Axos Financial, Inc. (AX) FY 2023 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, the Bank and Axos Nevada Holding comprise substantially all of the Company’s assets and liabilities and revenues and expenses. 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. 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.

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. 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.

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.

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. 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 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 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. Estimating fair value for these securities requires judgment, the degree of which is largely dependent on the amount of observable market data available to the Company. For securities valued using techniques that use significant unobservable inputs and are therefore

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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’s estimate of fair value for non-agency securities classified as Level 3 is highly subjective and is based on estimates of voluntary prepayments, default rates, severities and discount margins, which are forecasted for each month over the remaining life of each security. 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. 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 estimate of the allowance for credit losses includes both a quantitative and qualitative assessment, both of which include variables that are subject to uncertainty.

The quantitative assessment reflects modeled outputs utilizing economic scenarios and forecasts, which are subject to uncertainty, and is also based on the Company’s current and expected future economic outlook. Key economic variables considered in the quantitative assessment include factors such as the U.S. unemployment rate and interest rates, both of which impact the default rate of the loan pools. Additionally, the results of the quantitative assessment are impacted by the third-party macroeconomic forecasts across various economic scenarios. 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. 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. 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.

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. 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. If, after completing the qualitative assessment, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it performs a quantitative goodwill impairment test. The qualitative assessment requires management judgment in assessing factors including, but not limited to, the macroeconomic and industry environment as well as Company-specific factors. 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.

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.

For further information on Goodwill and Other Intangible Assets, refer to Note 1 - “Organizations and Summary of Significant Accounting Policies” and Note 9 – “Goodwill and Intangible Assets.”

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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. As noted below with respect to each measure, we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business and performance, and our management uses these non-GAAP measures when it internally evaluates the performance of our business and makes operating decisions. However, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.

We define “adjusted earnings”, a non-GAAP financial measure, as net income without the after-tax impact of non-recurring acquisition-related 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 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. Other costs for the year ended June 30, 2022 reflect a one-time resolution of a contractual claim.

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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. 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.

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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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.

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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.

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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.

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.

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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 primarily as a result of both increased rates earned on and 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 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. 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. 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.

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. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to each based on the relative changes attributable to volume and changes attributable to rate.

Interest Income. 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 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.

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.

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

For fiscal year 2023, non-interest income increased $7.1 million, or 6.3% compared to non-interest income in fiscal year 2022. The increase was primarily the result of an increase of $23.6 million in broker-dealer fee income driven by higher rates earned on cash sorting balances at non-affiliated banks. Also contributing to the increase was a $4.2 million increase in banking and service fees. The overall increase was partially offset by a decrease of $12.1 million in mortgage banking income as higher mortgage rates contributed to lower originations and loan sales, and the impact of change in the fair value of our mortgage servicing rights (“MSRs”) as well as a decrease of $7.7 million in prepayment penalty income due to slower prepayments.

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

For fiscal year 2023, non-interest expense increased $85.1 million, or 23.5% compared to non-interest expense in fiscal year 2022.

Salaries and related costs increased $36.9 million in fiscal year 2023 compared to fiscal year 2022, primarily corresponding to increased headcount to 1,455 as of June 30, 2023, from 1,335 as of June 30, 2022, as well as higher compensation.

Data processing increased $10.4 million in fiscal year 2023 compared to fiscal year 2022, primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology platforms.

Depreciation and amortization decreased $1.2 million in fiscal year 2023 compared to fiscal year 2022, primarily due to certain capitalized software becoming fully depreciated.

Advertising and promotional expense increased $23.6 million in fiscal year 2023 compared to fiscal year 2022, primarily due to increased deposit marketing and lead generation costs.

Occupancy and equipment expense increased $1.9 million in fiscal year 2023 compared to fiscal year 2022, primarily due to growth in our office footprint and annual increases on our existing office space.

Professional services increased $6.8 million in fiscal year 2023 compared to fiscal year 2022, primarily due to higher consulting expenses and increased legal expenses related to litigation.

Broker-dealer clearing charges decreased $1.8 million in fiscal year 2023 compared to fiscal year 2022, primarily due to reduced customer trading activity.

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The Federal Deposit Insurance Corporation (“FDIC”) and regulator fees increased by $3.7 million in fiscal year 2023 compared to fiscal year 2022, corresponding to a growth in average liabilities at the Bank and increased assessment rates during fiscal year 2023.

General and administrative expenses increased by $4.8 million in fiscal year 2023 compared to fiscal year 2022. 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. 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. 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. 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. 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. The following tables present the operating results of the segments:

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. 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.

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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.

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.

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.

For the fiscal year 2023, the Banking segment’s net interest income increased $178.5 million, or 29.9%, compared to net interest income in fiscal year 2022. The growth of net interest income is reflective of growth in the average balance of loans and leases combined with higher rates earned on loans and leases and interest-earning deposits in other financial institutions. 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 decrease in non-interest income was primarily the result of increased prevailing market interest rates which caused decreases of $12.1 million in mortgage banking income and $7.7 million in prepayment penalty income, which were partially offset by a $1.1 million increase in banking and servicing fees.

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. The increase in non-interest expense was primarily driven by a $74.2 million increase in advertising and promotional expense, a $24.8 million increase in salaries and related costs and a $16.0 million accrual in the first quarter of 2023 as a result of an adverse legal judgment that has not been finalized.

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 following table provides our Securities Business operating results:

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. 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.

For the fiscal year 2023, the Securities Business’s non-interest income increased $77.0 million compared to fiscal year 2022, primarily attributable to a $74.9 million increase in broker-dealer fee income attributable to increased cash-sorting fee revenue.

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For the fiscal year 2023, the Securities Business’s non-interest expense increased $18.6 million compared to non-interest expense in fiscal year ended June 30, 2022, primarily related to a $12.2 million increase in salaries and related expenses, a $2.4 million increase in data processing expenses and a $1.7 million increase in professional services.

Selected information concerning Axos Clearing follows as of each date indicated:

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.

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. The loan portfolio increased $2.4 billion on a net basis, primarily from portfolio loan originations of $8.3 billion, less principal repayments and other adjustments of $5.9 billion. Total cash increased by $0.8 billion primarily due to increased deposits. 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. Stockholders’ equity increased by $274.2 million, or 16.7%, to $1.9 billion at June 30, 2023, up from $1.6 billion at June 30, 2022. The increase was largely the result of $307.2 million in net income for the fiscal year and $20.0 million vesting and issuance of RSUs and stock-based compensation expense, partially offset by $49.3 million from purchases of treasury stock and a $3.7 million unrealized loss in other comprehensive income, net of tax.

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 $95.3 million at June 30, 2023 from $119.0 million at June 30, 2022. The decrease in non-performing assets during the fiscal year ended June 30, 2023 was primarily the result of a decrease in non-performing loans of $31.0 million, mainly in single family mortgage loans. Non-performing assets as a percentage of total assets decreased to 0.47% at June 30, 2023 from 0.68% at June 30, 2022. The decrease in non-performing assets during the

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fiscal year ended June 30, 2022 compared to June 30, 2021 was primarily due to a decrease in non-performing loans of $27.0 million, primarily single family mortgage loans.

Allowance for Credit Losses - Loans.

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

The Company’s allowance for credit losses increased $18.1 million or 12.2% from June 30, 2022 to June 30, 2023. 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. 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. 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. The decrease year-over-year was primarily due to decreases in net charge-offs of $6.1 million in the fully reserved Refund Advance loan portfolio.

Between June 30, 2022 and 2023, the Company’s total allowance for credit losses as a proportion of the loan portfolio decreased 4 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 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.

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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, 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. 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.

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, 2023, the Bank had a total borrowing capacity of approximately $2.7 billion, all of which was available for use. 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.

Axos Clearing has $150.0 million of secured lines of credit available for borrowing. As of June 30, 2023, there was $11.5 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, 2023 was 7.0%.

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. 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.

In December 2004, we completed a transaction that resulted in the issuance of $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. Prior to June 30, 2023, interest accrued at the rate of three-month LIBOR plus 2.4%, for a rate of 7.79% as of June 30, 2023, with interest paid quarterly. Following June 30, 2023, interest accrues at three-month term SOFR plus of 0.26161%.

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 “2026 Notes”). On March 31, 2021, the Company completed the redemption of $51.0 million aggregate principal amount. The 2026 Notes 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 2026 Notes. On March 31, 2021, the Company completed the redemption of $51.0 million aggregate principal amount of its 2026 Notes. The 2026 Notes 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 2026 Notes. 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 Holdings, Inc. (“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 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 2030 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 2030 Notes will bear interest at a floating rate per annum equal to the three-month term SOFR 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 2030 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 “2032 Notes”). The 2032 Notes are obligations only of Axos Financial, Inc. The 2032

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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 2032 Notes will bear interest at a floating rate per annum equal to three-month term SOFR plus a spread of 227 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 2032 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 2032 Notes.

We view our liquidity sources to be stable and adequate for our anticipated needs and contingencies for both the short and long-term. Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of 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.

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. At June 30, 2023, we had unfunded commitments to originate loans with an aggregate outstanding principal balance of $2,917.6 million, commitments to sell loans with an aggregate outstanding principal balance at the time of sale of $24.9 millions, 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.

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. Information presented for June 30, 2023, 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, 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. From time to time, we may need to raise additional capital to support our Company’s and Bank’s further growth and to maintain their “well capitalized” status.

The Company and Bank both elected the five-year CECL transition guidance for calculating regulatory capital and ratios. The amounts in the following table reflect this election. This guidance allowed an entity to add back to regulatory capital 100% of the impact of the day one CECL transition adjustment and 25% of the subsequent increases to the allowance for credit losses through June 30, 2022. 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.

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

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

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, 2023, the Company calculated a deposit requirement of $169.5 million and maintained a deposit of $116.8 million. On July 5, 2023, Axos Clearing made a deposit of $81.0 million to satisfy the deposit requirement. At June 30, 2022, the Company calculated 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 $39.0 million.

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, 2023, the Company calculated a deposit requirement of $26.8 million and maintained a deposit of $32.0 million. On July 1, 2023, Axos Clearing did not have to make a deposit to satisfy the deposit requirement. At June 30, 2022, the Company calculated 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.