Axos Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2018. The quarter-end balance sheet is compared with June 30, 2018; operating results are compared with the prior-year periods. Dollar figures below are in millions unless noted.
Business context
Axos is a diversified financial services company whose wholly owned Axos Bank provides nationwide consumer and business banking, lending, and specialty finance services. Growth includes online and affinity-channel banking, commercial lending, fiduciary services, and acquisitions.
Financial performance and condition
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 | Comparison |
|---|---|---|---|
| Interest and dividend income | $131.2 | $254.0 | Up 21.8% and 20.2% year over year |
| Net interest income | $92.7 | $179.0 | Up 10.1% and 8.6% |
| Provision for loan and lease losses | $5.0 | $5.6 | Prior-year periods: $4.0 and $5.0 |
| Non-interest income | $16.9 | $33.4 | Down $0.2 and up $3.0 |
| Non-interest expense | $50.9 | $103.9 | Up $10.1 and $25.0 |
| Net income | $38.8 | $75.7 | Prior-year periods: $31.7 and $64.0 |
| Diluted EPS | $0.62 | $1.20 | Prior-year periods: $0.49 and $0.99, as revised |
| Net interest margin | 3.87% | 3.82% | Down 13 and 12 basis points year over year |
| Efficiency ratio | 46.47% | 48.89% | Prior-year periods: 40.28% and 40.38% |
- Management attributed higher net income mainly to loan growth and lower income tax expense, partly offset by higher operating costs. Effective tax rates were 27.72% for the quarter and 26.55% year to date, versus 43.97% and 42.50% a year earlier, reflecting the federal tax-rate reduction.
- Average earning assets grew 13.8% for the quarter and 12.1% year to date. Rising deposit and borrowing costs weighed on margin; interest expense rose 63.4% and 61.3%, respectively.
- Mortgage banking income fell $3.3 million in the quarter and $6.2 million year to date. Higher banking and service fees—including income from Axos Fiduciary Services—and prepayment fees partly offset the quarterly decline. The year-to-date increase in other gains primarily reflected structured-settlement sales.
- At December 31, total assets were $9,810.1, net loans and leases $9,017.6, deposits $8,340.5, total liabilities $8,815.7, and stockholders’ equity $994.4. Since June 30, loans grew 6.9%, deposits 4.4%, and assets 2.8%.
- Cash and cash equivalents were $256.5, down from $622.9 at June 30. For the six months, operating cash flow was $115.5, investing cash flow was negative $669.2, and financing cash flow was $187.3; cash declined $366.3.
- Total borrowings were $397.1, including $342.5 of FHLB advances and $54.6 of subordinated notes and other borrowings, down from $511.6 at June 30. Deposit interest rates and borrowing costs increased.
- Capital ratios remained above regulatory “well capitalized” thresholds: Axos Bank’s common equity tier 1 ratio was 12.06% and total capital ratio 12.80%; the corresponding holding-company ratios were 12.50% and 14.01%. Equity was 10.14% of period-end assets. Tangible book value per common share, a non-GAAP measure, was $14.68.
- Nonperforming loans and leases were $43.0, or 0.47% of gross loans, versus $31.2 and 0.37% at June 30. Nonperforming assets were $51.7, or 0.53% of assets. The allowance was $53.7, equal to 0.59% of loans and 124.88% of nonperforming loans.
Material changes, outlook, and risks
- The November 2018 Nationwide Bank deposit acquisition added $2.4 billion at closing; the bank paid a premium of about $13.2 million. Net deposits rose much less because of planned runoff of higher-cost and short-term deposits. Axos also reduced short-term borrowings after receiving the acquired deposits.
- Axos repurchased 1.70 million shares for $47.9 million during the six months, at an average $28.09 per share; $16.9 million remained authorized at December 31.
- COR Securities Holdings was acquired on January 28, 2019, after quarter-end, for approximately $80 million in cash, with $7.5 million of subordinated notes also issued to principal stockholders. The WiseBanyan asset acquisition and approximately $225 million MWA Bank deposit acquisition remained subject to closing conditions; management expected both in the first half of calendar 2019 and first quarter of calendar 2019, respectively.
- No formal earnings or financial guidance is provided in the supplied filing text. Management said liquidity sources were stable and adequate for anticipated needs, citing $2,609.9 million of immediately available FHLB capacity, $1,368.4 million available from the Federal Reserve discount window, and $35 million in unused unsecured federal funds lines. The bank also had $1.7 billion of brokered deposits.
- Management warned that $1,562.9 million of time deposits mature within one year and replacement funding could cost more. Interest-rate sensitivity models are scenario-based and depend on assumptions about rates, prepayments, and deposit behavior.
- Credit quality bears monitoring: nonperforming assets increased, largely due to single-family mortgage loans. Management considered the allowance adequate but noted it may need to increase with portfolio growth or worsening credit conditions. Five wildfire-damaged loans totaling $9.9 million were identified; management did not expect material losses, citing insurance and its review.
- The company disclosed risks from the 2019 U.S. government shutdown, including possible delays in IRS refund processing that could extend Refund Advance loan duration. Entry into broker-dealer clearing through COR brings integration, retention, regulatory, litigation, counterparty, and securities-market risks.
- Several securities and shareholder derivative lawsuits remained active or on appeal. Two securities class actions had been dismissed with prejudice, but appeals were filed; a derivative complaint was amended and defendants moved to dismiss. The company said it could not reasonably estimate any potential loss.
- Expected-credit-loss standard ASU 2016-13 is scheduled for adoption beginning July 1, 2020; management expected a material financial-statement impact and was developing its implementation plan. New lease accounting was expected to add right-of-use assets and lease liabilities and could affect regulatory capital ratios, though management did not expect a material income-statement effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether loan growth can sustain earnings while funding costs continue to rise and net interest margin remains under pressure.
- Trends in nonperforming loans, delinquencies, charge-offs, and allowance adequacy, particularly in single-family mortgages and newer or growing loan categories.
- The composition, cost, and retention of deposits after the Nationwide acquisition, upcoming time-deposit maturities, and reliance on brokered funding.
- Acquisition closing and integration outcomes, including COR’s contribution, retention of correspondent clients, and the costs and risks of WiseBanyan and MWA Bank transactions.
- Actual liquidity and capital effects of future growth, share repurchases, the lease-accounting transition, and the expected-credit-loss standard.
- Developments in the pending litigation and any impact of government shutdowns or IRS processing delays on seasonal H&R Block-related products.