Axos Financial, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020 (Axos fiscal 2020 third quarter), not 2019 Q3 as stated in the request metadata. The filing was signed April 29, 2020. Unless otherwise noted, amounts below are in U.S. dollars.
Business context and reporting period
Axos is a diversified financial services company operating through Banking and Securities businesses. It offers nationwide banking, lending, deposit, securities clearing, and digital investment services. The filing reports unaudited results for the three and nine months ended March 31, 2020, compared with the same 2019 periods; balance-sheet comparisons are primarily with June 30, 2019.
Financial performance and condition
- Quarterly results: Net interest income was $148.6 million, up 15.1% year over year; non-interest income was $31.5 million, up 20.9%. Net income was $56.1 million versus $38.8 million, and diluted EPS was $0.91 versus $0.63. Net interest margin was 4.90%, compared with 4.84%.
- Nine-month results: Net interest income was $360.3 million, up 16.9%; non-interest income was $74.3 million, up 24.8%. Net income was $138.1 million versus $114.5 million, and diluted EPS was $2.23 versus $1.83. Net interest margin was 4.20%, compared with 4.19%.
- Expenses and margins: Quarterly non-interest expense fell to $71.8 million from $81.8 million, mainly because the prior-year quarter included a $15.3 million Securities Business bad-debt charge. Nine-month expense increased to $204.2 million from $185.7 million, primarily reflecting acquisition-related and growth costs. The consolidated efficiency ratio was 39.85% for the quarter and 46.99% for nine months.
- Loans and credit: Net loans and leases rose 10.6% from June 30, 2019, to $10.37 billion. The allowance for loan and lease losses increased to $87.1 million from $57.1 million. Provision expense was $28.5 million for the quarter and $35.7 million for nine months. Nonperforming loans and leases were $57.9 million, or 0.55% of gross loans, versus 0.51% at June 30, 2019.
- Balance sheet and funding: Total assets were $12.16 billion, up 8.4% from June 30, 2019. Deposits grew 6.5% to $9.57 billion, including a rise in non-interest-bearing deposits to $2.33 billion. Total borrowings were $846.8 million, including $770.5 million of FHLB advances; borrowings were 7.0% of assets. Stockholders’ equity was $1.18 billion.
- Cash flow and liquidity: For nine months, operating cash flow was $222.0 million, investing cash outflow was $987.6 million, and financing cash inflow was $762.5 million. Cash and regulatory-segregated cash totaled $854.2 million at March 31, 2020. The company reported $2.57 billion of immediately available FHLB borrowing capacity and $789.1 million available with additional collateral, as well as other bank and Federal Reserve facilities.
- Capital: Axos and Axos Bank were reported as well capitalized. At March 31, 2020, the bank’s common equity tier 1 ratio was 11.62%, tier 1 capital ratio 11.62%, and total capital ratio 12.60%.
Material changes versus comparable periods
- Profitability improved as loan growth lifted net interest income and Securities Business and mortgage banking fees increased. Quarterly results also benefited from the absence of the prior-year $15.3 million clearing-customer bad-debt charge.
- Credit-loss provisions increased year over year. Management attributed the increase to Refund Advance loan growth and approximately $6.6 million of additional provision related to deteriorating economic conditions, including hospitality, retail, and oil and gas exposures.
- Loan growth was broad-based, with commercial and industrial loans increasing to $2.21 billion from $1.66 billion at June 30, 2019. Non-interest-bearing deposits increased by $886.7 million over that date, primarily through the bankruptcy trustee and fiduciary services channel.
- For nine months, net income rose despite higher non-interest expense and provision expense. Non-GAAP adjusted earnings were $142.8 million, up 10.0%; adjusted diluted EPS was $2.31, up 11.6%. These measures exclude specified acquisition-related and other costs.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management identified uncertainty around borrower repayment, demand, deposits, markets, and credit quality. The company tightened underwriting, increased customer-service and portfolio-management resources, participated in the Paycheck Protection Program, and increased provisions. No COVID-related loan modifications had been made as of March 31, 2020; the filing provides no specific earnings or full-year guidance.
- H&R Block agreement and Durbin Amendment: Because assets exceeded $10 billion at December 31, 2019, the Durbin Amendment was to apply beginning July 2020. Axos estimated that compensating H&R Block for lost interchange income could cost approximately $25 million pre-tax annually, or about $0.28 per diluted share after tax. The amendment to the program agreement had not been executed by February 28, 2020, and H&R Block had a unilateral termination right; a mutually acceptable amendment was not assured.
- Accounting change: The company expected adoption of the CECL credit-loss standard, effective for its fiscal year beginning July 1, 2020, to have a material impact on its consolidated financial statements. The amount of that impact was not specified.
- Litigation: Securities class actions and shareholder derivative matters remained subject to appeals or other proceedings. The company disputed the allegations and stated it could not reasonably estimate any eventual loss or range of loss.
- Capital returns: Axos repurchased 1.82 million shares for $35.8 million during the nine months, at an average $19.74 per share; $72.5 million remained under the repurchase authorization at March 31, 2020.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: this is the March 31, 2020 quarter, not 2019 Q3.
- Track COVID-19-related credit deterioration, future provisions, payment deferrals, and the exposure of commercial and other loan portfolios.
- Verify the resolution and economics of the H&R Block agreement, including any termination or interchange-compensation outcome.
- Assess the eventual CECL adoption impact and changes in allowance coverage and nonperforming loans.
- Monitor deposit mix and concentration, brokered deposits, FHLB funding, available liquidity, and regulatory capital ratios.
- Review the status and potential consequences of pending litigation; the filing does not quantify a probable loss.