Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, Axos’s fiscal 2023 first quarter. The filing compares quarterly results with the three months ended September 30, 2021; balance-sheet changes are principally compared with June 30, 2022. Amounts are in U.S. dollars.
Business context and key results
Axos operates Banking and Securities businesses, offering nationwide digital banking, lending, securities clearing and custody, and investment services. Total assets were $18.4 billion at quarter-end.
| Metric | Quarter ended Sep. 30, 2022 | Comparable 2021 period |
|---|---|---|
| Net interest income | $180.5 million | $146.6 million |
| Provision for credit losses | $8.8 million | $4.0 million |
| Non-interest income | $27.2 million | $26.7 million |
| Non-interest expense | $116.1 million | $84.4 million |
| Income before taxes | $82.8 million | $84.9 million |
| Net income | $58.4 million | $60.2 million |
| Diluted EPS | $0.97 | $0.99 |
Net interest income rose 23.1%, while interest and dividend income increased 41.4% to $223.8 million. Higher loan balances and yields drove the increase, partly offset by higher deposit costs. Net interest margin increased 4 basis points to 4.26%, while the interest-rate spread narrowed to 3.66% from 4.04%. Return on average assets was 1.32% versus 1.66%; return on average common equity was 13.91% versus 16.20%. The efficiency ratio rose to 55.90% from 48.71%.
Balance sheet, liquidity and capital
- Loans: Net loans increased 8.0% from June 30 to $15.2 billion. Gross loans were $15.4 billion, led by commercial real estate at $5.5 billion (35.9% of gross loans). Loan originations for investment were $2.49 billion.
- Deposits: Increased 8.8% to $15.2 billion, including $10.5 billion in interest-bearing deposits. Non-interest-bearing deposits declined to $4.6 billion from $5.0 billion. Brokered deposits rose to $2.31 billion from $1.03 billion.
- Cash and funding: Cash, cash equivalents and regulatory-segregated cash totaled $1.70 billion. Borrowings were $538.3 million, or 2.92% of assets. The company reported $2.04 billion in immediately available FHLB capacity, additional capacity with collateral, and other borrowing facilities.
- Cash flows: Operating activities provided $70.8 million, investing activities used $1.15 billion, and financing activities provided $1.20 billion. The investing outflow primarily reflected loan growth; deposit growth was the main financing inflow.
- Credit quality: Nonaccrual loans were $120.5 million, or 0.78% of gross loans, versus 0.83% at June 30. Nonperforming assets were $125.8 million, or 0.68% of assets. The allowance was $155.5 million, 1.01% of loans held for investment.
- Capital: Stockholders’ equity was $1.70 billion, and equity-to-assets was 9.24%. Axos Financial and Axos Bank met regulatory capital requirements and were classified as well capitalized. Tangible book value per share, a non-GAAP measure, was $25.24.
Changes, commentary and notable items
- Net income declined 3.0% year over year despite substantial loan and net interest income growth. Management attributed the decline principally to a $31.7 million increase in non-interest expense and a higher credit-loss provision.
- Non-interest expense included a $16.0 million accrual related to an adverse jury verdict in litigation with MUFG Union Bank. The verdict was reached October 26, 2022, after quarter-end; the company recorded the accrual in the September quarter. Axos said it believes grounds exist for post-verdict relief and appeal.
- Non-GAAP adjusted earnings were $71.6 million and adjusted diluted EPS was $1.18, including adjustments for acquisition-related costs and the $16.0 million legal accrual. These measures are not substitutes for GAAP results.
- Deposit expense rose sharply as market rates increased. Management cited a 122-basis-point increase in average rates paid on interest-bearing demand and savings deposits year over year. Higher mortgage rates contributed to lower mortgage originations and prepayments, reducing mortgage banking and prepayment penalty income.
- Unrealized losses on available-for-sale securities increased: quarter-end fair value was $257.6 million, with $8.7 million in gross unrealized losses. The filing reported no credit-loss provision on this portfolio during the quarter.
- The filing gives no specific earnings or growth guidance. Management stated that it considers liquidity sources stable and adequate for anticipated needs and contingencies for the next 12 months and beyond.
- Risks discussed include interest-rate and deposit-cost changes, credit quality and real estate conditions, litigation outcomes, market and counterparty exposures, regulation, and the ability to integrate acquisitions. The company also disclosed $3.37 billion of commitments to originate loans; these are not necessarily future cash requirements.
- Two shareholder class-action settlements received final court approval in September and October 2022, respectively; the company stated they were within available insurance coverage and without admission of wrongdoing. Other derivative litigation remained pending or stayed, and loss estimates were not reasonably predictable.
Investor verification priorities
- Track deposit mix, brokered-deposit reliance, deposit pricing and funding costs as rates and competition change.
- Assess whether loan growth—particularly commercial real estate—corresponds with underwriting quality, delinquencies, nonaccrual loans and allowance coverage.
- Monitor the MUFG verdict, appeal or post-verdict relief, potential further expense, and the status of remaining litigation.
- Review the effect of interest-rate changes on net interest margin, funding costs, securities valuations and modeled earnings sensitivity; model results rely on assumptions.
- Reconcile reported GAAP earnings with non-GAAP adjusted earnings, including the legal and acquisition-cost adjustments.
- Confirm liquidity and regulatory capital trends, including the company’s capacity to fund loan growth and meet customer and broker-dealer obligations.