8-K: Axos Financial Reports Mixed Second Quarter Results, Adjusted EPS Beats Expectations

Axos Financial's second quarter fiscal year 2025 results show a decrease in net income compared to the previous year, but adjusted earnings per share exceeded expectations.

Summary

• Axos Financial reported a net income of $104.7 million and diluted earnings per share (EPS) of $1.80 for the quarter ended December 31, 2024.
• This compares to a net income of $151.8 million and diluted EPS of $2.62 for the same quarter in 2023, which included a one-time gain of $92.4 million from an FDIC loan purchase.
• Adjusted earnings increased to $105.8 million, or $1.82 per diluted share, up from $92.5 million, or $1.60 per diluted share, in the prior year quarter.
• Excluding the one-time gain and provision for credit losses related to the FDIC loan purchase, net income and diluted EPS increased by 15.7% and 15.1%, respectively.
• Net interest income was $280.1 million, a 22.5% increase year-over-year, but down from $292.0 million in the previous quarter.
• Non-interest income decreased significantly to $27.8 million, primarily due to the absence of the FDIC loan purchase gain.
• Total assets reached $23.7 billion, a 7.5% annualized increase from June 30, 2024, and total deposits were $19.9 billion, a 5.9% annualized increase.
• The net interest margin was 4.83%, which is above the company's target.
• Axos Advisory Services added $822 million in net new assets under custody during the quarter.
• The company's total capital to risk-weighted assets was 15.23% at the end of the quarter, up from 14.84% at June 30, 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the strong adjusted EPS and net interest margin, but tempered by the decrease in net income and non-interest income. The company is showing growth in key areas, but also facing challenges in the current economic environment.

Positives

• Adjusted EPS increased by 13.8% year-over-year, indicating strong underlying performance.
• Net interest margin of 4.83% is above the company's target.
• The company experienced strong loan growth in certain commercial and industrial lending categories, single family warehouse, and auto.
• Total assets and deposits showed solid growth, indicating a healthy expansion of the business.
• Axos Advisory Services saw a significant increase in net new assets under custody.
• Book value per share increased by 20.9% year-over-year, reflecting an increase in shareholder value.
• Interest-bearing deposit costs were reduced by 51 basis points from the linked quarter, improving profitability.

Negatives

• Net income decreased by 31.0% year-over-year, primarily due to the absence of a one-time gain from an FDIC loan purchase in the prior year.
• Non-interest income decreased by 77.6% year-over-year, mainly due to the absence of the FDIC loan purchase gain and decreases in mortgage banking and broker-dealer fee income.
• Non-interest expense increased by 19.3% year-over-year, driven by higher salaries, professional services, and regulatory fees.
• Net interest income decreased from $292.0 million in the previous quarter to $280.1 million, although this was partially due to the prepayment of three loans purchased from the FDIC in the previous quarter.

Risks

• The company's performance is sensitive to changes in interest rates, monetary policy, and inflation.
• There are risks associated with credit quality and the ability to attract and retain deposits.
• The company faces competition in the marketplace and is subject to regulatory changes.
• Conditions in the real estate markets could impact the company's performance.
• The outcome of litigation and other factors beyond the company's control could affect results.

Future Outlook

The document contains forward-looking statements regarding Axos' financial prospects, asset quality, deposit balances, capital ratios, and ability to grow and diversify its business. These statements are subject to risks and uncertainties, and actual results may differ materially.

Management Comments

• Greg Garrabrants, President and Chief Executive Officer of Axos, stated that they generated loan growth across certain commercial and industrial lending categories, single family warehouse and auto.
• Greg Garrabrants also noted that the net interest margin of 4.83% was well above their target.
• Management highlighted that they reduced interest-bearing deposit costs by 51 basis points from the linked quarter while maintaining deposit balances flat.

Industry Context

The results reflect a challenging environment for financial institutions, with increased interest rates impacting deposit costs and non-interest income. The company's focus on loan growth and expense management is consistent with strategies employed by other banks in the current economic climate. The growth in assets under custody in Axos Advisory Services is a positive sign for the company's wealth management business.

Comparison to Industry Standards

• Axos' net interest margin of 4.83% is relatively strong compared to the industry average, which has been under pressure due to rising deposit costs.
• Companies like Ally Financial and Discover Financial Services have also reported similar challenges in managing net interest margins in the current environment.
• Axos' loan growth in specific sectors like commercial and industrial lending is in line with trends seen in other regional banks, while the growth in assets under custody in Axos Advisory Services is comparable to the growth seen in wealth management divisions of larger banks like Charles Schwab and Fidelity.
• The decrease in non-interest income due to the absence of one-time gains is a common issue for banks that have benefited from such gains in previous periods, and is similar to the results reported by other banks that have had one-off gains in previous periods.
• The increase in non-interest expenses is also a common trend across the industry due to increased regulatory costs and competition for talent.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and diluted EPS, but encouraged by the increase in adjusted EPS and book value per share.
• Employees may be impacted by the increase in non-interest expenses, which includes higher salaries and related costs.
• Customers may benefit from the company's focus on loan growth and diversified deposit gathering.
• Suppliers and creditors may be impacted by the company's overall financial performance and capital ratios.

Next Steps

• The company will hold a conference call and webcast on January 28, 2025, to discuss the results.
• A replay of the conference call will be available until February 28, 2025.

Key Dates

Keywords

Axos Financial, Financial Results, Earnings Report, Net Income, Adjusted EPS, Net Interest Margin, Loan Growth, Deposit Growth, Asset Growth, Banking, Financial Services