Axos Financial, Inc. — Form 10-Q Summary
Period clarification: The filing covers the three months ended September 30, 2020, Axos Financial’s fiscal 2021 first quarter. It compares operating results with the three months ended September 30, 2019; balance-sheet comparisons are primarily with June 30, 2020. Figures below are in U.S. dollars.
Business context and reporting period
Axos is a diversified financial services company operating Banking and Securities businesses. Its banking operations provide nationwide deposit, consumer lending, mortgage, commercial real estate and commercial lending services; its securities business provides clearing, brokerage and digital investment services. The unaudited interim statements are prepared under GAAP.
Key financial metrics
| Metric | Quarter ended September 30, 2020 | Comparable period / reference |
|---|---|---|
| Net interest income | $127.3 million | $103.3 million, up 23.3% year over year |
| Net interest margin | 3.84% | 3.77% a year earlier |
| Provision for credit losses | $11.8 million | $2.7 million a year earlier |
| Non-interest income | $35.9 million | $21.5 million a year earlier |
| Non-interest expense | $75.5 million | $65.5 million a year earlier |
| Net income | $53.0 million | $40.8 million a year earlier |
| Diluted EPS | $0.88 | $0.66 a year earlier |
| Adjusted earnings / adjusted diluted EPS (non-GAAP) | $54.8 million / $0.91 | $42.0 million / $0.68 a year earlier |
| Efficiency ratio | 46.30% | 52.44% a year earlier |
| Operating cash flow | $66.3 million provided | $21.4 million provided a year earlier |
| Investing / financing cash flow | $316.1 million used / $578.5 million used | Compared with $403.4 million used / $226.9 million provided a year earlier |
Mortgage banking income rose to $19.6 million from $2.8 million, primarily reflecting higher origination activity. Interest expense fell to $22.6 million from $43.0 million as deposit rates declined. The provision for credit losses increased, including $6.5 million of additional reserves for seasonal tax product loans affected by IRS processing delays.
Financial position, liquidity and capital
- Total assets were $13.38 billion at September 30, down 3.4% from June 30. Net loans and leases were $10.93 billion, up 2.8% from quarter-end June.
- Deposits totaled $10.56 billion, down 6.9% from June 30, including a reduction in higher-cost interest-bearing and time deposits. Non-interest-bearing deposits increased to $2.03 billion.
- Cash, cash equivalents and cash segregated for regulatory purposes totaled $1.12 billion, versus $1.95 billion at June 30. The cash decrease reflected, among other items, deposit outflows and lending and investment activity.
- Total borrowings were $696.3 million, up from $478.3 million at June 30. In September, Axos issued $175 million of 4.875% fixed-to-floating subordinated notes due 2030.
- Stockholders’ equity was $1.24 billion. Company and Bank regulatory capital ratios remained above applicable “well capitalized” thresholds. Company total risk-based capital was 14.39%; Bank total risk-based capital was 12.55%.
- Management reported $3.04 billion of FHLB borrowing capacity available immediately and $2.17 billion available with additional collateral, plus a $1.72 billion Federal Reserve discount-window capacity. Axos also had $175 million in unused unsecured federal funds lines.
- Axos repurchased 582,249 shares for $12.7 million during the quarter; $56.8 million remained under the repurchase authorization.
Material changes, outlook and risks
- Adoption of CECL on July 1, 2020 added $47.3 million to the loan allowance and $5.7 million to unfunded commitment liabilities, with a $37.1 million after-tax reduction to opening retained earnings. The adoption used a modified retrospective method, so prior periods were not restated.
- The allowance for credit losses on loans reached $132.9 million, compared with $75.8 million at June 30; the quarter-end allowance equaled 1.20% of loans held for investment. Nonperforming loans rose to $172.1 million, or 1.56% of total loans, from $87.9 million, or 0.82%, at June 30. Management attributed much of the increase to single-family mortgages coming off COVID-related forbearance and deterioration in multifamily mortgage loans.
- Management described ongoing uncertainty from COVID-19 and said it had tightened underwriting, increased credit provisions, participated in PPP and increased customer-service and portfolio-management resources. As of September 30, the company was no longer allowing payment delays or interest-only payment arrangements; limited exceptions during the quarter included three commercial borrowers with $10.0 million outstanding and $0.9 million of auto and consumer deferrals.
- No formal earnings or financial guidance is provided in the filing. Management stated it believes liquidity sources are stable and adequate for anticipated needs over the next 12 months and beyond, while noting that actual results may differ from forward-looking statements.
- Risks include changing economic conditions and COVID-19 effects, credit quality and real estate exposure, interest-rate sensitivity, deposit and funding conditions, and ongoing shareholder litigation. The company said it disputes the litigation allegations and is defending the cases; it stated that a potential loss or range of loss could not be reasonably estimated.
- Other notable expense changes included higher professional-services costs and FDIC/regulatory fees, partly reflecting increased legal and consulting fees and the prior-year FDIC assessment credit not recurring. Adjusted earnings and adjusted EPS are non-GAAP measures and should not be viewed as substitutes for GAAP results.
Most important facts for investors to verify
- Whether the increase in nonperforming loans and credit-loss reserves persists, particularly in single-family, multifamily and commercial real estate portfolios.
- How CECL assumptions and economic forecasts affect future provisions and allowance adequacy.
- Whether mortgage banking income remains elevated and how sensitive earnings are to origination volumes, mortgage rates and margins.
- Deposit trends, funding costs, liquidity availability and the effect of the new subordinated notes on interest expense and capital.
- Developments in the securities class actions and derivative litigation, given the company’s inability to estimate potential losses.
- Reconciliation and comparability of non-GAAP adjusted earnings and adjusted EPS with GAAP net income and diluted EPS.