Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s common stock on the last practicable date: 60,000,709 shares of common stock, $0.01 par value per share, as of January 20, 2023.
(Dollars in thousands, except par and stated value)
(Unaudited)December 31, 2022
June 30, 2022
ASSETS
Cash and cash equivalents
$
1,755,603
$
1,202,587
Cash segregated for regulatory purposes
196,910
372,112
Total cash, cash equivalents, and cash segregated
1,952,513
1,574,699
Securities:
Trading
372
1,758
Available-for-sale
248,062
262,518
Stock of regulatory agencies
20,881
20,368
Loans held for sale, carried at fair value
4,292
4,973
Loans held for sale, lower of cost or fair value
455
10,938
Loans—net of allowance for credit losses of $157,218 as of December 31, 2022 and $148,617 as of June 30, 2022
15,473,212
14,091,061
Mortgage servicing rights, carried at fair value
25,526
25,213
Securities borrowed
58,846
338,980
Customer, broker-dealer and clearing receivables
272,579
417,417
Goodwill and other intangible assets—net
157,585
156,405
Other assets
526,712
496,835
TOTAL ASSETS
$
18,741,035
$
17,401,165
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing
3,442,148
5,033,970
Interest bearing
12,248,346
8,912,452
Total deposits
15,690,494
13,946,422
Advances from the Federal Home Loan Bank
100,000
117,500
Borrowings, subordinated notes and debentures
334,077
445,244
Securities loaned
156,008
474,400
Customer, broker-dealer and clearing payables
420,947
511,654
Accounts payable and other liabilities
251,950
262,972
Total liabilities
16,953,476
15,758,192
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Common stock—$0.01 par value; 150,000,000 shares authorized; 69,153,591 shares issued and 60,000,079 shares outstanding as of December 31, 2022; 68,859,722 shares issued and 59,777,949 shares outstanding as of June 30, 2022
692
689
Additional paid-in capital
465,350
453,784
Accumulated other comprehensive income (loss)—net of tax
(6,945)
(2,933)
Retained earnings
1,568,403
1,428,444
Treasury stock, at cost; 9,153,512 shares as of December 31, 2022 and 9,081,773 shares as of June 30, 2022
(239,941)
(237,011)
Total stockholders’ equity
1,787,559
1,642,973
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
18,741,035
$
17,401,165
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
Six Months Ended
December 31,
December 31,
(Dollars in thousands)
2022
2021
2022
2021
NET INCOME
$
81,552
$
60,787
$
139,959
$
120,997
Net unrealized gain (loss) from available-for-sale securities, net of income tax expense (benefit) of $503 and $(274) for the three months and $1,718 and $(488) for the six months ended December 31, 2022 and 2021, respectively.
(1,175)
(656)
(4,012)
(1,163)
Other comprehensive income (loss)
(1,175)
(656)
(4,012)
(1,163)
Comprehensive income
$
80,377
$
60,131
$
135,947
$
119,834
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2022 AND 2021
(Dollars in thousands, except per share and stated value amounts)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Axos Financial, Inc. (“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank”) and Axos Nevada Holding, LLC (“Axos Nevada Holding” and collectively, the “Company”). Axos Bank and its wholly owned subsidiary constitute the Banking Business segment and Axos Nevada Holding wholly owns the companies constituting the Securities Business segment. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three and six months ended December 31, 2022 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or not repeated herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2022 included in our Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2022 (“2022 Form 10-K”). A reclassification of certain components of non-interest income for the three and six months ended December 31, 2021 has been made to conform to the current period presentation. This reclassification had no effect on the Company’s total non-interest income, net income, financial position or cash flows. Additional reclassifications of certain amounts in the Condensed Consolidated Statement of Cash Flows for the six months ended December 31, 2021 have been made to conform to the current period presentation. These reclassifications had no effect on the Company’s results of operations or financial position.
Significant Accounting Policies
Our significant accounting policies are described in greater detail in Note 1—“Organizations and Summary of Significant Accounting Policies” contained in the 2022 Form 10-K.
New Accounting Standards
Accounting Standards Issued But Not Yet Adopted
The Financial Accounting Standards Board has issued three Accounting Standards Updates (“ASUs”) (2020-04, 2021-04 and 2022-06) all of which provide guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions are optional and are effective from March 12, 2020 through December 31, 2024. The Company is evaluating the impact on the Company’s Consolidated Financial Statements, but it does not expect any application of the provisions of these ASUs to have a material impact. For a further discussion of new accounting standards issued but not yet adopted which are applicable to the Company see Note 1—“Organizations and Summary of Significant Accounting Policies” contained in the 2022 Form 10-K.
From time to time the Company completes acquisitions and related corporate activities to supplement the organic growth and development of the business.
On August 2, 2021, the Company’s subsidiary, Axos Clearing LLC, acquired certain assets and liabilities of E*TRADE Advisor Services (“EAS”), the registered investment advisor custody business of Morgan Stanley. This business was rebranded as Axos Advisor Services (“AAS”). AAS adds incremental fee income, a turnkey technology platform used by independent registered investment advisors for trading and custody services, and low cost deposits that can be used to generate fee income from other bank partners or to fund loan growth at Axos Bank. The purchase price of $54.8 million consisted entirely of cash consideration paid upon acquisition and working capital adjustments.
The Company incurred acquisition-related costs totaling $0.04 million in total, all of which were recognized in the year ended June 30, 2022.
The acquisition is accounted for as a business combination under the acquisition method of accounting. Accordingly, tangible and intangible assets acquired (and liabilities assumed) are recorded at their estimated fair values as of the date of acquisition. The preliminary allocation of the $54.6 million purchase price consisted of $14.4 million of fair value of tangible assets acquired (which included $7.8 million of a right-of-use lease asset), $11.3 million of liabilities assumed (which included $7.8 million of a lease liability), $27.1 million of identifiable intangible assets and $24.4 million of goodwill, all of which is expected to be deductible for tax purposes. In December 2021, the Company made a $0.2 million true-up payment based on working capital adjustments, which was recorded as an increase in the purchase price up to $54.8 million with no impact on goodwill or identifiable intangible assets. After the working capital true-up, the final acquisition fair value of tangible assets acquired was $14.2 million and the final acquisition fair value of liabilities acquired was $10.9 million. Goodwill was calculated as the excess of consideration exchanged over the fair value of identifiable net assets acquired. The goodwill includes synergies expected to result from combining the acquired assets and liabilities with existing operations, coupling its custody platform with the Company’s existing product offerings and leveraging customer relationships through registered investment advisors (“RIAs”). The following table summarizes the fair value and useful life of each intangible asset acquired as of the acquisition date:
(Dollars in thousands)
Fair Value
Useful Lives (Years)
Trade Name
$
290
0.16
Proprietary Technology
10,990
7
Customer Relationships
15,650
14
Non-Compete Agreements
130
1
Total
$
27,060
The following table presents the results of operations of AAS for the six months ended December 31, 2021 on an unaudited pro forma basis, as if the acquisition of the entity rebranded to AAS had been consummated on July 1, 2020. The results of operations of AAS for the three months ended December 31, 2021 are reflected in the unaudited Condensed Consolidated Statements of Income. The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of what the Company’s results of operations would have been if the acquisition of EAS had occurred as of July 1, 2020, or the results of operations for any future periods. Additionally, the information presented does not reflect any synergies or other strategic benefits as a result of acquisition.
Pro Forma Revenue
(Dollars in thousands)
For the Six Months Ended December 31, 2021
Non-interest income
$
17,230
It is not practical to disclose net income on a pro forma basis as the assets and liabilities acquired are a component of a business.
The Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and June 30, 2022 are classified in their entirety based on the lowest level of input significant to the fair value measurement.
December 31, 2022
(Dollars in thousands)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
ASSETS:
Securities—Trading: Municipal
$
372
$
—
$
372
Securities—Available-for-Sale:
Agency MBS1
22,796
—
22,796
Non-Agency MBS2
—
175,123
175,123
Municipal
3,327
—
3,327
Asset-backed securities and structured notes
46,816
—
46,816
Total—Securities—Available-for-Sale
$
72,939
$
175,123
$
248,062
Loans Held for Sale
$
4,292
$
—
$
4,292
Mortgage servicing rights
$
—
$
25,526
$
25,526
Other assets—Derivative instruments
$
—
$
136
$
136
LIABILITIES:
Other liabilities—Derivative instruments
$
—
$
118
$
118
June 30, 2022
(Dollars in thousands)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
ASSETS:
Securities—Trading: Municipal
$
1,758
$
—
$
1,758
Securities—Available-for-Sale:
Agency MBS1
25,325
—
25,325
Non-Agency MBS2
—
186,814
186,814
Municipal
3,248
—
3,248
Asset-backed securities and structured notes
47,131
—
47,131
Total—Securities—Available-for-Sale
$
75,704
$
186,814
$
262,518
Loans Held for Sale
$
4,973
$
—
$
4,973
Mortgage servicing rights
$
—
$
25,213
$
25,213
Other assets—Derivative instruments
$
—
$
464
$
464
LIABILITIES:
Other liabilities—Derivative instruments
$
—
$
—
$
—
1Includes securities guaranteed by Ginnie Mae, a U.S. government agency, and the government sponsored enterprises Fannie Mae and Freddie Mac.
2 Private sponsors of securities collateralized primarily by first-lien mortgage loans on commercial properties or by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by Alt-A or pay-option ARM mortgages.
Additional information is presented below about assets measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
For the Three Months Ended
December 31, 2022
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency MBS
Mortgage Servicing Rights1
Derivative Instruments, net
Total
Opening balance
$
184,012
$
26,373
$
535
$
210,920
Total gains or losses for the period:
Included in earnings—Mortgage banking income
—
(1,046)
(517)
(1,563)
Included in other comprehensive income
(2,143)
—
—
(2,143)
Purchases, retentions, issues, sales and settlements:
Purchases/Retentions
—
199
—
199
Settlements
(6,746)
—
—
(6,746)
Closing balance
$
175,123
$
25,526
$
18
$
200,667
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—
$
(1,046)
$
(517)
$
(1,563)
For the Six Months Ended
December 31, 2022
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
Mortgage Servicing Rights1
Derivative Instruments, net
Total
Opening Balance
$
186,814
$
25,213
$
464
$
212,491
Total gains or losses for the period:
Included in earnings—Mortgage banking income
—
(93)
(446)
(539)
Included in other comprehensive income
(4,616)
—
—
(4,616)
Purchases, retentions, issues, sales and settlements:
Purchases/Retentions
—
406
—
406
Settlements
(7,075)
—
—
(7,075)
Closing balance
$
175,123
$
25,526
$
18
$
200,667
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—
$
(93)
$
(446)
$
(539)
1 Earnings from mortgage servicing rights (“MSR”) were attributable to: Time and payoffs, representing a decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period of $0.1 million and $0.5 million for the three and six months ended December 31, 2022, respectively, and a decrease in MSR value resulting from market-driven changes in interest rates of $0.9 million for the three months ended December 31, 2022 and an increase of $0.4 million for the six months ended December 31, 2022. Additions to mortgage servicing rights were retained upon sale of loans held for sale.
Purchases, retentions, issues, sales and settlements:
Purchases/Retentions
—
1,575
—
1,575
Settlements
(572)
—
—
(572)
Closing balance
$
58,752
$
20,110
$
1,377
$
80,239
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—
$
97
$
(849)
$
(752)
For the Six Months Ended
December 31, 2021
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
Mortgage Servicing Rights1
Derivative Instruments, net
Total
Opening Balance
$
67,615
$
17,911
$
2,205
$
87,731
Total gains or losses for the period:
Included in earnings—Mortgage banking income
—
(1,087)
(828)
(1,915)
Included in other comprehensive income
(639)
—
—
(639)
Purchases, retentions, issues, sales and settlements:
Purchases/Retentions
—
3,286
—
3,286
Settlements
(8,224)
—
—
(8,224)
Closing balance
$
58,752
$
20,110
$
1,377
$
80,239
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—
$
(1,087)
$
(828)
$
(1,915)
1 Earnings from mortgage servicing rights were attributable to: Time and payoffs, representing a decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period of $1.3 million and $2.8 million for the three and six months ended December 31, 2021, respectively, and an increase in MSR value resulting from market-driven changes in interest rates of $1.4 million and $1.8 million for the three and six months ended December 31, 2021, respectively. Additions to mortgage servicing rights were retained upon sale of loans held for sale.
The table below summarizes the quantitative information about level 3 fair value measurements as of the dates indicated:
December 31, 2022
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Non-agency MBS
$
175,123
Discounted Cash Flow
Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR
0.0 to 30.0% (21.9%)
0.0 to 6.1% (2.2%)
0.0 to 68.7% (27.4%)
2.6 to 7.1% (2.7%)
Mortgage Servicing Rights
$
25,526
Discounted Cash Flow
Projected Constant Prepayment Rate, Life (in years), Discount Rate
Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR
0.0 to 30.0% (21.4%)
0.0 to 7.9% (2.2%)
0.0 to 68.4% (26.7%)
2.7 to 9.3% (2.8%)
Mortgage Servicing Rights
$
25,213
Discounted Cash Flow
Projected Constant Prepayment Rate, Life (in years), Discount Rate
7.9 to 56.3% (11.0%)
1.2 to 9.9 (8.4)
9.5 to 11.5% (9.5%)
Derivative Instruments
$
464
Sales Comparison Approach
Projected Sales Profit of Underlying Loans
-3.1 to 0.8% (-1.2%)
The significant unobservable inputs used in the fair value measurement of the Company’s residential mortgage-backed securities are projected prepayment rates, probability of default, projected loss severity in the event of default and discount rate over LIBOR. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the projected loss severity and a directionally opposite change in the assumption used for projected prepayment rates.
The table below summarizes assets measured for impairment on a non-recurring basis:
December 31, 2022
(Dollars in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Balance
Other real estate owned and repossessed vehicles:
Single family real estate
$
—
$
—
$
4,383
$
4,383
Autos
$
—
$
—
$
1,421
$
1,421
Total
$
—
$
—
$
5,804
$
5,804
June 30, 2022
(Dollars in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Balance
Other real estate owned and repossessed vehicles:
Autos
—
—
798
798
Total
$
—
$
—
$
798
$
798
Non-recurring fair value measurements for other real estate owned and repossessed vehicles represent charge-offs of $657 thousand and $37 thousand for the three months ended December 31, 2022 and December 31, 2021, respectively, and $964 thousand and $49 thousand for the six months ended December 31, 2022 and December 31, 2021, respectively.
The Company has elected the fair value option for Agency loans held for sale. Given these loans are intended for sale, fair value is considered to be the best indicator of the amount to be realized from these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2022 and June 30, 2022.
As of December 31, 2022 and June 30, 2022, the aggregate fair value of loans held for sale, carried at fair value, contractual balance (including accrued interest), and unrealized gain was as follows:
Gains and losses from changes in fair value included in earnings for loans held for sale for the periods indicated below were:
For the Three Months Ended
For the Six Months Ended
December 31,
December 31,
(Dollars in thousands)
2022
2021
2022
2021
Interest income
$
103
$
194
$
153
$
394
Change in fair value
(422)
(1,021)
(331)
(978)
Total
$
(319)
$
(827)
$
(178)
$
(584)
The following table presents quantitative information about level 3 fair value measurements for other real estate owned and repossessed vehicles measured at fair value on a non-recurring basis at the periods indicated:
December 31, 2022
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Other real estate owned and repossessed vehicles:
Single family real estate
$
4,383
Sales comparison approach
Adjustment for differences between the comparable sales
3.5 to 12.1% (4.1%)
Autos
$
1,421
Sales comparison approach
Adjustment for differences between the comparable sales
-20.3 to -7.8% (-9.1%)
June 30, 2022
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Other real estate owned and repossessed vehicles:
Autos
$
798
Sales comparison approach
Adjustment for differences between the comparable sales
-17.2 to 4.6% (-7.5%)
1 For other real estate owned and repossessed vehicles the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the asset being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.
Carrying amounts and estimated fair values of financial instruments at December 31, 2022 and June 30, 2022 were:
December 31, 2022
Fair Value
(Dollars in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Total Fair Value
Financial assets:
Cash and cash equivalents
$
1,952,513
$
1,952,513
$
—
$
—
$
1,952,513
Securities—trading
372
—
372
—
372
Securities—available-for-sale
248,062
—
72,939
175,123
248,062
Loans held for sale, at fair value
4,292
—
4,292
—
4,292
Loans held for sale, at lower of cost or fair value
455
—
—
456
456
Loans held for investment—net
15,473,212
—
—
15,171,361
15,171,361
Securities borrowed
58,846
—
—
60,217
60,217
Customer, broker-dealer and clearing receivables
272,579
—
—
281,165
281,165
Mortgage servicing rights
25,526
—
—
25,526
25,526
Financial liabilities:
Total deposits
15,690,494
—
14,334,437
—
14,334,437
Advances from the Federal Home Loan Bank
100,000
—
92,471
—
92,471
Borrowings, subordinated notes and debentures
334,077
—
297,252
—
297,252
Securities loaned
156,008
—
—
156,039
156,039
Customer, broker-dealer and clearing payables
420,947
—
—
420,946
420,946
June 30, 2022
Fair Value
(Dollars in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Total Fair Value
Financial assets:
Cash and cash equivalents
$
1,574,699
$
1,574,699
$
—
$
—
$
1,574,699
Securities—trading
1,758
—
1,758
—
1,758
Securities—available-for-sale
262,518
—
75,704
186,814
262,518
Loans held for sale, at fair value
4,973
—
4,973
—
4,973
Loans held for sale, at lower of cost or fair value
10,938
—
—
10,985
10,985
Loans held for investment—net
14,091,061
—
—
14,015,157
14,015,157
Securities borrowed
338,980
—
—
329,963
329,963
Customer, broker-dealer and clearing receivables
417,417
—
—
414,383
414,383
Mortgage servicing rights
25,213
—
—
25,213
25,213
Financial liabilities:
Total deposits
13,946,422
—
12,812,512
—
12,812,512
Advances from the Federal Home Loan Bank
117,500
—
117,500
—
117,500
Borrowings, subordinated notes and debentures
445,244
—
416,947
—
416,947
Securities loaned
474,400
—
—
473,831
473,831
Customer, broker-dealer and clearing payables
511,654
—
—
471,859
471,859
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, borrowings or subordinated debt and for variable rate loans, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held for sale can be found in Note 3 – “Fair Value” of the 2022 Form 10-K. The carrying amount of stock of regulatory agencies approximates the estimated fair value of these investments. The fair value of off-balance sheet items is not material.
The amortized cost, carrying amount and fair value for the trading and available-for-sale securities at December 31, 2022 and June 30, 2022 were:
December 31, 2022
Trading
Available-for-sale
(Dollars in thousands)
Fair Value
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Mortgage-backed securities (MBS):
U.S. agencies1
$
—
$
26,008
$
1
$
(3,213)
$
22,796
Non-agency2
—
180,541
750
(6,168)
175,123
Total mortgage-backed securities
—
206,549
751
(9,381)
197,919
Non-MBS:
Municipal
372
3,592
—
(265)
3,327
Asset-backed securities and structured notes
—
47,000
—
(184)
46,816
Total Non-MBS
372
50,592
—
(449)
50,143
Total debt securities
$
372
$
257,141
$
751
$
(9,830)
$
248,062
June 30, 2022
Trading
Available-for-sale
(Dollars in thousands)
Fair Value
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Mortgage-backed securities (MBS):
U.S. agencies1
$
—
$
27,722
$
9
$
(2,406)
$
25,325
Non-agency2
—
187,616
1,832
(2,634)
186,814
Total mortgage-backed securities
—
215,338
1,841
(5,040)
212,139
Non-MBS:
Municipal
1,758
3,529
—
(281)
3,248
Asset-backed securities and structured notes
—
47,000
131
—
47,131
Total Non-MBS
1,758
50,529
131
(281)
50,379
Total debt securities
$
1,758
$
265,867
$
1,972
$
(5,321)
$
262,518
1Includes securities guaranteed by Ginnie Mae, a U.S. government agency, and the government sponsored enterprises Fannie Mae and Freddie Mac.
2Private sponsors of securities collateralized primarily by first-lien mortgage loans on commercial properties or by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by Alt-A or pay-option ARM mortgages.
No credit losses were recognized on available-for-sale securities in the three and six months ended December 31, 2022 and December 30, 2021. No allowance for credit losses for available-for-sale debt securities was recorded at December 31, 2022 and June 30, 2022 based on an analysis of: (1) the credit characteristics of the securities, including the forecasted cash flows, credit ratings, credit enhancement, and any external government backing, and (2) whether the Company is intending to sell or is required to sell any securities before recovering the amortized cost basis of the securities.
The Company’s non-agency MBS available-for-sale portfolio, with a total fair value of $175,123 at December 31, 2022, consists of 17 different issues of super senior securities.
The face amounts of debt securities available-for-sale pledged to secure borrowings at December 31, 2022 and June 30, 2022 were $1.1 million and $1.2 million, respectively.
Securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were:
December 31, 2022
Available-for-sale securities in loss position for
Less Than 12 Months
More Than 12 Months
Total
(Dollars in thousands)
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
MBS:
U.S. agencies
$
6,786
$
(470)
$
15,832
$
(2,743)
$
22,618
$
(3,213)
Non-agency
126,507
(5,705)
4,399
(463)
130,906
(6,168)
Total MBS
133,293
(6,175)
20,231
(3,206)
153,524
(9,381)
Non-MBS:
Municipal debt
3,327
(265)
—
—
3,327
(265)
Asset-backed securities and structured notes
46,816
(184)
—
—
46,816
(184)
Total Non-MBS
50,143
(449)
—
—
50,143
(449)
Total debt securities
$
183,436
$
(6,624)
$
20,231
$
(3,206)
$
203,667
$
(9,830)
June 30, 2022
Available-for-sale securities in loss position for
Less Than 12 Months
More Than 12 Months
Total
(Dollars in thousands)
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
MBS:
U.S. agencies
$
16,446
$
(1,338)
$
8,097
$
(1,068)
$
24,543
$
(2,406)
Non-agency
92,796
(2,204)
4,751
(430)
97,547
(2,634)
Total MBS
109,242
(3,542)
12,848
(1,498)
122,090
(5,040)
Non-MBS:
Municipal debt
3,248
(281)
—
—
3,248
(281)
Asset-backed securities and structured notes
—
—
—
—
—
—
Total Non-MBS
3,248
(281)
—
—
3,248
(281)
Total debt securities
$
112,490
$
(3,823)
$
12,848
$
(1,498)
$
125,338
$
(5,321)
On December 31, 2022, there were nineteen securities in a continuous loss position for a period of more than 12 months, and thirty-five securities in a continuous loss position for a period of less than 12 months. At June 30, 2022, there were fourteen securities in a continuous loss position for a period of more than 12 months, and twenty-five securities in a continuous loss position for a period of less than 12 months.
At December 31, 2022, one non-agency MBS with a total carrying amount of $1.4 million was determined to have cumulative credit losses of $0.8 million of which none was recognized in earnings during the three months ended December 31, 2022.
During the six months ended December 31, 2022 the Company sold no available-for-sale securities.
The components of the Company’s accumulated other comprehensive income (loss) are:
The following table sets forth the expected maturity distribution of our mortgage-backed securities and the contractual maturity distribution of our Non-RMBS securities and the weighted-average yield for each range of maturities:
At December 31, 2022
Total Amount
Due Within One Year
Due After One but within Five Years
Due After Five but within Ten Years
Due After Ten Years
(Dollars in thousands)
Amount
Yield1
Amount
Yield1
Amount
Yield1
Amount
Yield1
Amount
Yield1
Available-for-sale
Mortgage-backed securities:
Agency2
$
26,008
1.80
%
$
4,969
1.88
%
$
12,531
1.83
%
$
6,650
1.81
%
$
1,858
1.41
%
Non-Agency3
180,541
5.18
%
867
6.12
%
176,931
5.13
%
1,912
6.56
%
831
11.67
%
Total Mortgage-Backed Securities
$
206,549
4.76
%
$
5,836
2.51
%
$
189,462
4.91
%
$
8,562
2.87
%
$
2,689
4.58
%
Non-RMBS
Municipal
3,592
3.57
%
—
—
%
—
—
%
—
—
%
3,592
3.57
%
Asset-backed securities and structured notes
47,000
9.16
%
41,249
9.16
%
5,751
9.16
%
—
—
%
—
—
%
Total Non-RMBS
$
50,592
8.77
%
$
41,249
9.16
%
$
5,751
9.16
%
$
—
—
%
$
3,592
3.57
%
Available-for-sale—Amortized Cost
$
257,141
5.54
%
$
47,085
8.34
%
$
195,213
5.04
%
$
8,562
2.87
%
$
6,281
4.00
%
Available-for-sale—Fair Value
$
248,062
5.56
%
$
46,358
8.34
%
$
188,044
5.04
%
$
7,674
2.87
%
$
5,986
4.00
%
Total available-for-sale securities
$
248,062
5.56
%
$
46,358
8.34
%
$
188,044
5.04
%
$
7,674
2.87
%
$
5,986
4.00
%
1 Weighted-average yield is based on amortized cost of the securities. Residential mortgage-backed security yields and maturities include impact of expected prepayments and other timing factors such as interest rate forward curve.
2 Includes securities guaranteed by Ginnie Mae, a U.S. government agency, and the government sponsored enterprises Fannie Mae and Freddie Mac.
3Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mo prime, Alt-A or pay-option ARM mortgages.
Credit Quality Disclosures. Nonaccrual loans consisted of the following as of the dates indicated:
(Dollars in thousands)
As of December 31, 2022
Single Family - Mortgage & Warehouse
$
39,043
Multifamily and Commercial Mortgage
35,275
Commercial Real Estate
14,852
Commercial & Industrial - Non-RE
2,989
Auto & Consumer
1,447
Other
1,382
Total nonaccrual loans
$
94,988
Nonaccrual loans to total loans
0.61
%
(Dollars in thousands)
As of June 30, 2022
Single Family - Mortgage & Warehouse
$
66,424
Multifamily and Commercial Mortgage
33,410
Commercial Real Estate
14,852
Commercial & Industrial - Non-RE
2,989
Auto & Consumer
439
Other
80
Total nonaccrual loans
$
118,194
Nonaccrual loans to total loans
0.83
%
No interest income was recognized on nonaccrual loans in the three and six months ended December 31, 2022 and three and six months ended December 31, 2021. There were no nonaccrual loans without an allowance for credit losses as of December 31, 2022 and June 30, 2022.
Approximately 1.39% of our nonaccrual loans at December 31, 2022 were considered troubled debt restructurings (“TDRs”), compared to 1.18% at June 30, 2022. Borrowers that make timely payments after TDRs are considered non-performing for at least six months. Generally, after six months of timely payments, those TDRs are reclassified from the nonaccrual loan category to the performing loan category and any previously deferred interest income is recognized. Approximately 41.10% of the Company’s nonaccrual loans are single family first mortgages as of December 31, 2022.
The outstanding unpaid balance of loans that are either performing or nonaccrual by portfolio class was:
December 31, 2022
(Dollars in thousands)
Single Family-Mortgage & Warehouse
Multifamily and Commercial Mortgage
Commercial Real Estate
Commercial & Industrial - Non-RE
Auto & Consumer
Other
Total
Performing
$
3,949,912
$
3,014,853
$
5,747,197
$
2,205,956
$
630,736
$
5,852
$
15,554,506
Nonaccrual
39,043
35,275
14,852
2,989
1,447
1,382
94,988
Total
$
3,988,955
$
3,050,128
$
5,762,049
$
2,208,945
$
632,183
$
7,234
$
15,649,494
June 30, 2022
(Dollars in thousands)
Single Family-Mortgage & Warehouse
Multifamily and Commercial Mortgage
Commercial Real Estate
Commercial & Industrial - Non-RE
Auto & Consumer
Other
Total
Performing
$
3,922,038
$
2,844,270
$
4,766,192
$
2,025,139
$
566,789
$
11,054
$
14,135,482
Nonaccrual
66,424
33,410
14,852
2,989
439
80
118,194
Total
$
3,988,462
$
2,877,680
$
4,781,044
$
2,028,128
$
567,228
$
11,134
$
14,253,676
From time to time the Company modifies loan terms temporarily for borrowers who are experiencing financial stress. These loans are performing and accruing and generally return to the original loan terms after the modification term expires. The Company had no TDRs classified as performing loans at December 31, 2022 or June 30, 2022.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans based on credit risk. The Company uses the following definitions for risk ratings.
Pass. Loans classified as pass are well protected by the current net worth and paying capacity of the obligor or by the fair value of any underlying collateral, less cost to acquire and sell in a timely manner.
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The Company reviews and grades loans following a continuous review process, featuring coverage of all loan types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.
The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses and evaluates credit quality based on the aging status of its loans. Certain short-term loans do not have a fixed maturity date and are treated as delinquent if not paid in full 90 days after the origination date.
The outstanding unpaid balance of loans past due 30 days or more by portfolio class are:
December 31, 2022
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due
Total
Single Family-Mortgage & Warehouse
$
20,731
$
9,432
$
37,421
$
67,584
Multifamily and Commercial Mortgage
4,860
8,229
29,548
42,637
Commercial Real Estate
—
—
14,852
14,852
Auto & Consumer
5,353
1,278
821
7,452
Other
2,000
1,017
177
3,194
Total
$
32,944
$
19,956
$
82,819
$
135,719
As a % of total gross loans
0.21
%
0.13
%
0.53
%
0.87
%
June 30, 2022
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due
Total
Single Family-Mortgage & Warehouse
$
5,167
$
1,518
$
63,286
$
69,971
Multifamily and Commercial Mortgage
9,455
2,115
26,556
38,126
Commercial Real Estate
—
14,852
—
14,852
Auto & Consumer
4,865
1,009
466
6,340
Other
413
—
193
606
Total
$
19,900
$
19,494
$
90,501
$
129,895
As a % of total gross loans
0.14
%
0.14
%
0.63
%
0.91
%
Loans reaching 90+ days past due are placed on non-accrual as required under Company policy. No loans 90+ days past due were still accruing interest as of December 31, 2022 and June 30, 2022.
Loans in process of foreclosure were $23.6 million and $20.7 million as of December 31, 2022 and June 30, 2022, respectively.
Unfunded Loan Commitment Reserves
Unfunded loan commitment reserves are included in “Accounts payable and other liabilities” in the unaudited Condensed Consolidated Balance Sheets. Provisions for the unfunded loan commitments are included in the unaudited Condensed Consolidated Statements of Income in “General and administrative expenses”.
The following tables present a summary of the activity in the unfunded loan commitment reserves for the periods indicated:
The Company has an equity incentive plan, the Amended and Restated 2014 Stock Incentive Plan (the “2014 Plan”), which provides for the granting of non-qualified and incentive stock options, restricted stock and restricted stock units, stock appreciation rights and other awards to employees, directors and consultants. The Plan is designed to encourage selected employees and directors to improve operations and increase profits, and to accept or continue employment or association with the Company through participation in the growth in the value of the Company’s common stock. The Company also has an employment agreement with its Chief Executive Officer that authorizes an award of restricted stock units (the “RSU award”). For additional information regarding the Company’s stock-based compensation plans, see Note 16—“Stock-based Compensation” contained in the 2022 Form 10-K.
At December 31, 2022, 1,650,944 shares of common stock remained available for issuance pursuant to grant awards under the 2014 Plan and unrecognized compensation expense related to non-vested awards aggregated to $42.4 million and is expected to be recognized in future periods as follows:
(Dollars in thousands)
Stock Award Compensation Expense
For the fiscal year remainder:
Remainder of fiscal year 2023
$
11,973
2024
18,856
2025
9,293
2026
1,926
2027
400
Total
$
42,448
The following table presents the status and changes in restricted stock units for the periods indicated:
Restricted Stock Units
Weighted-Average Grant-Date Fair Value
Non-vested balance at June 30, 2022
1,350,763
$
41.16
Granted
407,632
39.03
Vested
(293,869)
31.89
Forfeited
(39,444)
40.88
Non-vested balance at December 31, 2022
1,425,082
$
42.47
The total fair value of shares vested for the three and six months ended December 31, 2022 was $0.1 million and $12.1 million, respectively. The total fair value of shares vested for the three and six months ended December 31, 2021 was $0.3 million and $14.8 million, respectively. The weighted-average remaining time period until vesting for restricted stock units as of December 31, 2022 was 1.2 years.
The following table presents the calculation of basic and diluted EPS:
Three Months Ended
Six Months Ended
December 31,
December 31,
(Dollars in thousands, except per share data)
2022
2021
2022
2021
Earnings Per Common Share
Net income
$
81,552
$
60,787
$
139,959
$
120,997
Average common shares issued and outstanding
59,999,573
59,496,489
59,927,078
59,443,667
Earnings per common share
$
1.36
$
1.02
$
2.34
$
2.04
Diluted Earnings Per Common Share
Net income
$
81,552
$
60,787
$
139,959
$
120,997
Average common shares issued and outstanding
59,999,573
59,496,489
59,927,078
59,443,667
Dilutive effect of average unvested RSUs
515,062
1,259,492
613,275
1,305,716
Total dilutive common shares outstanding
60,514,635
60,755,981
60,540,353
60,749,383
Diluted earnings per common share
$
1.35
$
1.00
$
2.31
$
1.99
8. COMMITMENTS AND CONTINGENCIES
Operating Leases.The Company leases office space under operating lease agreements scheduled to expire at various dates. The following table represents maturities of lease liabilities as of December 31, 2022 in the corresponding fiscal years:
(Dollars in thousands)
Remainder of fiscal year 2023
$
5,450
2024
10,976
2025
11,143
2026
10,811
2027
10,870
Thereafter
29,177
Total lease payments
78,427
Less: amount representing interest
(7,569)
Total Lease Liability
$
70,858
Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2022, the Company had commitments to originate $93.3 million in fixed rate loans and $2,956.4 million in variable rate loans, totaling an aggregate principal balance of $3,049.6 million. At December 31, 2022, the Company’s fixed rate commitments to originate had a weighted-average rate of 9.45%. At December 31, 2022, the Company also had commitments to sell $4.6 million in fixed rate loans and no variable rate loans, totaling an aggregate principal balance of $4.6 million.
Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
In the normal course of business, Axos Clearing’s customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and Axos Clearing has to purchase or sell the financial instrument underlying the contract at a loss. Axos Clearing’s clearing agreements with broker-dealers for which it provides clearing services requires them to indemnify Axos Clearing if customers fail to satisfy their contractual obligation.
Litigation.On October 15, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative class action lawsuit, Golden v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District of California (the “Golden Case”). On November 3, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a second putative class action lawsuit, Hazan v. BofI Holding, Inc., et al, and also brought in the United States District Court for the Southern District of California (the “Hazan Case”). On February 1, 2016, the Golden Case and the Hazan Case were consolidated as In re BofI Holding, Inc. Securities Litigation, Case #: 3:15-cv-02324-GPC-KSC (the “HMEPS Class Action”), and the Houston Municipal Employees Pension System was appointed lead plaintiff. The plaintiffs allege that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a complaint filed in connection with a wrongful termination of employment lawsuit filed on October 13, 2015 (the “Employment Matter”) and that as a result the Company’s statements regarding its internal controls, as well as portions of its financial statements, were false and misleading. On April 13, 2022, the parties executed a Stipulation and Agreement of Settlement. The Stipulation and Agreement of Settlement was submitted to the District Court for approval on April 15, 2022. On June 8, 2022, the court granted preliminary approval of the settlement and scheduled a hearing with respect to final approval of the settlement for October 7, 2022. On October 14, 2022, the District Court entered an order granting final approval of such settlement. The settlement was reached because the parties were able to negotiate terms within available insurance coverage and reach a stipulation that specifically provides that (i) all amounts due in connection with the settlement be paid exclusively by the insurers and that defendants have no direct liability in connection therewith, (ii) no wrongdoing be attributed to Axos, its management or its directors, (iii) the settlement is not to be construed as conceding or evidencing the truth or validity of any claim or allegation made by plaintiffs, and (iv) the defendants shall be deemed to have agreed, or otherwise be required, to modify, amend or restate any business practices, policies, procedures, regulatory filings or financial records, as a result thereof.
In addition to the HMEPS Class Action, two separate shareholder derivative actions were filed in December, 2015, purportedly on behalf of the Company. The first derivative action, Calcaterra v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on December 3, 2015. The second derivative action, Dow v. Micheletti, et al, was filed in the San Diego County Superior Court on December 16, 2015. A third derivative action, DeYoung v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 22, 2016, a fourth derivative action, Yong v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 29, 2016, a fifth derivative action, Laborers Pension Trust Fund of Northern Nevada v. Allrich et al, was filed in the United States District Court for the Southern District of California on February 2, 2016, and a sixth derivative action, Garner v. Garrabrants, et al, was filed in the San Diego County Superior Court on August 10, 2017. Each of these six derivative actions names the Company as a nominal defendant, and certain of its officers and directors as defendants. Each complaint sets forth allegations of breaches of fiduciary duties, gross mismanagement, abuse of control, and unjust enrichment against the defendant officers and directors. The plaintiffs in these derivative actions seek damages in unspecified amounts on the Company’s behalf from the officer and director defendants, certain corporate governance actions, and an award of their costs and attorney’s fees.
The United States District Court for the Southern District of California ordered the six above-referenced derivative actions pending before it to be consolidated and appointed lead counsel in the consolidated action. The matter has been stayed until pending post-trial motions in the Employment Matter are resolved.The two derivative actions pending before the San Diego County Superior Court have been consolidated and have been stayed by agreement of the parties.
On October 26, 2022, a jury verdict was reached in the case of MUFG Union Bank, N.A. v. Axos Bank, et al, awarding damages to Union Bank. Such verdict has yet to be reduced to judgment. On November 28, 2022, the Company filed a post-trial motion requesting, among other relief, that the court set aside the verdict and direct a verdict for defendants. The Company continues to believe that the evidence supports the defendants’ understanding of the facts and that meritorious defenses exist to substantially all claims made by Union Bank. In addition, the Company believes that there exist substantial grounds for post-verdict relief and appeal. The Company recorded a $16 million accrued expense in accounts payable and other liabilities on the condensed consolidated balance sheets and in general and administrative expense on the condensed consolidated statements of income as of and for the six months ended December 31, 2022, respectively.
Segment Reporting. The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The operating segments and segment results of the Company are determined based upon the management reporting system, which assigns balance sheet and income statement items to each of the business segments and by which segment results are evaluated by the Chief Executive Officer in deciding how to allocate resources and in assessing performance.
The Company evaluates performance and allocates resources based on pre-tax profit or loss from operations. Certain corporate administration costs and income taxes have not been allocated to the reportable segments. The Company operates through two operating segments: Banking Business and Securities Business. Inter-segment transactions are eliminated in consolidation and primarily include non-interest income earned by the Securities Business segment and non-interest expense incurred by the Banking Business segment for cash sorting fees related to deposits sourced from Securities Business segment customers, as well as interest expense paid by the Banking Business segment to each of the wholly-owned subsidiaries of the Company and to the Company itself for their operating cash held on deposit with the Business Banking segment.
In order to reconcile the two segments to the unaudited condensed consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results, goodwill, and assets of the segments:
Revenue Information. The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606 for the periods indicated. For further information of the Company’s recognition of revenue and Topic 606 see Note 1—“Organizations and Summary of Significant Accounting Policies” contained in the 2022 Form 10-K.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items and capital resources of Axos Financial, Inc. and subsidiaries (collectively, “we”, “us” or the “Company”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our 2022 Form 10-K, and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.
Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, the Company’s financial prospects and other projections of our performance and asset quality, our ability to continue to grow profitably and increase our business, our ability to continue to diversify lending and deposit franchises, and the anticipated timing and financial performance of other offerings, initiatives, and acquisitions, expectations of the environment in which we operate and projections of future performance, including any future impacts of the coronavirus pandemic (“COVID-19”). Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include our ability to successfully integrate acquisitions and realize the anticipated benefits of the transactions, changes in the interest rate environment, inflation, government regulation, general economic conditions, including uncertainties surrounding the severity, duration, and effects of the COVID-19 pandemic, changes in the competitive marketplace, conditions in the real estate markets in which we operate, risks associated with credit quality, the outcome and effects of litigation and other risk factors discussed under the heading “Item 1A. Risk Factors” herein and in our 2022 Form 10-K, which has been filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.
General
Our Company is a diversified financial services company with approximately $18.7 billion in assets. Axos Bank (the “Bank”) provides consumer and business banking products through its online, low-cost distribution channels and affinity partners. Our Bank has deposit and loan customers nationwide including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and automobiles. Our Bank generates fee income from consumer and business products including fees from loans originated for sale, deposit account service fees as well as technology and payment transaction processing fees. Our securities products and services are offered through Axos Clearing LLC (“Axos Clearing”) and its business division Axos Advisor Services (“AAS”) and Axos Invest, Inc. (“Axos Invest”), which generate interest and fee income by providing comprehensive securities clearing and custody services to introducing broker-dealers and registered investment advisor correspondents and digital investment advisory services to retail investors, respectively. Axos Invest LLC is an introducing broker-dealer which supports direct trading and Axos Invest, Inc. Axos Financial, Inc.’s common stock is listed on the New York Stock Exchange and is a component of the Russell 2000® Index, the KBW Nasdaq Financial Technology Index, the S&P SmallCap 600® Index, the KBW Nasdaq Financial Technology Index, and the Travillian Tech-Forward Bank Index.
Axos Financial, Inc. is supervised and regulated as a savings and loan holding company by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is required to file reports with, comply with the rules and regulations of, and is subject to, examination by the Federal Reserve.
Our Bank is a federal savings bank wholly-owned by our Company and regulated by the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition. As a depository institution with more than $10 billion in assets, our Bank and our affiliates are subject to direct supervision by the Consumer Financial Protection Bureau.
Axos Clearing is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). Axos Invest is a Registered Investment Advisor under the Investment Advisers Act of 1940, that is registered with the SEC, and Axos Invest LLC is an introducing broker-dealer that is registered with the SEC and FINRA.
The Company determines reportable segments based on what separate financial information is available and what segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. We operate through two segments: the Banking Business segment and the Securities Business segment.
Banking Business. The Banking Business segment includes a broad range of banking services including online banking, concierge banking, and mortgage, vehicle and unsecured lending through online and telephonic distribution channels to serve the needs of consumers and small businesses nationally. Our deposit products consist of demand, savings, money market and time deposit accounts. In addition, the Banking Business segment focuses on providing deposit products nationwide to industry verticals (e.g., Title and Escrow), cash management products to a variety of businesses, and commercial & industrial and commercial real estate lending to clients. The Banking Business segment includes a bankruptcy trustee and fiduciary service that provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees and fiduciaries.
Securities Business. The Securities Business segment includes the clearing broker-dealer, registered investment advisor custody business, registered investment advisor, and introducing broker-dealer lines of businesses. These lines of business offer products independently to their own customers as well as to Banking Business segment clients.
Critical Accounting Estimates
The following discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions and could have a material effect on the carrying value of assets and liabilities, our results of operations and/or our cash flows.
Critical accounting estimates are those we consider most important to the portrayal of our financial condition and results of operations because they require our most difficult judgments, often as a result of the need to make estimates that are inherently uncertain. Our critical accounting estimates are described in detail in Note 1 - “Organizations and Summary of Significant Accounting Policies” and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” contained in the 2022 Form 10-K.
In addition to the results presented in accordance with GAAP, this report includes the non-GAAP financial measures adjusted earnings, adjusted earnings per common share, and tangible book value per common share. Non-GAAP financial measures have inherent limitations, may not be comparable to similarly titled measures used by other companies and are not audited. Readers should be aware of these limitations and should be cautious as to their reliance on such measures. As noted below with respect to each measure, we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business and performance, and our management uses these non-GAAP measures when it internally evaluates the performance of our business and makes operating decisions. However, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.
We define “adjusted earnings”, a non-GAAP financial measure, as net income without the after-tax impact of non-recurring acquisition-related costs (including amortization of intangible assets related to acquisitions) and other costs (unusual or non-recurring charges). Adjusted earnings per diluted common share (“adjusted EPS”), a non-GAAP financial measure, is calculated by dividing non-GAAP adjusted earnings by the average number of diluted common shares outstanding during the period. We believe the non-GAAP measures of adjusted earnings and adjusted EPS provide useful information about the Company’s operating performance. We believe excluding the non-recurring acquisition-related costs, and other costs provides investors with an alternative understanding of our core business.
Below is a reconciliation of net income, the nearest compatible GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP) for the periods shown:
Three Months Ended
Six Months Ended
December 31,
December 31,
(Dollars in thousands, except per share amounts)
2022
2021
2022
2021
Net income
$
81,552
$
60,787
$
139,959
$
120,997
Acquisition-related costs
2,590
3,026
5,324
5,872
Other costs
—
—
16,000
—
Tax effects of adjustments
(788)
(896)
(6,406)
(1,723)
Adjusted earnings (Non-GAAP)
$
83,354
$
62,917
$
154,877
$
125,146
Adjusted EPS (Non-GAAP)
$
1.38
$
1.04
$
2.56
$
2.06
We define “tangible book value”, a non-GAAP financial measure, as book value adjusted for goodwill and other intangible assets. Tangible book value is calculated using common stockholders’ equity minus mortgage servicing rights, goodwill and other intangible assets. Tangible book value per common share, a non-GAAP financial measure, is calculated by dividing tangible book value by the common shares outstanding at the end of the period. We believe tangible book value per common share is useful in evaluating the Company’s capital strength, financial condition, and ability to manage potential losses.
Below is a reconciliation of total stockholders’ equity, the nearest compatible GAAP measure, to tangible book value (Non-GAAP) as of the dates indicated:
December 31,
(Dollars in thousands)
2022
2021
Common stockholders’ equity
$
1,787,559
$
1,523,157
Less: mortgage servicing rights, carried at fair value
Net interest income after provision for credit losses
196,410
141,568
368,135
284,210
Non-interest income
28,329
30,787
55,537
57,489
Non-interest expense
107,528
86,019
223,615
170,450
Income before income tax expense
117,211
86,336
200,057
171,249
Income tax expense
35,659
25,549
60,098
50,252
Net income
$
81,552
$
60,787
$
139,959
$
120,997
Per Common Share Data:
Net income:
Basic
$
1.36
$
1.02
$
2.34
$
2.04
Diluted
$
1.35
$
1.00
$
2.31
$
1.99
Adjusted earnings per common share (Non-GAAP)1
$
1.38
$
1.04
$
2.56
$
2.06
Book value per common share
$
29.79
$
25.60
$
29.79
$
25.60
Tangible book value per common share (Non-GAAP)1
$
26.74
$
22.54
$
26.74
$
22.54
Weighted average number of common shares outstanding:
Basic
59,999,573
59,496,489
59,927,078
59,443,667
Diluted
60,514,635
60,755,981
60,540,353
60,749,383
Common shares outstanding at end of period
60,000,079
59,498,575
60,000,079
59,498,575
Common shares issued at end of period
69,153,591
68,376,837
69,153,591
68,376,837
Performance Ratios and Other Data:
Loan originations for investment
$
2,013,576
$
2,525,871
$
4,499,800
$
4,618,150
Loan originations for sale
$
43,227
$
193,320
$
113,300
$
403,287
Return on average assets
1.77
%
1.63
%
1.55
%
1.65
%
Return on average common stockholders’ equity
18.71
%
16.29
%
16.35
%
16.51
%
Interest rate spread2
3.64
%
3.90
%
3.63
%
3.97
%
Net interest margin3
4.49
%
4.10
%
4.38
%
4.16
%
Net interest margin3 – Banking Business Segment
4.65
%
4.30
%
4.58
%
4.39
%
Efficiency ratio4
47.11
%
48.78
%
51.30
%
48.74
%
Efficiency ratio4 – Banking Business Segment
46.05
%
39.39
%
49.33
%
39.66
%
Asset Quality Ratios:
Net annualized charge-offs to average loans
0.05
%
0.01
%
0.05
%
0.01
%
Non-performing loans and leases to total loans
0.61
%
1.14
%
0.61
%
1.14
%
Non-performing assets to total assets
0.54
%
0.94
%
0.54
%
0.94
%
Allowance for credit losses - loans to total loans held for investment
1.00
%
1.10
%
1.00
%
1.10
%
Allowance for credit losses - loans to non-performing loans
165.51
%
96.27
%
165.51
%
96.27
%
1See “Use of Non-GAAP Financial Measures.”
2 Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the annualized weighted average
rate paid on interest-bearing liabilities.
3 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
4Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.
Comparison of the Three and Six Months EndedDecember 31, 2022 and 2021
For the three months ended December 31, 2022, we had net income of $81.6 million, or $1.35 per diluted share, compared to net income of $60.8 million, or $1.00 per diluted share, for the three months ended December 31, 2021. For the six months ended December 31, 2022, we had net income of $140.0 million, or $2.31 per diluted share, compared to net income of $121.0 million, or $1.99 per diluted share for the six months ended December 31, 2021.
Net Interest Income
Net interest income for the three and six months ended December 31, 2022 totaled $199.9 million and $380.4 million, an increase of 37.3% and 30.2%, compared to net interest income of $145.6 million and $292.2 million for the three and six months ended December 31, 2021, respectively. The increase for the three and six months was primarily due to higher average balances and rates earned in the loan portfolio, partially offset by higher rates paid on deposits.
Total interest and dividend income during the three and six months ended December 31, 2022 increased 78.0% to $279.6 million and 59.6% to $503.4 million, compared to $157.1 million and $315.4 million during the three and six months ended December 31, 2021, respectively. The increase in interest and dividend income for the three and six months ended December 31, 2022 was primarily attributable to higher average balances and rates earned in the loan portfolio and higher rates on deposits placed with other financial institutions.
Total interest expense was $79.7 million for the three months ended December 31, 2022, an increase of $68.2 million or 592.4% as compared with the three months ended December 31, 2021. Total interest expense was $123.0 million for the six months ended December 31, 2022, an increase of $99.8 million or 430.7% as compared with the six months ended December 31, 2021. The increase for the three and six months ended December 31, 2022 was primarily attributable to higher rates paid on deposits, as deposit rates continue to increase across the industry. Also contributing to the increase was higher interest expense on advances from the Federal Home Loan Bank (“FHLB”) and other borrowings, which for the three months ended December 31, 2022 was primarily attributable to higher balances of other borrowings and higher rates paid on both FHLB advances and other borrowings, and for the six months ended December 31, 2022, the increase was attributable to higher average balances and higher rates on both FHLB advances and other borrowings.
Net interest margin, defined as annualized net interest income divided by average earning assets, increased 39 basis points to 4.49% for the three months ended December 31, 2022 from 4.10% for the three months ended December 31, 2021, and increased 22 basis points to 4.38% for the six months ended December 31, 2022 from 4.16% for the six months ended December 31, 2021. During the three and six months ended December 31, 2022, the primary contributor to the 39 and 22 basis point increases, respectively, was the increase in interest-earning balances and rates, primarily loans, outpacing the increased cost of our deposits and other funding liabilities.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables present information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin:
For the Three Months Ended
December 31,
2022
2021
(Dollars in thousands)
Average
Balance1
Interest Income/ Expense
Average Yields
Earned/Rates
Paid2
Average
Balance1
Interest Income/ Expense
Average Yields
Earned/Rates
Paid2
Assets:
Loans3, 4
$
15,452,232
$
255,661
6.62
%
$
12,116,565
$
149,469
4.93
%
Interest-earning deposits in other financial institutions
1,664,408
15,614
3.75
%
1,247,675
642
0.21
%
Mortgage-backed and other investment securities4
257,133
3,578
5.57
%
139,711
1,338
3.83
%
Securities borrowed and margin lending5
409,543
4,321
4.22
%
686,920
5,366
3.12
%
Stock of the regulatory agencies
18,685
414
8.86
%
20,519
261
5.11
%
Total interest-earning assets
17,802,001
279,588
6.28
%
14,211,390
157,076
4.42
%
Non-interest-earning assets
678,531
676,030
Total assets
$
18,480,532
$
14,887,420
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings
$
9,951,529
$
65,028
2.61
%
$
6,587,348
$
4,299
0.26
%
Time deposits
1,146,877
6,320
2.20
%
1,333,848
3,506
1.05
%
Securities loaned
289,782
1,067
1.47
%
439,035
218
0.20
%
Advances from the FHLB
290,918
2,504
3.44
%
272,033
973
1.43
%
Borrowings, subordinated notes and debentures
375,331
4,759
5.07
%
262,781
2,512
3.82
%
Total interest-bearing liabilities
12,054,437
79,678
2.64
%
8,895,045
11,508
0.52
%
Non-interest-bearing demand deposits
3,941,751
3,734,029
Other non-interest-bearing liabilities
741,066
765,946
Stockholders’ equity
1,743,278
1,492,400
Total liabilities and stockholders’ equity
$
18,480,532
$
14,887,420
Net interest income
$
199,910
$
145,568
Interest rate spread6
3.64
%
3.90
%
Net interest margin7
4.49
%
4.10
%
1Average balances are obtained from daily data.
2Annualized.
3Loans include loans held for sale, loan premiums and unearned fees.
4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.
5Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited condensed consolidated balance sheets.
6Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
7Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
Interest-earning deposits in other financial institutions
1,449,814
22,961
3.17
%
1,205,409
1,233
0.20
%
Mortgage-backed and other investment securities4
260,102
6,876
5.29
%
148,000
2,759
3.73
%
Securities borrowed and margin lending5
537,404
8,705
3.24
%
795,231
12,217
3.07
%
Stock of the regulatory agencies
23,483
833
7.09
%
20,607
532
5.17
%
Total interest-earning assets
17,377,874
503,374
5.79
%
14,058,686
315,386
4.49
%
Non-interest-earning assets
683,127
587,794
Total assets
$
18,061,001
$
14,646,480
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings
$
8,851,092
$
92,737
2.10
%
$
6,568,907
$
7,866
0.24
%
Time deposits
1,151,797
11,116
1.93
%
1,348,454
7,651
1.13
%
Securities loaned
414,362
2,010
0.97
%
549,538
469
0.17
%
Advances from the FHLB
585,633
7,667
2.62
%
283,717
1,989
1.40
%
Borrowings, subordinated notes and debentures
377,650
9,459
5.01
%
249,170
5,201
4.17
%
Total interest-bearing liabilities
11,380,534
122,989
2.16
%
8,999,786
23,176
0.52
%
Non-interest-bearing demand deposits
4,213,995
3,431,150
Other non-interest-bearing liabilities
754,079
749,781
Stockholders’ equity
1,712,393
1,465,763
Total liabilities and stockholders’ equity
$
18,061,001
$
14,646,480
Net interest income
$
380,385
$
292,210
Interest rate spread6
3.63
%
3.97
%
Net interest margin7
4.38
%
4.16
%
1Average balances are obtained from daily data.
2Annualized.
3Loans include loans held for sale, loan premiums and unearned fees.
4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.
5Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited condensed consolidated balance sheets.
6Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
7Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
For the Three Months Ended
For the Six Months Ended
December 31,
December 31,
2022 vs 2021
2022 vs 2021
Increase (Decrease) Due to
Increase (Decrease) Due to
(Dollars in thousands)
Volume
Rate
Total Increase (Decrease)
Volume
Rate
Total Increase (Decrease)
Increase / (decrease) in interest income:
Loans
$
47,298
$
58,894
$
106,192
$
90,635
$
74,719
$
165,354
Interest-earning deposits in other financial institutions
291
14,681
14,972
292
21,436
21,728
Mortgage-backed and other investment securities
1,454
787
2,241
2,654
1,464
4,118
Securities borrowed and margin lending
(2,575)
1,530
(1,045)
(4,154)
642
(3,512)
Stock of the regulatory agencies
(25)
177
152
82
218
300
$
46,443
$
76,069
$
122,512
$
89,509
$
98,479
$
187,988
Increase / (decrease) in interest expense:
Interest-bearing demand and savings
$
3,248
$
57,481
$
60,729
$
3,642
$
81,229
$
84,871
Time deposits
(551)
3,365
2,814
(1,251)
4,716
3,465
Securities loaned
(99)
948
849
(142)
1,683
1,541
Advances from the FHLB
73
1,458
1,531
3,121
2,557
5,678
Borrowings, subordinated notes and debentures
1,274
973
2,247
3,062
1,196
4,258
$
3,945
$
64,225
$
68,170
$
8,432
$
91,381
$
99,813
Provision for Credit Losses
The provision for credit losses was $3.5 million for the three months ended December 31, 2022 compared to $4.0 million for the three months ended December 31, 2021. The provision for credit losses was $12.3 million for the six months ended December 31, 2022 compared to $8.0 million for the six months ended December 31, 2021. The provision for credit losses for the three and six months ended December 31, 2022 were primarily due to growth in the loan portfolio and changes in loan product mix. Provisions for credit losses are charged to income to bring the allowance for credit losses - loans to a level deemed appropriate by management based on the factors discussed under “Financial Condition—Asset Quality and Allowance for Credit Losses - Loans.”
The following table sets forth information regarding our non-interest income for the periods shown:
For the Three Months Ended
For the Six Months Ended
December 31,
December 31,
(Dollars in thousands)
2022
2021
Inc (Dec)
2022
2021
Inc (Dec)
Broker-dealer fee income
$
9,812
$
6,332
$
3,480
$
18,990
$
12,794
$
6,196
Advisory fee income
6,983
8,035
(1,052)
13,942
13,339
603
Banking and service fees
10,143
8,486
1,657
16,657
15,166
1,491
Mortgage banking income
641
4,640
(3,999)
4,006
9,910
(5,904)
Prepayment penalty fee income
750
3,294
(2,544)
1,942
6,280
(4,338)
Total non-interest income
$
28,329
$
30,787
$
(2,458)
$
55,537
$
57,489
$
(1,952)
Non-interest income decreased $2.5 million to $28.3 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease was primarily the result of lower mortgage banking income as higher mortgage rates contributed to lower originations, and the impact of changes in the fair value of our MSRs. Also contributing to the decrease was lower prepayment penalty fee income due to slower prepayments and a decrease in advisory fee income primarily due to lower average assets under custody. These decreases were partially offset by an increase in broker-dealer fee income from higher rates earned on cash sorting balances placed at non-affiliated banks and higher banking and service fees.
Non-interest income decreased $2.0 million to $55.5 million for the six months ended December 31, 2022 compared to the six months ended December 31, 2021. The decrease was primarily the result of lower mortgage banking income as higher mortgage rates contributed to lower originations, and the impact of changes in the fair value of our MSRs. Also contributing to the decrease was lower prepayment penalty fee income due to slower prepayments. Partially offsetting these decreases were higher broker-dealer fee income from higher rates earned on cash sorting balances placed at non-affiliated banks, higher banking and service fees as well as higher advisory fee income as incremental revenues from the AAS acquisition were partially offset by lower average assets under custody.
Non-Interest Expense
The following table sets forth information regarding our non-interest expense for the periods shown:
For the Three Months Ended
For the Six Months Ended
December 31,
December 31,
(Dollars in thousands)
2022
2021
Inc (Dec)
2022
2021
Inc (Dec)
Salaries and related costs
$
49,720
$
39,979
$
9,741
$
96,716
$
80,716
$
16,000
Data processing
14,632
12,199
2,433
28,654
24,291
4,363
Depreciation and amortization
5,957
6,785
(828)
12,051
12,513
(462)
Advertising and promotional
10,899
3,402
7,497
17,269
6,774
10,495
Professional services
8,455
5,943
2,512
16,542
10,488
6,054
Occupancy and equipment
3,683
3,342
341
7,737
6,523
1,214
FDIC and regulatory fees
3,569
2,475
1,094
7,304
4,741
2,563
Broker-dealer clearing charges
3,739
3,678
61
6,568
7,683
(1,115)
General and administrative expense
6,874
8,216
(1,342)
30,774
16,721
14,053
Total non-interest expenses
$
107,528
$
86,019
$
21,509
$
223,615
$
170,450
$
53,165
Non-interest expense was $107.5 million for the three months ended December 31, 2022, compared to $86.0 million for the three months ended December 31, 2021. Non-interest expense was $223.6 million for the six months ended December 31, 2022, up from $170.5 million for the six months ended December 31, 2021. The increases for the three and six months ended December 31, 2022 were primarily due to higher salaries and related costs, advertising and promotional expenses, professional services, and for the six months ended December 31, 2022, higher other general and administrative expenses.
Total salaries and related costs increased $9.7 million to $49.7 million for the three months ended December 31, 2022 compared to $40.0 million for the three months ended December 31, 2021 and increased $16.0 million to $96.7 million for the six months ended December 31, 2022 compared to $80.7 million for the six months ended December 31, 2021. The increases in compensation expense for the three and six months ended December 31, 2022 were primarily due to increased headcount as well as an increase in salaries. Our headcount increased to 1,447 from 1,280, or 13% between December 31, 2022 and 2021.
Data processing expense increased $2.4 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021, and increased $4.4 million for the six months ended December 31, 2022 compared to the six month period ended December 31, 2021, primarily due to enhancements to customer interfaces and the Company’s processing systems.
Depreciation and amortization expense decreased $0.8 million and $0.5 million for the three and six months ended December 31, 2022, compared to the three and six months ended December 31, 2021, respectively. The decreases for the three and six months ended December 31, 2022 were primarily due to certain capitalized software becoming fully depreciated, and for the six months ended December 31, 2022, the decrease was partially offset by incremental amortization of intangibles as a result of the AAS acquisition.
Advertising and promotional expense increased $7.5 million and $10.5 million for the three and six months ended December 31, 2022, compared to the three and six months ended December 31, 2021, respectively. The increase was primarily due to increased lead generation and deposit marketing costs.
Professional services expense increased $2.5 million and $6.1 million for the three and six months ended December 31, 2022, compared to the three and six months ended December 31, 2021, respectively. The increase for the three and six months ended December 31, 2022 was primarily due to higher consulting expenses supporting technology investments and for the six months ended December 31, 2022, the increase was also attributable to higher legal expenses related to litigation.
Occupancy and equipment expense increased by $0.3 million and $1.2 million for the three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021, respectively. The increases for the three and six months ended December 31, 2022 were primarily due to growth in our office footprint and annual increases on our existing office space.
Our cost of FDIC and regulatory fees increased by $1.1 million and $2.6 million for the three and six months ended December 31, 2022, compared to the three and six months ended December 31, 2021, respectively. The changes were due to balance sheet growth and changes in product mix at the Bank. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
Broker-dealer clearing charges for the three months ended December 31, 2022 were relatively unchanged from the three months ended December 31, 2021. Broker-dealer clearing charges decreased $1.1 million for the six months ended December 31, 2022 compared to the six months ended December 31, 2021, primarily due to reduced customer trading activity.
General and administrative costs decreased by $1.3 million and increased by $14.1 million for the three and six months ended December 31, 2022, compared to the three and six months ended December 31, 2021, respectively. The decrease for the three months ended December 31, 2022 was primarily due to a net benefit for credit losses for unfunded commitments in the three months ended December 31, 2022 compared to a net provision for the three months ended December 31, 2021. The increase for the six months ended December 31, 2022 was primarily attributable to a $16.0 million accrual in the first quarter of 2023 as a result of an adverse legal judgement that has not been finalized, partially offset by a net benefit for credit losses for unfunded commitments in the six months ended December 31, 2022 compared to a net provision for the six months ended December 31, 2021.
Provision for Income Taxes
Income tax expense was $35.7 million for the three months ended December 31, 2022 compared to $25.5 million for the three months ended December 31, 2021 and $60.1 million for the six months ended December 31, 2022 compared to $50.3 million for the six months ended December 31, 2021. Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended December 31, 2022 and 2021 were 30.42% and 29.59%, respectively. Our effective income tax rates for the six months ended December 31, 2022 and 2021 were 30.04% and 29.34%, respectively.
SEGMENT RESULTS
Our Company determines reportable segments based on what separate financial information is available and what segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the unaudited condensed consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:
For the three months ended December 31, 2022, our Banking Business segment had income before taxes of $109 million compared to income before taxes of $92.1 million for the three months ended December 31, 2021. For the six months ended December 31, 2022, the Banking Business segment had income before taxes of $190 million compared to income before taxes of $182.4 million for the six months ended December 31, 2021. For the three and six months ended December 31, 2022, the increase in income before taxes compared to the three and six months ended December 31, 2021, was mainly due to an increase in net interest income, partially offset by higher non-interest expense and lower non-interest income.
We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment:
At or for the Three Months Ended
At or for the Six Months Ended
December 31, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Efficiency ratio
46.05
%
39.39
%
49.33
%
39.66
%
Return on average assets
1.75
%
1.92
%
1.57
%
1.92
%
Interest rate spread
3.81
%
4.14
%
3.84
%
4.23
%
Net interest margin
4.65
%
4.30
%
4.58
%
4.39
%
Our Banking Business segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at Axos Financial, Inc. and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our Securities Business, including items related to borrowings that particularly decrease net interest margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables present our Banking Business segment’s information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin:
For the Three Months Ended
December 31,
2022
2021
(Dollars in thousands)
Average
Balance1
Interest Income/ Expense
Average Yields
Earned/Rates
Paid2
Average
Balance1
Interest Income/ Expense
Average Yields
Earned/Rates
Paid2
Assets:
Loans3, 4
$
15,429,873
$
255,309
6.62
%
$
12,076,831
$
148,960
4.93
%
Interest-earning deposits in other financial institutions
1,362,744
13,126
3.85
%
963,533
376
0.16
%
Mortgage-backed and other investment securities4
264,673
3,615
5.46
%
163,417
1,458
3.57
%
Stock of the regulatory agencies
18,685
411
8.80
%
17,402
260
5.98
%
Total interest-earning assets
17,075,975
272,461
6.38
%
13,221,183
151,054
4.57
%
Non-interest-earning assets
341,701
301,502
Total assets
$
17,417,676
$
13,522,685
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings
$
10,045,861
$
65,093
2.59
%
$
6,619,803
$
4,316
0.26
%
Time deposits
1,146,877
6,321
2.20
%
1,333,848
3,506
1.05
%
Advances from the FHLB
290,918
2,504
3.44
%
272,033
973
1.43
%
Borrowings, subordinated notes and debentures
33
—
—
%
261
—
—
%
Total interest-bearing liabilities
11,483,689
73,918
2.57
%
8,225,945
8,795
0.43
%
Non-interest-bearing demand deposits
4,001,370
3,784,965
Other non-interest-bearing liabilities
198,916
131,229
Stockholders’ equity
1,733,701
1,380,546
Total liabilities and stockholders’ equity
$
17,417,676
$
13,522,685
Net interest income
$
198,543
$
142,259
Interest rate spread5
3.81
%
4.14
%
Net interest margin6
4.65
%
4.30
%
1Average balances are obtained from daily data.
2Annualized.
3Loans include loans held for sale, loan premiums and unearned fees.
4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.
5Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
6Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
Interest-earning deposits in other financial institutions
1,145,975
18,757
3.27
%
921,695
713
0.15
%
Mortgage-backed and other investment securities4
270,324
6,986
5.17
%
171,981
3,004
3.49
%
Stock of the regulatory agencies
23,483
829
7.06
%
17,613
530
6.02
%
Total interest-earning assets
16,522,237
489,891
5.93
%
12,960,741
302,050
4.66
%
Non-interest-earning assets
327,034
294,156
Total assets
$
16,849,271
$
13,254,897
Liabilities and Stockholders’ Equity:
Interest-bearing demand and savings
$
8,927,706
$
92,833
2.08
%
$
6,617,301
$
7,910
0.24
%
Time deposits
1,151,797
11,116
1.93
%
1,348,454
7,651
1.13
%
Advances from the FHLB
585,633
7,667
2.62
%
283,717
1,989
1.40
%
Borrowings, subordinated notes and debentures
27
—
—
%
152
—
—
%
Total interest-bearing liabilities
10,665,163
111,616
2.09
%
8,249,624
17,550
0.43
%
Non-interest-bearing demand deposits
4,292,481
3,511,837
Other non-interest-bearing liabilities
192,094
141,222
Stockholders’ equity
1,699,533
1,352,214
Total liabilities and stockholders’ equity
$
16,849,271
$
13,254,897
Net interest income
$
378,275
$
284,500
Interest rate spread5
3.84
%
4.23
%
Net interest margin6
4.58
%
4.39
%
1Average balances are obtained from daily data.
2Annualized.
3Loans include loans held for sale, loan premiums and unearned fees.
4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.
5Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
6Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our net interest income for our Banking Business segment. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
For the Three Months Ended
For the Six Months Ended
December 31,
December 31,
2022 vs 2021
2022 vs 2021
Increase (Decrease) Due to
Increase (Decrease) Due to
(Dollars in thousands)
Volume
Rate
Total Increase (Decrease)
Volume
Rate
Total Increase (Decrease)
Increase / (decrease) in interest income:
Loans
$
47,590
$
58,759
$
106,349
$
91,506
$
74,010
$
165,516
Interest-earning deposits in other financial institutions
225
12,525
12,750
208
17,836
18,044
Mortgage-backed and other investment securities
1,163
994
2,157
2,162
1,820
3,982
Stock of the regulatory agencies, at cost
20
131
151
197
102
299
$
48,998
$
72,409
$
121,407
$
94,073
$
93,768
$
187,841
Increase / (decrease) in interest expense:
Interest-bearing demand and savings
$
3,318
$
57,459
$
60,777
$
3,698
$
81,225
$
84,923
Time deposits
(551)
3,366
2,815
(1,251)
4,716
3,465
Advances from the FHLB
73
1,458
1,531
3,121
2,557
5,678
$
2,840
$
62,283
$
65,123
$
5,568
$
88,498
$
94,066
The Banking Business segment’s net interest income for the three and six months ended December 31, 2022 totaled $198.5 million and $378.3 million, an increase of 39.6% and an increase of 33.0%, compared to net interest income of $142.3 million and $284.5 million for the three and six months ended December 31, 2021, respectively. The increase for the three and six months ended December 31, 2022 was primarily due to higher average balances and rates earned in the loan portfolio, higher rates on deposits placed with other financial institutions and a higher average balance of non-interest bearing deposits, partially offset by higher rates paid on deposits.
The Banking Business segment’s non-interest income decreased $5.7 million to $10.6 million and decreased $9.9 million to $21.3 million for the three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021, respectively. The decreases for the three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021, were mainly the result of lower mortgage banking income and prepayment penalty fee income as higher mortgage rates contributed to lower originations and a reduction in the fair value of our MSRs, and slower prepayments, respectively.
The Banking Business segment’s non-interest expense for the three and six months ended December 31, 2022 increased $33.8 million and $71.9 million, respectively, compared to the three and six months ended December 31, 2021. For the three and six months ended December 31, 2022 the increases compared to the three and six months ended December 31, 2021, were primarily due to higher advertising and promotional expenses, primarily due to amounts paid to our Securities Business segment for non-interest bearing deposits, higher salaries and related costs as a result of higher headcount and an increase in salaries, and for the six months ended December 31, 2022, a $16.0 million accrual in the first quarter of 2023 as a result of an adverse legal judgement that has not been finalized.
For the three months ended December 31, 2022, our Securities Business segment had income before taxes of $15.6 million compared to a loss before taxes of $0.7 million for the three months ended December 31, 2021. For the six months ended December 31, 2022, our Securities Business segment had income before taxes of $24.5 million compared to a loss before taxes of $0.7 million for the six months ended December 31, 2021. The increases for both the three and six months ended December 31, 2022 compared to the three and six months ended December 31, 2021 was primarily the result of higher non-interest income, partially offset by higher non-interest expense.
Net interest income for the three months ended December 31, 2022, increased $0.4 million to $4.9 million compared to $4.5 million for the three months ended December 31, 2021 primarily as a result of higher cash deposit balances and rates. Net interest income for the six months ended December 31, 2022 decreased $1.5 million to $9.2 million compared to $10.7 million for the six months ended December 31, 2021 primarily as a result of lower securities lending activity, partially offset by higher cash deposit balances and rates.
Non-interest income for the three months ended December 31, 2022, increased $19.6 million to $36.0 million compared to $16.5 million for the three months ended December 31, 2021. Non-interest income for the six months ended December 31, 2022 increased $35.6 million to $65.2 million compared to $29.6 million for the six months ended December 31, 2021. The increases were primarily a result of an increase in fees earned on FDIC-insured bank deposits, including amounts received from our Banking Business segment.
Non-interest expense for the three months ended December 31, 2022 increased $3.6 million to $25.3 million compared to $21.7 million for the three months ended December 31, 2021. Non-interest expense for the six months ended December 31, 2022 increased $8.9 million to $49.8 million compared to $40.9 million for the six months ended December 31, 2021. The increases were primarily due to higher headcount and an increase in salaries, and for the six months ended December 31, 2022 the increase was also attributable to higher professional services expense.
The following table provides selected information for Axos Clearing LLC as of each period indicated:
(Dollars in thousands)
December 31, 2022
June 30, 2022
FDIC insured deposit program balances at banks
$
2,353,167
$
3,452,358
Customer margin balances
$
206,776
$
285,894
Cash reserves for the benefit of customers
$
196,910
$
372,112
Securities lending:
Interest-earning assets – securities borrowed
$
58,846
$
338,980
Interest-bearing liabilities – securities loaned
$
156,008
$
474,400
FINANCIAL CONDITION
Balance Sheet Analysis
Our total assets increased $1.3 billion, or 7.7%, to $18.7 billion, as of December 31, 2022, up from $17.4 billion at June 30, 2022. The increase in total assets was primarily due to a $1.4 billion increase in loans. Total liabilities increased $1.2 billion, primarily due to a $1.7 billion increase in deposits, partially offset by a $0.3 billion decrease in securities loaned.
Net loans held for investment increased 9.8% to $15.5 billion at December 31, 2022 from $14.1 billion at June 30, 2022 primarily due to loan originations of $4.5 billion, partially offset by repayments and other changes of $3.1 billion.
The following table sets forth the composition of the loan portfolio as of the dates indicated:
December 31, 2022
June 30, 2022
(Dollars in thousands)
Amount
Percent
Amount
Percent
Single Family - Mortgage & Warehouse
$
3,988,955
25.5
%
$
3,988,462
28.0
%
Multifamily and Commercial Mortgage
3,050,128
19.5
%
2,877,680
20.2
%
Commercial Real Estate
5,762,049
36.9
%
4,781,044
33.5
%
Commercial & Industrial - Non-RE
2,208,945
14.1
%
2,028,128
14.2
%
Auto & Consumer
632,183
4.0
%
567,228
4.0
%
Other
7,234
—
%
11,134
0.1
%
Total gross loans
15,649,494
100.0
%
14,253,676
100.0
%
Allowance for credit losses - loans
(157,218)
(148,617)
Unaccreted discounts and loan fees
(19,064)
(13,998)
Total net loans
$
15,473,212
$
14,091,061
The Bank originates some single family interest only loans with terms that include repayments that are less than the repayments for fully amortizing loans. The Bank’s lending guidelines for interest only loans are adjusted for the increased credit risk associated with these loans by requiring borrowers with such loans to borrow at loan-to-values (“LTVs”) that are lower than standard amortizing ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not the interest only payment. The Bank monitors and performs reviews of interest only loans as part of its loan portfolio management process. Adverse trends reflected in the Company’s delinquency statistics, grading and classification of interest only loans would be reported to management and the Board of Directors. As of December 31, 2022, the Company had $1.3 billion of interest only mortgage loans with a weighted average LTV of 58.5%.
Asset Quality and Allowance for Credit Losses - Loans
Non-performing Assets
Non-performing loans are comprised of those past due 90 days or more and other nonaccrual loans. Non-performing assets include non-performing loans plus other real estate owned and repossessed vehicles. At December 31, 2022, our non-performing loans totaled $95.0 million, or 0.61% of total gross loans and our total non-performing assets totaled $100.8 million, or 0.54% of total assets.
Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following as of the dates indicated:
(Dollars in thousands)
December 31, 2022
June 30, 2022
Inc (Dec)
Non-performing assets:
Non-accrual loans:
Single Family - Mortgage & Warehouse
$
39,043
$
66,424
$
(27,381)
Multifamily and Commercial Mortgage
35,275
33,410
1,865
Commercial Real Estate
14,852
14,852
—
Commercial & Industrial - Non-RE
2,989
2,989
—
Auto & Consumer
1,447
439
1,008
Other
1,382
80
1,302
Total non-performing loans
94,988
118,194
(23,206)
Foreclosed real estate
4,383
—
4,383
Repossessed—Autos
1,421
798
623
Total non-performing assets
$
100,792
$
118,992
$
(18,200)
Total non-performing loans as a percentage of total loans
0.61
%
0.83
%
(0.22)
%
Total non-performing assets as a percentage of total assets
Total non-performing assets decreased from $119.0 million at June 30, 2022 to $100.8 million at December 31, 2022. The decrease in non-performing assets was primarily attributable to a decrease in non-accrual single family mortgage loans, partially offset by an increase in other non-performing loans and foreclosed real estate. The weighted average LTV of the single family mortgage loans remaining on non-accrual at December 31, 2022 was 59.8%.
The Bank had no performing troubled debt restructurings as of December 31, 2022 and June 30, 2022. A troubled debt restructuring is a concession made to a borrower experiencing financial difficulties, typically permanent or temporary modifications of principal and interest payments or an extension of maturity dates. When a loan is delinquent and classified as a troubled debt restructuring, no interest is accrued until the borrower demonstrates over time (typically six months) that it can make payments. When a loan is considered a troubled debt restructuring and is on nonaccrual, it is considered non-performing and included in the table above.
Management establishes an allowance for credit losses based upon its evaluation of the expected life-time credit losses related to the amortized cost basis of loans on the balance sheet. For additional information regarding the Company’s allowance for credit losses see Note 5 - Loans and Allowance for Credit Losses in the condensed consolidated financial statements. For a discussion of the provision for credit losses for the three and six months ended December 31, 2022, see “Results of Operations—Provision for Credit Losses.” We believe that the lower average LTV in the Bank’s mortgage loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks. We do not expect the resolution of the Bank’s existing other real estate owned and non-performing loans will have a significant adverse impact on our operating results.
Investment Securities
Total investment securities was $248.4 million as of December 31, 2022, compared with $264.3 million at June 30, 2022. During the six months ended December 31, 2022, we did not purchase any securities and received principal repayments of approximately $9.1 million in our available-for-sale portfolio. The remainder of the change for the available-for-sale portfolio is attributable to unrealized losses, accretion and other changes.
Deposits
Deposits increased by $1.7 billion, or 12.5%, to $15.7 billion at December 31, 2022, from $13.9 billion at June 30, 2022. Interest-bearing demand and savings increased $3.3 billion and time deposits increased $21.9 million. Non-interest bearing deposits decreased $1.6 billion, or 31.6%, to $3.4 billion at December 31, 2022, from $5.0 billion at June 30, 2022.
The following table sets forth the composition of the deposit portfolio as of the dates indicated:
December 31, 2022
June 30, 2022
(Dollars in thousands)
Amount
Rate1
Amount
Rate1
Non-interest bearing
$
3,442,148
—
%
$
5,033,970
—
%
Interest bearing:
Demand
5,661,863
3.03
%
3,611,889
0.61
%
Savings
5,509,620
2.93
%
4,245,555
0.95
%
Total interest-bearing demand and savings
11,171,483
2.98
%
7,857,444
0.79
%
Time deposits:
$250 and under2
688,524
1.85
%
651,392
1.22
%
Greater than $250
388,339
3.50
%
403,616
1.41
%
Total time deposits
1,076,863
2.41
%
1,055,008
1.25
%
Total interest bearing2
12,248,346
2.93
%
8,912,452
0.85
%
Total deposits
$
15,690,494
2.29
%
$
13,946,422
0.54
%
1 Based on weighted-average stated interest rates at end of period.
2The total interest bearing includes brokered deposits of $2,508.8 million and $1,032.7 million as of December 31, 2022 and June 30, 2022, respectively, of which $399.9 million and $250.0 million, respectively, are time deposits classified as $250 and under.
The following table sets forth the number of deposit accounts by type as of the date indicated:
December 31, 2022
June 30, 2022
December 31, 2021
Non-interest bearing
43,747
42,372
39,698
Interest-bearing checking and savings accounts
365,714
344,593
342,127
Time deposits
7,475
8,734
10,234
Total number of accounts
416,936
395,699
392,059
Total deposits that exceeded the FDIC insurance limit of $250,000 at December 31, 2022 and June 30, 2022 were $2.0 billion and $2.3 billion, respectively. The maturities of certificates of deposit that exceeded the FDIC insurance limit of $250,000 at December 31, 2022 were as follows:
(Dollars in thousands)
December 31, 2022
3 months or less
$
5,772
3 months to 6 months
1,829
6 months to 12 months
6,222
Over 12 months
11,780
Total
$
25,603
Borrowings
The following table sets forth the composition of our borrowings and the interest rates at the dates indicated:
December 31, 2022
June 30, 2022
December 31, 2021
(Dollars in thousands)
Balance
Weighted Average Rate
Balance
Weighted Average Rate
Balance
Weighted Average Rate
FHLB Advances
$100,000
2.26
%
$117,500
2.26
%
$157,500
2.29
%
Borrowings, subordinated notes and debentures
334,077
4.59
%
445,244
3.86
%
260,435
4.37
%
Total borrowings
$434,077
4.05
%
$562,744
3.53
%
$417,935
3.59
%
Weighted average cost of borrowings during the quarter
4.36
%
2.85
%
2.64
%
Borrowings as a percent of total assets
2.32
%
3.23
%
2.69
%
At December 31, 2022, total borrowings amounted to $434.1 million, down $128.7 million, or 22.9%, from June 30, 2022 and up $16.1 million or 3.9% from December 31, 2021. Borrowings as a percent of total assets were 2.32%, 3.23% and 2.69% at December 31, 2022, June 30, 2022 and December 31, 2021, respectively. Weighted average cost of borrowings during the quarter were 4.36%, 2.85% and 2.64% for the quarters ended December 31, 2022, June 30, 2022 and December 31, 2021, respectively.
We regularly use advances from the FHLB to manage our interest rate risk and, to a lesser extent, manage our liquidity position. Generally, FHLB advances with terms between three and ten years have been used to fund the purchase of single family and multifamily mortgages and to provide us with interest rate risk protection should rates rise.
Stockholders’ Equity
Stockholders’ equity increased $144.6 million to $1,787.6 million at December 31, 2022 compared to $1,643.0 million at June 30, 2022. The increase was the result of net income for the six months ended December 31, 2022 of $140.0 million and stock compensation expense and restricted stock unit vesting which combined for an increase of $8.6 million, partially offset by a $4.0 million decrease in accumulated other comprehensive income, net of tax.
During the three and six months ended December 31, 2022, the Company did not repurchase any common stock shares. The Company has $52.8 million remaining under the Board authorized stock repurchase program as of December 31, 2022.
During the six months ended December 31, 2022, we had net cash inflows from operating activities of $177.1 million compared to outflows of $72.5 million for the six months ended December 31, 2021. Net operating cash inflows and outflows fluctuate primarily due to the timing of the following: originations of loans held for sale, proceeds from loan sales, securities borrowed and loaned, and customer, broker-dealer and clearing receivables and payables and changes in other assets and payables.
Net cash outflows from investing activities totaled $1,411.4 million for the six months ended December 31, 2022, while outflows totaled $1,132.7 million for the six months ended December 31, 2021. The increase in outflows was primarily due to lower principal repayments on loans held for investment, partially offset by lower loan originations.
Net cash inflows from financing activities totaled $1,612.1 million for the six months ended December 31, 2022, compared to net cash inflows from financing activities of $1,290.0 million for the six months ended December 31, 2021. The primary driver behind the increase in net cash inflows was a larger net increase in deposits for the six months ended December 31, 2022.
During the six months ended December 31, 2022, the Bank could borrow up to 40.0% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and investment securities to the FHLB. At December 31, 2022, the Company had $2,250.4 million available immediately and $4,677.9 million available with additional collateral. At December 31, 2022, we also had three unsecured federal funds purchase lines with three different banks totaling $200 million, under which no borrowings were outstanding.
The Bank has the ability to borrow short-term from the Federal Reserve Bank of San Francisco Discount Window. At December 31, 2022, the Bank did not have any borrowings outstanding and the amount available from this source was $2,880.6 million. The credit line is collateralized by consumer loans and mortgage-backed securities.
Axos Clearing has a total of $150 million in uncommitted secured lines of credit for borrowing as needed. As of December 31, 2022, there was no amount outstanding. These credit facilities bear interest at rates based on the Federal Funds rate and are due upon demand.
Axos Clearing has a $190 million committed unsecured line of credit available for limited purpose borrowing, which includes $100 million from Axos Financial, Inc. As of December 31, 2022, there was no amount outstanding on this credit facility after elimination of intercompany balances. This credit facility bears interest at rates based on the Federal Funds rate and is due upon demand.
We believe our liquidity sources to be stable and adequate for our anticipated needs and contingencies for the next 12 months and beyond. We believe we have the ability to increase our level of deposits and borrowings to address our liquidity needs for the foreseeable future.
OFF-BALANCE SHEET COMMITMENTS
At December 31, 2022, we had commitments to originate loans with an aggregate outstanding principal balance of $3,049.6 million, and commitments to sell loans with an aggregate outstanding principal balance of $4.6 million. We have no commitments to purchase loans, investment securities or any other unused lines of credit.
In the normal course of business, Axos Clearing’s customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and Axos Clearing has to purchase or sell the financial instrument underlying the contract at a loss. Axos Clearing’s clearing agreements with broker-dealers for which it provides clearing services requires them to indemnify Axos Clearing if customers fail to satisfy their contractual obligation.
Our Company and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by our Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our results of operations or financial condition. The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank. Under these capital requirements and the regulatory framework for prompt corrective action, our Company and Bank must meet specific capital guidelines that involve quantitative measures of our Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.
Quantitative measures established by regulation require our Company and Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require our Company and Bank to maintain minimum ratios of tier 1 capital to adjusted average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. To be “well capitalized,” our Company and Bank must maintain minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. At December 31, 2022, our Company and Bank met all the capital adequacy requirements to which they were subject and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since December 31, 2022 that would materially adversely change the Company’s and Bank’s capital classifications. From time to time, we may need to raise additional capital to support our Company’s and Bank’s further growth and to maintain their “well capitalized” status.
The Company and Bank both elected the five-year current expected credit losses (“CECL”) transition guidance for calculating regulatory capital and ratios and the December 31, 2022 and June 30, 2022 amounts reflect this election. This guidance allowed an entity to add back to regulatory capital 100% of the impact of the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through June 30, 2022. Beginning with fiscal year 2023, this cumulative amount is phased out of regulatory capital at 25% per year until it is 100% phased out of regulatory capital beginning in fiscal year 2026.
The Company’s and Bank’s estimated capital amounts, capital ratios and capital requirements under Basel III were as follows:
Axos Financial, Inc.
Axos Bank
“Well Capitalized” Ratio
Minimum Capital Ratio
(Dollars in millions)
December 31, 2022
June 30, 2022
December 31, 2022
June 30, 2022
Regulatory Capital:
Tier 1
$
1,662
$
1,522
$
1,747
$
1,615
Common equity tier 1
$
1,662
$
1,522
$
1,747
$
1,615
Total capital
$
2,125
$
1,966
$
1,878
$
1,726
Assets:
Average adjusted
$
18,348
$
16,461
$
17,391
$
15,165
Total risk-weighted
$
15,751
$
15,443
$
15,487
$
14,366
Regulatory Capital Ratios:
Tier 1 leverage (to adjusted average assets)
9.06
%
9.25
%
10.05
%
10.65
%
5.00%
4.00%
Common equity tier 1 capital (to risk-weighted assets)
10.55
%
9.86
%
11.28
%
11.24
%
6.50%
4.50%
Tier 1 capital (to risk-weighted assets)
10.55
%
9.86
%
11.28
%
11.24
%
8.00%
6.00%
Total capital (to risk-weighted assets)
13.49
%
12.73
%
12.13
%
12.01
%
10.00%
8.00%
Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. At December 31, 2022 and June 30, 2022, our Company and Bank were in compliance with the capital conservation buffer requirement, which sets the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums to 7.0%, 8.5% and 10.5%, respectively.
Securities Business
Pursuant to the net capital requirements of the Exchange Act, Axos Clearing, is subject to the SEC Uniform Net Capital (Rule 15c3-1 of the Exchange Act). Under this rule, the Company has elected to operate under the alternate method and is required to maintain minimum net capital of $250,000 or 2% of aggregate debit balances arising from client transactions, as defined. Under the alternate method, the Company may not repay subordinated debt, pay cash distributions, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.
The net capital positions of Axos Clearing were as follows:
(Dollars in thousands)
December 31, 2022
June 30, 2022
Net capital
$
60,334
$
38,915
Excess Capital
$
55,977
$
32,665
Net capital as a percentage of aggregate debit items
27.69
%
12.45
%
Net capital in excess of 5% aggregate debit items
$
49,441
$
23,290
Axos Clearing, as a clearing broker, is subject to SEC Customer Protection Rule (Rule 15c3-3 of the Exchange Act) which requires segregation of funds in a special reserve account for the benefit of customers. At December 31, 2022, the Company calculated a deposit requirement of $189.6 million and maintained a deposit of $182.3 million. On January 3, 2023, the Company made a deposit of $16.8 million.
Certain broker-dealers have chosen to maintain brokerage customer accounts at Axos Clearing. To allow these broker-dealers to classify their assets held by the Company as allowable assets in their computation of net capital, the Company
computes a separate reserve requirement for Proprietary Accounts of Brokers (PAB). At December 31, 2022, the Company calculated a deposit requirement of $20.1 million and maintained a deposit of $14.3 million. On January 3, 2023, the Company made a withdrawal in the amount of $6.8 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For further discussion of the Company’s market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in the 2022 Form 10-K.
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature or contractually re-price within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would cause the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets reprice at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.
Banking Business
The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2022 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period:
Term to Repricing, Repayment, or Maturity at
December 31, 2022
(Dollars in thousands)
Six Months or Less
Over Six Months Through One Year
Over One Year Through Five Years
Over Five Years
Total
Interest-earning assets:
Cash and cash equivalents
$
1,660,666
$
—
$
—
$
—
$
1,660,666
Securities
225,978
2,541
11,665
15,468
255,652
Stock of the FHLB, at cost
17,250
—
—
—
17,250
Loans—net of allowance for credit loss
10,178,099
1,263,731
3,987,822
178,500
15,608,152
Loans held for sale
4,747
—
—
—
4,747
Total interest-earning assets
12,086,740
1,266,272
3,999,487
193,968
17,546,467
Non-interest earning assets
—
—
—
—
346,616
Total assets
$
12,086,740
$
1,266,272
$
3,999,487
$
193,968
$
17,893,083
Interest-bearing liabilities:
Interest-bearing deposits
$
9,438,274
$
2,621,885
$
289,246
$
972
$
12,350,377
Advances from the FHLB
10,000
—
30,000
60,000
100,000
Total interest-bearing liabilities
9,448,274
2,621,885
319,246
60,972
12,450,377
Other non-interest-bearing liabilities
—
—
—
—
3,674,965
Stockholders’ equity
—
—
—
—
1,767,741
Total liabilities and equity
$
9,448,274
$
2,621,885
$
319,246
$
60,972
$
17,893,083
Net interest rate sensitivity gap
$
2,638,466
$
(1,355,613)
$
3,680,241
$
132,996
$
5,096,090
Cumulative gap
$
2,638,466
$
1,282,853
$
4,963,094
$
5,096,090
$
5,096,090
Net interest rate sensitivity gap—as a % of total interest earning assets
15.04
%
(7.73)
%
20.97
%
0.76
%
29.04
%
Cumulative gap—as % of total interest earning assets
15.04
%
7.31
%
28.29
%
29.04
%
29.04
%
The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2022 on the basis of contractual maturities, adjusted for anticipated prepayments of principal and scheduled rate adjustments. The loan and securities prepayment rates reflected herein are based on historical experience. For the non-maturity deposit liabilities, we
use decay rates and rate adjustments based upon our historical experience. Actual repayments of these instruments could vary substantially if future experience differs from our historic experience.
Although “gap” analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.
The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the future 1-12 months and 13-24 months’ time periods. For purposes of modeling net interest income sensitivity, we assume no growth in the balance sheet other than for retained earnings:
As of December 31, 2022
First 12 Months
Next 12 Months
(Dollars in thousands)
Net Interest Income
Percentage Change from Base
Net Interest Income
Percentage Change from Base
Up 200 basis points
$
763,885
8.8
%
$
893,723
6.5
%
Base
$
701,953
—
%
$
839,332
—
%
Down 200 basis points
$
637,273
(9.2)
%
$
773,026
(7.9)
%
We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the underlying interest rate curves.
The following table indicates the sensitivity of market value of equity to the interest rate movement described above:
As of December 31, 2022
(Dollars in thousands)
Net Present Value
Percentage Change from Base
Net Present Value as a Percentage of Assets
Up 200 basis points
$
1,710,148
(5.8)
%
9.9
%
Up 100 basis points
$
1,780,406
(2.0)
%
10.2
%
Base
$
1,816,327
—
%
10.3
%
Down 100 basis points
$
1,800,479
(0.9)
%
10.1
%
Down 200 basis points
$
1,712,806
(5.7)
%
9.5
%
The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of interest rates, asset prepayments, runoffs in deposits and changes in repricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Furthermore, these computations do not take into account any actions that we may undertake in response to future changes in interest rates. Those actions include, but are not limited to, making change in loan and deposit interest rates and changes in our asset and liability mix.
Securities Business
Our Securities Business is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.
Our Securities Business is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest earning assets, including customer and correspondent margin loans and securities borrowing activities. Our exposure to interest rate risk is also from our funding sources including customer and correspondent cash balances, bank borrowings and securities lending activities. Interest rates on customer and correspondent balances and securities produce a positive spread with rates generally fluctuating in parallel.
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Many of the interest rates on customer and correspondent margin loans are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.
Our Securities Business is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.
Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.
ITEM 4.CONTROLS AND PROCEDURES
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In addition, there were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2022 (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The information set forth in Note 8 – “Commitments And Contingencies” to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference.
In addition, from time to time we may be a party to other claims or litigation that arise in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the Company’s business operations. None of such matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or business.
ITEM 1A.RISK FACTORS
We face a variety of risks that are inherent in our business and our industry. These risks are described in more detail under Part 1, “Item 1A. Risk Factors” in our 2022 Form 10-K, as supplemented by the risks described below. We encourage you to read these factors in their entirety. Moreover, other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currently available.
Liquidity and access to adequate funding cannot be assured.
Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity. The Bank may become unable to meet the cash flow requirements of its customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Company specific factors such as a decline in our credit rating (for which a rating agency recently announced a review for downgrade), an increase in the cost of capital from financial capital markets, a decrease in business activity due to adverse regulatory action or other company specific event, or a decrease in depositor or investor confidence may impair our access to funding with acceptable terms adequate to finance our activities. General factors related to the financial services industry such as a severe disruption in financial markets, a decrease in industry expectations, or a decrease in business activity due to political or environmental events may impair our access to liquidity. We rely primarily upon deposits and FHLB advances. Our ability to attract deposits could be negatively impacted by a public perception of our financial prospects or by increased deposit rates available at troubled institutions suffering from shortfalls in liquidity. The FHLB advances and the Federal Reserve Bank of San Francisco discount window are subject to regulation and other factors beyond our control. These factors may adversely affect the availability and pricing of advances to members such as the Bank. Selected sources of liquidity may become unavailable to the Bank if it were to no longer be considered “well-capitalized”.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth our market repurchases of Axos common stock and the Axos common shares retained in connection with net settlement of restricted stock awards during the quarter ended December 31, 2022.
(Dollars in thousands, except per share data)
Number of Shares Purchased
Average Price Paid Per Shares
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar value of Shares that May Yet be Purchased Under the Plans or Programs
Stock Repurchases1
Quarter Ended December 31, 2022
October 1, 2022 to October 31, 2022
—
$
—
—
$
—
November 1, 2022 to November 30, 2022
—
$
—
—
$
—
December 1, 2022 to December 31, 2022
—
$
—
—
$
—
For the Three Months Ended December 31, 2022
—
$
—
—
$
52,764
Stock Retained in Net Settlement2
October 1, 2022 to October 31, 2022
665
November 1, 2022 to November 30, 2022
364
December 1, 2022 to December 31, 2022
14
For the Three Months Ended December 31, 2022
1,043
1 On August 2, 2019, the Board of Directors of the Company authorized a program to repurchase up to $100 million of common stock. The share repurchase program will continue in effect until terminated by the Board of Directors of the Company. Purchases were made in open-market transactions.
2 On October 21, 2021, the stockholders of the Company approved the Amended and Restated 2014 Stock Incentive Plan, which, among other changes permitted net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum income tax obligation. Stock Retained in Net Settlement was purchased at the vesting price of the associated restricted stock unit.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Axos Financial, Inc.
Dated:
January 26, 2023
By:
/s/ Gregory Garrabrants
Gregory Garrabrants President and Chief Executive Officer (Principal Executive Officer)
Dated:
January 26, 2023
By:
/s/ Derrick K. Walsh
Derrick K. Walsh Executive Vice President and Chief Financial Officer (Principal Financial Officer)
