Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2020. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless noted. Axos operates Banking and Securities businesses.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year comparable | Six months ended Dec. 31, 2020 | Prior-year comparable |
|---|---|---|---|---|
| Net interest income | $134.1 | $108.4 | $261.4 | $211.7 |
| Provision for credit losses | $8.0 | $4.5 | $19.8 | $7.2 |
| Non-interest income | $28.7 | $21.2 | $64.6 | $42.7 |
| Non-interest expense | $76.3 | $67.0 | $151.8 | $132.4 |
| Net income | $54.8 | $41.3 | $107.8 | $82.1 |
| Diluted EPS | $0.91 | $0.67 | $1.79 | $1.32 |
| Net interest margin | 3.94% | 3.87% | 3.89% | 3.81% |
| Efficiency ratio | 46.86% | 51.66% | 46.58% | 52.04% |
Quarterly operating revenue, defined here as net interest income plus non-interest income, was $162.8 million, versus $129.6 million a year earlier. Return on average assets was 1.57% and return on average common equity was 17.30% for the quarter. Management-reported adjusted earnings were $56.6 million and adjusted diluted EPS $0.94; these are non-GAAP measures.
Financial position, credit and liquidity
- At December 31, total assets were $14.39 billion, up 3.9% from June 30. Net loans and leases were $11.61 billion, up 9.2%; gross loans were $11.75 billion.
- Deposits totaled $11.46 billion, up 1.1% from June 30. Non-interest-bearing deposits rose to $2.20 billion; interest-bearing deposits declined to $9.26 billion.
- Cash, cash equivalents and cash segregated for regulatory purposes totaled $1.44 billion, down from $1.95 billion at June 30. The filing reports available borrowing capacity of $2.47 billion from the FHLB immediately, plus $2.50 billion with additional collateral, and $1.84 billion at the Federal Reserve discount window. Management said liquidity sources were adequate for anticipated needs over the next 12 months and beyond.
- Six-month cash flows: operating activities provided $284.4 million; investing activities used $1.02 billion; financing activities provided $223.6 million. Cash and segregated cash fell by $507.3 million overall.
- Total borrowings were $601.0 million, compared with $478.3 million at June 30. This includes $175 million of 4.875% fixed-to-floating subordinated notes issued in September 2020, due 2030. Stockholders’ equity was $1.29 billion; equity to assets was 8.95%.
- Nonperforming loans were $169.3 million, or 1.44% of gross loans, versus $87.9 million, or 0.82%, at June 30. Nonperforming assets were $175.6 million, or 1.22% of assets. The allowance for loan credit losses was $136.4 million, 1.16% of gross loans, versus $75.8 million and 0.58% at June 30.
- Regulatory capital ratios remained above stated “well capitalized” thresholds: Axos Financial total risk-based capital was 13.88%, and Axos Bank’s was 12.44%. The company’s common equity tier 1 ratio was 10.85% and the Bank’s was 11.45%.
Changes, management commentary and risks
- Net income growth reflected higher net interest income from loan growth and lower deposit costs, as well as higher mortgage banking income. Mortgage banking income rose to $10.7 million for the quarter and $30.2 million for the six months.
- Expense growth reflected staffing, technology, professional services and regulatory fees. Staff increased 12.2% year over year to 1,157.
- Provision expense increased year over year. The July 1 adoption of CECL added approximately $53 million to the total allowance for credit losses and reduced opening retained earnings by $37.1 million, net of tax. Management cited loan growth, portfolio mix, COVID-related economic assumptions and the accounting change as factors in credit provisioning.
- Management reported no loan forbearance or payment deferrals during the December quarter. At December 31, it reported $0.9 million of auto and consumer loan deferrals granted during the six-month period. Nonperforming single-family, multifamily and commercial real estate loans rose; management linked single-family deterioration partly to borrowers exiting COVID-related forbearance.
- The company participated in the Paycheck Protection Program and planned to participate in its second round. It said it tightened underwriting standards and increased resources for customer service and portfolio management. The filing provides no specific earnings or revenue guidance.
- Litigation remains a contingency: a November 2020 ruling affirmed in part and reversed in part a dismissal order in a securities class action. The company disputes the allegations and is defending the cases; it said it could not reasonably estimate any eventual loss or range of loss.
- Other notable capital actions: Axos redeemed all 515 Series A preferred shares in October 2020 and repurchased $16.8 million of common stock during the six months, with $52.8 million remaining under its repurchase authorization.
Important facts for investors to verify
- Whether rising nonperforming loans and the CECL allowance adequately reflect credit risks, particularly in single-family, multifamily and commercial real estate portfolios.
- How sustainable mortgage banking income is, given its substantial contribution to year-over-year non-interest income growth.
- How loan growth, deposit mix and funding costs affect net interest margin and liquidity, and whether disclosed borrowing capacity remains available on expected terms.
- The impact of the pending securities and derivative litigation; the filing does not provide a reasonably estimable loss range.
- Regulatory capital and liquidity trends, including the effects of subordinated debt, share repurchases and future credit losses.