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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-37709
AXOS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 33-0867444 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| | |
| | |
9205 West Russell Road, Suite 400, Las Vegas, NV 89148
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (858) 649-2218
| | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value | AX | New York Stock Exchange |
__________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s common stock on the last practicable date: 57,732,167 shares of common stock, $0.01 par value per share, as of October 16, 2023.
AXOS FINANCIAL, INC.
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
(Dollars in thousands, except par and stated value) | September 30, 2023 | | June 30, 2023 |
ASSETS | | | |
Cash and cash equivalents | $ | 2,161,762 | | | $ | 2,233,027 | |
Cash segregated for regulatory purposes | 252,007 | | | 149,059 | |
| | | |
Total cash, cash equivalents and cash segregated | 2,413,769 | | | 2,382,086 | |
Securities: | | | |
Trading | 640 | | | 758 | |
Available-for-sale | 236,726 | | | 232,350 | |
| | | |
Stock of regulatory agencies | 21,533 | | | 21,510 | |
Loans held for sale, carried at fair value | 8,014 | | | 23,203 | |
Loans held for sale, lower of cost or fair value | — | | | 776 | |
Loans—net of allowance for credit losses of $170,870 as of September 30, 2023 and $166,680 as of June 30, 2023 | 16,955,041 | | | 16,456,728 | |
| | | |
| | | |
| | | |
Servicing rights, carried at fair value | 29,338 | | | 25,443 | |
| | | |
| | | |
Securities borrowed | 96,424 | | | 134,339 | |
Customer, broker-dealer and clearing receivables | 285,423 | | | 374,074 | |
Goodwill and other intangible assets—net | 149,572 | | | 152,149 | |
Other assets | 628,726 | | | 545,053 | |
TOTAL ASSETS | $ | 20,825,206 | | | $ | 20,348,469 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Deposits: | | | |
Non-interest bearing | 2,875,432 | | | 2,898,150 | |
Interest bearing | 14,690,309 | | | 14,224,958 | |
Total deposits | 17,565,741 | | | 17,123,108 | |
| | | |
Advances from the Federal Home Loan Bank | 90,000 | | | 90,000 | |
Borrowings, subordinated notes and debentures | 447,733 | | | 361,779 | |
| | | |
Securities loaned | 116,446 | | | 159,832 | |
Customer, broker-dealer and clearing payables | 341,915 | | | 445,477 | |
Accounts payable and other liabilities | 287,163 | | | 251,114 | |
Total liabilities | 18,848,998 | | | 18,431,310 | |
COMMITMENTS AND CONTINGENCIES (Note 8) | | | |
STOCKHOLDERS’ EQUITY: | | | |
| | | |
| | | |
| | | |
| | | |
Common stock—$0.01 par value; 150,000,000 shares authorized; 69,826,263 shares issued and 58,503,976 shares outstanding as of September 30, 2023; 69,465,446 shares issued and 58,943,035 shares outstanding as of June 30, 2023 | 698 | | | 695 | |
Additional paid-in capital | 486,676 | | | 479,878 | |
Accumulated other comprehensive income (loss)—net of tax | (6,388) | | | (6,610) | |
Retained earnings | 1,818,254 | | | 1,735,609 | |
Treasury stock, at cost; 11,322,287 shares as of September 30, 2023 and 10,522,411 shares as of June 30, 2023 | (323,032) | | | (292,413) | |
Total stockholders’ equity | 1,976,208 | | | 1,917,159 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 20,825,206 | | | $ | 20,348,469 | |
See accompanying notes to the condensed consolidated financial statements.
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | September 30, |
(Dollars in thousands, except earnings per common share) | | | | | 2023 | | 2022 |
INTEREST AND DIVIDEND INCOME: | | | | | | | |
Loans, including fees | | | | | $ | 326,974 | | | $ | 208,338 | |
Securities borrowed and customer receivables | | | | | 4,995 | | | 4,384 | |
Investments and other | | | | | 31,983 | | | 11,064 | |
Total interest and dividend income | | | | | 363,952 | | | 223,786 | |
INTEREST EXPENSE: | | | | | | | |
Deposits | | | | | 146,110 | | | 32,505 | |
Advances from the Federal Home Loan Bank | | | | | 529 | | | 5,163 | |
Securities loaned | | | | | 449 | | | 943 | |
Other borrowings | | | | | 5,709 | | | 4,700 | |
Total interest expense | | | | | 152,797 | | | 43,311 | |
Net interest income | | | | | 211,155 | | | 180,475 | |
Provision for credit losses | | | | | 7,000 | | | 8,750 | |
Net interest income, after provision for credit losses | | | | | 204,155 | | | 171,725 | |
NON-INTEREST INCOME: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Broker-dealer fee income | | | | | 12,477 | | | 9,178 | |
| | | | | | | |
Advisory fee income | | | | | 8,219 | | | 6,959 | |
Banking and service fees | | | | | 8,350 | | | 6,514 | |
Mortgage banking and servicing rights income | | | | | 3,878 | | | 3,365 | |
Prepayment penalty fee income | | | | | 1,583 | | | 1,192 | |
Total non-interest income | | | | | 34,507 | | | 27,208 | |
NON-INTEREST EXPENSE: | | | | | | | |
Salaries and related costs | | | | | 55,811 | | | 46,996 | |
Data and operational processing | | | | | 16,084 | | | 14,022 | |
Depreciation and amortization | | | | | 5,878 | | | 6,094 | |
Advertising and promotional | | | | | 10,375 | | | 6,370 | |
Professional services | | | | | 9,811 | | | 8,087 | |
Occupancy and equipment | | | | | 3,846 | | | 4,054 | |
FDIC and regulatory fees | | | | | 4,449 | | | 3,735 | |
Broker-dealer clearing charges | | | | | 4,012 | | | 2,829 | |
General and administrative expense | | | | | 10,240 | | | 23,900 | |
Total non-interest expense | | | | | 120,506 | | | 116,087 | |
INCOME BEFORE INCOME TAXES | | | | | 118,156 | | | 82,846 | |
INCOME TAXES | | | | | 35,511 | | | 24,439 | |
NET INCOME | | | | | $ | 82,645 | | | $ | 58,407 | |
| | | | | | | |
COMPREHENSIVE INCOME | | | | | $ | 82,867 | | | $ | 55,570 | |
Basic earnings per common share | | | | | $ | 1.40 | | | $ | 0.98 | |
Diluted earnings per common share | | | | | $ | 1.38 | | | $ | 0.97 | |
See accompanying notes to the condensed consolidated financial statements.
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | September 30, |
(Dollars in thousands) | | | | | 2023 | | 2022 |
NET INCOME | | | | | $ | 82,645 | | | $ | 58,407 | |
Net unrealized gain (loss) from available-for-sale securities, net of income tax expense (benefit) of $112 and $(1,215) for the three months ended September 30, 2023 and 2022, respectively. | | | | | 222 | | | (2,837) | |
| | | | | | | |
| | | | | | | |
Other comprehensive income (loss) | | | | | 222 | | | (2,837) | |
Comprehensive income | | | | | $ | 82,867 | | | $ | 55,570 | |
See accompanying notes to the condensed consolidated financial statements.
AXOS FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
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| | | | For the Three Months Ended September 30, 2023 |
| | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | | Retained Earnings | | Treasury Stock | | Total |
| | | | Number of Shares | | | |
(Dollars in thousands) | | | | | Issued | | Treasury | | Outstanding | | Amount | |
BALANCE—June 30, 2023 | | | | | 69,465,446 | | | (10,522,411) | | | 58,943,035 | | | $ | 695 | | | $ | 479,878 | | | $ | (6,610) | | | $ | 1,735,609 | | | $ | (292,413) | | | $ | 1,917,159 | |
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Net income | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 82,645 | | | — | | | 82,645 | |
Other comprehensive income (loss) | | | | | — | | | — | | | — | | | — | | | — | | | 222 | | | — | | | — | | | 222 | |
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Purchase of treasury stock | | | | | — | | | (648,208) | | | (648,208) | | | — | | | — | | | — | | | — | | | (24,536) | | | (24,536) | |
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Stock-based compensation activity | | | | | 360,817 | | | (151,668) | | | 209,149 | | | 3 | | | 6,798 | | | — | | | — | | | (6,083) | | | 718 | |
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BALANCE—September 30, 2023 | | | | | 69,826,263 | | | (11,322,287) | | | 58,503,976 | | | $ | 698 | | | $ | 486,676 | | | $ | (6,388) | | | $ | 1,818,254 | | | $ | (323,032) | | | $ | 1,976,208 | |
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| | | | For the Three Months Ended September 30, 2022 |
| | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss), Net of Income Tax | | Retained Earnings | | Treasury Stock | | Total |
| | | | Number of Shares | | | |
(Dollars in thousands) | | | | | Issued | | Treasury | | Outstanding | | Amount | |
BALANCE—June 30, 2022 | | | | | 68,859,722 | | | (9,081,773) | | | 59,777,949 | | | $ | 689 | | | $ | 453,784 | | | $ | (2,933) | | | $ | 1,428,444 | | | $ | (237,011) | | | $ | 1,642,973 | |
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Net income | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 58,407 | | | — | | | 58,407 | |
Other comprehensive income (loss) | | | | | — | | | — | | | — | | | — | | | — | | | (2,837) | | | — | | | — | | | (2,837) | |
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Stock-based compensation activity | | | | | 291,430 | | | (70,706) | | | 220,724 | | | 3 | | | 5,317 | | | — | | | — | | | (2,891) | | | 2,429 | |
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BALANCE—September 30, 2022 | | | | | 69,151,152 | | | (9,152,479) | | | 59,998,673 | | | $ | 692 | | | $ | 459,101 | | | $ | (5,770) | | | $ | 1,486,851 | | | $ | (239,902) | | | $ | 1,700,972 | |
See accompanying notes to the condensed consolidated financial statements.
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AXOS FINANCIAL, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
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| Three Months Ended |
| September 30, |
(Dollars in thousands) | 2023 | | 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 82,645 | | | $ | 58,407 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 5,878 | | | 6,094 | |
Other accretion and amortization | (3,101) | | | 707 | |
Stock-based compensation expense | 6,802 | | | 5,320 | |
Trading activity | 118 | | | 1,683 | |
Provision for credit losses | 7,000 | | | 8,750 | |
Deferred income taxes | 3,526 | | | (3,807) | |
Origination of loans held for sale | (50,607) | | | (70,073) | |
Unrealized and realized gains on loans held for sale | (1,796) | | | (2,433) | |
Proceeds from sale of loans held for sale | 65,138 | | | 67,610 | |
Changes in servicing rights | (3,448) | | | (953) | |
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Net change in assets and liabilities which provide (use) cash: | | | |
Securities borrowed | 37,915 | | | 251,358 | |
Customer, broker-dealer and clearing receivables | 88,651 | | | 61,015 | |
Other Assets | (86,123) | | | (6,347) | |
Securities loaned | (43,386) | | | (267,511) | |
Customer, broker-dealer and clearing payables | (103,562) | | | (65,484) | |
Accounts payable and other liabilities | 28,220 | | | 26,485 | |
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Net cash provided by operating activities | 33,870 | | | 70,821 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of available-for-sale investment securities | (4,796) | | | — | |
Proceeds from sale and repayment of available-for-sale investment securities | 718 | | | 1,029 | |
Purchase of stock of regulatory agencies | — | | | (54,964) | |
Proceeds from redemption of stock of regulatory agencies | — | | | 54,964 | |
Origination of loans held for investment | (2,560,043) | | | (2,486,224) | |
Proceeds from sale of loans originally classified as held for investment | — | | | 13,965 | |
Mortgage warehouse loan activity, net | (45,289) | | | 103,812 | |
Proceeds from sale of other real estate owned and repossessed assets | 918 | | | 719 | |
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Acquisition of business activity, net of cash acquired | — | | | (5,009) | |
Purchase of loans and leases, net of discounts and premiums | (51,892) | | | (51) | |
Principal repayments on loans | 2,160,911 | | | 1,229,390 | |
Purchases of furniture, equipment, software and intangibles | (6,492) | | | (7,921) | |
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Net cash used in investing activities | (505,965) | | | (1,150,290) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net increase in deposits | 442,633 | | | 1,230,209 | |
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Repayments of the Federal Home Loan Bank term advances | — | | | (5,000) | |
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Net (repayment) proceeds of other borrowings | 85,700 | | | (19,500) | |
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Tax payments related to settlement of restricted stock units | (6,083) | | | (2,891) | |
Purchase of treasury stock | (18,472) | | | — | |
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Net cash provided by financing activities | 503,778 | | | 1,202,818 | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 31,683 | | | 123,349 | |
CASH AND CASH EQUIVALENTS—Beginning of year | $ | 2,382,086 | | | $ | 1,574,699 | |
CASH AND CASH EQUIVALENTS—End of period | $ | 2,413,769 | | | $ | 1,698,048 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | |
Interest paid on interest-bearing liabilities | 152,359 | | | 42,429 | |
Income taxes paid | 52,664 | | | 37,277 | |
Transfers to other real estate and repossessed vehicles from loans held for investment | 1,847 | | | 5,522 | |
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Transfers from loans held for sale to loans and leases held for investment | 2,783 | | | 682 | |
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See accompanying notes to the condensed consolidated financial statements.
AXOS FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022
(Dollars in thousands, except per share and stated value amounts)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Axos Financial, Inc. (“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank”) and Axos Nevada Holding, LLC (“Axos Nevada Holding” and collectively, the “Company”). Axos, the Bank and Axos Nevada Holding comprise substantially all of the Company’s assets and liabilities and revenues and expenses. Axos Bank and its wholly owned subsidiaries constitute the Banking Business segment and Axos Nevada Holding and its wholly owns the subsidiaries constitute the Securities Business segment. All significant intercompany balances and transactions have been eliminated in consolidation. The Notes to the Consolidated Financial Statements are an integral part of the Company’s financial statements.
The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Certain amounts reported in prior periods have been reclassified to conform with the current presentation. Results for the three months ended September 30, 2023 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or not repeated herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2023 included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“2023 Form 10-K”) filed with the SEC.
Significant Accounting Policies
For further information regarding the Company’s significant accounting policies see Note 1—“Organizations and Summary of Significant Accounting Policies” in the 2023 Form 10-K.
During the three months ended September 30, 2023 there were no significant updates to the Company’s significant accounting policies, other than as described below and for the adoption of the accounting standards noted herein.
New Accounting Standards
The Financial Accounting Standards Board (“FASB”) issued three Accounting Standards Updates (“ASUs”) (2020-04, 2021-04 and 2022-06) all of which provide guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions are optional and are effective from March 12, 2020 through December 31, 2024. The Company adopted these ASUs on July 1, 2023, and there was no impact on its financial condition or results of operations upon adoption.
In March 2022, the FASB issued ASU 2022-02 which eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses (“CECL”) model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted this ASU on a prospective basis on July 1, 2023, and there was no impact on its financial condition or results of operations upon adoption. See Note 5—“Loans & Allowance for Credit Losses” for the new disclosures as a result of the adoption of this accounting guidance.
2. ACQUISITIONS
On August 23, 2023, the Company agreed to acquire approximately $52 million of marine floor financing loans at par value along with other assets for an additional $2 million, primarily consisting of servicing rights as well as certain employees. The transaction was accounted for as an asset acquisition and such assets are included in the Company’s unaudited Condensed Consolidated Balance Sheets as of September 30, 2023.
3. FAIR VALUE
The following tables sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2023 and June 30, 2023. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement:
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| | September 30, 2023 |
(Dollars in thousands) | | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
ASSETS: | | | | | | | |
Securities—Trading | | | $ | 640 | | | $ | — | | | $ | 640 | |
Securities—Available-for-sale: | | | | | | | |
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Agency MBS1 | | | 27,624 | | | — | | | 27,624 | |
Non-Agency MBS2 | | | — | | | 206,076 | | | 206,076 | |
Municipal | | | 3,026 | | | — | | | 3,026 | |
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Total—Securities—Available-for-sale | | | $ | 30,650 | | | $ | 206,076 | | | $ | 236,726 | |
Loans held for sale | | | $ | 8,014 | | | $ | — | | | $ | 8,014 | |
Servicing rights | | | $ | — | | | $ | 29,338 | | | $ | 29,338 | |
Other assets—Derivative instruments | | | $ | 1,295 | | | $ | — | | | $ | 1,295 | |
LIABILITIES: | | | | | | | |
Accrued expense and other liabilities—Derivative instruments | | | $ | 934 | | | $ | — | | | $ | 934 | |
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| | June 30, 2023 |
(Dollars in thousands) | | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
ASSETS: | | | | | | | |
Securities—Trading | | | $ | 758 | | | $ | — | | | $ | 758 | |
Securities—Available-for-sale: | | | | | | | |
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Agency MBS1 | | | 23,947 | | | — | | | 23,947 | |
Non-Agency MBS2 | | | — | | | 205,005 | | | 205,005 | |
Municipal | | | 3,398 | | | — | | | 3,398 | |
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Total—Securities—Available-for-sale | | | $ | 27,345 | | | $ | 205,005 | | | $ | 232,350 | |
Loans held for sale | | | $ | 23,203 | | | $ | — | | | $ | 23,203 | |
Servicing rights | | | $ | — | | | $ | 25,443 | | | $ | 25,443 | |
Other assets—Derivative instruments | | | $ | 919 | | | $ | — | | | $ | 919 | |
LIABILITIES: | | | | | | | |
Accrued expense and other liabilities—Derivative instruments | | | $ | 691 | | | $ | — | | | $ | 691 | |
1 Includes securities guaranteed by Ginnie Mae, a U.S. government agency, and the government sponsored enterprises Fannie Mae and Freddie Mac.
2 Private sponsors of securities collateralized primarily by first-lien mortgage loans on commercial properties or by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by Alt-A or pay-option adjustable rate mortgages (“ARMs”).
The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
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| | | For the Three Months Ended |
| | | September 30, 2023 |
(Dollars in thousands) | | | Securities – Available-for-Sale: Non-Agency RMBS | | Servicing Rights1 | | | | | | Total |
Opening Balance | | | $ | 205,005 | | | $ | 25,443 | | | | | | | $ | 230,448 | |
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Total gains or losses for the period: | | | | | | | | | | | |
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Included in earnings—Mortgage banking and servicing rights income | | | — | | | 1,858 | | | | | | | 1,858 | |
Included in other comprehensive income | | | 1,316 | | | — | | | | | | | 1,316 | |
Purchases, retentions, issues, sales and settlements: | | | | | | | | | | | |
Purchases/Retentions | | | — | | | 2,037 | | | | | | | 2,037 | |
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Settlements | | | (245) | | | — | | | | | | | (245) | |
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Closing balance | | | $ | 206,076 | | | $ | 29,338 | | | | | | | $ | 235,414 | |
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Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | | | $ | — | | | $ | 1,858 | | | | | | | $ | 1,858 | |
1 Earnings from servicing rights were attributable to: time and payoffs, representing a decrease in servicing rights value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period of $0.2 million for the three months ended September 30, 2023 and an increase in servicing rights value resulting from market-driven changes in interest rates of $2.1 million for the three months ended September 30, 2023. Additions to servicing rights were related to purchases and servicing rights retained upon sale of loans held for sale.
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| | | For the Three Months Ended | | |
| | | September 30, 2022 |
(Dollars in thousands) | | | Securities – Available-for-Sale: Non-Agency RMBS | | Servicing Rights1 | | Derivative Instruments, net | | Total | | |
Opening Balance | | | $ | 186,814 | | | $ | 25,213 | | | $ | 464 | | | $ | 212,491 | | | |
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Total gains or losses for the period: | | | | | | | | | | | |
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Included in earnings—Mortgage banking and servicing rights income | | | — | | | 953 | | | 71 | | | 1,024 | | | |
Included in other comprehensive income | | | (2,473) | | | — | | | — | | | (2,473) | | | |
Purchases, retentions, issues, sales and settlements: | | | | | | | | | | | |
Purchases/Retentions | | | — | | | 207 | | | — | | | 207 | | | |
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Settlements | | | (329) | | | — | | | — | | | (329) | | | |
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Closing balance | | | $ | 184,012 | | | $ | 26,373 | | | $ | 535 | | | $ | 210,920 | | | |
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Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period | | | $ | — | | | $ | 953 | | | $ | 71 | | | $ | 1,024 | | | |
1 Earnings from servicing rights were attributable to: time and payoffs, representing a decrease in servicing rights value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period of $0.4 million for the three months ended September 30, 2022 and an increase in servicing rights value resulting from market-driven changes in interest rates of $1.4 million for the three months ended September 30, 2022. Additions to servicing rights were retained upon sale of loans held for sale.
The table below summarizes the quantitative information about Level 3 fair value measurements as of the dates indicated:
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| September 30, 2023 |
(Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) |
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Securities – Non-agency MBS | $ | 206,076 | | Discounted Cash Flow | Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over SOFR Swaps | 0.0 to 58.1% (34.9%) 0.0 to 7.6% (2.4%) 0.0 to 68.7% (28.5%) 2.6 to 6.5% (2.6%) |
Servicing Rights | $ | 29,338 | | Discounted Cash Flow | Projected Constant Prepayment Rate, Life (in years), Discount Rate | 4.8 to 39.9% (13.0%) 1.7 to 15.8 (7.4) 9.5 to 11.5% (9.8%) |
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| June 30, 2023 |
(Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) |
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Securities – Non-agency MBS | $ | 205,005 | | Discounted Cash Flow | Projected Constant Prepayment Rate, Projected Constant Default Rate, Projected Loss Severity, Discount Rate over LIBOR | 0.0 to 59.7% (32.0%) 0.0 to 7.5% (2.4%) 0.0 to 68.7% (28.5%) 2.6 to 7.5% (2.7%) |
Servicing Rights | $ | 25,443 | | Discounted Cash Flow | Projected Constant Prepayment Rate, Life (in years), Discount Rate | 6.1 to 40.1% (12.6%) 1.8 to 10.9 (7.7) 9.5 to 11.5% (9.6%) |
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For mortgage-backed securities, significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the projected loss severity and a directionally opposite change in the assumption used for projected prepayment rates. For servicing rights, significant increases in projected prepayment rates or discount rates in isolation would result in a significantly lower fair value measurement, while a significant increase in expected life in isolation would result in a significantly higher fair value measurement. Generally, a change in the projected prepayment rates is accompanied by a directionally opposite change in expected life.
The aggregate fair value of loans held for sale, carried at fair value, contractual balance (including accrued interest), and unrealized gain were:
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(Dollars in thousands) | September 30, 2023 | | June 30, 2023 |
Aggregate fair value | $ | 8,014 | | | $ | 23,203 | |
Contractual balance | 7,878 | | | 22,844 | |
Unrealized gain | $ | 136 | | | $ | 359 | |
The total interest income and amount of gains and losses from changes in fair value included in earnings for loans held for sale were:
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| For the Three Months Ended | | |
| September 30, | | |
(Dollars in thousands) | 2023 | | 2022 | | | | |
Interest income | $ | 189 | | | $ | 50 | | | | | |
Change in fair value | (129) | | | 91 | | | | | |
Total | $ | 60 | | | $ | 141 | | | | | |
The table below summarizes assets measured for impairment on a non-recurring basis:
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| September 30, 2023 |
(Dollars in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance |
Other real estate owned and repossessed vehicles: | | | | | | | |
Single family real estate | $ | — | | | $ | — | | | $ | 5,574 | | | $ | 5,574 | |
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Multifamily real estate | — | | | — | | | 1,392 | | | 1,392 | |
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Autos | $ | — | | | $ | — | | | $ | 1,813 | | | $ | 1,813 | |
Total | $ | — | | | $ | — | | | $ | 8,779 | | | $ | 8,779 | |
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| June 30, 2023 |
(Dollars in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance |
Other real estate owned and repossessed vehicles: | | | | | | | |
| | | | | | | |
Single family real estate | $ | — | | | $ | — | | | $ | 5,574 | | | $ | 5,574 | |
Multifamily real estate | — | | | — | | | 1,392 | | | 1,392 | |
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Autos | — | | | — | | | 1,133 | | | 1,133 | |
Total | $ | — | | | $ | — | | | $ | 8,099 | | | $ | 8,099 | |
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Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $8.8 million at September 30, 2023, after write-downs of $0.4 million, and a net carrying amount of $8.1 million at June 30, 2023, after write-downs of $1.7 million.
The following table presents quantitative information about Level 3 fair value measurements for other real estate owned and repossessed vehicles measured at fair value on a non-recurring basis at the periods indicated:
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| September 30, 2023 |
(Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 |
Other real estate owned and repossessed vehicles2: | | | | |
Single family real estate | $ | 5,574 | | Sales comparison approach | Differences between the comparable sales | 62.1 to 93.6% (62.1%) |
Multifamily real estate | $ | 1,392 | | Sales comparison approach and income approach | Differences between the comparable sales and differences in net operating income expectations, capitalization rate | 49.8% to 54.5% (49.8%) |
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| June 30, 2023 |
(Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) 1 |
Other real estate owned and repossessed vehicles2: | | | | |
Single family real estate | $ | 5,574 | | Sales comparison approach | Differences between the comparable sales | 62.1 to 93.6% (62.1%) |
Multifamily real estate | $ | 1,392 | | Sales comparison approach and income approach | Differences between the comparable sales and differences in net operating income expectations, capitalization rate | 49.8 to 54.5%% (49.8%) |
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1 For other real estate owned and repossessed vehicles the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the asset being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.2 Repossessed vehicles are valued using third-party pricing information of comparable vehicle sales without adjustment.
Fair Value of Financial Instruments
Carrying amounts and estimated fair values of financial instruments at September 30, 2023 and June 30, 2023 were:
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| September 30, 2023 |
| | | Fair Value | | |
(Dollars in thousands) | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 2,413,769 | | | $ | 2,413,769 | | | $ | — | | | $ | — | | | $ | 2,413,769 | |
Securities—trading | 640 | | | — | | | 640 | | | — | | | 640 | |
Securities—available-for-sale | 236,726 | | | — | | | 30,650 | | | 206,076 | | | 236,726 | |
Stock of regulatory agencies | 21,533 | | | — | | | 21,533 | | | — | | | 21,533 | |
Loans held for sale, at fair value | 8,014 | | | — | | | 8,014 | | | — | | | 8,014 | |
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Loans held for investment—net | 16,955,041 | | | — | | | — | | | 16,935,835 | | | 16,935,835 | |
Securities borrowed | 96,424 | | | — | | | — | | | 102,084 | | | 102,084 | |
Customer, broker-dealer and clearing receivables | 285,423 | | | — | | | — | | | 294,499 | | | 294,499 | |
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Servicing rights | 29,338 | | | — | | | — | | | 29,338 | | | 29,338 | |
Other assets - derivative instruments | 1,295 | | | — | | | 1,295 | | | — | | | 1,295 | |
Financial liabilities: | | | | | | | | | |
Total deposits | 17,565,741 | | | — | | | 17,481,019 | | | — | | | 17,481,019 | |
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Advances from the Federal Home Loan Bank | 90,000 | | | — | | | 82,234 | | | — | | | 82,234 | |
Borrowings, subordinated notes and debentures | 447,733 | | | — | | | 414,462 | | | — | | | 414,462 | |
Securities loaned | 116,446 | | | — | | | — | | | 116,097 | | | 116,097 | |
Customer, broker-dealer and clearing payables | 341,915 | | | — | | | — | | | 341,915 | | | 341,915 | |
Accrued expense and other liabilities - derivative instruments | 934 | | | — | | | 934 | | | — | | | 934 | |
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| June 30, 2023 |
| | | Fair Value | | |
(Dollars in thousands) | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 2,382,086 | | | $ | 2,382,086 | | | $ | — | | | $ | — | | | $ | 2,382,086 | |
Securities—trading | 758 | | | — | | | 758 | | | — | | | 758 | |
Securities—available-for-sale | 232,350 | | | — | | | 27,345 | | | 205,005 | | | 232,350 | |
Stock of regulatory agencies | 21,510 | | | — | | | 21,510 | | | — | | | 21,510 | |
Loans held for sale, at fair value | 23,203 | | | — | | | 23,203 | | | — | | | 23,203 | |
Loans held for sale, at lower of cost or fair value | 776 | | | — | | | — | | | 780 | | | 780 | |
Loans held for investment—net | 16,456,728 | | | — | | | — | | | 16,417,183 | | | 16,417,183 | |
Securities borrowed | 134,339 | | | — | | | — | | | 143,461 | | | 143,461 | |
Customer, broker-dealer and clearing receivables | 374,074 | | | — | | | — | | | 386,082 | | | 386,082 | |
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Servicing rights | 25,443 | | | — | | | — | | | 25,443 | | | 25,443 | |
Other assets - derivative instruments | 919 | | | — | | | 919 | | | — | | | 919 | |
Financial liabilities: | | | | | | | | | |
Total deposits | 17,123,108 | | | — | | | 17,064,084 | | | — | | | 17,064,084 | |
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Advances from the Federal Home Loan Bank | 90,000 | | | — | | | 83,192 | | | — | | | 83,192 | |
Borrowings, subordinated notes and debentures | 361,779 | | | — | | | 327,564 | | | — | | | 327,564 | |
Securities loaned | 159,832 | | | — | | | — | | | 159,416 | | | 159,416 | |
Customer, broker-dealer and clearing payables | 445,477 | | | — | | | — | | | 445,447 | | | 445,447 | |
Accrued expense and other liabilities - derivative instruments | 691 | | | — | | | 691 | | | — | | | 691 | |
Carrying amount is the estimated fair value for cash and cash equivalents, stock of regulatory agencies, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, borrowings or subordinated debt and for variable rate loans, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities, loans held for sale and derivatives can be found in Note 3—“Fair Value” of the 2023 Form 10-K. The fair value of off-balance sheet items is not material.
4. SECURITIES
The amortized cost, carrying amount and fair value for the securities available-for-sale for the following periods were:
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| September 30, 2023 |
| Trading | | Available-for-sale | | |
(Dollars in thousands) | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | | | | | | | |
Mortgage-backed securities (MBS): | | | | | | | | | | | | | | | | | |
U.S. agencies1 | $ | — | | | $ | 31,277 | | | $ | 1 | | | $ | (3,654) | | | $ | 27,624 | | | | | | | | | |
Non-agency2 | — | | | 210,027 | | | 723 | | | (4,674) | | | 206,076 | | | | | | | | | |
Total mortgage-backed securities | — | | | 241,304 | | | 724 | | | (8,328) | | | 233,700 | | | | | | | | | |
Non-MBS: | | | | | | | | | | | | | | | | | |
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Municipal | 640 | | | 3,689 | | | — | | | (663) | | | 3,026 | | | | | | | | | |
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Total Non-MBS | 640 | | | 3,689 | | | — | | | (663) | | | 3,026 | | | | | | | | | |
Total debt securities | $ | 640 | | | $ | 244,993 | | |