Axos Financial, Inc. — Fiscal 2023 Second Quarter Form 10-Q
Reporting period: Quarter and six months ended December 31, 2022; comparisons are to the same periods in 2021 unless noted. Amounts are in U.S. dollars. The filing is unaudited.
Business context
Axos is a diversified financial services company with Banking Business and Securities Business segments. Banking provides online consumer and commercial banking and lending; Securities provides clearing, custody and investment services.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Net interest income | $199.9 million, up 37.3% | $380.4 million, up 30.2% |
| Net income | $81.6 million, versus $60.8 million | $140.0 million, versus $121.0 million |
| Diluted EPS | $1.35, versus $1.00 | $2.31, versus $1.99 |
| Net interest margin | 4.49%, versus 4.10% | 4.38%, versus 4.16% |
| Non-interest income | $28.3 million, down $2.5 million | $55.5 million, down $2.0 million |
| Non-interest expense | $107.5 million, up $21.5 million | $223.6 million, up $53.2 million |
At December 31, total assets were $18.7 billion, up 7.7% from June 30, 2022. Net loans were $15.5 billion, up 9.8%; deposits were $15.7 billion, up 12.5%; and stockholders’ equity was $1.79 billion. Cash, cash equivalents and cash segregated for regulatory purposes totaled $1.95 billion. Total borrowings, including FHLB advances, were $434.1 million.
For the six months, operating cash flow was $177.1 million, investing cash flow was negative $1.41 billion, and financing cash flow was positive $1.61 billion. The financing inflow was primarily driven by deposit growth. The company reported an equity-to-assets ratio of 9.54%. Axos Financial and Axos Bank were classified as well capitalized; their total risk-based capital ratios were 13.49% and 12.13%, respectively.
Credit indicators included non-performing loans of $95.0 million, or 0.61% of gross loans, versus 0.83% at June 30. The allowance for loan losses was $157.2 million, or 1.00% of loans held for investment. The six-month provision for credit losses was $12.3 million, compared with $8.0 million.
Material changes and management commentary
- Net interest income grew as loan balances and yields rose, while higher rates paid on deposits and other funding substantially increased interest expense. Consolidated interest expense for the quarter rose to $79.7 million from $11.5 million.
- Management attributed lower non-interest income mainly to reduced mortgage originations, changes in mortgage servicing rights fair value, and slower prepayments. Broker-dealer fees and banking and service fees partly offset those declines.
- Higher salaries, marketing, technology-related processing costs and professional services contributed to expense growth. Headcount rose 13% year over year to 1,447.
- Non-interest expense for the six-month period included a $16 million accrual related to an adverse Union Bank jury verdict. The verdict had not been reduced to judgment; Axos filed a post-trial motion and said it believes it has grounds for post-verdict relief and appeal.
- Interest-rate sensitivity modeling estimated net interest income would change by +8.8% under an immediate 200-basis-point increase and −9.2% under a 200-basis-point decrease over the first 12 months. These are model estimates, not guidance, and depend on assumptions about rates, prepayments and deposit behavior.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management said it believes liquidity sources are stable and adequate for anticipated needs over the next 12 months and beyond. It disclosed available FHLB borrowing capacity and other borrowing facilities, while cautioning that funding access and pricing can change.
Key risks include rate changes, deposit competition and funding costs, credit quality and real estate conditions, regulatory requirements, and litigation. The company disclosed that a rating agency had recently announced a review for downgrade, which it said could impair funding access or increase funding costs. At December 31, deposits exceeding the FDIC insurance limit totaled $2.0 billion; brokered deposits were $2.51 billion. Available-for-sale securities had $9.8 million of gross unrealized losses. A separate securities class-action settlement received final approval in October 2022, with settlement amounts payable by insurers and no admission of wrongdoing stated.
Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Deposit trends and composition, including the shift from non-interest-bearing deposits, rising deposit rates and brokered-deposit balances.
- Whether loan growth, credit quality, delinquency trends and the allowance remain consistent with management’s assumptions, particularly in commercial real estate.
- The outcome and financial implications of the Union Bank post-trial proceedings and any subsequent judgment or appeal.
- The status of the rating-agency review and any effect on funding access or cost.
- Actual net interest margin and earnings as rates and deposit pricing evolve; reported sensitivity figures are assumption-dependent.