Axos Financial, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and six months ended December 31, 2019, Axos’s fiscal second quarter and first half of fiscal 2020. The supplied request metadata says “2019 Q2,” but the filing’s actual reporting period is December 31, 2019. Axos operates banking and securities businesses; its securities segment includes clearing, custody, securities lending and digital investment services. Financial statements are unaudited.
Key financial results
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Net interest income | $108.4 million | $211.7 million | $92.7 million; $179.0 million |
| Provision for loan and lease losses | $4.5 million | $7.2 million | $5.0 million; $5.6 million |
| Non-interest income | $21.2 million | $42.7 million | $16.9 million; $33.4 million |
| Non-interest expense | $67.0 million | $132.4 million | $50.9 million; $103.9 million |
| Net income | $41.3 million | $82.1 million | $38.8 million; $75.7 million |
| Diluted EPS | $0.67 | $1.32 | $0.62; $1.20 |
| Net interest margin | 3.87% | 3.81% | 3.87%; 3.82% |
Quarterly and six-month GAAP net income increased 6.3% and 8.5%, respectively. Non-GAAP adjusted EPS was $0.69 for the quarter and $1.37 for the half-year, versus $0.63 and $1.24. The company defines this measure to exclude acquisition-related costs and, where applicable, excess FDIC expense.
- Balance sheet at December 31: Assets were $12.27 billion, up 9.3% from June 30; net loans and leases were $10.14 billion, up 8.1%; deposits were $10.11 billion, up 12.6%.
- Funding and liquidity: Cash, cash equivalents and regulatory-segregated cash totaled $1.03 billion. Total borrowings were $319.7 million, down 49.0% from June 30. Six-month operating cash flow was $128.7 million, investing cash outflow $779.2 million and financing cash inflow $819.3 million. Management stated that liquidity sources were stable and adequate for anticipated needs.
- Capital: Stockholders’ equity was $1.16 billion. Axos Financial’s common equity tier 1 ratio was 11.29% and Axos Bank’s was 11.55%; both were reported as well capitalized. The bank’s ratios were below June 30 levels.
- Credit quality: Nonperforming loans and leases were $52.7 million, or 0.52% of gross loans, versus 0.51% at June 30. Nonperforming assets were $60.3 million, or 0.49% of assets. The allowance was $59.5 million, equal to 0.58% of loans and 112.85% of nonperforming loans.
Material changes versus prior comparable periods
- Net interest income rose 16.9% for the quarter and 18.3% for the six months, primarily from loan growth and additional securities-borrowing and margin-lending activity. Net interest margin was essentially flat for the quarter and down slightly for the half-year.
- Non-interest income rose, mainly because the acquired securities business contributed $5.6 million in quarterly and $11.2 million in half-year broker-dealer fees. Banking and service fees declined $2.2 million for the quarter and $5.2 million for the half-year.
- Non-interest expense increased 31.5% for the quarter and 27.5% for the half-year, primarily reflecting securities-business acquisitions, higher staffing, technology and infrastructure costs. The consolidated efficiency ratio worsened to 51.66% from 46.47% in the quarter and to 52.04% from 48.89% for the half-year.
- Net loans grew notably in commercial and industrial and multifamily lending. Non-interest-bearing deposits increased $1.17 billion from June 30, primarily attributed to the bankruptcy trustee and fiduciary services channel. The filing also cites seasonal H&R Block-related account growth.
- The securities business, acquired during fiscal 2019, generated $6.3 million of quarterly non-interest income and recorded a pretax loss of $0.1 million; it had no comparable 2018 segment results.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- The company exceeded $10 billion in assets on December 31, 2019, making the Durbin Amendment applicable starting July 2020. Axos says it can avoid early termination of its H&R Block agreement by compensating H&R Block for lost interchange income; estimated cost is approximately $25 million pretax annually, or $18 million after tax/$0.28 per diluted share, subject to actual transaction volumes.
- Axos expects adoption of the expected-credit-loss standard (CECL) in fiscal 2021 to have a material impact on its financial statements; the filing does not quantify that impact.
- Several securities and derivative valuations use Level 3 inputs. Available-for-sale securities included $1.5 million of gross unrealized losses at December 31; one non-agency mortgage-backed security had $821,000 of cumulative credit losses, with no new impairment charge recognized during the quarter.
- Commitments to originate loans totaled $719.0 million; commitments to sell loans totaled $84.0 million. These contractual amounts do not necessarily represent future cash requirements.
- Class-action and shareholder derivative litigation remains pending on appeal or stayed in part. The company disputes the allegations and says it cannot reasonably estimate any eventual loss or range of loss.
- The company adopted lease accounting on July 1, 2019, recognizing a $77.8 million right-of-use asset and $79.7 million lease liability. At December 31, operating lease liabilities were $77.2 million.
Most important facts for investors to verify
- Whether loan growth, credit performance and the allowance remain appropriate as commercial and industrial exposure expands; review subsequent nonperforming-loan and charge-off trends.
- The earnings and cost trajectory of the securities business and whether acquisition-related expense and integration costs moderate.
- The actual cost and contract implications of the Durbin Amendment for the H&R Block relationship beginning July 2020.
- Deposit stability and funding costs, including the concentration and renewal profile of brokered and time deposits.
- The eventual CECL transition adjustment and its effect on reserves, retained earnings and regulatory capital.
- Updates to the pending litigation and any changes in the company’s assessment of potential losses.