Business context and reporting period
Axos Financial, Inc. is a diversified financial services company operating through Banking and Securities businesses, including online banking and lending, securities clearing, and investment services. This Form 10-Q covers the quarter and nine months ended March 31, 2021, compared with the corresponding 2020 periods. The supplied metadata label “2020 Q3” does not match the filing period; the filing is for fiscal 2021 Q3.
Unless noted otherwise, amounts are in U.S. dollars. Financial statements are unaudited.
Financial performance and condition
| Metric | Quarter ended Mar. 31, 2021 | Comparable 2020 quarter | Nine months ended Mar. 31, 2021 | Comparable 2020 period |
|---|---|---|---|---|
| Net interest income | $135.7 million | $148.6 million | $397.1 million | $360.3 million |
| Provision for credit losses | $2.7 million | $28.5 million | $22.5 million | $35.7 million |
| Non-interest income | $23.9 million | $31.5 million | $88.5 million | $74.3 million |
| Non-interest expense | $80.8 million | $71.8 million | $232.7 million | $204.2 million |
| Net income | $53.6 million | $56.1 million | $161.5 million | $138.1 million |
| Diluted EPS | $0.89 | $0.91 | $2.67 | $2.23 |
| Net interest margin | 3.96% | 4.90% | 3.91% | 4.20% |
| Efficiency ratio | 50.64% | 39.85% | 47.91% | 46.99% |
At March 31, 2021, total assets were $14.8 billion, net loans and leases were $11.7 billion, deposits were $11.6 billion, total liabilities were $13.5 billion, and stockholders’ equity was $1.35 billion. Cash, cash equivalents, and regulatory-segregated cash totaled $1.44 billion, down from $1.95 billion at June 30, 2020.
For the nine months, operating cash flow was $312.7 million, investing cash outflow was $1.13 billion, and financing cash inflow was $305.8 million. Total borrowings, including FHLB advances and subordinated notes, were $538.3 million; securities loaned were a separate $649.8 million liability. Axos Financial and Axos Bank were reported as well capitalized. Their total risk-based capital ratios were 13.32% and 12.71%, respectively; leverage ratios were 8.99% and 9.56%.
Material changes versus comparable periods
- Quarterly net income fell about 4% and diluted EPS declined from $0.91 to $0.89; nine-month net income rose about 17% and diluted EPS increased from $2.23 to $2.67.
- Quarterly net interest income declined 8.7%, while nine-month net interest income increased 10.2%. Management attributed the quarterly decline partly to prior-year seasonal tax-loan interest income that did not recur. Lower deposit costs and loan growth supported the nine-month increase.
- Net interest margin compressed, primarily because high-yielding H&R Block tax-loan products from the prior year did not recur. The H&R Block relationship was terminated.
- Quarterly non-interest income fell $7.7 million, mainly due to lower prepaid-card and refund-transfer fees; nine-month non-interest income increased $14.2 million, led by mortgage banking income, which rose $31.3 million.
- Non-interest expense rose $9.0 million for the quarter and $28.4 million for the nine months, with higher staffing, data-processing, professional-services, regulatory, and clearing costs. The quarterly efficiency ratio worsened to 50.64% from 39.85%.
- Gross loans and leases increased to $11.86 billion from $10.70 billion at June 30, 2020, including growth in commercial real estate. Deposits increased 2.4%; non-interest-bearing deposits rose 35.2%.
- Non-performing loans rose to $135.6 million, or 1.14% of gross loans, from $87.9 million, or 0.82%, at June 30, 2020. Non-performing assets increased to $142.4 million, or 0.96% of assets. The allowance for loan losses was $138.1 million, or 1.16% of loans.
Outlook, risks, contingencies, and unusual items
- No earnings or financial forecast was provided. Management said it believes liquidity sources are stable and adequate for anticipated needs over the next 12 months and beyond. It also cited capacity to increase deposits and borrowings.
- On April 20, 2021, after quarter-end, Axos announced a definitive agreement to acquire certain assets and liabilities of E*TRADE Advisor Services for $55 million in cash, funded from existing capital. Closing was expected in calendar Q3 2021; management expects the transaction to increase both Securities segment non-interest income and expense.
- The company adopted CECL (ASC 326) on July 1, 2020. Adoption increased the allowance by approximately $53.0 million and reduced opening retained earnings by $37.1 million, net of tax. Management cautioned that allowance estimates depend on uncertain economic forecasts and may require material adjustment.
- Management continued to monitor COVID-19 effects, tightened underwriting, and reallocated resources. No loan forbearances or payment deferrals were outstanding at March 31, 2021; $0.9 million of auto and consumer loan deferrals had been granted during the nine months.
- Pending securities and shareholder derivative litigation remains unresolved. The company disputes the allegations and is defending the cases; it said it could not reasonably estimate any eventual loss or range of loss.
- The company issued $175 million of 4.875% fixed-to-floating subordinated notes due 2030 and redeemed $51 million of 6.25% subordinated notes due 2026 on March 31, 2021. It also redeemed its Series A preferred stock and repurchased $16.8 million of common stock during the nine months.
- Interest-rate sensitivity modeling showed estimated first-12-month net interest income increasing 10.0% under an immediate 200-basis-point rise and decreasing 2.5% under a 100-basis-point decline. Management cautioned that these scenarios rely on assumptions and may not predict actual results.
Most important facts for investors to verify
- Confirm the reporting-period labeling: this filing reports the quarter ended March 31, 2021, notwithstanding the supplied “2020 Q3” metadata.
- Track non-performing loans, especially multifamily/commercial mortgage and commercial real estate exposures, and assess whether the $138.1 million allowance adequately reflects credit risk under CECL.
- Assess whether loan growth and mortgage banking gains can offset margin compression and the loss of H&R Block-related fees and seasonal tax-loan income.
- Monitor expense growth, the deteriorating quarterly efficiency ratio, and the Securities segment’s reported pre-tax loss.
- Review the E*TRADE Advisor Services transaction’s closing, integration, funding, and realized contribution to income and expenses.
- Follow developments in pending litigation and any changes to the company’s ability to estimate potential exposure.