Axos Financial, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items and capital resources of Axos Financial, Inc. and subsidiaries (collectively, “we”, “us” or the “Company”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our 2023 Form 10-K, and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.

Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Exchange Act, and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, the Company’s financial prospects and other projections of our performance and asset quality, our deposit balances and capital ratios, our ability to continue to grow profitably and increase our business, our ability to continue to diversify lending and deposit franchises, the anticipated timing and financial performance of other offerings, initiatives, and acquisitions, expectations of the environment in which we operate and projections of future performance. Actual results and the timing of events could differ materially from those expressed or implied in such forward-looking statements as a result of risks and uncertainties, including without limitation our ability to successfully integrate acquisitions and realize the anticipated benefits of the transactions, changes in the interest rate environment, monetary policy, inflation, government regulation, general economic conditions, changes in the competitive marketplace, conditions in the real estate markets in which we operate, risks associated with credit quality, our ability to attract and retain deposits and access other sources of liquidity, and the outcome and effects of litigation and other factors beyond our reasonable control. These and other risks and uncertainties are discussed under the heading “Item 1A. Risk Factors” herein and in our 2023 Form 10-K, which has been filed with the SEC, could cause actual results to differ materially from those expressed or implied in any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.

General

Our Company is a diversified financial services company with approximately $22.6 billion in assets and approximately $35.0 billion of assets under custody and/or administration at Axos Clearing LLC (“Axos Clearing”). Axos Bank (the “Bank”) provides consumer and commercial banking products through its digital online and mobile banking platforms, low-cost distribution channels and affinity partners. Our Bank offers deposit and lending products to customers nationwide including consumer and business checking, savings and time deposit accounts and single family and multifamily residential mortgages, commercial real estate mortgages and loans, fund and lender finance loans, asset-based loans, auto loans and other consumer loans. Our Bank generates non-interest income from consumer and business products, including fees from loans originated for sale, deposit account service fees, prepayment fees, as well as technology and payment transaction processing fees. We offer securities products and services to independent registered investment advisors (“RIAs”) and introducing broker dealers (“IBDs”) through Axos Clearing and Axos Advisor Services (“AAS”) and direct-to-consumer securities trading and digital investment management products through Axos Invest, Inc. (“Axos Invest”). AAS and Axos Clearing generate interest and fee income by providing comprehensive securities custody services to RIAs and clearing, stock lending and margin lending services to IBDs, respectively. Axos Invest generates fee income from self-directed securities trading and margin lending and fee income from digital wealth management services to consumers. Axos Invest LLC is an introducing broker-dealer which supports direct trading. Our common stock is listed on the New York Stock Exchange under the ticker symbol “AX” and is a component of the Russell 2000® Index, the KBW Nasdaq Financial Technology Index, the S&P SmallCap 600® Index, the KBW Nasdaq Financial Technology Index, and the Travillian Tech-Forward Bank Index.

Axos Financial, Inc. is supervised and regulated as a savings and loan holding company by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is required to file reports with, comply with the rules and regulations of, and is subject to examination by, the Federal Reserve.

Our Bank is a federal savings bank wholly-owned by our Company and regulated by the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition. As a depository institution with more than $10 billion in assets, our Bank and our affiliates are subject to direct supervision by the Consumer Financial Protection Bureau.

Axos Clearing is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). Axos Invest is a Registered Investment Advisor under the Investment Advisers Act of 1940, that is registered with the SEC. Axos Invest LLC is an introducing broker-dealer that is registered with the SEC and FINRA.

FDIC Loan Purchase

On December 7, 2023, the Company acquired from the FDIC two loan portfolios with an aggregate unpaid principal balance of $1.3 billion at a 37% discount to par. Given the level of discount at which the loans were purchased, the yield over the remaining life of the loans is expected to exceed that of the Company’s existing loan portfolio prior to the FDIC Loan Purchase. For additional information on the FDIC Loan Purchase, see Note 2 – “Acquisitions.”

Segment Information

The Company determines reportable segments based on what separate financial information is available and what segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. We operate through two segments: the Banking Business segment and the Securities Business segment.

Banking Business. The Banking Business segment includes a broad range of banking services including online banking, concierge banking, and mortgage, vehicle and unsecured lending through online, low-cost distribution channels to serve the needs of consumers and small businesses nationally. In addition, the Banking Business focuses on providing deposit products nationwide to industry verticals (e.g., Title and Escrow), treasury management products to a variety of businesses, and commercial & industrial and commercial real estate lending to clients. The Banking Business includes a bankruptcy trustee and fiduciary service that provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees and fiduciaries.

Securities Business. The Securities Business segment includes the clearing broker-dealer, registered investment advisor custody business, and introducing broker-dealer lines of businesses. These lines of business offer products independently to their own customers as well as to Banking Business segment clients. The Securities Business also offers specialized accounting software that serves the business management, family office and wealth management industries.

Critical Accounting Estimates

The following discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions and could have a material effect on the carrying value of assets and liabilities, our results of operations and/or our cash flows.

Critical accounting estimates are those we consider most important to the portrayal of our financial condition and results of operations because they require our most difficult judgments, often as a result of the need to make estimates that are inherently uncertain. Our critical accounting estimates are described in detail in the 2023 Form 10-K in Note 1—“Organizations and Summary of Significant Accounting Policies” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Critical Accounting Estimates.”

USE OF NON-GAAP FINANCIAL MEASURES

In addition to the results presented in accordance with GAAP, this report includes the non-GAAP financial measures adjusted earnings, adjusted earnings per common share (“Adjusted EPS”), 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. As noted below with respect to each measure, we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business and performance, and our management uses these non-GAAP measures when it internally evaluates the performance of our business and makes operating decisions. However, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.

We define “adjusted earnings”, a non-GAAP financial measure, as net income without the after-tax impact of non-recurring acquisition-related items, (including amortization of intangible assets related to acquisitions) and other costs (unusual or non-recurring charges). Adjusted EPS, a non-GAAP financial measure, 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 Company’s operating performance. We believe excluding the non-recurring acquisition-related costs, and other costs provides investors with an alternative understanding of our core business.

Below is a reconciliation of net income, the nearest compatible GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP):

(Dollars in thousands, except per share amounts)

We define “tangible book value”, a non-GAAP financial measure, as book value adjusted for goodwill and other intangible assets. Tangible book value is calculated using common stockholders’ equity minus servicing rights, goodwill and other intangible assets. Tangible book value per common share, a non-GAAP financial measure, 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):

(Dollars in thousands, except per share amounts)

32

SELECTED FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(Dollars in thousands)

33

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(Dollars in thousands, except per share data)

1 See “Use of Non-GAAP Financial Measures.”

2 Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the annualized weighted average rate paid on interest-bearing liabilities.

3 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

4 Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.

5 The increase in the ratios of the allowance for credit losses - loans to total loans held for investment and the allowance for credit losses - loans to non-performing loans at March 31, 2024 was primarily attributable to the allowance for credit losses related to the PCD loans acquired in the FDIC Loan Purchase. See Note 2 - “Acquisitions” for additional information.

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended March 31, 2024 and 2023

For the three months ended March 31, 2024, we had net income of $110.7 million, or $1.91 per diluted share, compared to net income of $79.9 million, or $1.32 per diluted share, for the three months ended March 31, 2023. For the nine months ended March 31, 2024, we had net income of $345.1 million, or $5.88 per diluted share, compared to net income of $219.8 million, or $3.63 per diluted share, for the nine months ended March 31, 2023.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents 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:

(Dollars in thousands)

1Average balances are obtained from daily data.

2Annualized.

3Loans include loans held for sale, loan premiums and unearned fees.

4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.

5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

6Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.

7Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

8Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

(Dollars in thousands)

1. Average balances are obtained from daily data.

2. Annualized.

3. Loans include loans held for sale, loan premiums and unearned fees.

4. Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.

5. Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

6. Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.

7. 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.

8. Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

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 each based on the relative changes attributable to volume and changes attributable to rate.

(Dollars in thousands)

1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

Net Interest Income

For the three months ended March 31, 2024, net interest income totaled $261.6 million, an increase of $62.6 million, or 31.5%, compared to net interest income of $199.0 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, net interest margin increased by 45 basis points compared to the net interest margin of 4.42% for the three months ended March 31, 2023.

For the three months ended March 31, 2024, total interest and dividend income increased 44.3% from the three months ended March 31, 2023, primarily due to a $125.4 million increase in interest income from loans, attributable to a 158 basis point increase in rates earned and a $2.9 billion increase in average balances.

For the three months ended March 31, 2024, total interest expense increased 67.9% from the three months ended March 31, 2023, primarily due to a $75.5 million increase in interest expense from demand and savings deposits, attributable to a 107 basis point increase in rates paid and a $4.2 billion increase in average balances.

For the nine months ended March 31, 2024, net interest income totaled $701.4 million, an increase of $122.0 million and 21.1% compared to net interest income of $579.4 million for the nine months ended March 31, 2023. For the nine months ended March 31, 2024 net interest margin increased by 20 basis points compared to the net interest margin of 4.41% for the nine months ended March 31, 2023.

For the nine months ended March 31, 2024, total interest and dividend income increased 48.3% from the nine months ended March 31, 2023, primarily due to a $346.2 million increase in interest income from loans, attributable to a 179 basis point increase in rates earned and a $2.3 billion increase in average balances.

For the nine months ended March 31, 2024, total interest expense increased 116.5% from the nine months ended March 31, 2023, primarily due to a $267.2 million increase in interest expense from demand and savings deposits, attributable to a 174 basis point increase in rates paid and a $4.4 billion increase in average balances.

Provision for Credit Losses

The provision for credit losses was $6.0 million and $26.5 million for the three and nine months ended March 31, 2024, respectively, compared to $5.5 million and $17.3 million for the three and nine months ended March 31, 2023, respectively. The provision for credit losses consists of provisions for both funded loans and for unfunded lending commitments. The provision for credit losses for funded loans was $9.0 million and $27.3 million for the three and nine months ended March 31, 2024, respectively. The provision for credit losses for the three months ended March 31, 2024 was primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and an increase in the Commercial Real Estate portfolio reflecting changes in the underlying macroeconomic variables. For the nine months ended March 31, 2024, the increase in the provision for credit losses was primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and the loans acquired in the FDIC Loan Purchase. The provision for credit losses for unfunded commitments benefit of $3.0 million and $0.8 million for the three and nine months ended March 31, 2024, respectively, was primarily driven by a change in the underlying mix of Commercial & Industrial - Non-RE unfunded commitments. Provisions for credit losses are charged to income to bring the allowance for credit losses for loans and unfunded lending commitments to a level deemed appropriate by management based on the factors discussed under the heading “Financial Condition—Asset Quality and Allowance for Credit Losses - Loans.”

Non-Interest Income

The following table sets forth information regarding our non-interest income:

(Dollars in thousands)

For the three and nine months ended March 31, 2024, non-interest income increased by $0.9 million or 2.8% and $104.0 million, or 118.49%, respectively.

For the three months ended March 31, 2024, increased advisory fee income, primarily attributable to higher mutual fund fee income, and increased mortgage banking and servicing rights income, primarily due to higher gains on loan sales, were partially offset by a decrease in broker-dealer fee income primarily attributable to lower cash sorting balances at non-affiliated banks.

For the nine months ended March 31, 2024, the increase in non-interest income is primarily attributable to a $92.4 million gain on the FDIC Loan Purchase completed in the three months ended December 31, 2023, an increase in broker-dealer fee income due to higher rates earned on cash sorting balances at non-affiliated banks and an increase in advisory fee income attributable to higher mutual fund fee income.

Non-Interest Expense

The following table sets forth information regarding our non-interest expense:

(Dollars in thousands)

For the three months ended March 31, 2024, non-interest expense increased $22.2 million, or 20.0%, primarily due to increases of:

• $14.4 million in salaries and related costs primarily due to increased headcount and salaries;
• $2.4 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs; and
• $2.3 million in professional services primarily due to increased legal and consulting services.

The increases were partially offset by a $1.5 million decrease in advertising and promotional expense primarily due to reduced deposit marketing expenses.

For the nine months ended March 31, 2024, non-interest expense increased $40.4 million, or 12.1%, primarily due to increases of:

• $32.4 million in salaries and related costs primarily due to increased headcount and salaries;
• $8.2 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs; and
• $4.5 million in broker-dealer clearing charges primarily due to higher mutual fund clearing fees and corporate actions.

The increases were partially offset by $12.4 million decrease in general and administrative expenses, primarily reflecting the absence of a $16.0 million accrual in the prior year first quarter for an adverse legal judgment that has not been finalized.

Provision for Income Taxes

Income tax expense was $44.8 million and $146.0 million for the three and nine months ended March 31, 2024, respectively, compared to $34.8 million and $94.9 million for three and nine months ended March 31, 2023, respectively. Our effective income tax rates for the three months ended March 31, 2024 and 2023 were 28.82% and 30.37%, respectively. Our effective income tax rates for the nine months ended March 31, 2024 and 2023 were 29.72% and 30.16%, respectively.

SEGMENT RESULTS

Our Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to our Company’s financial condition and operating results and management’s regular review of the operating results of those services. Our Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, our Company includes parent-only activities and intercompany eliminations. Inter-segment transactions are eliminated in consolidation and primarily include non-interest income earned by the Securities Business segment and non-interest expense incurred by the Banking Business segment for cash sorting fees related to deposits sourced from Securities Business segment customers, as well as interest expense paid by the Banking Business segment to each of the wholly-owned subsidiaries of our Company and to our Company itself for their operating cash held on deposit with the Banking Business segment.

The following tables present the operating results of the segments:

(Dollars in thousands)

40

Banking Business

For the three months ended March 31, 2024, our Banking Business segment had income before income taxes of $159.4 million, compared to income before taxes of $103.2 million for the three months ended March 31, 2023. For the nine months ended March 31, 2024, our Banking Business segment had income before income taxes of $488.0 million, compared to income before taxes of $293.4 million for the nine months ended March 31, 2023.

For the three and nine months ended March 31, 2024, the Banking Business segment’s net interest income increased $62.2 million or 31.7%, and $119.8 million or 20.8%, respectively, compared to net interest income for the three and nine months ended March 31, 2023, respectively. The increase in net interest income was primarily due to higher interest income from loans, primarily attributable to higher rates earned and average balances, partially offset by higher rates paid and higher average interest-bearing deposit balances.

For the three and nine months ended March 31, 2024, the Banking Business segment’s non-interest income increased $1.2 million, or 11.4%, and $96.3 million, or 301.3%, respectively, compared to non-interest income for the three and nine months ended March 31, 2023, respectively. The increase in non-interest income for the three months ended March 31, 2024 was primarily due to higher mortgage banking and servicing rights income and higher banking and service fees. For the nine months ended March 31, 2024, higher non-interest income was primarily driven by the $92.4 million gain on the FDIC Loan Purchase in the three months ended December 31, 2023.

For the three and nine months ended March 31, 2024, the Banking Business segment’s non-interest expense increased $6.7 million, or 6.8%, and $12.2 million, or 4.1%, respectively, compared to non-interest expense for the three and nine months ended March 31, 2023. The increase in non-interest expense for the three months ended March 31, 2024 was primarily due higher salaries and related costs, higher data and operational processing expenses and increased professional services expense, partially offset by lower advertising and promotional expense. For the nine months ended March 31, 2024, the increase in non-interest expense was primarily due to higher salaries and related costs, higher data and operational processing expenses and increased FDIC fees, partially offset by the absence of a $16.0 million accrual in the prior year period for an adverse legal judgment that has not been finalized and lower advertising and promotional expense.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables presents our Banking Business 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:

(Dollars in thousands)

1Average balances are obtained from daily data.

2Annualized.

3Loans include loans held for sale, loan premiums and unearned fees.

4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.

5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

6Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

7Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

(Dollars in thousands)

1Average balances are obtained from daily data.

2Annualized.

3Loans include loans held for sale, loan premiums and unearned fees.

4Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.

5Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

6Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

7Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth the effects of changing rates and volumes on our Banking Business segment’s 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 each based on the relative changes attributable to volume and changes attributable to rate.

(Dollars in thousands)

1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment:

Our Banking Business 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 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.

Securities Business

For the three and nine months ended March 31, 2024, our Securities Business segment had income before income taxes of $7.4 million and $30.7 million, respectively, compared to income before income taxes of $19.5 million and $44.0 million for the three and nine months ended March 31, 2023, respectively.

For the three and nine months ended March 31, 2024, net interest income increased $0.8 million or 12.6%, and $3.3 million or 21.1%, respectively, compared to net interest income for the three and nine months ended March 31, 2023. The increase was primarily driven by a decrease in average securities loaned balances and higher rates earned on margin loans.

For the three months ended March 31, 2024, non-interest income decreased $5.6 million, or 14.5%, compared to non-interest income for the three months ended March 31, 2023. For the nine months ended March 31, 2024, non-interest income decreased $3.5 million, or 3.4%, compared to non-interest income for the nine months ended March 31, 2023. The decreases were primarily driven by lower broker-dealer fee income, partially offset by higher advisory fee income.

For the three and nine months ended March 31, 2024, non-interest expense increased $7.4 million, or 29.2%, and $13.1 million or 17.4%, respectively, compared to non-interest expense for the three and nine months ended March 31, 2023. The increases were primarily driven by higher salaries and related costs, higher broker-dealer clearing charges and higher data and operational processing expenses.

The following table provides selected information for Axos Clearing:

(Dollars in thousands)

FINANCIAL CONDITION

Balance Sheet Analysis

Our total assets increased $2.3 billion, or 11.3%, to $22.6 billion at March 31, 2024, from $20.3 billion at June 30, 2023, primarily attributable to an increase in loans. Our total liabilities increased $2.0 billion, or 10.9%, to $20.4 billion at March 31, 2024 from $18.4 billion at June 30, 2023, primarily attributable to an increase in deposits.

Loans

The following table sets forth the composition of the loan portfolio:

(Dollars in thousands)

1 Includes PCD loans of $285.4 million in Multifamily and Commercial Mortgage and $44.5 million in Commercial Real Estate as of March 31, 2024. For further detail on PCD loans refer to Note 1—“Summary of Significant Accounting Policies”.

The increase in Multifamily and Commercial Mortgage loans and the related impact on the allowance for credit losses and unaccreted discounts and loan fees, was primarily driven by the FDIC Loan Purchase. For further information on the FDIC Loan Purchase, refer to Note 2—“Acquisitions.” The increase in Commercial & Industrial - Non-RE loans reflects the Company’s focus on expanding the sales and operational support teams to drive growth in this sector.

Asset Quality and Allowance for Credit Losses - Loans

Non-performing Assets

Non-performing loans are comprised of those 90 days or more past due and other nonaccrual loans. Loans not yet reaching 90 days past due may be placed on nonaccrual status based on management’s assessment of the aging of contractual principal amounts due, among other factors. For an aging analysis of the Company’s loans held for investment as of March 31, 2024 and June 30, 2023, see Note 5—“Loans and Allowance for Credit Losses” in the Condensed Consolidated Financial Statements. Non-performing assets include non-performing loans plus, other real estate owned and repossessed vehicles.

Non-performing assets consisted of the following:

(Dollars in thousands)

Total non-performing assets increased to $124.9 million at March 31, 2024 from $95.3 million at June 30, 2023, primarily attributable to increases in single-family mortgage and commercial real estate non-performing loans.

Management establishes an allowance for credit losses based upon its evaluation of the expected lifetime credit losses related to the amortized cost basis of loans on the balance sheet. The net charge-off rate for the three months ended March 31, 2024 was 0.07%, compared to 0.04% for the March 31, 2023. Of the 0.07% of net charge-offs for the three months ended March 31, 2024, 0.04% was related to Auto loans covered by insurance policies. For additional information regarding the Company’s allowance for credit losses see Note 5—“Loans and Allowance for Credit Losses” in the Condensed Consolidated Financial Statements. For a discussion of the provision for credit losses for the three and nine months ended March 31, 2024, see “Results of Operations—Provision for Credit Losses.” We believe that the lower average LTV in the loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks. The resolution of existing other real estate owned and non-performing loans should not have a significant adverse impact on our operating results.

Available-for-Sale Securities

Total available-for-sale securities were $207.6 million as of March 31, 2024, compared with $232.4 million at June 30, 2023. During the nine months ended March 31, 2024, we purchased $9.6 million of securities and received proceeds from sales and principal repayments of approximately $39.4 million. The remainder of the change for the available-for-sale portfolio is attributable to changes in the fair value of the securities.

Deposits

Deposits increased by $2.0 billion, or 11.6%, to $19.1 billion at March 31, 2024, from $17.1 billion at June 30, 2023. Interest-bearing demand and savings increased $2.4 billion and time deposits decreased $0.3 billion. Non-interest bearing deposits decreased by $0.1 billion as of March 31, 2024, compared with June 30, 2023.

The following table sets forth the composition of the deposit portfolio:

(Dollars in thousands)

1 Based on weighted-average stated interest rates at end of period.

2 The total interest-bearing includes brokered deposits of $1,840.0 million and $2,028.5 million as of March 31, 2024 and June 30, 2023, respectively, of which $482.1 million and $690.9 million, respectively, are time deposits classified as $250,000 and under.

The following table sets forth the number of deposit accounts by type:

Total Bank deposits that exceeded the FDIC insurance limit of $250,000 or were not collateralized at both March 31, 2024 and June 30, 2023 were $2.1 billion and $1.7 billion, respectively. The maturities of time deposits that exceeded the FDIC insurance limit were as follows:

(Dollars in thousands)

Borrowings

The following table sets forth the composition of our borrowings and the interest rates:

(Dollars in thousands)

We regularly use advances from the FHLB to manage our interest rate risk and, to a lesser extent, manage our liquidity position. Generally, FHLB advances with terms between three and ten years have been used to fund the origination of loans and to provide us with interest rate risk protection should rates rise. On March 6, 2024, the Company repurchased $5.0 million par value of its 4.00% Fixed-to-Floating Rate Subordinated Notes due March 1, 2032. For further information refer to Note 11—“Borrowings, Subordinated Notes and Debentures.”

Stockholders’ Equity

Stockholders’ equity increased $279.1 million to $2,196.3 million at March 31, 2024, compared to $1,917.2 million at June 30, 2023. The increase was primarily the result of net income for the nine months ended March 31, 2024 of $345.1 million partially offset by repurchases of $83.8 million of shares of the Company’s common stock.

During the nine months ended March 31, 2024, the Company repurchased a total of $83.8 million or 2,267,610 shares of common stock at an average price of $36.95 share. On February 12, 2024, the Company announced its Board of Directors’ authorization of a program to repurchase up to $100 million of its common stock. The new share repurchase authorization is in addition to the existing share repurchase plan announced on April 27, 2023, which had approximately $19.8 million remaining as of March 31, 2024. There were no purchases of treasury stock under the new repurchase authorization.

LIQUIDITY

Cash flow information is as follows:

(Dollars in thousands)

During the nine months ended March 31, 2024, we had net cash inflows from operating activities of $261.7 million compared to inflows of $119.2 million for the nine months ended March 31, 2023. Net operating cash inflows and outflows fluctuate primarily due to the timing of the following: originations of loans held for sale, proceeds from loan sales, securities borrowed and loaned, and customer, broker-dealer and clearing receivables and payables and changes in other assets and payables.

Net cash outflows from investing activities totaled $2,155.3 million for the nine months ended March 31, 2024, while outflows totaled $1,808.0 million for the nine months ended March 31, 2023. The increase in outflows was primarily due to increased originations and purchases of loans held for investment related to the FDIC Loan Purchase and acquisition of marine floor financing loans, partially offset by higher principal repayments on loans in the nine months ended March 31, 2023.

Net cash inflows from financing activities totaled $1,857.5 million for the nine months ended March 31, 2024, compared to net cash inflows from financing activities of $2,618.3 million for the nine months ended March 31, 2023. The primary driver behind the increase in net cash inflows was an increase in deposits in the nine months ended March 31, 2024.

As of March 31, 2024, the Bank could borrow up to 35% of its total assets from the FHLB. Borrowings are collateralized by pledging certain mortgage loans and available-for-sale securities to the FHLB. At March 31, 2024, the Company had $3,242.4 million available immediately and $3,629.1 million available with additional collateral and the Company had $5,226.4 million of loans and $152.0 thousand of securities pledged to the FHLB. We also had six unsecured federal funds purchase lines with six different banks totaling $275.0 million, under which no borrowings were outstanding at March 31, 2024.

The Bank has the ability to borrow short-term from the FRBSF Discount Window. At March 31, 2024, the Bank did not have any borrowings outstanding and the amount available from this source was $6,566.6 million. Borrowings are collateralized by pledging commercial loans and consumer loans. At March 31, 2024 we had $7,834.9 million of loans pledged to the FRBSF.

Axos Clearing has a $150 million secured line of credit available for borrowing, as needed. As of March 31, 2024, there was no amount outstanding on this credit facility. This credit facility bears interest at rates based on the Federal Funds rate and is due upon demand.

Axos Clearing also has $210 million of unsecured lines of credit available for limited purpose borrowing, which includes $100 million from Axos Financial, Inc. As of March 31, 2024, there was no amount outstanding on this credit facility. This credit facility bears interest at rates based on the Federal Funds rate and is due upon demand.

We view our liquidity sources to be stable and adequate for our anticipated needs and contingencies for both the short- and long-term. Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of March 31, 2024, we believe we have the ability to increase our level of deposits, and have available other potential sources of funding, to address our liquidity needs for the foreseeable future.

OFF-BALANCE SHEET COMMITMENTS

At March 31, 2024, we had commitments to fund loans of $3,676.5 million, and commitments to sell loans with an aggregate outstanding principal balance of $34.7 million. The Company also has standby letters of credit commitments of $15.9 million. We have no commitments to purchase available-for-sale securities as of March 31, 2024.

In the normal course of business, Axos Clearing’s customer, broker-dealer, and registered investment advisor activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and Axos Clearing has to purchase or sell the financial instrument underlying the contract at a loss. Axos Clearing’s clearing agreements with broker-dealers for which it provides clearing services requires them to indemnify Axos Clearing if customers fail to satisfy their contractual obligation.

CAPITAL RESOURCES AND REQUIREMENTS

Our Company 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 results of operations or financial condition. The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our 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 to maintain minimum ratios of tier 1 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. At March 31, 2024, our Company and Bank met all the capital adequacy requirements to which they were subject and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since March 31, 2024 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.

The Company and Bank both elected the five-year current expected credit losses (“CECL”) transition guidance for calculating regulatory capital and ratios and the March 31, 2024 and June 30, 2023 amounts reflect this election. This guidance allowed an entity to add back to regulatory capital 100% of the impact of the day-one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through June 30, 2022. In fiscal year 2024, this cumulative amount is phased out of regulatory capital at 50% and the cumulative amount will be 100% phased out of regulatory capital beginning in fiscal year 2026.

The Company’s and Bank’s estimated capital amounts, capital ratios and capital requirements under Basel III were as follows:

(Dollars in thousands)

Basel III requires all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. At March 31, 2024 and June 30, 2023, our Company and Bank were in compliance with the capital conservation buffer requirement, which sets the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums to 7.0%, 8.5% and 10.5%, respectively.

Securities Business

Pursuant to the net capital requirements of the Exchange Act, Axos Clearing, is subject to the SEC Uniform Net Capital (Rule 15c3-1 of the Exchange Act). Under this rule, the Company 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, the Company 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 positions of Axos Clearing were as follows:

(Dollars in thousands)

Axos Clearing, as a clearing broker, is subject to the SEC Customer Protection Rule (Rule 15c3-3 of the Exchange Act) which requires segregation of funds in a special reserve account for the exclusive benefit of customers (“Customer Reserve Bank Account”) and proprietary accounts of brokers (“PAB Reserve Account”). As of March 31, 2024, Axos Clearing was in compliance with its Customer Reserve Bank Account and PAB Reserve Account deposit requirements.

For further discussion of the Company’s market risk, see Item 7A—“Quantitative and Qualitative Disclosures About Market Risk” in the 2023 Form 10-K.

We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature or contractually re-price within a given period of time. 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.

Absent any subsequent asset and liability actions by management, 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 cause the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. Similarly, absent any subsequent asset and liability actions by management, during a period of falling interest rates, however, an institution with a positive gap would tend to have its assets reprice 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 at March 31, 2024 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period:

(Dollars in thousands)

1 Comprised primarily of non-agency and U.S. government agency mortgage-backed securities. The table reflects contractual repricing dates.

2 Loans includes loan premiums, discounts and unearned fees. The table reflects either contractual repricing dates or maturities.

3 The table assumes that the principal balances for demand deposits 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 March 31, 2024 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 historical experience.

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.

The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the future 1-12 months and 13-24 months’ time periods. For purposes of modeling net interest income sensitivity, we assume no growth in the balance sheet other than for retained earnings:

(Dollars in thousands)

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 market value of equity. We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the underlying interest rate curves.

The following table indicates the sensitivity of market value of equity to the interest rate movement described above:

(Dollars in thousands)

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. The relative levels of interest rates used in the scenarios are based on the forward yield curve as of the balance sheet date and assumptions for asset prepayment, deposit runoff and deposit repricing utilize such relative interest rates. In addition, deposit repricing and deposit runoff assumptions are generally based on historical behaviors over prior interest rate cycles. Results of these modeled outputs should not be relied upon as indicative of actual results. Furthermore, these computations 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, broker-dealer, and registered investment advisor 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.

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. Many 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.

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.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In addition, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2024 (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We face a variety of risks that are inherent in our business and our industry. These risks are described in more detail under Item 1A. “Risk Factors” in our 2023 Form 10-K. We encourage you to read these factors in their entirety. Moreover, other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currently available.