Net interest income increased 8.6% for the quarter and 11.8% for six months, supported by loan growth and lower deposit funding costs. Interest expense fell 45.9% and 47.1%, respectively. Net interest margin improved, while the efficiency ratio increased, indicating higher expenses relative to net revenue.
- Non-interest income was $30.8 million for the quarter, up from $28.7 million; for six months it was $57.5 million, down from $64.6 million. Higher broker-dealer fees, including AAS custody fees, were partly offset by lower mortgage banking income and the absence of certain H&R Block-related fees.
- At December 31, total assets were $15.55 billion, up 9.0% from June 30; net loans were $12.61 billion, up 10.4%; deposits were $12.27 billion, up 13.4%. Stockholders’ equity was $1.52 billion. Tangible book value per share, a non-GAAP measure, was $22.54.
- Cash, cash equivalents and cash segregated for regulatory purposes totaled $1.12 billion at period-end. For the six months, operating cash flow was negative $76.8 million, investing cash flow was negative $1.13 billion, and financing cash flow was positive $1.29 billion, principally reflecting deposit growth.
- Total borrowings, including FHLB advances, were $417.9 million, down 27.3% from June 30. The company reported $1.94 billion of immediately available FHLB capacity, a further $3.45 billion available with additional collateral, $2.43 billion available at the Federal Reserve discount window, and additional bank credit lines. Management stated liquidity was adequate for anticipated needs.
- Non-performing loans were $145.9 million, or 1.14% of gross loans; the loan allowance was $140.5 million, or 96.27% of non-performing loans. Net annualized charge-offs were 0.01% of average loans. The allowance-to-loans ratio was 1.10%.
Material changes versus comparable periods
- Loan growth, lower rates paid on deposits, and increased non-interest-bearing deposits supported net interest income and margin. Average non-interest-bearing deposits rose substantially, in part following the AAS acquisition.
- The August 2021 acquisition of E*TRADE Advisor Services, rebranded Axos Advisor Services (AAS), cost approximately $54.8 million in cash. It added custody technology, fee income and deposits; preliminary purchase accounting included $27.1 million of identifiable intangibles and $24.4 million of goodwill.
- Quarterly non-interest expense increased 12.7% to $86.0 million; six-month expense increased 12.3% to $170.5 million. The filing attributes much of the rise to AAS, staffing, technology investment and expanded lending and deposit activity.
- Mortgage banking income declined to $4.6 million for the quarter and $9.9 million for six months, versus $10.7 million and $30.2 million, respectively, in the prior-year periods. Broker-dealer fee income increased with AAS-related custody and mutual fund fees.
- Non-performing assets declined to $146.2 million from $152.0 million at June 30, though non-performing single-family loans increased by $16.6 million. Deposits grew while FHLB advances and securities loaned declined.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management says it believes liquidity sources are stable and adequate, and continues to monitor COVID-19-related uncertainty. No loans remained in COVID-19 forbearance at December 31, 2021.
- Interest-rate modeling estimated that an immediate 200-basis-point rise would increase net interest income by 8.8% over the next 12 months and 9.1% in the following 12 months; a 100-basis-point decline would reduce it by 1.7% and 3.1%, respectively. These are model estimates, not forecasts. The modeled market value of equity fell 13.0% under a 100-basis-point decline.
- Off-balance-sheet commitments to originate loans totaled $2.48 billion ($137.8 million fixed-rate and $2.35 billion variable-rate); commitments to sell loans totaled $50.0 million. Contractual commitments do not necessarily translate into future cash requirements.
- The company disclosed ongoing securities class-action and shareholder derivative litigation. It disputes the allegations; management said the eventual loss or range of loss, if any, could not be reasonably estimated.
- At December 31, Axos and Axos Bank met regulatory capital requirements and were classified as well capitalized. Reported common equity tier 1 ratios were 10.08% for Axos Financial and 10.91% for the Bank.
- Management concluded disclosure controls and procedures were effective at period-end. Results are subject to risks including credit quality, interest rates, economic and real-estate conditions, regulation, litigation and successful integration of acquisitions.
Important facts for investors to verify
- Whether loan and deposit growth, including AAS-related deposits, can be sustained and converted into profitable growth.
- Credit trends in commercial real estate, consumer and auto lending, and single-family non-performing loans; also monitor allowance adequacy as the portfolio expands.
- Whether mortgage banking and other fee income remain below prior-year levels, and whether AAS fees offset its operating and amortization costs.
- How interest-rate changes affect funding costs, asset yields, net interest margin and modeled equity sensitivity.
- Developments in the pending litigation and any resulting financial exposure; the filing does not provide a clear estimate of potential loss.
- Liquidity and capital levels, including the use and availability of contingent borrowing sources and the impact of further balance-sheet growth.