Axos Financial(AX) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. Financial Statements Presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :------------- | :------------ | :---------------- | :--------- | | ASSETS | | | | | | Total cash, cash equivalents, and cash segregated | $2,504,224 | $1,574,699 | $929,525 | 59.03% | | Loans—net | $15,836,255 | $14,091,061 | $1,745,194 | 12.38% | | Total Assets | $19,782,481 | $17,401,165 | $2,381,316 | 13.68% | | LIABILITIES | | | | | | Non-interest bearing deposits | $3,172,791 | $5,033,970 | $(1,861,179) | -36.97% | | Interest bearing deposits | $13,566,078 | $8,912,452 | $4,653,626 | 52.21% | | Total deposits | $16,738,869 | $13,946,422 | $2,792,447 | 20.02% | | Total Liabilities | $17,938,377 | $15,758,192 | $2,180,185 | 13.83% | | STOCKHOLDERS' EQUITY | | | | | | Total Stockholders' Equity | $1,844,104 | $1,642,973 | $201,131 | 12.24% | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Total interest and dividend income | $307,334 | $160,181 | 91.88% | $810,708 | $475,567 | 70.48% | | Total interest expense | $108,352 | $10,643 | 918.10% | $231,341 | $33,819 | 584.09% | | Net interest income | $198,982 | $149,538 | 33.08% | $579,367 | $441,748 | 31.15% | | Provision for credit losses | $5,500 | $4,500 | 22.22% | $17,750 | $12,500 | 42.00% | | Non-interest income | $32,246 | $28,774 | 12.00% | $87,783 | $86,263 | 1.76% | | Total non-interest expense | $111,044 | $86,819 | 27.90% | $334,659 | $257,269 | 30.08% | | Income before income taxes | $114,684 | $86,993 | 31.83% | $314,741 | $258,242 | 21.80% | | Income taxes | $34,834 | $25,170 | 38.32% | $94,932 | $75,422 | 25.87% | | Net Income | $79,850 | $61,823 | 29.16% | $219,809 | $182,820 | 20.23% | | Basic EPS | $1.33 | $1.04 | 27.88% | $3.67 | $3.07 | 19.54% | | Diluted EPS | $1.32 | $1.02 | 29.41% | $3.63 | $3.02 | 20.20% | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income | $79,850 | $61,823 | 29.16% | $219,809 | $182,820 | 20.23% | | Net unrealized gain (loss) from available-for-sale securities, net of income tax | $1,372 | $(2,970) | -146.19% | $(2,640) | $(4,133) | -36.14% | | Other comprehensive income (loss) | $1,372 | $(2,970) | -146.19% | $(2,640) | $(4,133) | -36.14% | | Comprehensive income | $81,222 | $58,853 | 37.99% | $217,169 | $178,687 | 21.54% | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :------------- | :------------ | :---------------- | :--------- | | Common stock | $694 | $689 | $5 | 0.73% | | Additional paid-in capital | $472,933 | $453,784 | $19,149 | 4.22% | | Accumulated other comprehensive income (loss)—net of tax | $(5,573) | $(2,933) | $(2,640) | 89.99% | | Retained earnings | $1,648,253 | $1,428,444 | $219,809 | 15.39% | | Treasury stock, at cost | $(272,203) | $(237,011) | $(35,192) | 14.85% | | Total stockholders' equity | $1,844,104 | $1,642,973 | $201,131 | 12.24% | - The Company repurchased $31.6 million of common stock at an average price of $37.22 per share during the three and nine months ended March 31, 2023[101] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net cash provided by operating activities | $119,247 | $69,482 | 71.63% | | Net cash used in investing activities | $(1,807,976) | $(1,724,106) | 4.86% | | Net cash provided by financing activities | $2,618,254 | $1,866,161 | 40.30% | | Net change in cash and cash equivalents | $929,525 | $211,537 | 339.04% | | Cash and cash equivalents—End of period | $2,504,224 | $1,249,314 | 100.45% | - Net increase in deposits was a primary driver for the increase in net cash provided by financing activities, increasing by $2.79 billion (YoY)[20] Notes to Condensed Consolidated Financial Statements 1. Summary of Significant Accounting Policies - The Company operates through two segments: Banking Business (Axos Bank) and Securities Business (Axos Nevada Holding, LLC)[26] - Reclassifications of certain non-interest income components and cash flow amounts for prior periods were made to conform to current presentation, with no effect on total non-interest income, net income, financial position, or cash flows[27] - The Company plans to adopt ASUs (2020-04, 2021-04, 2022-06) related to reference rate reform in fiscal year 2024, not expecting a material impact on its Consolidated Financial Statements[29] 2. Acquisitions - On August 2, 2021, Axos Clearing LLC acquired E*TRADE Advisor Services (rebranded as Axos Advisor Services, AAS) for $54.8 million in cash[31] - The acquisition resulted in $27.1 million of identifiable intangible assets and $24.4 million of goodwill, expected to be tax deductible[33] Intangible Assets Acquired (as of acquisition date) | Intangible Asset | Fair Value (in thousands) | Useful Lives (Years) | | :--------------- | :------------------------ | :------------------- | | Trade Name | $290 | 0.16 | | Proprietary Technology | $10,990 | 7 | | Customer Relationships | $15,650 | 14 | | Non-Compete Agreements | $130 | 1 | | Total | $27,060 | | 3. Fair Value - Non-recurring fair value measurements for other real estate owned and repossessed vehicles resulted in charge-offs of $535 thousand for the three months ended March 31, 2023, and $1,499 thousand for the nine months ended March 31, 2023[50] Assets Measured at Fair Value on a Recurring Basis (March 31, 2023) | Asset (in thousands) | Level 2 (Observable Inputs) | Level 3 (Unobservable Inputs) | Total | | :------------------- | :-------------------------- | :---------------------------- | :---- | | Securities—Trading: Municipal | $400 | — | $400 | | Securities—Available-for-sale: Agency MBS | $22,782 | — | $22,782 | | Securities—Available-for-sale: Non-Agency MBS | — | $206,300 | $206,300 | | Securities—Available-for-sale: Municipal | $3,384 | — | $3,384 | | Securities—Available-for-sale: Asset-backed securities and structured notes | $47,146 | — | $47,146 | | Loans held for sale | $7,920 | — | $7,920 | | Mortgage servicing rights | — | $25,396 | $25,396 | | Other assets—Derivative instruments | — | $381 | $381 | Loans Held for Sale at Fair Value (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | | :-------------------- | :------------- | :------------ | | Aggregate fair value | $7,920 | $4,973 | | Contractual balance | $7,663 | $4,881 | | Unrealized gain | $257 | $92 | 4. Securities - Unrealized losses on available-for-sale securities are primarily driven by the increase in interest rates since the securities were purchased[64] - As of March 31, 2023, the Company had twenty-nine securities in a continuous loss position for more than 12 months and twenty-five for less than 12 months[67] Total Debt Securities (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :------------- | :------------ | :---------------- | :--------- | | Trading Securities (Fair Value) | $400 | $1,758 | $(1,358) | -77.25% | | Available-for-sale Securities (Fair Value) | $279,612 | $262,518 | $17,094 | 6.51% | | Total Debt Securities (Fair Value) | $279,612 | $262,518 | $17,094 | 6.51% | | Total Amortized Cost (Available-for-sale) | $286,731 | $265,867 | $20,864 | 7.85% | | Total Unrealized Gains (Available-for-sale) | $1,654 | $1,972 | $(318) | -16.13% | | Total Unrealized Losses (Available-for-sale) | $(8,773) | $(5,321) | $(3,452) | 64.87% | 5. Loans & Allowance for Credit Losses - The provision for credit losses for the three and nine months ended March 31, 2023, was primarily driven by loan growth, changes in the macroeconomic environment, and changes in loan product mix[74] Loan Portfolio Composition (March 31, 2023 vs. June 30, 2022) | Loan Portfolio (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :---------------------------- | :------------- | :------------ | :---------------- | :--------- | | Single Family - Mortgage & Warehouse | $4,087,525 | $3,988,462 | $99,063 | 2.48% | | Multifamily and Commercial Mortgage | $3,082,801 | $2,877,680 | $205,121 | 7.13% | | Commercial Real Estate | $5,794,304 | $4,781,044 | $1,013,260 | 21.19% | | Commercial & Industrial - Non-RE | $2,454,839 | $2,028,128 | $426,711 | 21.04% | | Auto & Consumer | $594,596 | $567,228 | $27,368 | 4.82% | | Other | $6,240 | $11,134 | $(4,894) | -43.96% | | Total gross loans and leases | $16,020,305 | $14,253,676 | $1,766,629 | 12.39% | | Allowance for credit losses - loans | $(161,293) | $(148,617) | $(12,676) | 8.53% | Nonaccrual Loans (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :------------- | :------------ | :---------------- | :--------- | | Total nonaccrual loans | $95,941 | $118,194 | $(22,253) | -18.83% | | Nonaccrual loans to total loans | 0.60% | 0.83% | -0.23% | -27.71% | 6. Stockholders' Equity and Stock-Based Compensation - The Company repurchased $31.6 million of common stock at an average price of $37.22 per share during the three and nine months ended March 31, 2023[101] - On April 26, 2023, the Board of Directors authorized a new program to repurchase up to $100 million of common stock, in addition to the existing $21 million remaining authorization[101][254] Unrecognized Stock Award Compensation Expense (in thousands) | Fiscal Year | Amount | | :---------- | :----- | | Remainder of fiscal year 2023 | $7,113 | | 2024 | $22,261 | | 2025 | $14,418 | | 2026 | $5,561 | | 2027 | $832 | | Thereafter | $194 | | Total | $50,379 | 7. Earnings Per Common Share Earnings Per Common Share (March 31, 2023 vs. 2022) | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Basic EPS | $1.33 | $1.04 | 27.88% | $3.67 | $3.07 | 19.54% | | Diluted EPS | $1.32 | $1.02 | 29.41% | $3.63 | $3.02 | 20.20% | | Average common shares issued and outstanding (Basic) | 59,930,634 | 59,542,128 | 0.65% | 59,928,263 | 59,476,488 | 0.76% | | Total dilutive common shares outstanding (Diluted) | 60,627,400 | 60,611,959 | 0.02% | 60,595,414 | 60,605,486 | -0.02% | 8. Commitments and Contingencies - As of March 31, 2023, the Company had unfunded commitments of $57.5 million in fixed rate loans and $2,816.0 million in variable rate loans, totaling $2,873.5 million[105] - A jury verdict in the MUFG Union Bank, N.A. v. Axos Bank, et al case awarded damages to Union Bank, which was reduced to $7.8 million for tortious interference after a settlement application. The Company recorded a $16 million accrued expense related to this litigation[110] - Axos Clearing's customer activities involve off-balance-sheet risk from securities transactions, with clearing agreements requiring broker-dealers to indemnify Axos Clearing for customer failures[106][107] 9. Segment Reporting and Revenue Information - The Company operates through two operating segments: Banking Business and Securities Business, with performance evaluated based on pre-tax profit or loss[112][113] Segment Income Before Taxes (3 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | Banking Business 2023 | Securities Business 2023 | Corporate/Eliminations 2023 | Consolidated 2023 | Banking Business 2022 | Securities Business 2022 | Corporate/Eliminations 2022 | Consolidated 2022 | | :-------------------- | :-------------------- | :----------------------- | :-------------------------- | :---------------- | :-------------------- | :----------------------- | :-------------------------- | :---------------- | | Net interest income | $196,249 | $6,335 | $(3,602) | $198,982 | $147,828 | $3,377 | $(1,667) | $149,538 | | Provision for credit losses | $5,500 | — | — | $5,500 | $4,500 | — | — | $4,500 | | Non-interest income | $10,685 | $38,298 | $(16,737) | $32,246 | $15,741 | $15,609 | $(2,576) | $28,774 | | Non-interest expense | $98,252 | $25,138 | $(12,346) | $111,044 | $65,076 | $20,242 | $1,501 | $86,819 | | Income before taxes | $103,182 | $19,495 | $(7,993) | $114,684 | $93,993 | $(1,256) | $(5,744) | $86,993 | Segment Income Before Taxes (9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | Banking Business 2023 | Securities Business 2023 | Corporate/Eliminations 2023 | Consolidated 2023 | Banking Business 2022 | Securities Business 2022 | Corporate/Eliminations 2022 | Consolidated 2022 | | :-------------------- | :-------------------- | :----------------------- | :-------------------------- | :---------------- | :-------------------- | :----------------------- | :-------------------------- | :---------------- | | Net interest income | $574,524 | $15,486 | $(10,643) | $579,367 | $432,328 | $14,059 | $(4,639) | $441,748 | | Provision for credit losses | $17,750 | — | — | $17,750 | $12,500 | — | — | $12,500 | | Non-interest income | $31,954 | $103,467 | $(47,638) | $87,783 | $46,864 | $45,169 | $(5,770) | $86,263 | | Non-interest expense | $295,332 | $74,924 | $(35,597) | $334,659 | $190,250 | $61,169 | $5,850 | $257,269 | | Income before taxes | $293,396 | $44,029 | $(22,684) | $314,741 | $276,442 | $(1,941) | $(16,259) | $258,242 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes operational performance, financial condition, liquidity, and capital resources for the reporting period General Overview - Axos Financial, Inc. is a diversified financial services company with approximately $19.8 billion in assets[125] - Axos Bank provides consumer and business banking products, while Axos Clearing LLC, Axos Advisor Services, and Axos Invest, Inc. offer securities products and services[125] - The Company is supervised by the Federal Reserve, and Axos Bank is regulated by the OCC and FDIC. Securities entities are registered with the SEC and FINRA[126][128] Segment Information - The Banking Business segment provides online banking, concierge banking, and mortgage, vehicle, and unsecured lending, along with deposit products and cash management services[130] - The Securities Business segment offers comprehensive securities clearing and custody services to introducing broker-dealers and registered investment advisor correspondents, and digital investment advisory services to retail investors[131] Critical Accounting Estimates - The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures[132] - Critical accounting estimates are those considered most important due to difficult judgments and inherent uncertainty, detailed in Note 1 of the 2022 Form 10-K[133] Use of Non-GAAP Financial Measures - Non-GAAP financial measures include adjusted earnings, adjusted earnings per common share, and tangible book value per common share[135] - Adjusted earnings exclude the after-tax impact of non-recurring acquisition-related costs and other unusual charges to provide an understanding of core business[136] Adjusted Earnings and EPS (Non-GAAP) | Metric (in thousands, except per share) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (GAAP) | $79,850 | $61,823 | $219,809 | $182,820 | | Acquisition-related costs | $2,846 | $2,803 | $8,169 | $8,676 | | Other costs | — | — | $16,000 | — | | Tax effects of adjustments | $(864) | $(811) | $(7,290) | $(2,534) | | Adjusted earnings (Non-GAAP) | $81,832 | $63,815 | $236,688 | $188,962 | | Adjusted EPS (Non-GAAP) | $1.35 | $1.05 | $3.91 | $3.12 | Selected Financial Information Selected Balance Sheet Data (March 31, 2023 vs. June 30, 2022 vs. March 31, 2022) | Metric (in thousands) | Mar 31, 2023 | Jun 30, 2022 | Mar 31, 2022 | | :-------------------- | :----------- | :----------- | :----------- | | Total assets | $19,782,481 | $17,401,165 | $16,080,950 | | Loans—net of allowance for credit losses | $15,836,255 | $14,091,061 | $13,093,603 | | Total deposits | $16,738,869 | $13,946,422 | $12,733,002 | | Total stockholders' equity | $1,844,104 | $1,642,973 | $1,585,585 | Capital Ratios (March 31, 2023 vs. June 30, 2022 vs. March 31, 2022) | Metric | Mar 31, 2023 | Jun 30, 2022 | Mar 31, 2022 | | :----- | :----------- | :----------- | :----------- | | Axos Financial, Inc.: Tier 1 leverage | 9.29% | 9.25% | 9.43% | | Axos Financial, Inc.: Total capital | 13.63% | 12.73% | 13.30% | | Axos Bank: Tier 1 leverage | 10.17% | 10.65% | 10.51% | | Axos Bank: Total capital | 12.40% | 12.01% | 12.24% | | Axos Clearing LLC: Net capital | $79,459 | $38,915 | $39,109 | Selected Income Statement Data (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $198,982 | $149,538 | $579,367 | $441,748 | | Net income | $79,850 | $61,823 | $219,809 | $182,820 | | Diluted EPS | $1.32 | $1.02 | $3.63 | $3.02 | Results of Operations Net Income and EPS (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net income | $79.9 million | $61.8 million | 29.16% | $219.8 million | $182.8 million | 20.23% | | Diluted EPS | $1.32 | $1.02 | 29.41% | $3.63 | $3.02 | 20.20% | Net Interest Income - Total interest and dividend income increased by 91.9% for the three months and 70.5% for the nine months, driven by higher rates and average loan balances[148] - Total interest expense surged by 918.1% for the three months and 584.1% for the nine months, mainly due to higher rates paid on deposits and increased deposit balances[149] Net Interest Income and Margin (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net interest income | $199.0 million | $149.5 million | 33.1% | $579.4 million | $441.7 million | 31.2% | | Net interest margin | 4.42% | 4.02% | 0.40% pts | 4.41% | 4.11% | 0.30% pts | Provision for Credit Losses - The increase in provision for credit losses was primarily driven by loan growth, changes in the macroeconomic environment, and changes in loan product mix[157] Provision for Credit Losses (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Provision for credit losses | $5,500 | $4,500 | 22.22% | $17,750 | $12,500 | 42.00% | Non-Interest Income - Higher broker-dealer fee income was driven by higher rates earned on cash sorting balances at non-affiliated banks, partially offset by lower average cash sorting balances[160] - Lower mortgage banking income and prepayment penalty fee income were due to higher mortgage rates, lower originations, and changes in MSR fair value[160] Non-Interest Income (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Broker-dealer fee income | $13,745 | $5,174 | 165.65% | $32,735 | $17,968 | 82.19% | | Advisory fee income | $6,879 | $7,739 | -11.11% | $20,821 | $21,078 | -1.22% | | Banking and service fees | $8,443 | $7,278 | 15.90% | $25,100 | $22,444 | 11.84% | | Mortgage banking income | $1,107 | $5,790 | -80.88% | $5,113 | $15,700 | -67.40% | | Prepayment penalty fee income | $2,072 | $2,793 | -25.88% | $4,014 | $9,073 | -55.76% | | Total non-interest income | $32,246 | $28,774 | 12.00% | $87,783 | $86,263 | 1.76% | Non-Interest Expense - Headcount increased by 13% to 1,466 at March 31, 2023, from 1,294 at March 31, 2022, contributing to higher salaries and related costs[163] - The nine-month increase in general and administrative expenses was primarily due to a $16.0 million accrual in Q1 2023 for an adverse legal judgment[169] Non-Interest Expense (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Salaries and related costs | $53,046 | $43,133 | 23.00% | $149,762 | $123,849 | 20.92% | | Data processing | $15,808 | $12,274 | 28.80% | $44,462 | $36,565 | 21.59% | | Advertising and promotional | $11,786 | $3,357 | 251.10% | $29,055 | $10,131 | 186.79% | | Professional services | $6,747 | $4,346 | 55.29% | $23,289 | $14,834 | 57.00% | | General and administrative expense | $6,898 | $7,230 | -4.59% | $37,672 | $23,951 | 57.29% | | Total non-interest expenses | $111,044 | $86,819 | 27.90% | $334,659 | $257,269 | 30.08% | Provision for Income Taxes Income Tax Expense and Effective Tax Rate (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Income tax expense | $34,834 | $25,170 | 38.32% | $94,932 | $75,422 | 25.87% | | Effective income tax rate | 30.37% | 28.93% | 1.44% pts | 30.16% | 29.21% | 0.95% pts | Segment Results Banking Business - The Banking Business segment's non-interest income decreased due to lower mortgage banking income (higher mortgage rates, lower originations, MSR fair value changes) and lower prepayment penalty income[188] Banking Business Segment Performance (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net interest income | $196,249 | $147,828 | 32.75% | $574,524 | $432,328 | 32.89% | | Non-interest income | $10,685 | $15,741 | -32.12% | $31,954 | $46,864 | -31.81% | | Non-interest expense | $98,252 | $65,076 | 50.98% | $295,332 | $190,250 | 55.23% | | Income before taxes | $103,182 | $93,993 | 9.78% | $293,396 | $276,442 | 6.13% | Banking Business Segment Ratios (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Efficiency ratio | 47.48% | 39.79% | 48.70% | 39.70% | | Return on average assets | 1.61% | 1.84% | 1.59% | 1.89% | | Interest rate spread | 3.55% | 4.06% | 3.71% | 4.17% | | Net interest margin | 4.50% | 4.21% | 4.56% | 4.33% | Securities Business - Non-interest income increased significantly due to higher fees earned on FDIC-insured bank deposits, including amounts from the Banking Business segment[193] - Non-interest expense increased due to higher salaries and related costs from increased headcount and salaries, and higher professional services expense for the nine-month period[194] Securities Business Segment Performance (3 & 9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | YoY Change (%) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net interest income | $6,335 | $3,377 | 87.60% | $15,486 | $14,059 | 10.15% | | Non-interest income | $38,298 | $15,609 | 145.36% | $103,467 | $45,169 | 129.08% | | Non-interest expense | $25,138 | $20,242 | 24.19% | $74,924 | $61,169 | 22.49% | | Income before taxes | $19,495 | $(1,256) | -1652.07% | $44,029 | $(1,941) | -2378.57% | Financial Condition Balance Sheet Analysis - Total assets increased by $2.4 billion, or 13.7%, to $19.8 billion as of March 31, 2023, from $17.4 billion at June 30, 2022[196] - The increase in total assets was primarily due to a $1.7 billion increase in loans and a $0.9 billion increase in cash, cash equivalents and cash segregated[196] - Total liabilities increased $2.2 billion, primarily due to a $2.8 billion increase in deposits, partially offset by a $0.4 billion decrease in securities loaned[196] Loans - Net loans held for investment increased 12.4% to $15.8 billion at March 31, 2023, from $14.1 billion at June 30, 2022[198] - Loan originations totaled $6.2 billion, partially offset by repayments of $4.3 billion[198] Loan Portfolio Composition (March 31, 2023 vs. June 30, 2022) | Loan Portfolio | March 31, 2023 (Amount) | March 31, 2023 (Percent) | June 30, 2022 (Amount) | June 30, 2022 (Percent) | | :------------- | :---------------------- | :----------------------- | :--------------------- | :---------------------- | | Commercial Real Estate | $5,794,304 | 36.3% | $4,781,044 | 33.5% | | Single Family - Mortgage & Warehouse | $4,087,525 | 25.5% | $3,988,462 | 28.0% | | Multifamily and Commercial Mortgage | $3,082,801 | 19.2% | $2,877,680 | 20.2% | | Commercial & Industrial - Non-RE | $2,454,839 | 15.3% | $2,028,128 | 14.2% | | Auto & Consumer | $594,596 | 3.7% | $567,228 | 4.0% | | Other | $6,240 | 0.0% | $11,134 | 0.1% | | Total gross loans | $16,020,305 | 100.0% | $14,253,676 | 100.0% | Asset Quality and Allowance for Credit Losses - Loans - The decrease in non-performing assets was primarily attributable to a decrease in non-accrual single family mortgage loans[203] - The Bank had no performing troubled debt restructurings as of March 31, 2023 and June 30, 2022[204] Non-performing Assets (March 31, 2023 vs. June 30, 2022) | Metric (in thousands) | March 31, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------- | :------------- | :------------ | :---------------- | :--------- | | Total non-performing loans | $95,941 | $118,194 | $(22,253) | -18.83% | | Foreclosed real estate | $4,344 | — | $4,344 | N/A | | Repossessed—Autos | $958 | $798 | $160 | 20.05% | | Total non-performing assets | $101,243 | $118,992 | $(17,749) | -14.92% | | Total non-performing loans as a percentage of total loans | 0.60% | 0.83% | -0.23% pts | -27.71% | | Total non-performing assets as a percentage of total assets | 0.51% | 0.68% | -0.17% pts | -25.00% | Investment Securities - Total investment securities were $280.0 million as of March 31, 2023, compared with $264.3 million at June 30, 2022[206] - During the nine months ended March 31, 2023, the Company purchased a $30.0 million MBS security and received principal repayments of approximately $9.7 million in its available-for-sale portfolio[206] Deposits - Deposits increased by $2.8 billion, or 20.0%, to $16.7 billion at March 31, 2023, from $13.9 billion at June 30, 2022[207] - Interest-bearing demand and savings increased $3.9 billion and time deposits increased $743.2 million[207] - Non-interest bearing deposits decreased $1.9 billion, or 37.0%, to $3.2 billion at March 31, 2023, from $5.0 billion at June 30, 2022[207] Deposit Portfolio Composition (March 31, 2023 vs. June 30, 2022) | Deposit Type (in thousands) | March 31, 2023 (Amount) | March 31, 2023 (Rate) | June 30, 2022 (Amount) | June 30, 2022 (Rate) | | :-------------------------- | :---------------------- | :-------------------- | :--------------------- | :------------------- | | Non-interest bearing | $3,172,791 | —% | $5,033,970 | —% | | Interest bearing: Demand | $4,133,014 | 2.62% | $3,611,889 | 0.61% | | Interest bearing: Savings | $7,634,813 | 3.78% | $4,245,555 | 0.95% | | Total interest-bearing demand and savings | $11,767,827 | 3.37% | $7,857,444 | 0.79% | | Total time deposits | $1,798,251 | 3.95% | $1,055,008 | 1.25% | | Total deposits | $16,738,869 | 2.79% | $13,946,422 | 0.54% | Borrowings - Total borrowings were $424.3 million at March 31, 2023, down $138.4 million, or 24.6%, from June 30, 2022[214] - Weighted average cost of borrowings during the quarter increased to 4.48% for the quarter ended March 31, 2023, from 2.85% for the quarter ended June 30, 2022[214] - As of March 31, 2023, FHLB advances consisted of $90 million in term loans with a remaining weighted average life of 4.8 years, and the Company had an additional $2.5 billion of immediately available, undrawn capacity[215] Stockholders' Equity - Stockholders' equity increased $201.1 million to $1,844.1 million at March 31, 2023, compared to $1,643.0 million at June 30, 2022[216] - The increase was primarily due to net income of $219.8 million and net stock-based compensation activity of $15.6 million, partially offset by purchases of treasury stock[216] - The Company repurchased $31.6 million of common stock at an average price of $37.22 per share during the three and nine months ended March 31, 2023[217] Liquidity - The primary driver behind the increase in net cash inflows from financing activities was a larger net increase in deposits[220] - As of March 31, 2023, the Bank had $2.45 billion immediately available and $4.71 billion available with additional collateral from the FHLB, and $3.13 billion available from the Federal Reserve Bank of San Francisco Discount Window[220][221] Cash Flow Information (9 Months Ended March 31, 2023 vs. 2022) | Metric (in thousands) | 9 Months Ended Mar 31, 2023 | 9 Months Ended Mar 31, 2022 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Operating Activities | $119,247 | $69,482 | 71.63% | | Investing Activities | $(1,807,976) | $(1,724,106) | 4.86% | | Financing Activities | $2,618,254 | $1,866,161 | 40.30% | Off-Balance Sheet Commitments - As of March 31, 2023, the Company had unfunded commitments to originate loans with an aggregate outstanding principal balance of $2,873.5 million[223] - The Company also had commitments to sell loans with an aggregate outstanding principal balance of $8.5 million[223] - Axos Clearing's customer activities involve off-balance-sheet risk from potential non-performance by customers or other brokers, with clearing agreements requiring indemnification[224] Capital Resources and Requirements - As of March 31, 2023, Axos Financial, Inc. and Axos Bank met all capital adequacy requirements and were "well capitalized" under the regulatory framework[227] - The Company and Bank elected the five-year CECL transition guidance for calculating regulatory capital, which phases out 25% of the cumulative CECL adjustment per year starting fiscal year 2023[228] Regulatory Capital Ratios (March 31, 2023 vs. June 30, 2022) | Metric | Axos Financial, Inc. Mar 31, 2023 | Axos Financial, Inc. Jun 30, 2022 | Axos Bank Mar 31, 2023 | Axos Bank Jun 30, 2022 | Minimum Capital Ratio | "Well Capitalized" Ratio | | :----- | :-------------------------------- | :-------------------------------- | :--------------------- | :--------------------- | :-------------------- | :----------------------- | | Tier 1 leverage | 9.29% | 9.25% | 10.17% | 10.65% | 4.00% | 5.00% | | Common equity tier 1 capital | 10.71% | 9.86% | 11.55% | 11.24% | 4.50% | 6.50% | | Tier 1 capital | 10.71% | 9.86% | 11.55% | 11.24% | 6.00% | 8.00% | | Total capital | 13.63% | 12.73% | 12.40% | 12.01% | 8.00% | 10.00% | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Details the Company's exposure to market risk, primarily interest rate risk, and its management strategies Banking Business - The Banking Business measures interest rate sensitivity as the difference between interest-earning assets and interest-bearing liabilities that mature or re-price within a given period[237] - The Bank's overall asset sensitivity increased at March 31, 2023, due to a cushion of additional liquidity created in response to unprecedented liquidity stress in the banking industry[243] Banking Business Net Interest Rate Sensitivity Gap (March 31, 2023) | Metric (in thousands) | Six Months or Less | Over Six Months Through One Year | Over One Year Through Five Years | Over Five Years | Total | | :-------------------- | :----------------- | :------------------------------- | :------------------------------- | :-------------- | :---- | | Net interest rate sensitivity gap | $4,616,613 | $(3,384,583) | $3,543,555 | $88,047 | $4,863,632 | | Cumulative gap | $4,616,613 | $1,232,030 | $4,775,585 | $4,863,632 | $4,863,632 | | Cumulative gap—as % of total interest earning assets | 24.83% | 6.63% | 25.69% | 26.16% | 26.16% | Securities Business - The Securities Business is exposed to market risk from its role as a financial intermediary in customer, broker-dealer, and registered investment advisor transactions, including securities lending and trading activities[245] - Interest rate risk is managed by setting and monitoring limits on the size and duration of positions and the length of time securities can be held[246] - Credit risk from potential non-performance by counterparties, customers, or issuers is managed by setting position limits, conducting credit reviews, and using central clearing organizations[247] ITEM 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of the end of the reporting period - Management concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[248] - No changes in the Company's internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended March 31, 2023[248] - Control systems provide reasonable, not absolute, assurance, and their effectiveness can be impacted by resource constraints, business conditions, or compliance deterioration[249] PART II – OTHER INFORMATION ITEM 1. Legal Proceedings Discloses ongoing legal proceedings, including shareholder actions and a significant jury verdict - Six shareholder derivative actions were filed against the Company, with two dismissed without prejudice in March 2023, and others stayed pending resolution of a related wrongful termination lawsuit[108][109] - A jury verdict in MUFG Union Bank, N.A. v. Axos Bank, et al awarded damages, which were reduced to $7.8 million for tortious interference after a settlement application. The Company accrued $16 million for this and believes it has substantial grounds for appeal[110] ITEM 1A. Risk Factors Summarizes key business and industry risks that could impact the Company's financial results - The Company faces inherent business and industry risks, detailed in its 2022 Form 10-K and supplemented by its Quarterly Report on Form 10-Q for the period ended December 31, 2022[252] - Actual results and timing of events could differ materially from forward-looking statements due to risks such as changes in interest rates, government regulation, economic conditions, and litigation outcomes[124] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on common stock repurchases during the quarter and the authorization of a new buyback program - On April 26, 2023, the Board of Directors authorized a new program to repurchase up to $100 million of its common stock, in addition to the existing share repurchase plan[254] Common Stock Repurchases (Quarter Ended March 31, 2023) | Period | Number of Shares Purchased | Average Price Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares Yet Under or That May be Purchased Under the Plans or Programs (in thousands) | | :----- | :------------------------- | :---------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------------------------------------------------------- | | March 1, 2023 to March 31, 2023 | 849,081 | $37.22 | 849,081 | $21,159 | | For the Three Months Ended March 31, 2023 | 849,081 | $37.22 | 849,081 | $21,159 | ITEM 3. Defaults Upon Senior Securities Reports no defaults upon senior securities during the period ITEM 4. Mine Safety Disclosures States that mine safety disclosures are not applicable ITEM 5. Other Information Indicates no other information is reported for the period ITEM 6. Exhibits Lists the exhibits filed with the report, including required certifications and XBRL data - Exhibits include CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act) and Inline XBRL Taxonomy documents[256][257][258] Signatures Provides the official signatures of the company's executive officers, dating the report - The report is signed by Gregory Garrabrants, President and Chief Executive Officer, and Derrick K. Walsh, Executive Vice President and Chief Financial Officer, on April 27, 2023[265]