Axos Financial, Inc.: Form 10-Q for the period ended Sep 30, 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 2024 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 Securities Exchange Act of 1934, as amended (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 2024 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 $23.6 billion in assets and approximately $37.4 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 IBD 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, and the Travillian Tech-Forward Bank Index.

Axos Financial, Inc. is supervised and regulated as a savings and loan holding company that has elected to be treated as a financial 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 association, which has elected to operate as a covered savings association. The Bank is 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 IBD 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” in the 2024 Form 10-K.

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 Segment. 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 Segment 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 Segment 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 Segment. 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.

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 2024 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—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 comparable GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP):

(Dollars in thousands, except per share data)

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 comparable GAAP measure, to tangible book value (Non-GAAP):

(Dollars in thousands, except per share data)

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SELECTED FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(Dollars in thousands, except per share data)

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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 ratio of the allowance for credit losses - loans to total loans held for investment at September 30, 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” in the 2024 Form 10-K for additional information.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2024 and 2023

For the three months ended September 30, 2024, we had net income of $112.3 million, or $1.93 per diluted share, compared to net income of $82.6 million, or $1.38 per diluted share, for the three months ended September 30, 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)

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 September 30, 2024, net interest income totaled $292.0 million, an increase of $80.9 million, or 38.3%, compared to net interest income of $211.2 million for the three months ended September 30, 2023. For the three months ended September 30, 2024, net interest margin increased by 81 basis points compared to the net interest margin of 4.36% for the three months ended September 30, 2023.

For the three months ended September 30, 2024, total interest and dividend income increased 33.1% from the three months ended September 30, 2023, primarily due to a $111.3 million increase in interest income from loans, attributable to a $2.8 billion increase in average balances and a 116 basis point increase in rates earned, as well as higher discount accretion.

For the three months ended September 30, 2024, total interest expense increased 25.8% from the three months ended September 30, 2023, primarily due to a $43.5 million increase in interest expense from demand and savings deposits, attributable to a $3.1 billion increase in average balances and a 29 basis point increase in rates paid.

Provision for Credit Losses

The provision for credit losses was $14.0 million for the three months ended September 30, 2024, compared to $7.0 million for the three months ended September 30, 2023. 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 $11.5 million for the three months ended September 30, 2024, and was primarily due to the quantitative impact of macroeconomic variables in the allowance for credit losses model, primarily the U.S. unemployment rate, and increases in specific reserves, mainly in the commercial & industrial - non-RE portfolio. The provision for credit losses for unfunded lending commitments of $2.5 million for the three months ended September 30, 2024, was primarily driven by unfunded lending commitment growth, primarily in the commercial & industrial - non-RE portfolio. 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 months ended September 30, 2024, non-interest income decreased by $5.9 million, or 17.1%, primarily due to decreases of:

• $3.4 million in mortgage banking and servicing rights income, primarily attributable to the absence of a $1.9 million fair value gain in the prior year quarter and a decrease in the fair value of servicing rights in the current quarter on lower interest rates;
• $1.4 million in broker-dealer fee income, primarily attributable to lower balances on cash sorting balances at non-affiliated banks; and
• $1.0 million in prepayment penalty fee income.

Non-Interest Expense

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

(Dollars in thousands)

For the three months ended September 30, 2024, non-interest expense increased $27.0 million, or 22.4%, primarily due to increases of:

• $18.5 million in salaries and related costs primarily due to increased headcount and salaries, as the Bank continues to expand its commercial lending and deposit businesses and compliance and risk personnel; and
• $3.9 million in advertising and promotional expenses primarily due to deposit marketing.

Provision for Income Taxes

Income tax expense was $46.9 million for the three months ended September 30, 2024, compared to $35.5 million for three months ended September 30, 2023. Our effective income tax rates for the three months ended September 30, 2024 and 2023 were 29.43% and 30.05%, 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: the Banking Business Segment and the Securities Business Segment. In order to reconcile the two segments to the consolidated totals, our Company includes corporate 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)

Banking Business Segment

For the three months ended September 30, 2024, our Banking Business Segment had income before income taxes of $164.8 million, compared to income before taxes of $114.0 million for the three months ended September 30, 2023.

For the three months ended September 30, 2024, the Banking Business Segment’s net interest income increased $79.3 million or 37.9% compared to net interest income for the three months ended September 30, 2023, respectively. The increase in net interest income was primarily due to higher interest income from loans, primarily attributable to higher average balances and rates earned, as well as higher discount accretion, partially offset by higher balances and rates paid on interest-bearing deposit balances.

For the three months ended September 30, 2024, the Banking Business Segment’s non-interest income decreased $4.0 million, or 31.6%, compared to non-interest income for the three months ended September 30, 2023. The decrease in non-interest income for the three months ended September 30, 2024 was primarily due to lower mortgage banking and servicing rights income and lower prepayment penalty fee income.

For the three months ended September 30, 2024, the Banking Business Segment’s non-interest expense increased $17.5 million, or 17.4%, compared to non-interest expense for the three months ended September 30, 2023. The increase in non-interest expense for the three months ended September 30, 2024 was primarily due to higher salaries and related costs, data and operational processing expenses and higher advertising and promotional expenses.

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 Segment 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 Segment, including items related to securities financing operations.

Securities Business Segment

For the three months ended September 30, 2024, our Securities Business Segment had income before income taxes of $9.1 million, compared to income before income taxes of $12.6 million for the three months ended September 30, 2023.

For the three months ended September 30, 2024, net interest income increased $1.7 million or 31.1%, compared to net interest income for the three months ended September 30, 2023. The increase was primarily driven by lower balances of borrowings in the current quarter.

For the three months ended September 30, 2024, non-interest income decreased $4.7 million, or 13.5%, compared to non-interest income for the three months ended September 30, 2023. The decrease was primarily driven by lower broker-dealer fee income.

For the three months ended September 30, 2024, non-interest expense increased $0.6 million or 2.1%, compared to non-interest expense for the three months ended September 30, 2023. The increase was primarily driven by higher salaries and related costs.

The following table provides selected information for Axos Clearing:

(Dollars in thousands)

FINANCIAL CONDITION

Balance Sheet Analysis

Our total assets increased $0.7 billion, or 3.1%, to $23.6 billion at September 30, 2024, from $22.9 billion at June 30, 2024, primarily attributable to higher cash and cash equivalents. Our total liabilities increased $0.6 billion, or 2.9%, to $21.2 billion at September 30, 2024 from $20.6 billion at June 30, 2024, primarily attributable to higher deposit balances.

Loans and Allowance for Credit Losses - Loans

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

(Dollars in thousands)

1 Includes PCD loans of $282.6 million and $284.0 million in Multifamily and Commercial Mortgage and $44.5 million and $44.5 million in Commercial Real Estate as of September 30, 2024 and June 30, 2024, respectively. For further detail on PCD loans, see Note 1—“Summary of Significant Accounting Policies” in the 2024 Form 10-K.

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, see Note 2—“Acquisitions” in the 2024 Form 10-K.

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 September 30, 2024 was 0.17%, compared to 0.04% for the September 30, 2023. The increase in the net charge-off rate from the three months ended September 30, 2023, to the three months ended September 30, 2024, was primarily driven by charge-offs on one commercial mortgage loan and two commercial & industrial – non-RE loans. The amount charged off for each loan had been specifically reserved in full in the allowance for credit losses in prior periods. The commercial mortgage loan was issued in fiscal year 2020 and has been classified as substandard since September 2021. The two commercial & industrial – non-RE loans were issued in fiscal year 2021 and 2022, had been classified as substandard since April 2023 and February 2024, respectively. For additional information regarding the Company’s allowance for credit losses, see Note 4—“Loans & Allowance for Credit Losses” in the accompanying interim condensed consolidated financial statements. For a discussion of the provision for credit losses for the three months ended September 30, 2024, see Item 2—“Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.” 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.

Asset Quality

Non-performing Assets. Loans reaching 90 days past due are generally placed on nonaccrual status. 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 September 30, 2024 and June 30, 2024, see Note 4—“Loans & Allowance for Credit Losses” in the accompanying interim condensed consolidated financial statements. Non-performing assets include nonaccrual loans plus other real estate owned and repossessed vehicles.

Non-performing assets consisted of the following:

(Dollars in thousands)

Our non-performing assets increased to $177.4 million at September 30, 2024 from $115.8 million at June 30, 2024. The increase in non-performing assets during the three months ended September 30, 2024 was primarily the result of an increase in nonaccrual loans of $63.3 million partially offset by a decrease in other real estate owned and repossessed vehicles of $1.7 million. Non-performing assets as a percentage of total assets increased to 0.75% at September 30, 2024 from 0.51% at June 30, 2024.

Available-for-Sale Securities

Total available-for-sale securities were $138.0 million as of September 30, 2024, compared with $141.6 million at June 30, 2024. During the three months ended September 30, 2024, we purchased $16.0 million of securities and received principal repayments of $21.6 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 $0.6 billion, or 3.2%, to $20.0 billion at September 30, 2024, from $19.4 billion at June 30, 2024. As of September 30, 2024 compared with June 30, 2024, interest-bearing demand and savings increased $671.5 million and non-interest-bearing deposits increased by $80.0 million, while time deposits decreased $137.3 million.

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 Total deposits includes brokered deposits of $1,440.7 million and $1,611.6 million as of September 30, 2024 and June 30, 2024, respectively, which include brokered time deposits of $275.0 million and $400.0 million as of September 30, 2024 and June 30, 2024, respectively.

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 September 30, 2024 and June 30, 2024 were $2.3 billion and $2.1 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 July 15, 2024, the Company paid $2.6 million to repurchase $3.0 million par value of its 4.00% Fixed-to-Floating Rate Subordinated Notes due March 1, 2032. On September 27, 2024, the Company paid $9.2 million to repurchase $9.5 million par value of its 4.875% Fixed-to-Floating Rate Subordinated Notes due October 1, 2030. For additional information see Note 11—“Borrowings, Subordinated Notes and Debentures” in the accompanying interim condensed consolidated financial statements.

Stockholders’ Equity

Stockholders’ equity increased $115.1 million to $2,405.7 million at September 30, 2024, compared to $2,290.6 million at June 30, 2024. The increase was primarily the result of net income for the three months ended September 30, 2024 of $112.3 million.

LIQUIDITY

Cash flow information is as follows:

(Dollars in thousands)

During the three months ended September 30, 2024, we had net cash inflows from operating activities of $70.8 million compared to inflows of $34.2 million for the three months ended September 30, 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 $45.5 million for the three months ended September 30, 2024, while outflows totaled $506.3 million for the three months ended September 30, 2023. The decrease in outflows was primarily due to a decrease in net loan growth in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Net cash inflows from financing activities totaled $592.8 million for the three months ended September 30, 2024, compared to net cash inflows from financing activities of $503.8 million for the three months ended September 30, 2023. The increase in net cash inflows from financing is primarily driven by growth in deposits during the three months ended September 30, 2024.

As of September 30, 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 September 30, 2024, the Company had $3,075.7 million available immediately and $4,284.2 million available with additional collateral and the Company had $4,680.7 million of loans and $0.8 million of securities pledged to the FHLB. At September 30, 2024, we had $250.0 million in unsecured federal funds lines of credit with five major banks under which there were no borrowings outstanding.

The Bank has the ability to borrow short-term from the FRBSF Discount Window. At September 30, 2024, the Bank did not have any borrowings outstanding and the amount available from this source was $6,879.4 million. Borrowings are collateralized by pledging commercial loans and consumer loans. At September 30, 2024, we had $8,194.2 million of loans pledged to the FRBSF.

Axos Clearing has a $150 million third-party secured line of credit available for borrowing, as needed. As of September 30, 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 has a $110 million third-party unsecured line of credit available for limited purpose borrowing. As of September 30, 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 September 30, 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.

For additional information on certain contractual and other obligations, see Note 9—“Commitments and Contingencies” in the accompanying interim condensed consolidated financial statements and Note 12—“Other Assets,” and refer to Note 11—“Deposits,” Note 12—“Advances from the Federal Home Loan Bank” and Note 13—“Borrowings, Subordinated Notes and Debentures” in the 2024 Form 10-K.

CAPITAL RESOURCES AND REQUIREMENTS

The Company and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory agencies. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our Consolidated Financial Statements. The Federal Reserve establishes capital requirements for the Company and the OCC has similar requirements for our Bank. The following tables present regulatory capital information for the Company and Bank. Information presented for September 30, 2024 reflects the Basel III capital requirements for both the Company and Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 the Company and Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require the 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,” the 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 September 30, 2024, the 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 September 30, 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 the 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. The amounts in the following table 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 2025, this cumulative amount is phased out of regulatory capital at 75% and the cumulative amount will be 100% phased out of regulatory capital beginning in fiscal year 2026.

The Company’s and Bank’s capital ratios and requirements 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 September 30, 2024 and June 30, 2024, 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 position of Axos Clearing was 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 September 30, 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 2024 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 Segment

Beginning September 30, 2024, the Company made certain refinements to its interest rate sensitivity analyses for the Banking Business Segment by moving the simulation framework to an industry leading cash flow engine. The change was implemented to enhance the process and better reflect the behavior of its interest rate-sensitive assets and liabilities and provide improved granularity on key inputs and outputs used by the Company, including, but not limited to, prepayment and deposit beta assumptions. The modeled outputs as of September 30, 2024, when compared to those generated by applying the prior period methodology to the current period, do not result in significant changes to the previously disclosed interest rate sensitivities as of June 30, 2024. The reduced risk in the downward interest rate scenarios is primarily due to a change in deposit betas, which are now better aligned with the Company’s expectations.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at September 30, 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 of U.S. government securities, mortgage-backed securities and other securities. The table reflects contractual repricing dates.

2 Loans includes loan premiums, discounts and unearned fees. The table reflects either contractual repricing dates or expected 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 September 30, 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 primarily based on modeled cash flows. For the non-maturity deposit liabilities, we use decay rates and rate adjustments based upon our historical experience and the implied forward rate curve, respectively. 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 the Company assumes 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 MVE 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 MVE 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, and 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 Segment

Our Securities Business Segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.

Our Securities Business Segment 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. The majority 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.

As of September 30, 2024, Axos Clearing held municipal obligations classified as trading securities and had maturities greater than 10 years.

Our Securities Business Segment 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 obtained or refunded, 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 September 30, 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 the 2024 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.