Axos Financial(AX) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Axos Financial's unaudited condensed consolidated financial statements for Q4 and H1 2021 and 2020, with notes on accounting, acquisitions, and key financial metrics Condensed Consolidated Balance Sheets Total assets grew to $15.5 billion by December 31, 2021, driven by increased loans and deposits, reflecting overall balance sheet expansion | Metric | Dec 31, 2021 (in thousands) | Jun 30, 2021 (in thousands) | Change (in thousands) | |:---------------------------|:----------------------------|:----------------------------|:----------------------| | Total Assets | $15,547,947 | $14,265,565 | $1,282,382 | | Loans—net | $12,607,179 | $11,414,814 | $1,192,365 | | Total Deposits | $12,269,172 | $10,815,797 | $1,453,375 | | Total Liabilities | $14,024,790 | $12,864,629 | $1,160,161 | | Total Stockholders' Equity | $1,523,157 | $1,400,936 | $122,221 | Condensed Consolidated Statements of Income Net income increased for both Q4 and H1 2021, driven by higher net interest income and reduced credit loss provisions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Income | $145,568 | $134,092 | $292,210 | $261,419 | | Provision for Credit Losses | $4,000 | $8,000 | $8,000 | $19,800 | | Non-Interest Income | $30,787 | $28,718 | $57,489 | $64,573 | | Non-Interest Expense | $86,019 | $76,297 | $170,450 | $151,843 | | Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Basic EPS | $1.02 | $0.93 | $2.04 | $1.82 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income rose for Q4 and H1 2021, primarily due to increased net income, despite unrealized losses on securities | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Net unrealized gain (loss) from available-for-sale securities, net of tax | $(656) | $906 | $(1,163) | $2,188 | | Comprehensive Income | $60,131 | $55,691 | $119,834 | $109,995 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $1.52 billion by December 31, 2021, driven by net income and stock compensation | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Common Stock | $684 | $681 | $677 | | Additional Paid-in Capital | $441,061 | $432,550 | $420,895 | | Accumulated Other Comprehensive Income (Loss) | $1,344 | $2,507 | $1,251 | | Retained Earnings | $1,308,725 | $1,187,728 | $1,079,828 | | Treasury Stock | $(228,657) | $(222,530) | $(215,169) |\ | Total Stockholders' Equity | $1,523,157 | $1,400,936 | $1,287,482 | Condensed Consolidated Statements of Cash Flows H1 2021 saw net cash outflows from operating and investing activities, offset by significant financing inflows from increased deposits | Cash Flow Activity (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------------------|:----------------------------|:----------------------------| | Operating Activities | $(76,773) | $284,417 | | Investing Activities | $(1,132,694) | $(1,015,293) | | Financing Activities | $1,290,048 | $223,552 | | Net Change in Cash and Cash Equivalents | $80,581 | $(507,324) | | Cash and Cash Equivalents—End of period | $1,118,358 | $1,443,195 | Notes to Condensed Consolidated Financial Statements Detailed notes disclose accounting policies, acquisitions, fair value, securities, loans, equity, EPS, commitments, and segment performance 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited financial statements adhere to GAAP, with significant accounting policies detailed in the 10-K and no new standards adopted in FY2022 - The condensed consolidated financial statements are unaudited and reflect all normal and recurring adjustments necessary for a fair statement of financial condition and results of operations[28] - No new accounting standards have been adopted for the fiscal year beginning July 1, 2021[29] 2. ACQUISITIONS Axos Clearing acquired ETRADE Advisor Services for $54.8 million in cash, adding fee income, a tech platform, and low-cost deposits - On August 2, 2021, Axos Clearing, LLC acquired ETRADE Advisor Services (EAS), rebranded as Axos Advisor Services (AAS), for $54.8 million in cash[31][34][132] - The acquisition adds incremental fee income, a turnkey technology platform for independent registered investment advisors, and low-cost deposits[31][132] | Acquired Asset/Liability (in thousands) | Fair Value | |:----------------------------------------|:-----------| | Tangible assets acquired | $6,400 | | Liabilities assumed | $3,100 | | Identifiable intangible assets | $27,060 | | Goodwill | $24,400 | 3. FAIR VALUE Financial assets and liabilities are measured at fair value using a hierarchy, with significant Level 3 assets including Non-Agency MBS and MSRs - Fair value is defined as the exit price in an orderly transaction between market participants, maximizing observable inputs and minimizing unobservable inputs[37] | Financial Instrument (in thousands) | Fair Value (Dec 31, 2021) | Level 1 | Level 2 | Level 3 | |:------------------------------------|:--------------------------|:--------|:--------|:--------| | Securities—Trading: Municipal | $1,223 | $0 | $1,223 | $0 | | Securities—Available-for-Sale: | $139,581 | $0 | $80,829 | $58,752 | | Loans Held for Sale | $27,428 | $0 | $27,428 | $0 | | Mortgage servicing rights | $20,110 | $0 | $0 | $20,110 | | Other assets—Derivative instruments | $1,462 | $0 | $0 | $1,462 | - Significant unobservable inputs for residential mortgage-backed securities include projected prepayment rates, probability of default, and projected loss severity[48] 4. SECURITIES The debt securities portfolio totaled $139.6 million, with available-for-sale securities showing $2.9 million in net unrealized gains before tax | Security Type (in thousands) | Fair Value (Dec 31, 2021) | Amortized Cost (Available-for-sale) | Unrealized Gains (Available-for-sale) | Unrealized Losses (Available-for-sale) | |:-----------------------------------------|:--------------------------|:------------------------------------|:--------------------------------------|:---------------------------------------| | U.S. agencies MBS | $29,231 | $29,376 | $214 | $(359) | | Non-agency MBS | $58,752 | $56,949 | $2,152 | $(349) | | Municipal | $3,536 | $3,467 | $69 | $0 | | Asset-backed securities and structured notes | $48,062 | $46,933 | $1,129 | $0 | | Total Debt Securities | $139,581 | $136,725 | $3,564 | $(708) | - As of December 31, 2021, there were eight securities in a continuous loss position for a period of more than 12 months, and eleven securities in a continuous loss position for a period of less than 12 months[65] | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:------------------------------------------------------------------------------------|:-------------|:-------------| | Available-for-sale debt securities—net unrealized gains (losses) | $2,856 | $4,507 | | Tax benefit (expense) | $(667) | $(1,155) | | Net unrealized gain (loss) on investment securities in accumulated other comprehensive income (loss) | $1,344 | $2,507 | 5. LOANS & ALLOWANCE FOR CREDIT LOSSES Gross loans grew to $12.8 billion, with the allowance for credit losses at $140.5 million and nonaccrual loans at 1.14% of total gross loans | Loan Category (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Single Family - Mortgage & Warehouse | $4,281,646 | $4,359,472 | | Multifamily and Commercial Mortgage | $2,483,932 | $2,470,454 | | Commercial Real Estate | $3,857,367 | $3,180,453 | | Commercial & Industrial - Non-RE | $1,631,811 | $1,123,869 | | Auto & Consumer | $478,636 | $362,180 | | Other | $22,282 | $58,316 | | Total gross loans | $12,755,674 | $11,554,744 | | Allowance for credit losses - loans | $(140,489) | $(132,958) | | Total net loans | $12,607,179 | $11,414,814 | | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:------------------------------|:-------------|:-------------| | Total nonaccrual loans | $145,933 | $145,195 | | Nonaccrual loans to total loans | 1.14% | 1.26% | - Approximately 83.82% of the Bank's nonaccrual loans at December 31, 2021, were single family first mortgages[76] 6. EQUITY AND STOCK-BASED COMPENSATION Stockholders approved an additional one million shares for the 2014 Stock Incentive Plan, with $8.5 million in stock award expense recognized - Stockholders approved the Amended and Restated 2014 Stock Incentive Plan, reserving one million additional shares for purposes of the Company's equity compensation[89] - During the six months ended December 31, 2021, the Company granted 781,030 restricted stock unit awards (RSUs) to employees and directors, including 478,353 RSUs to the chief executive officer[90] | Metric (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------| | Stock award expense | $8,514 | $9,026 | | Total income tax benefit | $2,500 | $2,700 | | Unrecognized compensation expense (Dec 31, 2021) | $30,434 | N/A | 7. EARNINGS PER COMMON SHARE Basic EPS increased to $1.02 (Q4) and $2.04 (H1), with diluted EPS also rising, reflecting higher net income - Basic EPS is computed by dividing net income attributable to common stock by the sum of the weighted-average number of common shares outstanding and unvested participating RSUs. Diluted EPS includes the impact of dilutive potential common shares[94] | Metric (per share) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Basic EPS | $1.02 | $0.93 | $2.04 | $1.82 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | 8. COMMITMENTS AND CONTINGENCIES No loans were in COVID-19 forbearance; significant off-balance-sheet commitments include $2.48 billion in loan originations and ongoing litigation - As of December 31, 2021, no loans were on forbearance status for a forbearance granted from any prior date due to the COVID-19 pandemic[96][130] | Commitment Type (in millions) | Dec 31, 2021 | |:------------------------------|:-------------|\ | Fixed rate loan originations | $137.8 | | Variable rate loan originations | $2,345.2 | | Total loan originations | $2,483.0 | | Commitments to sell loans | $50.0 | - The company is a defendant in multiple class action and shareholder derivative lawsuits, which it is vigorously defending, but the eventual loss or range of loss cannot be reasonably predicted[102][104][105][106][108] 9. SEGMENT REPORTING The company operates two segments, Banking and Securities Business, with allocated costs and management-based reporting not comparable to peers - The company operates through two reportable segments: Banking Business and Securities Business[110][123][172] - All significant intercompany balances and transactions have been eliminated in consolidation[27] - Segment results are compiled based upon the management reporting system and are not necessarily comparable with similar information published by other financial institutions or in accordance with generally accepted accounting principles[128][129] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses financial condition, operations, liquidity, off-balance sheet items, and capital resources, including non-GAAP measures - The discussion covers results of operations, financial condition, liquidity, off-balance sheet items, and capital resources, and should be read in conjunction with the annual 10-K and interim financial statements[118] - The report contains forward-looking statements that involve risks and uncertainties, and actual results may vary due to factors like the COVID-19 pandemic, interest rate changes, government regulation, and litigation[119] - The company uses non-GAAP financial measures like "adjusted earnings," "adjusted EPS," and "tangible book value per common share" to provide additional insights into operating performance and capital strength, excluding non-recurring acquisition-related costs[136][137][139] SELECTED FINANCIAL DATA Selected financial data shows total assets at $15.5 billion, net income of $121.0 million for H1 2021, and strong capital ratios | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Total assets | $15,547,947 | $14,265,565 | $14,393,267 | | Loans—net | $12,607,179 | $11,414,814 | $11,609,584 | | Total deposits | $12,269,172 | $10,815,797 | $11,463,136 | | Total stockholders' equity | $1,523,157 | $1,400,936 | $1,287,482 | | Capital Ratio | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Axos Financial, Inc.: | | | | | Tier 1 leverage capital | 9.42% | 8.82% | 8.68% | | Common equity tier 1 capital | 10.08% | 11.36% | 10.85% | | Axos Bank: | | | | | Tier 1 leverage capital | 10.13% | 9.45% | 9.08% | | Common equity tier 1 capital | 10.91% | 12.28% | 11.45% | | Income Statement Data (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net interest income | $145,568 | $134,092 | $292,210 | $261,419 | | Net income | $60,787 | $54,785 | $120,997 | $107,807 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | | Net interest margin | 4.10% | 3.94% | 4.16% | 3.89% | RESULTS OF OPERATIONS Net income and adjusted earnings increased for Q4 and H1 2021, driven by higher net interest income and lower credit loss provisions - Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | | Adjusted Earnings (Non-GAAP) | $62,917 | $56,566 | $125,146 | $111,407 | | Adjusted EPS (Non-GAAP) | $1.04 | $0.94 | $2.06 | $1.85 | Net Interest Income Net interest income increased by 8.6% (Q4) and 11.8% (H1) due to loan growth and lower deposit rates, improving net interest margin | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Income | $145,568 | $134,092 | $292,210 | $261,419 | | Total Interest and Dividend Income | $157,076 | $155,379 | $315,386 | $305,268 | | Total Interest Expense | $11,508 | $21,287 | $23,176 | $43,849 | | Metric | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:--------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Margin | 4.10% | 3.94% | 4.16% | 3.89% | - Average non-interest bearing deposits increased significantly by $1,695.0 million and $1,460.0 million for the three and six months ended December 31, 2021, respectively, primarily from the deposits acquired through the acquisition of AAS, contributing to the decrease in average cost of funds[149][150] Provision for Credit Losses Provision for credit losses significantly decreased for Q4 and H1 2021 due to improved economic conditions and reduced COVID-19 disruptions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Provision for Credit Losses | $4,000 | $8,000 | $8,000 | $19,800 | - The decreases in the provision for credit losses were due to favorable changes in economic and business conditions resulting from reduced levels of disruptions from the COVID-19 pandemic[159] - Provisions for credit losses for the three and six months ended December 31, 2021, were primarily comprised of provisions in commercial real estate and consumer and auto due to growth in these segments of the loan portfolio[159] Non-Interest Income Non-interest income increased in Q4 2021 due to AAS acquisition and prepayment fees, but decreased in H1 2021 from lower mortgage banking income | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Non-Interest Income | $30,787 | $28,718 | $57,489 | $64,573 | | Broker-dealer fee income | $14,367 | $6,287 | $26,133 | $11,989 | | Mortgage banking income | $4,612 | $10,651 | $9,865 | $30,218 | | Prepayment penalty fee income | $3,294 | $1,579 | $6,280 | $2,947 | | Banking and service fees | $8,486 | $10,045 | $15,166 | $18,929 | - The increase in broker-dealer fee income was driven by custody and mutual fund fees earned by the newly acquired AAS division[162] - The decrease in mortgage banking income and banking and service fees was due to non-recurring Emerald Prepaid Mastercard® and Refund Transfer products associated with H&R Block[162] Non-Interest Expense Non-interest expense increased for Q4 and H1 2021, primarily due to the AAS acquisition and company expansion, raising operational costs | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Non-Interest Expenses | $86,019 | $76,297 | $170,450 | $151,843 | | Salaries and related costs | $39,979 | $38,199 | $80,716 | $76,822 | | Data processing | $12,199 | $9,673 | $24,291 | $17,601 | | Depreciation and amortization | $6,785 | $5,862 | $12,513 | $12,048 | | Broker-dealer clearing charges | $3,678 | $2,451 | $7,683 | $4,708 | | General and administrative expense | $8,216 | $4,967 | $16,721 | $11,261 | - Increased staffing levels as a result of the AAS acquisition contributed to higher salaries and related costs, with staff increasing to 1,280 from 1,157 (10.6%) between December 31, 2021, and 2020[166] - Data processing expense increased primarily due to enhancements to customer interfaces and the Company's core processing systems[166] Provision for Income Taxes Effective income tax rates for Q4 and H1 2021 were 29.59% and 29.34%, slightly lower due to stock compensation tax benefits | Metric | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Effective Tax Rate | 29.59% | 30.22% | 29.34% | 30.15% | - The change in effective income tax rates between periods are primarily the result of changes in tax benefits from stock compensation[171] SEGMENT RESULTS Banking Business drives income, while Securities Business reported a pre-tax loss for both periods due to higher non-interest expenses from the AAS acquisition - The company operates through two segments: Banking Business and Securities Business, with parent-only activities and intercompany eliminations reconciling to consolidated totals[172] | Segment Income Before Taxes (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Banking Business | $92,105 | $83,987 | $182,449 | $164,190 | | Securities Business | $(694) | $(480) | $(685) | $(1,154) | | Corporate/Eliminations | $(5,075) | $(4,994) | $(10,515) | $(8,687) | | Axos Consolidated | $86,336 | $78,513 | $171,249 | $154,349 | Banking Business Banking Business income before taxes increased for Q4 and H1 2021, driven by higher net interest income and lower credit loss provisions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Income before taxes | $92,105 | $83,987 | $182,449 | $164,190 | | Net interest income | $142,259 | $132,166 | $284,500 | $255,174 | | Provision for credit losses | $4,000 | $8,000 | $8,000 | $19,800 | | Banking Business Ratios | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Efficiency ratio | 39.39% | 40.45% | 39.66% | 40.20% | | Return on average assets | 1.92% | 1.80% | 1.92% | 1.79% | | Net interest margin | 4.30% | 4.11% | 4.39% | 4.01% | - The Banking Business segment's net interest margin exceeds the consolidated net interest margin due to certain items not reflected in its calculation, such as the borrowing costs at the Parent Company and yields/costs associated with securities financing operations in the Securities Business[179] Securities Business Securities Business reported a pre-tax loss for Q4 and H1 2021, primarily due to increased non-interest expenses from the AAS acquisition | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Income before taxes | $(694) | $(480) | $(685) | $(1,154) | | Net interest income | $4,506 | $4,260 | $10,682 | $9,154 | | Non-interest income | $16,454 | $6,572 | $29,560 | $12,356 | | Non-interest expense | $21,654 | $11,312 | $40,927 | $22,664 | - The increase in non-interest income was primarily attributable to the addition of AAS custody and mutual funds fees[192] - Non-interest expense increases were mainly due to higher salaries and related expenses, data processing, and broker-dealer clearing charges, largely driven by the AAS acquisition and increased activity[193] FINANCIAL CONDITION Financial condition improved with total assets growing 9.0% to $15.5 billion, driven by loan and deposit growth, alongside strong capital ratios - Total assets increased $1,282.4 million, or 9.0%, to $15.5 billion, as of December 31, 2021, up from $14.3 billion at June 30, 2021[196] - The increase in total assets was mainly due to an increase of $1,192.4 million in net loans held for investment and an increase of $80.6 million in cash and cash equivalents[196] - Total liabilities increased $1,160.2 million, primarily due to growth in deposits of $1,453.4 million[196] Balance Sheet Analysis Total assets increased by $1.28 billion to $15.5 billion, primarily from loan growth and deposits, partially offset by reduced FHLB advances - Total assets increased $1,282.4 million, or 9.0%, to $15.5 billion, as of December 31, 2021, up from $14.3 billion at June 30, 2021[196] - The increase in total assets was mainly due to an increase of $1,192.4 million in net loans held for investment and an increase of $80.6 million in cash and cash equivalents[196] - Total liabilities increased $1,160.2 million, primarily due to growth in deposits of $1,453.4 million, partially offset by a decrease of $196.0 million in advances from the FHLB and a decrease of $150.2 million in securities loaned[196] Loans Net loans held for investment grew 10.4% to $12.6 billion, driven by $4.6 billion in originations, with strong growth in CRE and C&I - Net loans held for investment increased 10.4% to $12.6 billion as of December 31, 2021, from $11.4 billion at June 30, 2021[198] - The increase in the loan portfolio was primarily due to loan originations of $4.6 billion, partially offset by loan repayments and other adjustments of $3.4 billion[198] | Loan Category (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Commercial Real Estate | $3,857,367 | $3,180,453 | | Commercial & Industrial - Non-RE | $1,631,811 | $1,123,869 | | Single Family - Mortgage & Warehouse | $4,281,646 | $4,359,472 | Asset Quality and Allowance for Loan and Lease Losses Non-performing assets decreased to $146.2 million (0.94% of total assets), while the allowance for credit losses on loans increased to $140.5 million | Non-performing Assets (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Change | |:-------------------------------------|:-------------|:-------------|:-------| | Total non-performing loans | $145,933 | $145,195 | $738 | | Total non-performing assets | $146,184 | $151,977 | $(5,793)| | Non-performing loans to total loans | 1.14% | 1.26% | (0.12)%| | Non-performing assets to total assets | 0.94% | 1.07% | (0.13)%| - The decrease in non-performing assets of approximately $5.8 million was primarily attributable to resolutions of multifamily and commercial mortgage loans, and foreclosed real estate, while non-performing single-family loans increased by $16.6 million[202] | Allowance for Credit Losses - Loans (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:---------------------------------------------------|:-------------|:-------------| | Total Allowance for Credit Losses - Loans | $140,489 | $132,958 | | Allocation % of Allowance: Commercial Real Estate | 48.0% | 43.6% | | Allocation % of Allowance: Commercial and Industrial - Non-RE | 16.2% | 21.4% | Investment Securities Total investment securities decreased to $140.8 million, primarily due to $58.6 million in principal repayments, partially offset by new purchases | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:--------------------------|:-------------|:-------------| | Total investment securities | $140,800 | $189,300 | - During the six months ended December 31, 2021, the company purchased securities for $12.3 million and received principal repayments of approximately $58.6 million in its available-for-sale portfolio[206] Deposits Total deposits increased by $1.5 billion (13.4%) to $12.3 billion, driven by a $1.4 billion rise in non-interest bearing deposits | Deposit Type (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Change | |:----------------------------|:-------------|:-------------|:-------| | Total Deposits | $12,269,172 | $10,815,797 | $1,453,375 | | Non-interest bearing | $3,847,461 | $2,474,424 | $1,373,037 | | Interest bearing | $8,421,711 | $8,341,373 | $80,338 | | Time deposits | $1,286,415 | $1,512,841 | $(226,426)| - Non-interest bearing deposits increased $1.4 billion, or 55.5%, primarily due to deposits provided by the AAS acquisition[208] - The total number of deposit accounts increased to 392,059 at December 31, 2021, from 385,609 at June 30, 2021[210] Borrowings Total borrowings decreased by $156.9 million (27.3%) to $417.9 million, mainly due to reduced FHLB advances and other borrowings | Borrowing Type (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:------------------------------------------|:-------------|:-------------|:-------------| | FHLB Advances | $157,500 | $353,500 | $182,500 | | Borrowings, subordinated notes and debentures | $260,435 | $221,358 | $418,480 | | Total borrowings | $417,935 | $574,858 | $600,980 | | Metric | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:-------------------------------------|:-------------|:-------------|:-------------| | Weighted average cost of borrowings during the quarter | 2.64% | 2.93% | 2.97% | | Borrowings as a percent of total assets | 2.69% | 4.03% | 4.18% | - The company regularly uses advances from the FHLB to manage interest rate risk and liquidity, generally funding single family and multifamily mortgages and providing interest rate risk protection[213] Stockholders' Equity Stockholders' equity increased by $122.2 million to $1.52 billion, driven by net income and stock compensation, with no common stock repurchases | Metric (in millions) | Dec 31, 2021 | Jun 30, 2021 | Change | |:---------------------------|:-------------|:-------------|:-------| | Stockholders' equity | $1,523.2 | $1,400.9 | $122.3 | - The increase was the result of net income for the six months ended December 31, 2021, of $121.0 million, stock compensation expense of $2.4 million, partially offset by a $1.2 million decrease in other comprehensive income, net of tax[214] - During the three and six months ended December 31, 2021, the Company did not repurchase any common stock shares, with $52.8 million remaining under the Board authorized stock repurchase program[214][247] LIQUIDITY H1 2021 saw net cash outflows from operating and investing activities, offset by financing inflows from deposits, with substantial borrowing capacity ensuring liquidity | Cash Flow Activity (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------| | Operating Activities | $(76,773) | $284,417 | | Investing Activities | $(1,132,694) | $(1,015,293) | | Financing Activities | $1,290,048 | $223,552 | - The primary driver behind the increase in net cash inflows from financing activities was increased deposits provided in part, by the acquisition of AAS for the six months ended December 31, 2021[216] - As of December 31, 2021, the Bank had $1,939.2 million available immediately and $3,449.5 million available with additional collateral from the FHLB, $2,433.9 million available from the Federal Reserve Bank, and Axos Clearing had $170.0 million in uncommitted secured lines of credit[217][218] OFF-BALANCE SHEET COMMITMENTS Off-balance sheet commitments include $2.48 billion in loan originations and $50.0 million in loan sales, with Axos Clearing's risks mitigated by indemnification agreements | Commitment Type (in millions) | Dec 31, 2021 | |:------------------------------|:-------------| | Loan originations | $2,483.0 | | Loan sales | $50.0 | - Axos Clearing's customer activities involve off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations, which is mitigated by indemnification clauses in clearing agreements with broker-dealers[220] CAPITAL RESOURCES AND REQUIREMENTS Axos Financial and Axos Bank met all regulatory capital requirements, classified as 'well capitalized,' with Axos Clearing also meeting its net capital requirements - As of December 31, 2021, both Axos Financial, Inc. and Axos Bank met all capital adequacy requirements and were "well capitalized" under the regulatory framework for prompt corrective action[222] | Regulatory Capital Ratios | Axos Financial, Inc. (Dec 31, 2021) | Axos Bank (Dec 31, 2021) | "Well Capitalized" Ratio | Minimum Capital Ratio | |:----------------------------------|:------------------------------------|:-------------------------|:-------------------------|:----------------------| | Tier 1 leverage | 9.42% | 10.13% | 5.00% | 4.00% | | Common equity tier 1 | 10.08% | 10.91% | 6.50% | 4.50% | | Tier 1 capital | 10.08% | 10.91% | 8.00% | 6.00% | | Total capital | 12.16% | 11.73% | 10.00% | 8.00% | - The Company and Bank elected the CECL 5-year transition guidance for calculating regulatory capital ratios[223] | Axos Clearing Net Capital (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Net capital | $39,453 | $35,950 | | Excess Capital | $32,171 | $27,904 | | Net capital as a percentage of aggregate debit items | 10.84% | 8.94% | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company manages interest rate risk via gap analysis and assesses rate shift impact on equity, while Securities Business market risk is managed through position limits - The company measures 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, known as the interest rate sensitivity gap[230] | Interest Rate Shift | Net Interest Income (First 12 Months) | Percentage Change from Base | Net Interest Income (Next 12 Months) | Percentage Change from Base | |:--------------------|:--------------------------------------|:----------------------------|:-------------------------------------|:----------------------------| | Up 200 basis points | $602,020 | 8.8% | $594,198 | 9.1% | | Base | $553,393 | 0% | $544,390 | 0% | | Down 100 basis points | $543,760 | (1.7)% | $527,446 | (3.1)% | | Interest Rate Shift | Net Present Value (in thousands) | Percentage Change from Base | Net Present Value as a Percentage of Assets | |:--------------------|:---------------------------------|:----------------------------|:--------------------------------------------| | Up 300 basis points | $1,527,926 | (0.8)% | 11.0% | | Up 200 basis points | $1,588,960 | 3.2% | 11.3% | | Up 100 basis points | $1,585,104 | 2.9% | 11.2% | | Base | $1,540,147 | 0% | 10.8% | | Down 100 basis points | $1,339,206 | (13.0)% | 9.3% | - The Securities Business is exposed to market risk primarily due to its role as a financial intermediary in customer transactions and trading activities, managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held[237][238][240] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS This section refers to the detailed market risk disclosures within Management's Discussion and Analysis of Financial Condition and Results of Operations - This section refers to the detailed discussion on market risks provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk"[241] ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls and procedures were effective as of December 31, 2021, acknowledging inherent limitations of control systems - The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021[242] - 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, and its effectiveness can be limited by resource constraints and changes in business conditions[242] PART II – OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section incorporates Note 8 on commitments and contingencies, detailing ongoing class action lawsuits and other routine litigation - The information set forth in Note 8 – "Commitments And Contingencies" to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference[244] - The company 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 business of the Bank, none of which are expected to have a material adverse effect[244] ITEM 1A. RISK FACTORS The company faces inherent business and industry risks, detailed in its Annual Report on Form 10-K, with other unanticipated factors potentially existing - The company faces a variety of risks that are inherent in its business and industry, described in more detail under Part 1, "Item 1A. Risk Factors" in its Annual Report on Form 10-K for the year ended June 30, 2021[245] - Other factors may also exist that the company cannot anticipate or currently does not consider to be significant based on information that is currently available[245] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No common stock repurchases occurred in Q4 2021, though shares were retained for tax obligations, with $52.8 million remaining in the repurchase program | Metric | Quarter Ended Dec 31, 2021 | |:-------------------------------------|:---------------------------| | Number of Shares Purchased (Stock Repurchases) | 0 | | Shares Retained in Net Settlement | 2,278 | | Approximate Dollar Value of Shares that May be Purchased (in thousands) | $52,764 | - The Board of Directors authorized a program to repurchase up to $100 million of common stock on March 17, 2016, and extended it by an additional $100 million on August 2, 2019, which continues in effect until terminated[247] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities occurred during the reported period - No defaults upon senior securities occurred[248] ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to Axos Financial, Inc[248] ITEM 5. OTHER INFORMATION No other information is reported under this item - No other information is reported under this item[257] ITEM 6. EXHIBITS Exhibits filed with the 10-Q report include certifications, the 2014 Stock Incentive Plan, and Inline XBRL documents - The exhibits include CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act), the Amended and Restated 2014 Stock Incentive Plan, and various Inline XBRL taxonomy documents[250][251][252][253][254][255][256] SIGNATURES The report is signed by the President and CEO, and EVP and CFO of Axos Financial, Inc. on January 27, 2022 - The report is signed by Gregory Garrabrants, President and Chief Executive Officer, and Derrick K. Walsh, Executive Vice President and Chief Financial Officer, on January 27, 2022[258]