Axos Financial, Inc. (AX) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those expressed or implied in our forward-looking statements due to various important factors, including those set forth under “Risk Factors” in Item 1A. and elsewhere in this Annual Report on Form 10-K. The following discussion and analysis should be read together with the Consolidated Financial Statements, including the related notes included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

The consolidated financial statements include the accounts of Axos Financial, Inc. (“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank”) and Axos Nevada Holding, LLC (“Axos Nevada Holding”), collectively, the “Company.” Axos Nevada Holding owns the companies constituting the Securities Business segment, including; Axos Securities, LLC, Axos Clearing LLC (“Axos Clearing”), a clearing broker-dealer, Axos Invest, Inc., a registered investment advisor, and Axos Invest LLC, an introducing broker-dealer. With approximately $17.4 billion in assets, Axos Bank provides consumer and business banking products through its low-cost distribution channels and affinity partners. 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. For more information on Axos Bank, please visit axosbank.com.

Net income for the fiscal year ended June 30, 2022 was $240.7 million compared to $215.7 million and $183.4 million for the fiscal years ended June 30, 2021 and 2020, respectively. Net income attributable to common stockholders for the fiscal year ended June 30, 2022 was $240.7 million, or $3.97 per diluted share compared to $215.5 million, or $3.56 per diluted share and $183.1 million, or $2.98 per diluted share for the years ended June 30, 2021 and 2020, respectively. Growth in our interest earning assets, particularly the loan and lease portfolio, reduced cost of interest-bearing liabilities and growth in non-interest bearing deposits were the primary reasons for the increase in our net income from fiscal 2021 to fiscal 2022.

Net interest income increased $68.4 million for the year ended June 30, 2022 compared to the year ended June 30, 2021. Net interest income for the year ended June 30, 2022 was $607.2 million compared to $538.7 million and $477.6 million for the years ended June 30, 2021 and 2020, respectively. The growth of net interest income from fiscal year 2020 through 2022 is primarily due to an increase in average earning assets mainly due to net loan portfolio growth, reduced rates on interest-bearing deposits and an increase in non-interest bearing demand deposits.

Provision for credit losses for the year ended June 30, 2022 was $18.5 million, compared to $23.8 million and $42.2 million for the years ended June 30, 2021 and 2020, respectively. The decrease of $5.3 million for fiscal year 2022 was due to favorable changes in economic and business conditions resulting from reduced levels of disruptions from the COVID-19 pandemic partially offset by loan growth and changes in loan mix. The decrease of $18.5 million for fiscal year 2021 is the result of provisions associated with non-recurring Refund Advance loans in fiscal year 2020.

Non-interest income for the fiscal year ended June 30, 2022, was $113.4 million compared to non-interest income of $105.3 million and $103.0 million for the fiscal years ended 2021 and 2020. The increase from fiscal year 2021 to fiscal year 2022 was primarily due to a $29.2 million increase in Advisory fee income from custody and mutual fund fees earned by the newly acquired AAS division and a $6.1 million increase in prepayment penalty fee income partially offset by a $23.1 million decrease in mortgage banking income and a $3.4 million decrease in broker-dealer fee income.

Non-interest expense for the fiscal year ended June 30, 2022 was $362.1 million compared to $314.5 million and $275.8 million for the years ended June 30, 2021 and 2020, respectively. The $47.6 million increase was generally due to the addition of AAS and the expansion of Bank operations specifically in areas related to lending and deposits, an $11.0 million charge due largely to a one-time resolution of a contractual claim, an increase of $14.8 million in salaries and related costs, an increase of $9.4 million in data processing, and an increase of $4.0 million in broker-dealer charges. Our staffing at June 30, 2022 rose to 1,335 full time employees compared to 1,165 and 1,099 at June 30, 2021 and 2020, respectively.

Total assets were $17.4 billion at June 30, 2022 compared to $14.3 billion at June 30, 2021. Assets grew $3.1 billion or 22.0% during the last fiscal year, primarily due to loan originations, primarily from commercial real estate and C&I lending and by an increase in total cash provided by an increase in deposits.

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MERGERS AND ACQUISITIONS

From time to time we undertake acquisitions or similar transactions consistent with our Company’s operating and growth strategies. On August 2, 2021, we acquired certain assets and liabilities of E*TRADE Advisor Services as described below. There were no other acquisitions or similar transactions undertaken during fiscal years 2021 and 2020.

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. 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. The purchase price of $54.8 million consisted entirely of cash consideration paid upon acquisition and working capital adjustments.

The acquisition is 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.

CRITICAL ACCOUNTING POLICIES AND 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. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

Critical accounting policies and estimates are those that we consider most important to the portrayal of our financial condition and results of operations because they require our most difficult judgments, often as a result of the need to make estimates that are inherently uncertain. We have identified critical accounting policies and estimates below. In addition, these critical accounting policies and estimates are included in Note 1 - “Summary of Significant Accounting Policies”.

Securities. There were no changes in the processes or methods of determining estimates affecting Securities in the year end June 30, 2022 as compared to the year ended June 30, 2021.

For further information on Securities, refer to Note 1 - “Summary of Significant Accounting Policies” and Note 4 - “Securities”.

Allowance for Credit Losses. The Company maintains an allowance for credit loss for the Company’s held-for-investment loan portfolio, excluding those loans measured at fair value in accordance with applicable accounting standards. The allowance for credit losses reflects management’s evaluation of the expected life-time credit losses related to the amortized cost basis of loans and net investment in leases on the balance sheet.

The assessment of the adequacy of our allowance for credit losses is based upon quantitative and qualitative factors, including levels and trends of past due and nonaccrual accounts, loss history and changes in the volume and mix of loans and collateral values. Charge-offs against the allowance for credit losses are taken on loans and leases where management determines the collection of principal is unlikely. Recoveries made on loans that have been charged off are credited to the allowance for credit losses.

The calculation of the allowance for credit losses is a critical accounting estimate. The Company’s process entails segregating the portfolio according to products with similar risk characteristics; applying a quantitative model which leverages both a probability of default (“PD”) and a loss given default (“LGD”) applied to historic and third-party economic data, and then overlaying these results with a qualitative assessment focused on limitations of the model and the underlying data.

Variables considered in the quantitative assessment include unemployment and interest rate risk which impact the default rate of the risk pools and the underlying collateral. The quantitative results are influenced by the weighting of third-party macroeconomic scenarios across the benign to adverse spectrum for each segment with the baseline economic scenario representing the consensus most likely in the third party forecast. The weighting of scenarios is subject to periodic review and may be adjusted based on the Company’s view of current economic conditions. Adjustment of scenario weighting away from the baseline scenario to more severe scenarios would increase the allowance for credit losses on the Company’s held-for-investment loan portfolio. Economic conditions that impacted management’s assessment of scenario weightings and the

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underlying economic forecasts at the end of fiscal year 2022 included rising interest rates, increased inflation, continued supply chain constraints and increased geopolitical unrest.

For further information on the Allowance for Credit Losses, refer to Note 1 - “Summary of Significant Accounting Policies”.

Goodwill and Other Intangible Assets. Estimates used to calculate fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. Application of the goodwill impairment tests requires significant judgments, including estimation of future cash flows. As such, changes in assumptions underlying the valuation of goodwill and other intangible assets are part of the ordinary course of accounting for goodwill and other intangible assets.

For further information on Goodwill and Other Intangible Assets, refer to Note 1 - “Summary of Significant Accounting Policies”.

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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 Annual Report on Form 10-K.

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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 Net charge-offs do not include any amounts transferred to loans held for sale.

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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:

1 Average balances are obtained from daily data.

2 Loans includes loans held for sale, loan premiums, discounts and unearned fees.

3 Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also includes $26.4 million as of June 30, 2022, $27.2 million as of June 30, 2021 and $28.0 million as of June 30, 2020 of loans that qualify for Community Reinvestment Act credit which are taxed at a reduced rate.

4 Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the audited condensed 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.

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RESULTS OF OPERATIONS

Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth in our interest earning assets and is subject to competitive factors in online banking and other markets. Our net interest income is reduced by our estimate of credit loss provisions for our loan portfolio. We also earn non-interest income primarily from mortgage banking activities, banking products and service activity, our Securities Business, prepaid card fee income, prepayment fee income from multifamily and commercial borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities. Losses on investment securities reduce non-interest income. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased to 1,335 full-time equivalent employees at June 30, 2022, from 1,165 full time employees at June 30, 2021. We are subject to federal and state income taxes, and our effective tax rates were 29.19%, 29.45% and 30.15% for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. Other factors that affect our results of operations include expenses relating to data processing, advertising, depreciation, occupancy, professional services, and other miscellaneous expenses.

COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2022 AND JUNE 30, 2021

Net Interest Income. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.

Interest Income. Interest income for the fiscal year ended June 30, 2022 totaled $659.7 million, an increase of $41.9 million, or 6.8%, compared to $617.9 million in interest income for the fiscal year ended June 30, 2021 primarily due to growth in volume of interest-earning assets from loan originations, mainly from commercial real estate and commercial & industrial lending, partially offset by reduced rates on interest-earning assets. Average interest-earning assets for the fiscal year ended June 30, 2022 increased by $937.4 million compared to the fiscal year ended June 30, 2021 primarily due to loan originations for investment which totaled $10.4 billion during the year ended June 30, 2022. Yields on loans decreased by 18 basis points to 4.98% for the fiscal year ended June 30, 2022, primarily due to declines in market interest rates. For the fiscal year ended June 30, 2022, the growth in average balances contributed additional interest income of $64.1 million, which was offset by a $22.2 million decrease in interest income due to declines in market interest rates. The average yield earned on our interest-earning assets was 4.49% for the fiscal year ended June 30, 2022, even compared to 4.49% in 2021.

Interest Expense. Interest expense totaled $52.6 million for the fiscal year ended June 30, 2022, a decrease of $26.6 million, or 33.6% compared to $79.1 million in interest expense during the fiscal year ended June 30, 2021, due primarily to a $1.7 billion increase in non-interest bearing deposits and decreased rates on deposits, as a result of the Federal Reserve’s decision to maintain the Fed Funds target rate near zero for most of the fiscal year. The average rate paid on all of our interest-bearing liabilities decreased to 0.58% for the fiscal year ended June 30, 2022 from 0.79% for the fiscal year ended June 30, 2021, due primarily to decreased rates on deposits. Average interest-bearing liabilities for the fiscal year ended June 30, 2022

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decreased $873.3 million compared to fiscal 2021, offset by an increase in non-interest bearing deposits. The average rate on interest-bearing demand and savings deposits decreased to 0.30% from 0.40% due to decreases in prevailing deposit rates across the industry. The rates on borrowings, subordinated notes and debentures also increased to 4.36% from 3.65% due to rates in effect when borrowing for operational needs. The average rate on time deposits decreased to 1.11% for the fiscal year ended June 30, 2022 from 1.73% for the fiscal year ended June 30, 2021, due to higher rate maturing time deposits. The average non-interest-bearing demand deposits were $3,927.2 million for the fiscal year ended June 30, 2022, up from $2,182.0 million, representing an increase of $1,745.2 million.

Provision for Credit Losses. Provision for credit losses was $18.5 million for the fiscal year ended June 30, 2022 and $23.8 million for fiscal 2021. The decrease of $5.3 million for fiscal year 2022 was due to favorable changes in economic and business conditions resulting from reduced levels of disruptions from the COVID-19 pandemic, partially offset by loan growth and changes in loan mix. The provisions are made to maintain our allowance for credit losses at levels which management believes to be adequate. The assessment of the adequacy of our allowance for credit losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the volume and mix of loans and collateral values.

See “Asset Quality and Allowance for Credit Losses - Loans” for discussion of our allowance for credit losses and the related loss provisions.

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

Non-interest income totaled $113.4 million for the fiscal year ended June 30, 2022 compared to non-interest income of $105.3 million for fiscal 2021. The increase was primarily the result of a $29.2 million increase in Advisory fee income from custody and mutual fund fees earned by the newly acquired AAS division and increased levels of prepayment penalty fee income of $6.1 million, partially offset by a decrease of $23.1 million in mortgage banking income, mainly due to raising rates and a $3.4 million decrease in broker-dealer fee income. Mortgage banking income for fiscal 2022 included a net mortgage servicing rights adjustment of approximately $2.3 million due to expected higher interest rates and slower mortgage prepayments.

Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods shown:

Non-interest expense totaled $362.1 million for the fiscal year ended June 30, 2022, an increase of $47.6 million compared to fiscal 2021. Salaries and related costs increased $14.8 million, or 9.7%, in fiscal 2022, generally due to the addition of AAS and the expansion of Bank operations specifically in areas related to lending and deposits. Our full time staff increased to 1,335 from 1,165 or 14.6% between fiscal years ended June 30, 2022 and 2021.

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Data processing increased $9.4 million, primarily due to enhancements to customer interfaces and the Bank’s core processing system.

Depreciation and amortization, increased $0.5 million primarily due to amortization of intangibles as a result of the AAS acquisition and depreciation on lending platform enhancements and infrastructure development.

Advertising and promotional expense decreased $0.6 million, primarily due to reductions in mortgage lead generation and deposit marketing costs.

Occupancy and equipment expense increased $0.3 million, primarily due to annual cost increases in our office space lease agreements and the addition of an assumed office space lease for our AAS employees.

Professional services, which include accounting and legal fees, increased $0.2 million in fiscal 2022 compared to 2021. The increase in professional services was primarily due to increased legal and consulting expenses.

Broker-dealer clearing charges increased $4.0 million, primarily attributable to the acquisition of AAS and increased clearing charges due to higher activity.

The Federal Deposit Insurance Corporation (“FDIC”) and regulator fees increased by $1.2 million in fiscal 2022 compared to fiscal 2021. The increase corresponds to growth in average liabilities at the Bank and increased assessment rates during fiscal 2022.

General and administrative expenses increased by $17.6 million in fiscal 2022 compared to 2021. The increase was primarily due to an $11.0 million charge due largely to a one-time resolution of a contractual claim, a $5.3 million provision to the unfunded loan commitment liability and increased travel costs of $2.1 million.

Income Tax Expense. Income tax expense was $99.2 million for the fiscal year ended June 30, 2022 compared to $90.0 million for fiscal 2021. Our effective tax rates were 29.19% and 29.45% for the fiscal years ended June 30, 2022 and 2021, respectively.

The Company received federal and state tax credits for the years ended June 30, 2022 and 2021, respectively. These tax credits reduced the effective tax rate by approximately 0.44% and 0.59%, respectively.

SEGMENT RESULTS

The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:

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Banking Business

For the fiscal year ended June 30, 2022, we had pre-tax income of $366.1 million compared to pre-tax income of $328.6 million for the fiscal year ended June 30, 2021. For the fiscal year ended June 30, 2022, the increase in pre-tax income was primarily related to increased net interest income due in large part to growth in volume of interest-earning assets from loan originations, primarily from commercial real estate and commercial & industrial lending, a decline in rates of interest-bearing demand and savings deposits and time deposits, growth in non-interest bearing deposits and a decrease in provision for credit losses, partially offset by a decrease in mortgage banking and an increase in non-interest expense.

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

Our Banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at the Company and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our Securities Business, including items related to securities financing operations.

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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:

1Average balances are obtained from daily data.

2Loans include loans held for sale, loan premiums and unearned fees.

3Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans include average balances of $26.4 million and $27.2 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2022 and 2021 twelve-month periods, respectively.

4Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

5Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

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Net Interest Income. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.

The Banking segment’s net interest income for the fiscal year ended June 30, 2022 totaled $597.8 million, an increase of 13.3%, compared to net interest income of $527.8 million for the fiscal year ended June 30, 2021. The growth of net interest income is primarily attributable to growth in volume of interest-earning assets from loan originations, primarily from commercial real estate and commercial & industrial lending, a decline in rates of interest-bearing demand and savings deposits and time deposits and growth in non-interest bearing deposits.

The Banking segment’s non-interest income decreased $18.2 million during the fiscal year ended June 30, 2022 to $60.9 million from the $79.2 million for the fiscal year ended June 30, 2021. The decrease in non-interest income for the fiscal year ended June 30, 2022, was primarily the result of a decrease in mortgage banking income of $23.1 million driven by the increase in mortgage rates partially offset by an increase of $6.1 million in prepayment penalty fee income.

Non-interest expense totaled $274.1 million for the fiscal year ended June 30, 2022, an increase of $19.5 million compared to fiscal 2021. General and administrative expenses increased by $16.4 million primarily due to an $11.0 million charge due largely to a one-time resolution of a contractual claim and a $5.3 million provision to the unfunded loan commitment liability, an increase in advertising and promotional expense of $8.6 million primarily due to costs paid to our Securities Segment for non-interest bearing deposits, a $5.8 million increase in data processing expense for systems enhancements, partially offset by a decrease of $4.7 million in salaries and related costs.

Securities Business

For the fiscal year ended June 30, 2022, our Securities Business segment had a loss before taxes of $2.4 million compared to the loss before taxes of $1.7 million for the fiscal year ended June 30, 2021.

The following table provides our Securities Business operating results:

Net interest income for the fiscal year ended June 30, 2022 was $17.6 million compared to $18.7 million for the fiscal year ended June 30, 2021. The decrease was primarily a result of a decrease in the rates earned on securities borrowed and margin lending. 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.

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Non-interest income totaled $64.1 million for the fiscal year ended June 30, 2022, an increase of $36.4 million compared to the $27.6 million during the fiscal year ended June 30, 2021. The increase was primarily attributable to a $28.3 million increase related to the addition of AAS custody and mutual funds fees, an increase of $10.3 million in fees earned on FDIC insured bank deposits, partially offset by a decrease of $1.2 million in correspondent fees, and a decrease of $1.3 million of clearing and custodial related fees.

Non-interest expense was $84.0 million during the fiscal year ended June 30, 2022, an increase of $35.9 million compared to $48.1 million during the fiscal year ended June 30, 2021. The increase was primarily related to an increase of $16.9 million in salaries and related expenses related to staffing and the acquisition of AAS, an increase of $4.1 million depreciation and amortization expense, an increase of $4.0 million in broker-dealer clearing charges, an increase of $3.6 million in data processing, an increase of $2.7 million occupancy and equipment expense, an increase of $1.4 million advertising and promotional expense, and an increase of $1.4 million general and administrative expenses. The increases were primarily the result of the addition of AAS.

Selected information concerning Axos Clearing LLC follows as of or for the year ended:

COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2021 AND JUNE 30, 2020

Net Interest Income. Net interest income totaled $538.7 million for the fiscal year ended June 30, 2021 compared to $477.6 million for the fiscal year ended June 30, 2020. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest

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expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.

Interest Income. Interest income for the fiscal year ended June 30, 2021 totaled $617.9 million, a decrease of $5.0 million, or 0.8%, compared to $622.8 million in interest income for the fiscal year ended June 30, 2020 primarily due to reduced rates on interest-earning assets, partially offset by growth in volume of interest-earning assets from loan originations, primarily from commercial real estate and commercial & industrial lending. Average interest-earning assets for the fiscal year ended June 30, 2021 increased by $2,167.7 million compared to the fiscal year ended June 30, 2020 primarily due to loan originations for investment which totaled $7,304.4 million during the year ended June 30, 2021. Yields on loans decreased by 58 basis points to 5.16% for the fiscal year ended June 30, 2021, primarily due to declines in market interest rates. For the fiscal year ended June 30, 2021, the growth in average balances contributed additional interest income of $77.0 million, which was offset by a $81.9 million decrease in interest income due to declines in market interest rates. The average yield earned on our interest-earning assets decreased to 4.49% for the fiscal year ended June 30, 2021, down from 5.37% in 2020 primarily due to decreases in loan yields and rates earned on deposits in other financial institutions. As a result of the Federal Reserve’s decisions to maintain the Fed Funds target rate near zero, the rates earned on our adjustable-rate loans are generally at their floor and the rates on newly originated loans are lower than the average rate of the loan portfolio.

Interest Expense. Interest expense totaled $79.1 million for the fiscal year ended June 30, 2021, a decrease of $66.1 million, or 45.5% compared to $145.2 million in interest expense during the fiscal year ended June 30, 2020, due primarily to a $192.0 million increase in non-interest bearing deposits and decreased rates on deposits, as a result of the Federal Reserve’s decisions to maintain the Fed Funds target rate near zero throughout the year, partially offset by greater volume of deposits due to growth. The average rate paid on all of our interest-bearing liabilities decreased to 0.79% for the fiscal year ended June 30, 2021 from 1.72% for the fiscal year ended June 30, 2020, due primarily to decreased rates on deposits. Average interest-bearing liabilities for the fiscal year ended June 30, 2021 increased $1,569.4 million compared to fiscal 2020. The average rate on interest-bearing demand and savings deposits decreased to 0.40% from 1.38% due to decreases in prevailing deposit rates across the industry. The rates on borrowing, subordinated notes and debentures also decreased to 3.65% from 5.45% due primarily to the mix of borrowings. The average rate on time deposits increased to 1.73% for the fiscal year ended June 30, 2021 from 2.42% for the fiscal year ended June 30, 2020, due to higher rate maturing time deposits. The average non-interest-bearing demand deposits were $2,182.0 million for the fiscal year ended June 30, 2021, up from $1,990.0 million, representing an increase of $192.0 million.

Provision for Credit Losses. Provision for credit losses was $23.8 million for the fiscal year ended June 30, 2021 and $42.2 million for fiscal 2020. The decrease was due to the decrease in provisions associated with non-recurring Refund Advance loans and macroeconomic updates relating to COVID-19. The provisions are made to maintain our allowance for credit losses at levels which management believes to be adequate. The assessment of the adequacy of our allowance for credit losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, loss history and changes in the volume and mix of loans and collateral values.

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See “Asset Quality and Allowance for Credit Losses - Loans” for discussion of our allowance for loan and lease losses and the related loss provisions.

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

Through our agreement with H&R Block, Inc. (“H&R Block”) and its wholly-owned subsidiaries the Bank earned significant non-interest income by providing H&R Block-branded financial products and services. On July 1, 2020, the Bank received written notification from Emerald Financial Services, LLC (“EFS”), a subsidiary of H&R Block, terminating the Program Management Agreement (“PMA”) covering the Emerald Prepaid Mastercard®, Refund Transfer and Emerald Advance products, effective July 1, 2020. While the PMA has been terminated, the Bank continued to perform certain services under the PMA until the services were fully transitioned to another bank in December 2020. Historically, the primary non-interest income generating H&R Block products and services that lead to the increased banking and service fees are Emerald Prepaid Mastercard® (“EPC”) and Refund Transfer (“RT”).

Non-interest income totaled $105.3 million for the fiscal year ended June 30, 2021 compared to non-interest income of $103.0 million for fiscal 2020. The increase was primarily the result of an increase of $21.5 million in mortgage banking income, resulting from an increase in originations and sales of loans held-for-sale due to the decline in market interest rates, an increase of $3.1 million in broker-dealer fee income, and increased levels of prepayment penalty fee income by $1.2 million, partially offset by a decrease of $17.1 million in banking and service fees, primarily due to Emerald Prepaid Mastercard® and Refund Transfer products associated with H&R Block that did not recur in fiscal 2021, and a $6.4 million decrease in gain on sale-other, as certain sales of lottery receivables and sales of Refund Advance loans to H&R Block in fiscal 2020 did not recur in fiscal 2021. Banking and service fees includes H&R Block-branded product fees, deposit fees, fee income from prepaid card sponsors, and certain C&I loan fees. The primary non-interest income-generating H&R Block products and services that led to increased levels of banking and service fees in fiscal 2020 are EPC and RT. For the fiscal year ended June 30, 2021, EPC was $2.6 million compared to $7.8 million for fiscal 2020. For the fiscal year ended June 30, 2021, RT was $1.4 million compared to $11.5 million for fiscal 2020.

Included in gain on sale – other are sales of unsecured and secured consumer and business loans originated through introductions from our third-party partner relationships and sales of structured settlement annuity and state lottery receivables. We engage in the wholesale and retail purchase of state lottery prize and structured settlement annuity payments. These payments are high credit quality deferred payment receivables having a state lottery commission or investment grade (top two tiers) insurance company payor. The Bank originates contracts for the retail purchase of such payments and classifies these under the category of Other in the loan portfolio. Factoring yields are typically higher than mortgage loan rates. Typically, the gain received upon sale of these payment streams is greater than the gain received from an equivalent amount of mortgage loan sales. Since 2013, pools of structured settlement receivables have been originated for sale depending upon management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and are classified on our balance sheet as loans held for sale. Increased sales on favorable terms during fiscal 2020 resulted in an increase in gain on sale from structured settlement annuity and state lottery receivables. Such sales did not recur to the same degree for during fiscal 2021.

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Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods shown:

Non-interest expense totaled $314.5 million for the fiscal year ended June 30, 2021, an increase of $38.7 million compared to fiscal 2020. Salaries and related costs increased $8.2 million, or 5.7%, in fiscal 2021 primarily due to the staffing additions from increased staffing levels to support expansion in the Banking segment, specifically for lending and information technology infrastructure development activities. Our staff increased to 1165 from 1099 or 6.0% between fiscal year ended June 30, 2021 and 2020 and increased to 1099 from 1007 or 9.1% between fiscal year ended June 30, 2020 and 2019.

Data processing increased $10.0 million, primarily due to enhancements to customer interfaces and the Bank’s core processing system.

Advertising and promotion expense increased $0.3 million, primarily due to reductions in deposit marketing throughout the year.

Depreciation and amortization, decreased $0.3 million primarily due to reduced depreciation on computer hardware and furniture and fixtures.

Occupancy and equipment expense increased $1.3 million, primarily due to the timing of new property leases and an impairment reserve charge on the early exit of a property lease of $0.9 million during fiscal 2021.

Professional services, which include accounting and legal fees, increased $11.1 million in fiscal 2021 compared to 2020. The increase in professional services was primarily due to increased legal and consulting expenses.

The Federal Deposit Insurance Corporation (“FDIC”) and regulator fee increased by $5.1 million in fiscal 2021 compared to fiscal 2020. The The increase corresponds to growth in average liabilities and small bank assessment credits received from the FDIC during fiscal 2020 which did not recur in fiscal 2021.

Broker-dealer clearing charges increased $2.9 million primarily due to increased correspondent and market activity.

General and administrative expenses increased by $0.6 million in fiscal 2021 compared to 2020. The increase was primarily due increased deposit servicing expenses.

Income Tax Expense. Income tax expense was $90.0 million for the fiscal year ended June 30, 2021 compared to $79.2 million for fiscal 2020. Our effective tax rates were 29.45% and 30.15% for the fiscal years ended June 30, 2021 and 2020, respectively.

As of June 30, 2020, the Company determined that certain stock-based compensation awards would not be granted under the plan, and the deferred tax assets related to these awards will not be realized. Accordingly, the Company wrote-off $6.8 million of a stock-based compensation deferred tax asset, resulting in a $2.0 million increase in tax expense for fiscal 2020.

The Company received federal and state tax credits for the years ended June 30, 2021 and 2020, respectively. These tax credits reduced the effective tax rate by approximately 0.59% and 0.77%, respectively.

SEGMENT RESULTS

The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review

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of the operating results of those services. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:

Banking Business

For the fiscal year ended June 30, 2021, we had pre-tax income of $328.6 million compared to pre-tax income of $285.7 million for the fiscal year ended June 30, 2020. For the fiscal year ended June 30, 2021, the increase in pre-tax income was primarily related to increased net interest income due to loan and deposit growth.

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

Our Banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at our Holding Company and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our Securities Business, including items related to securities financing operations.

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The following table presents our Banking segment’s information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the twelve months ended June 30, 2021 and 2020:

1Average balances are obtained from daily data.

2Loans include loans held for sale, loan premiums and unearned fees.

3Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans include average balances of $27.2 million and $28.0 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2021 and 2020 twelve-month periods, respectively.

4Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

5Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

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Net Interest Income. Net interest income totaled $527.8 million for the fiscal year ended June 30, 2021 compared to $464.4 million for the fiscal year ended June 30, 2020. The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.

The Banking segment’s net interest income for the fiscal year ended June 30, 2021 totaled $527.8 million, an increase of 13.6%, compared to net interest income of $464.4 million for the fiscal year ended June 30, 2020. The growth of net interest income is primarily due to net loan portfolio growth and a reduction of rates paid on deposits.

The Banking segment’s non-interest income creased $1.2 million from $80.4 million to $79.2 million for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020. The decrease in non-interest income for the fiscal year ended June 30, 2021, as primarily the result of a decrease of $17.0 million in banking and service fees, primarily from Emerald Prepaid Mastercard® and Refund Transfer products associated with H&R Block that did not recur in fiscal 2021, and a $6.4 million decrease in gain on sale-other, as certain sales of lottery receivables and sales of Refund Advance loans to H&R Block in fiscal 2020 did not recur in fiscal 2021, partially offset by an increase in mortgage banking income of $21.0 million driven by the decline of mortgage rates to record lows over the year, and an increase of $1.2 million in prepayment penalty fee income.

Non-interest expense totaled $254.6 million for the fiscal year ended June 30, 2021, an increase of $37.7 million compared to fiscal 2020. Salaries and related costs increased $13.3 million, or 11.9%, in fiscal 2021 due to increased staffing levels to support growth in staffing specifically for lending and information technology infrastructure development activities, a $9.8 million increase in data processing expense for loan and deposit systems enhancements, a $7.9 million increase in professional services due to increased legal and consulting expenses, an increase of $4.9 million in FDIC and OCC standard regulatory charges due to growth in average liabilities and a small bank assessment credit received from the FDIC in fiscal 2020 which did not recur, and a $1.6 million increase in occupancy expense primarily due to an impairment reserve charge on the early exit of a property lease.

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Securities Business

For the fiscal year ended June 30, 2021, our Securities Business segment had a loss before taxes of $1.7 million an improvement of 17.1% compared to the loss before taxes of $2.1 million for the fiscal year ended June 30, 2020.

The following table provides our Securities Business operating results:

Net interest income for the fiscal year ended June 30, 2021 was $18.7 million compared to $16.6 million for the fiscal year ended June 30, 2020, an increase of $2.1 million due to increased activity. In the Securities business, interest is earned on margin loan balances, securities borrowed, and cash deposit balances. Interest expense is incurred from cash borrowed through bank lines and securities lending.

Non-interest income totaled $27.6 million for the fiscal year ended June 30, 2021, an increase of $2.8 million compared to the $24.8 million during the fiscal year ended June 30, 2020. Increased activity resulted in an increase of $3.3 million from correspondent fees and an increase of $2.7 million from clearing and custodial related fees, partially offset by a decrease of $3.9 million in fees earned on managing customers’ FDIC insured bank deposits due to decreased rates.

Non-interest expense was $48.1 million during the fiscal year ended June 30, 2021 an increase of $4.6 million for the $43.5 million during the fiscal year ended June 30, 2020. The increase was primarily the result of an increase broker-dealer clearing charges of $2.9 million due to increased activity and an increase in professional services of $2.1 million due to an increase in legal expenses.

Selected information concerning Axos Clearing LLC follows as or for the year ended:

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2022 AND JUNE 30, 2021

Our total assets increased $3.1 billion, or 22.0%, to $17.4 billion, as of June 30, 2022, up from $14.3 billion at June 30, 2021. The loan portfolio increased $2.7 billion on a net basis, primarily from portfolio loan originations of $10.4 billion, less principal repayments and other adjustments of $7.7 billion. Total cash increased by $0.5 billion primarily due to increased deposits. Total liabilities increased by $2.9 billion or 22.5%, to $15.8 billion at June 30, 2022, up from $12.9 billion at June 30, 2021. The increase in total liabilities resulted primarily from growth in deposits of $3.1 billion, partially offset by decreased securities loaned of $0.3 billion and decreased advances from the Federal Home Loan Bank of $0.2 billion. Stockholders’ equity increased by $242.0 million, or 17.3%, to $1.6 billion at June 30, 2022, up from $1.4 billion at June 30, 2021. The

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increase was largely the result of $240.7 million in net income for the fiscal year, $6.8 million vesting and issuance of RSUs and stock-based compensation expense, partially offset by a $5.4 million unrealized loss in other comprehensive income, net of tax.

USE OF NON-GAAP FINANCIAL MEASURES

In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as adjusted earnings, adjusted earnings per common share, and tangible book value per common share. Non-GAAP financial measures have inherent limitations, may not be comparable to similarly titled measures used by other companies and are not audited. Readers should be aware of these limitations and should be cautious as to their reliance on such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.

We define “adjusted earnings” as net income without the after-tax impact of non-recurring acquisition-related costs (including amortization of intangible assets related to acquisitions), and other costs (unusual or nonrecurring charges). Adjusted earnings per diluted common share (“adjusted EPS”) is calculated by dividing non-GAAP adjusted earnings by the average number of diluted common shares outstanding during the period. We believe the non-GAAP measures of adjusted earnings and adjusted EPS provide useful information about the Company’s operating performance. We believe excluding the non-recurring acquisition related costs, and other costs provides investors with an alternative understanding of Axos’ business.

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

1 Primarily one-time resolution of a contractual claim.

We define “tangible book value,” as book value adjusted for goodwill and other intangible assets. Tangible book value is calculated using common stockholders’ equity minus mortgage servicing rights, goodwill and other intangible assets. Tangible book value per common share is calculated by dividing tangible book value by the common shares outstanding at the end of the period. We believe tangible book value per common share is useful in evaluating the Company’s capital strength, financial condition, and ability to manage potential losses. Other costs for the year ended June 30, 2022 relate to resolution of a contractual claim and a legal charge, neither of which are indicative of normal operating costs of the core business.

Below is a reconciliation of total stockholders’ equity, the nearest compatible GAAP measure, to tangible book value (Non-GAAP) as of the dates indicated:

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ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES - LOANS

Non-performing loans and foreclosed assets or “non-performing assets” consisted of the following:

Our non-performing assets decreased to $119.0 million at June 30, 2022 from $152.0 million at June 30, 2021. The decrease in non-performing assets during the fiscal year ended June 30, 2022 was substantially comprised of a decrease in non-performing loans of $27.0 million. Non-performing assets as a percentage of total assets decreased to 0.68% at June 30, 2022 from 1.10% at June 30, 2021. The increase in non-performing assets during the fiscal year ended June 30, 2021 compared to June 30, 2020 was comprised of an increase in non-performing loans of $57.3 million.

The decrease in non-performing loans at June 30, 2022 is primarily the result of the resolution of challenges incurred by single family borrowers impacted by COVID-19. Approximately 56.2% of the Bank’s nonaccrual loans are single family first mortgages that have an aggregate loan-to-value ratio of 58.2%.

We believe that the write-downs taken as of June 30, 2022 on non-performing loans and the low average LTVs on the balance of real estate loans in our portfolio make our future risk of loss better than other banks with significant exposure to real estate loans. If average nationwide residential housing values and commercial real estate values decline or if nationwide unemployment increases, we are likely to experience growth in the level of our non-performing loans and leases, foreclosed real estate and repossessed vehicles in future periods.

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Allowance for Credit Losses - Loans.

On July 1, 2020, the Company adopted ASC 326. The update replaces the historical incurred loss model to a current expected loss model. Refer to Note 1 - Summary of Significant Accounting Policies within this Form 10-K for further detail on the accounting adoption along with detail of the processes involved in determining the allowance for credit losses under the new guidance.

The following table sets forth the changes in our allowance for credit losses, by portfolio class for the dates indicated:

The following table sets forth our allowance for credit losses by portfolio class:

The Company’s allowance for credit losses increased $15.7 million or 11.8% from June 30, 2021 to June 30, 2022. As a percentage of the outstanding loan balance, the Company’s allowance was 1.04% at June 30, 2022 and 1.15% at June 30, 2021. Provisions for credit losses were $18.5 million for fiscal 2022 and $23.8 million for fiscal 2021. The Company’s credit loss provisions for fiscal 2022 compared to 2021 decreased by $5.3 million primarily due to updates in economic and business conditions and loan mix. Provisions for credit losses for fiscal 2022 were primarily comprised of provisions in Commercial Real Estate and Auto & Consumer due to growth in these segments of the loan portfolio.

Net charge-offs during the fiscal year ended June 30, 2022, were $2.8 million, primarily due to the auto & consumer segment. Net-charge-offs in fiscal 2022 decreased compared to fiscal 2021, due to decreases in net charge-offs of $6.1 million in other loans for the fully reserved charge-off of Refund Advance loans, $2.6 million in commercial & industrial - non RE, $2.4 million in single family - mortgage & warehouse, partially offset by an increase in net charge-offs of $0.7 million for auto & consumer.

Net charge-offs for single family - mortgage & warehouse loans increased $2.4 million for fiscal 2021. Net charge-offs for each of multifamily and commercial mortgage and commercial real estate loans increased $0.2 million in fiscal 2021, respectively. Net charge-offs for auto & consumer decreased $2.1 million for fiscal 2021. Net charge-offs for other decreased $9.1 million for fiscal 2021, primarily due to a $6.3 million decrease in Refund Advance charge-offs and a $0.9 million decrease in net charge-offs for unsecured consumer loans.

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Between June 30, 2021 and 2022, the Bank’s total allowance for credit losses as a proportion of the loan portfolio decreased 11 basis points primarily due to updates in economic and business conditions and loan mix.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. For Axos Bank, our sources of liquidity include deposits, borrowings, payments and maturities of outstanding loans, sales of loans, maturities or gains on sales of investment securities and other short-term investments. While scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally invest excess funds in overnight deposits and other short-term interest-earning assets. We use cash generated through retail deposits, our largest funding source, to offset the cash utilized in lending and investing activities. Our short-term interest-earning investment securities are used to provide liquidity for lending and other operational requirements.

As an additional source of funds, we have two credit agreements. Axos Bank can borrow up to 40% of its total assets from the FHLB. Borrowings are collateralized by pledging certain mortgage loans and investment securities to the FHLB. Based on loans and securities pledged at June 30, 2022, we had a total borrowing availability of an additional $2.0 billion available immediately and an additional $3.9 billion available with additional collateral, for advances from the FHLB for terms up to ten years.

The Bank can borrow from the discount window at the FRBSF. FRBSF borrowings are collateralized by commercial loans, consumer loans and mortgage-backed securities pledged to the FRBSF. Based on loans and securities pledged at June 30, 2022, the Bank had a total borrowing capacity of approximately $2.8 billion, all of which was available for use. At June 30, 2022, we also had $175.0 million in unsecured federal funds lines of credit with two major banks under which there were no borrowings outstanding.

In the past, the Bank has used long-term borrowings to fund our loans and to minimize our interest rate risk. Our future borrowings will depend on the growth of our lending operations and our exposure to interest rate risk. We expect to continue to use deposits and advances from the FHLB as the primary sources of funding our future asset growth.

Axos Clearing has $150.0 million uncommitted secured lines of credit available for borrowing. As of June 30, 2022, there was $58.4 million outstanding. These credit facilities bear interest at rates based on the Federal Funds rate and borrowings are due upon demand. The weighted average interest rate on the borrowings at June 30, 2022 was 2.99%.

Axos Clearing has a $175.0 million committed unsecured line of credit available for limited purpose borrowing, which includes $100.0 million from Axos Financial, Inc. As of June 30, 2022, there was $53.1 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. The unsecured line of credit requires Axos Clearing operate in accordance with specific covenants surrounding capital and debt ratios. Axos Clearing was in compliance of all covenants as of June 30, 2022.

In December 2004, we completed a transaction that resulted in $5.2 million of junior subordinated debentures for our company with a stated maturity date of February 23, 2035. We have the right to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, for a rate of 3.90% as of June 30, 2022, with interest paid quarterly.

In March 2016, Axos completed the sale of $51.0 million aggregate principal amount of our 6.25% Subordinated Notes due February 28, 2026 (the “Notes 2026”). On March 31, 2021, the Company completed the redemption of $51.0 million aggregate principal amount. The Notes 2026 were redeemed for cash by the Company at 100% of their principal amount, plus accrued and unpaid interest, in accordance with the terms of the indenture governing the Notes 2026. On March 31, 2021, the Company completed the redemption of $51.0 million aggregate principal amount of its Notes 2026. The Notes 2026 were redeemed for cash by the Company at 100% of their principal amount, plus accrued and unpaid interest, in accordance with the terms of the indenture governing the Notes 2026. Remaining unamortized deferred financing costs associated with such notes were expensed and included under Interest Expense - Other Borrowings in the Consolidated Statements of Income.

In January 2019, we issued subordinated notes totaling $7.5 million, to the principal stockholders of COR Securities in an equal principal amount, with a maturity of 15 months, to serve as the source of payment of indemnification obligations of the principal stakeholders of COR Securities under the Merger Agreement. Interest accrues at a rate of 6.25% per annum. During the fiscal year ended June 30, 2019, $0.1 million of subordinated loans were repaid. The Company has made an indemnification claim against the $7.4 million remaining.

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In September 2020, the Company completed the sale of $175.0 million aggregate principal amount of its 4.875% Fixed-to-Floating Rate Subordinated Notes due October 1, 2030 (the “Notes”). The Notes mature on October 1, 2030 and accrue interest at a fixed rate per annum equal to 4.875%, payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2021. From and including October 1, 2025, to, but excluding October 1, 2030 or the date of early redemption, the Notes will bear interest at a floating rate per annum equal to a benchmark rate (which is expected to be the Three-Month Term Secured Overnight Financing Rate) plus a spread of 476 basis points, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on January 2026. The Notes may be redeemed on or after October 1, 2025, which date may be extended at the Company’s discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions.

In March 2021, we filed a new shelf registration with the SEC which allows us to issue up to $400.0 million through the sale of debt securities, common stock, preferred stock and warrants.

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 “Notes”). The Notes are obligations only of Axos Financial, Inc. The 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. From and including March 1, 2027, to, but excluding March 1, 2032 or the date of early redemption, the Notes will bear interest at a floating rate per annum equal to a benchmark rate of the Three-Month Term SOFR plus a spread of 2.27 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing on June 1, 2027. The Notes may be redeemed on or after March 1, 2027, which date may be extended at the Company’s discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions. Fees and costs incurred in connection with the debt offering amortize to interest expense over the term of the Notes.

Off-Balance Sheet Commitments. At June 30, 2022, we had commitments to originate loans with an aggregate outstanding principal balance of $3,504.3 million, commitments to sell loans with an aggregate outstanding principal balance at the time of sale of $8.4 million, and no commitments to purchase loans, investment securities or any other unused lines of credit. See Item 3. Legal Proceedings for further information on pending litigation in which we are involved.

Contractual Obligations. The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of June 30, 2022 totaled $0.7 billion. If these maturing deposits do not remain with us, we may be required to seek other sources of funds, including using off-balance sheet deposits managed by Axos Clearing, other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on deposits and borrowings than we currently pay on time deposits maturing within one year. We believe, however, based on past experience, that a portion of our time deposits will remain with us. We believe we have the ability to attract and retain deposits by adjusting interest rates offered.

The following table presents our contractual obligations for long-term debt, time deposits, and operating leases by payment date:

1 Long-term debt includes advances from the FHLB and Subordinated notes and debentures.

2 Amounts include principal and interest due to recipient.

3 Commitments for low income housing project partnerships, which provide income tax credits, and in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements, excludes interest.

4 Payments are for the lease of real property.

Consolidated and Bank Capital Requirements. 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. 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.

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Information presented for June 30, 2022, reflects the Basel III capital requirements for both our Company and Bank. Under these capital requirements and the regulatory framework for prompt corrective action, our Company and Bank must meet specific capital guidelines that involve quantitative measures of our Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

Quantitative measures established by regulation require our Company and Bank to maintain certain minimum capital amounts and ratios. Federal bank regulators require our Company and Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity tier 1 capital to risk-weighted assets of 4.5%, tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. To be “well capitalized,” our Company and Bank must maintain minimum leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. At June 30, 2022, 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, 2022 that would materially adversely change the Company’s and Bank’s capital classifications. From time to time, we may need to raise additional capital to support our Company’s and Bank’s further growth and to maintain their “well capitalized” status.

The Company’s and Bank’s capital amounts, capital ratios and requirements were as follows:

At June 30, 2022, the Company and Bank were in compliance with the capital conservation buffer requirement. Inclusive of the fully phased-in capital conservation buffer, the common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively.

Securities Business

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Axos Clearing, is subject to the SEC Uniform Net Capital (Rule 15c3-1 of the Exchange Act). Under this rule, Axos Clearing has elected to operate under the alternate method and is required to maintain minimum net capital of $250,000 or 2% of aggregate debit balances arising from client transactions, as defined. Under the alternate method, Axos Clearing may not repay subordinated debt, pay cash distributions, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.

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The net capital position of Axos Clearing was as follows:

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. At June 30, 2022, the Company had a deposit requirement of $286.9 million and maintained a deposit of $335.8 million. On July 1, 2022, Axos Clearing made a withdrawal of excess deposits of $39 million. At June 30, 2021, the Company had a deposit requirement of $258.1 million and maintained a deposit of $251.2 million. On July 1, 2021, Axos Clearing made a deposit to satisfy the deposit requirement.

Certain broker-dealers have chosen to maintain brokerage customer accounts at Axos Clearing. To allow these broker-dealers to classify their assets held by the Company as allowable assets in their computation of net capital, the Company computes a separate reserve requirement for Proprietary Accounts of Brokers (PAB). At June 30, 2022, the Company had a deposit requirement of $29.1 million and maintained a deposit of $36.3 million. On July 1, 2022, Axos Clearing made a withdrawal of $6.1 million of excess deposits. At June 30, 2021, the Company had a deposit requirement of $73.6 million and maintained a deposit of $71.0 million. On July 1, 2021, Axos Clearing made a deposit to satisfy the deposit requirement.