Axos Financial(AX) - 2021 Q4 - Annual Report

PART I Business Axos Financial is a diversified financial services company operating through its Banking and Securities business segments - Axos Financial is a financial holding company with a diversified model, providing banking and securities products through online and low-cost distribution channels[9] - The company operates through two primary segments: the Banking Business and the Securities Business[13] - A key business strategy is to integrate the clearing and wealth management platforms with the banking platform to create a unified customer experience and generate low-cost deposits for the Banking Business[10] Financial Snapshot as of June 30, 2021 | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $14.3 | | Loans | $11.5 | | Total Deposits | $10.8 | | Borrowings | $0.6 | Banking Business The Banking Business segment focuses on nationwide asset origination and deposit generation through various digital channels - The Banking Business distributes deposit and loan products through multiple channels, including national online brands, affinity groups, commercial banking divisions, and commission-based sales forces[16][17] - At June 30, 2021, demand and savings accounts constituted 86.0% of total deposits, reflecting a strong core deposit base[54] Loan Portfolio Composition (in thousands) | Loan Type | 2021 Amount | 2021 Percent | 2020 Amount | 2020 Percent | | :--- | :--- | :--- | :--- | :--- | | Single Family - Mortgage & Warehouse | $4,359,472 | 37.8% | $4,722,304 | 44.2% | | Multifamily and Commercial Mortgage | $2,470,454 | 21.4% | $2,263,054 | 21.1% | | Commercial Real Estate | $3,180,453 | 27.5% | $2,297,920 | 21.5% | | Commercial & Industrial - Non-RE | $1,123,869 | 9.7% | $885,320 | 8.3% | | Auto & Consumer | $362,180 | 3.1% | $341,365 | 3.1% | | Other | $58,316 | 0.5% | $193,479 | 1.8% | | Total Loans Held for Investment | $11,554,744 | 100.0% | $10,703,442 | 100.0% | Deposit Composition (in thousands) | Deposit Type | 2021 Amount | 2021 Rate | 2020 Amount | 2020 Rate | | :--- | :--- | :--- | :--- | :--- | | Non-interest-bearing | $2,474,424 | — | $1,936,661 | — | | Interest-bearing Demand | $3,369,845 | 0.15% | $3,456,127 | 0.37% | | Savings | $3,458,687 | 0.21% | $3,697,188 | 0.78% | | Time deposits | $1,512,841 | 1.22% | $2,246,718 | 1.91% | | Total Deposits | $10,815,797 | 0.29% | $11,336,694 | 0.75% | Securities Business The Securities Business provides clearing, custody, and digital investment advisory services through Axos Clearing and Axos Invest - Axos Clearing provides comprehensive back-office services, including trade execution, clearance, and record keeping to 69 financial organizations as of June 30, 2021[67] - Axos Invest offers both self-directed and digital advisory services, which are integrated into the universal digital banking platform to create a holistic financial management ecosystem for customers[69] Supervision and Regulation The company and its subsidiaries are subject to extensive regulation by the Federal Reserve, OCC, FDIC, SEC, and FINRA - Axos Financial, Inc. is regulated as a savings and loan holding company by the Federal Reserve, while Axos Bank's primary regulator is the OCC, with the FDIC as its deposit insurer[90] - The Company and the Bank are subject to Basel III capital rules, requiring minimum ratios for risk-based capital, and both entities exceeded the 'well-capitalized' thresholds as of June 30, 2021[93][95][98] - The broker-dealer subsidiaries are subject to extensive regulation by the SEC and FINRA, including stringent net capital requirements under Rule 15c3-1 and customer protection rules[136][141][144] - Having surpassed $10 billion in assets, the Bank is now under the direct supervision of the Consumer Financial Protection Bureau (CFPB) and subject to the Durbin Amendment[127][128] Risk Factors The company faces risks from macroeconomic conditions, regulation, cybersecurity, and its mortgage-heavy loan portfolio Risks Relating to Macroeconomic Conditions The company's performance is highly sensitive to interest rate changes, economic downturns, and the upcoming LIBOR transition - Net interest income is highly dependent on interest rate movements, as assets and liabilities reprice at different times and are tied to different indices[149] - A significant economic downturn, particularly in California where 72.4% of the mortgage portfolio is located, could lead to higher loan delinquencies and write-downs[152][179] - The planned discontinuation of LIBOR after 2021 introduces uncertainty and could adversely affect the value and performance of financial instruments indexed to it[155][156] Risks Related to COVID-19 and the Federal Paycheck Protection Program The COVID-19 pandemic introduces uncertainty and exposes the bank to compliance and credit risks related to the PPP - The COVID-19 pandemic has contributed to increased unemployment, financial market volatility, and a higher risk of delinquencies, defaults, and foreclosures in the company's loan portfolio[159] - Participation in the PPP subjects the bank to risks of non-compliance with SBA rules, which could lead to the denial of loan guarantees or require refunding of fees[166] Risks Relating to our Business Operations Operational risks include the subjectivity of accounting estimates, credit risk in the C&I portfolio, and ongoing litigation - The adoption of the CECL accounting standard for credit losses requires significant management judgment and could increase volatility in the allowance for credit losses[188][189] - The broker-dealer business is subject to significant risks, including credit risk from counterparty failure, as exemplified by a $15.3 million bad debt expense in March 2019 from a correspondent default[197][198] - The company faces ongoing litigation risk, including putative class action and derivative lawsuits alleging violations of federal securities laws, which could require significant management time and legal expenses[204][205] Technology Risks in our Online Business The company's online business model is heavily reliant on technology and faces risks from third-party providers and cybersecurity threats - The company relies substantially on third-party service providers for core banking and securities transaction technology, making it vulnerable to service interruptions or terminations[226][227] - Security breaches or cybersecurity attacks could expose the company to loss of customer information, litigation, and significant legal and financial liability[233][234] Properties The company leases its principal executive offices in Las Vegas, Nevada and additional office space in San Diego, California - Principal offices are located at 9205 West Russell Road, Suite 400, Las Vegas, NV 89148[244] - The company leases approximately 27,100 sq. ft. in Las Vegas (leases expire Dec 2023) and 182,000 sq. ft. in San Diego (leases expire June 2030)[244] Legal Proceedings The company is involved in several class action and shareholder derivative lawsuits alleging violations of federal securities laws - The company is a defendant in a consolidated class action lawsuit (In re BofI Holding, Inc. Securities Litigation) alleging violations of the Securities Exchange Act of 1934[246] - A separate putative class action (Mandalevy Case) makes similar allegations based on a March 2017 media article[248] - Six shareholder derivative actions have been filed against certain officers and directors, alleging breach of fiduciary duty, mismanagement, and unjust enrichment[250] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'AX', with earnings retained for growth and stock repurchases - The company's common stock trades on the New York Stock Exchange under the symbol "AX"[254] - The company has never paid a cash dividend on its common stock and does not expect to in the foreseeable future, retaining earnings for growth and repurchases[255] - A stock repurchase program authorizes up to $200 million in buybacks; in FY 2021, the company repurchased $16.8 million of stock, with $52.8 million remaining available[257] Selected Financial Data This section presents a five-year summary of key financial data, showing growth in assets, loans, and net income Selected Financial Data (Fiscal Year Ended June 30, in thousands, except per share data) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Assets | $14,265,565 | $13,851,900 | $11,220,238 | | Loans, net | $11,414,814 | $10,631,349 | $9,382,124 | | Total Deposits | $10,815,797 | $11,336,694 | $8,983,173 | | Total Stockholders' Equity | $1,400,936 | $1,230,846 | $1,073,050 | | Net Interest Income | $538,742 | $477,611 | $408,605 | | Net Income | $215,707 | $183,438 | $155,131 | | Diluted EPS | $3.56 | $2.98 | $2.48 | | Return on Average Assets | 1.52% | 1.53% | 1.51% | | Return on Average Common Equity | 16.51% | 15.65% | 15.40% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased in fiscal 2021, driven by higher net interest income, while the company remains well-capitalized Results of Operations Fiscal 2021 net interest income grew 12.8% due to lower funding costs, offsetting an increase in non-interest expense - The increase in net interest income was driven by a $66.1 million decrease in interest expense, primarily due to lower rates paid on deposits[309][310][311] - Non-interest income was boosted by a $21.5 million increase in mortgage banking income, but this was partially offset by a $17.1 million decrease in banking and service fees[314] Comparison of Key Income Statement Items (FY2021 vs. FY2020, in millions) | Item | FY 2021 | FY 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $538.7 | $477.6 | $61.1 | 12.8% | | Provision for Credit Losses | $23.8 | $42.2 | ($18.4) | -43.6% | | Non-Interest Income | $105.3 | $103.0 | $2.3 | 2.2% | | Non-Interest Expense | $314.5 | $275.8 | $38.7 | 14.0% | | Net Income | $215.7 | $183.4 | $32.3 | 17.6% | Financial Condition Total assets grew 3.0% to $14.3 billion, though non-performing assets increased to 1.10% of total assets - Total assets increased by $0.4 billion to $14.3 billion, primarily due to an $0.8 billion net increase in loans, funded by a $0.9 billion decrease in cash[369] - The allowance for credit losses increased by 75.4% to $133.0 million, representing 1.15% of total loans, largely due to the adoption of the CECL accounting standard[378][379] Non-Performing Assets (in thousands) | Metric | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Total non-performing loans and leases | $145,195 | $87,941 | | Total non-performing assets | $151,977 | $94,349 | | Non-performing assets as a % of total assets | 1.10% | 0.68% | Liquidity and Capital Resources The company maintains strong liquidity and capital, with both the holding company and bank exceeding 'well-capitalized' minimums - Primary sources of liquidity are deposits and advances from the Federal Home Loan Bank (FHLB); at June 30, 2021, the company had $2.3 billion in immediate borrowing capacity from the FHLB[380][381] - Axos Clearing maintained excess net capital of $27.9 million above its regulatory requirement of $8.0 million as of June 30, 2021[398] Regulatory Capital Ratios as of June 30, 2021 | Ratio | Axos Financial, Inc. | Axos Bank | "Well Capitalized" Minimum | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 11.36% | 12.28% | 6.50% | | Tier 1 capital | 11.36% | 12.28% | 8.00% | | Total capital | 13.78% | 13.21% | 10.00% | | Tier 1 leverage | 8.82% | 9.45% | 5.00% | Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective as of June 30, 2021 - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[422] - Management assessed internal control over financial reporting as effective as of June 30, 2021, based on the COSO framework; this assessment was audited by BDO USA, LLP, which issued an unqualified opinion[425][426][429] - Changes were made to internal controls over financial reporting due to the adoption of the new credit loss standard, ASC 326, on July 1, 2020[426] PART III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[434][435] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[436] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[437] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[438] Principal Accountant Fees and Services Information regarding accountant fees and services is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[439] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[441][442]