UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended December 31, 2023
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission file number: 001-37709
AXOS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0867444 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
9205 West Russell Road, Suite 400, Las Vegas, NV 89148
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (858) 649-2218
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $0.01 par value | AX | New York Stock Exchange | ||||||
__________________________________________________________________________________________
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: 56,898,609 shares of common stock, $0.01 par value per share, as of January 23, 2024.
AXOS FINANCIAL, INC.
INDEX
| Page | |||||
PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (Dollars in thousands, except par and stated value) | December 31, 2023 | June 30, 2023 | |||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,568,768 | $ | 2,233,027 | |||||||
| Cash segregated for regulatory purposes | 194,955 | 149,059 | |||||||||
| Total cash, cash equivalents and cash segregated | 1,763,723 | 2,382,086 | |||||||||
Trading securities | 329 | 758 | |||||||||
Available-for-sale securities | 239,812 | 232,350 | |||||||||
| Stock of regulatory agencies | 21,534 | 21,510 | |||||||||
| Loans held for sale, carried at fair value | 13,468 | 23,203 | |||||||||
| Loans held for sale, lower of cost or fair value | — | 776 | |||||||||
Loans—net of allowance for credit losses of $251,749 as of December 31, 2023 and $166,680 as of June 30, 2023 | 18,264,354 | 16,456,728 | |||||||||
Servicing rights, carried at fair value | 28,043 | 25,443 | |||||||||
| Securities borrowed | 145,176 | 134,339 | |||||||||
| Customer, broker-dealer and clearing receivables | 265,857 | 374,074 | |||||||||
| Goodwill and other intangible assets—net | 146,793 | 152,149 | |||||||||
| Other assets | 734,675 | 545,053 | |||||||||
| TOTAL ASSETS | $ | 21,623,764 | $ | 20,348,469 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Deposits: | |||||||||||
| Non-interest bearing | 2,833,657 | 2,898,150 | |||||||||
| Interest bearing | 15,370,255 | 14,224,958 | |||||||||
| Total deposits | 18,203,912 | 17,123,108 | |||||||||
| Advances from the Federal Home Loan Bank | 90,000 | 90,000 | |||||||||
| Borrowings, subordinated notes and debentures | 341,086 | 361,779 | |||||||||
| Securities loaned | 155,492 | 159,832 | |||||||||
| Customer, broker-dealer and clearing payables | 368,885 | 445,477 | |||||||||
| Accounts payable and other liabilities | 386,165 | 251,114 | |||||||||
| Total liabilities | 19,545,540 | 18,431,310 | |||||||||
COMMITMENTS AND CONTINGENCIES (Note 9) | |||||||||||
| STOCKHOLDERS’ EQUITY: | |||||||||||
Common stock—$0.01 par value; 150,000,000 shares authorized; 69,828,709 shares issued and 56,898,377 shares outstanding as of December 31, 2023; 69,465,446 shares issued and 58,943,035 shares outstanding as of June 30, 2023 | 698 | 695 | |||||||||
| Additional paid-in capital | 493,268 | 479,878 | |||||||||
Accumulated other comprehensive income (loss)—net of income tax | (3,919) | (6,610) | |||||||||
| Retained earnings | 1,970,025 | 1,735,609 | |||||||||
Treasury stock, at cost; 12,930,332 shares as of December 31, 2023 and 10,522,411 shares as of June 30, 2023 | (381,848) | (292,413) | |||||||||
| Total stockholders’ equity | 2,078,224 | 1,917,159 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 21,623,764 | $ | 20,348,469 | |||||||
See accompanying notes to the condensed consolidated financial statements.
1
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands, except earnings per common share) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| INTEREST AND DIVIDEND INCOME: | |||||||||||||||||||||||
| Loans, including fees | $ | 357,852 | $ | 255,661 | $ | 684,826 | $ | 463,999 | |||||||||||||||
| Securities borrowed and customer receivables | 5,467 | 4,321 | 10,462 | 8,705 | |||||||||||||||||||
Investments and other | 31,344 | 19,606 | 63,327 | 30,670 | |||||||||||||||||||
| Total interest and dividend income | 394,663 | 279,588 | 758,615 | 503,374 | |||||||||||||||||||
| INTEREST EXPENSE: | |||||||||||||||||||||||
| Deposits | 160,181 | 71,348 | 306,291 | 103,853 | |||||||||||||||||||
| Advances from the Federal Home Loan Bank | 530 | 2,504 | 1,059 | 7,667 | |||||||||||||||||||
| Securities loaned | 1,010 | 1,067 | 1,459 | 2,010 | |||||||||||||||||||
| Other borrowings | 4,336 | 4,759 | 10,045 | 9,459 | |||||||||||||||||||
| Total interest expense | 166,057 | 79,678 | 318,854 | 122,989 | |||||||||||||||||||
| Net interest income | 228,606 | 199,910 | 439,761 | 380,385 | |||||||||||||||||||
| Provision for credit losses | 13,500 | 3,001 | 20,500 | 11,751 | |||||||||||||||||||
| Net interest income, after provision for credit losses | 215,106 | 196,909 | 419,261 | 368,634 | |||||||||||||||||||
| NON-INTEREST INCOME: | |||||||||||||||||||||||
| Broker-dealer fee income | 12,519 | 9,812 | 24,996 | 18,990 | |||||||||||||||||||
| Advisory fee income | 7,362 | 6,983 | 15,581 | 13,942 | |||||||||||||||||||
| Banking and service fees | 10,061 | 10,143 | 18,411 | 16,657 | |||||||||||||||||||
Mortgage banking and servicing rights income | 753 | 641 | 4,631 | 4,006 | |||||||||||||||||||
| Prepayment penalty fee income | 1,037 | 750 | 2,620 | 1,942 | |||||||||||||||||||
Gain on acquisition | 92,397 | — | 92,397 | — | |||||||||||||||||||
| Total non-interest income | 124,129 | 28,329 | 158,636 | 55,537 | |||||||||||||||||||
| NON-INTEREST EXPENSE: | |||||||||||||||||||||||
| Salaries and related costs | 58,883 | 49,720 | 114,694 | 96,716 | |||||||||||||||||||
Data and operational processing | 18,326 | 14,632 | 34,410 | 28,654 | |||||||||||||||||||
| Depreciation and amortization | 6,488 | 5,957 | 12,366 | 12,051 | |||||||||||||||||||
| Advertising and promotional | 9,794 | 10,899 | 20,169 | 17,269 | |||||||||||||||||||
| Professional services | 5,976 | 8,455 | 15,787 | 16,542 | |||||||||||||||||||
| Occupancy and equipment | 4,001 | 3,683 | 7,847 | 7,737 | |||||||||||||||||||
| FDIC and regulatory fees | 3,935 | 3,569 | 8,384 | 7,304 | |||||||||||||||||||
| Broker-dealer clearing charges | 5,948 | 3,739 | 9,960 | 6,568 | |||||||||||||||||||
| General and administrative expense | 8,488 | 7,373 | 18,728 | 31,273 | |||||||||||||||||||
| Total non-interest expense | 121,839 | 108,027 | 242,345 | 224,114 | |||||||||||||||||||
| INCOME BEFORE INCOME TAXES | 217,396 | 117,211 | 335,552 | 200,057 | |||||||||||||||||||
| INCOME TAXES | 65,625 | 35,659 | 101,136 | 60,098 | |||||||||||||||||||
| NET INCOME | $ | 151,771 | $ | 81,552 | $ | 234,416 | $ | 139,959 | |||||||||||||||
| COMPREHENSIVE INCOME | $ | 154,240 | $ | 80,377 | $ | 237,107 | $ | 135,947 | |||||||||||||||
| Basic earnings per common share | $ | 2.65 | $ | 1.36 | $ | 4.04 | $ | 2.34 | |||||||||||||||
| Diluted earnings per common share | $ | 2.62 | $ | 1.35 | $ | 3.98 | $ | 2.31 | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
2
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| NET INCOME | $ | 151,771 | $ | 81,552 | $ | 234,416 | $ | 139,959 | |||||||||||||||
Net unrealized gain (loss) from available-for-sale securities, net of income tax expense (benefit) of $1,058 and $(503) for the three months ended and $1,170 and $(1,718) for the six months ended December 31, 2023 and 2022, respectively. | 2,469 | (1,175) | 2,691 | (4,012) | |||||||||||||||||||
| Other comprehensive income (loss) | 2,469 | (1,175) | 2,691 | (4,012) | |||||||||||||||||||
| COMPREHENSIVE INCOME | $ | 154,240 | $ | 80,377 | $ | 237,107 | $ | 135,947 | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| For the Three Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Issued | Treasury | Outstanding | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2023 | 69,826,263 | (11,322,287) | 58,503,976 | $ | 698 | $ | 486,676 | $ | (6,388) | $ | 1,818,254 | $ | (323,032) | $ | 1,976,208 | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 151,771 | — | 151,771 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | 2,469 | — | — | 2,469 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | (1,607,301) | (1,607,301) | — | — | — | — | (58,650) | (58,650) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 2,446 | (744) | 1,702 | — | 6,592 | — | — | (166) | 6,426 | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2023 | 69,828,709 | (12,930,332) | 56,898,377 | $ | 698 | $ | 493,268 | $ | (3,919) | $ | 1,970,025 | $ | (381,848) | $ | 2,078,224 | ||||||||||||||||||||||||||||||||||||||
| For the Six Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Issued | Treasury | Outstanding | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—June 30, 2023 | 69,465,446 | (10,522,411) | 58,943,035 | $ | 695 | $ | 479,878 | $ | (6,610) | $ | 1,735,609 | $ | (292,413) | $ | 1,917,159 | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 234,416 | — | 234,416 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | 2,691 | — | — | 2,691 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | (2,255,509) | (2,255,509) | — | — | — | — | (83,186) | (83,186) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 363,263 | (152,412) | 210,851 | 3 | 13,390 | — | — | (6,249) | 7,144 | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2023 | 69,828,709 | (12,930,332) | 56,898,377 | $ | 698 | $ | 493,268 | $ | (3,919) | $ | 1,970,025 | $ | (381,848) | $ | 2,078,224 | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(Unaudited)
| For the Three Months Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Issued | Treasury | Outstanding | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2022 | 69,151,152 | (9,152,479) | 59,998,673 | $ | 692 | $ | 459,101 | $ | (5,770) | $ | 1,486,851 | $ | (239,902) | $ | 1,700,972 | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 81,552 | — | 81,552 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | (1,175) | — | — | (1,175) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 2,439 | (1,033) | 1,406 | — | 6,249 | — | — | (39) | 6,210 | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2022 | 69,153,591 | (9,153,512) | 60,000,079 | $ | 692 | $ | 465,350 | $ | (6,945) | $ | 1,568,403 | $ | (239,941) | $ | 1,787,559 | ||||||||||||||||||||||||||||||||||||||
| For the Six Months Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Issued | Treasury | Outstanding | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—June 30, 2022 | 68,859,722 | (9,081,773) | 59,777,949 | $ | 689 | $ | 453,784 | $ | (2,933) | $ | 1,428,444 | $ | (237,011) | $ | 1,642,973 | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 139,959 | — | 139,959 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | (4,012) | — | — | (4,012) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 293,869 | (71,739) | 222,130 | 3 | 11,566 | — | — | (2,930) | 8,639 | ||||||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2022 | 69,153,591 | (9,153,512) | 60,000,079 | $ | 692 | $ | 465,350 | $ | (6,945) | $ | 1,568,403 | $ | (239,941) | $ | 1,787,559 | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
AXOS FINANCIAL, INC. | |||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
(Unaudited) | |||||||||||
| Six Months Ended | |||||||||||
| December 31, | |||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 234,416 | $ | 139,959 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 12,365 | 12,051 | |||||||||
| Other accretion and amortization | (12,006) | 529 | |||||||||
| Stock-based compensation expense | 13,393 | 11,569 | |||||||||
| Trading activity | 429 | 1,386 | |||||||||
| Provision for credit losses | 20,500 | 11,751 | |||||||||
| Deferred income taxes | 21,032 | 7,592 | |||||||||
| Origination of loans held for sale | (96,910) | (113,300) | |||||||||
| Unrealized and realized gains on loans held for sale | (3,854) | (4,115) | |||||||||
| Proceeds from sale of loans held for sale | 107,846 | 117,252 | |||||||||
| Changes in servicing rights | (1,955) | 93 | |||||||||
| Gain on FDIC Loan Purchase | (92,397) | — | |||||||||
| Net change in assets and liabilities which provide (use) cash: | |||||||||||
| Securities borrowed | (10,837) | 280,134 | |||||||||
| Customer, broker-dealer and clearing receivables | 108,217 | 144,838 | |||||||||
| Other Assets | (72,132) | (19,062) | |||||||||
| Securities loaned | (4,340) | (318,392) | |||||||||
| Customer, broker-dealer and clearing payables | (76,592) | (90,707) | |||||||||
| Accounts payable and other liabilities | (81) | (4,502) | |||||||||
| Net cash provided by operating activities | 147,094 | 177,076 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of available-for-sale securities | (9,612) | — | |||||||||
| Proceeds from sale and repayment of available-for-sale securities | 5,952 | 9,111 | |||||||||
| Purchase of stock of regulatory agencies | — | (74,972) | |||||||||
| Proceeds from redemption of stock of regulatory agencies | — | 74,972 | |||||||||
| Origination of loans held for investment | (5,299,304) | (4,499,800) | |||||||||
| Proceeds from sale of loans originally classified as held for investment | — | 13,965 | |||||||||
| Mortgage warehouse loan activity, net | 150,941 | 136,545 | |||||||||
| Proceeds from sale of other real estate owned and repossessed assets | 3,420 | 1,229 | |||||||||
| Acquisition of business activity, net of cash acquired | — | (5,531) | |||||||||
| Purchase of loans and leases, net of discounts and premiums | (841,408) | (127) | |||||||||
| Principal repayments on loans | 4,270,813 | 2,947,186 | |||||||||
| Purchases of furniture, equipment, software and intangibles | (17,031) | (13,982) | |||||||||
| Net cash used in investing activities | (1,736,229) | (1,411,404) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Net increase in deposits | 1,080,804 | 1,744,072 | |||||||||
| Repayments of the Federal Home Loan Bank term advances | — | (17,500) | |||||||||
| Net (repayment) proceeds of other borrowings | (21,200) | (111,500) | |||||||||
| Tax payments related to settlement of restricted stock units | (6,249) | (2,930) | |||||||||
| Purchase of treasury stock | (82,583) | — | |||||||||
| Net cash provided by financing activities | 970,772 | 1,612,142 | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (618,363) | 377,814 | |||||||||
| CASH AND CASH EQUIVALENTS—Beginning of year | $ | 2,382,086 | $ | 1,574,699 | |||||||
| CASH AND CASH EQUIVALENTS—End of period | $ | 1,763,723 | $ | 1,952,513 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Interest paid on interest-bearing liabilities | 323,042 | 121,878 | |||||||||
| Income taxes paid | 84,436 | 73,129 | |||||||||
| Transfers to other real estate and repossessed vehicles from loans held for investment | 3,301 | 7,228 | |||||||||
| Transfers from loans held for sale to loans and leases held for investment | 2,783 | 690 | |||||||||
| Operating lease liabilities from obtaining right of use assets | 5,767 | — | |||||||||
See accompanying notes to the condensed consolidated financial statements.
6
AXOS FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED DECEMBER 31, 2023 AND 2022
(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, the Bank and Axos Nevada Holding comprise substantially all of the Company’s assets and liabilities and revenues and expenses. The Bank, its wholly owned subsidiaries, and the activities of two lending-related trust entities, constitute the Banking Business segment and Axos Nevada Holding and its wholly owned subsidiaries constitute the Securities Business segment. All significant intercompany balances and transactions have been eliminated in consolidation. The Notes to the Consolidated Financial Statements are an integral part of the Company’s financial statements.
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. Certain amounts reported in prior periods have been reclassified to conform with the current presentation. Results for the three and six months ended December 31, 2023 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, 2023 included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“2023 Form 10-K”) filed with the SEC.
Significant Accounting Policies
For further information regarding the Company’s significant accounting policies see Note 1—“Organizations and Summary of Significant Accounting Policies” in the 2023 Form 10-K. During the three and six months ended December 31, 2023 there were no significant updates to the Company’s significant accounting policies, other than as noted below and the adoption of the accounting standards noted herein.
Purchased Credit Deteriorated (“PCD”) Loans. Purchased loans that reflect a more-than-insignificant deterioration of credit since their origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit losses on the date of acquisition. The initial amortized cost of PCD loans is determined by reducing the loans’ par value by the acquisition date estimate of expected credit losses with any difference between the resulting amount and the loans’ purchase price recorded as a non-credit-related discount. Subsequent changes in the initial estimate of expected credit losses are recognized in the provision for credit losses in the Company's Consolidated Statements of Income.
7
New Accounting Standards
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (“FASB”) 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 adopted these ASUs on July 1, 2023, and there was no impact on its financial condition or results of operations upon adoption.
In March 2022, the FASB issued ASU 2022-02 which eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses (“CECL”) model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted this ASU on a prospective basis on July 1, 2023, and there was no impact on its financial condition or results of operations upon adoption. See Note 5—“Loans & Allowance for Credit Losses” for the new disclosures as a result of the adoption of this accounting guidance.
Accounting Standards Issued But Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07 which requires disclosure of significant business segment expenses and a description of the composition of other segment expenses by business segment. The ASU also requires disclosure of the title and position of the chief operating decision maker and an explanation of how the chief operating decision maker uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company does not expect any impact on its financial condition or results of operations upon adoption.
In December 2023, the FASB issued ASU 2023-09 which requires further granularity on the disclosure of income taxes, including:
•Certain prescribed line items in the income tax rate reconciliation presented both in dollar and percentage terms;
•Income taxes paid, income before income taxes and income taxes disaggregated by federal, state and foreign taxes; and
•Further disaggregation of income taxes paid by any individual jurisdiction equal to or exceeding five percent of total income taxes paid.
This standard is effective for fiscal years beginning after December 15, 2024. The Company does not expect any impact on its financial condition or results of operations upon adoption.
8
2. ACQUISITIONS
On August 23, 2023, the Company acquired approximately $52 million of marine floor financing loans at par value along with other assets for an additional $2 million, primarily consisting of servicing rights as well as certain employees. The transaction was accounted for as an asset acquisition and such assets are included in the Company’s unaudited Condensed Consolidated Balance Sheets as of December 31, 2023.
On December 7, 2023, the Company acquired from the Federal Deposit Insurance Corporation (“FDIC”) two loan portfolios, comprising both PCD and non-PCD loans, with an aggregate unpaid principal balance of $1.3 billion at a fair value of $901.5 million, reflecting a non-credit-related discount of $306.8 million and an allowance for credit losses on PCD loans of $70.1 million, (the “FDIC Loan Purchase”). Also included in the acquisition were certain related interest rate derivative assets and liabilities with a fair value of $109.0 million and $104.4 million, respectively, as of the date of the acquisition and whose maturities generally align with those of the loans acquired. The acquisition of the non-PCD loans and interest rate derivatives was accounted for as a purchase of financial assets and liabilities, and the Company recognized a $92.4 million gain on the transaction included in “Gain on acquisition” in the Unaudited Condensed Consolidated Statement of Income.
For additional information on PCD loans, see Note 1—“Summary of Significant Accounting Policies,” and for additional information on the Company’s loans and derivative instruments, see Note 5—“Loans & Allowance Credit Losses” and Note 6—“Derivatives,” respectively.
The following table summarizes the PCD loans acquired in the FDIC Loan Purchase:
| (Dollars in thousands) | Total | ||||
Unpaid principal balance | $ | 341,301 | |||
Non-credit discount | (100,686) | ||||
| Allowance for credit losses at acquisition | (70,097) | ||||
Purchase price | $ | 170,518 | |||
9
3. FAIR VALUE
The following tables sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2023 and June 30, 2023. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement:
| December 31, 2023 | ||||||||||||||||||||
| (Dollars in thousands) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||
| ASSETS: | ||||||||||||||||||||
Trading securities | $ | 329 | $ | — | $ | 329 | ||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||
Agency MBS1 | 28,664 | — | 28,664 | |||||||||||||||||
Non-Agency MBS2 | — | 207,708 | 207,708 | |||||||||||||||||
| Municipal | 3,440 | — | 3,440 | |||||||||||||||||
Total—Available-for-sale securities: | $ | 32,104 | $ | 207,708 | $ | 239,812 | ||||||||||||||
| Loans held for sale | $ | 13,468 | $ | 13,468 | ||||||||||||||||
| Servicing rights | $ | — | $ | 28,043 | $ | 28,043 | ||||||||||||||
| Other assets—Derivative instruments | $ | 96,084 | $ | — | $ | 96,084 | ||||||||||||||
| LIABILITIES: | ||||||||||||||||||||
| Accounts payable and other liabilities—Derivative instruments | $ | 92,144 | $ | — | $ | 92,144 | ||||||||||||||
| June 30, 2023 | ||||||||||||||||||||
| (Dollars in thousands) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||
| ASSETS: | ||||||||||||||||||||
| Trading securities | $ | 758 | $ | — | $ | 758 | ||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||
Agency MBS1 | 23,947 | — | 23,947 | |||||||||||||||||
Non-Agency MBS2 | — | 205,005 | 205,005 | |||||||||||||||||
| Municipal | 3,398 | — | 3,398 | |||||||||||||||||
| Total—Available-for-sale securities: | $ | 27,345 | $ | 205,005 | $ | 232,350 | ||||||||||||||
| Loans held for sale | $ | 23,203 | $ | — | $ | 23,203 | ||||||||||||||
| Servicing rights | $ | — | $ | 25,443 | $ | 25,443 | ||||||||||||||
| Other assets—Derivative instruments | $ | 919 | $ | — | $ | 919 | ||||||||||||||
| LIABILITIES: | ||||||||||||||||||||
| Accounts payable and other liabilities—Derivative instruments | $ | 691 | $ | — | $ | 691 | ||||||||||||||
1 Includes 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 adjustable rate mortgages (“ARMs”).
10
The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
For the Three Months Ended | |||||||||||||||||
| December 31, 2023 | |||||||||||||||||
| (Dollars in thousands) | Available-for-Sale Securities: Non-Agency MBS | Servicing Rights1 | Total | ||||||||||||||
| Opening balance | $ | 206,076 | $ | 29,338 | $ | 235,414 | |||||||||||
| Total gains or losses for the period: | |||||||||||||||||
| — | (1,494) | (1,494) | |||||||||||||||
| 1,876 | — | 1,876 | |||||||||||||||
| Purchases, retentions, issues, sales and settlements: | |||||||||||||||||
| Purchases/Retentions | — | 199 | 199 | ||||||||||||||
| Settlements | (244) | — | (244) | ||||||||||||||
| Closing balance | $ | 207,708 | $ | 28,043 | $ | 235,751 | |||||||||||
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | $ | — | $ | (1,494) | $ | (1,494) | |||||||||||
For the Six Months Ended | |||||||||||||||||
| December 31, 2023 | |||||||||||||||||
| (Dollars in thousands) | Available-for-Sale Securities: Non-Agency MBS | Servicing Rights1 | Total | ||||||||||||||
| Opening Balance | $ | 205,005 | $ | 25,443 | $ | 230,448 | |||||||||||
| Total gains or losses for the period: | |||||||||||||||||
| — | 365 | 365 | |||||||||||||||
| 3,191 | — | 3,191 | |||||||||||||||
| Purchases, retentions, issues, sales and settlements: | |||||||||||||||||
| Purchases/Retentions | — | 2,235 | 2,235 | ||||||||||||||
| Settlements | (488) | — | (488) | ||||||||||||||
| Closing balance | $ | 207,708 | $ | 28,043 | $ | 235,751 | |||||||||||
| Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | $ | — | $ | 365 | $ | 365 | |||||||||||
1 Earnings from servicing rights were attributable to: time and payoffs, representing a decrease in servicing rights 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 $0.3 million and $0.5 million for the three and six months ended December 31, 2023 and a decrease in servicing rights value resulting from market-driven changes in interest rates of $1.2 million three months ended December 31, 2023 and an increase of $0.9 million for the six months ended December 31, 2023. Additions to servicing rights were related to purchases and servicing rights retained upon sale of loans held for sale.
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For the Three Months Ended | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Available-for-Sale Securities: Non-Agency MBS | Servicing Rights1 | Derivative Instruments, net | Total | |||||||||||||||||||
| Opening balance | $ | 184,012 | $ | 26,373 | $ | 535 | $ | 210,920 | |||||||||||||||
| Total gains or losses for the period: | |||||||||||||||||||||||
| — | (1,046) | (517) | (1,563) | ||||||||||||||||||||
| (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) | Available-for-Sale Securities: Non-Agency MBS | Servicing Rights1 | Derivative Instruments, net | Total | |||||||||||||||||||
| Opening Balance | $ | 186,814 | $ | 25,213 | $ | 464 | $ | 212,491 | |||||||||||||||
| Total gains or losses for the period: | |||||||||||||||||||||||
| — | (93) | (446) | (539) | ||||||||||||||||||||
| (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 servicing rights were attributable to: time and payoffs, representing a decrease in servicing rights 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 and an decrease in servicing rights 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 servicing rights were retained upon sale of loans held for sale.
12
The table below summarizes the quantitative information about Level 3 fair value measurements:
| December 31, 2023 | ||||||||||||||
| (Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average)1 | ||||||||||
| Securities – Non-agency MBS | $ | 207,708 | Discounted Cash Flow | Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over SOFR Swaps | 0.0 to 59.2% (34.0%) 0.0 to 31.4% (2.5%) 0.0 to 68.7% (28.5%) 2.6 to 6.5% (2.6%) | |||||||||
Servicing Rights | $ | 28,043 | Discounted Cash Flow | Projected Constant Prepayment Rate, Life (in years), Discount Rate | 5.2 to 38.1% (12.2%) 1.6 to 15.2 (7.6) 9.5 to 11.5% (9.8%) | |||||||||
| June 30, 2023 | ||||||||||||||
| (Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average)1 | ||||||||||
| Securities – Non-agency MBS | $ | 205,005 | Discounted Cash Flow | Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR | 0.0 to 59.7% (32.0%) 0.0 to 7.5% (2.4%) 0.0 to 68.7% (28.5%) 2.6 to 7.5% (2.7%) | |||||||||
Servicing Rights | $ | 25,443 | Discounted Cash Flow | Projected Constant Prepayment Rate, Life (in years), Discount Rate | 6.1% to 40.1% (12.6%) 1.8 to 10.9 (7.7) 9.5 to 11.5% (9.6%) | |||||||||
1 The weighted average for Securities - Non-agency MBS is based on the relative fair value of the securities and for Servicing Rights is based on the relative unpaid principal of the loans being serviced.
For non-agency mortgage-backed securities, 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. For servicing rights, significant increases in projected prepayment rates or discount rates in isolation would result in a significantly lower fair value measurement, while a significant increase in expected life in isolation would result in a significantly higher fair value measurement. Generally, a change in the projected prepayment rates is accompanied by a directionally opposite change in expected life.
The aggregate fair value of loans held for sale, carried at fair value, contractual balance (including accrued interest), and unrealized gain were:
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | |||||||||
| Aggregate fair value | $ | 13,468 | $ | 23,203 | |||||||
| Contractual balance | 13,013 | 22,844 | |||||||||
| Unrealized gain | $ | 455 | $ | 359 | |||||||
The total interest income and amount of gains and losses from changes in fair value included in earnings for loans held for sale were:
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Interest income | $ | 141 | $ | 103 | $ | 330 | $ | 153 | |||||||||||||||
| Change in fair value | 33 | (422) | (96) | (331) | |||||||||||||||||||
| Total | $ | 174 | $ | (319) | $ | 234 | $ | (178) | |||||||||||||||
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The table below summarizes assets measured at fair value on a non-recurring basis:
| December 31, 2023 | |||||||||||||||||||||||
| (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 | $ | — | $ | — | $ | 5,574 | $ | 5,574 | |||||||||||||||
| Autos | $ | — | $ | — | $ | 1,743 | $ | 1,743 | |||||||||||||||
| Total | $ | — | $ | — | $ | 7,317 | $ | 7,317 | |||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| (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 | $ | — | $ | — | $ | 5,574 | $ | 5,574 | |||||||||||||||
| Multifamily real estate | — | — | 1,392 | 1,392 | |||||||||||||||||||
| Autos | — | — | $ | 1,133 | 1,133 | ||||||||||||||||||
| Total | $ | — | $ | — | $ | 8,099 | $ | 8,099 | |||||||||||||||
Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $7.3 million at December 31, 2023, after write-downs of $1.1 million, and a net carrying amount of $8.1 million at June 30, 2023, after write-downs of $1.7 million.
The following table presents quantitative information about Level 3 fair value measurements for other real estate owned measured at fair value on a non-recurring basis:
| December 31, 2023 | ||||||||||||||
| (Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 | ||||||||||
Other real estate owned: | ||||||||||||||
| Single family real estate | $ | 5,574 | Sales comparison approach | Differences between the comparable sales | 62.1 to 93.6% (62.1%) | |||||||||
| June 30, 2023 | ||||||||||||||
| (Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 | ||||||||||
Other real estate owned: | ||||||||||||||
| Single family real estate | $ | 5,574 | Sales comparison approach | Differences between the comparable sales | 62.1 to 93.6% (62.1%) | |||||||||
| Multifamily real estate | $ | 1,392 | Sales comparison approach and income approach | Differences between the comparable sales and differences in net operating income expectations, capitalization rate | 49.8 to 54.5% (49.8%) | |||||||||
1 For other real estate owned 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. The weighted average is based on the relative fair value of comparable sales.
14
Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments at December 31, 2023 and June 30, 2023 were:
| December 31, 2023 | |||||||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash, cash equivalents and segregated cash | $ | 1,763,723 | $ | 1,763,723 | $ | — | $ | — | $ | 1,763,723 | |||||||||||||||||||
Trading securities | 329 | — | 329 | — | 329 | ||||||||||||||||||||||||
Available-for-sale securities | 239,812 | — | 32,104 | 207,708 | 239,812 | ||||||||||||||||||||||||
| Stock of regulatory agencies | 21,534 | — | 21,534 | — | 21,534 | ||||||||||||||||||||||||
| Loans held for sale, at fair value | 13,468 | — | 13,468 | — | 13,468 | ||||||||||||||||||||||||
| Loans held for investment—net | 18,264,354 | — | — | 18,313,778 | 18,313,778 | ||||||||||||||||||||||||
| Securities borrowed | 145,176 | — | — | 155,513 | 155,513 | ||||||||||||||||||||||||
| Customer, broker-dealer and clearing receivables | 265,857 | — | — | 278,219 | 278,219 | ||||||||||||||||||||||||
Servicing rights | 28,043 | — | — | 28,043 | 28,043 | ||||||||||||||||||||||||
| Other assets - derivative instruments | 96,084 | — | 96,084 | — | 96,084 | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Total deposits | 18,203,912 | — | 18,120,805 | — | 18,120,805 | ||||||||||||||||||||||||
| Advances from the Federal Home Loan Bank | 90,000 | — | 84,150 | — | 84,150 | ||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 341,086 | — | 314,321 | — | 314,321 | ||||||||||||||||||||||||
| Securities loaned | 155,492 | — | — | 155,492 | 155,492 | ||||||||||||||||||||||||
| Customer, broker-dealer and clearing payables | 368,885 | — | — | 368,885 | 368,885 | ||||||||||||||||||||||||
| Accounts payable and other liabilities - derivative instruments | 92,144 | — | 92,144 | — | 92,144 | ||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash, cash equivalents and segregated cash | $ | 2,382,086 | $ | 2,382,086 | $ | — | $ | — | $ | 2,382,086 | |||||||||||||||||||
Trading securities | 758 | — | 758 | — | 758 | ||||||||||||||||||||||||
Available-for-sale securities | 232,350 | — | 27,345 | 205,005 | 232,350 | ||||||||||||||||||||||||
Stock of regulatory agencies | 21,510 | — | 21,510 | — | 21,510 | ||||||||||||||||||||||||
| Loans held for sale, at fair value | 23,203 | — | 23,203 | — | 23,203 | ||||||||||||||||||||||||
| Loans held for sale, at lower of cost or fair value | 776 | — | — | 780 | 780 | ||||||||||||||||||||||||
| Loans held for investment—net | 16,456,728 | — | — | 16,417,183 | 16,417,183 | ||||||||||||||||||||||||
| Securities borrowed | 134,339 | — | — | 143,461 | 143,461 | ||||||||||||||||||||||||
| Customer, broker-dealer and clearing receivables | 374,074 | — | — | 386,082 | 386,082 | ||||||||||||||||||||||||
Servicing rights | 25,443 | — | — | 25,443 | 25,443 | ||||||||||||||||||||||||
| Other assets - derivative instruments | 919 | — | 919 | — | 919 | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Total deposits | 17,123,108 | — | 17,064,084 | — | 17,064,084 | ||||||||||||||||||||||||
| Advances from the Federal Home Loan Bank | 90,000 | — | 83,192 | — | 83,192 | ||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 361,779 | — | 327,564 | — | 327,564 | ||||||||||||||||||||||||
| Securities loaned | 159,832 | — | — | 159,416 | 159,416 | ||||||||||||||||||||||||
| Customer, broker-dealer and clearing payables | 445,477 | — | — | 445,447 | 445,447 | ||||||||||||||||||||||||
| Accounts payable and other liabilities - derivative instruments | 691 | — | 691 | — | 691 | ||||||||||||||||||||||||
Carrying amount is the estimated fair value for cash and cash equivalents and segregated cash, stock of regulatory agencies, 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, loans held for sale and derivatives can be found in Note 3—“Fair Value” of the 2023 Form 10-K. The fair value of off-balance sheet items is not material.
15
4. AVAILABLE-FOR-SALE SECURITIES
The amortized cost and fair value of available-for-sale securities were:
| December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||
| Mortgage-backed securities (MBS): | |||||||||||||||||||||||
U.S. agencies1 | $ | 31,048 | $ | 238 | $ | (2,622) | $ | 28,664 | |||||||||||||||
Non-agency2 | 209,783 | 911 | (2,986) | 207,708 | |||||||||||||||||||
| Total mortgage-backed securities | 240,831 | 1,149 | (5,608) | 236,372 | |||||||||||||||||||
| Non-MBS: | |||||||||||||||||||||||
| Municipal | 3,721 | — | (281) | 3,440 | |||||||||||||||||||
| Total Non-MBS | 3,721 | — | (281) | 3,440 | |||||||||||||||||||
Total available-for-sale securities | $ | 244,552 | $ | 1,149 | $ | (5,889) | $ | 239,812 | |||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||
| Mortgage-backed securities (MBS): | |||||||||||||||||||||||
U.S. agencies1 | $ | 27,024 | $ | — | $ | (3,077) | $ | 23,947 | |||||||||||||||
Non-agency2 | 210,271 | 711 | (5,977) | 205,005 | |||||||||||||||||||
| Total mortgage-backed securities | 237,295 | 711 | (9,054) | 228,952 | |||||||||||||||||||
| Non-MBS: | |||||||||||||||||||||||
| Municipal | 3,656 | — | (258) | 3,398 | |||||||||||||||||||
| Total Non-MBS | 3,656 | — | (258) | 3,398 | |||||||||||||||||||
Total available-for-sale securities | $ | 240,951 | $ | 711 | $ | (9,312) | $ | 232,350 | |||||||||||||||
1 Includes 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.
No credit losses were recognized on available-for-sale securities in the three and six months ended December 31, 2023 and December 31, 2022. Based on the underlying government guarantees and other credit protection supporting our securities, no allowance for credit losses for available-for-sale securities was recorded at December 31, 2023 and June 30, 2023. The Company has no allowance for the available-for-sale securities in an unrealized loss position based on an analysis of: (1) the credit characteristics of the securities, including the forecasted cash flows, credit ratings, credit enhancement, and external government backing, as applicable, 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 unrealized losses on available-for-sale securities are primarily driven by the increase in interest rates since the securities were purchased.
The face amounts of available-for-sale securities pledged to secure borrowings at December 31, 2023 and June 30, 2023 were $0.8 million and $0.9 million, respectively.
During the three and six months ended December 31, 2023 and 2022, the Company sold a $4.8 million available-for-sale security with no realized gain or loss.
16
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, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 25 | $ | — | $ | 20,762 | $ | (2,622) | $ | 20,787 | $ | (2,622) | |||||||||||||||||||||||
| Non-agency | 42,324 | (71) | 133,670 | (2,915) | 175,994 | (2,986) | |||||||||||||||||||||||||||||
| Total MBS | 42,349 | (71) | 154,432 | (5,537) | 196,781 | (5,608) | |||||||||||||||||||||||||||||
| Non-MBS: | |||||||||||||||||||||||||||||||||||
Municipal | — | — | 3,440 | (281) | 3,440 | (281) | |||||||||||||||||||||||||||||
| Total Non-MBS | — | — | 3,440 | (281) | 3,440 | (281) | |||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 42,349 | $ | (71) | $ | 157,872 | $ | (5,818) | $ | 200,221 | $ | (5,889) | |||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 3,182 | $ | (16) | $ | 20,642 | $ | (3,061) | $ | 23,824 | $ | (3,077) | |||||||||||||||||||||||
| Non-agency | 107,982 | (1,808) | 95,385 | (4,169) | 203,367 | (5,977) | |||||||||||||||||||||||||||||
| Total MBS | 111,164 | (1,824) | 116,027 | (7,230) | 227,191 | (9,054) | |||||||||||||||||||||||||||||
| Non-MBS: | |||||||||||||||||||||||||||||||||||
Municipal | — | — | 3,398 | (258) | 3,398 | (258) | |||||||||||||||||||||||||||||
| Total Non-MBS | — | — | 3,398 | (258) | 3,398 | (258) | |||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 111,164 | $ | (1,824) | $ | 119,425 | $ | (7,488) | $ | 230,589 | $ | (9,312) | |||||||||||||||||||||||
The components of the Company’s accumulated other comprehensive income (loss) are as follows:
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | |||||||||
Available-for-sale securities—net unrealized gains (losses) | $ | (4,740) | $ | (8,601) | |||||||
Available-for-sale securities—non-credit related | (845) | (845) | |||||||||
| Subtotal | (5,585) | (9,446) | |||||||||
| Tax benefit (expense) | 1,666 | 2,836 | |||||||||
| Net unrealized gain (loss) on investment securities in accumulated other comprehensive income (loss) | $ | (3,919) | $ | (6,610) | |||||||
The following table sets forth the expected maturity distribution of our mortgage-backed securities, which is based on assumed prepayment rates, and the maturity distribution of our non-MBS, which is based on the contractual maturity:
| As of December 31, 2023 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Total Amount | Due Within One Year | Due after One but within Five Years | Due after Five but within Ten Years | Due After Ten Years | ||||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||||||||
Agency1 | $ | 31,048 | $ | 6,907 | $ | 14,543 | $ | 7,222 | $ | 2,376 | |||||||||||||||||||
Non-Agency2 | $ | 209,783 | $ | 163,929 | $ | 43,425 | $ | 1,534 | $ | 895 | |||||||||||||||||||
| Total MBS | $ | 240,831 | $ | 170,836 | $ | 57,968 | $ | 8,756 | $ | 3,271 | |||||||||||||||||||
Non-MBS: | |||||||||||||||||||||||||||||
| Municipal | $ | 3,721 | $ | — | $ | — | $ | — | $ | 3,721 | |||||||||||||||||||
| Total Non-MBS | $ | 3,721 | $ | — | $ | — | $ | — | $ | 3,721 | |||||||||||||||||||
Available-for-sale—Amortized cost | $ | 244,552 | $ | 170,836 | $ | 57,968 | $ | 8,756 | $ | 6,992 | |||||||||||||||||||
| Available-for-sale—Fair value | $ | 239,812 | $ | 168,400 | $ | 56,864 | $ | 8,181 | $ | 6,367 | |||||||||||||||||||
1 Includes 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 pools of 1-4 family residential, Alt-A or pay-option ARM mortgages and commercial mortgages.
17
5. LOANS & ALLOWANCE FOR CREDIT LOSSES
The Company categorizes the loan portfolio into six segments: Single Family - Mortgage & Warehouse, Multifamily and Commercial Mortgage, Commercial Real Estate, Commercial & Industrial - Non Real Estate, Auto & Consumer and Other. For further detail of the segments of the Company’s loan portfolio, refer to Note 1—“Organizations and Summary of Significant Accounting Policies” in the 2023 Form 10-K.
The following table sets forth the composition of the loan portfolio:
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | |||||||||
| Single Family - Mortgage & Warehouse | $ | 4,092,104 | $ | 4,173,833 | |||||||
Multifamily and Commercial Mortgage1 | 4,065,019 | 3,082,225 | |||||||||
Commercial Real Estate1 | 6,043,400 | 6,199,818 | |||||||||
| Commercial & Industrial - Non-RE | 4,177,461 | 2,639,650 | |||||||||
| Auto & Consumer | 477,275 | 546,264 | |||||||||
| Other | 5,150 | 10,236 | |||||||||
| Total gross loans | 18,860,409 | 16,652,026 | |||||||||
| Allowance for credit losses - loans | (251,749) | (166,680) | |||||||||
| Unaccreted premiums (discounts) and loan fees | (344,306) | (28,618) | |||||||||
| Total net loans | $ | 18,264,354 | $ | 16,456,728 | |||||||
1 Includes PCD loans of $296.7 million in Multifamily and Commercial Mortgage and $44.5 million in Commercial Real Estate as of December 31, 2023. For further detail on PCD loans refer to Note 1—“Summary of Significant Accounting Policies”.
Accrued interest receivable on loans held for investments totaled $107.7 million and $77.9 million as of December 31, 2023 and June 30, 2023, respectively.
At December 31, 2023 and June 30, 2023, the Company has pledged certain loans totaling $5,155.8 million and $5,128.4 million, respectively, to the Federal Home Loan Bank (“FHLB”) and $3,915.0 million and $3,689.5 million, respectively, to the Federal Reserve Bank of San Francisco (“FRBSF”).
The following table presents the components of the provision for credit losses:
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Provision for credit losses - loans | $ | 12,500 | $ | 3,500 | $ | 18,250 | $ | 12,250 | |||||||||||||||
Provision for credit losses - unfunded lending commitments | 1,000 | (499) | 2,250 | (499) | |||||||||||||||||||
Total provision for credit losses | $ | 13,500 | $ | 3,001 | $ | 20,500 | $ | 11,751 | |||||||||||||||
The following tables summarize activity in the allowance for credit losses - loans by portfolio segment:
| For the Three Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Single Family-Mortgage & Warehouse | Multifamily and Commercial Mortgage | Commercial Real Estate | Commercial & Industrial - Non-RE | Auto & Consumer | Other | Total | ||||||||||||||||||||||||||||||||||
Balance at October 1, 2023 | $ | 17,426 | $ | 15,874 | $ | 71,355 | $ | 54,592 | $ | 11,614 | $ | 9 | $ | 170,870 | |||||||||||||||||||||||||||
Allowance for credit losses at acquisition of PCD loans | — | 58,972 | 11,125 | — | — | — | $ | 70,097 | |||||||||||||||||||||||||||||||||
| Provision (benefit) for credit losses - loans | (2,080) | 3,507 | (4,702) | 14,695 | 1,080 | — | 12,500 | ||||||||||||||||||||||||||||||||||
| Charge-offs | — | — | — | (86) | (2,321) | — | (2,407) | ||||||||||||||||||||||||||||||||||
| Recoveries | 10 | — | — | — | 679 | — | 689 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | $ | 15,356 | $ | 78,353 | $ | 77,778 | $ | 69,201 | $ | 11,052 | $ | 9 | $ | 251,749 | |||||||||||||||||||||||||||
18
| For the Three Months Ended 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 | ||||||||||||||||||||||||||||||||||
Balance at October 1, 2022 | $ | 18,039 | $ | 14,649 | $ | 73,776 | $ | 34,383 | $ | 14,595 | $ | 30 | $ | 155,472 | |||||||||||||||||||||||||||
| Provision (benefit) for credit losses - loans | 1,878 | 808 | (1,608) | 1,655 | 776 | (9) | 3,500 | ||||||||||||||||||||||||||||||||||
| Charge-offs | (294) | — | — | — | (1,871) | — | (2,165) | ||||||||||||||||||||||||||||||||||
| Recoveries | 8 | — | — | — | 403 | — | 411 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | 19,631 | $ | 15,457 | $ | 72,168 | $ | 36,038 | $ | 13,903 | $ | 21 | $ | 157,218 | |||||||||||||||||||||||||||
| For the Six Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Single Family-Mortgage & Warehouse | Multifamily and Commercial Mortgage | Commercial Real Estate | Commercial & Industrial - Non-RE | Auto & Consumer | Other | Total | ||||||||||||||||||||||||||||||||||
Balance at July 1, 2023 | $ | 17,503 | $ | 16,848 | $ | 72,755 | $ | 46,347 | $ | 13,212 | $ | 15 | $ | 166,680 | |||||||||||||||||||||||||||
Allowance for credit losses at acquisition of PCD loans | — | 58,972 | 11,125 | — | — | — | 70,097 | ||||||||||||||||||||||||||||||||||
| Provision (benefit) for credit losses - loans | (2,090) | 2,533 | (6,102) | 22,940 | 975 | (6) | 18,250 | ||||||||||||||||||||||||||||||||||
| Charge-offs | (80) | — | — | (86) | (4,602) | — | (4,768) | ||||||||||||||||||||||||||||||||||
| Recoveries | 23 | — | — | — | 1,467 | — | 1,490 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | $ | 15,356 | $ | 78,353 | $ | 77,778 | $ | 69,201 | $ | 11,052 | $ | 9 | $ | 251,749 | |||||||||||||||||||||||||||
| For the Six Months Ended 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 | ||||||||||||||||||||||||||||||||||
Balance at July 1, 2022 | $ | 19,670 | $ | 14,655 | $ | 69,339 | $ | 30,808 | $ | 14,114 | $ | 31 | $ | 148,617 | |||||||||||||||||||||||||||
| Provision (benefit) for credit losses - loans | 236 | 802 | 2,829 | 5,212 | 3,181 | (10) | 12,250 | ||||||||||||||||||||||||||||||||||
| Charge-offs | (298) | — | — | — | (4,233) | — | (4,531) | ||||||||||||||||||||||||||||||||||
| Recoveries | 23 | — | — | 18 | 841 | — | 882 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | 19,631 | $ | 15,457 | $ | 72,168 | $ | 36,038 | $ | 13,903 | $ | 21 | $ | 157,218 | |||||||||||||||||||||||||||
For the three and six months ended December 31, 2023, the allowance for credit losses for loans increased primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and the loans acquired in the FDIC Loan Purchase.
Loan products within each portfolio contain varying collateral types which impact the estimate of the loss given default utilized in the calculation of the allowance. For further discussion of the model method of estimating expected lifetime credit losses to Note 1—“Organizations and Summary of Significant Accounting Policies” within the 2023 Form 10-K.
19
The following tables present a summary of the activity in the allowance for credit losses for off-balance sheet lending commitments:
Three Months Ended December 31, | |||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||
Balance at October 1, | $ | 11,723 | $ | 10,973 | |||||||
Provision for credit losses - unfunded lending commitments | 1,000 | (499) | |||||||||
Balance at December 31, | $ | 12,723 | $ | 10,474 | |||||||
Six Months Ended December 31, | |||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||
Balance at July 1, | $ | 10,473 | $ | 10,973 | |||||||
Provision for credit losses - unfunded lending commitments | 2,250 | (499) | |||||||||
Balance at December 31, | $ | 12,723 | $ | 10,474 | |||||||
The increase in the allowance for off-balance sheet lending commitments at December 31, 2023 compared to June 30, 2023, was primarily driven by an increase in the amount of Commercial Real Estate and Commercial and Industrial - Non-RE unfunded commitments.
The following table presents loan-to-value (“LTV”) for the Company’s real estate loans outstanding as of December 31, 2023:
| Total Real Estate Loans | Single Family - Mortgage & Warehouse | Multifamily and Commercial Mortgage | Commercial Real Estate | ||||||||||||||||||||
| Weighted-Average LTV | 47.8 | % | 56.4 | % | 53.3 | % | 38.8 | % | |||||||||||||||
| Median LTV | 53.0 | % | — | % | 55.0 | % | 50.0 | % | 35.0 | % | |||||||||||||
The Company’s effective weighted-average LTV was 48.6% for real estate loans originated during the three months ended December 31, 2023.
Credit Quality Disclosures. The following tables provide the composition of loans that are performing and nonaccrual by portfolio segment:
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Single Family-Mortgage & Warehouse | Multifamily and Commercial Mortgage | Commercial Real Estate | Commercial & Industrial - Non-RE | Auto & Consumer | Other | Total | ||||||||||||||||||||||||||||||||||
| Performing | $ | 4,037,817 | $ | 4,027,695 | $ | 6,017,298 | $ | 4,174,472 | $ | 475,505 | $ | 5,114 | $ | 18,737,901 | |||||||||||||||||||||||||||
| Nonaccrual | $ | 54,287 | $ | 37,324 | $ | 26,102 | $ | 2,989 | $ | 1,770 | $ | 36 | $ | 122,508 | |||||||||||||||||||||||||||
| Total | $ | 4,092,104 | $ | 4,065,019 | $ | 6,043,400 | $ | 4,177,461 | $ | 477,275 | $ | 5,150 | $ | 18,860,409 | |||||||||||||||||||||||||||
| Nonaccrual loans to total loans | 0.65 | % | |||||||||||||||||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Single Family-Mortgage & Warehouse | Multifamily and Commercial Mortgage | Commercial Real Estate | Commercial & Industrial - Non-RE | Auto & Consumer | Other | Total | ||||||||||||||||||||||||||||||||||
| Performing | $ | 4,143,119 | $ | 3,047,122 | $ | 6,184,966 | $ | 2,636,661 | $ | 544,807 | $ | 8,191 | $ | 16,564,866 | |||||||||||||||||||||||||||
| Nonaccrual | 30,714 | 35,103 | 14,852 | 2,989 | 1,457 | 2,045 | 87,160 | ||||||||||||||||||||||||||||||||||
| Total | $ | 4,173,833 | $ | 3,082,225 | $ | 6,199,818 | $ | 2,639,650 | $ | 546,264 | $ | 10,236 | $ | 16,652,026 | |||||||||||||||||||||||||||
| Nonaccrual loans to total loans | 0.52 | % | |||||||||||||||||||||||||||||||||||||||
There were no nonaccrual loans without an allowance for credit losses as of December 31, 2023 and June 30, 2023. There was no interest income recognized on nonaccrual loans in the three months ended December 31, 2023 and 2022.
Credit Quality Indicators. 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.
20
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.
21
The following tables presents the composition of loans by portfolio segment, fiscal year of origination and credit quality indicator, and the amount of gross charge-offs for the six months ended December 31, 2023:
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Loans Held for Investment by Fiscal Year of Origination | Revolving Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | |||||||||||||||||||||||||||||||||||||||||
| Single Family-Mortgage & Warehouse | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 309,717 | $ | 648,620 | $ | 1,297,738 | $ | 501,469 | $ | 309,309 | $ | 779,468 | $ | 98,848 | $ | 3,945,169 | |||||||||||||||||||||||||||||||
| Special Mention | — | 10,593 | 13,575 | 3,928 | 8,851 | 38,883 | — | 75,830 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 285 | 4,292 | 3,910 | 14,999 | 47,619 | — | 71,105 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 309,717 | 659,498 | 1,315,605 | 509,307 | 333,159 | 865,970 | 98,848 | 4,092,104 | |||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | — | — | — | — | — | 80 | — | 80 | |||||||||||||||||||||||||||||||||||||||
| Multifamily and Commercial Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 22,417 | 758,825 | 1,089,359 | 664,917 | 562,656 | 880,855 | — | 3,979,029 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 9,096 | 1,985 | — | 459 | 1,085 | — | 12,625 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 4,992 | 7,250 | 10,457 | 33,075 | 17,591 | — | 73,365 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 22,417 | 772,913 | 1,098,594 | 675,374 | 596,190 | 899,531 | — | 4,065,019 | |||||||||||||||||||||||||||||||||||||||
Gross charge-offs | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,071,507 | 1,710,690 | 1,737,152 | 521,677 | 17,816 | 53,000 | 780,174 | 5,892,016 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 18,657 | 52,338 | 34,250 | 15,000 | 31,139 | — | 151,384 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 1,071,507 | 1,729,347 | 1,789,490 | 555,927 | 32,816 | 84,139 | 780,174 | 6,043,400 | |||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial - Non-RE | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 486,830 | 411,930 | 322,969 | 43,934 | 7,630 | 4,427 | 2,752,431 | 4,030,151 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 37,404 | 35,179 | — | 10,554 | — | 45,528 | 128,665 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | 14,624 | 1,032 | — | 2,989 | — | 18,645 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 486,830 | 449,334 | 372,772 | 44,966 | 18,184 | 7,416 | 2,797,959 | 4,177,461 | |||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | — | — | — | — | — | 86 | — | 86 | |||||||||||||||||||||||||||||||||||||||
| Auto & Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 27,105 | 136,439 | 215,435 | 55,732 | 18,658 | 20,624 | — | 473,993 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 462 | 644 | 100 | 34 | 46 | — | 1,286 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 426 | 925 | 372 | 127 | 146 | — | 1,996 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 27,105 | 137,327 | 217,004 | 56,204 | 18,819 | 20,816 | — | 477,275 | |||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | — | 1,435 | 2,111 | 755 | 131 | 170 | — | 4,602 | |||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 3,061 | — | — | 1,071 | — | 982 | — | 5,114 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | 36 | — | — | — | 36 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 3,061 | — | — | 1,107 | — | 982 | — | 5,150 | |||||||||||||||||||||||||||||||||||||||
| Gross charge-offs | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,920,637 | 3,666,504 | 4,662,653 | 1,788,800 | 916,069 | 1,739,356 | 3,631,453 | 18,325,472 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 57,555 | 51,383 | 4,028 | 19,898 | 40,014 | 45,528 | 218,406 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 24,360 | 79,429 | 50,057 | 63,201 | 99,484 | — | 316,531 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,920,637 | $ | 3,748,419 | $ | 4,793,465 | $ | 1,842,885 | $ | 999,168 | $ | 1,878,854 | $ | 3,676,981 | $ | 18,860,409 | |||||||||||||||||||||||||||||||
| As a % of total gross loans | 10.18% | 19.87% | 25.42% | 9.77% | 5.30% | 9.96% | 19.50% | 100.0% | |||||||||||||||||||||||||||||||||||||||
Total gross charge-offs | $ | — | $ | 1,435 | $ | 2,111 | $ | 755 | $ | 131 | $ | 336 | $ | — | $ | 4,768 | |||||||||||||||||||||||||||||||
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| June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Loans Held for Investment by Fiscal Year of Origination | Revolving Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | |||||||||||||||||||||||||||||||||||||||||
| Single Family-Mortgage & Warehouse | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 730,498 | $ | 1,346,804 | $ | 522,873 | $ | 324,458 | $ | 255,547 | $ | 639,401 | $ | 243,175 | $ | 4,062,756 | |||||||||||||||||||||||||||||||
| Special Mention | — | 7,280 | 7,026 | 8,303 | 12,942 | 18,244 | 6,614 | 60,409 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 5,188 | 4,686 | 14,384 | 2,024 | 24,386 | — | 50,668 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 730,498 | 1,359,272 | 534,585 | 347,145 | 270,513 | 682,031 | 249,789 | 4,173,833 | |||||||||||||||||||||||||||||||||||||||
| Multifamily and Commercial Mortgage | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 558,787 | 975,186 | 498,744 | 314,383 | 224,592 | 404,222 | — | 2,975,914 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 9,691 | 4,636 | 1,360 | 7,705 | — | — | 23,392 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 3,145 | 5,686 | 38,857 | 6,181 | 29,050 | — | 82,919 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 558,787 | 988,022 | 509,066 | 354,600 | 238,478 | 433,272 | — | 3,082,225 | |||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 1,867,476 | 2,323,095 | 631,500 | 87,059 | 117,928 | — | 960,024 | 5,987,082 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 29,000 | 43,427 | — | 8,457 | 800 | 15,062 | 96,746 | ||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 29,200 | 37,951 | 18,500 | 15,487 | 14,852 | — | 115,990 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 1,896,476 | 2,395,722 | 669,451 | 114,016 | 134,215 | 29,914 | 960,024 | 6,199,818 | |||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial - Non-RE | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 488,120 | 358,214 | 29,777 | 14,794 | 2,098 | — | 1,707,619 | 2,600,622 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | 8,221 | — | 11,413 | — | — | 600 | 20,234 | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 17,762 | 1,032 | — | — | — | — | 18,794 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 488,120 | 384,197 | 30,809 | 26,207 | 2,098 | — | 1,708,219 | 2,639,650 | |||||||||||||||||||||||||||||||||||||||
| Auto & Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 161,831 | 256,154 | 70,223 | 24,906 | 19,897 | 9,929 | — | 542,940 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 423 | 632 | 453 | 60 | 14 | 6 | — | 1,588 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 350 | 785 | 233 | 133 | 162 | 73 | — | 1,736 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 162,604 | 257,571 | 70,909 | 25,099 | 20,073 | 10,008 | — | 546,264 | |||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 5,721 | — | 1,306 | — | — | 1,164 | — | 8,191 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Substandard | — | 2,000 | 45 | — | — | — | — | 2,045 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | 5,721 | 2,000 | 1,351 | — | — | 1,164 | — | 10,236 | |||||||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 3,812,433 | 5,259,453 | 1,754,423 | 765,600 | 620,062 | 1,054,716 | 2,910,818 | 16,177,505 | |||||||||||||||||||||||||||||||||||||||
| Special Mention | 29,423 | 69,251 | 12,115 | 29,593 | 21,461 | 33,312 | 7,214 | 202,369 | |||||||||||||||||||||||||||||||||||||||
| Substandard | 350 | 58,080 | 49,633 | 71,874 | 23,854 | 68,361 | — | 272,152 | |||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,842,206 | $ | 5,386,784 | $ | 1,816,171 | $ | 867,067 | $ | 665,377 | $ | 1,156,389 | $ | 2,918,032 | $ | 16,652,026 | |||||||||||||||||||||||||||||||
| As a % of total gross loans | 23.07% | 32.35% | 10.91% | 5.21% | 4.00% | 6.94% | 17.52% | 100.0% | |||||||||||||||||||||||||||||||||||||||
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.
23
The following tables provide the aging of loans by portfolio segment:
| December 31, 2023 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Current | 30-59 Days | 60-89 Days | 90+ Days | Total | ||||||||||||||||||||||||
| Single Family-Mortgage & Warehouse | $ | 3,994,250 | $ | 20,770 | $ | 10,364 | $ | 66,720 | $ | 4,092,104 | |||||||||||||||||||
| Multifamily and Commercial Mortgage | 4,022,438 | 8,109 | 1,085 | 33,387 | 4,065,019 | ||||||||||||||||||||||||
| Commercial Real Estate | 6,001,011 | — | — | 42,389 | 6,043,400 | ||||||||||||||||||||||||
| Commercial & Industrial - Non-RE | 4,177,461 | — | — | — | 4,177,461 | ||||||||||||||||||||||||
| Auto & Consumer | 468,133 | 6,805 | 1,311 | 1,026 | 477,275 | ||||||||||||||||||||||||
| Other | 5,150 | — | — | — | 5,150 | ||||||||||||||||||||||||
| Total | $ | 18,668,443 | $ | 35,684 | $ | 12,760 | $ | 143,522 | $ | 18,860,409 | |||||||||||||||||||
| As a % of total gross loans | 98.98 | % | 0.19 | % | 0.07 | % | 0.76 | % | 100.00 | % | |||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Current | 30-59 Days | 60-89 Days | 90+ Days | Total | ||||||||||||||||||||||||
| Single Family-Mortgage & Warehouse | $ | 4,102,150 | $ | 20,832 | $ | 7,971 | $ | 42,880 | $ | 4,173,833 | |||||||||||||||||||
| Multifamily and Commercial Mortgage | 3,048,217 | 2,705 | 1,124 | 30,179 | 3,082,225 | ||||||||||||||||||||||||
| Commercial Real Estate | 6,173,716 | 11,250 | — | 14,852 | 6,199,818 | ||||||||||||||||||||||||
Commercial & Industrial - Non-RE | 2,639,650 | — | — | — | 2,639,650 | ||||||||||||||||||||||||
| Auto & Consumer | 537,181 | 6,529 | 1,707 | 847 | 546,264 | ||||||||||||||||||||||||
| Other | 8,024 | 68 | 1 | 2,143 | 10,236 | ||||||||||||||||||||||||
| Total | $ | 16,508,938 | $ | 41,384 | $ | 10,803 | $ | 90,901 | $ | 16,652,026 | |||||||||||||||||||
| As a % of total gross loans | 99.14 | % | 0.25 | % | 0.06 | % | 0.55 | % | 100.00 | % | |||||||||||||||||||
Loans reaching 90+ days past due are generally placed on non-accrual. As of December 31, 2023 and June 30, 2023, there were loans of $31.3 million and $14.1 million, respectively, over 90 days past due and still accruing interest as the Company expects to collect the principal and interest amounts due.
Single family mortgage loans in process of foreclosure were $18.5 million and $17.7 million as of December 31, 2023 and June 30, 2023, respectively.
Prior to adoption of ASU 2022-02, the Company accounted for certain modifications as troubled debt restructurings (“TDRs”). Approximately 1.77% of our nonaccrual loans were considered TDRs at June 30, 2023. Borrowers that made timely payments after TDRs were considered non-performing for at least six months. Generally, after six months of timely payments, those TDRs were reclassified from the nonaccrual loan category to the performing loan category and any previously deferred interest income was recognized. The Company had no TDRs classified as performing loans at June 30, 2023.
6. DERIVATIVES
For additional information on the Company’s derivative instruments, see Note 1—“Organizations and Summary of Significant Accounting Policies,” Note 2—“Acquisitions” and Note 3—“Fair Value” in the 2023 Form 10-K and Note 3—“Fair Value” herein. As of December 31, 2023 and June 30, 2023, there were no derivatives designated in hedge accounting relationships.
The following table presents the fair values and notional amounts of the Company’s derivative instruments. While the notional amounts give an indication of the volume of the Company’s derivatives activity, the notional amounts significantly exceed, in
24
the Company’s view, the possible losses that could arise from such transactions. For most derivative contracts, the notional amount is not exchanged, rather it is a reference amount used to calculate payments.
Interest Rate Contracts | |||||||||||
| (Dollars in thousands) | As of 12/31/2023 | As of 6/30/2023 | |||||||||
Derivative Assets — Fair Value | $ | 96,084 | $ | 919 | |||||||
Derivative Liabilities — Fair Value | 92,144 | 691 | |||||||||
Derivative Assets — Notional | $ | 1,316,516 | $ | 231,709 | |||||||
Derivative Liabilities — Notional | 1,319,604 | 204,522 | |||||||||
The following table presents the gains (losses) related to the Company’s derivative instrument activity recognized in the Consolidated Statements of Income:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Banking and service fees | $ | 50 | $ | 119 | $ | 390 | $ | 119 | |||||||||||||||
| Mortgage banking and servicing rights income | 231 | 23 | 508 | 285 | |||||||||||||||||||
7. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
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 2014 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. On November 9, 2023, the Company’s stockholders approved the 2014 Plan, which authorized one million additional shares for future awards under the 2014 Plan. 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” in the 2023 Form 10-K.
At December 31, 2023, 1,932,436 shares of common stock were authorized for future awards under the 2014 Plan. As of December 31, 2023, the total compensation cost related to non-vested awards not yet recognized was $45.4 million and the weighted-average period over which it is expected to be recognized is 1.3 years.
The following table presents the status and changes in RSUs:
RSUs | Weighted-Average Grant-Date Fair Value | ||||||||||
Non-vested balance at June 30, 2023 | 1,407,882 | $ | 41.53 | ||||||||
| Granted | 643,746 | 42.66 | |||||||||
| Vested | (363,263) | 37.65 | |||||||||
| Forfeited | (42,012) | 40.33 | |||||||||
Non-vested balance at December 31, 2023 | 1,646,353 | $ | 42.86 | ||||||||
The total fair value of shares vested for the three and six months ended December 31, 2023 was $0.1 million and $14.9 million, respectively. 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.
Common Stock Repurchases. During the three and six months ended December 31, 2023, the Company repurchased a total of $58.7 million and $83.2 million, or 1,607,301 and 2,255,509 common shares at an average price of $36.49 per share and $36.88 per share, respectively. The Company did not repurchase common stock during the three and six months ended December 31, 2022. For additional information regarding the Company’s share repurchase program see Note 15—“Stockholders’ Equity” in the 2023 Form 10-K.
25
8. EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per common share (“EPS”):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Earnings Per Common Share | |||||||||||||||||||||||
| Net income | $ | 151,771 | $ | 81,552 | $ | 234,416 | $ | 139,959 | |||||||||||||||
| Average common shares issued and outstanding | 57,216,621 | 59,999,573 | 58,082,830 | 59,927,078 | |||||||||||||||||||
| Earnings per common share | $ | 2.65 | $ | 1.36 | $ | 4.04 | $ | 2.34 | |||||||||||||||
| Diluted Earnings Per Common Share | |||||||||||||||||||||||
| Net income | $ | 151,771 | $ | 81,552 | $ | 234,416 | $ | 139,959 | |||||||||||||||
| Average common shares issued and outstanding | 57,216,621 | 59,999,573 | 58,082,830 | 59,927,078 | |||||||||||||||||||
| Dilutive effect of average unvested RSUs | 716,213 | 515,062 | 847,597 | 613,275 | |||||||||||||||||||
Average dilutive common shares outstanding | 57,932,834 | 60,514,635 | 58,930,427 | 60,540,353 | |||||||||||||||||||
| Diluted earnings per common share | $ | 2.62 | $ | 1.35 | $ | 3.98 | $ | 2.31 | |||||||||||||||
| Weighted average antidilutive common stock equivalents (excluded from the computation of EPS) | 1,598 | 249,075 | 837 | 51,793 | |||||||||||||||||||
For further information regarding the Company’s EPS calculation see Note 17— “Earnings per Common Share” in the 2023 Form 10-K.
9. 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:
| (Dollars in thousands) | As of December 31, 2023 | |||||||
| Within one year | $ | 12,357 | ||||||
| After one year and within two years | 12,728 | |||||||
| After two years and within three years | 12,438 | |||||||
| After three years and within four years | 12,380 | |||||||
| After four years within five years | 10,570 | |||||||
| After five years | 17,367 | |||||||
| Total lease payments | 77,840 | |||||||
| Less: amount representing interest | (7,299) | |||||||
| Total lease liability | $ | 70,541 | ||||||
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, 2023, the Company had unfunded commitments to originate $107.6 million in fixed rate loans and $3,394.8 million in variable rate loans, totaling an aggregate outstanding principal balance of $3,502.4 million. For December 31, 2023, the Company’s fixed rate commitments to originate had a weighted-average rate of 8.17%. At December 31, 2023, the Company also had fixed rate commitments to sell loans with an aggregate outstanding principal balance of $13.7 million. At December 31, 2023, 95.1% of the commitments to originate loans are matched with commitments to sell related to conforming single family loans classified as held for sale, respectively.
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 LLC.’s (“Axos Clearing”) customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-
26
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. A consolidated derivative action, In re BofI Holding, Inc., Case No. 15cv2722 GPC (KSC), is pending before the United States District Court for the Southern District of California (the “Derivative Action”). The complaint in the Derivative Action sets forth allegations made in a related employment action, Erhart v. BofI Holding Inc., No. 15cv2287 BAS (NLS) (S.D. Cal.) (the “Employment Action”) brought by a former employee of the Company and was stayed pending resolution of the Employment action. On October 4, 2023, the court hearing the Employment Action entered a final amended judgment awarding damages and attorneys’ fees to the plaintiff. The defendants have filed a Notice of Appeal from the Employment Action judgment and all orders merged therein. On January 2, 2024, the Derivative Action plaintiff filed a Third Amended Complaint. The Derivative Action defendants dispute, and intend to vigorously defend against, the allegations raised in the Third Amended Complaint. The Derivative Action plaintiff seeks damages on behalf of the Company with respect to the Employment Action, and also seeks damages on behalf of the Company in connection with a now settled securities class action that was also based upon allegations made in the Employment Action and settled within available insurance coverage without attribution of wrongdoing to the Company, its management, or its directors.
In view of the inherent difficulty of predicting the outcome of the Derivative Action it is not possible to reasonably predict or estimate the eventual loss or range of loss, if any, related to the Derivative Action.
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. Judgment on such verdict was initially entered on June 5, 2023, and a corrected judgment was entered on June 20, 2023. The Company filed a Notice of Appeal on July 6, 2023, and the plaintiff filed a Notice of Cross-Appeal on July 20, 2023. Briefs have been submitted and the parties now await the scheduling of oral arguments by the court. The Company recorded a $16 million accrued expense in “Accounts payable and other liabilities” on the condensed consolidated balance sheet and in “General and administrative expense” on the condensed consolidated statement of income as of and for the year ended June 30, 2023, respectively. Given the uncertainty of the appellate process and other factors that are unknown or currently unquantifiable, the Company maintained its accrual at December 31, 2023.
27
10. SEGMENT REPORTING AND REVENUE INFORMATION
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 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. For more information on the Company’s operating segments, see Note 23—“Segment Reporting” in the Company’s 2023 Form 10-K.
In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results, goodwill, and assets of the segments:
For the Three Months Ended December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 226,635 | $ | 6,080 | $ | (4,109) | $ | 228,606 | |||||||||||||||
| Provision for credit losses | 13,500 | — | — | 13,500 | |||||||||||||||||||
| Non-interest income | 103,779 | 32,641 | (12,291) | 124,129 | |||||||||||||||||||
| Non-interest expense | 102,282 | 27,968 | (8,411) | 121,839 | |||||||||||||||||||
| Income before taxes | $ | 214,632 | $ | 10,753 | $ | (7,989) | $ | 217,396 | |||||||||||||||
For the Three Months Ended December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 198,545 | $ | 4,876 | $ | (3,511) | $ | 199,910 | |||||||||||||||
| Provision for credit losses | 3,001 | — | — | 3,001 | |||||||||||||||||||
| Non-interest income | 10,557 | 36,004 | (18,232) | 28,329 | |||||||||||||||||||
| Non-interest expense | 96,783 | 25,271 | (14,027) | 108,027 | |||||||||||||||||||
| Income before taxes | $ | 109,318 | $ | 15,609 | $ | (7,716) | $ | 117,211 | |||||||||||||||
For the Six Months Ended December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 435,854 | $ | 11,622 | $ | (7,715) | $ | 439,761 | |||||||||||||||
| Provision for credit losses | 20,500 | — | — | 20,500 | |||||||||||||||||||
| Non-interest income | 116,336 | 67,196 | (24,896) | 158,636 | |||||||||||||||||||
| Non-interest expense | 203,068 | 55,491 | (16,214) | 242,345 | |||||||||||||||||||
| Income before taxes | $ | 328,622 | $ | 23,327 | $ | (16,397) | $ | 335,552 | |||||||||||||||
For the Six Months Ended December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 378,275 | $ | 9,151 | $ | (7,041) | $ | 380,385 | |||||||||||||||
| Provision for credit losses | 11,751 | — | — | 11,751 | |||||||||||||||||||
| Non-interest income | 21,269 | 65,169 | (30,901) | 55,537 | |||||||||||||||||||
| Non-interest expense | 197,579 | 49,786 | (23,251) | 224,114 | |||||||||||||||||||
| Income before taxes | $ | 190,214 | $ | 24,534 | $ | (14,691) | $ | 200,057 | |||||||||||||||
28
| As of December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Goodwill | $ | 35,721 | $ | 61,952 | $ | — | $ | 97,673 | |||||||||||||||
| Total Assets | $ | 20,757,856 | $ | 819,744 | $ | 46,164 | $ | 21,623,764 | |||||||||||||||
| As of June 30, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Goodwill | $ | 35,721 | $ | 61,952 | $ | — | $ | 97,673 | |||||||||||||||
| Total Assets | $ | 19,396,167 | $ | 899,496 | $ | 52,806 | $ | 20,348,469 | |||||||||||||||
Revenue Information. The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Accounting Standards Codification (“ASC”) 606 for the periods indicated. For further information of the Company’s recognition of revenue and ASC 606 see Note 1—“Organizations and Summary of Significant Accounting Policies” in the 2023 Form 10-K.
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Advisory fee income | $ | 7,362 | $ | 6,983 | $ | 15,581 | $ | 13,942 | |||||||||||||||
| Broker-dealer clearing fees | 6,068 | 4,425 | 11,603 | 9,658 | |||||||||||||||||||
| Deposit service fees | 2,414 | 2,202 | 3,094 | 3,308 | |||||||||||||||||||
| Card fees | 732 | 2,144 | 1,414 | 2,933 | |||||||||||||||||||
| Bankruptcy trustee and fiduciary service fees | 1,397 | 2,167 | 2,791 | 2,940 | |||||||||||||||||||
| Non-interest income (in-scope of ASC 606) | 17,973 | 17,921 | 34,483 | 32,781 | |||||||||||||||||||
| Non-interest income (out-of-scope of ASC 606) | 106,156 | 10,408 | 124,153 | 22,756 | |||||||||||||||||||
| Total non-interest income | $ | 124,129 | $ | 28,329 | $ | 158,636 | $ | 55,537 | |||||||||||||||
29
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 2023 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 deposit balances and capital ratios, our ability to continue to grow profitably and increase our business, our ability to continue to diversify lending and deposit franchises, 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. Actual results and the timing of events could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties, including without limitation our ability to successfully integrate acquisitions and realize the anticipated benefits of the transactions, changes in the interest rate environment, monetary policy, inflation, government regulation, general economic conditions, changes in the competitive marketplace, conditions in the real estate markets in which we operate, risks associated with credit quality, our ability to attract and retain deposits and access other sources of liquidity, and the outcome and effects of litigation and other factors beyond our reasonable control. These and other risks and uncertainties are discussed under the heading “Item 1A. Risk Factors” herein and in our 2023 Form 10-K, which has been filed with the SEC, could cause actual results to differ materially from those expressed or implied in any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. All forward-looking statements are qualified in their entirety by this cautionary statement, and 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 $21.6 billion in assets and approximately $34.4 billion of assets under custody and/or administration at Axos Clearing. Axos Bank (the “Bank”) provides consumer and business banking products through its digital online and mobile banking platforms, 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, commercial real estate mortgages and loans, fund and lender finance loans, asset-based loans, auto loans and other consumer loans. 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. We offer securities products and services to independent registered investment advisors (“RIAs”) and introducing broker dealers (“IBDs”) through Axos Clearing and Axos Advisor Services (“AAS”) and direct-to-consumer securities trading and digital investment management products through Axos Invest, Inc. (“Axos Invest”). AAS and Axos Clearing generate interest and fee income by providing comprehensive securities custody services to RIAs and clearing, stock lending and margin lending services to IBDs, respectively. Axos Invest generates fee income from self-directed securities trading and margin lending and fee income from digital wealth management services to consumers. Axos Invest LLC is an introducing broker-dealer which supports direct trading. Our common stock is listed on the New York Stock Exchange under the ticker symbol “AX” 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.
30
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. Axos Invest LLC is an introducing broker-dealer that is registered with the SEC and FINRA.
FDIC Loan Purchase
On December 7, 2023, the Company acquired from the FDIC two loan portfolios with an aggregate unpaid principal balance of $1.3 billion at a 37% discount to par. Given the level of discount at which the loans were purchased, the yield over the remaining life of the loans is expected to exceed that of the Company’s existing loan portfolio prior to the FDIC Loan Purchase. For additional information on the FDIC Loan Purchase, see Note 2 – “Acquisitions.”
Segment Information
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, low-cost distribution channels to serve the needs of consumers and small businesses nationally. In addition, the Banking Business focuses on providing deposit products nationwide to industry verticals (e.g., Title and Escrow), treasury management products to a variety of businesses, and commercial & industrial and commercial real estate lending to clients. The Banking Business 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, 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. The Securities Business also offers specialized accounting software that serves the business management, family office and wealth management industries.
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 GAAP. 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 the 2023 Form 10-K in Note 1—“Organizations and Summary of Significant Accounting Policies” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Critical Accounting Estimates.”
31
USE OF NON-GAAP FINANCIAL MEASURES
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 (“Adjusted EPS”), 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 items, (including amortization of intangible assets related to acquisitions) and other costs (unusual or non-recurring charges). 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):
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 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):
| December 31, | |||||||||||
| (Dollars in thousands, except per share amounts) | 2023 | 2022 | |||||||||
| Common stockholders’ equity | $ | 2,078,224 | $ | 1,787,559 | |||||||
| Less: servicing rights, carried at fair value | 28,043 | 25,526 | |||||||||
| Less: goodwill and intangible assets—net | 146,793 | 157,585 | |||||||||
| Tangible common stockholders’ equity (Non-GAAP) | $ | 1,903,388 | $ | 1,604,448 | |||||||
| Common shares outstanding at end of period | 56,898,377 | 60,000,079 | |||||||||
| Book value per common share | 36.53 | 29.79 | |||||||||
| Less: servicing rights, carried at fair value per common share | 0.49 | 0.43 | |||||||||
| Less: goodwill and other intangible assets—net per common share | 2.59 | 2.62 | |||||||||
| Tangible book value per common share (Non-GAAP) | $ | 33.45 | $ | 26.74 | |||||||
32
SELECTED FINANCIAL INFORMATION
AXOS FINANCIAL, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | December 31, 2022 | ||||||||||||||
| Selected Balance Sheet Data: | |||||||||||||||||
| Total assets | $ | 21,623,764 | $ | 20,348,469 | $ | 18,741,035 | |||||||||||
| Loans—net of allowance for credit losses | 18,264,354 | 16,456,728 | 15,473,212 | ||||||||||||||
| Loans held for sale, carried at fair value | 13,468 | 23,203 | 4,292 | ||||||||||||||
| Loans held for sale, lower of cost or fair value | — | 776 | 455 | ||||||||||||||
Allowance for credit losses | 251,749 | 166,680 | 157,218 | ||||||||||||||
Trading securities | 329 | 758 | 372 | ||||||||||||||
Available-for-sale securities | 239,812 | 232,350 | 248,062 | ||||||||||||||
| Securities borrowed | 145,176 | 134,339 | 58,846 | ||||||||||||||
| Customer, broker-dealer and clearing receivables | 265,857 | 374,074 | 272,579 | ||||||||||||||
| Total deposits | 18,203,912 | 17,123,108 | 15,690,494 | ||||||||||||||
| Advances from the Federal Home Loan Bank | 90,000 | 90,000 | 100,000 | ||||||||||||||
| Borrowings, subordinated debentures and debentures | 341,086 | 361,779 | 334,077 | ||||||||||||||
| Securities loaned | 155,492 | 159,832 | 156,008 | ||||||||||||||
| Customer, broker-dealer and clearing payables | 368,885 | 445,477 | 420,947 | ||||||||||||||
| Total stockholders’ equity | 2,078,224 | 1,917,159 | 1,787,559 | ||||||||||||||
| Capital Ratios: | |||||||||||||||||
| Equity to assets at end of period | 9.61 | % | 9.42 | % | 9.54 | % | |||||||||||
| Axos Financial, Inc.: | |||||||||||||||||
| Tier 1 leverage (to adjusted average assets) | 9.39 | % | 8.96 | % | 9.06 | % | |||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 10.97 | % | 10.94 | % | 10.55 | % | |||||||||||
| Tier 1 capital (to risk-weighted assets) | 10.97 | % | 10.94 | % | 10.55 | % | |||||||||||
| Total capital (to risk-weighted assets) | 13.79 | % | 13.82 | % | 13.49 | % | |||||||||||
| Axos Bank: | |||||||||||||||||
| Tier 1 leverage (to adjusted average assets) | 10.22 | % | 9.68 | % | 10.05 | % | |||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 12.26 | % | 11.63 | % | 11.28 | % | |||||||||||
| Tier 1 capital (to risk-weighted assets) | 12.26 | % | 11.63 | % | 11.28 | % | |||||||||||
| Total capital (to risk-weighted assets) | 13.25 | % | 12.50 | % | 12.13 | % | |||||||||||
| Axos Clearing LLC: | |||||||||||||||||
| Net capital | $ | 103,454 | $ | 35,221 | $ | 60,334 | |||||||||||
| Excess capital | $ | 98,397 | $ | 29,905 | $ | 55,977 | |||||||||||
| Net capital as a percentage of aggregate debit items | 40.92 | % | 13.25 | % | 27.69 | % | |||||||||||
| Net capital in excess of 5% aggregate debit items | $ | 90,812 | $ | 21,930 | $ | 49,441 | |||||||||||
33
AXOS FINANCIAL, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At or for the Three Months Ended | At or for the Six Months Ended | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Selected Income Statement Data: | |||||||||||||||||||||||
| Interest and dividend income | $ | 394,663 | $ | 279,588 | $ | 758,615 | $ | 503,374 | |||||||||||||||
| Interest expense | 166,057 | 79,678 | 318,854 | 122,989 | |||||||||||||||||||
| Net interest income | 228,606 | 199,910 | 439,761 | 380,385 | |||||||||||||||||||
| Provision for credit losses | 13,500 | 3,001 | 20,500 | 11,751 | |||||||||||||||||||
| Net interest income, after provision for credit losses | 215,106 | 196,909 | 419,261 | 368,634 | |||||||||||||||||||
| Non-interest income | 124,129 | 28,329 | 158,636 | 55,537 | |||||||||||||||||||
| Non-interest expense | 121,839 | 108,027 | 242,345 | 224,114 | |||||||||||||||||||
| Income before income taxes | 217,396 | 117,211 | 335,552 | 200,057 | |||||||||||||||||||
| Income taxes | 65,625 | 35,659 | 101,136 | 60,098 | |||||||||||||||||||
| Net income | $ | 151,771 | $ | 81,552 | $ | 234,416 | $ | 139,959 | |||||||||||||||
| Per Common Share Data: | |||||||||||||||||||||||
| Net income: | |||||||||||||||||||||||
| Basic | $ | 2.65 | $ | 1.36 | $ | 4.04 | $ | 2.34 | |||||||||||||||
| Diluted | $ | 2.62 | $ | 1.35 | $ | 3.98 | $ | 2.31 | |||||||||||||||
Adjusted earnings per common share (Non-GAAP)1 | $ | 1.60 | $ | 1.38 | $ | 3.00 | $ | 2.56 | |||||||||||||||
| Book value per common share | $ | 36.53 | $ | 29.79 | $ | 36.53 | $ | 29.79 | |||||||||||||||
Tangible book value per common share (Non-GAAP)1 | $ | 33.45 | $ | 26.74 | $ | 33.45 | $ | 26.74 | |||||||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 57,216,621 | 59,999,573 | 58,082,830 | 59,927,078 | |||||||||||||||||||
| Diluted | 57,932,834 | 60,514,635 | 58,930,427 | 60,540,353 | |||||||||||||||||||
| Common shares outstanding at end of period | 56,898,377 | 60,000,079 | 56,898,377 | 60,000,079 | |||||||||||||||||||
| Common shares issued at end of period | 69,828,709 | 69,153,591 | 69,828,709 | 69,153,591 | |||||||||||||||||||
| Performance Ratios and Other Data: | |||||||||||||||||||||||
| Loan originations for investment | $ | 2,739,261 | $ | 2,013,576 | $ | 5,344,593 | $ | 4,499,800 | |||||||||||||||
| Loan originations for sale | 44,325 | 43,227 | 96,910 | 113,300 | |||||||||||||||||||
Loan purchases | 789,516 | 76 | 841,408 | 127 | |||||||||||||||||||
| Return on average assets | 2.90 | % | 1.77 | % | 2.29 | % | 1.55 | % | |||||||||||||||
| Return on average common stockholders’ equity | 30.39 | % | 18.71 | % | 23.72 | % | 16.35 | % | |||||||||||||||
Interest rate spread2 | 3.58 | % | 3.64 | % | 3.48 | % | 3.63 | % | |||||||||||||||
Net interest margin3 | 4.55 | % | 4.49 | % | 4.46 | % | 4.38 | % | |||||||||||||||
Net interest margin3 – Banking Business Segment | 4.62 | % | 4.65 | % | 4.54 | % | 4.58 | % | |||||||||||||||
Efficiency ratio4 | 34.54 | % | 47.33 | % | 40.50 | % | 51.41 | % | |||||||||||||||
Efficiency ratio4 – Banking Business Segment | 30.96 | % | 46.29 | % | 36.78 | % | 49.45 | % | |||||||||||||||
| Asset Quality Ratios: | |||||||||||||||||||||||
| Net annualized charge-offs to average loans | 0.02 | % | 0.05 | % | 0.04 | % | 0.05 | % | |||||||||||||||
| Non-performing loans and leases to total loans | 0.65 | % | 0.61 | % | 0.65 | % | 0.61 | % | |||||||||||||||
| Non-performing assets to total assets | 0.60 | % | 0.54 | % | 0.60 | % | 0.54 | % | |||||||||||||||
Allowance for credit losses - loans to total loans held for investment5 | 1.33 | % | 1.00 | % | 1.33 | % | 1.00 | % | |||||||||||||||
Allowance for credit losses - loans to non-performing loans5 | 205.50 | % | 165.51 | % | 205.50 | % | 165.51 | % | |||||||||||||||
1 See “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.
4 Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.
5 The increase in the ratios of the allowance for credit losses - loans to total loans held for investment and the allowance for credit losses - loans to non-performing loans at December 31, 2023 was primarily attributable to the allowance for credit losses related to the PCD loans acquired in the FDIC Loan Purchase. See Note 2 - “Acquisitions” for additional information.
34
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 2023 and 2022
For the three months ended December 31, 2023, we had net income of $151.8 million, or $2.62 per diluted share, compared to net income of $81.6 million, or $1.35 per diluted share, for the three months ended December 31, 2022. For the six months ended December 31, 2023, we had net income of $234.4 million, or $3.98 per diluted share, compared to net income of $140.0 million, or $2.31 per diluted share, for the six months ended December 31, 2022.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents 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, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 17,499,840 | $ | 357,852 | 8.18 | % | $ | 15,452,232 | $ | 255,661 | 6.62 | % | |||||||||||||||||||||||
Non-purchased loans | 17,241,605 | 345,905 | 8.02 | % | 15,452,232 | 255,661 | 6.62 | % | |||||||||||||||||||||||||||
Purchased loans5 | 258,235 | 11,947 | 18.51 | % | — | — | — | % | |||||||||||||||||||||||||||
| Interest-earning deposits in other financial institutions | 2,023,446 | 27,737 | 5.48 | % | 1,664,408 | 15,614 | 3.75 | % | |||||||||||||||||||||||||||
Mortgage-backed and other investment securities4 | 238,470 | 3,200 | 5.37 | % | 257,133 | 3,578 | 5.57 | % | |||||||||||||||||||||||||||
Securities borrowed and margin lending6 | 336,919 | 5,467 | 6.49 | % | 409,543 | 4,321 | 4.22 | % | |||||||||||||||||||||||||||
| Stock of the regulatory agencies | 17,250 | 407 | 9.44 | % | 18,685 | 414 | 8.86 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 20,115,925 | 394,663 | 7.85 | % | 17,802,001 | 279,588 | 6.28 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 810,366 | 678,531 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 20,926,291 | $ | 18,480,532 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 13,931,565 | $ | 150,107 | 4.31 | % | $ | 9,951,529 | $ | 65,028 | 2.61 | % | |||||||||||||||||||||||
| Time deposits | 1,002,116 | 10,074 | 4.02 | % | 1,146,877 | 6,320 | 2.20 | % | |||||||||||||||||||||||||||
| Securities loaned | 181,690 | 1,010 | 2.23 | % | 289,782 | 1,067 | 1.47 | % | |||||||||||||||||||||||||||
| Advances from the FHLB | 90,000 | 530 | 2.35 | % | 290,918 | 2,504 | 3.44 | % | |||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 349,862 | 4,336 | 4.96 | % | 375,331 | 4,759 | 5.07 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 15,555,233 | 166,057 | 4.27 | % | 12,054,437 | 79,678 | 2.64 | % | |||||||||||||||||||||||||||
| Non-interest-bearing demand deposits | 2,682,261 | 3,941,751 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 690,854 | 741,066 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 1,997,943 | 1,743,278 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 20,926,291 | $ | 18,480,532 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 228,606 | $ | 199,910 | |||||||||||||||||||||||||||||||
Interest rate spread7 | 3.58 | % | 3.64 | % | |||||||||||||||||||||||||||||||
Net interest margin8 | 4.55 | % | 4.49 | % | |||||||||||||||||||||||||||||||
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.
5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
6Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.
7Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
8Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
35
For the Six Months Ended, | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 17,075,797 | $ | 684,826 | 8.02 | % | $ | 15,107,071 | $ | 463,999 | 6.14 | % | |||||||||||||||||||||||
Non-purchased loans | 16,945,974 | 672,879 | 7.94 | % | 15,107,071 | 463,999 | 6.14 | % | |||||||||||||||||||||||||||
Purchased loans5 | 129,823 | 11,947 | 18.51 | % | — | — | — | % | |||||||||||||||||||||||||||
| Interest-earning deposits in other financial institutions | 2,058,407 | 56,247 | 5.47 | % | 1,449,814 | 22,961 | 3.17 | % | |||||||||||||||||||||||||||
Mortgage-backed and other investment securities4 | 235,929 | 6,336 | 5.37 | % | 260,102 | 6,876 | 5.29 | % | |||||||||||||||||||||||||||
Securities borrowed and margin lending6 | 334,105 | 10,462 | 6.26 | % | 537,404 | 8,705 | 3.24 | % | |||||||||||||||||||||||||||
| Stock of the regulatory agencies | 17,250 | 744 | 8.63 | % | 23,483 | 833 | 7.09 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 19,721,488 | 758,615 | 7.69 | % | 17,377,874 | 503,374 | 5.79 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 768,570 | 683,127 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 20,490,058 | $ | 18,061,001 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 13,389,681 | $ | 284,465 | 4.25 | % | $ | 8,851,092 | $ | 92,737 | 2.10 | % | |||||||||||||||||||||||
| Time deposits | 1,087,896 | 21,826 | 4.01 | % | 1,151,797 | 11,116 | 1.93 | % | |||||||||||||||||||||||||||
| Securities loaned | 185,198 | 1,459 | 1.58 | % | 414,362 | 2,010 | 0.97 | % | |||||||||||||||||||||||||||
| Advances from the FHLB | 90,000 | 1,059 | 2.35 | % | 585,633 | 7,667 | 2.62 | % | |||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 384,892 | 10,045 | 5.22 | % | 377,650 | 9,459 | 5.01 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 15,137,667 | 318,854 | 4.21 | % | 11,380,534 | 122,989 | 2.16 | % | |||||||||||||||||||||||||||
| Non-interest-bearing demand deposits | 2,672,180 | 4,213,995 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 703,876 | 754,079 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 1,976,335 | 1,712,393 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 20,490,058 | $ | 18,061,001 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 439,761 | $ | 380,385 | |||||||||||||||||||||||||||||||
Interest rate spread7 | 3.48 | % | 3.63 | % | |||||||||||||||||||||||||||||||
Net interest margin8 | 4.46 | % | 4.38 | % | |||||||||||||||||||||||||||||||
1.Average balances are obtained from daily data.
2.Annualized.
3.Loans include loans held for sale, loan premiums and unearned fees.
4.Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
5.Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.
6.Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.
7.Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
8.Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
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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 each based on the relative changes attributable to volume and changes attributable to rate.
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
2023 vs 2022 | 2023 vs 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 36,781 | $ | 65,410 | $ | 102,191 | $ | 65,928 | $ | 154,899 | $ | 220,827 | |||||||||||||||||||||||
Non-purchased loans | 24,834 | 65,410 | 90,244 | 53,981 | 154,899 | 208,880 | |||||||||||||||||||||||||||||
Purchased loans1 | 11,947 | — | 11,947 | 11,947 | — | 11,947 | |||||||||||||||||||||||||||||
Interest-earning deposits in other financial institutions | 3,862 | 8,261 | 12,123 | 12,199 | 21,087 | 33,286 | |||||||||||||||||||||||||||||
Mortgage-backed and other investment securities | (253) | (125) | (378) | (643) | 103 | (540) | |||||||||||||||||||||||||||||
| Securities borrowed and margin lending | (868) | 2,014 | 1,146 | (4,178) | 5,935 | 1,757 | |||||||||||||||||||||||||||||
| Stock of the regulatory agencies | (33) | 26 | (7) | (248) | 159 | (89) | |||||||||||||||||||||||||||||
Total increase (decrease) in interest income | $ | 39,489 | $ | 75,586 | $ | 115,075 | $ | 73,058 | $ | 182,183 | $ | 255,241 | |||||||||||||||||||||||
| Increase (decrease) in interest expense: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 32,367 | $ | 52,712 | $ | 85,079 | $ | 63,981 | $ | 127,747 | $ | 191,728 | |||||||||||||||||||||||
| Time deposits | (884) | 4,638 | 3,754 | (649) | 11,359 | 10,710 | |||||||||||||||||||||||||||||
| Securities loaned | (485) | 428 | (57) | (1,440) | 889 | (551) | |||||||||||||||||||||||||||||
| Advances from the FHLB | (1,354) | (620) | (1,974) | (5,890) | (718) | (6,608) | |||||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | (320) | (103) | (423) | 184 | 402 | 586 | |||||||||||||||||||||||||||||
Total increase (decrease) in interest expense | $ | 29,324 | $ | 57,055 | $ | 86,379 | $ | 56,186 | $ | 139,679 | $ | 195,865 | |||||||||||||||||||||||
1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
Net Interest Income
For the three months ended December 31, 2023, net interest income totaled $228.6 million, an increase of $28.7 million and 14.4% compared to net interest income of $199.9 million for the three months ended December 31, 2022. For the three months ended December 31, 2023, net interest margin, defined as annualized net interest income divided by average interest-earning assets, increased by 6 basis points compared to the net interest margin of 4.49% for the three months ended December 31, 2022.
For the three months ended December 31, 2023, total interest and dividend income increased 41.16% from the three months ended December 31, 2022, primarily due to a $102.2 million increase in interest income from loans, attributable to a 156 basis point increase in rates earned and a $2.0 billion increase in average balances.
For the three months ended December 31, 2023, total interest expense increased 108.41% from the three months ended December 31, 2022, primarily due to a $85.1 million increase in interest expense from demand and savings deposits, attributable to a 170 basis point increase in rates paid and a $4.0 billion increase in average balances.
For the six months ended December 31, 2023, net interest income totaled $439.8 million, an increase of $59.4 million and 15.6% compared to net interest income of $380.4 million for the six months ended December 31, 2022. For the six months ended December 31, 2023, net interest margin, defined as annualized net interest income divided by average interest-earning assets, increased by 8 basis points compared to the net interest margin of 4.38% for the six months ended December 31, 2022.
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For the six months ended December 31, 2023, total interest and dividend income increased 50.71% from the six months ended December 31, 2022, primarily due to a $220.8 million increase in interest income from loans, attributable to a 188 basis point increase in rates earned and a $2.0 billion increase in average balances.
For the six months ended December 31, 2023, total interest expense increased 159.3% from the six months ended December 31, 2022, primarily due to $191.7 million increase in interest expense from demand and savings deposits, attributable to a 215 basis point increase in rates paid and a $4.5 billion increase in average balances.
Provision for Credit Losses
The provision for credit losses was $13.5 million and $20.5 million for the three and six months ended December 31, 2023 compared to $3.0 million and $11.8 million for the three and six months ended December 31, 2022. The provision for credit losses for loans for the three and six months ended December 31, 2023 was primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and the loans acquired in the FDIC Loan Purchase. The provision for credit losses for unfunded commitments of $1.0 million and $2.3 million for the three and six months ended December 31, 2023, respectively, was primarily driven by an increase in the amount of Commercial Real Estate and Commercial and Industrial - Non-RE unfunded commitments. Provisions for credit losses are charged to income to bring the allowance for credit losses for loans and unfunded lending commitments to a level deemed appropriate by management based on the factors discussed under the heading “Financial Condition—Asset Quality and Allowance for Credit Losses - Loans.”
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Non-Interest Income
The following table sets forth information regarding our non-interest income:
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | Inc (Dec) | 2023 | 2022 | Inc (Dec) | |||||||||||||||||||||||||||||
| Broker-dealer fee income | $ | 12,519 | $ | 9,812 | $ | 2,707 | $ | 24,996 | $ | 18,990 | $ | 6,006 | |||||||||||||||||||||||
| Advisory fee income | 7,362 | 6,983 | 379 | 15,581 | 13,942 | 1,639 | |||||||||||||||||||||||||||||
| Banking and service fees | 10,061 | 10,143 | (82) | 18,411 | 16,657 | 1,754 | |||||||||||||||||||||||||||||
| Mortgage banking and servicing rights income | 753 | 641 | 112 | 4,631 | 4,006 | 625 | |||||||||||||||||||||||||||||
| Prepayment penalty fee income | 1,037 | 750 | 287 | 2,620 | 1,942 | 678 | |||||||||||||||||||||||||||||
| Gain on acquisition | 92,397 | — | 92,397 | 92,397 | — | 92,397 | |||||||||||||||||||||||||||||
| Total non-interest income | $ | 124,129 | $ | 28,329 | $ | 95,800 | $ | 158,636 | $ | 55,537 | $ | 103,099 | |||||||||||||||||||||||
For the three and six months ended December 31, 2023, non-interest income increased by $95.8 million or 338.2%, primarily due to a $92.4 million gain on the FDIC Loan Purchase and an increase in broker-dealer fee income, primarily driven by higher rates earned on cash sorting balances at non-affiliated banks.
Non-Interest Expense
The following table sets forth information regarding our non-interest expense:
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | Inc (Dec) | 2023 | 2022 | Inc (Dec) | |||||||||||||||||||||||||||||
| Salaries and related costs | $ | 58,883 | $ | 49,720 | $ | 9,163 | $ | 114,694 | $ | 96,716 | $ | 17,978 | |||||||||||||||||||||||
| Data and operational processing | 18,326 | 14,632 | 3,694 | 34,410 | 28,654 | 5,756 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 6,488 | 5,957 | 531 | 12,366 | 12,051 | 315 | |||||||||||||||||||||||||||||
| Advertising and promotional | 9,794 | 10,899 | (1,105) | 20,169 | 17,269 | 2,900 | |||||||||||||||||||||||||||||
| Professional services | 5,976 | 8,455 | (2,479) | 15,787 | 16,542 | (755) | |||||||||||||||||||||||||||||
| Occupancy and equipment | 4,001 | 3,683 | 318 | 7,847 | 7,737 | 110 | |||||||||||||||||||||||||||||
| FDIC and regulatory fees | 3,935 | 3,569 | 366 | 8,384 | 7,304 | 1,080 | |||||||||||||||||||||||||||||
| Broker-dealer clearing charges | 5,948 | 3,739 | 2,209 | 9,960 | 6,568 | 3,392 | |||||||||||||||||||||||||||||
| General and administrative expense | 8,488 | 7,373 | 1,115 | 18,728 | 31,273 | (12,545) | |||||||||||||||||||||||||||||
| Total non-interest expense | $ | 121,839 | $ | 108,027 | $ | 13,812 | $ | 242,345 | $ | 224,114 | $ | 18,231 | |||||||||||||||||||||||
For the three months ended December 31, 2023, non-interest expense increased $13.8 million, or 12.8%, primarily due to increases of:
•$9.2 million in salaries and related costs due to increased headcount and salaries;
•$3.7 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs; and
•$2.2 million in broker-dealer clearing charges primarily due to mutual fund clearing fees and corporate actions.
The increases were partially offset by a $2.5 million decrease in professional services, primarily due to reduced legal and consulting services.
For the six months ended December 31, 2023, non-interest expense increased $18.2 million, or 8.13%, primarily due to increases of:
•$18.0 million in salaries and related costs due to increased headcount and salaries;
•$5.8 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs;
•$3.4 million in broker-dealer clearing charges primarily due to mutual fund clearing fees and corporate actions; and
39
•$2.9 million in advertising and promotional expenses due to increased deposit marketing.
The increases were partially offset by a $12.5 million decrease in general and administrative expenses, primarily reflecting the absence of a $16.0 million accrual in the prior year quarter for an adverse legal judgment that has not been finalized.
Provision for Income Taxes
Income tax expense was $65.6 million and $101.1 million for the three and six months ended December 31, 2023, compared to $35.7 million and $60.1 million for three and six months ended December 31, 2022. Our effective income tax rates for the three months ended December 31, 2023 and 2022 were 30.19% and 30.42%, respectively. Our effective income tax rates for the six months ended December 31, 2023 and 2022 were 30.14% and 30.04%, respectively.
SEGMENT RESULTS
Our Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to our Company’s financial condition and operating results and management’s regular review of the operating results of those services. Our Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, our Company includes parent-only activities and intercompany eliminations. 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 our Company and to our Company itself for their operating cash held on deposit with the Banking Business segment.
40
The following tables present the operating results of the segments:
For the Three Months Ended December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 226,635 | $ | 6,080 | $ | (4,109) | $ | 228,606 | |||||||||||||||
| Provision for credit losses | 13,500 | — | — | 13,500 | |||||||||||||||||||
| Non-interest income | 103,779 | 32,641 | (12,291) | 124,129 | |||||||||||||||||||
| Non-interest expense | 102,282 | 27,968 | (8,411) | 121,839 | |||||||||||||||||||
| Income before income taxes | $ | 214,632 | $ | 10,753 | $ | (7,989) | $ | 217,396 | |||||||||||||||
For the Three Months Ended December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 198,545 | $ | 4,876 | $ | (3,511) | $ | 199,910 | |||||||||||||||
| Provision for credit losses | 3,001 | — | — | 3,001 | |||||||||||||||||||
| Non-interest income | 10,557 | 36,004 | (18,232) | 28,329 | |||||||||||||||||||
| Non-interest expense | 96,783 | 25,271 | (14,027) | 108,027 | |||||||||||||||||||
| Income before income taxes | $ | 109,318 | $ | 15,609 | $ | (7,716) | $ | 117,211 | |||||||||||||||
For the Six Months Ended December 31, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 435,854 | $ | 11,622 | $ | (7,715) | $ | 439,761 | |||||||||||||||
| Provision for credit losses | 20,500 | — | — | 20,500 | |||||||||||||||||||
| Non-interest income | 116,336 | 67,196 | (24,896) | 158,636 | |||||||||||||||||||
| Non-interest expense | 203,068 | 55,491 | (16,214) | 242,345 | |||||||||||||||||||
| Income before income taxes | $ | 328,622 | $ | 23,327 | $ | (16,397) | $ | 335,552 | |||||||||||||||
For the Six Months Ended December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Banking Business | Securities Business | Corporate/Eliminations | Axos Consolidated | |||||||||||||||||||
| Net interest income | $ | 378,275 | $ | 9,151 | $ | (7,041) | $ | 380,385 | |||||||||||||||
| Provision for credit losses | 11,751 | — | — | 11,751 | |||||||||||||||||||
| Non-interest income | 21,269 | 65,169 | (30,901) | 55,537 | |||||||||||||||||||
| Non-interest expense | 197,579 | 49,786 | (23,251) | 224,114 | |||||||||||||||||||
| Income before income taxes | $ | 190,214 | $ | 24,534 | $ | (14,691) | $ | 200,057 | |||||||||||||||
Banking Business
For the three months ended December 31, 2023, our Banking Business segment had income before income taxes of $214.6 million, compared to income before taxes of $109.3 million for the three months ended December 31, 2022. For the six months ended December 31, 2023, our Banking Business segment had income before income taxes of $328.6 million, compared to income before taxes of $190.2 million for the six months ended December 31, 2022.
For the three and six months ended December 31, 2023, the Banking Business segment’s net interest income increased $28.1 million or 14.1%, and $57.6 million or 15.2%, respectively, compared to net interest income for the three and six months ended December 31, 2022. The increase in net interest income was primarily due to higher interest income from loans driven and from deposits in other financial institutions, primarily attributable to higher rates earned and average balances, partially offset by higher rates paid and higher average interest-bearing deposit balances.
For the three and six months ended December 31, 2023, the Banking Business segment’s non-interest income increased $93.2 million, or 883.0%, and $95.1 million, or 447.0%, respectively, compared to non-interest income for the three and six months ended December 31, 2022. The increase in non-interest income was primarily due to a $92.4 million on the FDIC Loan Purchase. For the six months ended December 31, 2023, higher non-interest income was further driven by increased prepayment penalty fee income, mortgage banking and servicing rights income and banking and service fee income.
For the three and six months ended December 31, 2023, the Banking Business segment’s non-interest expense increased $5.5 million or 5.7%, and $5.5 million or 2.8%, respectively, compared to non-interest expense for the three and six
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months ended December 31, 2022. The increase in non-interest expense was primarily due to increases in salaries and related costs from higher headcount and salaries and increases in data and operational costs from enhancement of core processing systems and customer interfaced offset by decreases in advertising and promotional expense from reduced cash sorting fees paid to our Securities Business. For the six months ended December 31, 2023, the increase in non-interest expense was further offset by the absence of a $16.0 million accrual in the prior year quarter for an adverse legal judgment that has not been finalized.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables presents 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, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 17,499,840 | $ | 358,114 | 8.19 | % | $ | 15,429,873 | $ | 255,309 | 6.62 | % | |||||||||||||||||||||||
Non-purchased loans | 17,241,605 | 346,167 | 8.03 | % | 15,429,873 | 255,309 | 6.62 | % | |||||||||||||||||||||||||||
Purchased loans5 | 258,235 | 11,947 | 18.51 | % | — | — | — | % | |||||||||||||||||||||||||||
| Interest-earning deposits in other financial institutions | 1,867,823 | 25,688 | 5.50 | % | 1,362,744 | 13,126 | 3.85 | % | |||||||||||||||||||||||||||
Mortgage-backed and other investment securities4 | 238,092 | 3,162 | 5.31 | % | 264,673 | 3,615 | 5.46 | % | |||||||||||||||||||||||||||
| Stock of the regulatory agencies | 17,250 | 407 | 9.38 | % | 18,685 | 411 | 8.80 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 19,623,005 | 387,371 | 7.90 | % | 17,075,975 | 272,461 | 6.38 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 474,729 | 341,701 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 20,097,734 | $ | 17,417,676 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 13,951,710 | $ | 150,131 | 4.30 | % | $ | 10,045,861 | $ | 65,093 | 2.59 | % | |||||||||||||||||||||||
| Time deposits | 1,002,116 | 10,075 | 4.02 | % | 1,146,877 | 6,321 | 2.20 | % | |||||||||||||||||||||||||||
| Advances from the FHLB | 90,000 | 530 | 2.36 | % | 290,918 | 2,504 | 3.44 | % | |||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 22 | — | — | % | 33 | — | — | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 15,043,848 | 160,736 | 4.27 | % | 11,483,689 | 73,918 | 2.57 | % | |||||||||||||||||||||||||||
| Non-interest-bearing demand deposits | 2,789,378 | 4,001,370 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 254,906 | 198,916 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 2,009,602 | 1,733,701 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 20,097,734 | $ | 17,417,676 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 226,635 | $ | 198,543 | |||||||||||||||||||||||||||||||
Interest rate spread6 | 3.63 | % | 3.81 | % | |||||||||||||||||||||||||||||||
Net interest margin7 | 4.62 | % | 4.65 | % | |||||||||||||||||||||||||||||||
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.
5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
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.
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For the Six Months Ended | |||||||||||||||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (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 | $ | 17,075,797 | $ | 684,769 | 8.02 | % | $ | 15,082,455 | $ | 463,319 | 6.14 | % | |||||||||||||||||||||||
Non-purchased loans | 16,945,974 | 672,822 | 7.94 | % | 15,082,455 | 463,319 | 6.14 | % | |||||||||||||||||||||||||||
Purchased loans5 | 129,823 | 11,947 | 18.51 | % | — | — | — | % | |||||||||||||||||||||||||||
| Interest-earning deposits in other financial institutions | 1,867,119 | 51,404 | 5.51 | % | 1,145,975 | 18,757 | 3.27 | % | |||||||||||||||||||||||||||
Mortgage-backed and other investment securities6 | 235,380 | 6,336 | 5.38 | % | 270,324 | 6,986 | 5.17 | % | |||||||||||||||||||||||||||
| Stock of the regulatory agencies | 17,250 | 744 | 8.59 | % | 23,483 | 829 | 7.06 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 19,195,546 | 743,253 | 7.74 | % | 16,522,237 | 489,891 | 5.93 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 428,200 | 327,034 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 19,623,746 | $ | 16,849,271 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 13,438,664 | $ | 284,514 | 4.23 | % | $ | 8,927,706 | $ | 92,833 | 2.08 | % | |||||||||||||||||||||||
| Time deposits | 1,087,896 | 21,826 | 4.01 | % | 1,151,797 | 11,116 | 1.93 | % | |||||||||||||||||||||||||||
| Advances from the FHLB | 90,000 | 1,059 | 2.35 | % | 585,633 | 7,667 | 2.62 | % | |||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 27 | — | 7.41 | % | 27 | — | — | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 14,616,587 | 307,399 | 4.21 | % | 10,665,163 | 111,616 | 2.09 | % | |||||||||||||||||||||||||||
| Non-interest-bearing demand deposits | 2,802,887 | 4,292,481 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 228,603 | 192,094 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 1,975,669 | 1,699,533 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 19,623,746 | $ | 16,849,271 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 435,854 | $ | 378,275 | |||||||||||||||||||||||||||||||
Interest rate spread6 | 3.53 | % | 3.84 | % | |||||||||||||||||||||||||||||||
Net interest margin7 | 4.54 | % | 4.58 | % | |||||||||||||||||||||||||||||||
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.
5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
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.
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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our Banking Business segment’s 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 each based on the relative changes attributable to volume and changes attributable to rate.
For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||||||||
2023 vs 2022 | 2023 vs 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 37,144 | $ | 65,661 | $ | 102,805 | $ | 66,769 | $ | 154,681 | $ | 221,450 | |||||||||||||||||||||||
Non-purchased loans | 25,197 | 65,661 | 90,858 | 54,822 | 154,681 | 209,503 | |||||||||||||||||||||||||||||
Purchased loans1 | 11,947 | — | 11,947 | 11,947 | — | 11,947 | |||||||||||||||||||||||||||||
| Interest-earning deposits | 5,826 | 6,736 | 12,562 | 15,023 | 17,624 | 32,647 | |||||||||||||||||||||||||||||
| Securities | (356) | (97) | (453) | (789) | 139 | (650) | |||||||||||||||||||||||||||||
| Stock of the regulatory agencies, at cost | (33) | 29 | (4) | (245) | 160 | (85) | |||||||||||||||||||||||||||||
Total increase (decrease) in interest income | $ | 42,581 | $ | 72,329 | $ | 114,910 | $ | 80,758 | $ | 172,604 | $ | 253,362 | |||||||||||||||||||||||
| Increase / (decrease) in interest expense: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand and savings | $ | 31,517 | $ | 53,521 | $ | 85,038 | $ | 63,737 | $ | 127,944 | $ | 191,681 | |||||||||||||||||||||||
| Time deposits | (884) | 4,638 | 3,754 | (649) | 11,359 | 10,710 | |||||||||||||||||||||||||||||
| Advances from the FHLB | (1,357) | (617) | (1,974) | (5,890) | (718) | (6,608) | |||||||||||||||||||||||||||||
Total increase (decrease) in interest expense | $ | 29,276 | $ | 57,542 | $ | 86,818 | $ | 57,198 | $ | 138,585 | $ | 195,783 | |||||||||||||||||||||||
1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.
We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment:
For the Three Months Ended December 31, | For the Six Months Ended December 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Efficiency ratio | 30.96 | % | 46.29 | % | 36.78 | % | 49.45 | % | |||||||||||||||
| Return on average assets | 2.81 | % | 1.75 | % | 2.24 | % | 1.57 | % | |||||||||||||||
| Interest rate spread | 3.63 | % | 3.81 | % | 3.53 | % | 3.84 | % | |||||||||||||||
| Net interest margin | 4.62 | % | 4.65 | % | 4.54 | % | 4.58 | % | |||||||||||||||
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 our Company 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 securities financing operations.
Securities Business
For the three and six months ended December 31, 2023, our Securities Business segment had income before income taxes of $10.8 million and $23.3 million, respectively, compared to income before income taxes of $15.6 million and $24.5 million for the three and six months ended December 31, 2022. respectively.
For the three and six months ended December 31, 2023, net interest income increased $1.2 million or 24.7%, and $2.5 million or 27.0%, respectively, compared to net interest income for the three and six months ended December 31, 2022. The
44
increase was primarily driven by an increase in rates earned on interest-bearing cash deposit balances and margin lending and a lower average balances on lines of credit.
For the three months ended December 31, 2023, non-interest income decreased $3.4 million, or 9.3%, compared to non-interest income for the three months ended December 31, 2022. The decrease was primarily driven by lower broker dealer fee income. For the six months ended December 31, 2023, non-interest income increased $2.0 million, or 3.1%, compared to non-interest income for the six months ended December 31, 2022. The increase was primarily driven by higher advisory fees.
For the three and six months ended December 31, 2023, non-interest expense increased $2.7 million, or 10.7%, and $5.7 million or 11.5%, respectively, compared to non-interest expense for the three and six months ended December 31, 2022. The increase was primarily driven by higher salaries and related costs, higher broker dealer clearing charges offset by lower professional services expense.
The following table provides selected information for Axos Clearing:
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | |||||||||
| FDIC insured deposit program balances at banks | $ | 1,364,830 | $ | 1,627,053 | |||||||
Margin balances | $ | 192,315 | $ | 205,880 | |||||||
| Cash reserves for the benefit of customers | $ | 194,955 | $ | 149,059 | |||||||
| Securities lending: | |||||||||||
Interest-earning assets – securities borrowed | $ | 145,176 | $ | 134,339 | |||||||
Interest-bearing liabilities – securities loaned | $ | 155,492 | $ | 159,832 | |||||||
FINANCIAL CONDITION
Balance Sheet Analysis
Our total assets increased $1.3 billion, or 6.3%, to $21.6 billion, as of December 31, 2023, up from $20.3 billion at June 30, 2023. The increase in total assets was primarily due to an increase of $1.8 billion in loans, partially offset by a decrease in cash of $0.6 billion. Total liabilities increased $1.1 billion, primarily from an increase in deposits of $1.1 billion.
Loans
The following table sets forth the composition of the loan portfolio:
| December 31, 2023 | June 30, 2023 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Single Family - Mortgage & Warehouse | $ | 4,092,104 | 21.7 | % | $ | 4,173,833 | 25.1 | % | |||||||||||||||
Multifamily and Commercial Mortgage1 | 4,065,019 | 21.6 | % | 3,082,225 | 18.5 | % | |||||||||||||||||
Commercial Real Estate1 | 6,043,400 | 32.0 | % | 6,199,818 | 37.2 | % | |||||||||||||||||
| Commercial & Industrial - Non-RE | 4,177,461 | 22.1 | % | 2,639,650 | 15.8 | % | |||||||||||||||||
| Auto & Consumer | 477,275 | 2.5 | % | 546,264 | 3.3 | % | |||||||||||||||||
| Other | 5,150 | 0.1 | % | 10,236 | 0.1 | % | |||||||||||||||||
| Total gross loans | 18,860,409 | 100.0 | % | 16,652,026 | 100.0 | % | |||||||||||||||||
| Allowance for credit losses - loans | (251,749) | (166,680) | |||||||||||||||||||||
| Unaccreted discounts and loan fees | (344,306) | (28,618) | |||||||||||||||||||||
| Total net loans | $ | 18,264,354 | $ | 16,456,728 | |||||||||||||||||||
1 Includes PCD loans of $296.7 million in Multifamily and Commercial Mortgage and $44.5 million in Commercial Real Estate as of December 31, 2023. For further detail on PCD loans refer to Note 1—“Summary of Significant Accounting Policies”.
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 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
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interest only loans would be reported to management and the Board of Directors. As of December 31, 2023, the Company had $1.3 billion of interest-only mortgage loans with a weighted average LTV of 57.8%.
Asset Quality and Allowance for Credit Losses - Loans
Non-performing Assets
Non-performing loans are comprised of those 90 days or more past due and other non-accrual loans. Non-performing assets include non-performing loans plus, other real estate owned and repossessed vehicles. At December 31, 2023, our non-performing loans totaled $122.5 million, or 0.65% of total gross loans and our total non-performing assets totaled $129.8 million, or 0.60%, of total assets.
Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following:
| (Dollars in thousands) | December 31, 2023 | June 30, 2023 | Inc (Dec) | ||||||||||||||
| Non-performing assets: | |||||||||||||||||
| Non-accrual loans: | |||||||||||||||||
| Single Family - Mortgage & Warehouse | $ | 54,287 | $ | 30,714 | $ | 23,573 | |||||||||||
| Multifamily and Commercial Mortgage | 37,324 | 35,103 | 2,221 | ||||||||||||||
| Commercial Real Estate | 26,102 | 14,852 | 11,250 | ||||||||||||||
| Commercial & Industrial - Non-RE | 2,989 | 2,989 | — | ||||||||||||||
| Auto & Consumer | 1,770 | 1,457 | 313 | ||||||||||||||
| Other | 36 | 2,045 | (2,009) | ||||||||||||||
| Total non-performing loans | $ | 122,508 | $ | 87,160 | $ | 35,348 | |||||||||||
| Foreclosed real estate | 5,574 | 6,966 | (1,392) | ||||||||||||||
Repossessed vehicles—Autos | 1,743 | 1,133 | 610 | ||||||||||||||
| Total non-performing assets | $ | 129,825 | $ | 95,259 | $ | 34,566 | |||||||||||
| Total non-performing loans as a percentage of total loans | 0.65 | % | 0.52 | % | 0.13 | % | |||||||||||
| Total non-performing assets as a percentage of total assets | 0.60 | % | 0.47 | % | 0.13 | % | |||||||||||
Total non-performing assets increased from $95.3 million at June 30, 2023 to $129.8 million at December 31, 2023. The increase in non-performing assets was primarily attributable to increases in single-family mortgage loans and commercial real estate.
Management establishes an allowance for credit losses based upon its evaluation of the expected lifetime credit losses related to the amortized cost basis of loans on the balance sheet. The net charge-off rate for the six months ended December 31, 2023 was 0.02%, compared to 0.05% for the six months ended December 31, 2022. Of the 0.02% of net charge-offs for the three months ended December 31, 2023, 0.01% were related to Auto loans covered by insurance policies. 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, 2023, see “Results of Operations—Provision for Credit Losses.” We believe that the lower average LTV in the loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks. The resolution of existing other real estate owned and non-performing loans should not have a significant adverse impact on our operating results.
Total available-for-sale securities were $239.8 million as of December 31, 2023, compared with $232.4 million at June 30, 2023. During the six months ended December 31, 2023, we purchased $9.6 million of securities and received principal repayments of approximately $6.0 million. The remainder of the change for the available-for-sale portfolio is attributable to changes in unrealized losses and accretion.
Deposits
Deposits increased by $1.1 billion, or 6.3%, to $18.2 billion at December 31, 2023, from $17.1 billion at June 30, 2023. Interest-bearing demand and savings increased $1.5 billion and time deposits decreased $0.3 billion. Non-interest bearing deposits decreased by $0.1 billion as of December 31, 2023, compared with June 30, 2023.
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The following table sets forth the composition of the deposit portfolio:
| December 31, 2023 | June 30, 2023 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Rate1 | Amount | Rate1 | |||||||||||||||||||
| Non-interest bearing | $ | 2,833,657 | — | % | $ | 2,898,150 | — | % | |||||||||||||||
| Interest-bearing: | |||||||||||||||||||||||
| Demand | 3,340,669 | 4.27 | % | 3,334,615 | 2.43 | % | |||||||||||||||||
| Savings | 11,062,139 | 4.32 | % | 9,575,781 | 4.20 | % | |||||||||||||||||
| Total interest-bearing demand and savings | 14,402,808 | 4.31 | % | 12,910,396 | 3.74 | % | |||||||||||||||||
| Time deposits: | |||||||||||||||||||||||
$250 and under2 | 588,502 | 4.11 | % | 932,436 | 3.72 | % | |||||||||||||||||
| Greater than $250 | 378,945 | 4.77 | % | 382,126 | 4.36 | % | |||||||||||||||||
| Total time deposits | 967,447 | 4.37 | % | 1,314,562 | 3.91 | % | |||||||||||||||||
Total interest bearing2 | 15,370,255 | 4.31 | % | 14,224,958 | 3.76 | % | |||||||||||||||||
| Total deposits | $ | 18,203,912 | 3.64 | % | $ | 17,123,108 | 3.12 | % | |||||||||||||||
1 Based on weighted-average stated interest rates at end of period.
2 The total interest-bearing includes brokered deposits of $1,783.1 million and $2,028.5 million as of December 31, 2023 and June 30, 2023, respectively, of which $381.6 million and $690.9 million, respectively, are time deposits classified as $250,000 and under.
The following table sets forth the number of deposit accounts by type:
| December 31, 2023 | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Non-interest bearing | 47,846 | 45,640 | 43,747 | ||||||||||||||
| Interest-bearing checking and savings accounts | 461,293 | 427,299 | 365,714 | ||||||||||||||
| Time deposits | 5,682 | 6,340 | 7,475 | ||||||||||||||
Total number of deposit accounts | 514,821 | 479,279 | 416,936 | ||||||||||||||
Total Bank deposits that exceeded the FDIC insurance limit of $250,000 or were not collateralized at both December 31, 2023 and June 30, 2023 were $1.9 billion and 1.7 billion, respectively. The maturities of time deposits that exceeded the FDIC insurance limit of $250,000 were as follows:
| (Dollars in thousands) | December 31, 2023 | ||||
| 3 months or less | $ | 145,459 | |||
| 3 months to 6 months | 187,778 | ||||
| 6 months to 12 months | 30,051 | ||||
| Over 12 months | 15,657 | ||||
| Total | $ | 378,945 | |||
Borrowings
The following table sets forth the composition of our borrowings and the interest rates:
| December 31, 2023 | June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | Weighted Average Rate | Balance | Weighted Average Rate | Balance | Weighted Average Rate | ||||||||||||||||||||||||||||||||
| FHLB Advances | $ | 90,000 | 2.32 | % | $ | 90,000 | 2.32 | % | $ | 100,000 | 2.26 | % | ||||||||||||||||||||||||||
| Borrowings, subordinated notes and debentures | 341,086 | 4.61 | % | 361,779 | 4.69 | % | 334,077 | 4.59 | % | |||||||||||||||||||||||||||||
| Total borrowings | $ | 431,086 | 4.13 | % | $ | 451,779 | 4.22 | % | $ | 434,077 | 4.05 | % | ||||||||||||||||||||||||||
| Weighted average cost of borrowings during the quarter | 4.43 | % | 4.58 | % | 4.36 | % | ||||||||||||||||||||||||||||||||
| Borrowings as a percent of total assets | 1.99 | % | 2.22 | % | 2.32 | % | ||||||||||||||||||||||||||||||||
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 origination of loans and to provide us with interest rate risk protection should rates rise.
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Stockholders’ Equity
Stockholders’ equity increased $161.1 million to $2,078.2 million at December 31, 2023, compared to $1,917.2 million at June 30, 2023. The increase was primarily the result of net income for the six months ended December 31, 2023 of $234.4 million partially offset by repurchases of $83.2 million of common shares.
During the six months ended December 31, 2023, the Company repurchased a total of $83.2 million or 2,255,509 shares of common stock at an average price of $36.88 share. The Company had $20.5 million remaining under the 2023 Board authorized stock repurchase program as of December 31, 2023.
LIQUIDITY
Cash flow information is as follows:
For the Six Months Ended | |||||||||||
| December 31, | |||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||
| Operating Activities | $ | 147,094 | $ | 177,076 | |||||||
| Investing Activities | $ | (1,736,229) | $ | (1,411,404) | |||||||
| Financing Activities | $ | 970,772 | $ | 1,612,142 | |||||||
During the six months ended December 31, 2023, we had net cash inflows from operating activities of $147.1 million compared to inflows of $177.1 million for the six months ended December 31, 2022. 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 $1,736.2 million for the six months ended December 31, 2023, while outflows totaled $1,411.4 million for the six months ended December 31, 2022. The increase in outflows was primarily due to higher principal repayments, partially offset by increased originations and purchases of loans held for investment related to the FDIC Loan Purchase and acquisition of marine floor financing loans in the six months ended December 31, 2023.
Net cash inflows from financing activities totaled $970.8 million for the six months ended December 31, 2023, compared to net cash inflows from financing activities of $1,612.1 million for the six months ended December 31, 2022. The primary driver behind the decrease in net cash inflows was a lower net increase in deposits in the six months ended December 31, 2023.
As of December 31, 2023, the Bank could borrow up to 35% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and available-for-sale securities to the FHLB. At December 31, 2023, the Company had $2,696.7 million available immediately and $4,080.8 million available with additional collateral and the Company had $5,155.8 million of loans and $159.2 thousand of securities pledged to the FHLB. We also had 5 unsecured federal funds purchase lines with five different banks totaling $250.0 million, under which no borrowings were outstanding at December 31, 2023.
The Bank has the ability to borrow short-term from the FRBSF Discount Window. At December 31, 2023, the Bank did not have any borrowings outstanding and the amount available from this source was $3,136.1 million. The credit line is collateralized by consumer loans and mortgage-backed securities. At December 31, 2023 we had $3,915.0 million of loans pledged to the FRBSF.
Axos Clearing has a $150 million secured line of credit available for borrowing, as needed. As of December 31, 2023, there was $6 million outstanding on this credit facility. This credit facility bears interest at rates based on the Federal Funds rate and is due upon demand.
Axos Clearing also has $210 million of unsecured lines of credit available for limited purpose borrowing, which includes $100 million from Axos Financial, Inc. As of December 31, 2023, there was no amount outstanding on this credit facility. This credit facility bears interest at rates based on the Federal Funds rate and is due upon demand.
We view our liquidity sources to be stable and adequate for our anticipated needs and contingencies for both the short- and long-term. Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of December 31, 2023, we believe we have the ability to increase our level of deposits, and have available other potential sources of funding, to address our liquidity needs for the foreseeable future.
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OFF-BALANCE SHEET COMMITMENTS
At December 31, 2023, we had commitments to fund loans of $3,502.4 million, and commitments to sell loans with an aggregate outstanding principal balance of $13.7 million. We have no commitments to purchase available-for-sale securities as of December 31, 2023.
In the normal course of business, Axos Clearing’s customer, broker-dealer, and registered investment advisor 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.
CAPITAL RESOURCES AND REQUIREMENTS
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, 2023, 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, 2023 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, 2023 and June 30, 2023 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. In fiscal year 2024, this cumulative amount is phased out of regulatory capital at 50% and the cumulative amount will be 100% phased out of regulatory capital beginning in fiscal year 2026.
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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 thousands) | December 31, 2023 | June 30, 2023 | December 31, 2023 | June 30, 2023 | |||||||||||||||||||||||||||||||
| Regulatory Capital: | |||||||||||||||||||||||||||||||||||
| Tier 1 | $ | 1,951,838 | $ | 1,796,352 | $ | 2,049,461 | $ | 1,866,705 | |||||||||||||||||||||||||||
| Common equity tier 1 | $ | 1,951,838 | $ | 1,796,352 | $ | 2,049,461 | $ | 1,866,705 | |||||||||||||||||||||||||||
| Total capital | $ | 2,454,167 | $ | 2,269,237 | $ | 2,214,559 | $ | 2,007,006 | |||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Average adjusted | $ | 20,792,068 | $ | 20,059,002 | $ | 20,046,527 | $ | 19,284,378 | |||||||||||||||||||||||||||
| Total risk-weighted | $ | 17,795,583 | $ | 16,414,213 | $ | 16,713,359 | $ | 16,054,633 | |||||||||||||||||||||||||||
| Regulatory Capital Ratios: | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage (to adjusted average assets) | 9.39 | % | 8.96 | % | 10.22 | % | 9.68 | % | 5.00% | 4.00% | |||||||||||||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 10.97 | % | 10.94 | % | 12.26 | % | 11.63 | % | 6.50% | 4.50% | |||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | 10.97 | % | 10.94 | % | 12.26 | % | 11.63 | % | 8.00% | 6.00% | |||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | 13.79 | % | 13.82 | % | 13.25 | % | 12.50 | % | 10.00% | 8.00% | |||||||||||||||||||||||||
Basel III requires 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, 2023 and June 30, 2023, 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, 2023 | June 30, 2023 | |||||||||
| Net capital | $ | 103,454 | $ | 35,221 | |||||||
| Excess Capital | $ | 98,397 | $ | 29,905 | |||||||
| Net capital as a percentage of aggregate debit items | 40.92 | % | 13.25 | % | |||||||
| Net capital in excess of 5% aggregate debit items | $ | 90,812 | $ | 21,930 | |||||||
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, 2023, the Company calculated a deposit requirement of $137.3 million and maintained a deposit of $172.9 million. On January 2, 2024, the Company made a withdrawal of $20.0 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, 2023, the Company
50
calculated a deposit requirement of $7.8 million and maintained a deposit of $22.1 million. On January 2, 2024, the Company made a deposit of $1.0 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For further discussion of the Company’s market risk, see Item 7A—“Quantitative and Qualitative Disclosures About Market Risk” in the 2023 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, 2023 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, 2023 | |||||||||||||||||||||||||||||
| (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 | $ | 1,535,399 | $ | — | $ | — | $ | — | $ | 1,535,399 | |||||||||||||||||||
Available-for-sale securities1 | 205,515 | 3,532 | 13,781 | 16,984 | 239,812 | ||||||||||||||||||||||||
| Stock of the FHLB, at cost | 17,250 | — | — | — | 17,250 | ||||||||||||||||||||||||
Loans2 | 13,097,222 | 1,287,416 | 3,640,361 | 239,538 | 18,264,537 | ||||||||||||||||||||||||
| Loans held for sale | 13,468 | — | — | — | 13,468 | ||||||||||||||||||||||||
| Total interest-earning assets | 14,868,854 | 1,290,948 | 3,654,142 | 256,522 | 20,070,466 | ||||||||||||||||||||||||
| Non-interest earning assets | — | — | — | — | 687,390 | ||||||||||||||||||||||||
| Total assets | $ | 14,868,854 | $ | 1,290,948 | $ | 3,654,142 | $ | 256,522 | $ | 20,757,856 | |||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||
Interest-bearing deposits3 | $ | 14,312,416 | $ | 958,363 | $ | 109,991 | $ | 37 | $ | 15,380,807 | |||||||||||||||||||
| Advances from the FHLB | — | 30,000 | — | 60,000 | 90,000 | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 14,312,416 | 988,363 | 109,991 | 60,037 | 15,470,807 | ||||||||||||||||||||||||
| Other non-interest-bearing liabilities | — | — | — | — | 3,192,359 | ||||||||||||||||||||||||
| Stockholders’ equity | — | — | — | — | 2,094,690 | ||||||||||||||||||||||||
| Total liabilities and equity | $ | 14,312,416 | $ | 988,363 | $ | 109,991 | $ | 60,037 | $ | 20,757,856 | |||||||||||||||||||
| Net interest rate sensitivity gap | $ | 556,438 | $ | 302,585 | $ | 3,544,151 | $ | 196,485 | $ | 4,599,659 | |||||||||||||||||||
| Cumulative gap | $ | 556,438 | $ | 859,023 | $ | 4,403,174 | $ | 4,599,659 | $ | 4,599,659 | |||||||||||||||||||
| Net interest rate sensitivity gap—as a % of total interest earning assets | 2.77 | % | 1.51 | % | 17.66 | % | 0.98 | % | 22.92 | % | |||||||||||||||||||
Cumulative gap—as % of total cumulative interest earning assets | 2.77 | % | 4.28 | % | 21.94 | % | 22.92 | % | 22.92 | % | |||||||||||||||||||
1 Comprised primarily of non-agency and U.S. government agency mortgage-backed securities. The table reflects contractual repricing dates.
2 Loans includes loan premiums, discounts and unearned fees. The table reflects either contractual repricing dates or maturities.
3 The table assumes that the principal balances for demand deposits and savings accounts will reprice in the first year.
The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2023 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.
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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:
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, 2023 | |||||||||||||||||
| (Dollars in thousands) | Net Present Value | Percentage Change from Base | Net Present Value as a Percentage of Assets | ||||||||||||||
| Up 200 basis points | $ | 2,093,506 | (1.0) | % | 10.2 | % | |||||||||||
| Up 100 basis points | $ | 2,108,770 | (0.3) | % | 10.3 | % | |||||||||||
| Base | $ | 2,114,101 | — | % | 10.2 | % | |||||||||||
| Down 100 basis points | $ | 2,109,467 | (0.2) | % | 10.2 | % | |||||||||||
| Down 200 basis points | $ | 2,096,831 | (0.8) | % | 10.0 | % | |||||||||||
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. The relative levels of interest rates used in the scenarios are based on the forward yield curve as of the balance sheet date and asset prepayment, deposit runoff and repricing assumptions utilize such relative interest rates. In addition, deposit repricing and runoff assumptions are generally based on historical behaviors over prior interest rate cycles. Results of these modeled outputs 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 changes 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, broker-dealer, and registered investment advisor 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.
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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. During the quarter ended December 31, 2023, the Company implemented a new enterprise resource planning (“ERP”) system to replace certain of its existing financial and operating systems. As a result of this implementation, certain internal controls over financial reporting have been automated, modified, or implemented to address the new control environment associated with this ERP system. Other than the implementation of this ERP system, there were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2023 (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.
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PART II—OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The information set forth in Note 9—“Commitments And Contingencies” to the 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 Item 1A. “Risk Factors” in our 2023 Form 10-K. 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.
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 stock retained in connection with net settlement of restricted stock awards during the quarter ended December 31, 2023.
| (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, 2023 | |||||||||||||||||||||||
| October 1, 2023 to October 31, 2023 | 1,377,080 | $ | 36.56 | 1,377,080 | $ | 28,785,217 | |||||||||||||||||
| November 1, 2023 to November 30, 2023 | 230,221 | 36.09 | 230,221 | 20,475,752 | |||||||||||||||||||
| December 1, 2023 to December 31, 2023 | — | — | — | — | |||||||||||||||||||
| For the Three Months Ended December 31, 2023 | 1,607,301 | $ | 36.49 | 1,607,301 | $ | 20,475,752 | |||||||||||||||||
Stock Retained in Net Settlement2 | |||||||||||||||||||||||
| October 1, 2023 to October 31, 2023 | 73 | ||||||||||||||||||||||
| November 1, 2023 to November 30, 2023 | 609 | ||||||||||||||||||||||
| December 1, 2023 to December 31, 2023 | 62 | ||||||||||||||||||||||
| For the Three Months Ended December 31, 2023 | 744 | ||||||||||||||||||||||
1 On April 27, 2023, the Company announced a program to repurchase up to $100 million of its common stock. The share repurchase program will continue in effect until terminated by the Board of Directors of the Company.
2 The Amended and Restated 2014 Stock Incentive Plan permits 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
| Exhibit Number | Description | Incorporated By Reference to | |||||||||
| 31.1 | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||
| 31.2 | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||
| 32.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||||
| 32.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||||
| 101.INS | Inline XBRL Instance Document | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith. | |||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | Filed herewith. | |||||||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | Filed herewith. | |||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | Filed herewith. | |||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Document | Filed herewith. | |||||||||
| 104 | Cover Page Interactive Data File | Formatted as Inline XBRL and contained in Exhibit 101 | |||||||||
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SIGNATURES
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 30, 2024 | By: | /s/ Gregory Garrabrants | ||||||||||||||
| Gregory Garrabrants President and Chief Executive Officer (Principal Executive Officer) | |||||||||||||||||
| Dated: | January 30, 2024 | By: | /s/ Derrick K. Walsh | ||||||||||||||
| Derrick K. Walsh Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||||||||
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