Axos Financial, Inc. — Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended March 31, 2019 (fiscal 2019 Q3), with balance-sheet comparisons to June 30, 2018 and income comparisons to March 31, 2018. This differs from the request metadata, which says “2018 Q3.” Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim statements are unaudited.
Business context
Axos operates Banking and Securities businesses. Banking provides nationwide online and partner-distributed consumer and business banking, lending, deposits, and trustee services. Securities includes clearing, broker-dealer, and investment-advisory activities. The quarter included recently acquired securities businesses; results are therefore not fully comparable with the prior-year quarter.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Prior-year comparable | Nine months ended March 31, 2019 | Prior-year comparable |
|---|---|---|---|---|
| Net interest income | $129.2 | $116.7 | $308.2 | $281.4 |
| Provision for loan and lease losses | $19.0 | $16.9 | $24.6 | $21.9 |
| Non-interest income | $26.1 | $23.5 | $59.5 | $54.0 |
| Non-interest expense | $81.8 | $45.4 | $185.7 | $124.3 |
| Net income | $38.8 | $51.3 | $114.5 | $115.3 |
| Diluted EPS | $0.63 | $0.80 | $1.83 | $1.79 |
| Net interest margin | 4.82% | 4.77% | 4.18% | 4.25% |
| Efficiency ratio | 52.69% | 32.40% | 50.49% | 37.05% |
For the nine months, operating cash flow was $126.6 million, investing cash flow was negative $663.8 million, and financing cash flow was positive $677.7 million. Cash and cash equivalents ended at $763.3 million, including $474.4 million segregated for regulatory purposes.
At March 31, 2019, total assets were $10.88 billion, net loans and leases were $9.10 billion, deposits were $8.66 billion, and stockholders’ equity was $1.04 billion. FHLB advances were $443.5 million; borrowings, subordinated notes, and debentures were $214.5 million. Securities loaned, a separate securities-financing liability, were $201.6 million. Axos reported $2.71 billion of immediately available FHLB borrowing capacity, $1.93 billion available from the Federal Reserve discount window, and $35 million of unused unsecured federal-funds lines. Brokered deposits were $1.40 billion.
Common equity Tier 1 ratios were 12.19% for Axos Financial and 12.33% for Axos Bank; both were reported as well capitalized. Axos Clearing reported $22.4 million net capital and $17.8 million excess capital.
Material changes versus prior periods
- Quarterly net income declined 24% year over year, while nine-month net income was nearly flat. Management attributed the decline principally to a $15.3 million bad-debt expense from a correspondent customer’s unauthorized securities trades.
- Net interest income increased with loan growth and higher loan yields, but funding costs rose: quarterly interest expense increased 42% and nine-month interest expense increased 54%. Net interest margin was slightly higher for the quarter but lower year to date.
- Non-interest expense rose substantially, primarily reflecting acquired securities-business costs, expanded staffing and infrastructure, and the $15.3 million bad-debt reserve. Quarterly efficiency ratio also increased materially.
- Net loans and leases increased 7.9% from June 30, 2018; total deposits increased 8.4%. Total assets increased 14.0%.
- Nonperforming loans and leases increased to $44.5 million, or 0.49% of gross loans, from $31.2 million, or 0.37%, at June 30, 2018. The allowance increased to $71.7 million from $49.2 million.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it considers liquidity sources stable and adequate for anticipated needs and believes deposits and borrowings can be increased as needed. Results are subject to seasonality from H&R Block-related products, typically strongest in the fiscal quarter ended March 31.
- Acquisitions included Nationwide Bank deposits ($2.4 billion, acquired November 2018), COR Clearing (approximately $80.3 million cash consideration; provisional $34.9 million goodwill and $20.1 million intangible assets), WiseBanyan (acquired February 2019), and MWA Bank deposits ($173 million, acquired March 2019). COR purchase accounting remained provisional.
- The securities business recorded the $15.3 million bad-debt expense following a correspondent customer default tied to unauthorized trades. The filing identifies counterparty, collateral, integration, regulatory, and securities-market risks associated with the expanded business.
- Credit risks include increased nonaccrual mortgage loans and higher provisions, including for H&R Block Refund Advance loans. Management said the allowance was adequate, while noting future provisions depend on evolving portfolio and economic risks.
- Several securities class and derivative actions remained subject to appeals or other proceedings. The company disputes the allegations and stated it could not reasonably estimate any eventual loss or range of loss.
- The company expects adoption of the new lease standard on July 1, 2019 to add right-of-use assets and lease liabilities and potentially affect regulatory capital ratios, but not materially affect income. It expects the credit-loss standard, effective for its fiscal year beginning July 1, 2020, to have a material financial-statement impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $15.3 million correspondent-customer loss is fully reserved and whether there are further related exposures or recoveries.
- Credit-quality trends, especially nonperforming mortgage loans, construction-loan ratings, Refund Advance performance, and the adequacy of the $71.7 million allowance.
- Acquisition integration, retention of clearing correspondents and acquired deposits, provisional purchase-accounting adjustments, and Securities segment profitability excluding the unusual bad-debt charge.
- Funding costs, brokered-deposit reliance, near-term time-deposit maturities, and liquidity and capital effects of acquired and securities-financing businesses.
- Developments in pending litigation and appeals; the filing does not provide a clear estimate of potential loss.
- The comparability of management’s non-GAAP adjusted earnings, which exclude specified acquisition-related costs, excess FDIC expense, and the unusual bad-debt expense.