Axos Financial(AX) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's total assets increased to $21.6 billion, driven by loan growth, while net income significantly rose to $151.8 million due to an acquisition gain Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Total Assets | $21,623,764 | $20,348,469 | | Loans—net | $18,264,354 | $16,456,728 | | Total Deposits | $18,203,912 | $17,123,108 | | Total Stockholders' Equity | $2,078,224 | $1,917,159 | Condensed Consolidated Statements of Income Highlights (in thousands, except EPS) | Metric | Three Months Ended Dec 31, 2023 | Three Months Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net Interest Income | $228,606 | $199,910 | | Provision for Credit Losses | $13,500 | $3,001 | | Non-Interest Income | $124,129 | $28,329 | | Net Income | $151,771 | $81,552 | | Diluted EPS | $2.62 | $1.35 | Notes to Condensed Consolidated Financial Statements This section details significant accounting policies, recent acquisitions including a major FDIC loan portfolio purchase, and changes in the allowance for credit losses - On December 7, 2023, the Company acquired two loan portfolios from the FDIC with an aggregate unpaid principal balance of $1.3 billion for $901.5 million, recognizing a $92.4 million gain on the transaction[32] - The allowance for credit losses on loans increased to $251.7 million at December 31, 2023, from $166.7 million at June 30, 2023, primarily due to loan growth and the acquisition of Purchased Credit Deteriorated (PCD) loans from the FDIC, which added $70.1 million to the allowance at acquisition[68][70][73] - During the three and six months ended December 31, 2023, the Company repurchased $58.7 million (1,607,301 shares) and $83.2 million (2,255,509 shares) of its common stock, respectively[102] Segment Income Before Taxes (Three Months Ended Dec 31, 2023, in thousands) | Segment | Net Interest Income (in thousands) | Provision for Credit Losses (in thousands) | Non-interest Income (in thousands) | Non-interest Expense (in thousands) | Income Before Taxes (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Banking Business | $226,635 | $13,500 | $103,779 | $102,282 | $214,632 | | Securities Business | $6,080 | $0 | $32,641 | $27,968 | $10,753 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant increase in net income, driven by an FDIC loan purchase gain and strong net interest income growth, alongside asset expansion and stable capital ratios Results of Operations Net income significantly increased to $151.8 million, primarily driven by a $92.4 million FDIC loan purchase gain and a 14.4% rise in net interest income - Net interest income increased by 14.4% to $228.6 million for the three months ended December 31, 2023, compared to the prior year, driven by a $2.0 billion increase in average loan balances and a 156 basis point increase in rates earned[156][157] - Non-interest income for the quarter increased by $95.8 million (338.2%) year-over-year, primarily due to a $92.4 million gain on the FDIC Loan Purchase[163] - Non-interest expense increased by $13.8 million (12.8%) year-over-year, mainly due to a $9.2 million rise in salaries and related costs from increased headcount and a $3.7 million increase in data processing expenses[164] - The provision for credit losses was $13.5 million for the quarter, up from $3.0 million in the prior-year quarter, mainly due to loan growth in the Commercial & Industrial portfolio and loans acquired from the FDIC[161] Segment Results The Banking Business segment's pre-tax income nearly doubled to $214.6 million due to the FDIC acquisition gain, while the Securities Business segment's pre-tax income declined to $10.8 million - The Banking Business segment's income before taxes nearly doubled to $214.6 million for the quarter ended Dec 31, 2023, from $109.3 million in the prior year, largely due to the FDIC loan purchase gain[175] - The Securities Business segment's income before taxes decreased to $10.8 million for the quarter from $15.6 million in the prior year, impacted by lower non-interest income and higher expenses[187] Financial Condition Total assets reached $21.6 billion, driven by a $2.2 billion increase in the gross loan portfolio, while non-performing assets rose to 0.60% of total assets Loan Portfolio Composition (in thousands) | Loan Category | December 31, 2023 (in thousands) | June 30, 2023 (in thousands) | | :--- | :--- | :--- | | Single Family - Mortgage & Warehouse | $4,092,104 | $4,173,833 | | Multifamily and Commercial Mortgage | $4,065,019 | $3,082,225 | | Commercial Real Estate | $6,043,400 | $6,199,818 | | Commercial & Industrial - Non-RE | $4,177,461 | $2,639,650 | | Total Gross Loans | $18,860,409 | $16,652,026 | - Total deposits increased by $1.1 billion (6.3%) to $18.2 billion at December 31, 2023, from June 30, 2023, with interest-bearing demand and savings accounts driving the growth[200] - Non-performing assets rose to $129.8 million (0.60% of total assets) from $95.3 million (0.47% of total assets) at June 30, 2023, mainly due to an increase in non-accrual single-family mortgage and commercial real estate loans[196][197] Liquidity and Capital Resources The company maintains strong liquidity with substantial borrowing capacity and increased stockholders' equity, remaining 'well capitalized' under all regulatory measures - The company has substantial available liquidity, including $4.1 billion in total FHLB borrowing capacity and $3.1 billion available from the FRBSF Discount Window as of December 31, 2023[209] Regulatory Capital Ratios (Axos Financial, Inc.) | Ratio | December 31, 2023 | Requirement for "Well Capitalized" | | :--- | :--- | :--- | | Tier 1 leverage | 9.39% | 5.00% | | Common equity tier 1 capital | 10.97% | 6.50% | | Tier 1 capital | 10.97% | 8.00% | | Total capital | 13.79% | 10.00% | - Stockholders' equity increased by $161.1 million in the six months ended December 31, 2023, reflecting $234.4 million in net income partially offset by $83.2 million in common stock repurchases[206] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, showing asset sensitivity with a positive cumulative gap, projecting net interest income benefits from rising rates and minimal equity sensitivity Net Interest Income Sensitivity Analysis (Next 12 Months) | Rate Shock | Net Interest Income (in thousands) | Percentage Change from Base | | :--- | :--- | :--- | | Up 200 bps | $1,074,457 | 10.3% | | Base | $973,901 | — | | Down 200 bps | $894,052 | (8.2)% | - The company has a positive cumulative interest rate sensitivity gap of $556.4 million for the next six months, indicating that more assets than liabilities will reprice in that period[227] Controls and Procedures Management concluded disclosure controls were effective, with internal controls modified due to a new ERP system implementation during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period[237] - A new enterprise resource planning (ERP) system was implemented during the quarter, leading to changes in the internal control environment, including automation and modification of certain controls[237] PART II – OTHER INFORMATION Legal Proceedings The company is involved in a consolidated derivative action with an unpredictable outcome and is appealing an adverse judgment with a $16 million accrual - A consolidated derivative action is pending, stemming from a related employment lawsuit. The company intends to vigorously defend against the allegations, but the eventual loss, if any, cannot be reasonably estimated[110][111] - The company is appealing a jury verdict in the MUFG Union Bank, N.A. v. Axos Bank case and has maintained a $16 million accrued expense related to this matter[112] Risk Factors The report refers to the risk factors disclosed in the 2023 Form 10-K, indicating no significant new or changed risks during the quarter - The report refers to the risk factors disclosed in the 2023 Form 10-K, indicating no significant new or changed risks during the quarter[241] Issuer Purchases of Equity Securities During the quarter ended December 31, 2023, the company repurchased 1,607,301 shares of its common stock at an average price of $36.49 per share, with $20.5 million remaining for repurchase Share Repurchases for Quarter Ended December 31, 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2023 | 1,377,080 | $36.56 | | Nov 2023 | 230,221 | $36.09 | | Dec 2023 | 0 | — | | Total | 1,607,301 | $36.49 |