Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2023, the first quarter of Axos’s fiscal 2024 year (not calendar 2023 Q1). Figures are unaudited. Year-over-year comparisons are with the three months ended September 30, 2022; balance-sheet comparisons are generally with June 30, 2023.
Business context and key financial results
Axos is a diversified financial services company operating Banking and Securities businesses. At quarter-end it reported $20.8 billion in assets and approximately $33.9 billion of assets under custody and/or administration at Axos Clearing.
| Metric | Quarter ended September 30, 2023 | Comparison |
|---|---|---|
| Net interest income | $211.2 million | Up 17% from $180.5 million |
| Net interest margin | 4.36% | Up 10 basis points year over year |
| Provision for credit losses | $7.0 million | Down from $8.8 million |
| Non-interest income | $34.5 million | Up from $27.2 million |
| Non-interest expense | $120.5 million | Up from $116.1 million |
| Income before taxes | $118.2 million | Up from $82.8 million |
| Net income / diluted EPS | $82.6 million / $1.38 | Up from $58.4 million / $0.97 |
| Adjusted EPS (non-GAAP) | $1.41 | Compared with $1.18 |
| Return on average assets / equity | 1.64% / 16.91% | Compared with 1.32% / 13.91% |
| Efficiency ratio | 49.05% | Improved from 55.90% |
Financial condition, liquidity and capital
- Total assets were $20.83 billion, up 2.3% from June 30. Net loans were $16.96 billion, up 3.0%; gross loan originations for investment were $2.61 billion, partly offset by $2.16 billion of principal repayments.
- Total deposits were $17.57 billion, up $442.6 million during the quarter. The reported quarter-end weighted-average rate on deposits rose to 3.64% from 3.12% at June 30; interest-bearing deposits averaged 4.15% during the quarter, versus 1.62% a year earlier.
- Cash and cash segregated for regulatory purposes totaled $2.41 billion. Cash flow was $33.9 million from operations, $(506.0) million from investing and $503.8 million from financing activities.
- FHLB advances were $90.0 million; borrowings, subordinated notes and debentures were $447.7 million. The filing reports total borrowings of $537.7 million, or 2.58% of assets.
- At September 30, Axos Financial’s CET1 and total capital ratios were 11.11% and 14.06%; Axos Bank’s were 11.69% and 12.65%. Both were reported as well capitalized and above applicable minimums.
- Management described liquidity sources as stable and adequate. The filing reports $2.89 billion of FHLB borrowing availability immediately, $3.89 billion available with additional collateral, $2.86 billion available through the Federal Reserve discount window, and $250 million in unsecured federal funds lines. These facilities are subject to collateral and other terms.
Material changes and management commentary
- Higher loan yields and growth, plus higher returns on deposits held at other financial institutions, supported interest income. Deposit interest expense rose sharply as both balances and rates increased; the company’s interest rate spread narrowed year over year even as consolidated net interest margin improved.
- Non-interest income increased 27%, led by broker-dealer fees, banking and service fees, and advisory fees. Expenses rose 3.8%; higher staffing, deposit marketing, technology processing and professional services were partly offset by lower general and administrative expense.
- The prior-year quarter included a $16.0 million accrual for an adverse legal judgment. Its absence reduced the current-quarter year-over-year expense comparison. The company maintained the $16.0 million accrual at September 30 while appealing the judgment.
- Non-performing loans increased to $106.9 million, or 0.62% of gross loans, from $87.2 million and 0.52% at June 30. Non-performing assets rose to $115.7 million, or 0.56% of assets. Net annualized charge-offs remained low at 0.04%.
- The allowance for loan credit losses increased to $170.9 million. Management attributed the increase to loan growth, particularly in commercial and industrial non-real-estate lending, and greater weighting of adverse economic forecast scenarios. The allowance was 1.00% of loans and 159.80% of non-performing loans.
- Deposits exceeding the FDIC insurance limit or not collateralized totaled $1.7 billion at quarter-end, unchanged from June 30. Management stated approximately 90% of total Bank deposits were insured or collateralized.
Outlook, risks, contingencies and unusual items
- The filing provides no specific numerical earnings or balance-sheet guidance. Management’s forward-looking statements identify interest rates and monetary policy, inflation, economic and real estate conditions, credit quality, deposit retention and other funding access, competition, regulation, acquisition integration, and litigation outcomes as risks.
- Axos had $3.22 billion of unfunded commitments to originate loans, including $3.12 billion variable-rate commitments. These are contractual commitments, not necessarily expected cash outflows. It also reported $13.2 million of commitments to sell loans.
- The company is appealing the MUFG Union Bank judgment; the plaintiff also cross-appealed. The company says the ultimate loss, if any, cannot be reasonably estimated. A separate derivative action remains stayed pending resolution of a related employment action.
- During the quarter Axos repurchased 648,208 shares for approximately $24.5 million at an average $37.85 per share. It repurchased a further 963,640 shares for approximately $35 million from October 1 through October 20, 2023.
- Available-for-sale securities had $9.0 million of gross unrealized losses at September 30, primarily attributed to higher interest rates; the company recorded no credit-loss allowance for those securities. Fair values for non-agency mortgage-backed securities and servicing rights use significant unobservable inputs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit pricing and funding mix continue to pressure net interest spread and earnings as rates and deposit competition change.
- Whether the increase in non-performing loans—particularly in commercial real estate and single-family mortgages—continues, and whether the allowance remains adequate as economic forecasts evolve.
- The status and potential financial impact of the MUFG appeal and the stayed derivative and employment actions; the filing does not provide a clear estimate of any additional potential loss.
- The availability and practical capacity of stated liquidity sources, including collateral requirements, and the concentration and insurance status of deposits.
- The sensitivity of results and securities valuations to interest-rate changes, including the filing’s modeled scenarios and Level 3 valuation assumptions.
- The effect of repurchases, future capital needs and regulatory capital requirements; adjusted EPS and tangible book value are non-GAAP measures and should be considered alongside GAAP results.