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What changed in Axos Financial, Inc.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Axos Financial, Inc.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+429 added−471 removedSource: 10-K (2024-08-22) vs 10-K (2023-08-29)

Top changes in Axos Financial, Inc.'s 2024 10-K

429 paragraphs added · 471 removed · 299 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

89 edited+24 added−117 removed75 unchanged
Biggest changeThe industry verticals targeted by Commercial Banking include; 8 Table of Cont ents ◦ Specialty Deposit Verticals , which include Title, Escrow, HOA and Property Management, 1031 Exchange, Trust & Estates and Payment Processors; ◦ Software Verticals , which include: ▪ Axos Fiduciary Services : A full-service fiduciary team catered specifically to support bankruptcy and non-bankruptcy trustees and fiduciaries with their software and banking needs, and ▪ Zenith Information Systems, Inc. : A business management and entertainment accounting and payroll software offering supported by a dedicated service team; ◦ Commercial Banking Verticals , which include other middle market industries along with deposit relationships for Commercial Real Estate and Commercial & Industrial lending clients.
Biggest changeOur deposit lines of business include: • Commercial deposits, which primarily include deposits sourced from a targeted set of industry verticals: ◦ Commercial Banking Verticals, which include other middle market industries along with deposit relationships from commercial real estate and commercial & industrial clients ◦ Specialty Deposit Verticals, which include title, escrow, home owner association (“HOA”) and property management, 1031 exchange, trust & estates and payment processors; and ◦ Software Verticals, which include: ▪ Axos Fiduciary Services : A full-service fiduciary team catered specifically to support bankruptcy and non-bankruptcy trustees and fiduciaries with their software and banking needs, and ▪ Zenith Information Systems, Inc .: A business management and entertainment accounting and payroll software offering supported by a dedicated service team. • Consumer deposits, which primarily include retail and small business deposits as well as sweep deposits from financial advisory and clearing firms, including Axos Clearing and its business division, AAS.
In addition, trust preferred securities have been phased out of tier 1 capital for banking organizations that had $15 billion or more in total consolidated assets as of December 31, 2009 unless the banking organization grows above $15.0 billion in assets as a result of an acquisition. The Company’s trust preferred securities currently are grandfathered under this provision.
In addition, trust preferred securities have been phased out of tier 1 capital for banking organizations that had $15.0 billion or more in total consolidated assets as of December 31, 2009 unless the banking organization grows above $15.0 billion in assets as a result of an acquisition. The Company’s trust preferred securities currently are grandfathered under this provision.
In addition, such rules may require us to make substantial capital contributions into one or more of the our broker-dealers in order for such subsidiaries to comply with such rules, either in the form of cash or subordinated loans made in accordance with the requirements of all applicable net capital rules. Customer Protection Rule.
In addition, such rules may require us to make substantial capital contributions into one or more of our broker-dealers in order for such subsidiaries to comply with such rules, either in the form of cash or subordinated loans made in accordance with the requirements of all applicable net capital rules. Customer Protection Rule.
Broker-dealers are subject to extensive laws, rules and regulations covering all aspects of the Securities Business, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of clients’ funds and securities, capital adequacy, record keeping and reporting, the conduct of directors, officers, and employees, qualification and licensing of supervisory and sales personnel, marketing practices, supervisory and organizational procedures intended to ensure compliance with securities laws and to prevent improper trading on material nonpublic information, limitations on extensions of credit in securities transactions, clearance and settlement procedures, and rules designed to promote high standards of commercial honor and just and equitable principles of trade.
Broker-dealers are subject to extensive laws, rules and regulations covering all aspects of the Securities Business Segment, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of clients’ funds and securities, capital adequacy, record keeping and reporting, the conduct of directors, officers, and employees, qualification and licensing of supervisory and sales personnel, marketing practices, supervisory and organizational procedures intended to ensure compliance with securities laws and to prevent improper trading on material nonpublic information, limitations on extensions of credit in securities transactions, clearance and settlement procedures, and rules designed to promote high standards of commercial honor and just and equitable principles of trade.
If the Federal Reserve or the OCC determines that a saving and loan holding company’s or federal savings bank’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of its operations are unsatisfactory or that its management has violated any law or regulation, the agency has the authority to take a number of different remedial actions as it deems appropriate under the circumstances.
If the Federal Reserve or the OCC determines that a savings and loan holding company’s or federal savings bank’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of its operations are unsatisfactory or that its management has violated any law or regulation, the agency has the authority to take a number of different remedial actions as it deems appropriate under the circumstances.
For construction loans, we consider borrower experience and may obtain project completion guarantees from our borrowers and require borrowers to fund costs that exceed the initial construction budgets. As part of the underwriting of construction loans, we consider market conditions and perform stress testing to help ensure payoff via refinance or sale will cover any loan proceeds advanced.
For construction loans, we consider borrower 2 experience and may obtain project completion guarantees from our borrowers and require borrowers to fund costs that exceed the initial construction budgets. As part of the underwriting of construction loans, we consider market conditions and perform stress testing to help ensure payoff via refinance or sale will cover any loan proceeds advanced.
The CFPB has broad examination and enforcement authority, including the power to issue subpoenas and cease and desist orders, commence civil actions, hold investigations and hearings and seek civil penalties, as well as the authority to regulate disclosures, mandate registration of any covered person and to regulate what it considers unfair, deceptive, abusive practices.
The CFPB has broad examination and enforcement authority, including the power to issue subpoenas and cease and desist orders, commence civil actions, hold investigations and hearings and seek civil penalties, as well as the authority to regulate disclosures, mandate registration of any covered person and to regulate what it considers unfair, deceptive, and/or abusive practices.
Additionally, the Net Capital Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to, and approval from, the SEC and FINRA for certain capital withdrawals. Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital.
Additionally, the Net Capital Rule and certain FINRA rules impose 11 requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to, and approval from, the SEC and FINRA for certain capital withdrawals. Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital.
In addition, if the Bank receives a rating of less than satisfactory under the Community Reinvestment Act, we would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.
In addition, if the Bank receives a rating of less than 5 satisfactory under the Community Reinvestment Act, we would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.
Our Company and the Bank are subject to the risk-based regulatory capital framework and guidelines established by the Federal Reserve and the OCC. In July 2013, the Federal Reserve and the OCC published final rules (the “Regulatory Capital Rules”) establishing a comprehensive capital framework for U.S. banking organizations.
Our Company and the Bank are subject to the risk-based regulatory capital framework and guidelines established by the Federal Reserve and the OCC. In 2013, the Federal Reserve and the OCC published final rules (the “Regulatory Capital Rules”) establishing a comprehensive capital framework for U.S. banking organizations.
In addition, OCC regulations provide that minimum capital levels greater than those provided in the regulations may be established by the OCC for individual savings associations upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances.
In addition, OCC regulations provide that minimum capital levels greater than those provided in the regulations may be established by the OCC for individual savings associations upon a determination that 7 the savings association’s capital is or may become inadequate in view of its circumstances.
Our investment policy, as established by our Board of Directors, is designed to maintain liquidity and generate a favorable return on investment without incurring undue interest rate risk, credit risk or portfolio asset concentration risk.
Our investment policy, as established by our Board of Directors, is designed to maintain liquidity and generate a favorable return on investment without incurring undue interest rate risk, credit risk or asset concentration risk.
The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on its capital position and requires certain board approval procedures to be followed.
The law limits both the 8 individual and aggregate amount of loans the Bank may make to insiders based, in part, on its capital position and requires certain board approval procedures to be followed.
Financial holding companies are generally permitted to affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature." Such activities include, among other things, securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking.
Financial holding companies are generally permitted to affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Such activities include, among other things, securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking.
Savings associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. At June 30, 2023, the Bank was in compliance with its QTL requirement and met the definition of a DBLA. Liquidity Standard .
Savings associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. At June 30, 2024, the Bank was in compliance with its QTL requirement and met the definition of a DBLA. Liquidity Standard .
The Economic Growth, Regulatory Relief, and Consumer Protection Act set the asset threshold for enhanced prudential standards and stress testing at $100 billion of total consolidated assets. Based on asset levels at June 30, 2022, neither the Company nor the Bank are subject to enhanced stress test regulations.
The Economic Growth, Regulatory Relief, and Consumer Protection Act set the asset threshold for enhanced prudential standards and stress testing at $100 billion of total consolidated assets. Based on asset levels at June 30, 2023, neither the Company nor the Bank are subject to enhanced stress test regulations.
These actions include the power to enjoin any “unsafe or unsound” banking practices; to require that affirmative action be taken to correct any conditions resulting from any violation of law or unsafe or unsound practice; to issue an administrative order that can be judicially enforced; to require that it increase its capital; to restrict its growth; assess civil monetary penalties against it or its officers or directors; and to remove any of its officers and directors.
These actions include, among other things, the power to enjoin any “unsafe or unsound” banking practices; to require that affirmative action be taken to correct any conditions resulting from any violation of law or unsafe or unsound practice; to issue an administrative order that can be judicially enforced; to require that it increase its capital; to restrict its growth; assess civil monetary penalties against it or its officers or directors; and to remove any of its officers and directors.
The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits.
The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to, among other things: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits.
In addition, the Company and the Bank elected the current expected credit losses (“CECL”) five-year transition guidance for calculating regulatory capital ratios on July 1, 2020 and the June 30, 2023 ratios include this election.
In addition, the Company and the Bank elected the current expected credit losses (“CECL”) five-year transition guidance for calculating regulatory capital ratios on July 1, 2020 and the June 30, 2024 ratios include this election.
If the OCC determines that the Bank fails to meet any standard prescribed by the guidelines, the OCC may require us to submit to it an acceptable plan to achieve compliance with the standard. OCC regulations establish deadlines for the submission and review of such safety and soundness compliance plans in response to any such determination. Loans-to-One-Borrower Limitations .
If the OCC determines that the Bank fails to meet any standard prescribed by these guidelines, the OCC may require us to submit to it an acceptable plan to achieve compliance with the required standards. OCC regulations establish deadlines for the submission and review of such safety and soundness compliance plans in response to any such determination. Loans-to-One-Borrower Limitations .
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.
Our Bank generates non-interest income from consumer and business products, including fees from loans originated for sale, deposit account service fees, prepayment fees, loan servicing fees, as well as technology and payment transaction processing fees.
Significant new rules and regulations continue to arise as a result of the Dodd-Frank Act, including the implementation of a more stringent fiduciary standard for broker-dealers and increased regulation of investment advisers. Compliance with these provisions could result in increased costs.
Significant new rules and regulations continue to arise from the SEC and the Dodd-Frank Act, including the implementation of a more stringent fiduciary standard for broker-dealers and increased regulation of investment advisers. Compliance with these provisions could result in increased costs.
HUMAN CAPITAL At June 30, 2023, we had 1,455 full-time employees, which does not include seasonal internship employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with our employees to be satisfactory.
HUMAN CAPITAL At June 30, 2024, we had 1,781 full-time employees, which does not include seasonal internship employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with our employees to be satisfactory.
If a financial holding company fails to continue to meet any of the prerequisites for 15 Table of Cont ents financial holding company status, including those described above, the Federal Reserve may order the company to divest its subsidiary banks or discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company.
If a financial holding company fails to continue to meet any of the prerequisites for financial holding company status, including those described above, the Federal Reserve may order the company to divest its subsidiary banks or discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company.
The SEC Form CRS requires registered investment advisors and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. 21 Table of Cont ents AVAILABLE INFORMATION Axos Financial, Inc. files reports, proxy and information statements and other information electronically with the SEC.
The SEC Form CRS requires registered investment advisors and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. AVAILABLE INFORMATION Axos Financial, Inc. files reports, proxy and information statements and other information electronically with the SEC.
Competition for those deposits comes from a wide variety of other banks, savings institutions, and credit unions. Money market funds, full-service securities brokerage firms and financial technology companies also compete for these funds. The Bank competes for these deposits by offering superior service and a variety of deposit accounts at competitive rates.
Competition for those deposits comes from a wide variety of other banks, savings institutions, and credit unions. Money market funds, full-service securities brokerage firms and financial technology companies also compete for these funds. The Banking Business Segment competes for these deposits by offering superior service and a variety of deposit accounts at competitive rates.
Generally, a broker-dealer’s net capital is net worth plus qualified subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational charges. At June 30, 2023, our broker-dealers were in compliance with applicable net capital requirements. The SEC, FINRA and other regulatory organizations impose rules that require notification when net capital falls below certain predefined thresholds.
Generally, a broker-dealer’s net capital is net worth plus qualified subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational charges. As of June 30, 2024, our broker-dealers were in compliance with applicable net capital requirements. The SEC, FINRA and other regulatory organizations impose rules that require notification when net capital falls below certain predefined thresholds.
Violations of laws, rules and regulations governing a broker-dealer’s actions could result in censure, penalties and 20 Table of Cont ents fines, the issuance of cease-and-desist orders, the restriction, suspension, or expulsion from the securities industry of such broker-dealer, its registered representatives, officers or employees, or other similar adverse consequences.
Violations of laws, rules and regulations governing a broker-dealer’s actions could result in censure, penalties and fines, the issuance of cease-and-desist orders, the restriction, suspension, or expulsion from the securities industry of such broker-dealer, its registered representatives, officers or employees, or other similar adverse consequences.
We believe this is important to recruiting and retaining talent to allow our organization to achieve its goals and objectives. COMPETITION The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify in the future. The Bank attracts deposits through its banking sales force and online acquisition channels.
We believe this is important to recruiting and retaining talent to allow our organization to achieve its goals and objectives. 4 COMPETITION The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify in the future. The Banking Business Segment attracts deposits through its banking sales force and online acquisition channels.
The laws and regulations of the CFPB and other consumer protection laws and regulations to which the Bank is subject mandate certain disclosure requirements and regulate the manner in which we must deal with customers when taking deposits from, making loans to, or engaging in other types of transactions with, our customers.
The laws and regulations of the CFPB and other consumer protection laws and regulations to which the Bank is subject mandate certain disclosure requirements and regulate the manner in which we must deal with customers when taking deposits from, making loans to, or engaging in other types of transactions with, our customers. 9 Privacy Standards and Cybersecurity .
Axos Clearing competes directly with numerous other financial advisory and investment banking firms, broker-dealers and banks, including 13 Table of Cont ents large national and major regional firms and smaller niche companies, some of whom are not broker-dealers and, therefore, are not subject to the broker-dealer regulatory framework.
Axos Clearing competes directly with numerous other financial advisory and investment banking firms, broker-dealers and banks, including large national and major regional firms and smaller niche companies, some of whom are not broker-dealers and, therefore, are not subject to the broker-dealer regulatory framework.
In underwriting commercial & industrial – non-real estate loans, we primarily consider the borrowers’ operating cash flows and the value of underlying collateral. Additionally, in our commercial real estate and commercial & industrial – non-real estate loans we typically take a senior lien position in a structured facility collateralized by the underlying assets. Loan Quality and Credit Risk .
In underwriting commercial & industrial – non-real estate loans, we primarily consider the borrowers’ operating cash flows and the value of underlying collateral. Additionally, in our commercial real estate and commercial & industrial – non-real estate loans we typically take a senior lien position in a structured facility collateralized by the underlying assets.
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 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, retail and floor plan marine loans and other consumer loans.
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.
AAS and Axos Clearing generate interest and asset- and transaction-based 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 digital wealth management services.
A capital conservation buffer of 2.5% above each of these levels is required for banking institutions to avoid restrictions on their ability to make capital distributions, including the payment of dividends. 14 Table of Cont ents The Regulatory Capital Rules provide for a number of deductions from and adjustments to CET1.
A capital conservation buffer of 2.5% above each of these regulatory minimum levels is required for banking institutions to avoid restrictions on their ability to make capital distributions, including the payment of dividends. The Regulatory Capital Rules provide for a number of deductions from and adjustments to CET1.
This guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through June 30, 2022. This cumulative amount will then be phased out of regulatory capital over the following three years beginning July 1, 2022.
This guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through June 30, 2022. This cumulative amount is being phased out of regulatory capital over the three years beginning July 1, 2022.
No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. Volcker Rule.
No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. REGULATION OF FINANCIAL HOLDING COMPANY General .
With limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral.
With limited exceptions, the maximum amount that a savings association may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Qualified Thrift Lender Test .
Depository institutions with more than $10 billion in assets and their affiliates are subject to direct supervision by the CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. As of June 30, 2023, we had $20.3 billion in total assets, placing the Bank under the direct supervision and oversight of the CFPB.
Depository institutions with more than $10 billion in assets and their affiliates are subject to direct supervision by the CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. As of June 30, 2024, the Bank had $22.1 billion in total assets, placing the Bank under the direct supervision and oversight of the CFPB.
Failure to comply with these sanctions and the U.S. Foreign Corrupt Practices Act, or similar laws and regulations, could have serious legal and reputational consequences. REGULATION OF SECURITIES BUSINESS Our correspondent clearing and custodial firm Axos Clearing, and introducing broker Axos Invest LLC, are broker-dealers registered with the SEC and members of FINRA and various other self-regulatory organizations.
Failure to comply with these sanctions and the U.S. Foreign Corrupt Practices Act, or similar laws and regulations, could have serious legal and reputational consequences. REGULATION OF THE SECURITIES BUSINESS SEGMENT Our correspondent clearing and custodial firm Axos Clearing, and introducing broker Axos Invest LLC, are broker-dealers registered with the SEC, members of FINRA and licensed with all U.S.
The failure of the Company or the Bank to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by federal banking regulators that could have a material effect on the Company, explained in more detail below under “Regulation of Banking Business – Regulatory Capital Requirements and Prompt Corrective Action”.
The failure of the Company or the Bank to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by federal banking regulators that could have a material effect on the Company, explained in more detail below under “Regulation of Axos Bank”.
The Regulatory Capital Rules are intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements. The capital requirements for the Company are similar to those for the Bank.
The Regulatory Capital Rules are intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements.
Axos Bank is not subject to any such individual minimum regulatory capital requirement and the Bank’s regulatory capital exceeded all minimum regulatory capital requirements as of June 30, 2023. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Stress Testing.
Axos Bank is not subject to any such individual minimum regulatory capital requirement and the Bank’s regulatory capital exceeded all minimum regulatory capital requirements as of June 30, 2024. See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Liquidity and Capital Resources.” Stress Testing.
Any such legislation, regulatory changes or amendments could adversely affect us and no assurance can be given as to whether, or in what form, any such changes may occur. REGULATION OF FINANCIAL HOLDING COMPANY General .
Any such legislation, regulatory changes or amendments could adversely affect us and no assurance can be given as to whether, or in what form, any such changes may occur.
We attempt to mitigate these risks through the structuring of these lending products, adhering to underwriting policies in evaluating the management of the business and the credit-worthiness of borrowers and guarantors. Auto Our automobile lending division originates prime and subprime loans to customers secured by new and used automobiles (“autos”).
We attempt to mitigate these risks through the structuring of these lending products, adhering to underwriting policies in evaluating the management of the business and the credit-worthiness of borrowers and guarantors. Auto & Consumer Our Auto loans are secured by new and used automobiles (“autos”).
Under certain provisions of the Dodd-Frank Act known as the Volcker Rule, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates, are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a “covered fund”.
Under certain provisions of the Dodd-Frank Act known as the Volcker Rule, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates, are generally prohibited from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in private equity and hedge funds and certain other entities.
Our failure to comply with privacy, data protection and information security laws could 19 Table of Cont ents result in significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.
Our failure, or perceived failure, to comply with privacy policies, or applicable, data protection and information security laws, regulations, rules, standards or contractual obligations, could result in significant regulatory or governmental investigations or actions, litigation, fines, sanctions, and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.
Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB.
Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB.
For additional information, please see Note 19 - “Minimum Regulatory Capital Requirements” to the financial statements filed with this report. Source of Strength . The Dodd-Frank Act extends the Federal Reserve “source of strength” doctrine to savings and loan holding companies.
For additional information, please see Note 19 — “Regulatory Capital Requirements” in the Consolidated Financial Statements. Source of Strength . The Dodd-Frank Act extends the Federal Reserve’s “source of strength” doctrine to savings and loan holding companies.
The Regulatory Capital Rules require banking organizations (i.e., both the Company and the Bank) to maintain a minimum “common equity Tier 1” (“CET1”) ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets).
The Regulatory Capital Rules require the Company and the Bank to maintain a minimum “common equity Tier 1” (“CET1”) ratio, a Tier 1 risk-based capital ratio, a total risk-based capital ratio, and a minimum leverage ratio (calculated as Tier 1 capital to average consolidated assets).
The basic deposit insurance limit is $250,000. 16 Table of Cont ents Regulatory Capital Requirements and Prompt Corrective Action . The prompt corrective action regulation of the OCC requires mandatory actions and authorizes other discretionary actions to be taken by the OCC against a savings association that falls within undercapitalized capital categories specified in OCC regulations.
The prompt corrective action regulation of the OCC requires mandatory actions and authorizes other discretionary actions to be taken by the OCC against a savings association that falls within undercapitalized capital categories specified in OCC regulations.
The information below does not purport to be complete and is qualified in its entirety by reference to all applicable laws and regulations. In addition, new and amended legislation, rules and regulations governing the Company are introduced from time to time by the U.S. government and its various agencies, including in response to recent highly-publicized bank failures.
In addition, new and amended legislation, rules and regulations governing the Company are introduced from time to time by the U.S. government and its various agencies, including in response to recent highly-publicized bank failures.
Our subprime loans are insured via a default risk mitigation product in which we recoup a large percentage of the deficiency balance on charged off loans. We distribute our auto loan products through direct and indirect channels, hold all of the auto loans that we originate and perform the loan servicing functions for these loans.
Loans to subprime borrowers are insured via a default risk mitigation product in which we recoup a large percentage of the deficiency balance on charged off loans. We source auto loans through direct and indirect channels and retain and service all of the auto loans that we originate.
Broker-dealers are also subject to federal regulation and the securities laws of each state where they conduct business. Our broker-dealers are members of, and are primarily subject to regulation, supervision and regular examination by FINRA.
These self-regulatory organizations adopt rules (which are subject to approval by the SEC) for governing their members and the industry. Broker-dealers are also subject to federal regulation and the securities laws of each state where they conduct business. Our broker-dealers are primarily subject to regulation, supervision and regular examination by FINRA.
Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations. As of June 30, 2023, Axos Bank was in compliance with the applicable liquidity standard. Transactions with Related Parties .
Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations. As of June 30, 2024, Axos Bank was in compliance with the applicable liquidity standard. For additional information on the Company’s liquidity, see “Liquidity and Capital Resources” in Part II, Item 7. Transactions with Related Parties .
If the OCC determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OCC may, if the institution is well-capitalized, reclassify it as adequately capitalized.
If the OCC determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OCC may reclassify the institution’s capital category or subject the institution to certain restrictions.
Insurance of Deposit Accounts . The FDIC administers a deposit insurance fund (the “DIF”) that insures depositors in certain types of accounts up to a prescribed amount for the loss of any such depositor’s respective deposits due to the failure of an FDIC member depository institution.
The following discussion summarizes some of the principal areas of regulation applicable to the Bank and its operations. Insurance of Deposit Accounts . The FDIC administers the DIF which insures depositors in certain types of accounts up to a prescribed amount for the loss of any such depositor’s respective deposits due to the failure of an FDIC member depository institution.
Savings associations generally are subject to the lending limits applicable to national banks.
Savings associations generally are subject to certain lending limits.
Axos Invest, Inc. is subject to the requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and the Investment Company Act of 1940, as amended, and is subject to examination by the SEC. The following information describes aspects of the material laws and regulations applicable to the Company.
In addition, Axos Invest, Inc., an investment adviser, is registered with the SEC. Axos Invest, Inc. is subject to the requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and the Investment Company Act of 1940, as amended, and is subject to examination by the SEC.
The federal banking laws require that appropriate regulatory approvals must be obtained before an individual or company may take actions to “control” a bank or savings association. The definition of control found in the HOLA is similar to that found in the Bank Holding Company Act of 1956 (“BHCA”) for bank holding companies.
The federal banking laws require that appropriate regulatory approvals must be obtained before an individual or company may take actions to “control” a bank or savings association. 6 Volcker Rule.
We typically reduce exposure in these loans by entering into a structured facility, under which we take a senior lien position collateralized by the underlying assets at advance rates well below the collateral value. The remainder of this portfolio is comprised of leveraged cash flow lending and commercial and industrial leases.
For certain commercial non-real estate loan products, we typically reduce risk exposure in these loans by entering into a structured facility, under which we take a senior lien position collateralized by the underlying assets at advance rates well below the collateral value.
Credit extensions generated by the Bank conform to the intent and technical requirements of our lending policies and the applicable lending regulations of our federal regulators.
Loan Underwriting Process and Criteria Our loan underwriting policies and procedures are written and adopted by our Bank’s Board of Directors and our Bank’s Credit Committee. Credit extensions by the Bank conform to the intent and technical requirements of our lending policies and the applicable lending regulations of our federal regulators.
These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations.
These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition to the GLBA, we are subject to various other federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity.
This regulation is intended primarily for the protection of our customers, the deposit insurance fund and the U.S. finance system and not for the benefit of our security holders. 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”).
This regulation is intended primarily for the protection of our customers, the deposit insurance fund (“DIF”) and the U.S. financial system and not for the benefit of our security holders.
Various aspects of the Regulatory Capital Rules continue to be subject to further evaluation and interpretation by the U.S. banking regulators.
Various aspects of the Regulatory Capital Rules continue to be subject to further evaluation and interpretation by the U.S. banking regulators. As of June 30, 2024, the capital ratios of both the Company and the Bank exceeded the minimums necessary to be considered “well-capitalized” under the capital adequacy requirements.
Although commercial and industrial loans and leases are often collateralized directly or indirectly by equipment, inventory, accounts or loans receivable or other business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment because accounts or loans receivable may be uncollectible and inventories and equipment may be obsolete or of limited use.
Leveraged cash flow loans rely on free cash flow as a primary repayment source and enterprise value as the secondary repayment source. The liquidation of collateral in the event of a borrower default may be an insufficient source of repayment because accounts or loans receivable may be uncollectible and inventories and equipment may be obsolete or of limited use.
We do not know of any practice, condition or violation that might lead to termination of our access to the DIF. Axos Bank is a member depository institution of the FDIC and its deposits are insured by the DIF up to the applicable limits, which are backed by the full faith and credit of the U.S. Government.
Axos Bank is a member depository institution of the FDIC and its deposits are insured by the DIF up to the applicable limits, which are backed by the full faith and credit of the U.S. Government. The basic deposit insurance limit is $250,000. Regulatory Capital Requirements and Prompt Corrective Action .
In the most recent Community Reinvestment Act Report, issued May 2019, the Bank received a ‘Satisfactory’ rating covering calendar years 2016, 2017, and 2018. 18 Table of Cont ents Federal Home Loan Bank (“FHLB”) System . The Bank is a member of the FHLB system.
In the most recent Community Reinvestment Act Report, issued in April 2023, the Bank received a ‘Satisfactory’ rating covering calendar years 2019, 2020, and 2021. Federal Home Loan Bank (“FHLB”) System . The Bank is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region.
The FDIC is authorized to examine its member institutions and to require that they file periodic reports of their condition and op erations. The FDIC may also prohibit any member institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF.
As the administrator of the DIF, the FDIC assesses its member depository institutions and determines the appropriate DIF premiums to be paid by each such institution. The FDIC is authorized to examine its member institutions and to require that they file periodic reports of their condition and op erations.
The FDIC has the authority to initiate enforcement actions against savings associations, after giving the primary federal regulator the opportunity to take such action. The FDIC may terminate an institution’s access to the DIF if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC may also prohibit any member institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC has the authority to initiate enforcement actions against savings associations, after giving the primary federal regulator the opportunity to take such action.
Because risk-adjusted returns available on acquisitions may exceed returns available through retaining assets from our origination channels, we have elected to purchase loans and securities from time to time. Some of our loans and securities were purchased at discounts to par value, which enhance our effective yield through accretion into income in subsequent periods. Loan Portfolio Composition .
Because risk-adjusted returns available on acquired assets may exceed returns available through retaining assets from our origination channels, we have elected to purchase loans and securities from time to time, and may continue to do so in the future.
Securities services . We offer fully disclosed clearing services through Axos Clearing to FINRA and SEC registered member firms for trade execution and clearance as well as back-office services such as record keeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance, and custody of securities.
Axos Clearing offers fully disclosed clearing services to Financial Industry Regulatory Authority (“FINRA”) and SEC registered member firms for trade execution and clearance in addition to back-office services such as recordkeeping, trade reporting, and reorganization assistance.
The Bank, as a federal savings bank, is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency (“OCC”) as its primary regulator, and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer.
The Bank, a federal savings association, has elected to operate as a covered savings association, which became effective in August 2024, and is subject to regulation, examination and supervision by the OCC as its primary regulator, and the FDIC as its deposit insurer.
Capital regulations applicable to savings associations such as the Bank also require savings associations to meet the additional capital standard of tangible capital equal to at least 1.5% of total adjusted assets. The Bank’s capital requirements are viewed as minimum standards and most financial institutions are expected to maintain capital levels well above the minimum.
The Bank’s capital requirements are viewed as minimum standards and most financial institutions are expected to maintain capital levels well above the minimum.
Axos Clearing also uses various clearing organizations, including the Depository Trust Company, the National Securities Clearing Corporation, Euroclear and the Options Clearing Corporation. Our broker-dealers are registered with the SEC, FINRA, all 50 U.S. states and the District of Columbia.
States, the District of Columbia and Puerto Rico, and various other self-regulatory organizations. Axos Clearing also uses various clearing organizations, including the Depository Trust Company, the National Securities Clearing Corporation, Euroclear and the Options Clearing Corporation. 10 Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally FINRA, the Municipal Securities Rulemaking Board or national securities exchanges.
Accordingly, Axos Financial is registered as a savings and loan holding company with the Federal Reserve and is subject to the Federal Reserve’s regulations, examinations, supervision and reporting requirements. Axos Financial is required to file reports with, comply with the rules and regulations of, and is subject to examination by the Federal Reserve.
Axos Financial is required to file reports with, comply with the rules and regulations of, and is subject to examination by the Federal Reserve. In addition, the Federal Reserve has enforcement authority over Axos Financial and its subsidiaries. Capital .
REGULATION OF BANKING BUSINESS General . As a federally-chartered savings and loan association whose deposit accounts are insured by the FDIC, Axos Bank is subject to extensive regulation by the OCC, FDIC and the CFPB with respect to federal consumer financial laws. The following discussion summarizes some of the principal areas of regulation applicable to the Bank and its operations.
As a covered savings association, the Bank is not required to comply with the lending limits established by the HOLA that are applicable to federal savings associations. Axos Bank is subject to extensive regulation and examination by the OCC, FDIC and the CFPB with respect to federal consumer financial laws.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
Many states have also recently implemented or modified their data breach notification and data privacy requirements.
Our subsidiaries, Axos Clearing LLC and Axos Invest LLC, are broker-dealers and are registered with and subject to regulation by the SEC and FINRA. In addition, Axos Invest, Inc., an investment adviser, is registered with the SEC.
As a covered savings association, the Bank is required to become a member of the Federal Reserve System and subscribe to the capital stock of the Federal Reserve Bank of San Francisco (the “FRBSF”). Our subsidiaries, Axos Clearing LLC and Axos Invest LLC, are broker-dealers and are registered with and subject to regulation by the SEC and FINRA.
Many of our loans have initial fixed rate periods (three, five or seven years) before starting a regular adjustment period (annually, semi-annually or monthly) as well as prepayment protection clauses, interest rate floors and rate change caps. We divide our multifamily residential mortgage portfolio between the loans we retain and the loans we sell.
Loans often include initial fixed rate periods of either three, five, or seven years before starting a variable rate period, which is based on the Secured Overnight Financing Rate (“SOFR”) or other interest rate indices. Multifamily and Commercial Mortgage loans generally include prepayment protection clauses, interest floors and rate change caps.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on our financial condition, results of operations and prospects. In addition, raising equity capital will have a dilutive effect on the equity interests of our existing stockholders and may cause our stock price to decline.
Biggest changeAccordingly, we cannot provide assurance on our ability to raise additional capital if needed or whether it can be raised on terms acceptable to us. If we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on our financial condition, results of operations and prospects.
To manage the expected growth of our operations and personnel, we will be required to manage multiple aspects of the business simultaneously, including among other things: (i) improve existing and implement new transaction processing, operational and financial systems, procedures and controls; (ii) maintain effective credit scoring and underwriting guidelines; (iii) maintain sufficient levels of regulatory capital and liquidity; and (iv) expand our employee base and train and manage this growing employee base.
To manage the expected growth of our operations and personnel, we will be required to manage multiple aspects of the business simultaneously, including to, among other things: (i) improve existing and implement new transaction processing, operational and financial systems, procedures and controls; (ii) maintain effective credit scoring and underwriting guidelines; (iii) maintain sufficient levels of regulatory capital and liquidity; and (iv) expand our employee base and train and manage this growing employee base.
Our failure to comply with current, or adapt to new or changing, laws, regulations or policies could result in enforcement actions and sanctions against us by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on our business, financial condition and results of operations, and the value of our common stock.
Our failure to comply with current, or adapt to new or changing, laws, regulations or policies could result in enforcement actions and sanctions against us by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on our business, 15 financial condition and results of operations, and the value of our common stock.
The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors. Risks Relating to Macroeconomic Conditions Changes in interest rates could adversely affect our performance.
The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors. 12 Risks Relating to Macroeconomic Conditions Changes in interest rates could adversely affect our performance.
In addition, if we identify material weaknesses or significant deficiencies in our internal control over financial reporting or are required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures. We could lose investor confidence in the accuracy and completeness of our financial reports and potentially subject us to litigation.
In addition, if we identify material weaknesses or significant deficiencies in our internal control over financial reporting or are required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures. We could lose investor 28 confidence in the accuracy and completeness of our financial reports and potentially subject us to litigation.
The risk that these types of events could seriously harm our business is likely to increase as we add more customers and expand the number of smartphone and internet-based products and services we offer. We have risks of systems failure and disruptions to operations.
The risk that these types of events could seriously harm our business is likely to increase as we add more customers 25 and expand the number of smartphone and internet-based products and services we offer. We have risks of systems failure and disruptions to operations.
A worsening of business and economic conditions generally or specifically in the principal markets in which we conduct business could have adverse effects, including the following: • a decrease in the demand for, or the availability of, loans and other products and services we offer; • a decrease in deposit balances, including low-cost and noninterest bearing deposits, and changes in our interest rate mix toward higher-cost deposits; • an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us, which could lead to higher levels of nonperforming assets, net charge-offs, and provisions for credit losses; • a decrease in the value of loans and other assets secured by collateral such as consumer or commercial real estate; • a decrease in net interest income from our lending and deposit gathering activities; • an impairment of certain intangible assets such as goodwill; • an increase in competition resulting from increasing consolidation within the financial services industry; and • an increase in borrowing costs in excess of changes in the rate at which we reinvest funds.
A worsening of business and economic conditions generally or specifically in the principal markets in which we conduct business could have adverse effects, including the following: • a decrease in the demand for, or the availability of, loans and other products and services we offer; • a decrease in deposit balances, including low-cost and non-interest-bearing deposits, and changes in our interest rate mix toward higher-cost deposits; • an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us, which could lead to higher levels of nonperforming assets, net charge-offs, and provisions for credit losses; • a decrease in the value of loans and other assets secured by collateral such as consumer or commercial real estate; • a decrease in net interest income from our lending and deposit gathering activities; • an impairment of certain intangible assets such as goodwill; • an increase in competition resulting from increasing consolidation within the financial services industry; and 13 • an increase in borrowing costs in excess of changes in the rate at which we reinvest funds.
System enhancements and updates may create risks associated with implementing new systems and integrating them with existing ones. Due to the complexity and interconnectedness of information technology systems, the process of enhancing our layers of defense can create a risk of systems disruptions and security issues.
System enhancements and updates may create risks associated with implementing new systems and integrating them with existing ones. Due to the complexity and interconnectedness of information technology systems, the process of enhancing our technical layers of defense can create a risk of systems disruptions and security issues.
Although our loans and leases are typically secured, the risk of default, generally due to a borrower’s inability to make scheduled payments on his or her loan, is an inherent risk of the Banking Business.
Although our loans and leases are typically secured, the risk of default, generally due to a borrower’s inability to make scheduled payments on his or her loan, is an inherent risk of the Banking Business Segment.
Our common stock price may fluctuate significantly due to a variety of factors that include the following: • actual or expected variations in quarterly results of operations; • recommendations by securities analysts; • operating and stock price performance of comparable companies, as deemed by investors; • news reports relating to trends, concerns, and other issues in the financial services industry, including recent highly-publicized bank failures; • perceptions in the marketplace about our Company or competitors; • new technology used, or services offered, by competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors; • failure to integrate acquisitions or realize expected benefits from acquisitions; • changes in government regulations; and • geopolitical conditions, such as acts or threats of terrorism or military action.
Our common stock price may fluctuate significantly due to a variety of factors that include the following: • actual or expected variations in quarterly results of operations; • recommendations by securities analysts; • operating and stock price performance of comparable companies, as deemed by investors; • news reports relating to trends, concerns, and other issues in the financial services industry, including bank failures; • perceptions in the marketplace about our Company or competitors; • new technology used, or services offered, by competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, our Company or competitors; • failure to integrate acquisitions or realize expected benefits from acquisitions; • changes in government regulations; and • geopolitical conditions, such as acts or threats of terrorism or military action.
FinTechs continue to emerge and compete with traditional financial institutions across a wide variety of products and services. Consumers have demonstrated a growing willingness to obtain banking services from FinTechs.
FinTechs 22 continue to emerge and compete with traditional financial institutions across a wide variety of products and services. Consumers have demonstrated a growing willingness to obtain banking services from FinTechs.
These provisions include: • supermajority voting provisions providing that certain sections of our Certificate of Incorporation and our By-laws may not be amended or repealed by our stockholders without the affirmative vote of the holders of at least 75% of the voting power, and requiring the affirmative vote of the holders of at least 75% of the voting power to remove a director or directors and only for cause; • our classified Board of Directors, which may tend to discourage a third-party from making a tender offer or otherwise attempting to obtain control of us since the classification of our Board of Directors generally increases the difficulty of replacing a majority of directors; 35 Table of Cont ents • advance notice provisions requiring stockholders seeking to nominate candidates to be elected as directors at an annual meeting or to bring business before an annual meeting to comply with the written procedure specified in our By-laws; • the inability of stockholders to act by written consent or to call special meetings; • the ability of our Board of Directors to make, alter or repeal our by-laws; • the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval; • the additional shares of authorized common stock and preferred stock available for issuance under our Certificate of Incorporation, which could be issued at such times, under such circumstances and with such terms and conditions as to impede a change in control.
These provisions include: • supermajority voting provisions providing that certain sections of our Certificate of Incorporation and our By-laws may not be amended or repealed by our stockholders without the affirmative vote of the holders of at 27 least 75% of the voting power, and requiring the affirmative vote of the holders of at least 75% of the voting power to remove a director or directors and only for cause; • our classified Board of Directors, which may tend to discourage a third-party from making a tender offer or otherwise attempting to obtain control of us since the classification of our Board of Directors generally increases the difficulty of replacing a majority of directors; • advance notice provisions requiring stockholders seeking to nominate candidates to be elected as directors at an annual meeting or to bring business before an annual meeting to comply with the written procedure specified in our By-laws; • the inability of stockholders to act by written consent or to call special meetings; • the ability of our Board of Directors to make, alter or repeal our by-laws; • the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval; • the additional shares of authorized common stock and preferred stock available for issuance under our Certificate of Incorporation, which could be issued at such times, under such circumstances and with such terms and conditions as to impede a change in control.
Our success depends on, among other things: • Having a large and increasing number of customers who use our bank for their banking needs; • Our ability to attract, hire and retain key personnel as our business grows; • Our ability to secure additional capital as needed; • The relevance of our products and services to customer needs and demands and the rate at which we and our competitors introduce or modify new products and services; • Our ability to offer products and services with fewer employees than competitors; • The satisfaction of our customers with our customer service; • Ease of use of our websites and smartphone applications; 31 Table of Cont ents • Our ability to provide a secure and stable technology platform for financial services that provides us with reliable and effective operational, financial and information systems; and • Integration of our broker-dealer and registered investment-advisory businesses.
Our success depends on, among other things: • Having a large and increasing number of customers who use our bank for their banking needs; • Our ability to attract, hire and retain key personnel as our business grows; • Our ability to secure additional capital as needed; • The relevance of our products and services to customer needs and demands and the rate at which we and our competitors introduce or modify new products and services; • Our ability to offer products and services with fewer employees than competitors; • The satisfaction of our customers with our customer service; • Ease of use of our websites and smartphone applications; • Our ability to provide a secure and stable technology platform for financial services that provides us with reliable and effective operational, financial and information systems; and • Integration of our broker-dealer and registered investment-advisory businesses.
In determining the amount of the allowance for loan and lease losses, we make various assumptions and judgments about the collectibility of our loan and lease portfolio, including the creditworthiness of our borrowers, the value of the real estate serving as collateral for the repayment of our loans and our loss history.
In determining the amount of the allowance for loan and lease losses, we make various assumptions and judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers, the value of the real estate serving as collateral for the repayment of our loans and our loss history.
We rely substantially upon third-party service providers for our core technology and to protect us from system failures or disruptions. This reliance may mean that we will not be able to resolve operational problems internally or on a timely basis, which could lead to customer dissatisfaction or long-term disruption of our operations.
We rely substantially upon third-party service providers for our core banking and securities transactions technology and to protect us from system failures or disruptions. This reliance may mean that we will not be able to resolve operational problems internally or on a timely basis, which could lead to customer dissatisfaction or long-term disruption of our operations.
Events, both actual or rumored, involving limited liquidity, defaults, non-performance or other adverse developments that affect other companies in the financial services industry or the financial services industry generally have in the past, and may in the future, lead to erosion of customer confidence in the financial services industry, deposit volatility, liquidity issues, stock price volatility and other adverse developments, including increased regulatory oversight, increased premiums for the FDIC insurance program, higher capital requirements or changes in the way regulatory capital is calculated, 23 Table of Cont ents and impositions of additional restrictions through regulatory changes or supervisory or enforcement activities.
Events, both actual or rumored, involving limited liquidity, defaults, non-performance or other adverse developments that affect other companies in the financial services industry or the financial services industry generally have in the past, and may in the future, lead to erosion of customer confidence in the financial services industry, deposit volatility, liquidity issues, stock price volatility and other adverse developments, including increased regulatory oversight, increased premiums for the FDIC insurance program, higher capital requirements or changes in the way regulatory capital is calculated, and impositions of additional restrictions through regulatory changes or supervisory or enforcement activities.
The Inflation Reduction Act (the “IRA”), which establishes a new 15% corporate alternative minimum tax on adjusted book income (of corporations that have an average adjusted book income in excess of $1 billion over a three tax year period) for tax years beginning after December 31, 2022, may impact the Company’s cash tax payments and tax credit carryforward balances.
The Inflation Reduction Act (the “IRA”), which established a 15% corporate alternative minimum tax on adjusted book income (of corporations that have an average adjusted book income in excess of $1 billion over a three tax year period) for tax years beginning after December 31, 2022, may impact the Company’s cash tax payments and tax credit carryforward balances.
Misconduct by employees could also result in fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential personal information. The Company may not be able to prevent employee errors or misconduct, and the precautions the Company takes to detect this type of activity might not be effective in all cases.
Misconduct by employees and third-party vendors could also result in fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential personal information. The Company may not be able to prevent employee errors or misconduct, and the precautions the Company takes to detect this type of activity might not be effective in all cases.
The COVID-19 pandemic has had a potentially long-term negative impact on certain commercial real estate portfolios due to the risk that tenants may reduce the office space they lease as some portion of the workforce continues to work remotely on a hybrid or fulltime basis.
The COVID-19 pandemic has had a potentially long-term negative impact on certain commercial real estate portfolios due to the risk that tenants may reduce the office space they lease as some portion of the workforce continues to work remotely on a hybrid or full-time basis.
If an actual or perceived breach of our security occurs, including those of our third-party vendors, such as hacking or identity theft, it could 34 Table of Cont ents cause serious negative consequences, including significant disruption of our operations, misappropriation of confidential information, or damage to computers or systems, and may result in violations of applicable privacy and other laws, financial loss and loss of confidence in our security measures.
If an actual or perceived breach of our security occurs, including those of our third-party vendors, such as hacking or identity theft, it could cause serious negative consequences, including significant disruption of our operations, misappropriation of confidential information, or damage to computers or systems, and may result in violations of applicable privacy and other laws, financial loss and loss of confidence in our security measures.
Our Bank is based in San Diego, California, and approximately 41.3% of our real estate loan portfolio was secured by real estate located in California at June 30, 2023. In addition, some of our computer systems that operate our internet websites and their back-up systems are located in San Diego, California. Historically, California has been vulnerable to natural disasters.
Our Bank is based in San Diego, California, and approximately 37.3% of our real estate loan portfolio was secured by real estate located in California at June 30, 2024. In addition, some of our computer systems that operate our internet websites and their back-up systems are located in San Diego, California. Historically, California has been vulnerable to natural disasters.
If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our business, results of operations and financial condition. 28 Table of Cont ents Higher FDIC assessments could negatively impact profitability.
If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our business, results of operations and financial condition. Higher FDIC assessments could negatively impact profitability.
These negative events may cause us to incur losses and may adversely affect our capital, financial condition and results of operations. 22 Table of Cont ents The specific impact on us of unfavorable or uncertain economic or market conditions is difficult to predict, could be long or short term, and may be direct or indirect.
These negative events may cause us to incur losses and may adversely affect our capital, financial condition and results of operations. The specific impact on us of unfavorable or uncertain economic or market conditions is difficult to predict, could be long or short term, and may be direct or indirect.
In addition, further regulation, including in response to recent highly-publicized bank failures, could increase the assessment rate we are required to pay to the FDIC, adversely affecting our earnings. It is very difficult to predict future changes in regulation or the competitive impact that any such changes would have on our business.
In addition, further regulation, including in response to bank failures, could increase the assessment rate we are required to pay to the FDIC, adversely affecting our earnings. It is difficult to predict future changes in regulation or the competitive impact that any such changes would have on our business.
There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes or technology is changed or new products and services are introduced.
There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes or technology change or new products and services are introduced.
These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. 27 Table of Cont ents If our allowance for credit losses is not sufficient to cover actual credit losses, our earnings, capital adequacy and overall financial condition may suffer materially.
These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. If our allowance for credit losses is not sufficient to cover actual credit losses, our earnings, capital adequacy and overall financial condition may suffer materially.
We are exposed to interest rate risk because our interest-earning assets and interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates, as the two have different time periods for adjustment and can be tied to different measures of rates.
We are exposed to interest rate risk because our interest-earning assets and interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates, as they may have different time periods for adjustment and can be tied to different measures of rates.
Any material weaknesses or significant deficiencies in our internal control over financial reporting or restatement of our financial statements could have a material adverse effect on our business, results of operations, reputation, and financial condition. 36 Table of Cont ents ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Any material weaknesses or significant deficiencies in our internal control over financial reporting or restatement of our financial statements could have a material adverse effect on our business, results of operations, reputation, and financial condition. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Our broker-dealer and investment advisory businesses subjects us to regulatory risks. Our broker-dealer and investment advisory business subjects us to regulation by the SEC, FINRA, other self-regulatory organizations (“SROs”), state securities commissions, and other regulatory bodies.
Our broker-dealer and investment advisory businesses subject us to regulatory risks. Our broker-dealer and investment advisory businesses subject us to regulation by the SEC, FINRA, other self-regulatory organizations (“SROs”), state securities commissions, and other regulatory bodies.
Our success depends in large part on the continuing efforts of a few individuals. If we are unable to retain these key personnel or attract, hire and retain others to oversee and manage our Company, our business could suffer.
Our success depends in large part on the continuing efforts of key executives. If we are unable to retain these key personnel or attract, hire and retain others to oversee and manage our Company, our business could suffer.
If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory 24 Table of Cont ents approval to proceed with acquisitions and other strategic transactions, which could negatively impact our business, financial condition, results of operations and prospects.
If our policies, procedures and systems are deemed deficient, we may be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approval to proceed with acquisitions and other strategic transactions, which could negatively impact our business, financial condition, results of operations and prospects.
At June 30, 2023, our multifamily residential loans were $3.1 billion or 18.5% of our loan portfolio. The payment on such loans is typically dependent on the cash flows generated by the projects, which are affected by the supply and demand for multifamily residential units and commercial property within the relative market.
At June 30, 2024, our multifamily residential loans were $3.9 billion or 19.5% of our loan portfolio. The payment on such loans is typically dependent on the cash flows generated by the projects, which are affected by the supply and demand for multifamily residential units and commercial property within the relative market.
New or amended laws, rules, regulations and policies, including potential changes under consideration in response to recent highly-publicized bank failures, could impact our operations, increase our capital requirements or substantially restrict our growth and adversely affect our ability to operate profitably by making compliance more difficult or expensive, restrict our ability to originate or sell loans, or impact the amount of interest or other charges or fees earned on loans or other products.
New or amended laws, rules, regulations and policies, including potential changes under consideration in response to bank failures, and the upcoming U.S. presidential election, could impact our operations, increase our capital requirements or substantially restrict our growth and adversely affect our ability to operate profitably by making compliance more difficult or expensive, restrict our ability to originate or sell loans, or impact the amount of interest or other charges or fees earned on loans or other products.
Given the current economic and political environment and ongoing budgetary pressures, the enactment of new federal or state legislation or new interpretations of existing tax laws could adversely impact our tax position, in some circumstances retroactively.
Our financial performance is impacted by federal and state tax laws. Given the current economic and political environment and ongoing budgetary pressures, the enactment of new federal or state legislation or new interpretations of existing tax laws could adversely impact our tax position, in some circumstances retroactively.
For further information about our C&I lending business, please refer to “Business - Asset Origination and Fee Income Businesses - Commercial Real Estate Secured and Commercial Lending.” While we believe we have established appropriate underwriting and ongoing monitoring policies and procedures for our lending activities, there can be no assurance that such underwriting and ongoing monitoring policies and procedures are, or will continue to be, appropriate or that losses on loans will not require increased allowances for loan and lease losses.
For further information about our C&I lending business, please refer to “Business - Loan Portfolio - Commercial & Industrial - Non-Real Estate.” 19 While we believe we have established appropriate underwriting and ongoing monitoring policies and procedures for our lending activities, there can be no assurance that such underwriting and ongoing monitoring policies and procedures are, or will continue to be, appropriate or that losses on loans will not require increased allowances for loan and lease losses.
We employ cybersecurity measures that are designed to prevent, detect, and respond to cyberattacks, including management-level engagement and corporate governance, formalized risk management, advanced technical controls, incident response planning, frequent vulnerability testing, vendor management, intrusion monitoring, security awareness program, and partnerships with the appropriate government and law enforcement agencies.
Through our cybersecurity risk management program, we employ cybersecurity measures that are designed to prevent, detect, and respond to cybersecurity incidents, including management-level engagement and corporate governance, formalized risk management processes, advanced technical controls, incident response planning, frequent vulnerability testing, vendor management, intrusion monitoring, the maintenance of a security awareness program, and established partnerships with appropriate government and law enforcement agencies.
We may have to establish a larger allowance for loan and lease losses in the future if, in our judgment, it becomes necessary.
We may have to establish a larger allowance for credit losses in the future if, in our judgment, it becomes necessary.
Liquidity and access to adequate funding cannot be assured. Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity.
Liquidity is essential to our business and the inability to raise funds through deposits, borrowings, equity and debt offerings, or other sources could have a materially adverse effect on our liquidity.
In the course of our business, we may foreclose and take title to real estate, including commercial real estate, and could be subject to environmental liabilities with respect to those properties.
We are exposed to risk of environmental liability with respect to properties to which we take title. 24 In the course of our business, we may foreclose and take title to real estate, including commercial real estate, and could be subject to environmental liabilities with respect to those properties.
During the last three fiscal years we have sold approximately $2.2 billion of residential mortgage loans to Fannie Mae and Freddie Mac and into MBS guaranteed by Ginnie Mae. As of June 30, 2023, approximately 10.3% of our securities portfolio consisted of RMBS issued or guaranteed by these GSEs.
During the last three fiscal years we have sold approximately $774.1 million of residential mortgage loans to Fannie Mae and Freddie Mac and into MBS guaranteed by Ginnie Mae. As of June 30, 2024, approximately 19.2% of our securities portfolio consisted of RMBS issued or guaranteed by these GSEs.
Our broker-dealer business subjects us to a number of risks and challenges, including risks related to our ability to integrate the acquired operations and the associated internal controls and regulatory functions into our current operations; our ability to retain key personnel; our ability to limit the outflow of acquired deposits and successfully retain and manage acquired assets; our ability to retain existing correspondents who may choose to perform their own clearing services, move their clearing business to one of our competitors or exit the business; our ability to attract new customers and generate new assets in areas not previously served; and the possible assumption of risks and liabilities related to litigation or regulatory proceedings involving the acquired operations.
Our broker-dealer business subjects us to a number of risks and challenges, including risks related to operationalizing internal controls and regulatory functions; our ability to retain key personnel; our ability to limit the outflow of deposits and successfully retain and manage assets; our ability to retain correspondents who may choose to perform their own clearing services, move their clearing business to one of our competitors or exit the business; and our ability to attract customers and generate new assets in areas not previously served.
At June 30, 2023, approximately 41.3% and 25.2% of our real estate loan portfolio was secured by real estate located in California and New York, respectively. In recent years, there has been significant volatility in real estate values.
At June 30, 2024, approximately 37.3% and 28.8% of our real estate loan portfolio was secured by real estate located in California and New York, respectively. In recent years, there has been significant volatility in real estate values.
We operate in an uncertain economic environment due to a variety of other reasons including, but not limited to, trade policies and tariffs, geopolitical tensions, including escalating military tensions in Europe as a result of Russia’s invasion of Ukraine, volatile energy prices and uncertain continuing effects of the coronavirus (“COVID-19”) pandemic.
We operate in an uncertain economic environment due to a variety of other reasons including, but not limited to, trade policies and tariffs, geopolitical tensions, including escalating military conflicts and tensions in Europe as a result of Russia’s invasion of Ukraine and the ongoing conflict in the Middle East, and volatile energy prices.
The IRA includes a nondeductible 1% excise tax on certain repurchases of corporate stock for transactions occurring after December 31, 2022, which would likely increase the Company’s cost of any future share repurchases.
The IRA includes a nondeductible 1% excise tax on certain repurchases of corporate stock for transactions occurring after December 31, 2022, which increases the Company’s cost of share repurchases exceeding certain thresholds.
Any such poor performance could adversely affect our advisory and custody business and the fees that we earn on client assets. Our broker-dealer business is also subject to regulatory requirements and risks discussed above under “Our broker-dealer and investment advisory businesses subjects us to regulatory risks” .
Any such poor performance could adversely affect our advisory and custody business and the fees that we earn on client assets. 20 Our broker-dealer and advisory businesses are also subject to regulatory requirements and risks discussed above under “Regulation of the Securities Business Segment” in “Supervision and Regulation” and “Our broker-dealer and investment advisory businesses subject us to regulatory risks” herein.
Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, reputation and financial condition.
Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could result in regulatory investigations or penalties, reduce investor confidence, or otherwise have a material adverse effect on our business, results of operations, reputation and financial condition.
Our broker-dealer business exposes us to other risks and uncertainties that are common in the securities industry, including intense competition, and potentially new areas and types of litigation including lawsuits based on allegations concerning our correspondents.
Our broker-dealer business exposes us to other risks and uncertainties that are common in the securities industry, including intense competition, and potentially new areas and types of litigation including lawsuits based on allegations concerning our correspondents or based upon the correspondent’s actions even though we do not control their activities.
In addition, the broker-dealer business may subject us to risks related to the movement of equity prices. For example, if securities prices decline rapidly, the value of our collateral could fall below the amount of the indebtedness secured by these securities, and in rapidly appreciating markets, our risk of loss may increase due to short positions.
For example, if securities prices decline rapidly, the value of our collateral for margin and other positions could fall below the amount of the indebtedness secured by these securities, and in rapidly appreciating markets, our risk of loss may increase due to short positions.
If we fail to attract and retain the necessary personnel, or if the costs of employee compensation or benefits increase substantially, our business, prospects, financial condition and results of operations could be adversely affected. We are exposed to risk of environmental liability with respect to properties to which we take title.
If we fail to attract and retain the necessary personnel, or if the costs of employee compensation or benefits increase substantially, our business, prospects, financial condition and results of operations could be adversely affected.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments, include methodologies to value our securities, estimate our allowance for loan losses and the realization of deferred tax assets and liabilities.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments, include methodologies to value our securities, estimate our allowance for credit losses and the evaluation of goodwill and other intangibles for impairment.
Any decision to change the structure, mandate or overall business practices of the GSEs and/or the relationship among the GSEs, the government and the private mortgage loan markets, or any failure by the GSEs to satisfy their obligations with respect to their RMBS, could have a material adverse effect on our business, financial condition and results of operations. 26 Table of Cont ents Commercial and industrial and commercial real estate loans may expose our company to greater financial and credit risk than other loans.
Any decision to change the structure, mandate or overall business practices of the GSEs and/or the relationship among the GSEs, the government and the private mortgage loan markets, or any failure by the GSEs to satisfy their obligations with respect to their RMBS, could have a material adverse effect on our business, financial condition and results of operations.
Our broker-dealer business subjects us to a variety of risks associated with the securities industry.
Our broker-dealer and advisory businesses subject us to a variety of risks associated with the securities industry.
A further downgrade of the credit ratings of the Company or the Bank could adversely affect our access to liquidity and capital and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us or purchase our securities, thereby, potentially reducing our ability to generate earnings. 30 Table of Cont ents Our inability to manage our growth or deploy assets profitably could harm our business and decrease our overall profitability, which may cause our stock price to decline.
A further downgrade of the credit ratings of the Company or the Bank could adversely affect our access to liquidity and capital and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us or purchase our securities, thereby, potentially reducing our ability to generate earnings.
There is increased public awareness and concern by governmental organizations on a variety of environmental, social, and sustainability matters, including climate change. This increased awareness may include more prescriptive reporting of environmental, social, and governance metrics, and other compliance requirements.
There is increased public awareness and concern by governmental organizations on a variety of environmental, social, and sustainability matters, including climate change. This increased awareness may include more prescriptive reporting of environmental, social, and governance metrics, and other compliance requirements. Further legislation and regulatory requirements could increase the operating expenses of, or otherwise adversely impact, us and our customers.
Risks Associated with our Common Stock The market price of our common stock may be volatile. Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired.
Stock price volatility may make it more difficult for our stockholders to resell their common stock when desired.
To the extent that we fail to adequately address the risks associated with non-residential lending, particularly in C&I lending, we may experience increases in levels of non-performing loans and leases and be forced to incur additional loan and lease loss provision expense, which would adversely affect our net interest income and capital levels and reduce our profitability.
To the extent that we fail to adequately address the risks associated with non-residential lending, particularly in C&I lending, including loans collateralized by customer securities, we may experience increases in levels of non-performing loans and leases and be forced to record additional provisions for credit losses, which would adversely affect our capital levels and reduce our profitability.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, our financial performance and a number of other factors, many of which are outside our control. Accordingly, we cannot provide assurance on our ability to raise additional capital if needed or whether it can be raised on terms acceptable to us.
Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets, economic conditions, our financial performance and a number of other factors, many of which are outside our control.
Increases in interest rates can negatively impact our business, including a possible reduction in customers’ or potential customers’ desire to borrow money or adversely affecting customers’ ability to repay on outstanding loans by increasing their debt obligations. On the deposit side, increasing interest rates generally lead to interest rate increases on our deposit accounts.
Loan originations and repayment rates tend to increase with declining interest rates and decrease with rising interest rates. Increases in interest rates can negatively impact our business, including a possible reduction in customers’ or potential customers’ desire to borrow money or adversely affecting customers’ ability to repay on outstanding loans by increasing their debt obligations.
The potential impacts of extreme weather conditions, natural disasters and rising sea levels, could impact our operations as well as those of our customers and third party vendors upon which we rely.
Extreme weather conditions, natural disasters, rising sea levels, acts of war or terrorism, civil unrest, public health issues, or other adverse external events could harm our business. The potential impacts of extreme weather conditions, natural disasters and rising sea levels, could impact our operations as well as those of our customers and third party vendors upon which we rely.
See “Regulation of Securities Business.” 25 Table of Cont ents Policies and regulations enacted by the Consumer Financial Protection Bureau may negatively impact our residential mortgage loan business and compliance risk.
See “Regulation of the Securities Business Segment.” 16 Policies and regulations enacted by the Consumer Financial Protection Bureau may negatively impact our consumer business and increase our compliance burdens.
A decrease in the mortgage buying activity of Fannie Mae, Freddie Mac, and MBS’s guaranteed by Ginnie Mae or a failure by Fannie Mae, Ginnie Mae, and Freddie Mac to satisfy their obligations with respect to their RMBS could have a material adverse effect on our business, financial condition and results of operations.
If residential housing values were to decline or nationwide unemployment levels rise, we are likely to experience increases in the level of our non-performing loans and foreclosures in future periods. 17 A decrease in the mortgage buying activity of Fannie Mae, Freddie Mac, and MBS’s guaranteed by Ginnie Mae or a failure by Fannie Mae, Ginnie Mae, and Freddie Mac to satisfy their obligations with respect to their RMBS could have a material adverse effect on our business, financial condition and results of operations.
If we are not able to maintain our levels of profitability by deploying deposits in profitable assets or investments, our net interest margin and overall level of profitability will decrease and our stock price may decline. We depend on the accuracy and completeness of information about customers .
If we are not able to maintain our levels of profitability by deploying deposits in profitable assets or investments, our net interest margin and overall level of profitability will decrease and our stock price may decline. New lines of business, purchased assets or liabilities or new products and services may subject us to additional risks.
There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators have focused on compliance with the Bank Secrecy Act and anti-money laundering regulations.
There is increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators have focused on compliance with the Bank Secrecy Act and anti-money laundering regulations. Several banking institutions have received large fines, or suffered limitations on their operations, for non-compliance with these laws and regulations.
The credit rating agencies regularly evaluate the Company and the Bank, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, such as conditions affecting the financial services industry, the economy, and changes in rating methodologies more generally.
Selected sources of liquidity may become unavailable to the Bank if it were to no longer be considered “well-capitalized.” A reduction in our credit ratings could adversely affect our access to capital and could increase our cost of funds . 21 The credit rating agencies regularly evaluate the Company and the Bank, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, such as conditions affecting the financial services industry, the economy, and changes in rating methodologies more generally.
Our ability to attract deposits could be negatively impacted by a public perception of our financial prospects or by increased deposit rates available at troubled institutions suffering from shortfalls in liquidity. The FHLB advances and the Federal Reserve Bank of San Francisco (“FRBSF”) discount window are subject to regulation and other factors beyond our control.
Our ability to attract deposits could be negatively impacted by a public perception of our financial prospects or by increased deposit rates available at troubled institutions suffering from shortfalls in liquidity.
Our commercial and industrial loans as well as our commercial real estate – mortgage portfolio was approximately $2,639.7 million and $6,199.8 million at June 30, 2023, comprising approximately 15.8% and 37.2% of our total loan portfolio, respectively. Commercial loans generally carry large balances and may involve a greater degree of financial and credit risk than other loans.
Commercial and industrial and commercial real estate loans may expose our company to greater financial and credit risk than other loans. Our commercial and industrial loans as well as our commercial real estate – mortgage portfolio was approximately $5.2 billion and $6.1 billion at June 30, 2024, comprising approximately 26.5% and 30.7% of our total loan portfolio, respectively.
Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies, and ultimately may require its liquidation. 29 Table of Cont ents We may seek additional capital, but it may not be available when it is needed, which would limit our ability to execute our strategic plan.
Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies, and ultimately may require its liquidation.
Our assets and deposit base have grown substantially in recent years, and we anticipate that we will continue to grow over time, perhaps significantly.
Our inability to manage our growth or deploy assets profitably could harm our business and decrease our overall profitability, which may cause our stock price to decline. Our assets and deposit base have grown substantially in recent years, and we anticipate that we will continue to grow over time, perhaps significantly.
The costs of compliance with these laws or regulatory actions may increase our operational costs, restrict our ability to provide certain products and services, reduce income from certain business initiatives, or result in interruptions or delays in the availability of systems. 33 Table of Cont ents Concerns about our practices with regard to the collection, use, disclosure or security of personal information of our customers or other privacy related matters, even if unfounded, could damage our reputation and results of operations.
The costs of compliance with these laws or regulatory actions may increase our operational costs, restrict our ability to provide certain products and services, reduce income from certain business initiatives, or result in interruptions or delays in the availability of systems.
The monetary policies of the Federal Reserve, implemented through open market operations, the federal funds rate targets, and the discount rate for banking borrowings and reserve requirements, affect prevailing interest rates. A material change in any of these policies could have a material impact on us or our customers (including borrowers), and therefore on our results of operations.
The monetary policies of the Federal Reserve, implemented through open market operations, the federal funds rate (“Fed Funds Rate”) targets, and the discount rate for banking borrowings and reserve requirements, affect prevailing interest rates.
Such damage could also adversely affect our ability to raise additional capital. Any such damage to our reputation could have a material adverse effect on our financial condition and results of operations. Extreme weather conditions, natural disasters, rising sea levels, acts of war or terrorism, civil unrest, public health issues, or other adverse external events could harm our business.
Such damage could also adversely affect our ability to raise additional capital. Any such damage to our reputation could have a material adverse effect on our financial condition and results of operations.
The Company and its subsidiaries are subject to changes in federal and state tax laws and the interpretation of existing laws and examinations and challenges by taxing authorities . Our financial performance is impacted by federal and state tax laws.
Such actions could have an adverse effect on our business, financial condition and results of operations, including as a result of reputational harm. The Company and its subsidiaries are subject to changes in federal and state tax laws and the interpretation of existing laws and examinations and challenges by taxing authorities .
Inflation could negatively impact our business and our profitability. Prolonged periods of inflation may impact our profitability by negatively impacting our non-interest expenses, including increasing expense related to talent acquisition and retention. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services.
Inflation has negatively impacted, and may continue to negatively impact our business and our profitability. Prolonged periods of inflation have impacted, and may continue to impact our profitability by negatively impacting our non-interest expenses, including increasing expense related to talent acquisition and retention.
Declines in real estate markets or sustained economic downturns increases the risk of credit losses or charge-offs related to our loans or foreclosures on certain real estate properties. If we foreclose on these loans, our holding period for the collateral typically is longer than residential properties because there are fewer potential purchasers of the collateral.
Declines in real estate markets or sustained economic downturns increases the risk of credit losses or charge-offs related to our loans or foreclosures on certain real estate properties. Underwriting and portfolio management activities cannot completely eliminate all risks related to these loans.
Any significant failure to pay on time by our customers could impact our earnings.
Commercial loans generally carry large balances and may involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by our customers could impact our earnings.
If we become subject to significant environmental liabilities, our business, prospects, financial condition and results of operations could be adversely affected. Technology Risks We depend on third-party service providers for our core banking and securities transactions technology, and interruptions in or terminations of their services could materially impair the quality of our services.
If we become subject to significant environmental liabilities, our business, prospects, financial condition and results of operations could be adversely affected. Technology Risks We rely on technology and information systems that may be disrupted, which would pose operational risks. We rely on technology and information systems for, among other things, communications, processing customer transactions, recordkeeping and financial controls.
In addition, raising additional equity capital would dilute existing stockholders’ equity interests and may cause our stock price to decline. We are required by regulatory authorities to maintain adequate levels of capital to support our operations.
We are subject to stringent capital requirements and may need to raise additional capital in the future, and that capital may not be available or its cost may be high. We are required by regulatory authorities to maintain adequate levels of capital to support our operations.
On February 1, 2023, a credit rating agency, Moody’s Investors Service, downgraded the Company’s and the Bank’s long-term issuer ratings, among others. There can be no assurance that we will maintain our current credit ratings.
There can be no assurance that we will maintain our current credit ratings.
As a result, our operating margins, financial condition and results of operations may be adversely affected. Replacement of the LIBOR benchmark interest rate may have an impact on our business, financial condition or results of operations. LIBOR and certain other interest rate benchmarks are the subject of national, international, and other regulatory guidance and reform.
As a result, our operating margins, financial condition and results of operations may be adversely affected. Our business and operating results could be adversely affected by the political environment and governmental fiscal and monetary policies .
The market transition away from LIBOR to alternative reference rates is complex and could have a range of adverse effects on our business, financial condition and results of operations.
Failure to successfully manage these risks could have a material adverse effect on our business, financial condition and results of operations. We depend on the accuracy and completeness of information about customers .

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES Our principal offices are located at 9205 West Russell Road, Suite 400, Las Vegas, NV 89148. Our Banking and Securities segments conduct business at this location and our telephone number is (858) 649-2218. We have additional office space located at 4350 La Jolla Village Drive, Suite 140, San Diego, California 92122.
Biggest changeITEM 2. PROPERTIES Our principal offices are located at 9205 West Russell Road, Suite 400, Las Vegas, NV 89148. Our Banking and Securities Business Segments both conduct business at this location. Among other additional locations, we have office space located in San Diego, California totaling approximately 186,000 square feet. 29
Removed
Our offices in Las Vegas consist of a total of approximately 30,000 square feet under leases that expire August 31, 2027 and our San Diego facilities consist of a total of approximately 186,000 square feet under leases that expire June 30, 2030.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeNone of such matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or business. For additional information on legal proceedings, refer to Note 18 - “Commitments, Contingencies, and Off-Balance-Sheet Activities.” ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 37 Table of Cont ents PART II
Biggest changeNone of such matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or business. For additional information on legal proceedings, refer to Note 18 — “Commitments, Contingencies, and Off-Balance-Sheet Activities” in the Consolidated Financial Statements. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 30 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePeriod Number of Shares Purchased Average Price Paid Per Shares Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs Stock Repurchases 1, 2 (dollars in thousands) Quarter Ended June 30, 2023 April 1, 2023 to April 30, 2023 243,063 $ 37.42 243,063 $ 112,219,372 May 1, 2023 to May 31, 2023 228,611 37.37 228,611 103,677,065 June 1, 2023 to June 30, 2023 406 38.35 406 103,661,495 For the Three Months Ended June 30, 2023 472,080 $ 37.39 472,080 $ 103,661,495 Stock Retained in Net Settlement 3 April 1, 2023 to April 30, 2023 421 May 1, 2023 to May 31, 2023 1,225 June 1, 2023 to June 30, 2023 63,276 For the Three Months Ended June 30, 2023 64,922 1 On April 27, 2023, the Company announced a program to repurchase up to $100 million of its common stock.
Biggest changePeriod Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs Stock Repurchases 1, 2 (dollars in thousands) April 1, 2024 to April 30, 2024 114,104 $ 49.89 114,104 $ 114,064 May 1, 2024 to May 31, 2024 — — — 114,064 June 1, 2024 to June 30, 2024 159,540 47.28 159,540 106,521 For the Three Months Ended June 30, 2024 273,644 $ 48.37 273,644 $ 106,521 Stock Retained in Net Settlement April 1, 2024 to April 30, 2024 1,432 May 1, 2024 to May 31, 2024 1,190 June 1, 2024 to June 30, 2024 96,707 For the Three Months Ended June 30, 2024 99,329 1 On April 27, 2023, the Company announced a program to repurchase up to $100 million of its common stock and on February 12, 2024, the Company announced a program to repurchase up to $100 million of its common stock.
Stock Retained in Net Settlement was purchased at the vesting price of the associated restricted stock unit .
Stock retained in net settlement was purchased at the vesting price of associated restricted stock unit.
EQUITY COMPENSATION PLAN INFORMATION The following table provides information regarding the aggregate number of securities to be issued under all of our stock option and equity based compensation plans upon exercise of outstanding options, warrants and other rights and their weighted-average exercise prices as of June 30, 2023.
EQUITY COMPENSATION PLAN INFORMATION The following table provides information regarding the aggregate number of securities to be issued under all of our stock option and equity based compensation plans upon exercise of outstanding options, warrants and other rights and their weighted-average exercise prices as of June 30, 2024.
NYSE Index, and (ii) the banks included in the ABA NASDAQ Community Bank Total Return Index (ticker: XABQ). The graph assumes $100 was invested in AX common stock, in U.S. NYSE Composite Total Return Index (ticker: NYATR) and in ABA NASDAQ Community Bank Total Return Index (ticker: XABQ) on June 30, 2018. The indexes assume reinvestment of dividends.
NYSE Index, and (ii) the banks included in the ABA NASDAQ Community Bank Total Return Index (ticker: XABQ). The graph assumes $100 was invested in AX common stock, in U.S. NYSE Composite Total Return Index (ticker: NYATR) and in ABA NASDAQ Community Bank Total Return Index (ticker: XABQ) on June 30, 2019. The indexes assume reinvestment of dividends.
Plan Category (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options and units granted (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders — $ — 1,426,865 Equity compensation plans not approved by security holders N/A N/A N/A Total — $ — 1,426,865 39 Table of Cont ents COMPANY STOCK PERFORMANCE The following graph compares the total return of our common stock over the last five fiscal years, starting June 30, 2018 through June 30, 2023, with that of (i) the companies included in the total return for the U.S.
Plan Category (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options and units granted (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders — $ — 1,755,662 Equity compensation plans not approved by security holders N/A N/A N/A Total — $ — 1,755,662 32 COMPANY STOCK PERFORMANCE The following graph compares the total return of our common stock over the last five fiscal years, starting June 30, 2019 through June 30, 2024, with that of (i) the companies included in the total return for the U.S.
Future dividends will depend primarily upon our earnings, financial condition and need for funds, as well as government policies and regulations applicable to us and our bank that limit the amount that may be paid as dividends without prior approval. Preferred Stock .
Future dividends will depend primarily upon our earnings, financial condition and need for funds, as well as government policies and regulations applicable to us and our bank that limit the amount that may be paid as dividends without prior approval. ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Repurchases.
During the fiscal year ended June 30, 2023, there were 214,807 restricted stock unit award shares which were retained by the Company and converted to cash at the average rate of $40.24 per share to fund the grantee’s income tax obligations. 38 Table of Cont ents The following table sets forth our market repurchases of Axos common stock and the Axos common shares retained in connection with net settlement of restricted stock unit awards during the fourth fiscal quarter ended June 30, 2023.
During the fiscal year ended June 30, 2024, there were 336,110 restricted stock unit award shares which were retained by the Company and converted to cash at the average rate of $48.17 per share to fund the grantee’s income tax obligations. 31 The following table sets forth our market repurchases of Axos common stock and the Axos common shares retained in connection with net settlement of restricted stock unit awards during the fourth fiscal quarter ended June 30, 2024.
On August 6, 2019 the Company announced a program to repurchase up to $100 million of its common stock, and on April 27, 2023, the Company announced a program to repurchase an additional $100 million of its common stock.
On April 27, 2023, the Company announced a program to repurchase up to $100 million of its common stock and on February 12, 2024, the Company announced a program to repurchase up to an additional $100 million of its common stock.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the New York Stock Exchange under the symbol “AX”. There were 59,984,909 shares of common stock outstanding as of August 25, 2023 held by approximately 43,000 holders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the New York Stock Exchange under the symbol “AX”. There were 56,894,891 shares of common stock outstanding as of August 9, 2024 held by approximately 45,000 holders of record.
The Company accounts for treasury stock using the cost method as a reduction of stockholders’ equity in the accompanying Consolidated Financial Statements. Net Settlement of Restricted Stock Unit Awards.
The Company accounts for treasury stock using the cost method as a reduction of stockholders’ equity in the accompanying Consolidated Financial Statements. Net Settlement of Restricted Stock Unit Awards. The Company’s amended and restated 2014 Stock Incentive Plan, permits net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum income tax obligation.
Under the 2019 authorization, the Company has repurchased a total of $96.3 million or 3,721,014 common shares at an average price of $25.89 per share and there remains $3.7 million of availability under the plan. There have been no purchases under the 2023 authorization.
The Company has repurchased a total of $97.0 million or 2,541,254 common shares at an average price of $38.18 per share and there remains $106.5 million of availability under the programs. There have been no purchases under the 2024 authorization.
In October 2021, the stockholders of the Company approved the amended and restated 2014 Stock Incentive Plan, which, among other changes, permitted net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum income tax obligation.
Both of the share repurchase programs will continue in effect until terminated by the Board of Directors of the Company. 2 The Amended and Restated 2014 Stock Incentive Plan permits net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum income tax obligation.
A substantially larger number of holders of our common stock are beneficial holders, whose shares are held of record by brokers and other financial institutions. The transfer agent and registrar of our common stock is Computershare. DIVIDENDS As discussed below, on October 30, 2020, we redeemed all 515 outstanding shares of Series A-6% Cumulative Nonparticipating Perpetual Preferred Stock.
A substantially larger number of holders of our common stock are beneficial holders, whose shares are held of record by brokers and other financial institutions. The transfer agent and registrar of our common stock is Computershare. DIVIDENDS We intend to retain any earnings to finance the growth and development of our business and common stock repurchases.
The share repurchase authorization is in addition to the existing share repurchase plan announced on August 6, 2019. The share repurchase program will continue in effect until terminated by the Board of Directors of the Company.
The February 12, 2024 share repurchase authorization is in addition to the existing share repurchase plan announced on April 27, 2023.
Removed
As such, no holders of record of any class of stock are entitled to receive dividends currently. We currently intend to retain any earnings to finance the growth and development of our business and common stock repurchases.
Added
Cumulative Return as of June 30, 2019 2020 2021 2022 2023 2024 Axos $ 100.00 $ 81.03 $ 170.24 $ 131.56 $ 144.73 $ 209.72 NYSE 100.00 93.50 133.01 119.06 133.78 155.51 XABQ 100.00 76.08 121.28 113.91 93.99 108.07 ITEM 6. [Reserved] 33
Removed
The Company redeemed for cash all 515 outstanding shares of Series A-6% Cumulative Nonparticipating Perpetual Preferred Stock on October 30, 2020, at the face value $10,000 liquidation price per share plus accrued dividends.
Removed
There were no dividends declared for the year ended June 30, 2023 and June 30, 2022 as the Series A preferred stock was redeemed during fiscal year 2021. The Company declared dividends to holders of its Series A preferred stock totaling $0.1 million for the year ended June 30, 2021. ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Repurchases.
Removed
No purchases have been made under the 2023 authorization. 2 On August 6, 2019, the Company announced a program to repurchase up to $100 million of common stock. The share repurchase program will continue in effect until terminated by the Board of Directors of the Company.
Removed
Purchases were made in open-market transactions. 3 In October 2021, the stockholders of the Company approved the amended and restated 2014 Stock Incentive Plan, which, among other changes permitted net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum income tax obligation.
Removed
Cumulative Return as of June 30, 2018 2019 2020 2021 2022 2023 Axos $ 100.00 $ 66.61 $ 53.97 $ 113.40 $ 87.63 $ 96.41 NYSE 100.00 107.07 100.11 142.41 127.47 143.24 XABQ 100.00 90.33 68.72 109.55 102.89 84.90

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

86 edited+43 added−31 removed29 unchanged
Biggest changeAt or for the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2023 2022 2021 Selected Balance Sheet Data: Total assets $ 20,348,469 $ 17,401,165 $ 14,265,565 Loans, net of allowance for credit losses 16,456,728 14,091,061 11,414,814 Loans held for sale, carried at fair value 23,203 4,973 29,768 Loans held for sale, lower of cost or fair value 776 10,938 12,294 Allowance for credit losses 166,680 148,617 132,958 Securities—trading 758 1,758 1,983 Securities—available-for-sale 232,350 262,518 187,335 Securities borrowed 134,339 338,980 619,088 Customer, broker-dealer and clearing receivables 374,074 417,417 369,815 Total deposits 17,123,108 13,946,422 10,815,797 Advances from the FHLB 90,000 117,500 353,500 Borrowings, subordinated debentures and other borrowings 361,779 445,244 221,358 Securities loaned 159,832 474,400 728,988 Customer, broker-dealer and clearing payables 445,477 511,654 535,425 Total stockholders’ equity 1,917,159 1,642,973 1,400,936 Selected Income Statement Data: Interest and dividend income $ 1,157,138 $ 659,728 $ 617,863 Interest expense 374,017 52,570 79,121 Net interest income 783,121 607,158 538,742 Provision for credit losses 24,750 18,500 23,750 Net interest income after provision for credit losses 758,371 588,658 514,992 Non-interest income 120,488 113,363 105,261 Non-interest expense 447,115 362,062 314,510 Income before income tax expense 431,744 339,959 305,743 Income tax expense 124,579 99,243 90,036 Net income $ 307,165 $ 240,716 $ 215,707 Net income attributable to common stock $ 307,165 $ 240,716 $ 215,518 Per Common Share Data: Net income: Basic $ 5.15 $ 4.04 $ 3.64 Diluted $ 5.07 $ 3.97 $ 3.56 Adjusted earnings per common share (Non-GAAP 1 ) $ 5.39 $ 4.23 $ 3.68 Book value per common share $ 32.53 $ 27.48 $ 23.62 Tangible book value per common share (Non-GAAP 1 ) $ 29.51 $ 24.45 $ 21.36 Weighted-average number of common shares outstanding: Basic 59,691,541 59,523,626 59,229,495 Diluted 60,566,854 60,610,954 60,519,611 Common shares outstanding at end of period 58,943,035 59,777,949 59,317,944 45 Table of Cont ents At or for the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2023 2022 2021 Performance Ratios and Other Data: Loan originations for investment $ 8,452,215 $ 10,366,796 $ 6,471,864 Loan originations for sale $ 160,607 $ 656,487 $ 1,608,700 Return on average assets 1.64 % 1.57 % 1.52 % Return on average common stockholders’ equity 17.22 % 15.61 % 16.51 % Interest rate spread 2 3.44 % 3.91 % 3.70 % Net interest margin 3 4.35 % 4.13 % 3.92 % Net interest margin - Banking segment only 3 4.48 % 4.36 % 4.11 % Efficiency ratio 4 49.48 % 50.25 % 48.84 % Efficiency ratio - Banking segment only 4 47.76 % 41.61 % 41.95 % Capital Ratios: Equity to assets at end of period 9.42 % 9.44 % 9.82 % Axos Financial, Inc.: Tier 1 leverage (to adjusted average assets) 8.96 % 9.25 % 8.82 % Common equity tier 1 capital (to risk-weighted assets) 10.94 % 9.86 % 11.36 % Tier 1 capital (to risk-weighted assets) 10.94 % 9.86 % 11.36 % Total capital (to risk-weighted assets) 13.82 % 12.73 % 13.78 % Axos Bank: Tier 1 leverage (to adjusted average assets) 9.68 % 10.65 % 9.45 % Common equity tier 1 capital (to risk-weighted assets) 11.63 % 11.24 % 12.28 % Tier 1 capital (to risk-weighted assets) 11.63 % 11.24 % 12.28 % Total capital (to risk-weighted assets) 12.50 % 12.01 % 13.21 % Axos Clearing LLC: Net capital $ 35,221 $ 38,915 $ 35,950 Excess capital $ 29,905 $ 32,665 $ 27,904 Net capital as percentage of aggregate debit item 13.25 % 12.45 % 8.94 % Net capital in excess of 5% aggregate debit item $ 21,930 $ 23,290 $ 15,836 Asset Quality Ratios: Net annualized charge-offs (recoveries) to average loans outstanding 0.04 % 0.02 % 0.12 % Net annualized charge-offs (recoveries) to average loans outstanding excluding tax products 0.04 % 0.02 % 0.07 % Non-performing loans and leases to total loans 0.52 % 0.83 % 1.26 % Non-performing assets to total assets 0.47 % 0.68 % 1.07 % Allowance for credit losses - loans to total loans held for investment at end of period 1.00 % 1.04 % 1.15 % Allowance for credit losses - loans to non-performing loans 191.23 % 125.74 % 91.57 % 1 See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Use of Non-GAAP Financial Measures.” 2 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. 3 Net interest margin represents 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. 46 Table of Cont ents 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: For the Fiscal Years Ended June 30, 2023 2022 2021 (Dollars in thousands) Average Balance 1 Interest Income / Expense Average Yields Earned / Rates Paid Average Balance 1 Interest Income / Expense Average Yields Earned / Rates Paid Average Balance 1 Interest Income / Expense Average Yields Earned / Rates Paid Assets: Loans 2,3 $ 15,571,290 $ 1,048,874 6.74 % $ 12,576,873 $ 626,628 4.98 % $ 11,332,020 $ 584,410 5.16 % Interest-earning deposits in other financial institutions 1,761,902 73,467 4.17 % 1,233,983 4,501 0.36 % 1,600,811 2,185 0.14 % Investment securities 259,473 14,669 5.65 % 176,951 6,952 3.93 % 192,420 9,560 4.97 % Securities borrowed and margin lending 4 388,386 18,657 4.80 % 687,363 20,512 2.98 % 613,735 20,466 3.33 % Stock of the regulatory agencies 20,936 1,471 7.03 % 21,844 1,135 5.20 % 20,588 1,242 6.03 % Total interest-earning assets 18,001,987 $ 1,157,138 6.43 % 14,697,014 $ 659,728 4.49 % 13,759,574 $ 617,863 4.49 % Non-interest-earning assets 735,783 658,494 394,085 Total assets $ 18,737,770 $ 15,355,508 $ 14,153,659 Liabilities and Stockholders’ Equity: Interest-bearing demand and savings $ 10,211,737 $ 305,655 2.99 % $ 6,773,321 $ 20,053 0.30 % $ 7,204,698 $ 29,031 0.40 % Time deposits 1,225,537 33,826 2.76 % 1,226,774 13,567 1.11 % 1,825,795 31,498 1.73 % Securities loaned 303,932 3,673 1.21 % 469,051 1,124 0.24 % 412,385 1,496 0.36 % Advances from the FHLB 423,612 12,644 2.98 % 349,796 4,625 1.32 % 211,077 4,672 2.21 % Borrowings, subordinated notes and debentures 362,733 18,219 5.02 % 302,454 13,201 4.36 % 340,699 12,424 3.65 % Total interest-bearing liabilities 12,527,551 $ 374,017 2.99 % 9,121,396 $ 52,570 0.58 % 9,994,654 $ 79,121 0.79 % Non-interest-bearing demand deposits 3,730,524 3,927,195 2,182,009 Other non-interest-bearing liabilities 695,617 764,542 671,581 Stockholders’ equity 1,784,078 1,542,375 1,305,415 Total liabilities and stockholders’ equity $ 18,737,770 $ 15,355,508 $ 14,153,659 Net interest income $ 783,121 $ 607,158 $ 538,742 Interest rate spread 5 3.44 % 3.91 % 3.70 % Net interest margin 6 4.35 % 4.13 % 3.92 % 1 Average balances are obtained from daily data. 2 Loans includes loans held for sale, loan premiums, discounts and unearned fees. 3 Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. 4 Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the audited consolidated balance sheets. 5 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. 6 Net interest margin represents net interest income as a percentage of average interest-earning assets. 47 Table of Cont ents RESULTS OF OPERATIONS Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities.
Biggest changeAt or for the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2024 2023 2022 Selected Balance Sheet Data: Total assets $ 22,855,334 $ 20,348,469 $ 17,401,165 Loans—net of allowance for credit losses 19,231,385 16,456,728 14,091,061 Loans held for sale, carried at fair value 16,482 23,203 4,973 Loans held for sale, lower of cost or fair value — 776 10,938 Allowance for credit losses 260,542 166,680 148,617 Trading securities 353 758 1,758 Available-for-sale securities 141,611 232,350 262,518 Securities borrowed 67,212 134,339 338,980 Customer, broker-dealer and clearing receivables 240,028 374,074 417,417 Total deposits 19,359,217 17,123,108 13,946,422 Advances from the Federal Home Loan Bank 90,000 90,000 117,500 Borrowings, subordinated debentures and other borrowings 325,679 361,779 445,244 Securities loaned 74,177 159,832 474,400 Customer, broker-dealer and clearing payables 301,127 445,477 511,654 Total stockholders’ equity 2,290,596 1,917,159 1,642,973 Selected Income Statement Data: Interest and dividend income $ 1,655,607 $ 1,157,138 $ 659,728 Interest expense 694,178 374,017 52,570 Net interest income 961,429 783,121 607,158 Provision for credit losses 32,500 24,250 23,750 Net interest income, after provision for credit losses 928,929 758,871 583,408 Non-interest income 222,660 120,488 113,363 Non-interest expense 516,108 447,615 356,812 Income before income tax expense 635,481 431,744 339,959 Income taxes 185,473 124,579 99,243 Net income $ 450,008 $ 307,165 $ 240,716 Per Common Share Data: Net income: Basic $ 7.82 $ 5.15 $ 4.04 Diluted $ 7.66 $ 5.07 $ 3.97 Adjusted earnings per common share (Non-GAAP 1 ) $ 6.74 $ 5.39 $ 4.23 Book value per common share $ 40.26 $ 32.53 $ 27.48 Tangible book value per common share (Non-GAAP 1 ) $ 37.26 $ 29.51 $ 24.45 Weighted-average number of common shares outstanding: Basic 57,509,029 59,691,541 59,523,626 Diluted 58,725,636 60,566,854 60,610,954 Common shares outstanding at end of period 56,894,565 58,943,035 59,777,949 Common shares issued at end of period 70,221,632 69,465,446 68,859,722 38 At or for the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2024 2023 2022 Performance Ratios and Other Data: Loan originations for investment $ 10,388,439 $ 8,452,215 $ 10,366,796 Loan originations for sale $ 197,305 $ 160,607 $ 656,487 Loan purchases $ 841,838 $ 1,564 $ 31,667 Return on average assets 2.08 % 1.64 % 1.57 % Return on average common stockholders’ equity 21.64 % 17.22 % 15.61 % Interest rate spread 2 3.62 % 3.44 % 3.91 % Net interest margin 3 4.62 % 4.35 % 4.13 % Net interest margin - Banking Business Segment only 3 4.68 % 4.48 % 4.36 % Efficiency ratio 4 43.59 % 49.54 % 49.52 % Efficiency ratio - Banking Business Segment only 4 38.42 % 47.82 % 40.81 % Capital Ratios: Equity to assets at end of period 10.02 % 9.42 % 9.44 % Axos Financial, Inc.: Tier 1 leverage (to adjusted average assets) 9.43 % 8.96 % 9.25 % Common equity tier 1 capital (to risk-weighted assets) 12.01 % 10.94 % 9.86 % Tier 1 capital (to risk-weighted assets) 12.01 % 10.94 % 9.86 % Total capital (to risk-weighted assets) 14.84 % 13.82 % 12.73 % Axos Bank: Tier 1 leverage (to adjusted average assets) 9.74 % 9.68 % 10.65 % Common equity tier 1 capital (to risk-weighted assets) 12.74 % 11.63 % 11.24 % Tier 1 capital (to risk-weighted assets) 12.74 % 11.63 % 11.24 % Total capital (to risk-weighted assets) 13.81 % 12.50 % 12.01 % Axos Clearing LLC: Net capital $ 101,462 $ 35,221 $ 38,915 Excess capital $ 96,654 $ 29,905 $ 32.665 Net capital as percentage of aggregate debit item 42.21 % 13.25 % 12.45 % Net capital in excess of 5% aggregate debit item $ 89,442 $ 21,930 $ 23,290 Asset Quality Ratios: Net charge-offs to average loans outstanding 0.05 % 0.04 % 0.02 % Nonaccrual loans and leases to total loans 0.57 % 0.52 % 0.83 % Non-performing assets to total assets 0.51 % 0.47 % 0.68 % Allowance for credit losses - loans to total loans held for investment 5 1.34 % 1.00 % 1.04 % Allowance for credit losses - loans to nonaccrual loans 5 229.84 % 191.23 % 125.74 % 1 See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Use of Non-GAAP Financial Measures.” 2 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. 3 Net interest margin represents 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 assets at June 30, 2024 was primarily attributable to the allowance for credit losses related to the PCD loans acquired in the FDIC Loan Purchase.
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).
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).
(“COR Securities”) in an equal principal amount, with a maturity of 15 months, to serve as the source of payment of indemnification obligations of the principal stakeholders of COR Securities under the Merger Agreement. Interest accrues at a rate of 6.25% per annum. During the fiscal year ended June 30, 2019, $0.1 million of subordinated loans were repaid.
(“COR Securities”) in an equal principal amount, with a maturity of 15 months, to serve as the source of payment of indemnification obligations of the principal stakeholders of COR Securities under the applicable merger agreement. Interest accrues at a rate of 6.25% per annum. During the fiscal year ended June 30, 2019, $0.1 million of subordinated loans were repaid.
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 the Company and to the Company itself for their operating cash held on deposit with the Banking Business segment.
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 42 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 the Company and to the Company itself for their operating cash held on deposit with the Banking Business Segment.
The Company has made an indemnification claim against the $7.4 million remaining amount. In September 2020, the Company completed the sale of $175.0 million aggregate principal amount of its 4.875% Fixed-to-Floating Rate Subordinated Notes due October 1, 2030 (the “2030 Notes”).
The Company has made an indemnification claim against the $7.4 million remaining amount. In September 2020, the Company completed the sale of $175 million aggregate principal amount of its 4.875% Fixed-to-Floating Rate Subordinated Notes due October 1, 2030 (the “2030 Notes”).
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.
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- 52 balance-sheet items as calculated under regulatory accounting practices.
However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.
However, 34 actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.
The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations.
The 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, the Company includes parent-only activities and intercompany eliminations.
At June 30, 2023, our Company and Bank met all the capital adequacy requirements to which they were subject to and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since June 30, 2023 that would materially adversely change the Company’s and Bank’s capital classifications.
At June 30, 2024, our Company and Bank met all the capital adequacy requirements to which they were subject to and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since June 30, 2024 that would materially adversely change the Company’s and Bank’s capital classifications.
Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of June 30, 2023, 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.
Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of June 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.
The Company periodically reviews and adjusts the weighting of scenarios based on Management’s ACL framework. Adjustment of scenario weighting away from the baseline scenario to the adverse scenario should increase the allowance for credit losses on the Company’s held-for-investment loan and net investment in leases portfolio, all else remaining equal.
The Company periodically reviews and adjusts the weighting of scenarios based on management’s allowance for credit losses (“ACL”) framework. Adjustment of scenario weighting away from the baseline scenario to the adverse scenario should increase the allowance for credit losses on the Company’s held-for-investment loan and net investment in leases portfolio, all else remaining equal.
Under the alternate method, Axos Clearing may not repay subordinated debt, pay cash distributions, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.
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.
We are subject to federal and state income taxes, and our effective tax rates were 28.85%, 29.19% and 29.45% for the fiscal years ended June 30, 2023, 2022, and 2021, respectively. Other factors that affect our results of operations include expenses relating to data processing, advertising, depreciation, occupancy, professional services, and other miscellaneous expenses.
We are subject to federal and state income taxes, and our effective tax rates were 29.19%, 28.85% and 29.19% for the fiscal years ended June 30, 2024, 2023, and 2022, respectively. Other factors that affect our results of operations include expenses relating to data and operational processing, advertising, depreciation, occupancy, professional services, and other miscellaneous expenses.
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2023 AND JUNE 30, 2022 Net Interest Income . The following table sets forth the effects of changing rates and volumes on our net interest income.
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2024 AND JUNE 30, 2023 Net Interest Income . The following table sets forth the effects of changing rates and volumes on our net interest income.
In addition, these critical accounting estimates are discussed further in Note 1 - “ Organizations and Summary of Significant Accounting Policies. ” Securities . The Company’s securities held as trading and held as available for sale are carried at fair value.
In addition, these critical accounting estimates are discussed further in Note 1 — “ Organizations and Summary of Significant Accounting Policies ” in the Consolidated Financial Statements. Securities . The Company’s securities held as trading and held as available for sale are carried at fair value.
Under this rule, Axos Clearing has elected to operate under the alternate method and is required to maintain minimum net capital of $250,000 or 2% of aggregate debit balances arising from client transactions, as defined.
Under 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.
For securities valued using techniques that use significant unobservable inputs and are therefore 41 Table of Cont ents classified as Level 3 of the fair value hierarchy, the Company incorporates significantly more judgment to estimate the security’s fair value, as Level 3 valuation inputs inherently have increased uncertainty compared to inputs used when estimating the fair value of securities classified as Level 2.
For securities valued using techniques that use significant unobservable inputs and are therefore classified as Level 3 of the fair value hierarchy, the Company incorporates significantly more judgment to estimate the security’s fair value, as Level 3 valuation inputs inherently have increased uncertainty compared to inputs used when estimating the fair value of securities classified as Level 2.
The Company maintains an allowance for credit losses for its held-for-investment loan and net investment in leases portfolio, excluding loans measured at fair value in accordance with applicable accounting standards, which represents management’s estimate of the expected lifetime credit losses on the loans and net investment in leases.
The Company maintains an allowance for credit losses for its held-for-investment loan and net investment in leases portfolio as well as lending commitments, excluding loans measured at fair value in accordance with applicable accounting standards, which represents management’s estimate of the expected lifetime credit losses on the loans and net investment in leases.
These tax credits reduced the effective tax rate by approximately 0.45% and 0.44%, respectively. SEGMENT RESULTS The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services.
These tax credits decreased the effective tax rate by approximately 0.58% and 0.45%, respectively. SEGMENT RESULTS The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services.
Changes in one or more of these inputs can cause a significant change in the estimated fair value. For further information on Securities, refer to Note 1 - “Organizations and Summary of Significant Accounting Policies,” Note 3 - “Fair Value” and Note 4 - “Securities.” Allowance for Credit Losses .
Changes in one or more of these inputs can cause a significant change in the estimated fair value. For further information on Securities, refer to Note 1 — “Organizations and Summary of Significant Accounting Policies,” Note 3 — “Fair Value” and Note 4 — “Available-For-Sale Securities” in the Consolidated Financial Statements. Allowance for Credit Losses .
Other costs for the year ended June 30, 2022 reflect a one-time resolution of a contractual claim. 43 Table of Cont ents 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 mortgage servicing rights, goodwill and other intangible assets.
Other costs for the fiscal year ended June 30, 2022 reflect a one-time resolution of a contractual claim. 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.
We believe excluding the non-recurring acquisition related costs, and other costs provides investors with an alternative understanding of Axos’ business.
We believe excluding the non-recurring acquisition-related costs, and other costs provides investors with an alternative understanding our core business.
As a percentage of the outstanding loan balance, the Company’s allowance was 1.00% and 1.04% at June 30, 2023 and 2022, respectively. Provisions for credit losses were $24.8 million and $18.5 million for fiscal year 2023 and 2022, respectively.
As a percentage of the outstanding loan balance, the Company’s allowance was 1.34% and 1.00% at June 30, 2024 and 2023, respectively. Provisions for credit losses were $32.8 million and $24.8 million for fiscal year 2024 and 2023, respectively.
(“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank”) and Axos Nevada Holding, LLC (“Axos Nevada Holding”), collectively, the “Company.” Axos, the Bank and Axos Nevada Holding comprise substantially all of the Company’s assets and liabilities and revenues and expenses.
(“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank” or “Axos Bank”) and Axos Nevada Holding, LLC (“Axos Nevada Holding”), collectively, the “Company.” Axos, the Bank, two lending-related trust entities and Axos Nevada Holding comprise substantially all of the Company’s assets and liabilities and revenues and expenses.
Additionally, evaluating other intangible assets for impairment requires management to use significant judgment. The valuation of other intangible assets is primarily determined using discounted cash flows, market comparisons and recent transactions, the inputs for which may be unobservable and are subject to uncertainty.
The valuation of other intangible assets is primarily determined using discounted cash flows, market comparisons and recent transactions, the inputs for which may be unobservable and are subject to uncertainty.
Certain auto loans are insured for credit losses through which the Company recognizes fee income upon the receipt of insurance proceeds following the charge off of the loans. For fiscal year 2022, net charge-offs were $2.8 million and decreased $6.7 million compared to net charge-offs for fiscal year 2021.
For fiscal year 2023, net charge-offs were $6.7 million and increased $3.8 million compared to net charge-offs for fiscal year 2022, primarily due to net charge-offs in the auto and consumer portfolio. Certain auto loans are insured for credit losses through which the Company recognizes fee income upon the receipt of insurance proceeds following the charge-off of the loans.
Selected information concerning Axos Clearing follows as of each date indicated: June 30, (Dollars in thousands) 2023 2022 FDIC insured program balances at banks $ 1,627,053 $ 3,452,358 Margin balances $ 205,880 $ 285,894 Cash reserves for the benefit of customers $ 149,059 $ 372,112 Securities lending: Interest-earning assets – stock borrowed $ 134,339 $ 338,980 Interest-bearing liabilities – stock loaned $ 159,832 $ 474,400 COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2022 AND JUNE 30, 2021 For a comparison of our fiscal year 2022 results compared to 2021 results, see Part II, Item 7, “Comparison of the Fiscal Years Ended June 30, 2022 and June 30, 2021” in the Annual Report on Form 10-K for the year-ended June 30, 2022 filed with the SEC.
Selected information concerning Axos Clearing follows as of each date indicated: June 30, (Dollars in thousands) 2024 2023 FDIC insured program balances at banks $ 1,289,105 $ 1,627,053 Margin balances $ 219,848 $ 205,880 Cash reserves for the benefit of customers $ 113,676 $ 149,059 Securities lending: Interest-earning assets – stock borrowed $ 67,212 $ 134,339 Interest-bearing liabilities – stock loaned $ 74,177 $ 159,832 COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2023 AND JUNE 30, 2022 For a comparison of our fiscal year 2023 results compared to fiscal year 2022 results, see Part II, Item 7, “Comparison of the Fiscal Years Ended June 30, 2023 and June 30, 2022” in the Annual Report on Form 10-K for the fiscal year-ended June 30, 2023 filed with the SEC.
The 2032 Notes are obligations only of Axos Financial, Inc. The 2032 55 Table of Cont ents Notes mature on March 1, 2032 and accrue interest at a fixed rate per annum equal to 4.00%, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2022.
The 2032 Notes mature on March 1, 2032 and accrue interest at a fixed rate per annum equal to 4.00%, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2022.
We earn non-interest income primarily from mortgage banking activities, banking products and service activity, asset custody services, broker-dealer clearing and related services, prepayment fee income from multifamily and commercial borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities. Losses on sales of investment securities reduce non-interest income.
Our net interest income is reduced by our current estimate of credit losses. We earn non-interest income primarily from mortgage banking activities, banking products and service activity, asset custody services, broker-dealer clearing and related services, prepayment fee income from multifamily and commercial borrowers who repay their loans before maturity and from gains on sales of other loans and available-for-sale securities.
The following tables present regulatory capital information for our Company and Bank. Information presented for June 30, 2023, reflects the Basel III capital requirements for both our Company and Bank.
The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank. The following tables present regulatory capital information for our Company and Bank. Information presented for June 30, 2024, reflects the Basel III capital requirements for both our Company and Bank.
There were no other significant acquisitions undertaken during fiscal years 2023, 2022 or 2021. CRITICAL ACCOUNTING ESTIMATES The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
CRITICAL ACCOUNTING ESTIMATES The following discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Failure by our Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by regulators that could have a material adverse effect on our consolidated financial statements. The Federal Reserve establishes capital requirements for our Company and the OCC has similar requirements for our Bank.
Consolidated and Bank Capital 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 Consolidated Financial Statements.
To test for impairment, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Evaluating goodwill for impairment requires significant judgment and requires the use of certain unobservable inputs that are subject to uncertainty. To test for impairment, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Borrowings are collateralized by pledging certain mortgage loans and investment securities to the FHLB. Based on loans and securities pledged at June 30, 2023, we had a total borrowing availability of an additional $3.1 billion available immediately and an additional $4.5 billion available with additional collateral, for advances from the FHLB for terms of up to ten years.
Based on loans and securities pledged at June 30, 2024, we had a total borrowing availability of an additional $3,012.6 million available immediately and an additional $4,229.1 million available with additional collateral, for advances from the FHLB for terms of up to ten years.
The purchase price of $54.8 million consisted entirely of cash consideration paid upon acquisition and working capital adjustments. This acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, tangible and intangible assets acquired (and liabilities assumed) are recorded at their estimated fair values as of the date of acquisition.
This acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, tangible and intangible assets acquired (and liabilities assumed) are recorded at their estimated fair values as of the date of acquisition.
In the Securities Business, interest is earned through margin loan balances, securities borrowed and cash deposit balances. Interest expense is incurred from cash borrowed through bank lines and securities lending.
In the Securities Business Segment, interest is earned through margin loan balances, securities borrowed and cash deposit balances.
Below is a reconciliation of net income, the nearest compatible GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP) for the periods shown: For Year Ended June 30, (Dollars in thousands, except per share amounts) 2023 2022 2021 Net income $ 307,165 $ 240,716 $ 215,707 Acquisition-related costs 10,948 11,355 9,826 Other costs 1 16,000 10,975 — Income tax effect (7,776) (6,519) (2,894) Adjusted earnings (Non-GAAP) $ 326,337 $ 256,527 $ 222,639 Average dilutive common shares outstanding 60,566,854 60,610,954 60,519,611 Diluted EPS $ 5.07 $ 3.97 $ 3.56 Acquisition-related costs 0.18 0.19 0.16 Other costs 1 0.27 0.18 — Income tax effect (0.13) (0.11) (0.04) Adjusted EPS (Non-GAAP) $ 5.39 $ 4.23 $ 3.68 1 Other costs for the year ended June 30, 2023 include an accrual as a result of an adverse legal judgement that has not been finalized.
Below is a reconciliation of net income and diluted EPS, the nearest comparable GAAP measure, to adjusted earnings and adjusted EPS (Non-GAAP): For Fiscal Year Ended June 30, (Dollars in thousands, except per share amounts) 2024 2023 2022 Net income $ 450,008 $ 307,165 $ 240,716 FDIC Loan Purchase - Gain on purchase (92,397) — — FDIC Loan Purchase - Provision for credit losses 4,648 — — Acquisition-related costs 10,843 10,948 11,355 Other costs 1 — 16,000 10,975 Income tax effect 22,446 (7,776) (6,519) Adjusted earnings (Non-GAAP) 395,548 326,337 256,527 Average dilutive common shares outstanding 58,725,636 60,566,854 60,610,954 Diluted EPS $ 7.66 $ 5.07 $ 3.97 FDIC Loan Purchase - Gain on purchase (1.57) — — FDIC Loan Purchase - Provision for credit losses 0.08 — — Acquisition-related costs 0.18 0.18 0.19 Other costs 1 — 0.27 0.18 Income tax effect $ 0.39 $ (0.13) $ (0.11) Adjusted EPS (Non-GAAP) $ 6.74 $ 5.39 $ 4.23 1 Other costs for the fiscal year ended June 30, 2023 include an accrual as a result of an adverse legal judgement that has not been finalized.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2023 AND JUNE 30, 2022 Our total assets increased $2.9 billion, or 16.9%, to $20.3 billion, as of June 30, 2023, up from $17.4 billion at June 30, 2022.
FINANCIAL CONDITION Our total assets increased $2.6 billion, or 12.3%, to $22.9 billion, as of June 30, 2024, up from $20.3 billion at June 30, 2023.
Qualitative criteria used in the assessment, as outlined in Note 1 – “ Organizations and Summary of Significant Accounting Policies ”, can require significant judgment and is subject to uncertainty.
Additionally, management performs a qualitative assessment to address inherent limitations in the model and data. Qualitative criteria used in the assessment, as outlined in Note 1 — “ Organizations and Summary of Significant Accounting Policies ” in the Consolidated Financial Statements, can require significant judgment and is subject to uncertainty.
The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased to 1,455 full-time equivalent employees at June 30, 2023, from 1,335 full-time employees at June 30, 2022.
Losses on sales of available-for-sale securities reduce non-interest income. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased to 1,781 full-time employees at June 30, 2024, from 1,455 full-time employees at June 30, 2023.
For fiscal year 2023, income tax expense increased $25.3 million, or 25.5% compared to income tax expense in fiscal year 2022. The fiscal year 2023 effective tax rate of 28.85%, decreased by 0.34% compared to fiscal year 2022. The Company received federal and state tax credits for the years ended June 30, 2023 and 2022, respectively.
For fiscal year 2024, income tax expense increased $60.9 million, or 48.9% compared to income tax expense in fiscal year 2023. The fiscal year 2024 effective tax rate of 29.19%, increased by 0.34% compared to fiscal year 2023. The Company received federal and state tax credits for both fiscal years ended June 30, 2024 and 2023.
Axos Clearing has a $190.0 million unsecured line of credit available for limited purpose borrowing, which includes $100.0 million from Axos Financial, Inc. As of June 30, 2023, there was $15.7 million outstanding after elimination of intercompany balances. This credit facility bears interest at rates based on the Federal Funds rate and borrowings are due upon demand.
As of June 30, 2024, there was no amount outstanding. These credit facilities bear interest at rates based on the Federal Funds rate and borrowings are due upon demand. Axos Clearing has a $110.0 million unsecured line of credit available for limited purpose borrowing. As of June 30, 2024, there was no amount outstanding after elimination of intercompany balances.
Below is a reconciliation of total stockholders’ equity, the nearest compatible GAAP measure, to tangible book value (Non-GAAP) as of the dates indicated: At the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2023 2022 2021 Common stockholders’ equity $ 1,917,159 $ 1,642,973 $ 1,400,936 Less: mortgage servicing rights, carried at fair value 25,443 25,213 17,911 Less: goodwill and intangible assets 152,149 156,405 115,972 Tangible common stockholders’ equity (Non-GAAP) $ 1,739,567 $ 1,461,355 $ 1,267,053 Common shares outstanding at end of period 58,943,035 59,777,949 59,317,944 Book value per common share $ 32.53 $ 27.48 $ 23.62 Less: mortgage servicing rights, carried at fair value per common share $ 0.44 $ 0.42 $ 0.31 Less: goodwill and other intangible assets per common share $ 2.58 $ 2.61 $ 1.95 Tangible book value per common share (Non-GAAP) $ 29.51 $ 24.45 $ 21.36 44 Table of Cont ents FINANCIAL HIGHLIGHTS The following selected consolidated financial information should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and footnotes included elsewhere in this report.
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. 36 Below is a reconciliation of total stockholders’ equity, the nearest comparable GAAP measure, to tangible book value (Non-GAAP) as of the dates indicated: At the Fiscal Years Ended June 30, (Dollars in thousands, except per share amounts) 2024 2023 2022 Common stockholders’ equity $ 2,290,596 $ 1,917,159 $ 1,642,973 Less: servicing rights, carried at fair value 28,924 25,443 25,213 Less: goodwill and intangible assets—net 141,769 152,149 156,405 Tangible common stockholders’ equity (Non-GAAP) $ 2,119,903 $ 1,739,567 $ 1,461,355 Common shares outstanding at end of period 56,894,565 58,943,035 59,777,949 Book value per common share $ 40.26 $ 32.53 $ 27.48 Less: servicing rights, carried at fair value per common share $ 0.51 $ 0.44 $ 0.42 Less: goodwill and other intangible assets—net per common share $ 2.49 $ 2.58 $ 2.61 Tangible book value per common share (Non-GAAP) $ 37.26 $ 29.51 $ 24.45 37 FINANCIAL HIGHLIGHTS The following selected consolidated financial information should be read in conjunction with Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and footnotes included elsewhere in this report.
Economic forecasts that impacted management’s assessment of scenario weightings included interest rates, inflation, supply chain constraints and geopolitical unrest. Changes in one or more of these variables can cause a significant change in the estimate of the allowance for credit losses. Additionally, management performs a qualitative assessment to address inherent limitations in the model and data.
Economic forecasts that impacted management’s assessment of scenario weightings included interest rates, inflation, supply chain constraints and geopolitical unrest. Changes in one or more of these variables can cause a significant change in the estimate of the allowance for credit losses. There were no significant changes in these variables during the fiscal year ended June 30, 2024.
The net capital position of Axos Clearing was as follows: (Dollars in thousands) June 30, 2023 June 30, 2022 Net capital $ 35,221 $ 38,915 Less: required net capital 5,316 6,250 Excess capital $ 29,905 $ 32,665 Net capital as a percentage of aggregate debit items 13.25 % 12.45 % Net capital in excess of 5% aggregate debit items $ 21,930 $ 23,290 Axos Clearing, as a clearing broker, is subject to SEC Customer Protection Rule (Rule 15c3-3 of the Exchange Act) which requires segregation of funds in a special reserve account for the benefit of customers.
The net capital position of Axos Clearing was as follows: (Dollars in thousands) June 30, 2024 June 30, 2023 Net capital $ 101,462 $ 35,221 Excess capital $ 96,654 $ 29,905 Net capital as a percentage of aggregate debit items 42.21 % 13.25 % Net capital in excess of 5% aggregate debit items $ 89,442 $ 21,930 Axos Clearing, as a clearing broker, is subject to SEC Customer Protection Rule (Rule 15c3-3 of the Exchange Act) which requires segregation of funds in a special reserve account for the exclusive benefit of customers (“Customer Reserve Bank Account”) and proprietary accounts of brokers (“PAB Reserve Account”).
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.
Readers should be aware of these limitations and should be cautious as to their reliance on such measures. We believe the non-GAAP financial measures disclosed in this release enhance investors’ understanding of our business and performance, and our management uses these measures when it internally evaluates the performance of our business and makes operating decisions.
As of June 30, 2023, the Company pledged $5,128.4 million of loans and $0.2 million of securities to the FHLB to secure its borrowings. At June 30, 2023, we had $225.0 million in unsecured federal funds lines of credit with four major banks under which there were no borrowings outstanding.
As of June 30, 2024, the Company pledged $4,942.8 million of loans and $149.0 thousand of securities to the FHLB to secure its borrowings. At June 30, 2024, we had $275.0 million in unsecured federal funds lines of credit with six major banks under which there were no borrowings outstanding. The Bank can borrow short-term from the FRBSF Discount Window.
If the Company performs a quantitative test, management applies significant judgment in deriving valuation inputs, evaluating current operating results, estimating future cash flows, assessing market conditions and considering other factors. Factors used to calculate the fair value of a reporting unit are subject to uncertainty and can change from year to year based on availability and observability.
If the Company performs a quantitative test, management applies significant judgment in deriving valuation inputs, evaluating current operating results, estimating future cash flows, assessing market conditions and considering other factors.
The following table sets forth the changes in our allowance for credit losses, by portfolio class for the dates indicated: (Dollars in thousands) Single Family - Mortgage & Warehouse Multifamily and Commercial Mortgage Commercial Real Estate Commercial & Industrial - Non-RE Auto & Consumer Other Total Total Allowance as a % of Total Loans Balance at June 30, 2020 $ 25,899 $ 4,719 $ 21,052 $ 9,954 $ 9,462 $ 4,721 $ 75,807 0.71 % Effect of Adoption of ASC 326 6,318 7,408 25,893 7,042 610 29 47,300 Provision for credit losses (3,242) 1,196 11,238 14,251 (1,354) 1,661 23,750 Charge-offs (2,502) (177) (255) (2,833) (3,517) (7,274) (16,558) Recoveries 131 — — 46 1,318 1,164 2,659 Balance at June 30, 2021 26,604 13,146 57,928 28,460 6,519 301 132,958 1.15 % Provision for credit losses (7,009) 1,332 11,411 2,544 10,492 (270) 18,500 Charge-offs (82) — — (322) (4,024) — (4,428) Recoveries 157 177 — 126 1,127 — 1,587 Balance at June 30, 2022 19,670 14,655 69,339 30,808 14,114 31 148,617 1.04 % Provision for credit losses (2,302) 2,193 3,416 15,521 5,938 (16) 24,750 Charge-offs (314) — — — (9,142) — (9,456) Recoveries 449 — — 18 2,302 — 2,769 Balance at June 30, 2023 $ 17,503 $ 16,848 $ 72,755 $ 46,347 $ 13,212 $ 15 $ 166,680 1.00 % Net Charge-Offs to Average Loans - Year Ended June 30, 2023 — % — % — % — % 1.12 % — % 0.04 % Net Charge-Offs (Recoveries) to Average Loans - Year Ended June 30, 2022 — % (0.01) % — % 0.01 % 0.60 % — % 0.02 % Net Charge-Offs to Average Loans - Year Ended June 30, 2021 0.05 % 0.01 % 0.01 % 0.30 % 0.67 % 3.96 % 0.12 % The Company’s allowance for credit losses increased $18.1 million or 12.2% from June 30, 2022 to June 30, 2023.
The following table sets forth the changes in our allowance for credit losses, by portfolio class for the dates indicated: (Dollars in thousands) Single Family - Mortgage & Warehouse Multifamily and Commercial Mortgage Commercial Real Estate Commercial & Industrial - Non-RE Auto & Consumer Total Total Allowance as a % of Total Loans Balance at June 30, 2021 $ 26,604 $ 13,146 $ 57,928 $ 28,460 $ 6,820 $ 132,958 1.15 % Provision for credit losses (7,009) 1,332 11,411 2,544 10,222 18,500 Charge-offs (82) — — (322) (4,024) (4,428) Recoveries 157 177 — 126 1,127 1,587 Balance at June 30, 2022 19,670 14,655 69,339 30,808 14,145 148,617 1.04 % Provision for credit losses (2,302) 2,193 3,416 15,521 5,922 24,750 Charge-offs (314) — — — (9,142) (9,456) Recoveries 449 — — 18 2,302 2,769 Balance at June 30, 2023 17,503 16,848 72,755 46,347 13,227 166,680 1.00 % Allowance for credit losses at acquisition of PCD loans — 58,997 11,125 — — 70,122 Provision for credit losses (489) (4,434) 3,900 29,769 4,004 32,750 Charge-offs (172) (640) — (84) (11,013) (11,909) Recoveries 101 — — — 2,798 2,899 Balance at June 30, 2024 $ 16,943 $ 70,771 $ 87,780 $ 76,032 $ 9,016 $ 260,542 1.34 % Net Charge-Offs to Average Loans - Fiscal Year Ended June 30, 2024 — % 0.02 % — % — % 1.70 % 0.05 % Net Charge-Offs to Average Loans - Fiscal Year Ended June 30, 2023 — % — % — % — % 1.10 % 0.04 % Net Charge-Offs (Recoveries) to Average Loans - Fiscal Year Ended June 30, 2022 — % (0.01) % — % 0.01 % 0.57 % 0.02 % The Company’s allowance for credit losses increased $93.9 million or 56.3% at June 30, 2024 from June 30, 2023.
We use cash generated through retail deposits, our largest funding source, to offset the cash utilized in lending and investing activities. Our short-term interest-earning investment securities are used to provide liquidity for lending and other operational requirements. 54 Table of Cont ents Axos Bank can borrow up to 40% of its total assets from the FHLB.
We generally invest excess funds in overnight deposits and other short-term interest-earning assets. We use cash generated through retail deposits, our largest funding source, to offset the cash utilized in lending and investing activities. Our short-term interest-earning available-for-sale securities are used to provide liquidity for lending and other operational requirements.
While scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally invest excess funds in overnight deposits and other short-term interest-earning assets.
Our sources of liquidity include deposits, borrowings, payments and maturities of outstanding loans, sales of loans, maturities or sales of available-for-sale securities and other short-term investments. While scheduled loan payments and maturing available-for-sale securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
Beginning with fiscal year 2023, this cumulative amount is phased out of regulatory capital at 25% per year until it is 100% phased out of regulatory capital beginning in fiscal year 2026. 56 Table of Cont ents The Company’s and Bank’s capital ratios and requirements were as follows: Minimum Capital Requirement Minimum Capital Requirement with Capital Buffer Minimum to Be Well Capitalized June 30, 2023 2022 2021 Regulatory Capital Ratios (Company): Tier 1 leverage ratio 8.96 % 9.25 % 8.82 % 4.00 % 4.00 % N/A Common equity tier 1 capital ratio 10.94 % 9.86 % 11.36 % 4.50 % 7.00 % N/A Tier 1 risk-based capital ratio 10.94 % 9.86 % 11.36 % 6.00 % 8.50 % N/A Total risk-based capital ratio 13.82 % 12.73 % 13.78 % 8.00 % 10.50 % N/A Regulatory Capital Ratios (Bank): Tier 1 leverage ratio 9.68 % 10.65 % 9.45 % 4.00 % 4.00 % 5.00 % Common equity tier 1 capital ratio 11.63 % 11.24 % 12.28 % 4.50 % 7.00 % 6.50 % Tier 1 risk-based capital ratio 11.63 % 11.24 % 12.28 % 6.00 % 8.50 % 8.00 % Total risk-based capital ratio 12.50 % 12.01 % 13.21 % 8.00 % 10.50 % 10.00 % Axos Clearing Capital Requirements.
The Company’s and Bank’s capital ratios and requirements were as follows: Minimum Capital Requirement Minimum Capital Requirement with Capital Buffer Minimum to Be Well Capitalized June 30, 2024 2023 Regulatory Capital Ratios (Company): Tier 1 leverage ratio 9.43 % 8.96 % 4.00 % 4.00 % N/A Common equity tier 1 capital ratio 12.01 % 10.94 % 4.50 % 7.00 % N/A Tier 1 risk-based capital ratio 12.01 % 10.94 % 6.00 % 8.50 % N/A Total risk-based capital ratio 14.84 % 13.82 % 8.00 % 10.50 % N/A Regulatory Capital Ratios (Bank): Tier 1 leverage ratio 9.74 % 9.68 % 4.00 % 4.00 % 5.00 % Common equity tier 1 capital ratio 12.74 % 11.63 % 4.50 % 7.00 % 6.50 % Tier 1 risk-based capital ratio 12.74 % 11.63 % 6.00 % 8.50 % 8.00 % Total risk-based capital ratio 13.81 % 12.50 % 8.00 % 10.50 % 10.00 % Axos Clearing Capital Requirements.
The following table provides our Securities Business operating results: For the Fiscal Year Ended June 30, (Dollars in thousands) 2023 2022 Net interest income $ 21,042 $ 17,580 Non-interest income 141,107 64,069 Non-interest expense 102,572 84,014 Income (Loss) before taxes $ 59,577 $ (2,365) For the fiscal year 2023, the Securities Business’s net interest income increased $3.5 million, or 19.7% compared to fiscal year 2022, resulting in large part from an increase in the rates earned on interest bearing cash deposit balances and margin lending.
The following table provides our Securities Business Segment operating results: For the Fiscal Year Ended June 30, (Dollars in thousands) 2024 2023 Net interest income $ 26,207 $ 21,042 Non-interest income 129,020 141,107 Non-interest expense 115,091 102,572 Income (Loss) before taxes $ 40,136 $ 59,577 For the fiscal year 2024, the Securities Business Segment’s net interest income increased $5.2 million, or 24.5%, compared to fiscal year 2023, resulting in large part from higher rates earned on securities borrowed and margin lending, partially offset by higher rates paid on securities loaned.
The unsecured line of credit requires Axos Clearing to operate in accordance with specific covenants with respect to capital and debt ratios. Axos Clearing was in compliance with all covenants as of June 30, 2023.
This credit facility bears interest at rates based on the Federal Funds rate and borrowings are due upon demand. The unsecured line of credit requires Axos Clearing to 51 operate in accordance with specific covenants with respect to capital and debt ratios. Axos Clearing was in compliance with all covenants as of June 30, 2024.
For further information on the allowance for credit losses, refer to Note 1 - “Organizations and Summary of Significant Accounting Policies” and Note 5 – “Loans & Allowance for Credit Losses-Loans.” Goodwill and Other Intangible Assets . Evaluating goodwill for impairment requires significant judgment and requires the use of certain unobservable inputs that are subject to uncertainty.
For further information on the allowance for credit losses, refer to Note 1 — “Organizations and Summary of Significant Accounting Policies” and Note 5 — “Loans & Allowance for Credit Losses” in the Consolidated Financial Statements. Goodwill and Other Intangible Assets .
The following table presents our Banking segment’s information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted-average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted-average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin: For the Fiscal Years Ended June 30, 2023 2022 (Dollars in thousands) Average Balance 1 Interest Income/ Expense Average Yields Earned/Rates Paid Average Balance 1 Interest Income/Expense Average Yields Earned/Rates Paid Assets: Loans 2,3 $ 15,548,042 $ 1,047,580 6.74 % $ 12,539,502 $ 624,501 4.98 % Interest-earning deposits in other financial institutions 1,510,076 64,707 4.29 % 953,490 3,189 0.33 % Investment securities 3 268,072 14,849 5.54 % 198,637 7,410 3.73 % Stock of the regulatory agencies, at cost 20,936 1,462 6.98 % 18,789 1,132 6.02 % Total interest-earning assets 17,347,126 1,128,598 6.51 % 13,710,418 636,232 4.64 % Non-interest-earning assets 345,535 296,228 Total Assets $ 17,692,661 $ 14,006,646 Liabilities and Stockholder's Equity: Interest-bearing demand and savings $ 10,299,234 $ 305,832 2.97 % $ 6,843,840 $ 20,207 0.30 % Time deposits 1,225,537 33,826 2.76 % 1,226,774 13,567 1.11 % Advances from the FHLB 423,612 12,644 2.98 % 349,796 4,625 1.32 % Borrowings, subordinated notes and debentures 36 — — % 93 — — % Total interest-bearing liabilities $ 11,948,419 $ 352,302 2.95 % $ 8,420,503 $ 38,399 0.46 % Non-interest-bearing demand deposits 3,789,607 4,012,615 Other non-interest-bearing liabilities 189,457 143,841 Stockholder's equity 1,765,178 1,429,687 Total Liabilities and Stockholders' Equity $ 17,692,661 $ 14,006,646 Net interest income $ 776,296 $ 597,833 Interest rate spread 4 3.56 % 4.18 % Net interest margin 5 4.48 % 4.36 % 1 Average balances are obtained from daily data. 2 Loans include loans held for sale, loan premiums and unearned fees. 3 Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. 4 Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate paid on interest-bearing liabilities. 5 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 51 Table of Cont ents Net Interest Income .
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 the 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. 43 The following table 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: For the Fiscal Years Ended June 30, 2024 2023 (Dollars in thousands) Average Balance 1 Interest Income/ Expense Average Yields Earned/Rates Paid Average Balance 1 Interest Income/Expense Average Yields Earned/Rates Paid Assets: Loans 2,3 $ 18,010,709 $ 1,499,572 8.33 % $ 15,548,042 $ 1,047,580 6.74 % Non-purchased loans 17,458,451 1,405,202 8.05 % 15,548,042 1,047,580 6.74 % Purchased loans 4 552,258 94,370 17.09 % — — — % Interest-earning deposits in other financial institutions 2,077,696 112,239 5.40 % 1,510,076 64,707 4.29 % Mortgage-backed and other securities 3 218,031 11,234 5.15 % 268,072 14,849 5.54 % Stock of the regulatory agencies 17,250 1,524 8.83 % 20,936 1,462 6.98 % Total interest-earning assets 20,323,686 1,624,569 7.99 % 17,347,126 1,128,598 6.51 % Non-interest-earning assets 452,752 345,535 Total Assets $ 20,776,438 $ 17,692,661 Liabilities and Stockholder's Equity: Interest-bearing demand and savings $ 14,391,239 $ 626,755 4.36 % $ 10,299,234 $ 305,832 2.97 % Time deposits 1,062,644 43,892 4.13 % 1,225,537 33,826 2.76 % Advances from the FHLB 107,454 3,087 2.87 % 423,612 12,644 2.98 % Borrowings, subordinated notes and debentures — — — % 36 — — % Total interest-bearing liabilities $ 15,561,337 $ 673,734 4.33 % $ 11,948,419 $ 352,302 2.95 % Non-interest-bearing demand deposits 2,848,303 3,789,607 Other non-interest-bearing liabilities 276,585 189,457 Stockholder's equity 2,090,213 1,765,178 Total Liabilities and Stockholders' Equity $ 20,776,438 $ 17,692,661 Net interest income $ 950,835 $ 776,296 Interest rate spread 5 3.66 % 3.56 % Net interest margin 6 4.68 % 4.48 % 1 Average balances are obtained from daily data. 2 Loans include loans held for sale, loan premiums and unearned fees. 3 Interest income includes reductions for amortization of loan and available-for-sale securities premiums and earnings from accretion of discounts and loan fees. 4 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase. 5 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. 6 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 44 Net Interest Income .
This business was rebranded as Axos Advisors Services (“AAS”). AAS adds incremental fee income, a turnkey technology platform used by independent registered investment advisors for trading and custody services, and low-cost deposits that can be used to generate fee income from other bank partners or to fund loan growth at Axos Bank.
AAS adds incremental fee income, a turnkey technology platform used by independent RIAs for trading and custody services, and low-cost deposits that can be used to generate fee income from other bank partners or to fund loan growth at Axos Bank. The purchase price of $54.8 million consisted entirely of cash consideration paid upon acquisition and working capital adjustments.
ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES - LOANS Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following: At June 30, (Dollars in thousands) 2023 2022 2021 Non-performing assets: Non-accrual loans: Single Family - Mortgage & Warehouse $ 30,714 $ 66,424 $ 105,708 Multifamily and Commercial Mortgage 35,103 33,410 20,428 Commercial Real Estate 14,852 14,852 15,839 Commercial & Industrial - Non-RE 2,989 2,989 2,942 Auto & Consumer 1,457 439 278 Other 2,045 80 — Total non-accrual loans 87,160 118,194 145,195 Foreclosed real estate 6,966 — 6,547 Repossessed - Autos 1,133 798 235 Total non-performing assets $ 95,259 $ 118,992 $ 151,977 Total non-performing loans as a percentage of total loans 0.52 % 0.83 % 1.26 % Total non-performing assets as a percentage of total assets 0.47 % 0.68 % 1.10 % Our non-performing assets decreased to $95.3 million at June 30, 2023 from $119.0 million at June 30, 2022.
Non-performing assets consisted of the following: At June 30, (Dollars in thousands) 2024 2023 2022 Non-performing assets: Nonaccrual loans: Single Family - Mortgage & Warehouse $ 45,711 $ 30,714 $ 66,424 Multifamily and Commercial Mortgage 35,054 35,103 33,410 Commercial Real Estate 26,102 14,852 14,852 Commercial & Industrial - Non-RE 4,020 2,989 2,989 Auto & Consumer 2,472 3,502 519 Total nonaccrual loans 113,359 87,160 118,194 Foreclosed real estate 1,840 6,966 — Repossessed - Autos 610 1,133 798 Total non-performing assets $ 115,809 $ 95,259 $ 118,992 Total nonaccrual loans as a percentage of total loans 0.57 % 0.52 % 0.83 % Total non-performing assets as a percentage of total assets 0.51 % 0.47 % 0.68 % Our non-performing assets increased to $115.8 million at June 30, 2024 from $95.3 million at June 30, 2023.
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 costs (including amortization of intangible assets related to acquisitions), and other costs (unusual or nonrecurring charges).
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 certain gains and provisions resulting from the Company’s FDIC Loan Purchase), and other costs (unusual or non-recurring charges).
The following table sets forth information regarding our non-interest income: For the Fiscal Year Ended June 30, (Dollars in thousands) 2023 2022 Broker-dealer fee income $ 46,503 $ 22,880 Advisory fee income 28,324 29,230 Banking and service fees 32,938 28,752 Mortgage banking income 7,101 19,198 Prepayment penalty fee income 5,622 13,303 Total non-interest income $ 120,488 $ 113,363 For fiscal year 2023, non-interest income increased $7.1 million, or 6.3% compared to non-interest income in fiscal year 2022.
The following table sets forth information regarding our non-interest income: For the Fiscal Year Ended June 30, (Dollars in thousands) 2024 2023 Inc (Dec) Broker-dealer fee income $ 48,136 $ 46,503 $ 1,633 Advisory fee income 31,335 28,324 3,011 Banking and service fees 35,723 32,938 2,785 Mortgage banking and servicing rights income 10,000 7,101 2,899 Prepayment penalty fee income 5,069 5,622 (553) Gain on acquisition 92,397 — 92,397 Total non-interest income $ 222,660 $ 120,488 $ 102,172 For fiscal year 2024, non-interest income increased $102.2 million, or 84.8% compared to non-interest income in fiscal year 2023.
At June 30, 2023 we had $3.7 billion of loans pledged to the FRBSF. Our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk. We expect to continue to use deposits and advances from the FHLB as the primary sources of funding our future asset growth.
Our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk. We expect to continue to use deposits and advances from the FHLB as the primary sources of funding our future asset growth. Axos Clearing has a $150.0 million third-party secured line of credit available for borrowing.
For additional information on certain contractual and other obligations, see Note 10 - “Leases,” Note 11 - “Deposits,” Note 12 - “Advances from the Federal Home Loan Bank” and Note 13 - “Borrowings, Subordinated Debt and Debentures.” Off-Balance Sheet Commitments .
For additional information on certain contractual and other obligations, see Note 9— “Other Assets,” Note 11 — “Deposits,” Note 12— “Advances from the Federal Home Loan Bank,” Note 13— “Borrowings, Subordinated Debt and Debentures” and Note 18— “Commitments, Contingencies and Off-Balance Sheet Activities” in the Consolidated Financial Statements. See Item 3. “Legal Proceedings” for further information on pending litigation.
The following tables present the operating results of the segments: Fiscal Year Ended June 30, 2023 (Dollars in thousands) Banking Business Securities Business Corporate/Eliminations Axos Consolidated Net interest income $ 776,294 $ 21,042 $ (14,215) $ 783,121 Provision for credit losses 24,750 — — $ 24,750 Non-interest income 42,260 141,107 (62,879) $ 120,488 Non-interest expense 390,911 102,572 (46,368) $ 447,115 Income (loss) before taxes $ 402,893 $ 59,577 $ (30,726) $ 431,744 Fiscal Year Ended June 30, 2022 (Dollars in thousands) Banking Business Securities Business Corporate/Eliminations Axos Consolidated Net interest income $ 597,833 $ 17,580 $ (8,255) $ 607,158 Provision for credit losses 18,500 — — $ 18,500 Non-interest income 60,881 64,069 (11,587) $ 113,363 Non-interest expense 274,079 84,014 3,969 $ 362,062 Income (loss) before taxes $ 366,135 $ (2,365) $ (23,811) $ 339,959 Banking Business For the fiscal year ended June 30, 2023, we had pre-tax income of $402.9 million compared to pre-tax income of $366.1 million for the fiscal year ended June 30, 2022.
The following tables present the operating results of the segments: Fiscal Year Ended June 30, 2024 (Dollars in thousands) Banking Business Segment Securities Business Segment Corporate/Eliminations Axos Consolidated Net interest income $ 950,832 $ 26,207 $ (15,610) $ 961,429 Provision for credit losses 32,500 — — $ 32,500 Non-interest income 139,071 129,020 (45,431) $ 222,660 Non-interest expense 418,695 115,091 (17,678) $ 516,108 Income (loss) before taxes $ 638,708 $ 40,136 $ (43,363) $ 635,481 Fiscal Year Ended June 30, 2023 (Dollars in thousands) Banking Business Segment Securities Business Segment Corporate/Eliminations Axos Consolidated Net interest income $ 776,294 $ 21,042 $ (14,215) $ 783,121 Provision for credit losses 24,250 — — $ 24,250 Non-interest income 42,260 141,107 (62,879) $ 120,488 Non-interest expense 391,411 102,572 (46,368) $ 447,615 Income (loss) before taxes $ 402,893 $ 59,577 $ (30,726) $ 431,744 Banking Business Segment For the fiscal year ended June 30, 2024, we had pre-tax income of $638.7 million compared to pre-tax income of $402.9 million for the fiscal year ended June 30, 2023.
Tangible book value per common share is calculated by dividing tangible book value by the common shares outstanding at the end of the period. We believe tangible book value per common share is useful in evaluating the Company’s capital strength, financial condition, and ability to manage potential losses.
Tangible book value per common share is calculated by dividing tangible book value by the common shares outstanding at the end of the period.
For a discussion of the provision for credit losses in fiscal year 2023, see Note 5 – “Loans & Allowance for Credit Losses.” For fiscal year 2023, net charge-offs were $6.7 million and increased $3.8 million compared to net charge-offs for fiscal year 2022, primarily due to the net charge-offs in the auto and consumer portfolio.
For fiscal year 2024, net charge-offs were $9.0 million and increased $2.3 million compared to net charge-offs for fiscal year 2023, primarily due to net charge-offs in the auto and consumer portfolio.
For fiscal year 2023, interest income increased $497.4 million, or 75.4%, compared to interest income in fiscal year 2022, primarily attributable to growth of 23.8% in average loan balances, a 176 basis point increase in rates earned on loans and a 381 basis point increase in rates earned on interest-earning deposits placed with other financial institutions. Interest Expense .
For fiscal year 2024, interest income increased $498.5 million, or 43.1%, compared to interest income in fiscal year 2023, primarily reflecting higher rates earned and average balances of loans and interest-earning deposits in other financial institutions. Interest Expense .
Axos Nevada Holding owns the companies constituting the Securities Business segment, including; Axos Securities, LLC, Axos Clearing LLC (“Axos Clearing”), a clearing broker-dealer, Axos Invest, Inc., a registered investment advisor, and Axos Invest LLC, an introducing broker-dealer. With approximately $20.3 billion in assets, Axos Bank provides consumer and business banking products through its low-cost distribution channels and affinity partners.
The Bank, its wholly owned subsidiaries, and the activities of two lending-related trust entities, constitute the Banking Business Segment. Axos Nevada Holding owns the companies constituting the Securities Business Segment, including Axos Securities, LLC, Axos Clearing LLC (“Axos Clearing”), a clearing broker-dealer, Axos Invest, Inc., a registered investment advisor, and Axos Invest LLC, an introducing broker-dealer.
Provision for Credit Losses . For fiscal year 2023, provision for credit losses increased $6.3 million compared to the provision for credit losses in fiscal year 2022. See “Asset Quality and Allowance for Credit Losses - Loans” for discussion of our allowance for credit losses and the related loss provisions. 48 Table of Cont ents Non-interest Income .
See “Asset Quality and Allowance for Credit Losses - Loans” for discussion of our allowance for credit losses and the related provision for credit losses. 41 Non-interest Income .
For the fiscal year 2023, the Banking segment’s non-interest expense increased $116.8 million, or 42.6% compared to non-interest expense in fiscal 2022.
For the fiscal year 2024, the Banking Business Segment’s net interest income increased $174.5 million, or 22.5%, compared to net interest income in fiscal year 2023.
The increase was primarily attributable to a $16.0 million expense accrual in 2023 as a result of an adverse legal judgment that has not been finalized, partially offset by a $11.0 million charge due to a one-time resolution of a contractual claim in the prior fiscal year. Income Tax Expense .
The increases were partially offset by a $14.4 million decrease in general and administrative expenses, primarily reflecting the absence of a $16.0 million accrual in the prior year for an adverse legal judgment that has not been finalized. Income Tax Expense .
For the fiscal year ended June 30, 2023, the increase in pre-tax income was primarily related to the increase in net interest income due largely to growth in the volume and rates earned on loans and leases, primarily from commercial real estate and commercial & industrial lending, partially offset by an increase in volume and rates on interest-bearing demand and savings deposits. 50 Table of Cont ents We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment: Fiscal Year Ended June 30, 2023 June 30, 2022 Efficiency ratio 47.76 % 41.61 % Return on average assets 1.60 % 1.64 % Interest rate spread 3.56 % 4.18 % Net interest margin 4.48 % 4.36 % Our Banking segment’s net interest margin exceeds our consolidated net interest margin.
We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business Segment: Fiscal Year Ended June 30, 2024 June 30, 2023 Efficiency ratio 38.42 % 47.82 % Return on average assets 2.20 % 1.60 % Interest rate spread 3.66 % 3.56 % Net interest margin 4.68 % 4.48 % Our Banking Business Segment’s net interest margin exceeds our consolidated net interest margin.
Securities Business For the fiscal year ended June 30, 2023, our Securities Business segment had income before taxes of $59.6 million compared to the loss before taxes of $2.4 million for the fiscal year ended June 30, 2022.
The increase in non-interest expense was primarily driven by increased salaries and related costs reflecting growth in lending business. Securities Business Segment For the fiscal year ended June 30, 2024, our Securities Business Segment had income before taxes of $40.1 million compared to income before taxes of $59.6 million for the fiscal year ended June 30, 2023.
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.
USE OF NON-GAAP FINANCIAL MEASURES In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as adjusted earnings, adjusted earnings per common share, and tangible book value per common share. Non-GAAP financial measures have inherent limitations, may not be comparable to similarly titled measures used by other companies and are not audited.
Total liabilities increased by $2.7 billion or 17.0%, to $18.4 billion at June 30, 2023, up from $15.8 billion at June 30, 2022. The increase in total liabilities resulted primarily from growth in deposits of $3.2 billion, partially offset by decreased securities loaned of $0.3 billion and decreased borrowings, subordinated notes and debentures of $0.1 billion.
The increase in total liabilities primarily reflects growth in deposits of $2.2 billion. Stockholders’ equity increased by $373.4 million, or 19.5%, to $2.3 billion at June 30, 2024, up from $1.9 billion at June 30, 2023. The increase in stockholders’ equity primarily reflects net income of $450.0 million, partially offset by repurchases of $97.0 million of treasury stock.
For more information on Axos Bank, please visit axosbank.com. MERGERS AND ACQUISITIONS From time to time we undertake acquisitions or similar transactions consistent with our operating and growth strategies. E*TRADE Advisor Services acquisition . On August 2, 2021, Axos Clearing, LLC, acquired certain assets and liabilities of E*TRADE Advisor Services (“EAS”), the registered investment advisor custody business of Morgan Stanley.
On August 2, 2021, Axos Clearing, LLC, acquired certain assets and liabilities of E*TRADE Advisor Services (“EAS”), the registered investment advisor custody business of Morgan Stanley. This business was rebranded as AAS.
The following table sets forth information regarding our non-interest expense for the periods shown: For the Fiscal Year Ended June 30, (Dollars in thousands) 2023 2022 Salaries and related costs $ 204,271 $ 167,390 Data processing 60,557 50,159 Depreciation and amortization 23,387 24,596 Advertising and promotional 37,150 13,580 Occupancy and equipment 15,647 13,745 Professional services 29,268 22,482 Broker-dealer clearing charges 13,433 15,184 FDIC and regulatory fees 15,534 11,823 General and administrative expenses 47,868 43,103 Total non-interest expense $ 447,115 $ 362,062 For fiscal year 2023, non-interest expense increased $85.1 million, or 23.5% compared to non-interest expense in fiscal year 2022.
The following table sets forth information regarding our non-interest expense for the periods shown: For the Fiscal Year Ended June 30, (Dollars in thousands) 2024 2023 Inc (Dec) Salaries and related costs $ 250,873 $ 204,271 $ 46,602 Data and operational processing 69,370 60,557 8,813 Depreciation and amortization 27,086 23,387 3,699 Advertising and promotional 42,797 37,150 5,647 Professional services 36,532 29,268 7,264 Occupancy and equipment 16,704 15,647 1,057 FDIC and regulatory fees 20,546 15,534 5,012 Broker-dealer clearing charges 18,260 13,433 4,827 General and administrative expense 33,940 48,368 (14,428) Total non-interest expense $ 516,108 $ 447,615 $ 68,493 For fiscal year 2024, non-interest expense increased $68.5 million, or 15.3%, compared to fiscal year 2023, primarily due to increases of: • $46.6 million in salaries and related costs primarily due to increased headcount and salaries, reflecting increases in the broker-dealer and lending businesses; • $8.8 million in data and operational processing expense primarily due to ongoing enhancements of core processing systems, customer interfaces and custody technology programs; and • $7.3 million in professional services primarily due to increased legal and consulting services.
The growth of interest income was offset by increased rates paid on interest-bearing demand and savings deposits and on time deposits combined with growth in the average interest-bearing demand and savings deposits. For the fiscal year 2023, the Banking segment’s non-interest income decreased $18.7 million, or 30.6% compared to non-interest income in fiscal year 2022.
The growth of net interest income is reflective of higher rates earned and average balances of loans and interest-earning deposits in other financial institutions, partially offset by higher rates and average balances of interest-bearing deposits. For the fiscal year 2024, the Banking Business Segment’s non-interest income increased $96.8 million, or 229.1%, compared to non-interest income in fiscal year 2023.
Axos Clearing and Axos Invest LLC, provide comprehensive securities clearing services to introducing broker-dealers and registered investment advisor correspondents and digital investment advisory services to retail investors, respectively. Axos Financial, Inc.’s common stock is listed on the NYSE under the symbol “AX” and is a component of the Russell 2000 ® Index and the S&P SmallCap 600 ® Index.
Axos Financial, Inc.’s common stock is listed on the NYSE under the symbol “AX” and is a component of the Russell 2000 ® Index and the S&P SmallCap 600 ® Index. MERGERS AND ACQUISITIONS From time to time, we undertake acquisitions or similar transactions consistent with our operating and growth strategies.
In March 2021, we filed a new shelf registration with the SEC which allows us to issue up to $400.0 million through the sale of debt securities, common stock, preferred stock and warrants. In February 2022, the Company completed the sale of $150.0 million aggregate principal amount of its 4.00% Fixed-to-Floating Rate Subordinated Notes (the “2032 Notes”).
In February 2022, the Company completed the sale of $150 million aggregate principal amount of its 4.00% Fixed-to-Floating Rate Subordinated Notes (the “2032 Notes”). The 2032 Notes are obligations only of Axos Financial, Inc.
For fiscal year 2023, interest expense increased $321.4 million, or 611.5% compared to interest expense in fiscal year 2022, primarily attributable to a 269 basis point increase in rates paid on interest-bearing demand and savings deposits, a 165 increase in rates paid on time deposits and growth of 50.8% in average interest-bearing demand and savings deposit balances.
For fiscal year 2024, interest expense increased $320.2 million, or 85.6% compared to interest expense in fiscal year 2023, primarily attributable to higher rates and average balances of interest-bearing deposits. Provision for Credit Losses . For fiscal year 2024, provision for credit losses increased $8.3 million compared to the provision for credit losses in fiscal year 2023.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeBanking Business The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at June 30, 2023 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period: Term to Repricing, Repayment, or Maturity at June 30, 2023 (Dollars in thousands) Six Months or Less Over Six Months Through One Year Over One Year through Five Years Over Five Years Total Interest-earning assets: Cash and cash equivalents $ 2,164,284 $ — $ — $ — $ 2,164,284 Mortgage-backed and other investment securities 1 209,049 2,526 14,017 13,790 $ 239,382 Stock of the FHLB, at cost 17,250 — — — $ 17,250 Loans 2 11,444,889 1,252,109 3,762,452 142,313 $ 16,601,763 Loans held for sale 23,979 — — — $ 23,979 Total interest-earning assets 13,859,451 1,254,635 3,776,469 156,103 19,046,658 Non-interest-earning assets — — — 371,219 $ 371,219 Total assets $ 13,859,451 $ 1,254,635 $ 3,776,469 $ 527,322 $ 19,417,877 Interest-bearing liabilities: Interest-bearing deposits 3 $ 8,087,273 $ 6,056,512 $ 164,276 $ — $ 14,308,061 Advances from the FHLB — — 30,000 60,000 $ 90,000 Other borrowings — — — — $ — Total interest-bearing liabilities 8,087,273 6,056,512 194,276 60,000 14,398,061 Other non-interest-bearing liabilities — — — 3,135,290 $ 3,135,290 Stockholders’ equity — — — 1,884,526 $ 1,884,526 Total liabilities and equity $ 8,087,273 $ 6,056,512 $ 194,276 $ 5,079,816 $ 19,417,877 Net interest rate sensitivity gap $ 5,772,178 $ (4,801,877) $ 3,582,193 $ 96,103 $ 4,648,597 Cumulative gap $ 5,772,178 $ 970,301 $ 4,552,494 $ 4,648,597 $ 4,648,597 Net interest rate sensitivity gap—as a % of total interest-earning assets 30.31 % (25.21) % 18.81 % 0.50 % 24.41 % Cumulative gap—as a % of total cumulative interest-earning assets 30.31 % 5.09 % 23.90 % 24.41 % 24.41 % 1 Comprised of U.S. government securities, mortgage-backed securities and other securities, which are classified as trading and available-for-sale.
Biggest changeBanking Business Segment The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities that were outstanding at June 30, 2024 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period: Term to Repricing, Repayment, or Maturity at June 30, 2024 (Dollars in thousands) Six Months or Less Over Six Months Through One Year Over One Year through Five Years Over Five Years Total Interest-earning assets: Cash and cash equivalents $ 1,996,470 $ — $ — $ — $ 1,996,470 Mortgage-backed and other securities 1 109,264 3,131 13,283 15,933 $ 141,611 Stock of the FHLB, at cost 17,250 — — — $ 17,250 Loans 2 13,533,178 1,522,351 3,942,999 232,758 $ 19,231,286 Loans held for sale 16,482 — — — $ 16,482 Total interest-earning assets 15,672,644 1,525,482 3,956,282 248,691 21,403,099 Non-interest-earning assets — — — — $ 762,528 Total assets $ 15,672,644 $ 1,525,482 $ 3,956,282 $ 248,691 $ 22,165,627 Interest-bearing liabilities: Interest-bearing deposits 3 $ 15,166,641 $ 1,241,069 $ 25,268 $ 12 $ 16,432,990 Advances from the FHLB 30,000 — — 60,000 $ 90,000 Total interest-bearing liabilities 15,196,641 1,241,069 25,268 60,012 16,522,990 Other non-interest-bearing liabilities — — — — $ 3,344,124 Stockholders’ equity — — — — $ 2,298,513 Total liabilities and equity $ 15,196,641 $ 1,241,069 $ 25,268 $ 60,012 $ 22,165,627 Net interest rate sensitivity gap $ 476,003 $ 284,413 $ 3,931,014 $ 188,679 $ 4,880,109 Cumulative gap $ 476,003 $ 760,416 $ 4,691,430 $ 4,880,109 $ 4,880,109 Net interest rate sensitivity gap—as a % of total interest-earning assets 2.22 % 1.33 % 18.37 % 0.88 % 22.80 % Cumulative gap—as a % of total cumulative interest-earning assets 2.22 % 3.55 % 21.92 % 22.80 % 22.80 % 1 Comprised of U.S. government securities, mortgage-backed securities and other securities.
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.
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.
Securities Business Our Securities Business is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities.
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.
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 deposit and savings accounts will reprice in the first year.
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 deposit and savings accounts will reprice in the first year.
The above table provides an approximation of the projected re-pricing of assets and liabilities at June 30, 2023 on the basis of contractual maturities, adjusted for anticipated prepayments of principal and scheduled rate adjustments. The loan and securities prepayment rates reflected are based on historical experience.
The above table provides an approximation of the projected re-pricing of assets and liabilities at June 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 are based on historical experience.
Generally, loan prepayments increase in falling interest rate environments and decrease in rising interest rate environments. In addition, prepayment risk results from the right of customers to withdraw their time deposits before maturity. Generally, early withdrawals of time deposits increase during rising interest rate environments and decrease in falling interest rate environments.
Prepayment risk results from the right of customers to pay their loans prior to maturity. Generally, loan prepayments increase in falling interest rate environments and decrease in rising interest rate environments. In addition, prepayment risk results from the right of customers to withdraw their time deposits before maturity.
The MTA index is based on a moving average of rates outstanding during the previous 12 months. A sharp movement in interest rates in a month will not be fully reflected in the index for 12 months resulting in a lag in the repricing of our loans and securities based on this index.
A sharp movement in interest rates in a month will not be fully reflected in the index for 12 months resulting in a lag in the repricing of our loans and securities based on this index.
We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the underlying interest rate curves.
We analyze the MVE sensitivity to an immediate parallel and sustained shift in interest rates derived from the underlying interest rate curves.
In a rising interest rate 58 Table of Cont ents environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would result in the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities.
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.
These risks include lag, repricing, basis, prepayment and lifetime cap risk, each of which is described in further detail below: Lag/Repricing Risk . Lag risk results from the inherent timing difference between the repricing of our adjustable rate assets and our liabilities. Repricing risk is caused by the mismatch of repricing methods between interest-earning assets and interest-bearing liabilities.
We are exposed to different types of interest rate risk. These risks include lag, repricing, basis, prepayment and lifetime cap risk, each of which is described in further detail below: Lag Risk and Repricing Risk . Lag risk results from the inherent timing difference between the repricing of our adjustable rate assets and our liabilities.
During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets mature at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.
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.
The following table indicates the sensitivity of market value of equity to the interest rate movement as described above: As of June 30, 2023 (Dollars in thousands) Market Value of Equity Percentage Change from Base MVE as a Percentage of Assets Up 200 basis points $ 1,817,575 (1.4) % 9.5 % Up 100 basis points $ 1,846,771 0.2 % 9.6 % Base $ 1,843,498 — % 9.5 % Down 100 basis points $ 1,841,132 (0.1) % 9.5 % Down 200 basis points $ 1,812,345 (1.7) % 9.2 % 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.
The following table indicates the sensitivity of MVE to the interest rate movement as described above: As of June 30, 2024 (Dollars in thousands) Market Value of Equity Percentage Change from Base MVE as a Percentage of Assets Up 200 basis points $ 2,525,333 (0.9) % 11.5 % Up 100 basis points $ 2,550,197 0.1 % 11.5 % Base $ 2,548,547 — % 11.5 % Down 100 basis points $ 2,561,280 0.5 % 11.4 % Down 200 basis points $ 2,540,087 (0.3) % 11.3 % 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.
Our earning assets that reprice are directly tied to various indices, such as: U.S. Treasury, SOFR, Ameribor, BSBY, Eleventh District Cost of Funds, Federal Funds (“Fed Funds”), Interest Rate on Excess Reserves (“IOER”), Prime and, until June 30, 2023, LIBOR. Generally, our deposit rates are not directly tied to these same indices.
Our earning assets that reprice are directly tied to various indices, such as: U.S. Treasury, SOFR, Ameribor, Bloomberg Short Term Bank Yield Index (“BSBY”), Federal Funds (“Fed Funds”), Interest Rate on Excess Reserves (“IOER”) and Prime. Generally, our deposit rates are not directly tied to these same indices.
For purposes of modeling net interest income sensitivity the Bank assumes no growth in the balance sheet other than for retained earnings: As of June 30, 2023 First 12 Months Next 12 Months (Dollars in thousands) Net Interest Income Percentage Change from Base Net Interest Income Percentage Change from Base Up 200 basis points $ 1,072,045 20.1 % $ 1,064,324 9.7 % Base $ 892,695 — % $ 969,968 — % Down 200 basis points $ 795,482 (10.9) % $ 901,698 (7.0) % 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.
For purposes of modeling net interest income sensitivity the Bank assumes no growth in the balance sheet other than for retained earnings: As of June 30, 2024 First 12 Months Next 12 Months (Dollars in thousands) Net Interest Income Percentage Change from Base Net Interest Income Percentage Change from Base Up 200 basis points $ 1,135,401 9.4 % $ 1,207,819 5.6 % Base $ 1,037,790 — % $ 1,143,255 — % Down 200 basis points $ 938,090 (9.6) % $ 1,072,185 (6.2) % 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.
Lag/repricing risk can produce short-term volatility in our net interest income during periods of interest rate movements even though the effect of this lag generally balances out over time. One example of lag risk is the repricing of assets indexed to the monthly treasury average (“MTA”).
Repricing risk is caused by the mismatch of repricing methods between interest-earning assets and interest-bearing liabilities. Lag risk and repricing risk can produce short-term volatility in our net interest income during periods of interest rate movements even though the effect of this lag generally balances out over time.
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. 59 Table of Cont ents The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the 1-12 months and 13-24 months’ time periods.
For example, gap analysis is limited in its ability to predict trends in future earnings and makes no 55 assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.
Our 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.
At June 30, 2024, Axos Clearing held municipal obligations classified as trading securities and had maturities greater than 10 years. 56 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.
In particular, changes in interest rates affect our net interest income, net interest margin, net income, the value of our securities portfolio, the volume of loans originated, and the amount of gain or loss on the sale of our loans. 57 Table of Cont ents We are exposed to different types of interest rate risk.
Changes in interest rates can have a variety of effects on our business. In particular, changes in interest rates affect our net interest income, net interest margin, net income, the value of our securities portfolio, the volume of loans originated, and the amount of gain or loss on the sale of our loans.
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates.
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.
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. At June 30, 2023, Axos Clearing held municipal obligations classified as trading securities and had maturities greater than 10 years.
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.
Therefore, if liability-linked indices rise faster than asset-linked indices and there are no other changes in our asset/liability mix, our net interest income will likely decline due to basis risk. Prepayment Risk . Prepayment risk results from the right of customers to pay their loans prior to maturity.
A portion of the Bank’s deposits are based on administrative rates controlled by management and the remaining portion are directly tied to Fed Funds. Therefore, if liability-linked indices rise faster than asset-linked indices and there are no other changes in our asset/liability mix, our net interest income will likely decline due to basis risk. Prepayment Risk .
The principal objective of our asset/liability management is to manage the sensitivity of market value of equity (“MVE”) to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by our Board of Directors. Our Board of Directors has delegated the responsibility to oversee the administration of these policies to the Bank’s asset/liability committee (“ALCO”).
Asset/liability management is governed by policies reviewed and approved annually by our Board of Directors. Our Board of Directors has delegated the responsibility to oversee the administration of these policies to the Bank’s asset/liability committee (“ALCO”). The interest rate risk strategy currently deployed by ALCO is to primarily use “natural” balance sheet hedging.
This risk is managed by setting and 60 Table of Cont ents monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.
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 underlying securities lending activities is marked to market daily and additional collateral is obtained or refunded, as necessary.
The management team then executes the recommended strategy by increasing or decreasing the duration of the investments and borrowings, resulting in the appropriate level of market risk the Board of Directors wants to maintain. Other examples of ALCO policies designed to reduce our interest rate risk include limiting the premiums paid to purchase mortgage loans or mortgage-backed securities.
ALCO makes adjustments to the overall MVE sensitivity by recommending investment and borrowing strategies. The management team then executes the recommended strategy by increasing or decreasing the duration of the investments and borrowings, resulting in the appropriate level of market risk the Board of Directors wants to maintain.
This policy addresses mortgage prepayment risk by capping the yield loss from an unexpected high level of mortgage loan prepayments. At least once a quarter, ALCO members report to our Board of Directors the status of our interest rate risk profile.
Other examples of ALCO policies designed to reduce our interest rate risk include limiting the premiums paid to purchase mortgage loans or mortgage-backed securities. This policy addresses mortgage prepayment risk by capping the yield loss from an unexpected high level of mortgage loan prepayments.
When estimating the future performance of our assets and liabilities, we make assumptions as to when and how much of our loans and deposits will be prepaid. If the assumptions prove to be incorrect, the asset or liability may perform differently than expected.
Generally, early withdrawals of time deposits increase during rising interest rate environments and decrease in falling interest rate environments. When estimating the future performance of our assets and liabilities, we make assumptions as to when and how much of our loans and deposits will be prepaid.
In periods of rising interest rates, it is possible for the fully indexed interest rate (index rate plus the margin) to exceed the lifetime interest rate cap. This feature prevents the loan from repricing to a level that exceeds the cap’s specified interest rate, thus adversely affecting net interest income in periods of relatively high interest rates.
This feature prevents the loan from repricing to a level that exceeds the cap’s specified interest rate, thus adversely affecting net interest income in periods of relatively high interest rates. On a weighted-average basis, our adjustable rate loans at June 30, 2024 had lifetime rate caps that were 526 basis points greater than their current stated note rates.
On a weighted-average basis, our adjustable rate loans at June 30, 2023 had lifetime rate caps that were 601 basis points greater than their current stated note rates. If market rates rise by more than the interest rate cap, we will not be able to increase these loan rates above the interest rate cap.
If market rates rise by more than the interest rate cap, we will not be able to increase these loan rates above the interest rate cap. The principal objective of our asset/liability management is to manage the sensitivity of market value of equity (“MVE”) to changing interest rates.
Removed
Changes in interest rates can have a variety of effects on our business.
Added
One example of lag risk is the repricing of assets indexed to the monthly treasury average (“MTA”). The MTA index is based on a moving average of rates outstanding during the previous 12 months.
Removed
A portion of the Bank’s deposits are based on administrative rates controlled by management and the remaining portion are directly tied to Fed Funds. Certain debt is linked to Fed Funds and, until June 30, 2023, LIBOR.
Added
If the assumptions prove to be incorrect, the asset or liability may perform differently than expected. Lifetime Cap Risk . Our adjustable rate loans have lifetime interest rate caps. In periods of rising interest rates, it is possible for the fully indexed interest rate (index rate plus the margin) to exceed the lifetime interest rate cap.
Removed
In 2022 and 2021, the Bank experienced high rates of loan prepayments due to historically low interest rates; however, as interest rates increased throughout 2023 loan prepayments have slowed considerably. Lifetime Cap Risk . Our adjustable rate loans have lifetime interest rate caps.
Added
At least once a quarter, ALCO members report to our Board of Directors the status of our interest rate risk profile. 54 We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature within a given period of time.
Removed
The interest rate risk strategy currently deployed by ALCO is to primarily use “natural” balance sheet hedging. ALCO makes adjustments to the overall MVE sensitivity by recommending investment and borrowing strategies.
Added
The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the 1-12 months’ and 13-24 months’ time periods.
Removed
Collateral underlying margin loans to customers and correspondents and underlying securities lending activities is marked to market daily and additional collateral is obtained or refunded, as necessary.

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