Axos Financial, Inc. — Form 10-K Summary
Period clarification: Although the request metadata says “2019 Q4,” this filing is an annual report for the fiscal year ended June 30, 2020, comparing primarily with the year ended June 30, 2019. Amounts are in U.S. dollars.
Business context and reporting period
Axos is a financial holding company operating an online-focused bank and a securities business that provides clearing, custody, margin lending, and digital investment services. The filing reports two segments: Banking and Securities. The 2019 acquisitions of COR Clearing and WiseBanyan contributed to the Securities Business results; no acquisitions were completed in fiscal 2020.
Financial results and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total assets, June 30 | $13.85 billion | $11.22 billion |
| Total loans and leases held for investment, gross | $10.70 billion | $9.45 billion |
| Total deposits | $11.34 billion | $8.98 billion |
| Interest and dividend income | $622.8 million | $564.9 million |
| Net interest income | $477.6 million | $408.6 million |
| Non-interest income | $103.0 million | $82.8 million |
| Non-interest expense | $275.8 million | $251.2 million |
| Provision for loan and lease losses | $42.2 million | $27.4 million |
| Net income | $183.4 million | $155.1 million |
| Diluted earnings per share | $2.98 | $2.48 |
- Net interest margin was 4.12%, versus 4.07%; the Banking segment’s margin was 4.19%, versus 4.14%.
- Consolidated efficiency ratio was 47.50%, improved from 51.12%; Banking segment efficiency ratio was 39.81%, versus 40.51%.
- Return on average assets was 1.53%, versus 1.51%; return on average common equity was 15.65%, versus 15.40%.
- Operating cash flow was $284.1 million; investing cash flow was negative $1.35 billion; financing cash flow was $2.16 billion. Cash and cash equivalents, including segregated cash, ended the year at $1.95 billion.
- At June 30, 2020, FHLB advances were $242.5 million and borrowings, subordinated notes and debentures were $235.8 million. The Bank also had $152.0 million outstanding under the PPP Liquidity Facility. Total stockholders’ equity was $1.23 billion.
- Company and Bank capital ratios remained above regulatory “well-capitalized” thresholds: Company CET1 11.22% and total capital 12.64%; Bank CET1 11.79% and total capital 12.62%.
Material changes versus FY2019
- Assets grew 23.5%, with loan growth concentrated in commercial and industrial and income-property lending. Deposits rose $2.35 billion, primarily in demand and savings accounts.
- Net income increased about 18%. Higher loan balances and a full year of Securities Business activity lifted net interest and fee income; lower interest expense partly offset lower yields as rates fell.
- Provision expense rose to $42.2 million, reflecting COVID-19-related economic uncertainty, portfolio growth, and loan-mix changes. The allowance increased to $75.8 million from $57.1 million.
- Non-performing loans and leases increased to $87.9 million from $48.4 million; non-performing assets were $94.3 million, or 0.68% of assets, compared with $55.9 million, or 0.50%.
- Mortgage banking income increased to $20.6 million from $5.3 million, and broker-dealer fee income rose to $23.2 million from $11.7 million. Banking and service fees declined to $46.3 million from $53.9 million.
- Fiscal 2019 Securities Business results included a $15.3 million bad-debt expense from a correspondent customer; no similar charge was reported in FY2020. Stock repurchases totaled $38.9 million in FY2020.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific near-term earnings or revenue guidance. Long-term objectives include annualized return on average common equity of at least 17%, annual growth in average interest-earning assets of at least 12%, and a Banking segment efficiency ratio of 40% or lower.
- COVID-19 and credit: Management tightened underwriting, increased customer-service and portfolio-management resources, and offered payment relief. At June 30, 2020, forbearance covered $95.8 million of loans, primarily single-family residential; payment deferrals covered $28.2 million of auto loans and $2.7 million of unsecured consumer loans. Management said future credit deterioration was uncertain.
- H&R Block: Following the Durbin Amendment taking effect for Axos on July 1, 2020, H&R Block terminated its program-management agreement covering Emerald Card, Emerald Advance and Refund Transfer, and selected another bank for Refund Advance. Under stated volume and transition assumptions, the filing estimates a possible FY2021 reduction in net operating income of approximately $21 million, or $0.35 per diluted share, for the terminated products and fees, plus approximately $10 million, or $0.17 per diluted share, for Refund Advance.
- Accounting and unusual items: Axos adopted the lease accounting standard in FY2020. It adopted CECL on July 1, 2020, after year-end; management estimated an additional $35–$55 million allowance for credit losses, with regulatory-capital relief phased in. A $6.8 million stock-compensation deferred tax asset write-off increased FY2020 tax expense by $2.0 million.
- Principal risks: COVID-19 effects, interest-rate and funding sensitivity, California real-estate concentration, rising non-performing loans, allowance-estimation uncertainty, C&I credit exposure, regulatory costs, cybersecurity and third-party technology dependence, and the H&R Block relationship. The company also disclosed shareholder class-action and derivative litigation; outcomes and potential losses could not be reasonably estimated.
- Liquidity and reporting: The Bank reported substantial unused FHLB and Federal Reserve borrowing capacity and said it complied with applicable liquidity and capital requirements. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track the performance of COVID-19-affected loans, subsequent delinquencies and non-performing assets, charge-offs, and the adequacy of the allowance, including the CECL adoption impact.
- Verify the realized revenue and earnings effect of H&R Block program terminations, transition arrangements, and any replacement business.
- Monitor deposit mix and cost, including brokered deposits, deposit maturities, and available funding capacity.
- Assess whether loan growth—particularly in C&I, multifamily and California real estate—continues to meet underwriting and return targets.
- Review subsequent litigation developments and any material change in the disclosed inability to estimate potential losses.