Axos Financial, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021, filed August 25, 2021. The request metadata says “2020 Q4,” but this filing covers FY2021; it also reports FY2021’s fourth quarter. Axos is a digital-focused financial services company with Banking and Securities businesses.
Financial and operating performance
- Profit: Net income was $215.7 million, up 17.6% from $183.4 million in FY2020. Diluted EPS rose to $3.56 from $2.98. Adjusted diluted EPS, a non-GAAP measure, was $3.68.
- Income and margins: Net interest income increased 12.8% to $538.7 million; non-interest income rose 2.2% to $105.3 million. Interest expense fell 45.5% to $79.1 million, while non-interest expense increased 14.0% to $314.5 million. Net interest margin declined to 3.92% from 4.12%; consolidated efficiency ratio increased to 48.84% from 47.50%.
- Credit costs and asset quality: Provision for credit losses was $23.8 million, down from $42.2 million. The allowance for credit losses was $133.0 million, or 1.15% of gross loans, versus $75.8 million, or 0.71%, a year earlier. Non-performing loans and leases increased to $145.2 million from $87.9 million; non-performing assets were $152.0 million.
- Balance sheet: Assets were $14.27 billion, up 3.0%; net loans were $11.41 billion, up from $10.63 billion. Deposits fell to $10.82 billion from $11.34 billion. Stockholders’ equity rose to $1.40 billion from $1.23 billion.
- Cash flow: Operating cash flow was $412.6 million; investing cash flow was negative $866.8 million and financing cash flow negative $458.6 million. Cash and cash equivalents declined $912.7 million to $1.04 billion, mainly as cash funded lending and deposits contracted.
- Funding and capital: FHLB advances were $353.5 million and borrowings, subordinated notes and debentures totaled $221.4 million. The Company and Bank were “well capitalized”; their total risk-based capital ratios were 13.78% and 13.21%, respectively. The Bank had $2.3 billion of immediately available FHLB capacity and approximately $2.1 billion of FRBSF borrowing capacity, both subject to collateral and other terms.
- Segments: Banking pre-tax income increased to $328.6 million from $285.7 million. Securities’ pre-tax loss narrowed to $1.7 million from $2.1 million.
Material changes versus FY2020
- Loan growth was concentrated in commercial real estate and commercial and industrial lending; CRE loans rose to $3.18 billion from $2.30 billion. Single-family mortgage and warehouse loans declined to $4.36 billion from $4.72 billion.
- Lower deposit costs supported earnings: average rates paid on interest-bearing liabilities fell to 0.79% from 1.72%. Lower asset yields nonetheless reduced net interest margin.
- Mortgage banking income increased to $42.2 million from $20.6 million, while banking and service fees fell to $29.1 million from $46.3 million. The H&R Block program termination and reduced related product activity contributed to the fee decline.
- CECL was adopted July 1, 2020. Adoption increased the loan allowance by $47.3 million and reduced retained earnings by $37.1 million, net of tax. The allowance’s year-end increase reflects both adoption and subsequent provisions.
- Cash declined as deposits decreased and loan fundings continued. The company issued $175 million of 4.875% fixed-to-floating subordinated notes and redeemed $51 million of 6.25% notes during the year.
Outlook, risks, contingencies and unusual items
- Long-term objectives, not near-term guidance: Management’s stated plan is to maintain annualized return on average common equity of at least 17%, grow average interest-earning assets at least 12% annually, and bring the Bank efficiency ratio to 40% or lower. FY2021 return on average common equity was 16.51%; the Banking efficiency ratio was 41.95%.
- Management cited loan and deposit growth and lower funding costs as earnings drivers. It continued to monitor COVID-19 effects, tightened underwriting, and reported no mortgage, warehouse or CRE payment deferrals at year-end; $0.9 million of auto and consumer deferrals were granted during FY2021.
- Key exposures include interest-rate and LIBOR-transition risk, credit deterioration in real estate and growing commercial lending portfolios, California real estate concentration, funding and deposit competition, cybersecurity and third-party technology dependence, and regulatory compliance. Approximately 72.4% of the mortgage portfolio was secured by California property.
- Pending securities class-action and shareholder derivative litigation relates to allegations the Company disputes. Management said it was vigorously defending the cases and could not reasonably estimate any loss or range of loss.
- On August 2, 2021, after year-end, Axos acquired E*TRADE Advisor Services for $54.9 million cash. The business had approximately $24.8 billion in assets under custody, including $1.2 billion in client cash sweeps, as of July 30, 2021.
- Other notable items: FY2021 share repurchases totaled $16.8 million; the remaining authorization was $52.8 million. The filing states the Company does not expect to pay common-stock dividends in the foreseeable future. Auditors issued unqualified opinions on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.
Key facts for investors to verify
- Whether rising non-performing loans, especially in single-family, multifamily and commercial real estate, translate into higher charge-offs or further allowance needs.
- Whether commercial real estate and C&I growth earns adequate risk-adjusted returns and remains within underwriting and concentration limits.
- How lower asset yields, deposit repricing and rate movements affect net interest margin, liquidity and capital.
- The durability of fee income after the H&R Block program termination, and the cost, integration and deposit benefits of the E*TRADE Advisor Services acquisition.
- Developments and potential financial exposure in the pending litigation, and any material changes in the CECL allowance assumptions or audit findings.