AXOS FINANCIAL, INC. The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those expressed or implied in our forward-looking statements due to various important factors, including those set forth under "Risk Factors" in Item 1A. and elsewhere in this Annual Report on Form 10-K. The following discussion and analysis should be read together with the "Selected Financial Data" and consolidated financial statements, including the related notes included elsewhere in this Annual Report on Form 10-K. OVERVIEW The consolidated financial statements include the accounts ofAxos Financial, Inc. ("Axos") and its wholly owned subsidiaries,Axos Bank (the "Bank") andAxos Nevada Holding, LLC ("Axos Nevada Holding "), collectively, the "Company."Axos Nevada Holding owns the companies constituting the Securities Business segment, including;Axos Securities, LLC ,Axos Clearing LLC ("Axos Clearing"), a clearing broker-dealer,Axos Invest, Inc. , a registered investment advisor, andAxos Invest LLC , an introducing broker-dealer. With approximately$14.3 billion in assets,Axos Bank provides consumer and business banking products through its low-cost distribution channels and affinity partners.Axos Clearing andAxos Invest LLC , provide comprehensive securities clearing services to introducing broker-dealers and registered investment advisor correspondents and digital investment advisory services to retail investors, respectively.Axos Financial, Inc.'s common stock is listed on the NYSE under the symbol "AX" and is a component of the Russell 2000® Index and the S&P SmallCap 600® Index. For more information onAxos Bank , please visit axosbank.com. Net income for the fiscal year endedJune 30, 2021 was$215.7 million compared to$183.4 million and$155.1 million for the fiscal years endedJune 30, 2020 and 2019, respectively. Net income attributable to common stockholders for the fiscal year endedJune 30, 2021 was$215.5 million , or$3.56 per diluted share compared to$183.1 million , or$2.98 per diluted share and$154.8 million , or$2.48 per diluted share for the years endedJune 30, 2020 and 2019, respectively. Growth in our interest earning assets, particularly the loan and lease portfolio, and a reduced cost of interest-bearing liabilities were the primary reasons for the increase in our net income from fiscal 2020 to fiscal 2021. Net interest income increased$61.1 million for the year endedJune 30, 2021 compared to the year endedJune 30, 2020 . Net interest income for the year endedJune 30, 2021 was$538.7 million compared to$477.6 million and$408.6 million for the years endedJune 30, 2020 and 2019, respectively. The growth of net interest income from fiscal year 2019 through 2021 is primarily due to net loan portfolio growth and a reduction of rates paid on deposits. Provision for credit losses for the year endedJune 30, 2021 was$23.8 million , compared to$42.2 million and$27.4 million for the years endedJune 30, 2020 and 2019, respectively. The decrease of$18.5 million for fiscal year 2021 is the result of provisions associated with non-recurring Refund Advance loans. The increase of$14.9 million for fiscal year 2020 is the result of additional provisions for changes in economic and business conditions resulting from the COVID-19 pandemic, overall loan portfolio growth, and changes in the loan mix. Non-interest income for the fiscal year endedJune 30, 2021 , was$105.3 million compared to non-interest income of$103.0 million and$82.8 million for the fiscal years ended 2020 and 2019. The increase from fiscal year 2020 to fiscal year 2021 was primarily the result of an increase of mortgage banking income, partially offset by a decrease in banking and service fees related to the discontinued income tax product. The increase from fiscal year 2019 to fiscal year 2020 was primarily the result of an increase of mortgage banking and a full year of broker-dealer fees. Non-interest expense for the fiscal year endedJune 30, 2021 was$314.5 million compared to$275.8 million and$251.2 million for the years endedJune 30, 2020 and 2019, respectively. The increase was primarily due to an increase of$8.2 million in staffing for lending, information technology infrastructure development, clearing services, and regulatory compliance, an increase in data processing, and an increase in professional services. Our staffing atJune 30, 2021 rose to 1165 employees compared to 1099 and 1007 atJune 30, 2020 and 2019, respectively. Total assets were$14.3 billion atJune 30, 2021 compared to$13.9 billion atJune 30, 2020 . Assets grew$0.4 billion or 3.0% during the last fiscal year, primarily due to loan originations, primarily from C&I and income property lending, partially offset by a decrease in total cash. We built our cash position at the beginning of the COVID-19 pandemic and used it to fund loan growth during fiscal 2021. COVID-19 Impact. We are closely monitoring the developments of and uncertainties caused by the COVID-19 pandemic. In response to the changes in economic and business conditions as a result of the COVID-19 pandemic, we continue to take the following actions to support customers, employees, partners and shareholders: 47 -------------------------------------------------------------------------------- •Actively communicating with borrowers and partners to assess individual needs; •Providing secure and efficient remote work options for our team members; •Adjusting provisions for credit losses; •Tightening underwriting standards; •Reallocating personnel to increase resources for customer service and portfolio management; and •Limiting business travel. Under the guidelines set forth in the CARES Act, for our borrowers who were one or less payments past due onApril 1, 2020 , we may delay payments for an agreed upon timeframe, depending on each individual borrower's characteristics. The Company has taken proactive measures to manage loans that became delinquent during the recent economic downturn as a result of the COVID-19 pandemic. As ofJune 30, 2021 , the Company provided no forbearance nor deferrals of payment obligations on any single family, multifamily and commercial mortgage loans, warehouse loans and commercial real estate loans. Deferrals totaling$0.9 million of auto and consumers loans were granted during the year endedJune 30, 2021 . MERGERS AND ACQUISITIONS From time to time we undertake acquisitions or similar transactions consistent with our Company's operating and growth strategies. We completed no business acquisitions or asset acquisitions during the fiscal years endedJune 30, 2021 andJune 30, 2020 , two business acquisitions and two asset acquisitions during the fiscal year endedJune 30, 2019 . OnAugust 2, 2021 , we acquired certain assets and liabilities of E*TRADE Advisor Services, the registered investment advisor custody business Morgan Stanley acquired in its acquisition of E*TRADE Financial Corporation in 2020. E*TRADE Advisor Services acquisition. OnAugust 2, 2021 , Axos Clearing closed its acquisition of E*TRADE Advisor Services ("EAS"), the registered investment advisor ("RIA") custody business Morgan Stanley acquired in its acquisition of E*TRADE Financial Corporation in 2020. EAS had approximately$24.8 billion of assets under custody, including$1.2 billion of client cash sweeps, atJuly 30, 2021 . EAS has been rebranded Axos Advisor Services and operates as the RIA custody business within Axos Clearing. The$54.9 million cash purchase price was funded with existing capital.MWABank deposit acquisition. OnMarch 15, 2019 , the Bank closed the deposit assumption agreement withMWABank and acquired approximately$173 million of deposits, including approximately$151 million of checking, savings and money market accounts and$22 million of time deposits, fromMWABank . Axos did not acquire any assets, employees or branches in this transaction. The Bank received cash equal to the book value of the deposit liabilities.WiseBanyan . OnFebruary 26, 2019 the Company's subsidiary,Axos Securities, LLC , had completed the acquisition ofWiseBanyan Holding, Inc. and its subsidiaries (collectively "WiseBanyan"). Headquartered inLas Vegas, Nevada ,WiseBanyan (nowAxos Invest ) is a provider of personal financial and investment management services through a proprietary technology platform. When acquired,WiseBanyan served approximately 24,000 clients with approximately$150 million of assets under management. The Company paid$3.2 million in cash to acquire the assets ofWiseBanyan and recorded$2.7 million in intangible assets.The Company purchased the wholeWiseBanyan business and has the entire voting interest.Goodwill is not expected to be deducted for tax purposes.COR Securities Holdings . OnJanuary 28, 2019 ("Acquisition Date"),Axos Clearing, LLC and Axos Clarity MergeCo., Inc. completed the acquisition ofCOR Securities Holdings Inc. ("COR Securities "), the parent company ofCOR Clearing LLC ("COR Clearing"), pursuant to the terms of the Agreement and Plan of Merger, dated as ofSeptember 28, 2018 (the "Merger Agreement"). Headquartered inOmaha, Nebraska , COR Clearing is a full-service correspondent clearing firm for independent broker-dealers. Established as a part ofMutual of Omaha Insurance Company and spun off asLegent Clearing in 2002, COR Clearing provides clearing, settlement, custody, and securities and margin lending to more than sixty introducing broker-dealers and 90,000 customers. The total cash consideration of approximately$80.9 million was funded with existing capital. Upon closing, the Company issued subordinated notes totaling$7.5 million to the principal stockholders ofCOR Securities in an equal principal amount, with a maturity of 15 months, to serve as a source of payment of indemnification obligations of the principal stakeholders ofCOR Securities under the Merger Agreement. The Company is in the process of making an indemnification claim against the$7.4 million remaining. The acquisition ofCOR Securities is accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The Company recorded goodwill of$35.5 million and an additional$20.1 million in intangible assets as of the Acquisition Date. Included in the professional services line of the statement of income the Company recognized$0.4 million in transaction costs. 48 -------------------------------------------------------------------------------- The acquisition will enable the Company to expand its banking business to a new customer base through independent broker-dealers and consumer account relationships, scale entry into wealth management through technology-driven platforms, and increase and diversify fee revenue, all of which will improve key operating metrics. The goodwill recognized results from the expected synergies and potential earnings from this combination.Nationwide Bank deposit acquisition. OnNovember 16, 2018 , the Bank completed the acquisition of substantially all ofNationwide Bank's ("Nationwide") deposits at the time of closing, adding$2.4 billion in deposits, including$661.4 million in checking, savings and money market accounts and$1.7 billion in time deposit accounts. The Bank received cash for the deposit balances transferred less a premium of$13.5 million , recorded in intangibles, commensurate with the fair market value of the deposits purchased. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Securities. We classify securities as either trading, available-for-sale or held-to-maturity. Trading securities are recorded at fair value with changes in fair value recorded in earnings each period. Securities available-for-sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities. For securities other than non-agency MBS, we use observable market participant inputs and categorize these securities as Level II in determining fair value. For non-agency MBS securities, we use a level III fair value model approach. To determine the performance of the underlying mortgage loan pools, we consider where appropriate borrower prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (or decreased by) the forecasted increase or decrease in the national unemployment rate as well as the forecasted increase or decrease in the national home price appreciation (HPA) index. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted decrease or increase in the HPA index. To determine the discount rates used to compute the present value of the expected cash flows for these non-agency MBS securities, we separate the securities by the borrower characteristics in the underlying pool. For example, non-agency RMBS "Prime" securities generally have borrowers with higher FICO scores and better documentation of income. "Alt-A" securities generally have borrowers with lower FICO and less documentation of income. "Pay-option ARMs" are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). Separate discount rates are calculated for Prime, Alt-A and Pay-option ARM non-agency MBS securities using market-participant assumptions for risk, capital and return on equity. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining change in fair value is recognized in other comprehensive income. Changes in the allowance for credit losses, if any, are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the 49 -------------------------------------------------------------------------------- uncollectibility of an available-for-sale investment security is confirmed or when either of the criteria regarding intent or requirement to sell is met. For non-agency MBS we determine the cash flow expected to be collected and calculate the present value for purposes of testing for credit loss, by utilizing the same industry-standard tool and the same cash flows as those calculated for fair values (discussed above). We compute cash flows based upon the underlying mortgage loan pools and our estimates of prepayments, defaults, and loss severities. We input our projections for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The discount rates used to compute the present value of the expected cash flows for purposes of testing for credit loss are different from those used to calculate fair value and are either the implicit rate calculated in each of our securities at acquisition or the last accounting yield (ASC Topic 325-40-35). We calculate the implicit rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the case of pay-option ARMs) without prepayment assumptions. We use this discount rate in the industry-standard model to calculate the present value of the cash flows for purposes of measuring the credit loss of our debt securities. Allowance for Credit Losses. OnJuly 1, 2020 , we adopted Accounting Standard Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments" and all subsequent amendments that modified ASU 2016-13 (collectively, "ASC 326"). The allowance for credit losses is maintained at a level needed to absorb expected credit losses over the contractual life, considering the effects of prepayments, of the loan portfolio as of the reporting date. Determining the adequacy of the allowance is complex and requires judgment by our management team about the effect of matters that are inherently uncertain. As such, a future assessment of current conditions may require material adjustments to the allowance. Our process for determining expected life-time credit losses entails a loan-level, model-based approach and requires consideration of a broad range of relevant information relating to historical loss experience, current economic conditions and reasonable and supportable forecasts. A credit loss is estimated for all loans. Consequently, we stratify the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively. We define a segment as the level at which we develop a systematic methodology to determine the allowance for credit losses. Additionally, we can further stratify loans of similar type, risk attributes and methods for monitoring credit risk. We categorize the loan portfolio into six segments: Single Family - Mortgage & Warehouse, Multifamily and Commercial Mortgage,Commercial Real Estate , Commercial & Industrial -Non Real Estate , Auto & Consumer and Other - refer to Note 1 - "Summary of Significant Accounting Policies" for further detail of the segments and classes within. The method for estimating expected life-time credit losses includes, among other things, the following main components: 1) The use of a probability of default ("PD")/loss given default ("LGD") model; 2) defining a number of economic scenarios across the benign to adverse spectrum; 3) a reasonable forecast period of 12 months for all loan segments; and 4) a reversion period of 18 months using a linear transition to historical loss rates for each loan pool. After the reversion period, the historical loss rate is applied over the remaining contractual life of loan. Reasonable forecast periods and reversion periods are subject to periodic review and may be adjusted based on our review of current economic conditions. Given the inherent limitations of a solely quantitative model, qualitative adjustments are included to arrive at the ending calculated loss amount in order to account for data points not captured from quantitative inputs alone. Qualitative criteria we consider includes, among other things, the following: • Regulatory and Legal - matters that may impact the timeliness and/or amounts of repayments; • Concentration - portfolio composition and loan concentration; • Collateral Dependency - changes in collateral values; • Lending/Underwriting Standards - current lending policies and the effects of any new policies; • Nature and Volume - loan production volume and mix; • Loan Trends - credit performance trends, including a borrower's financial condition and credit rating. Specifically, we review whether the model reflects the appropriate level of PD and LGD, given the macroeconomic forecasts used as compared to our loan portfolio. We determine the adequacy of the allowance based on reviews of individual loans, recent loss experience, current economic conditions, expectations about future economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. If, based on our evaluation, macroeconomic factors do not capture our assumption regarding collateral values (LGD) and defaults (PD), we will apply additional qualitative overlays to the loan portfolio. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. 50 -------------------------------------------------------------------------------- For further information on the Allowance for Credit Losses, refer to Note 1 - "Summary of Significant Accounting Policies".Goodwill and Other Intangible Assets.Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.Goodwill is subject to impairment testing at the reporting unit level, which is conducted at least annually. The Company performs impairment testing during the third quarter of each year or when events or changes in circumstances indicate the assets might be impaired. The goodwill impairment testing requires us to make judgments and assumptions. The testing consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue, profit forecasts, and recent industry and market conditions and trends, then comparing those estimated fair values with the carrying values of the assets and liabilities of each reporting unit, which includes the allocated goodwill. Based on the results, the Company determined that the estimated fair value exceeded its carrying value and concluded that the goodwill and other identifiable intangible assets were not impaired. USE OF NON-GAAP FINANCIAL MEASURES In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as adjusted earnings, adjusted earnings per common share, and tangible book value per common share. Non-GAAP financial measures have inherent limitations, may not be comparable to similarly titled measures used by other companies and are not audited. Readers should be aware of these limitations and should be cautious as to their reliance on such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures. We define "adjusted earnings" as net income without the after-tax impact of non-recurring acquisition-related costs (including amortization of intangible assets related to acquisitions), and other costs (unusual or nonrecurring charges). Adjusted earnings per diluted common share ("adjusted EPS") is calculated by dividing non-GAAP adjusted earnings by the average number of diluted common shares outstanding during the period. We believe the non-GAAP measures of adjusted earnings and adjusted EPS provide useful information about the Bank's operating performance. We believe excluding the non-recurring acquisition related costs, and other costs provides investors with an alternative understanding of Axos' business. Below is a reconciliation of net income, the nearest compatible GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP) for the periods shown: For Twelve Months Ended June 30, (Dollars in thousands, except per share amounts) 2021 2020 2019 Net income$ 215,707 $ 183,438 $ 155,131 Acquisition-related costs 9,826 10,108 6,714 Excess FDIC expense - - 1,111 Other costs - - 15,299 Tax effect of adjustments (2,894) (3,048) (6,267) Adjusted earnings (Non-GAAP)$ 222,639 $ 190,498 $ 171,988 Adjusted EPS (Non-GAAP)$ 3.68 $ 3.10 $ 2.75 51
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We define "tangible book value," as book value adjusted for goodwill and other
intangible assets. Tangible book value is calculated using common stockholders'
equity minus mortgage servicing rights, goodwill and other intangible assets.
Tangible book value per common share is calculated by dividing tangible book
value by the common shares outstanding at the end of the period. We believe
tangible book value per common share is useful in evaluating the Company's
capital strength, financial condition, and ability to manage potential losses.
Below is a reconciliation of total stockholders' equity, the nearest compatible
GAAP measure, to tangible book value (Non-GAAP) as of the dates indicated:
At the Fiscal Years Ended June 30,
(Dollars in thousands, except per share
amounts) 2021 2020 2019 2018 2017
Total stockholders' equity $ 1,400,936 $ 1,230,846
- 5,063 5,063 5,063 5,063
Common stockholders' equity 1,400,936 1,225,783 1,067,987 955,450 829,184
Less: mortgage servicing rights, carried
at fair value 17,911 10,675 9,784 10,752 7,200
Less: goodwill and intangible assets 115,972 125,389 134,893 67,788 -
Tangible common stockholders' equity
(Non-GAAP) $ 1,267,053 $ 1,089,719
59,317,944 59,612,635 61,128,817 62,688,064 63,536,244
Tangible book value per common share
(Non-GAAP) $ 21.36 $ 18.28 $ 15.10 $ 13.99 $ 12.94
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AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables set forth, for the periods indicated, information regarding
(i) average balances; (ii) the total amount of interest income from
interest-earning assets and the weighted average yields on such assets;
(iii) the total amount of interest expense on interest-bearing liabilities and
the weighted average rates paid on such liabilities; (iv) net interest income;
(v) interest rate spread; and (vi) net interest margin:
For the Fiscal Years Ended June 30,
2021 2020 2019
Average Average Average
Interest Yields Interest Yields Interest Yields
Average Income / Earned / Average Income / Earned / Average Income / Earned /
(Dollars in thousands) Balance1 Expense Rates Paid Balance1 Expense Rates Paid Balance1 Expense Rates Paid
Assets:
Loans2,3 $ 11,332,020 $ 584,410 5.16 % $ 10,149,867 $ 582,748 5.74 % $ 8,974,820 $ 525,317 5.85 %
Interest-earning deposits in other
financial institutions 1,600,811 2,185 0.14 % 833,612 10,906 1.31 % 631,228 13,495 2.14 %
Investment securities 192,420 9,560 4.97 % 217,598 11,061 5.08 % 210,189 13,943 6.63 %
Securities borrowed and margin
lending 613,735 20,466 3.33 % 362,063 16,585 4.58 % 173,829 8,746 5.03 %
Stock of the regulatory agencies 20,588 1,242 6.03 % 28,776 1,539 5.35 % 41,078 3,386 8.24 %
Total interest-earning assets 13,759,574 $ 617,863 4.49 % 11,591,916 $ 622,839 5.37 % 10,031,144 $ 564,887 5.63 %
Non-interest-earning assets 394,085 395,789 234,993
Total assets $ 14,153,659 $ 11,987,705 $ 10,266,137
Liabilities and Stockholders' Equity:
Interest-bearing demand and savings $ 7,204,698 $ 29,031 0.40 % $ 4,844,700 $ 66,883 1.38 % $ 3,906,833 $ 61,391 1.57 %
Time deposits 1,825,795 31,498 1.73 % 2,482,151 60,033 2.42 % 2,322,039 55,689 2.40 %
Securities loaned 412,385 1,496 0.36 % 247,420 679 0.27 % 221,469 748 0.34 %
Advances from the FHLB 211,077 4,672 2.21 % 747,358 11,988 1.60 % 1,397,460 32,834 2.35 %
Borrowings, subordinated notes and
debentures 340,699 12,424 3.65 % 103,652 5,645 5.45 % 104,287 5,620 5.39 %
Total interest-bearing liabilities 9,994,654 79,121 0.79 % 8,425,281 145,228 1.72 % 7,952,088 156,282 1.97 %
Non-interest-bearing demand deposits 2,182,009 1,990,005 1,227,285
Other non-interest-bearing
liabilities 671,581 397,506 76,651
Stockholders' equity 1,305,415 1,174,913 1,010,113
Total liabilities and stockholders'
equity $ 14,153,659 $ 11,987,705 $ 10,266,137
Net interest income $ 538,742 $ 477,611 $ 408,605
Interest rate spread4 3.70 % 3.65 % 3.66 %
Net interest margin5 3.92 % 4.12 % 4.07 %
1 Average balances are obtained from daily data.
2 Loans includes loans held for sale, loan premiums, discounts and unearned
fees.
3 Interest income includes reductions for amortization of loan and investment
securities premiums and earnings from accretion of discounts and loan fees. Loan
and lease fee income is not significant. Also includes $27.2 million as of
June 30, 2021 , $28.0 million as of June 30, 2020 and $28.7 million as of
June 30, 2019 of loans that qualify for Community Reinvestment Act credit which
are taxed at a reduced rate.
4 Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities.
5 Net interest margin represents net interest income as a percentage of average
interest-earning assets.
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RESULTS OF OPERATIONS
Our results of operations depend on our net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Our net interest income has increased
as a result of the growth in our interest earning assets and is subject to
competitive factors in online banking and other markets. Our net interest income
is reduced by our estimate of credit loss provisions for our loan portfolio. We
also earn non-interest income primarily from mortgage banking activities,
banking products and service activity, our Securities Business, prepaid card fee
income, prepayment fee income from multifamily and commercial borrowers who
repay their loans before maturity and from gains on sales of other loans and
investment securities. Losses on investment securities reduce non-interest
income. The largest component of non-interest expense is salary and benefits,
which is a function of the number of personnel, which increased to 1,165
full-time equivalent employees at June 30, 2021 , from 1,099 full time employees
at June 30, 2020 . We are subject to federal and state income taxes, and our
effective tax rates were 29.45%, 30.15% and 27.10% for the fiscal years ended
June 30, 2021 , 2020, and 2019, respectively. Other factors that affect our
results of operations include expenses relating to data processing, advertising,
depreciation, occupancy, professional services, and other miscellaneous
expenses.
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2021 AND JUNE 30, 2020
Net Interest Income. Net interest income totaled $538.7 million for the fiscal
year ended June 30, 2021 compared to $477.6 million for the fiscal year ended
June 30, 2020 . The following table sets forth the effects of changing rates and
volumes on our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense attributable to changes in
volume (changes in volume multiplied by prior rate); and (ii) effects on
interest income and interest expense attributable to changes in rate (changes in
rate multiplied by prior volume). The change in interest due to both volume and
rate has been allocated proportionally to both, based on their relative absolute
values.
Fiscal Year Ended June 30, 2021 vs 2020
Increase (Decrease) Due to
Total
Increase
(Dollars in thousands) Volume Rate (Decrease)
Increase (decrease) in interest income:
Loans $ 63,934 $ (62,272) $ 1,662 Interest-earning deposits in other financial institutions 5,473
(14,194) (8,721)
Investment securities (1,265) (236) (1,501)
Securities borrowed and margin lending 9,287 (5,406) 3,881
Stock of the regulatory agencies (476) 179 (297)
Total increase (decrease) in interest income $ 76,953 $ (81,929) $ (4,976)
Increase (decrease) in interest expense:
Interest-bearing demand and savings $ 23,234 $ (61,086) $ (37,852)
Time deposits (13,730) (14,805) (28,535)
Securities loaned 544 273 817
Advances from the FHLB (10,732) 3,416 (7,316)
Other borrowings 9,184 (2,405) 6,779
Total increase (decrease) in interest expense $ 8,500 $ (74,607) $ (66,107)
Interest Income. Interest income for the fiscal year ended June 30, 2021 totaled
$617.9 million , a decrease of $5.0 million , or 0.8%, compared to $622.8 million
in interest income for the fiscal year ended June 30, 2020 primarily due to
reduced rates on interest-earning assets, partially offset by growth in volume
of interest-earning assets from loan originations, primarily from commercial
real estate and commercial & industrial lending. Average interest-earning assets
for the fiscal year ended June 30, 2021 increased by $2,167.7 million compared
to the fiscal year ended June 30, 2020 primarily due to loan originations for
investment which totaled $7,304.4 million during the year ended June 30, 2021 .
Yields on loans decreased by 58 basis points to 5.16% for the fiscal year ended
June 30, 2021 , primarily due to declines in market interest rates. For the
fiscal year ended June 30, 2021 , the growth in average balances contributed
additional interest income of $77.0 million , which was offset by a $81.9 million
decrease in interest income due to declines in market interest rates. The
average yield earned on our interest-earning assets decreased to 4.49% for the
fiscal year ended June 30, 2021 , compared to 5.37% in 2020 primarily due to
decreases in loan yields and rates earned on deposits in other financial
institutions. As a result of the Federal Reserve's decisions to maintain the Fed
Funds target rate near zero, the rates earned on our adjustable-rate loans are
generally at their floor and the rates on newly originated loans are lower than
the average rate of the loan portfolio.
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Interest Expense. Interest expense totaled $79.1 million for the fiscal year
ended June 30, 2021 , a decrease of $66.1 million , or 45.5% compared to $145.2
million in interest expense during the fiscal year ended June 30, 2020 , due
primarily to a $192.0 million increase in non-interest bearing deposits and
decreased rates on deposits, as a result of the Federal Reserve's decision to
maintain the Fed Funds target rate near zero throughout the year, partially
offset by greater volume of deposits due to growth. The average rate paid on all
of our interest-bearing liabilities decreased to 0.79% for the fiscal year ended
June 30, 2021 from 1.72% for the fiscal year ended June 30, 2020 , due primarily
to decreased rates on deposits. Average interest-bearing liabilities for the
fiscal year ended June 30, 2021 increased $1,569.4 million compared to fiscal
2020. The average rate on interest-bearing demand and savings deposits decreased
to 0.40% from 1.38% due to decreases in prevailing deposit rates across the
industry. The rates on borrowings, subordinated notes and debentures also
decreased to 3.65% from 5.45% due primarily to the mix of borrowings. The
average rate on time deposits decreased to 1.73% for the fiscal year ended
June 30, 2021 from 2.42% for the fiscal year ended June 30, 2020 , due to higher
rate maturing time deposits. The average non-interest-bearing demand deposits
were $2,182.0 million for the fiscal year ended June 30, 2021 , up from $1,990.0
million , representing an increase of $192.0 million .
Provision for Credit Losses. Provision for credit losses was $23.8 million for
the fiscal year ended June 30, 2021 and $42.2 million for fiscal 2020. The
decrease was due to the decrease in provisions associated with non-recurring
Refund Advance loans and macroeconomic updates relating to COVID-19. The
provisions are made to maintain our allowance for credit losses at levels which
management believes to be adequate. The assessment of the adequacy of our
allowance for credit losses is based upon a number of quantitative and
qualitative factors, including levels and trends of past due and nonaccrual
loans, loss history and changes in the volume and mix of loans and collateral
values.
See "Asset Quality and Allowance for Credit Losses - Loans" for discussion of
our allowance for credit losses and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our
non-interest income:
For the Fiscal Year Ended June 30,
(Dollars in thousands) 2021 2020
Prepayment penalty fee income 7,166 5,993
Gain on sale - other 491 6,871
Mortgage banking income 42,150 20,646
Broker-dealer fee income 26,317 23,210
Banking and service fees 29,137 46,267
Total non-interest income $ 105,261 $ 102,987
Through our agreement with H&R Block, Inc. ("H&R Block") and its wholly-owned
subsidiaries the Bank earned significant non-interest income by providing H&R
Block-branded financial products and services. On July 1, 2020 , the Bank
received written notification from Emerald Financial Services, LLC ("EFS"), a
subsidiary of H&R Block, terminating the Program Management Agreement ("PMA")
covering the Emerald Prepaid Mastercard®, Refund Transfer and Emerald Advance
products, effective July 1, 2020 . While the PMA has been terminated, the Bank
continued to perform certain services under the PMA until the services were
fully transitioned to another bank in December 2020 . Historically, the primary
non-interest income generating H&R Block products and services that lead to the
increased banking and service fees are Emerald Prepaid Mastercard® ("EPC") and
Refund Transfer ("RT").
Non-interest income totaled $105.3 million for the fiscal year ended June 30,
2021 compared to non-interest income of $103.0 million for fiscal 2020. The
increase was primarily the result of an increase of $21.5 million in mortgage
banking income, resulting from an increase in originations and sales of loans
held-for-sale due to the decline in market interest rates, an increase of $3.1
million in broker-dealer fee income, and increased levels of prepayment penalty
fee income by $1.2 million , partially offset by a decrease of $17.1 million in
banking and service fees, primarily due to Emerald Prepaid Mastercard® and
Refund Transfer products associated with H&R Block that did not recur in fiscal
2021, and a $6.4 million decrease in gain on sale-other, as certain sales of
lottery receivables and sales of Refund Advance loans to H&R Block in fiscal
2020 did not recur in fiscal 2021. Banking and service fees includes H&R
Block-branded product fees, deposit fees, fee income from prepaid card sponsors,
and certain C&I loan fees. The primary non-interest income-generating H&R Block
products and services that led to increased levels of banking and service fees
in fiscal 2020 are EPC and RT. For the fiscal year ended June 30, 2021 , EPC was
$2.6 million compared to $7.8 million for fiscal 2020. For the fiscal year ended
June 30, 2021 , RT was $1.4 million compared to $11.5 million for fiscal 2020.
55
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Included in gain on sale - other are sales of unsecured and secured consumer and
business loans originated through introductions from our third-party partner
relationships and sales of structured settlement annuity and state lottery
receivables. We engage in the wholesale and retail purchase of state lottery
prize and structured settlement annuity payments. These payments are high credit
quality deferred payment receivables having a state lottery commission or
investment grade (top two tiers) insurance company payor. The Bank originates
contracts for the retail purchase of such payments and classifies these under
the category of Other in the loan portfolio. Factoring yields are typically
higher than mortgage loan rates. Typically, the gain received upon sale of these
payment streams is greater than the gain received from an equivalent amount of
mortgage loan sales. Since 2013, pools of structured settlement receivables have
been originated for sale depending upon management's assessment of interest rate
risk, liquidity, and offers containing favorable terms and are classified on our
balance sheet as loans held for sale. Increased sales on favorable terms during
fiscal 2020 resulted in an increase in gain on sale from structured settlement
annuity and state lottery receivables. Such sales did not recur to the same
degree for during fiscal 2021.
Non-interest Expense. The following table sets forth information regarding our
non-interest expense for the periods shown:
For the Fiscal Year Ended June 30,
(Dollars in thousands) 2021 2020
Salaries and related costs $ 152,576 $ 144,341
Data processing 40,719 30,671
Depreciation and amortization 24,124 24,443
Advertising and promotional 14,212 14,523
Occupancy and equipment 13,402 12,059
Professional services 22,241 11,095
Broker-dealer clearing charges 11,152 8,210
FDIC and regulator fees 10,603
5,538
General and administrative expenses 25,481 24,886 Total non-interest expense $ 314,510$ 275,766 Non-interest expense totaled$314.5 million for the fiscal year endedJune 30, 2021 , an increase of$38.7 million compared to fiscal 2020. Salaries and related costs increased$8.2 million , or 5.7%, in fiscal 2021 primarily due to the staffing additions from increased staffing levels to support expansion in the Banking segment, specifically for lending and information technology infrastructure development activities. Our staff increased to 1,165 from 1099 or 6.0% between fiscal years endedJune 30, 2021 and 2020 and increased to 1099 from 1007 or 9.1% between fiscal years endedJune 30, 2020 and 2019.
Data processing increased
Depreciation and amortization, decreased
Advertising and promotion expense decreased
Occupancy and equipment expense increased$1.3 million , primarily due to the timing of new property leases and an impairment reserve charge on the early exit of a property lease of$0.9 million during fiscal 2021.
Professional services, which include accounting and legal fees, increased
Broker-dealer clearing charges increased
TheFederal Deposit Insurance Corporation ("FDIC") and regulator fees increased by$5.1 million in fiscal 2021 compared to fiscal 2020. The increase corresponds to growth in average liabilities and small bank assessment credits received from theFDIC during fiscal 2020 which did not recur in fiscal 2021. General and administrative expenses increased by$0.6 million in fiscal 2021 compared to 2020. The increase was primarily due increased deposit servicing expenses. Income Tax Expense. Income tax expense was$90.0 million for the fiscal year endedJune 30, 2021 compared to$79.2 million for fiscal 2020. Our effective tax rates were 29.45% and 30.15% for the fiscal years endedJune 30, 2021 and 2020, respectively. 56 -------------------------------------------------------------------------------- As ofJune 30, 2020 , the Company determined that certain stock-based compensation awards would not be granted under the plan, and the deferred tax assets related to these awards would not be realized. Accordingly, the Company wrote-off$6.8 million of a stock-based compensation deferred tax asset, resulting in a$2.0 million increase in tax expense for fiscal 2020. The Company received federal and state tax credits for the years endedJune 30, 2021 and 2020, respectively. These tax credits reduced the effective tax rate by approximately 0.59% and 0.77%, respectively. SEGMENT RESULTS The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company's financial condition and operating results and management's regular review of the operating results of those services. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:
Fiscal Year Ended
Banking Securities
(Dollars in thousands) Business Business Corporate/Eliminations Axos Consolidated Net interest income$ 527,760 $ 18,746 $ (7,764) $ 538,742 Provision for loan losses 23,750 - - 23,750 Non-interest income 79,150 27,627 (1,516) 105,261 Non-interest expense 254,596 48,095 11,819 314,510 Income (loss) before taxes$ 328,564 $ (1,722) $ (21,099) $ 305,743
Fiscal Year Ended
Banking Securities
(Dollars in thousands) Business Business Corporate/Eliminations Axos Consolidated Net interest income$ 464,448 $ 16,630 $ (3,467) $ 477,611 Provision for loan losses 42,200 - - 42,200 Non-interest income 80,374 24,817 (2,204) 102,987 Non-interest expense 216,895 43,525 15,346 275,766 Income (loss) before taxes$ 285,727 $ (2,078) $ (21,017) $ 262,632 Banking Business For the fiscal year endedJune 30, 2021 , we had pre-tax income of$328.6 million compared to pre-tax income of$285.7 million for the fiscal year endedJune 30, 2020 . For the fiscal year endedJune 30, 2021 , the increase in pre-tax income was primarily related to increased net interest income due to loan and deposit growth. We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment: Fiscal Year Ended June 30, 2021 June 30, 2020 Efficiency ratio 41.95 % 39.81 % Return on average assets 1.76 % 1.78 % Interest rate spread 3.92 % 3.72 % Net interest margin 4.11 % 4.19 % Our Banking segment's net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at our Holding Company and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our Securities Business, including items related to securities financing operations. 57 -------------------------------------------------------------------------------- The following table presents our Banking segment's information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the twelve months endedJune 30, 2021 and 2020: For the Fiscal Years Ended June 30, 2021 2020 Interest Income/ Average Yields Interest Average Yields (Dollars in thousands) Average Balance1 Expense Earned/Rates Paid Average Balance1 Income/Expense Earned/Rates Paid Assets: Loans2,3$ 11,287,008 $ 581,504 5.15 %$ 10,122,818 $ 581,518 5.74 % Interest-earning deposits in other financial institutions 1,329,029 1,359 0.10 % 700,659 8,839 1.26 % Investment securities3 221,213 10,166 4.60 % 235,893 11,661 4.94 % Stock of the regulatory agencies, at cost 17,250 932 5.40 % 25,696 1,532 5.96 % Total interest-earning assets 12,854,500 593,961 4.62 % 11,085,066 603,550 5.44 % Non-interest-earning assets 172,712 188,625 Total Assets$ 13,027,212 $ 11,273,691 Liabilities and Stockholder's Equity: Interest-bearing demand and savings$ 7,324,855 $ 29,626 0.40 %$ 4,864,591 $ 67,070 1.38 % Time deposits 1,825,795 31,498 1.73 % 2,482,151 60,033 2.42 % Advances from the FHLB 211,077 4,672 2.21 % 747,358 11,988 1.60 % Borrowings, subordinated notes and debentures 116,255 406 0.35 % 3,092 11 0.36 %
Total interest-bearing liabilities
0.70 % $ 8,097,192 $ 139,102 1.72 %
Non-interest-bearing demand deposits 2,209,932 2,000,755
Other non-interest-bearing
liabilities 121,545 85,951
Stockholder's equity 1,217,753 1,089,793
Total Liabilities and Stockholders'
Equity $ 13,027,212 $ 11,273,691
Net interest income $ 527,759 $ 464,448
Interest rate spread4 3.92 % 3.72 %
Net interest margin5 4.11 % 4.19 %
1Average balances are obtained from daily data.
2Loans include loans held for sale, loan premiums and unearned fees.
3Interest income includes reductions for amortization of loan and investment
securities premiums and earnings from accretion of discounts and loan fees.
Loans include average balances of $27.2 million and $28.0 million of Community
Reinvestment Act loans which are taxed at a reduced rate for the 2021 and 2020
twelve-month periods, respectively.
4Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities.
5Net interest margin represents annualized net interest income as a percentage
of average interest-earning assets.
58
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Net Interest Income. Net interest income totaled $527.8 million for the fiscal
year ended June 30, 2021 compared to $464.4 million for the fiscal year ended
June 30, 2020 . The following table sets forth the effects of changing rates and
volumes on our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense attributable to changes in
volume (changes in volume multiplied by prior rate); and (ii) effects on
interest income and interest expense attributable to changes in rate (changes in
rate multiplied by prior volume). The change in interest due to both volume and
rate has been allocated proportionally to both, based on their relative absolute
values.
Fiscal Year Ended June 30, 2021 vs 2020
Increase (Decrease) Due to
Total
Increase
(Dollars in thousands) Volume Rate (Decrease)
Increase (decrease) in interest income:
Loans and leases $ 63,068 $ (63,082) $ (14) Interest-earning deposits in other financial institutions 4,330
(11,810) (7,480)
Investment securities (710) (785) (1,495)
Stock of the regulatory agencies (466) (134) (600)
Total increase (decrease) in interest income $ 66,222 $ (75,811) $ (9,589)
Increase (decrease) in interest expense:
Interest-bearing demand and savings $ 24,084 $ (61,528) $ (37,444)
Time deposits (13,730) (14,805) (28,535)
Advances from the FHLB (10,732) 3,416 (7,316)
Other borrowings 395 - 395
Total increase (decrease) in interest expense $ 17 $ (72,917) $ (72,900)
The Banking segment's net interest income for the fiscal year ended June 30,
2021 totaled $527.8 million , an increase of 13.6%, compared to net interest
income of $464.4 million for the fiscal year ended June 30, 2020 . The growth of
net interest income is primarily due to net loan portfolio growth and a
reduction of rates paid on deposits.
The Banking segment's non-interest income decreased $1.2 million during the
fiscal year ended June 30, 2021 to $79.2 million from the $80.4 million for the
fiscal year ended June 30, 2020 . The decrease in non-interest income for the
fiscal year ended June 30, 2021 , was primarily the result of a decrease of $17.0
million in banking and service fees, primarily from Emerald Prepaid Mastercard®
and Refund Transfer products associated with H&R Block that did not recur in
fiscal 2021, and a $6.4 million decrease in gain on sale-other, as certain sales
of lottery receivables and sales of Refund Advance loans to H&R Block in fiscal
2020 did not recur in fiscal 2021, partially offset by an increase in mortgage
banking income of $21.0 million driven by the decline of mortgage rates to
record lows over the year, and an increase of $1.2 million in prepayment penalty
fee income.
Non-interest expense totaled $254.6 million for the fiscal year ended June 30,
2021 , an increase of $37.7 million compared to fiscal 2020. Salaries and related
costs increased $13.3 million , or 11.9%, in fiscal 2021 due to increased
staffing levels to support growth in staffing specifically for lending and
information technology infrastructure development activities, a $9.8 million
increase in data processing expense for loan and deposit systems enhancements, a
$7.9 million increase in professional services due to increased legal and
consulting expenses, an increase of $4.9 million in FDIC and OCC standard
regulatory charges due to growth in average liabilities and a small bank
assessment credit received from the FDIC in fiscal 2020 which did not recur, and
a $1.6 million increase in occupancy expense primarily due to an impairment
reserve charge on the early exit of a property lease.
Securities Business
For the fiscal year ended June 30, 2021 , our Securities Business segment had a
loss before taxes of $1.7 million an improvement of 17.1% compared to the loss
before taxes of $2.1 million for the fiscal year ended June 30, 2020 .
59
--------------------------------------------------------------------------------The following table provides our Securities Business operating results:
For the Fiscal Year Ended June 30,
(Dollars in thousands) 2021 2020
Net interest income $ 18,746 $ 16,630
Non-interest income 27,627 24,817
Non-interest expense 48,095 43,525
Income (Loss) before taxes $ (1,722) $ (2,078)
Net interest income for the fiscal year ended June 30, 2021 was $18.7 million
compared to $16.6 million for the fiscal year ended June 30, 2020 , an increase
of $2.1 million due to increased activity. In the Securities business, interest
is earned on margin loan balances, securities borrowed, and cash deposit
balances. Interest expense is incurred from cash borrowed through bank lines and
securities lending.
Non-interest income totaled $27.6 million for the fiscal year ended June 30,
2021 , an increase of $2.8 million compared to the $24.8 million during the
fiscal year ended June 30, 2020 . Increased activity resulted in an increase of
$3.3 million from correspondent fees and an increase of $2.7 million from
clearing and custodial related fees, partially offset by a decrease of $3.9
million in fees earned on managing customers' FDIC insured bank deposits due to
decreased rates.
Non-interest expense was $48.1 million during the fiscal year ended June 30,
2021 an increase of $4.6 million for the $43.5 million during the fiscal year
ended June 30, 2020 . The increase was primarily the result of an increase
broker-dealer clearing charges of $2.9 million due to increased activity and an
increase in professional services of $2.1 million due to an increase in legal
expenses.
Selected information concerning Axos Clearing LLC follows as of or for the three
months ended:
June 30,
(Dollars in thousands) 2021 2020
Compensation as a % of net revenue 32.4 % 39.2 %
FDIC insured program balances (end of period) $ 730,248 $ 450,251
Customer margin balances (end of period) $ 327,148 $ 206,702
Customer funds on deposit, including short credits (end of
period) $ 322,153 $ 194,042
Clearing:
Total tickets 2,053,362 1,228,635
Correspondents (end of period) 69 61
Securities lending:
Interest-earning assets - stock borrowed (end of period) $ 619,088 $ 222,368
Interest-bearing liabilities - stock loaned (end of period) $ 728,988 $ 255,945
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2020 AND JUNE 30, 2019
Net Interest Income. Net interest income totaled $477.6 million for the fiscal
year ended June 30, 2020 compared to $408.6 million for the fiscal year ended
June 30, 2019 . The following table sets forth the effects of changing rates and
volumes on our net interest income. Information is provided with respect to
(i) effects on interest income and interest expense attributable to changes in
volume (changes in volume multiplied by prior rate); and (ii) effects on
interest income and interest
60
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expense attributable to changes in rate (changes in rate multiplied by prior
volume). The change in interest due to both volume and rate has been allocated
proportionally to both, based on their relative absolute values.
Fiscal Year Ended June 30, 2020 vs 2019
Increase (Decrease) Due to
Total
Increase
(Dollars in thousands) Volume Rate (Decrease)
Increase (decrease) in interest income:
Loan and Leases $ 67,483 $ (10,052) $ 57,431
Interest-earning deposits in other financial institutions 3,570 (6,159) (2,589)
Investment securities 476 (3,358) (2,882)
Securities borrowed and margin lending 8,686 (847) 7,839
Stock of the regulatory agencies (851) (996) (1,847)
Total increase (decrease) in interest income $ 79,364 $ (21,412) $ 57,952
Increase (decrease) in interest expense:
Interest-bearing demand and savings $ 13,522 $ (8,030) $ 5,492
Time deposits 3,876 468 4,344
Securities loaned 87 (156) (69)
Advances from the FHLB (12,364) (8,482) (20,846)
Other borrowings (35) 60 25
Total increase/(decrease) in interest expense $ 5,086 $ (16,140) $ (11,054)
Interest Income. Interest income for the fiscal year ended June 30, 2020 totaled
$622.8 million , an increase of $58.0 million , or 10.3%, compared to $564.9
million in interest income for the fiscal year ended June 30, 2019 primarily due
to growth in volume of interest-earning assets from loan originations, primarily
from commercial & industrial lending and the addition of securities borrowed and
margin lending from our new securities segment. Average interest-earning assets
for the fiscal year ended June 30, 2020 increased by $1,560.8 million compared
to the fiscal year ended June 30, 2019 primarily due to loan and lease
originations for investment which totaled $6,798.0 million during the year ended
June 30, 2020 . Yields on loans and leases decreased by 11 basis points to 5.74%
for the fiscal year ended June 30, 2020 , primarily due to declines in market
interest rates. For the fiscal year ended June 30, 2020 , the growth in average
balances contributed additional interest income of $79.4 million , which was
partially offset by by a $21.4 million decrease in interest income due to
declines in market interest rates. The average yield earned on our
interest-earning assets decreased to 5.37% for the fiscal year ended June 30,
2020 , down from 5.63% for the same period in 2019 primarily due to the decrease
in rate from loans and leases. As a result of the Federal Reserve decisions to
decrease the Fed Funds rate over the last year, the rates earned on our
adjustable-rate loans declined and the rates on newly originated loans declined.
Interest Expense. Interest expense totaled $145.2 million for the fiscal year
ended June 30, 2020 , a decrease of $11.1 million , or 7.1% compared to $156.3
million in interest expense during the fiscal year ended June 30, 2019 , due
primarily to a $762.7 million increase in non-interest bearing deposits and
decreased rates on deposits and advances, as a result of the Federal Reserve's
decisions to decrease the Fed Funds rate over the year, partially offset by
greater volume of deposits due to growth. The average rate paid on all of our
interest-bearing liabilities decreased to 1.72% for the fiscal year ended
June 30, 2020 from 1.97% for the fiscal year ended June 30, 2019 , due primarily
to decreased rates on deposits and advances from FHLB. Average interest-bearing
liabilities for the fiscal year ended June 30, 2020 increased $473.2 million
compared to fiscal 2019. The average rate on interest-bearing deposits decreased
to 1.38% from 1.57% due to decreases in prevailing deposit rates across the
industry. The rates on advances from the FHLB also decreased to 1.60% from 2.35%
due primarily to the Fed rate decreases. The average rate on time deposits
increased to 2.42% for the fiscal year ended June 30, 2020 from 2.40% for the
fiscal year ended June 30, 2019 , due to changes in the mix of time deposits.
Average FHLB advances for the fiscal year ended June 30, 2020 decreased $650.1
million , or 46.5% compared to fiscal 2019. The average non-interest-bearing
demand deposits were $1,990.0 million for the fiscal year ended June 30, 2020 ,
representing an increase of $762.7 million .
Provision for Credit Losses. Provision for credit losses was $42.2 million for
the fiscal year ended June 30, 2020 and $27.4 million for fiscal 2019. The
increase in the credit loss provision was primarily due to additional provisions
for changes in economic and business conditions resulting from the COVID-19
pandemic, overall loan portfolio growth, and changes in the loan mix. The
provisions are made to maintain our allowance for loan and lease losses at
levels which management believes to be adequate. The assessment of the adequacy
of our allowance for loan and lease losses is based upon a number of
quantitative and qualitative factors, including levels and trends of past due
and nonaccrual loans, loss history and changes in the volume and mix of loans
and collateral values.
61
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See "Asset Quality and Allowance for Credit Losses - Loans" for discussion of
our allowance for loan and lease losses and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our
non-interest income:
For the Fiscal Year Ended June 30,
(Dollars in thousands) 2020 2019
Realized gain on securities: $ - $ 709
Unrealized loss on securities:
Total impairment losses - (1,666)
Loss (gain) recognized in other comprehensive income - 845
Total unrealized loss on securities $ - $ (821)
Prepayment penalty fee income 5,993 5,851
Gain on sale-other 6,871 6,160
Mortgage banking income 20,646 5,267
Broker-dealer fee income 23,210 11,737
Banking and service fees 46,267 53,854
Total non-interest income $ 102,987 $ 82,757
Our relationship with H&R Block began in fiscal 2016 and introduced
seasonality into banking and service fees category of non-interest income, with
an increase during our second quarter and the peak income in this category
typically occurring during our third fiscal quarter ended March 31 . Therefore,
banking and services fees for the three months ended March 31 , are not
indicative of results to be expected for other quarters during the fiscal year.
Historically, the primary non-interest income generating H&R Block products and
services that lead to the increased banking and service fees are Emerald Prepaid
Mastercard® ("EPC") and Refund Transfer ("RT").
Non-interest income totaled $103.0 million for the fiscal year ended June 30,
2020 compared to non-interest income of $82.8 million for fiscal 2019. The
increase was primarily the result of an increase of $15.4 million in mortgage
banking income, resulting from an increase in originations of loans
held-for-sale increased due to the decline in market interest rates, an increase
of $11.5 million in broker-dealer fee income from a full year of our securities
segment, an increase in net unrealized loss on securities of $0.8 million , a
$0.7 million increase in gain on sale-other, and increased levels of prepayment
penalty fee income of $0.1 million , partially offset by a decrease of $7.6
million in banking and service fees due to trustee and fiduciary services and a
decrease in realized gain on sale of securities of $0.7 million . Banking and
service fees includes H&R Block-branded product fees, deposit fees, fee income
from prepaid card sponsors, and certain C&I loan fees. The primary non-interest
income-generating H&R Block products and services that led to the increased
banking and service fees are EPC and RT. For the fiscal year ended June 30,
2020 , EPC was flat at $7.8 million compared to fiscal 2019. For the fiscal year
ended June 30, 2020 , RT decreased $0.8 million to $11.5 million from $12.3
million for fiscal 2019.
Included in gain on sale - other are sales of unsecured and secured consumer and
business loans originated through introductions from our third-party partner
relationships, for example H&R Block-branded Emerald Advance, and sales of
structured settlement annuity and state lottery receivables. We engage in the
wholesale and retail purchases of state lottery prize and structured settlement
annuity payments. These payments are high credit quality deferred payment
receivables having a state lottery commission or investment grade (top two
tiers) insurance company payor. The Bank originates contracts for the retail
purchase of such payments and classifies these under the heading of Factoring in
the loan portfolio. Factoring yields are typically higher than mortgage loan
rates. Typically, the gain received upon sale of these payment streams is
greater than the gain received from an equivalent amount of mortgage loan sales.
Since 2013, pools of structured settlement receivables are originated for sale
from time to time depending upon management's assessment of interest rate risk,
liquidity, and offers containing favorable terms and, if originated for sale,
would be classified on our balance sheet as loans held for sale.
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--------------------------------------------------------------------------------Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods shown:
For the Fiscal Year Ended June 30,
(Dollars in thousands) 2020 2019
Salaries and related costs $ 144,341 $ 127,433
Data processing and internet 30,671 24,150
Depreciation and amortization 24,443 16,471 Advertising and promotional 14,523 14,710 Occupancy and equipment 12,059 8,571 Professional services 11,095 11,916 Broker-dealer clearing charges 8,210 2,822 FDIC and regulator fees 5,538 9,005 General and administrative 24,886 36,128 Total non-interest expense $ 275,766$ 251,206 Non-interest expense totaled$275.8 million for the fiscal year endedJune 30, 2020 , an increase of$24.6 million compared to fiscal 2019. Salaries and related costs increased$16.9 million , or 13.3%, in fiscal 2020 due to staffing additions from the aforementioned acquisitions and increased staffing levels to support growth in the Banking segment, specifically for deposits, lending, information technology infrastructure development, and compliance activities. Our staff increased to 1099 from 1007 or 9.14% between fiscal year endedJune 30, 2020 and 2019 and increased to 1007 from 801 or 25.72% between fiscal year endedJune 30, 2019 and 2018.
Data processing and internet expense increased
Advertising and promotion expense decreased$0.2 million , primarily due to decreased mortgage lead generation and deposit marketing costs as well as by a reduction of costs from the fiscal 2019 rebranding. Depreciation and amortization, increased$8.0 million primarily due to the amortization of intangibles from recent acquisitions, depreciation on lending and deposit platform enhancements and infrastructure development.
Occupancy and equipment expense increased
Professional services, which include accounting and legal fees, decreased$0.8 million in fiscal 2020 compared to 2019. The decrease in professional services was primarily due to a 2019 non-recurring charge of$15.3 million in our Securities Business for an impaired and uncollectible receivable. The change inFederal Deposit Insurance Corporation ("FDIC") and OCC standard regulatory charges decreased by$3.5 million in fiscal 2020 compared to fiscal 2019. The decrease was a result of a small bank assessment credits received from theFDIC . As anFDIC -insured institution, the Bank is required to pay deposit insurance premiums to theFDIC . Broker-dealer clearing charges were$8.2 million for the fiscal year endedJune 30, 2020 . The increase was attributable full period costs compared to the 2019 periods as the Securities Business was acquired part way through the fiscal year in lateJanuary 2019 . General and administrative expenses decreased by$11.2 million in fiscal 2020 compared to 2019. The decrease was primarily due to a$15.3 million increase in our Securities Business for an impaired and uncollectible receivable. Income Tax Expense. Income tax expense was$79.2 million for the fiscal year endedJune 30, 2020 compared to$57.7 million for fiscal 2019. Our effective tax rates were 30.15% and 27.10% for the fiscal years endedJune 30, 2020 and 2019, respectively. As ofJune 30, 2020 , the Company determined that certain stock-based compensation awards would not be granted under the plan, and the deferred tax assets related to these awards will not be realized. Accordingly, the Company wrote-off$6.8 million of stock-based compensation deferred tax asset, resulting in a$2.0 million increase in tax expense for fiscal 2020. During the year endedJune 30, 2019 , the Company acquiredCOR Securities Holdings . The Company recognized a deferred tax liability benefit of$2.2 million . The Company received federal and state tax credits for the years endedJune 30, 2020 , 2019, and 2018, respectively.These tax credits reduced the effective tax rate by approximately 0.77%, 1.55%, and 2.38% respectively. 63 -------------------------------------------------------------------------------- SEGMENT RESULTS The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company's financial condition and operating results and management's regular review of the operating results of those services. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:
Fiscal Year Ended
Banking Securities
(Dollars in thousands) Business Business Corporate/Eliminations Axos Consolidated Net interest income$ 464,448 $ 16,630 $ (3,467) $ 477,611 Provision for loan losses 42,200 - - 42,200 Non-interest income 80,374 24,817 (2,204) 102,987 Non-interest expense 216,895 43,525 15,346 275,766 Income before taxes$ 285,727 $ (2,078) $ (21,017) $ 262,632
Fiscal Year Ended
Banking Securities
(Dollars in thousands) Business Business Corporate/Eliminations Axos Consolidated Net interest income$ 404,500 $ 7,564 $ (3,459) $ 408,605 Provision for loan losses 27,350 - - 27,350 Non-interest income 70,917 12,071 (231) 82,757 Non-interest expense 192,588 34,430 24,188 251,206 Income before taxes$ 255,479 $ (14,795) $ (27,878) $ 212,806 Banking Business For the fiscal year endedJune 30, 2020 , we had pre-tax income of$285.7 million compared to pre-tax income of$255.5 million for the fiscal year endedJune 30, 2019 . For the fiscal year endedJune 30, 2020 , the increase in pre-tax income was primarily related to increased net interest income due to loan and deposit growth. We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment: Fiscal Year Ended June 30, 2020 June 30, 2019 Efficiency ratio 39.81 % 40.51 % Return on average assets 1.78 % 1.83 % Interest rate spread 3.72 % 3.72 % Net interest margin 4.19 % 4.14 % Our Banking segment's net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at our Holding Company and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our Securities Business, including items related to securities financing operations. 64 -------------------------------------------------------------------------------- The following table presents our Banking segment's information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the twelve months endedJune 30, 2020 and 2019: For the Fiscal Years Ended June 30, 2020 2019 Interest Income/ Average Yields Interest Average Yields (Dollars in thousands) Average Balance1 Expense Earned/Rates Paid Average Balance1 Income/Expense Earned/Rates Paid Assets: Loans and Leases2,3$ 10,122,818 $ 581,518 5.74 %$ 8,974,624 $ 525,307 5.85 % Interest-earning deposits in other financial institutions 700,659 8,839 1.26 % 540,047 12,285 2.27 % Investment securities3 235,893 11,661 4.94 % 208,234 13,929 6.69 % Stock of the regulatory agencies, at cost 25,696 1,532 5.96 % 40,000 3,378 8.45 %
Total interest-earning assets
5.44 %$ 9,762,905 $ 554,899 5.68 % Non-interest-earning assets 188,625 189,802 Total Assets$ 11,273,691 $ 9,952,707 Liabilities and Stockholder's Equity: Interest-bearing demand and savings$ 4,864,591 $ 67,070 1.38 %$ 3,964,429 $ 61,845 1.56 % Time deposits 2,482,151 60,033 2.42 % 2,322,039 55,689 2.40 % Advances from the FHLB 747,358 11,988 1.60 % 1,397,460 32,834 2.35 % Borrowings, subordinated notes and debentures 3,092 11 0.36 % 1,112 31 2.70 %
Total interest-bearing liabilities
1.72 %$ 7,685,040 $ 150,399 1.96 % Non-interest-bearing demand deposits 2,000,755 1,236,508 Other non-interest-bearing liabilities 85,951 58,004 Stockholder's equity$ 1,089,793 $ 973,155 Total Liabilities and Stockholders' Equity$ 11,273,691 $ 9,952,707 Net interest income$ 464,448 $ 404,500 Interest rate spread4 3.72 % 3.72 % Net interest margin5 4.19 % 4.14 % 1Average balances are obtained from daily data. 2Loans and leases include loans held for sale, loan premiums and unearned fees. 3Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans and leases include average balances of$28.0 million and$28.7 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2020 and 2019 twelve-month periods, respectively. 4Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities. 5Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 65 -------------------------------------------------------------------------------- Net Interest Income. Net interest income totaled$464.4 million for the fiscal year endedJune 30, 2020 compared to$404.5 million for the fiscal year endedJune 30, 2019 . The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values. Fiscal Year Ended June 30, 2020 vs 2019 Increase (Decrease) Due to Total Increase (Dollars in thousands) Volume Rate (Decrease) Increase (decrease) in interest income: Loans and leases$ 66,222 $ (10,011) $ 56,211
Interest-earning deposits in other financial institutions 2,990
(6,436) (3,446)
Investment securities 1,690 (3,958) (2,268)
Stock of the regulatory agencies (1,012) (834) (1,846)
Total increase (decrease) in interest income $ 69,890 $ (21,239) $ 48,651
Increase (decrease) in interest expense:
Interest-bearing demand and savings $ 12,928 $ (7,703) $ 5,225
Time deposits 3,876 468 4,344
Advances from the FHLB (12,364) (8,482) (20,846)
Other borrowings 21 (41) (20)
Total increase (decrease) in interest expense $ 4,461 $ (15,758) $ (11,297)
The Banking segment's net interest income for the fiscal year ended June 30,
2020 totaled $464.4 million , an increase of 14.8%, compared to net interest
income of $404.5 million for the fiscal year ended June 30, 2019 . The growth of
net interest income is primarily due to increased volume of loans and leases,
partially offset by decreased average yields earned on interest earning assets
and increased levels of interest-bearing demand and savings. The provision
increased from 2019 to 2020 due to macroeconomic updates related to COVID-19.
The Banking segment's non-interest income increased $9.5 million from $70.9
million to $80.4 million for the fiscal year ended June 30, 2020 compared to the
fiscal year ended June 30, 2019 . The increase in non-interest income for the
fiscal year ended June 30, 2020 , was primarily the result of an increase in
mortgage banking income of $14.6 million , a decrease in net unrealized loss on
securities of $0.8 million , a $0.7 million increase in gain on sale-other and an
increase of $0.1 million in prepayment penalty fee income, partially offset by a
decrease of $6.1 million in banking and service fees and a decrease in realized
gain on sale of securities of $0.7 million . Banking and service fees includes
H&R Block-branded product fees, deposit fees, fee income from prepaid card
sponsors, and certain C&I loan fees. EPC and RT, our primary non-interest
income-generating H&R Block products and services, are categorized in banking
and service fees. For the fiscal year ended June 30, 2020 , EPC was flat at $7.8
million compared to fiscal 2019. For the fiscal year ended June 30, 2020 , RT
decreased $0.8 million to $11.5 million from $12.3 million for fiscal 2019.
Non-interest expense totaled $216.9 million for the fiscal year ended June 30,
2020 , an increase of $24.3 million compared to fiscal 2019. Salaries and related
costs increased $15.4 million , or 16.0%, in fiscal 2020 due to increased
staffing levels to support growth in staffing for lending, information
technology infrastructure development, regulatory compliance, and the trustee
and fiduciary services, a $6.4 million increase in depreciation and amortization
for amortization of fiduciary services intangibles and systems enhancements, a
$3.0 million increase in occupancy expense, a $2.9 million increase in data
processing expense for loan and deposit systems enhancements, and a $2.0 million
increase in other and general expense, partially offset by a decrease of $3.8
million in FDIC and OCC standard regulatory charges due a small bank assessment
credit received from the FDIC , and a $1.2 million decrease in professional
services.
Securities Business
For the fiscal year ended June 30, 2020 , our Securities Business segment had a
loss before taxes of $2.1 million . The Securities Business segment was created
as a result of acquisitions during fiscal 2019; therefore, comparisons are
limited in meaning, since the Securities Business was only part of the
consolidated organization for five months of fiscal 2019. For the fiscal year
ended June 30, 2019 , the $14.8 million loss was primarily due to a $15.3 million
bad debt expense related to a correspondent customer of our clearing
broker-dealer.
66
--------------------------------------------------------------------------------The following table provides our Securities Business operating results:
Fiscal Year Ended
(Dollars in thousands) June 30, 2020 June 30, 2019
Net interest income $ 16,630 $ 7,564
Non-interest income 24,817 12,071
Non-interest expense 43,525 34,430
Income (Loss) before income taxes
Net interest income during the fiscal year endedJune 30, 2020 was$16.6 million . Net interest income for the fiscal year endedJune 30, 2019 was$7.6 million . In the Securities Business, interest is earned on margin loan balances, securities borrowed, and cash deposit balances. Interest expense is incurred from cash borrowed through bank lines and securities lending. Non-interest income during the fiscal year endedJune 30, 2020 was$24.8 million , the result of$8.2 million of clearing and custodial related fees,$7.9 million of correspondent fees,$6.3 million in fees earned onFDIC insured bank deposits, and$2.4 million of clearing technology services. Non-interest income during the fiscal year endedJune 30, 2019 was$12.1 million , the result of$8.9 million of clearing and custodial related fees and$3.1 million in fees earned onFDIC insured bank deposits. Non-interest expense during the fiscal year endedJune 30, 2020 was$43.5 million . Total non-interest expense included salaries and related costs of$18.5 million , broker-dealer clearing charges of$8.2 million , data processing of$5.5 million , other and general expenses of$3.8 million , professional services of$2.9 million and depreciation and amortization of$2.6 million . Non-interest expense during the fiscal year endedJune 30, 2019 was$34.4 million . Total non-interest expense included other and general expense of$16.4 million (of which$15.3 million was bad debt expense related to a correspondent customer of our clearing broker-dealer), salaries and related costs of$8.3 million , professional services of$3.0 million , broker-dealer clearing charges of$2.8 million and data processing and internet expenses of$2.1 million . Selected information concerningAxos Clearing LLC follows: Fiscal Year Ended (Dollars in thousands) June 30, 2020 June 30, 2019 Compensation as a % of net revenue 39.2 % 35.0 % FDIC insured program balances (end of period)$ 450,251 $ 341,576 Customer margin balances (end of period)$ 206,702 $ 189,193 Customer funds on deposit, including short credits (end of period)$ 194,042 $ 206,469 Clearing: Total tickets 1,228,635 595,962 Correspondents (end of period) 61 62 Securities lending: Interest-earning assets - stock borrowed (end of period) $
222,368
COMPARISON OF FINANCIAL CONDITION ATJUNE 30, 2021 ANDJUNE 30, 2020 Our total assets increased$0.4 billion , or 3.0%, to$14.3 billion , as ofJune 30, 2021 , up from$13.9 billion atJune 30, 2020 . The loan portfolio increased$0.8 billion on a net basis, primarily from portfolio loan originations of$7.3 billion , less principal repayments and other adjustments of$6.5 billion . Total cash decreased by$0.9 billion primarily due to decreased deposits and loan fundings. Total liabilities increased by$243.6 million or 1.9%, to$12.9 billion atJune 30, 2021 , up from$12.6 billion atJune 30, 2020 . The increase in total liabilities resulted primarily from growth in securities loaned of$0.5 billion , advances from theFederal Home Loan Bank of$0.1 billion and customer and broker-dealer payables of$0.2 billion , 67 -------------------------------------------------------------------------------- partially offset by decreased deposits of$0.5 billion . Stockholders' equity increased by$170.1 million , or 13.8%, to$1.4 billion atJune 30, 2021 , up from$1.2 billion atJune 30, 2020 . The increase was the result of$215.7 million in net income for the fiscal year,$10.0 million vesting and issuance of RSUs and stock-based compensation expense, partially offset by a$37.1 million adjustment to retained earnings for the adoption of ASC 326,$16.8 million in stock repurchases,$5.2 million for redemption of Series-A preferred stock,$3.4 million unrealized gain in other comprehensive income, net of tax, and$0.1 million in dividends declared on preferred stock. For the year endedJune 30, 2021 , the Company repurchased a total of$16.8 million , or 753,597 common shares at an average price of$22.24 per share. ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES - LOANS Non-performing loans and leases and foreclosed assets or "non-performing assets" consisted of the following: At June 30, (Dollars in thousands) 2021 2020 2019 2018 2017 Non-performing assets: Non-accrual loans and leases: Single Family - Mortgage & Warehouse$ 105,708 $ 84,030 $ 46,005 $ 28,462 $ 23,393 Multifamily and Commercial Mortgage 20,428 3,425 2,108 232 4,255 Commercial Real Estate 15,839 - - - - Total non-accrual loans secured by real estate 141,975 87,455 48,113 28,694 27,648 Commercial & Industrial - Non-RE 2,942 213 - 2,361 588 Auto & Consumer 278 273 331 171 157 Other - Total non-performing loans and leases 145,195 87,941 48,444 31,226 28,393 Foreclosed real estate 6,547 6,114 7,449 9,385 1,353 Repossessed vehicles 235 294 36 206 60 Total non-performing assets$ 151,977 $ 94,349 $ 55,929 $ 40,817 $ 29,806 Total non-performing loans and leases as a percentage of total loans and leases 1.26 % 0.82 % 0.51 % 0.37 % 0.38 % Total non-performing assets as a percentage of total assets 1.10 % 0.68 % 0.50 % 0.43 % 0.35 % Our non-performing assets increased to$152.0 million atJune 30, 2021 from$94.3 million atJune 30, 2020 . The increase in non-performing assets during the fiscal year endedJune 30, 2021 was substantially comprised of an increase in non-performing loans and leases of$57.3 million . Non-performing assets as a percentage of total assets increased to 1.10% atJune 30, 2021 from 0.68% atJune 30, 2020 . The increase in non-performing assets during the fiscal year endedJune 30, 2020 compared toJune 30, 2019 was comprised of an increase in non-performing loans and leases of$39.5 million . The increase in non-performing loans and leases is primarily the result of increased deliquent single family residential real estate secured loans, multifamily loans and commercial real estate loans as a result of COVID-10 related economic deterioration during the fiscal years endedJune 30, 2021 and 2020. Approximately 72.8% of the Bank's nonaccrual loans and leases are single family first mortgages that have an aggregate loan-to-value ratio of 56.7%. We have experienced growth in our non-performing single family mortgage loans over the last five years; however, we believe that the write-downs taken as ofJune 30, 2021 on these non-performing loans and the low average LTVs on the balance of our single family mortgage real estate loans in our portfolio make our future risk of loss better than other banks with significant exposure to real estate loans. If average nationwide residential housing values decline or if nationwide unemployment increases, we are likely to experience growth in the level of our non-performing loans and leases, foreclosed real estate and repossessed vehicles in future periods. For discussion of the COVID-19 impact on our assets and our actions taken, see the beginning of "Management's Discussion and Analysis of Financial Condition and Results of Operations." Allowance for Credit Losses - Loans. OnJuly 1, 2020 , the Company adopted ASC 326. The update replaces the historical incurred loss model to a current expected loss model, resulting, generally, in earlier recognition of loss. Refer to Note 1 - Summary of Significant Accounting Policies within this Form 10-K for further detail on the accounting adoption along with detail of the processes involved in determining the allowance for credit losses under the new guidance. 68 --------------------------------------------------------------------------------
The following table sets forth the changes in our allowance for loan and lease losses, by portfolio class for the dates indicated:
Single Family - Multifamily and Commercial & Total Allowance
Mortgage & Commercial Commercial Real Auto & Industrial - as a % of Total
(Dollars in thousands) Warehouse Mortgage Estate Consumer Non-RE Other Total Loans
Balance at June 30, 2016 $ 19,350 $ 4,309 $ 3,922 $ 1,669 $ 6,235 $ 341 $ 35,826 0.56 %
Provision for loan losses 2,233 (224) 2,108 1,330 300 5,314 11,061
Charge-offs (1,138) (23) - (433) - (3,502) (5,096)
Transfers to held for
sale - - - - - (1,828) (1,828)
Recoveries 138 416 - - 207 108 869
Balance at June 30, 2017 20,583 4,478 6,030 2,566 6,742 433 40,832 0.55 %
Provision for loan and
lease losses 832 (424) 3,172 2,152 3,696 16,372 25,800
Charge-offs (559) - - (803) - (14,617) (15,979)
Transfers to held for
sale - - - - - (2,307) (2,307)
Recoveries 49 - - 212 - 544 805
Balance at June 30, 2018 20,905 4,054 9,202 4,127 10,438 425 49,151 0.58 %
Provision for loan and
lease losses 1,777 (356) 5,430 5,731 255 14,513 27,350
Charge-offs (799) - - (3,752) (1,149) (13,963) (19,663)
Transfers to held for
sale - - - - - (2,356) (2,356)
Recoveries 407 109 - 233 - 1,854 2,603
Balance at June 30, 2019 22,290 3,807 14,632 6,339 9,544 473 57,085 0.60 %
Provision for loan and
lease losses 3,546 793 6,420 7,429 4,542 19,470 42,200
Charge-offs (203) - - (5,047) (4,132) (16,451) (25,833)
Recoveries 266 119 - 741 - 1,229 2,355
Balance at June 30, 2020 25,899 4,719 21,052 9,462 9,954 4,721 75,807 0.71 %
Effect of Adoption of ASC
326 6,318 7,408 25,893 610 7,042 29 47,300
Provision for loan and
lease losses (3,242) 1,196 11,238 (1,354) 14,251 1,661 23,750
Charge-offs (2,502) (177) (255) (3,517) (2,833) (7,274) (16,558)
Recoveries 131 - - 1,318 46 1,164 2,659
Balance at June 30, 2021 $ 26,604 $ 13,146 $ 57,928 $ 6,519 $ 28,460 $ 301 $ 132,958 1.15 %
The following table sets forth our allowance for credit losses by portfolio
class:
At June 30,
2021 2020 2019 2018 2017
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a % as a % as a % as a % as a %
Amount of of Total Amount of of Total Amount of of Total Amount of of Total Amount of of Total
(Dollars in thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
Single Family - Mortgage
& Warehouse $ 26,604 37.8 % $ 25,899 44.1 % $ 22,290 39.0 % $ 20,905 42.5 % $ 20,583 50.4 %
Multifamily and
Commercial Mortgage 13,146 21.4 % 4,719 21.1 % 3,807 6.7 % 4,054 8.2 % 4,478 11.0 %
Commercial Real Estate 57,928 27.5 % 21,052 21.5 % 14,632 25.6 % 9,202 18.7 % 6,030 14.8 %
Commercial & Industrial
- Non-RE 28,460 9.7 % 9,954 8.3 % 9,544 16.7 % 10,438 21.2 % 6,742 16.5 %
Auto & Consumer 6,519 3.1 % 9,462 3.2 % 6,339 11.1 % 4,127 8.4 % 2,566 6.3 %
Other 301 0.5 % 4,721 1.8 % 473 0.8 % 425 0.9 % 433 1.1 %
Total $ 132,958 100.0 % $ 75,807 100.0 % $ 57,085 100.0 % $ 49,151 100.0 % $ 40,832 100.0 %
The Company's allowance for credit losses increased $57.2 million or 75.4% from
June 30, 2020 to June 30, 2021 . As a percentage of the outstanding loan balance,
the Company's allowance was 1.15% at June 30, 2021 and 0.71% at June 30, 2020 .
Provisions for credit losses were $23.8 million for fiscal 2021 and $42.2
million for fiscal 2020. The Company's credit loss provisions for fiscal 2021
compared to 2020 decreased by $18.5 million primarily due to non-recurring
Refund Advance loans and changes in economic and business conditions resulting
from the COVID-19 pandemic. Provisions for credit losses for
69
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fiscal 2021 were primarily comprised of provisions in commercial real estate and
commercial & industrial - non-RE due to growth in these segments of the loan
portfolio.
Net charge-offs for single family - mortgage & warehouse loans increased $2.4
million for fiscal 2021. Net charge-offs for each of multifamily and commercial
mortgage and commercial real estate loans increased $0.2 million in fiscal 2021.
Net charge-offs for auto & consumer decreased $2.1 million for fiscal 2021. Net
charge-offs for other decreased $9.1 million for fiscal 2021, primarily due to a
$6.3 million decrease in Refund Advance charge-offs and a $0.9 million decrease
in net charge-offs for unsecured consumer loans. For fiscal 2020, net
charge-offs for single family mortgage real estate secured loans decreased $0.5
million , multifamily and commercial real estate secured loans incurred no
charge-offs or recoveries in fiscal 2020. Net charge-offs for the auto &
consumer increased $0.4 million for fiscal 2020. Net charge-offs for the other
increased $3.5 million for fiscal 2020, primarily due to a $2.8 million increase
in Refund Advance charge-offs and a $0.4 million increase in net charge-offs for
unsecured consumer loans. In fiscal 2019, the remaining balance of Refund
Advance loans were sold prior to year end, and the loss attributable was
classified in transfer to held for sale in the allowance for loan and lease
losses changes table.
Between June 30, 2020 and 2021, the Bank's total allowance for credit losses as
a proportion of the loan portfolio increased 44 basis points primarily due to
adoption of ASC 326.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. For Axos Bank , our sources of liquidity include deposits, borrowings,
payments and maturities of outstanding loans, sales of loans, maturities or
gains on sales of investment securities and other short-term investments. While
scheduled loan payments and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. We generally invest excess funds in overnight
deposits and other short-term interest-earning assets. We use cash generated
through retail deposits, our largest funding source, to offset the cash utilized
in lending and investing activities. Our short-term interest-earning investment
securities are also used to provide liquidity for lending and other operational
requirements.
As an additional source of funds, we have two credit agreements. Axos Bank can
borrow up to 40% of its total assets from the FHLB. Borrowings are
collateralized by pledging certain mortgage loans and investment securities to
the FHLB. Based on loans and securities pledged at June 30, 2021 , we had a total
borrowing availability of another $2.3 billion available immediately and an
additional $3.1 billion available with additional collateral, for advances from
the FHLB for terms up to ten years.
The Bank can also borrow from the discount window at the FRBSF. FRBSF borrowings
are collateralized by commercial loans, consumer loans and mortgage-backed
securities pledged to the FRBSF. Based on loans and securities pledged at
June 30, 2021 , we had a total borrowing capacity of approximately $2.1 billion ,
all of which was available for use. At June 30, 2021 , we also had $175.0 million
in unsecured federal funds lines of credit with two major banks under which
there were no borrowings outstanding.
In the past, we have used long-term borrowings to fund our loans and to minimize
our interest rate risk. Our future borrowings will depend on the growth of our
lending operations and our exposure to interest rate risk. We expect to continue
to use deposits and advances from the FHLB as the primary sources of funding our
future asset growth.
The Bank has zero advances outstanding from the Federal Reserve Bank through the
Paycheck Protection Program Liquidity Facility, and no Small Business
Administration Paycheck Protection Program Loans pledged as of June 30, 2021 .
The advances had weighted average interest rates of 0.35% during the year ended
June 30, 2021 .
Axos Clearing has $133.8 million uncommitted secured lines of credit available
for borrowing. As of June 30, 2021 , there was $36.2 million outstanding. These
credit facilities bear interest at rates based on the Federal Funds rate and are
due upon demand. The weighted average interest rate on the borrowings at
June 30, 2021 was 1.75%.
Axos Clearing has a $50.0 million committed unsecured line of credit available
for limited purpose borrowing. As of June 30, 2021 , there was no amount
outstanding. This credit facility bears interest at rates based on the Federal
Funds rate and are due upon demand. The unsecured line of credit requires Axos
Clearing operate in accordance with specific covenants surrounding capital and
debt ratios. Axos Clearing was in compliance of all covenants as of June 30,
2021 .
In December 2004 , we completed a transaction that resulted in $5.2 million of
junior subordinated debentures for our company with a stated maturity date of
February 23, 2035 . We have the right to redeem the debentures in whole (but not
in part) on or after specific dates, at a redemption price specified in the
indenture plus any accrued but unpaid interest through the
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redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%,
for a rate of 2.55% as of June 30, 2021 , with interest paid quarterly.
In March 2016 , we completed the sale of $51.0 million aggregate principal amount
of our 6.25% Subordinated Notes due February 28, 2026 (the "Notes 2026"). On
March 31, 2021 , the Company completed the redemption of $51.0 million aggregate
principal amount. The Notes 2026 were redeemed for cash by the Company at 100%
of their principal amount, plus accrued and unpaid interest, in accordance with
the terms of the indenture governing the Notes 2026. On March 31, 2021 , the
Company completed the redemption of $51.0 million aggregate principal amount of
its Notes 2026. The Notes 2026 were redeemed for cash by the Company at 100% of
their principal amount, plus accrued and unpaid interest, in accordance with the
terms of the indenture governing the Notes 2026. Remaining unamortized deferred
financing costs associated with such notes were expensed and included under
Interest Expense - Other Borrowings in the Consolidated Statements of Income.
In January 2019 , we issued subordinated notes totaling $7.5 million , to the
principal stockholders of COR Securities in an equal principal amount, with a
maturity of 15 months, to serve as the source of payment of indemnification
obligations of the principal stakeholders of COR Securities under the Merger
Agreement. Interest accrues at a rate of 6.25% per annum. During the fiscal year
ended June 30, 2019 , $0.1 million of subordinated loans were repaid. The Company
has made an indemnification claim against the $7.4 million remaining.
In September 2020 , the Company completed the sale of $175.0 million aggregate
principal amount of its 4.875% Fixed-to-Floating Rate Subordinated Notes due
October 1, 2030 (the "Notes"). The Notes mature on October 1, 2030 and accrue
interest at a fixed rate per annum equal to 4.875%, payable semi-annually in
arrears on April 1 and October 1 of each year, commencing on April 1, 2021 . From
and including October 1, 2025 , to, but excluding October 1, 2030 or the date of
early redemption, the Notes will bear interest at a floating rate per annum
equal to a benchmark rate (which is expected to be the Three-Month Term Secured
Overnight Financing Rate) plus a spread of 476 basis points, payable quarterly
in arrears on January 1 , April 1 , July 1 and October 1 of each year, commencing
on January 2026 . The Notes may be redeemed on or after October 1, 2025 , which
date may be extended at the Company's discretion, at a redemption price equal to
principal plus accrued and unpaid interest, subject to certain conditions.
In March 2021 , we filed a new shelf registration with the SEC which allows us to
issue up to $400.0 million through the sale of debt securities, common stock,
preferred stock and warrants.
Off-Balance Sheet Commitments. At June 30, 2021 , we had commitments to originate
loans with an aggregate outstanding principal balance of $708.6 million ,
commitments to sell loans with an aggregate outstanding principal balance at the
time of sale of $55.9 million , and no commitments to purchase loans, investment
securities or any other unused lines of credit. See Item 3. Legal Proceedings
for further information on pending litigation in which we are involved.
Contractual Obligations. The Company enters into contractual obligations in the
normal course of business primarily as a source of funds for its asset growth
and to meet required capital needs. Our time deposits due within one year of
June 30, 2021 totaled $1.0 billion . If these maturing deposits do not remain
with us, we may be required to seek other sources of funds, including using
off-balance sheet deposits managed by Axos Clearing, other time deposits and
borrowings. Depending on market conditions, we may be required to pay higher
rates on deposits and borrowings than we currently pay on time deposits maturing
within one year. We believe, however, based on past experience, that a portion
of our time deposits will remain with us. We believe we have the ability to
attract and retain deposits by adjusting interest rates offered.
71
--------------------------------------------------------------------------------The following table presents our contractual obligations for long-term debt, time deposits, and operating leases by payment date:
At June 30, 2021
Payments Due by Period
Less than One to Three to More than
(Dollars in thousands) Total One Year
Three Years Five Years Five Years
Long-term debt obligations1, 2
$ 49,241 $ 50,219 $ 244,061 Other obligations3 15,090 7,716 5,925 348 1,101 Time deposits2 1,534,801 1,032,195 350,124 152,482 - Operating lease obligations4 79,549 9,548 19,242 16,822 33,937 Total$ 2,264,895 $ 1,341,393 $ 424,532 $ 219,871 $ 279,099 1 Long-term debt includes advances from the FHLB and Subordinated notes and debentures. 2 Amounts include principal and interest due to recipient. 3 Commitments for low income housing project partnerships, which provide income tax credits, and in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements, excludes interest. 4 Payments are for the lease of real property. Consolidated and Bank Capital Requirements. OurCompany and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by our Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. TheFederal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank. The following tables present regulatory capital information for our Company and Bank. Information presented forJune 30, 2021 , reflects the Basel III capital requirements that became effectiveJanuary 1, 2015 for both our Company and Bank. Under these capital requirements and the regulatory framework for prompt corrective action, our Company and Bank must meet specific capital guidelines that involve quantitative measures of our Company and Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation require our Company and Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require our Company and Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. To be "well capitalized," our Company and Bank must maintain minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. AtJune 30, 2021 , our Company and Bank met all the capital adequacy requirements to which they were subject to and were "well capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred sinceJune 30, 2020 that would materially adversely change the Company's and Bank's capital classifications. From time to time, we may need to raise additional capital to support our Company's and Bank's further growth and to maintain their "well capitalized" status. 72 -------------------------------------------------------------------------------- The Company's and Bank's capital amounts, capital ratios and requirements were as follows: Axos Financial, Inc. Axos Bank "Well Capitalized"
Ratio Ratio
Regulatory Capital : Tier 1$ 1,309,496 $ 1,106,393 $ 1,262,885 $ 1,080,455 Common equity tier 1$ 1,309,496 $ 1,101,330 $ 1,262,885 $ 1,080,455 Total capital (to risk-weighted assets)$ 1,587,625 $ 1,240,923 $ 1,358,430 $ 1,156,401 Assets: Average adjusted$ 14,851,462 $ 12,333,030 $ 13,359,578 $ 11,679,819 Total risk-weighted$ 11,522,645 $ 9,817,374 $ 10,283,135 $ 9,160,365 Regulatory Capital Ratios: Tier 1 leverage (core) capital to adjusted average assets 8.82 % 8.97 % 9.45 % 9.25 % 5.00 % 4.00 % Common equity tier 1 capital (to risk-weighted assets) 11.36 % 11.22 % 12.28 % 11.79 % 6.50 % 4.50 % Tier 1 capital (to risk-weighted assets) 11.36 % 11.27 % 12.28 % 11.79 % 8.00 % 6.00 % Total capital (to risk-weighted assets) 13.78 % 12.64 % 13.21 % 12.62 % 10.00 % 8.00 % AtJune 30, 2021 , the Company and Bank are in compliance with the capital conservation buffer requirement, for the common equity tier 1 risk based, tier 1 risk-based and total risk-based capital ratios of 7.0%, 8.5% and 10.5%, respectively. Securities Business Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Axos Clearing, is subject to theSEC Uniform Net Capital (Rule 15c3-1 of the Exchange Act). Under this rule, Axos Clearing has elected to operate under the alternate method and is required to maintain minimum net capital of$250,000 or 2% of aggregate debit balances arising from client transactions, as defined. Under the alternate method, Axos Clearing may not repay subordinated debt, pay cash distributions, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement. The net capital position of Axos Clearing was as follows: (Dollars in thousands) June 30, 2021 June 30, 2020 Net capital$ 35,950 $ 34,022 Less: required net capital 8,046 4,572 Excess capital$ 27,904 $ 29,450 Net capital as a percentage of aggregate debit items 8.94 % 14.88 % Net capital in excess of 5% aggregate debit items$ 15,836
Axos Clearing, as a clearing broker, is subject to SEC Customer Protection Rule (Rule 15c3-3 of the Exchange Act) which requires segregation of funds in a special reserve account for the benefit of customers. AtJune 30, 2021 , the Company had a deposit requirement of$258.1 million and maintained a deposit of$251.2 million . OnJuly 1, 2021 , Axos Clearing made a deposit to satisfy the deposit requirement. AtJune 30, 2020 , the Company had a deposit requirement of$159.5 million and maintained a deposit of$178.8 million . Certain broker-dealers have chosen to maintain brokerage customer accounts at the Axos Clearing. To allow these broker-dealers to classify their assets held by the Company as allowable assets in their computation of net capital, the Company computes a separate reserve requirement for Proprietary Accounts of Brokers (PAB). AtJune 30, 2021 , the Company had a deposit requirement of$73.6 million and maintained a deposit of$71.0 million . OnJuly 1, 2021 , Axos Clearing made a deposit 73 -------------------------------------------------------------------------------- to satisfy the deposit requirement. AtJune 30, 2020 , the Company had a deposit requirement of$17.0 million and maintained a deposit of$15.2 million . OnJuly 1, 2020 , Axos Clearing made a deposit to satisfy the deposit requirement. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is defined as the sensitivity of income and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. Changes in interest rates can have a variety of effects on our business. In particular, changes in interest rates affect our net interest income, net interest margin, net income, the value of our securities portfolio, the volume of loans originated, and the amount of gain or loss on the sale of our loans. We are exposed to different types of interest rate risk. These risks include lag, repricing, basis, prepayment and lifetime cap risk, each of which is described in further detail below: Lag/Repricing Risk. Lag risk results from the inherent timing difference between the repricing of our adjustable rate assets and our liabilities. Repricing risk is caused by the mismatch of repricing methods between interest-earning assets and interest-bearing liabilities. Lag/repricing risk can produce short-term volatility in our net interest income during periods of interest rate movements even though the effect of this lag generally balances out over time. One example of lag risk is the repricing of assets indexed to the monthly treasury average ("MTA"). The MTA index is based on a moving average of rates outstanding during the previous 12 months. A sharp movement in interest rates in a month will not be fully reflected in the index for 12 months resulting in a lag in the repricing of our loans and securities based on this index. We expect more of our interest-earning liabilities will mature or reprice within one year than will our interest-bearing assets, resulting in a one year negative interest rate sensitivity gap (the difference between our interest rate sensitive assets maturing or repricing within one year and our interest rate sensitive liabilities maturing or repricing within one year, expressed as a percentage of total interest-earning assets). In a rising interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a greater increase in its yield on assets relative to its cost on liabilities, and thus an increase in its net interest income. Basis Risk. Basis risk occurs when assets and liabilities have similar repricing timing but repricing is based on different market interest rate indices. Our adjustable rate loans that reprice are directly tied to indices based uponU.S. Treasury rates, LIBOR, Eleventh District Cost of Funds and the Prime rate. Our deposit rates are not directly tied to these same indices. Therefore, if deposit interest rates rise faster than the adjustable rate loan indices and there are no other changes in our asset/liability mix, our net interest income will likely decline due to basis risk. Prepayment Risk. Prepayment risk results from the right of customers to pay their loans prior to maturity. Generally, loan prepayments increase in falling interest rate environments and decrease in rising interest rate environments. In addition, prepayment risk results from the right of customers to withdraw their time deposits before maturity. Generally, early withdrawals of time deposits increase during rising interest rate environments and decrease in falling interest rate environments. When estimating the future performance of our assets and liabilities, we make assumptions as to when and how much of our loans and deposits will be prepaid. If the assumptions prove to be incorrect, the asset or liability may perform differently than expected. In the last three fiscal years, the Bank has experienced high rates of loan prepayments due to historically low interest rates and a low LTV loan portfolio. Lifetime Cap Risk. Our adjustable rate loans have lifetime interest rate caps. In periods of rising interest rates, it is possible for the fully indexed interest rate (index rate plus the margin) to exceed the lifetime interest rate cap. This feature prevents the loan from repricing to a level that exceeds the cap's specified interest rate, thus adversely affecting net interest income in periods of relatively high interest rates. On a weighted average basis, our adjustable rate loans atJune 30, 2021 had lifetime rate caps that were 621 basis points greater than their current stated note rates. If market rates rise by more than the interest rate cap, we will not be able to increase these loan rates above the interest rate cap. The principal objective of our asset/liability management is to manage the sensitivity of Market Value of Equity ("MVE") to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by our board of directors. Our board of directors has delegated the responsibility to oversee the administration of these policies to the Bank's asset/liability committee ("ALCO"). The interest rate risk strategy currently deployed by ALCO is to primarily use "natural" balance sheet hedging. ALCO makes adjustments to the overall MVE sensitivity by recommending investment and borrowing strategies. The management team then executes the recommended strategy by increasing or decreasing the duration of the investments and borrowings, resulting in the appropriate level of market risk the board wants to maintain. Other examples of ALCO policies designed to reduce our interest rate risk include limiting the premiums paid to purchase mortgage loans or mortgage-backed securities. This policy addresses mortgage prepayment risk by capping the yield loss from an unexpected high level of mortgage loan prepayments. At least once a quarter, ALCO members report to our board of directors the status of our interest rate risk profile. 74 -------------------------------------------------------------------------------- We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would result in the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets mature at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income. Banking Business The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding atJune 30, 2020 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period: Term
to Repricing, Repayment, or Maturity at
June 30, 2021
Over One
Over Six Year
Months Through through Over Five
(Dollars in thousands) Six Months or Less One Year Five Years Years Total
Interest-earning assets:
Cash and cash equivalents $ 694,717 $ - $ - $ - $ 694,717
Mortgage-backed and other investment
securities1 185,094 1,378 10,416 16,320 213,208
Stock of the FHLB, at cost 17,250 - - - 17,250
Loans, net of allowance for loan and
lease losses2 7,215,162 1,418,651 2,835,817 37,622 11,507,252
Loans held for sale 42,062 - - - 42,062
Total interest-earning assets 8,154,285 1,420,029 2,846,233 53,942 12,474,489
Non-interest-earning assets - - - - 270,540
Total assets $ 8,154,285 $
1,420,029
$ 6,175,706 $
1,774,197
Advances from the FHLB 196,000 40,000 57,500 60,000 353,500 Other borrowings 110,947 - - 14,000 124,947 Total interest-bearing liabilities 6,482,653 1,814,197 548,819 74,448 8,920,117 Other non-interest-bearing liabilities - - - - 2,525,001 Stockholders' equity - - - - 1,299,911
Total liabilities and equity
$ 1,671,632 $
1,277,464
13.40 % (3.16) % 18.42 % (0.16) % 28.49 %
Cumulative gap-as a % of cumulative
interest-earning assets 13.40 % 10.24 % 28.66 % 28.49 % 28.49 %
1 Comprised of U.S. government securities, mortgage-backed securities and other
securities, which are classified as trading and available-for-sale. The table
reflects contractual repricing dates.
2 The table reflects either contractual repricing dates, or maturities.
3 The table assumes that the principal balances for demand deposit and savings
accounts will reprice in the first year.
The above table provides an approximation of the projected re-pricing of assets
and liabilities at June 30, 2021 on the basis of contractual maturities,
adjusted for anticipated prepayments of principal and scheduled rate
adjustments. The loan and securities prepayment rates reflected herein are based
on historical experience. For the non-maturity deposit liabilities, we use decay
rates and rate adjustments based upon our historical experience. Actual
repayments of these instruments could vary substantially if future experience
differs from our historic experience.
75
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Although "gap" analysis is a useful measurement device available to management
in determining the existence of interest rate exposure, its static focus as of a
particular date makes it necessary to utilize other techniques in measuring
exposure to changes in interest rates. For example, gap analysis is limited in
its ability to predict trends in future earnings and makes no assumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the interest rate
environment.
Our net interest margin for the fiscal year ended June 30, 2021 decreased to
4.11% compared to 4.19% for the fiscal year ended June 30, 2020 . During the
fiscal year ended June 30, 2021 , interest income earned on loans and on mortgage
backed securities was influenced by interest rate changes and the amortization
of premiums and discounts on purchases, and interest expense paid on deposits
and new borrowings were influenced by the Fed Funds rate.
The following table indicates the sensitivity of net interest income movements
to parallel instantaneous shocks in interest rates for the 1-12 months and 13-24
months' time periods. For purposes of modeling net interest income sensitivity
the Bank assumes no growth in the balance sheet other than for retained
earnings:
As of June 30, 2021
First 12 Months Next 12 Months
Net Interest Percentage Change Net Interest Percentage Change
(Dollars in thousands) Income from Base Income from Base
Up 200 basis points $ 552,820 8.3 % $ 538,383 9.4 %
Base $ 510,289 - % $ 492,124 - %
Down 100 basis points $ 502,930 (1.4) % $ 478,353 (2.8) %
We attempt to measure the effect market interest rate changes will have on the
net present value of assets and liabilities, which is defined as MVE. We analyze
the MVE sensitivity to an immediate parallel and sustained shift in interest
rates derived from current U.S. Treasury and LIBOR yield curves. For rising
interest rate scenarios, the base market interest rate forecast was increased by
100, 200 and 300 basis points. For the falling interest rate scenarios, we used
a 100 basis points decrease due to limitations inherent in the current rate
environment.
The following table indicates the sensitivity of MVE to the interest rate
movement as described above:
As of
Market Value of Percentage MVE as a
(Dollars in thousands) Equity Change from Base Percentage of Assets
Up 300 basis points $ 1,614,331 2.7 % 12.6 %
Up 200 basis points $ 1,638,353 4.3 % 12.7 %
Up 100 basis points $ 1,612,726 2.6 % 12.4 %
Base $ 1,571,364 - % 11.9 %
Down 100 basis points $ 1,395,457 (11.2) % 10.5 %
The computation of the prospective effects of hypothetical interest rate changes
is based on numerous assumptions, including relative levels of interest rates,
asset prepayments, runoffs in deposits and changes in repricing levels of
deposits to general market rates, and should not be relied upon as indicative of
actual results. Furthermore, the results included in the tables above do not
take into account any actions that we may undertake in response to future
changes in interest rates. Those actions include, but are not limited to, making
changes in loan and deposit interest rates and changes in our asset and
liability mix.
Securities Business
Our securities business is exposed to market risk primarily due to its role as a
financial intermediary in customer transactions, which may include purchases and
sales of securities, securities lending activities, and in our trading
activities, which are used to support sales, underwriting and other customer
activities. We are subject to the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates, market prices, investor expectations and changes in credit
ratings of the issuer.
Our securities business is exposed to interest rate risk as a result of
maintaining inventories of interest rate sensitive financial instruments and
other interest earning assets including customer and correspondent margin loans
and securities borrowing activities. Our exposure to interest rate risk is also
from our funding sources including customer and correspondent cash balances,
bank borrowings and securities lending activities. Interest rates on customer
and correspondent balances and securities produce a positive spread with rates
generally fluctuating in parallel.
76--------------------------------------------------------------------------------
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily. AtJune 30, 2021 , Axos Clearing held municipal obligations, these positions were classified as held for sale securities and had maturities greater than 10 years. Our securities business is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations. Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.
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