Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018 (the first quarter of fiscal 2019), filed October 24, 2018. The request metadata labels this “2018 Q1,” but the filing covers the quarter ended September 30, 2018. Axos is a diversified financial services company operating primarily through Axos Bank, with online banking, lending, specialty finance and fee-generating businesses.
Financial performance
| Metric | Quarter ended Sept. 30, 2018 | Prior-year quarter |
|---|---|---|
| Interest and dividend income | $122.8 million | $103.5 million |
| Net interest income | $86.3 million | $80.6 million |
| Provision for loan and lease losses | $0.6 million | $1.0 million |
| Non-interest income | $16.5 million | $13.3 million |
| Non-interest expense | $52.9 million | $38.0 million |
| Income before taxes | $49.3 million | $54.9 million |
| Net income | $36.8 million | $32.4 million |
| Diluted EPS | $0.58 | $0.50 |
| Net interest margin | 3.76% | 3.87% |
Net interest income rose 7.1%, supported by 10.4% growth in average earning assets and higher loan yields; higher deposit and borrowing costs partly offset that growth. Net interest margin declined 11 basis points. The effective tax rate fell to 25.27% from 40.98%, primarily reflecting the federal corporate tax-rate reduction under the Tax Cuts and Jobs Act. Return on average assets was 1.57%; return on average common equity was 14.98%.
Non-interest income increased $3.2 million, including higher banking and service fees and gains on sales of other assets, partly offset by lower mortgage banking income. Expenses rose $14.9 million, notably from compensation, regulatory fees, advertising and amortization. Management reported non-GAAP adjusted earnings of $38.4 million and adjusted diluted EPS of $0.61, excluding acquisition-related costs and excess FDIC expense; these measures are not substitutes for GAAP results.
Financial position, cash flow and capital
- Total assets were $9.79 billion at September 30, up 2.6% from June 30, 2018. Net loans and leases were $8.65 billion, up 2.6%; gross loans and leases were $8.72 billion.
- Deposits fell $1.91 billion, or 23.9%, to $6.08 billion. The company said the runoff was planned: short-term brokered, municipal and other higher-cost deposits were allowed to mature ahead of the planned Nationwide Bank deposit acquisition.
- FHLB advances increased $2.12 billion to $2.58 billion, temporarily replacing deposit funding. Total borrowings were $2.63 billion, or 26.9% of assets, compared with 5.4% at June 30.
- Cash and cash equivalents were $534.0 million, down from $622.9 million at June 30. Operating cash flow was $43.5 million; investing cash outflow was $343.5 million, primarily reflecting loan growth; financing cash inflow was $211.1 million. Net cash decreased $88.9 million.
- Stockholders’ equity was $1.00 billion; the equity-to-assets ratio was 10.22%. Axos Financial and Axos Bank were reported as well capitalized. At the holding company, CET1 was 13.42% and total capital was 14.95%; at the bank, the corresponding ratios were 12.69% and 13.41%.
- Credit quality indicators included nonaccrual loans and leases of $30.1 million, or 0.35% of gross loans, and nonperforming assets of $39.6 million, or 0.40% of assets. The allowance was $50.1 million, or 0.57% of loans held for investment. Management considered it adequate but noted future provisions depend on ongoing risk assessments.
Changes, outlook and risks
- Compared with the prior-year quarter, net income rose 13.8%, while pretax income declined as expense growth exceeded revenue growth. Net interest margin and the interest-rate spread also narrowed. Efficiency ratio increased to 51.47% from 40.49%.
- The company had OCC approval for its planned acquisition of substantially all Nationwide Bank deposits, estimated at approximately $3 billion, with closing targeted for November 2018. Separately, it announced an agreement to acquire COR Clearing’s parent, with closing expected in the first half of calendar 2019, subject to approvals and other conditions. These transactions were not completed during the reported quarter.
- Management said liquidity sources were stable and adequate for anticipated needs. At quarter-end, it reported $354.1 million of immediately available FHLB capacity, $35 million of unused unsecured federal funds lines and $1.35 billion available from the Federal Reserve discount window. It also cited the ability to increase deposits and borrowings.
- No specific earnings or financial guidance was provided. The filing identifies interest-rate changes, economic conditions, competition, credit quality, integration and funding needs, and litigation outcomes as risks. In a modeled parallel 200-basis-point rate increase, net interest income was estimated to decline 3.9% over both the next 12 months and the following 12 months; model results depend on assumptions and are not forecasts.
- Legal matters include an appeal of a securities class-action dismissal, another putative securities class action and shareholder derivative litigation. The company disputes the allegations; management said it could not reasonably estimate any eventual loss or range of loss.
- The company adopted Topic 606 on July 1, 2018, with no material impact. It expects the forthcoming expected-credit-loss standard (ASU 2016-13) to materially affect its consolidated financial statements; adoption was scheduled for fiscal periods beginning July 1, 2020.
- The filing describes immaterial corrections to previously reported EPS and cash-flow classifications; these revisions did not affect net income or retained earnings. The 2017 comparison EPS was revised to $0.51 basic and $0.50 diluted.
Most important facts for investors to verify
- Whether the planned Nationwide deposit acquisition closed as targeted, and its final deposit mix, purchase premium, funding effects and integration costs.
- Whether deposit runoff and reliance on FHLB advances unwind as anticipated, and the resulting funding costs, liquidity and net interest margin.
- Whether loan growth, nonaccrual balances, charge-offs and allowance coverage remain consistent with management’s credit-risk assessment.
- Whether operating expenses—especially staffing, regulatory costs and acquisition-related costs—moderate relative to revenue growth.
- Progress, terms, regulatory status and expected financial impact of the COR Clearing acquisition, and developments in the pending litigation.
- The eventual quantified impact of ASU 2016-13 and any material changes in interest-rate sensitivity or capital ratios.