Axos Financial, Inc. quarterly report, Q3 FY2023

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Axos Financial, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended March 31, 2023, compared with the corresponding 2022 periods; balance-sheet comparisons are primarily to June 30, 2022. Although the request metadata says “2022 Q3,” the filing is for fiscal 2023 third quarter. Unaudited interim results are not necessarily indicative of full-year results.

Business context and key financial metrics

Axos is a diversified financial services company operating Banking and Securities businesses. The filing reports approximately $19.8 billion in assets.

  • Quarterly results: Net interest income was $199.0 million, up 33.1% year over year; non-interest income was $32.2 million. Net income was $79.9 million, up from $61.8 million, and diluted EPS was $1.32 versus $1.02. Adjusted diluted EPS, a non-GAAP measure, was $1.35.
  • Nine-month results: Net interest income was $579.4 million, up 31.2%; non-interest income was $87.8 million. Net income was $219.8 million, versus $182.8 million, and diluted EPS was $3.63 versus $3.02. Adjusted diluted EPS was $3.91.
  • Margins and operating costs: Consolidated net interest margin was 4.42% for the quarter, versus 4.02% a year earlier; the nine-month margin was 4.41%, versus 4.11%. Quarterly non-interest expense rose to $111.0 million from $86.8 million. The efficiency ratio was 48.02% for the quarter, versus 51.26% a year earlier; the Banking segment’s ratio increased to 47.48% from 39.79%.
  • Assets, loans and deposits: Total assets were $19.78 billion, up 13.7% from June 30, 2022. Net loans were $15.84 billion, up 12.4%; gross loans were $16.02 billion, with commercial real estate representing 36.3%. Deposits were $16.74 billion, up 20.0%. Non-interest-bearing deposits declined to $3.17 billion from $5.03 billion, while the stated rate on total interest-bearing deposits increased to 3.45% from 0.85%.
  • Credit quality: Non-performing loans were $95.9 million, or 0.60% of gross loans, compared with 0.83% at June 30, 2022. The allowance for loan losses was $161.3 million, equal to 1.01% of loans held for investment. Nine-month provision expense increased to $17.8 million from $12.5 million.
  • Cash flow and liquidity: For the nine months, operating cash flow was $119.2 million, investing cash outflow was $1.81 billion, and financing cash inflow was $2.62 billion, principally reflecting deposit growth. Cash, cash equivalents and regulatory-segregated cash totaled $2.50 billion at quarter-end, versus $1.57 billion at June 30, 2022. Management reported $2.45 billion of immediately available FHLB capacity, $3.13 billion available from the Federal Reserve Discount Window, and $250 million in unsecured federal-funds lines; none of these facilities had outstanding borrowings at quarter-end.
  • Debt and capital: FHLB advances were $90.0 million and borrowings, subordinated notes and debentures were $334.3 million. Regulatory capital ratios were 9.29% Tier 1 leverage and 10.71% common equity tier 1 at the holding company; Axos Bank’s corresponding ratios were 10.17% and 11.55%. The company and bank met the filing’s “well capitalized” standards. Tangible book value per share, a non-GAAP measure, was $28.03.

Material changes versus comparable periods

  • Higher loan yields and balances and higher rates earned on deposits at other financial institutions drove interest income and net interest income growth. Deposit interest expense rose sharply as deposit rates and balances increased; quarterly interest expense was $108.4 million versus $10.6 million.
  • Quarterly non-interest income increased 12.1%, mainly from broker-dealer fees and banking and service fees. Mortgage banking income and prepayment penalty income declined; higher mortgage rates contributed to lower originations.
  • Quarterly expenses increased 27.9%, including higher compensation, technology, advertising and professional services costs. Headcount rose 13% year over year to 1,466 at March 31, 2023.
  • The Securities Business reported pre-tax income of $19.5 million for the quarter, compared with a $1.3 million loss a year earlier, largely reflecting higher fees on FDIC-insured bank deposits. Banking Business pre-tax income rose to $103.2 million from $94.0 million.
  • During the nine months, deposits increased $2.8 billion, while non-interest-bearing deposits fell $1.9 billion. Borrowings declined $138.4 million from June 30, 2022.

Outlook, risks, contingencies and unusual items

  • The filing provides no specific earnings or revenue guidance. Management says liquidity sources are stable and adequate for anticipated short- and long-term needs, while cautioning that actual results may differ materially from forward-looking statements.
  • Management identifies interest-rate and monetary-policy changes, inflation, economic and real-estate conditions, credit quality, deposit gathering and alternative funding access, regulation, competition, acquisition integration and litigation outcomes as risks.
  • The company recorded a $16.0 million expense and accrual in the nine-month period related to an adverse jury verdict in the MUFG Union Bank litigation. The court subsequently reduced the tortious-interference award from $15.8 million to $7.8 million before prejudgment interest calculations. Axos says it believes it has defenses and grounds for appeal, but maintained the accrual given uncertainty.
  • Management reported that banking-industry liquidity stress during the quarter led it to hold additional liquidity, increasing the Bank’s modeled asset sensitivity. The model estimates first-12-month net interest income would rise 20.6% under an instantaneous 200-basis-point increase and fall 11.5% under a 200-basis-point decrease; the filing cautions that these estimates depend on assumptions and are not forecasts.
  • Unfunded loan commitments totaled $2.87 billion, mostly variable-rate. The company also disclosed legacy shareholder derivative actions and ordinary-course litigation. The two state-court derivative actions were dismissed without prejudice in March 2023; the federal consolidated actions remained stayed.
  • Axos repurchased $31.6 million of stock during the nine months at an average $37.22 per share. On April 26, 2023, the board authorized an additional $100 million repurchase program.

Important facts for investors to verify

  • How deposit pricing, the shift away from non-interest-bearing deposits, brokered deposits and uninsured balances affect funding costs and liquidity. Brokered deposits were $2.50 billion; deposits exceeding the FDIC insurance limit were reported at $1.8 billion.
  • Commercial real estate and commercial and industrial loan concentrations, delinquency trends, allowance adequacy and the effect of changing economic forecasts on expected credit losses.
  • The final outcome, appeal prospects and any change to the $16.0 million litigation accrual, including prejudgment interest and related costs.
  • Whether strong net interest income growth can persist as deposit costs reprice, and whether expense growth—particularly advertising, compensation and technology—translates into sustainable earnings.
  • Assumptions behind interest-rate sensitivity and liquidity disclosures, including potential deposit outflows, prepayments and the size and duration of the additional liquidity cushion.