Axos CEO Says Both Failed Syndicated Loans Had Non-Bank Agents, Not Bank Exams, Behind Them
Net charge-offs hit 109 basis points for the quarter, against 25 basis points in the prior quarter.
Axos Financial, the digital bank and securities clearing firm, took two large loan losses this quarter that were the only ones in its syndicated cash-flow book led by non-bank agents, CEO Greg Garrabrants told analysts on Thursday's earnings call. Net charge-offs ran at 109 basis points of loans, against 25 basis points the prior quarter.
Two big loans, small Axos stakes
Asked by an analyst whether the pair were side-by-side note structures or loans Axos originated, Garrabrants said both were syndicated cash-flow loans. Both were very large, backed by heavy sponsor equity, and Axos held small pieces. One had a total size of almost a billion dollars.
Asked whether the annual shared national credit exam, a regulatory review of large syndicated loans, prompted the write-offs, he said no. Nothing about the decision to charge them off was tied to a regulatory exam, he said; it was Axos's own view, based on where the credits stood and what had happened, that they should be written off rather than reserved.
CFO Derrick Walsh said the borrowers sat in different industries, and that the charge-offs were largely covered by reserves set aside in earlier quarters. Excluding the two, annualized net charge-offs were eight basis points, against nine the prior quarter.
The lesson: non-bank agents and EBITDA
Garrabrants said non-bank agents are "just probably more willing to provide accommodations to sponsors without maybe being as taking the required action earlier." He added that Axos has little control in such deals. He said lessons include being "highly skeptical of EBITDA adjustments" and looking hard at supply chains and regulatory or tariff pressures. He also said the company should be more thoughtful about taking smaller positions in syndicated cash-flow deals, though the transcript of that remark is garbled.
Walsh told a Keefe, Bruyette & Woods analyst that the syndicated cash-flow book totals $459 million of loans, the vast majority pass-rated and performing well.
Another cash-flow loan on non-accrual
Garrabrants said a separate cash-flow loan was placed on non-accrual this quarter, meaning it is no longer accruing interest. He said it has "definitely higher potential loss content" than a real-estate-backed commercial loan that also went on non-accrual. It is an operating business doing what it needs to "right the ship," he said, and Axos has put a decent-sized reserve on it.
Overall, Axos reported net income of $129.6 million, or $2.25 a diluted share, for the quarter ended September 30. Provision for credit losses was $24.5 million, against $17.9 million the prior quarter. Walsh said the company expects to hold its loan loss reserve at 1.1% to 1.2% of loans and leases.
The company targets low to mid-teens organic loan growth in the fiscal year ending June 30, 2027, excluding any acquisitions.
Sources
- Axos Financial: Fiscal Q1 Earnings Snapshot – WTOP News — wtop.com
- Axos Financial Q1 2027 Earnings Call Transcript — benzinga.com
- Axos outlines low to mid-teen loan growth in fiscal 2027 as it targets flat net interest margin (NYSE:AX) — seekingalpha.com
- Compared to Estimates, Axos Financial (AX) Q1 Earnings: A Look at Key Metrics — Yahoo Finance
- Axos Financial (AX) Q1 Earnings and Revenues Top Estimates — Yahoo Finance
