Financial Data and Key Metrics Changes - Axos Financial reported a net income of $61.8 million for Q3 2022, with diluted earnings per share of $1.02, representing a year-over-year growth of 15.3% [9] - Book value per share increased by 17% to $26.58 compared to the previous year [9] - The efficiency ratio for the banking business was 39.79%, showing positive operating leverage due to strong net interest income growth [11][43] Business Line Data and Key Metrics Changes - Total loan originations for Q3 2022 were $2.5 billion, up 57% from $1.6 billion in the same period last year [14] - Ending loan balances increased by 3.9% linked-quarter to $13.1 billion, with strong growth in auto, commercial real estate, and C&I lending [9][14] - Mortgage banking income was $5.7 million, up from $4.6 million in the previous quarter, but down from $9 million in the same quarter last year due to lower refinancing activity [15] Market Data and Key Metrics Changes - Noninterest-bearing deposits increased by approximately $287.8 million from December 31, 2021, representing 33% of total deposits at March 31, 2022, up from 23% a year ago [10] - Total client deposits from custody and clearing businesses were approximately $2.9 billion, with $2.1 billion kept on Axos Bank's balance sheet [21] - The weighted average demand and savings deposits cost decreased to 22 basis points from 38 basis points year-over-year [20] Company Strategy and Development Direction - The company is focusing on improving operational efficiencies and scalability in its securities business, with a target to reduce costs by approximately $1 million annually through the conversion to self-clearing [73] - Axos Financial aims to leverage its diverse lending and deposit businesses to position itself favorably in a rising interest rate environment [22][25] - The integration of Axos Advisory Services is progressing well, with expectations of improved profitability in the securities business over time [31] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving the higher end of the loan growth target for fiscal 2022, supported by strong demand across multiple loan categories [30] - The company remains cautious about the economic impact of interest rate increases on aggregate loan demand and is monitoring credit quality closely [66][70] - Management highlighted the importance of maintaining a strong capital position to support organic loan growth and potential acquisitions [33][45] Other Important Information - The company raised $150 million in subordinated debt to augment its capital ahead of anticipated rate increases [33] - The total allowance for credit losses was $143 million, representing 1.1% of total loans, which is approximately 22 times the annualized net charge-offs [29] Q&A Session Summary Question: What is the scalability of the AAS business and expected efficiency ratio? - Management acknowledged ongoing opportunities for process improvement and efficiency in the AAS business, with a target for positive income despite interest rate dependencies [48][49] Question: How are new clients responding to Axos Securities and market volatility? - Management noted that market volatility could act as a catalyst for RIAs to switch custodians, emphasizing the unique service offerings and technology integration provided by Axos [54][55] Question: What are the trends in new loan yields and competitive landscape? - Management indicated that new loan yields are expected to rise, particularly in the single-family sector, as the securitization market stabilizes [60][62]

Axos Financial, Inc. (NYSE:AX) Q2 2022 Earnings Conference Call January 27, 2022 5:00 PM ET Company Participants Johnny Lai - Vice President, Investor Relations & Corporate Development Gregory Garrabrants - President & Chief Executive Officer Andrew Micheletti - Executive Vice President, Finance Derrick Walsh - Executive Vice President & Chief Financial Officer Conference Call Participants Andrew Leisch - Piper Sandler Steve Moss - B. Riley Securities Michael Perito - KBW Disclaimer*: This transcript is des ...

PART I – FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) Axos Financial's unaudited condensed consolidated financial statements for Q4 and H1 2021 and 2020, with notes on accounting, acquisitions, and key financial metrics [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(unaudited)%20as%20of%20December%2031%2C%202021%20and%20June%2030%2C%202021) Total assets grew to **$15.5 billion** by December 31, 2021, driven by increased loans and deposits, reflecting overall balance sheet expansion | Metric | Dec 31, 2021 (in thousands) | Jun 30, 2021 (in thousands) | Change (in thousands) | |:---------------------------|:----------------------------|:----------------------------|:----------------------| | Total Assets | $15,547,947 | $14,265,565 | $1,282,382 | | Loans—net | $12,607,179 | $11,414,814 | $1,192,365 | | Total Deposits | $12,269,172 | $10,815,797 | $1,453,375 | | Total Liabilities | $14,024,790 | $12,864,629 | $1,160,161 | | Total Stockholders' Equity | $1,523,157 | $1,400,936 | $122,221 | [Condensed Consolidated Statements of Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20(unaudited)%20for%20the%20three%20and%20six%20months%20ended%20December%2031%2C%202021%20and%202020) Net income increased for both Q4 and H1 2021, driven by higher net interest income and reduced credit loss provisions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Income | $145,568 | $134,092 | $292,210 | $261,419 | | Provision for Credit Losses | $4,000 | $8,000 | $8,000 | $19,800 | | Non-Interest Income | $30,787 | $28,718 | $57,489 | $64,573 | | Non-Interest Expense | $86,019 | $76,297 | $170,450 | $151,843 | | Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Basic EPS | $1.02 | $0.93 | $2.04 | $1.82 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | [Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(unaudited)%20for%20the%20three%20and%20six%20months%20ended%20December%2031%2C%202021%20and%202020) Comprehensive income rose for Q4 and H1 2021, primarily due to increased net income, despite unrealized losses on securities | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Net unrealized gain (loss) from available-for-sale securities, net of tax | $(656) | $906 | $(1,163) | $2,188 | | Comprehensive Income | $60,131 | $55,691 | $119,834 | $109,995 | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(unaudited)%20for%20the%20three%20and%20six%20months%20ended%20December%2031%2C%202021%20and%202020) Stockholders' equity increased to **$1.52 billion** by December 31, 2021, driven by net income and stock compensation | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Common Stock | $684 | $681 | $677 | | Additional Paid-in Capital | $441,061 | $432,550 | $420,895 | | Accumulated Other Comprehensive Income (Loss) | $1,344 | $2,507 | $1,251 | | Retained Earnings | $1,308,725 | $1,187,728 | $1,079,828 | | Treasury Stock | $(228,657) | $(222,530) | $(215,169) |\ | Total Stockholders' Equity | $1,523,157 | $1,400,936 | $1,287,482 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(unaudited)%20for%20the%20six%20months%20ended%20December%2031%2C%202021%20and%202020) H1 2021 saw net cash outflows from operating and investing activities, offset by significant financing inflows from increased deposits | Cash Flow Activity (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------------------|:----------------------------|:----------------------------| | Operating Activities | $(76,773) | $284,417 | | Investing Activities | $(1,132,694) | $(1,015,293) | | Financing Activities | $1,290,048 | $223,552 | | Net Change in Cash and Cash Equivalents | $80,581 | $(507,324) | | Cash and Cash Equivalents—End of period | $1,118,358 | $1,443,195 | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes disclose accounting policies, acquisitions, fair value, securities, loans, equity, EPS, commitments, and segment performance [1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=1.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Unaudited financial statements adhere to GAAP, with significant accounting policies detailed in the 10-K and no new standards adopted in FY2022 - The condensed consolidated financial statements are unaudited and reflect all normal and recurring adjustments necessary for a fair statement of financial condition and results of operations[28](index=28&type=chunk) - No new accounting standards have been adopted for the fiscal year beginning July 1, 2021[29](index=29&type=chunk) [2. ACQUISITIONS](index=11&type=section&id=2.%20ACQUISITIONS) Axos Clearing acquired E*TRADE Advisor Services for **$54.8 million** in cash, adding fee income, a tech platform, and low-cost deposits - On August 2, 2021, Axos Clearing, LLC acquired E*TRADE Advisor Services (EAS), rebranded as Axos Advisor Services (AAS), for **$54.8 million** in cash[31](index=31&type=chunk)[34](index=34&type=chunk)[132](index=132&type=chunk) - The acquisition adds incremental fee income, a turnkey technology platform for independent registered investment advisors, and low-cost deposits[31](index=31&type=chunk)[132](index=132&type=chunk) | Acquired Asset/Liability (in thousands) | Fair Value | |:----------------------------------------|:-----------| | Tangible assets acquired | $6,400 | | Liabilities assumed | $3,100 | | Identifiable intangible assets | $27,060 | | Goodwill | $24,400 | [3. FAIR VALUE](index=12&type=section&id=3.%20FAIR%20VALUE) Financial assets and liabilities are measured at fair value using a hierarchy, with significant Level 3 assets including Non-Agency MBS and MSRs - Fair value is defined as the exit price in an orderly transaction between market participants, maximizing observable inputs and minimizing unobservable inputs[37](index=37&type=chunk) | Financial Instrument (in thousands) | Fair Value (Dec 31, 2021) | Level 1 | Level 2 | Level 3 | |:------------------------------------|:--------------------------|:--------|:--------|:--------| | Securities—Trading: Municipal | $1,223 | $0 | $1,223 | $0 | | Securities—Available-for-Sale: | $139,581 | $0 | $80,829 | $58,752 | | Loans Held for Sale | $27,428 | $0 | $27,428 | $0 | | Mortgage servicing rights | $20,110 | $0 | $0 | $20,110 | | Other assets—Derivative instruments | $1,462 | $0 | $0 | $1,462 | - Significant unobservable inputs for residential mortgage-backed securities include projected prepayment rates, probability of default, and projected loss severity[48](index=48&type=chunk) [4. SECURITIES](index=18&type=section&id=4.%20SECURITIES) The debt securities portfolio totaled **$139.6 million**, with available-for-sale securities showing **$2.9 million** in net unrealized gains before tax | Security Type (in thousands) | Fair Value (Dec 31, 2021) | Amortized Cost (Available-for-sale) | Unrealized Gains (Available-for-sale) | Unrealized Losses (Available-for-sale) | |:-----------------------------------------|:--------------------------|:------------------------------------|:--------------------------------------|:---------------------------------------| | U.S. agencies MBS | $29,231 | $29,376 | $214 | $(359) | | Non-agency MBS | $58,752 | $56,949 | $2,152 | $(349) | | Municipal | $3,536 | $3,467 | $69 | $0 | | Asset-backed securities and structured notes | $48,062 | $46,933 | $1,129 | $0 | | Total Debt Securities | $139,581 | $136,725 | $3,564 | $(708) | - As of December 31, 2021, there were **eight** securities in a continuous loss position for a period of more than **12 months**, and **eleven** securities in a continuous loss position for a period of less than **12 months**[65](index=65&type=chunk) | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:------------------------------------------------------------------------------------|:-------------|:-------------| | Available-for-sale debt securities—net unrealized gains (losses) | $2,856 | $4,507 | | Tax benefit (expense) | $(667) | $(1,155) | | Net unrealized gain (loss) on investment securities in accumulated other comprehensive income (loss) | $1,344 | $2,507 | [5. LOANS & ALLOWANCE FOR CREDIT LOSSES](index=20&type=section&id=5.%20LOANS%20%26%20ALLOWANCE%20FOR%20CREDIT%20LOSSES) Gross loans grew to **$12.8 billion**, with the allowance for credit losses at **$140.5 million** and nonaccrual loans at **1.14%** of total gross loans | Loan Category (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Single Family - Mortgage & Warehouse | $4,281,646 | $4,359,472 | | Multifamily and Commercial Mortgage | $2,483,932 | $2,470,454 | | Commercial Real Estate | $3,857,367 | $3,180,453 | | Commercial & Industrial - Non-RE | $1,631,811 | $1,123,869 | | Auto & Consumer | $478,636 | $362,180 | | Other | $22,282 | $58,316 | | Total gross loans | $12,755,674 | $11,554,744 | | Allowance for credit losses - loans | $(140,489) | $(132,958) | | Total net loans | $12,607,179 | $11,414,814 | | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:------------------------------|:-------------|:-------------| | Total nonaccrual loans | $145,933 | $145,195 | | Nonaccrual loans to total loans | 1.14% | 1.26% | - Approximately **83.82%** of the Bank's nonaccrual loans at December 31, 2021, were single family first mortgages[76](index=76&type=chunk) [6. EQUITY AND STOCK-BASED COMPENSATION](index=26&type=section&id=6.%20EQUITY%20AND%20STOCK-BASED%20COMPENSATION) Stockholders approved an additional one million shares for the 2014 Stock Incentive Plan, with **$8.5 million** in stock award expense recognized - Stockholders approved the Amended and Restated 2014 Stock Incentive Plan, reserving **one million** additional shares for purposes of the Company's equity compensation[89](index=89&type=chunk) - During the six months ended December 31, 2021, the Company granted **781,030** restricted stock unit awards (RSUs) to employees and directors, including **478,353** RSUs to the chief executive officer[90](index=90&type=chunk) | Metric (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------| | Stock award expense | $8,514 | $9,026 | | Total income tax benefit | $2,500 | $2,700 | | Unrecognized compensation expense (Dec 31, 2021) | $30,434 | N/A | [7. EARNINGS PER COMMON SHARE](index=27&type=section&id=7.%20EARNINGS%20PER%20COMMON%20SHARE) Basic EPS increased to **$1.02** (Q4) and **$2.04** (H1), with diluted EPS also rising, reflecting higher net income - Basic EPS is computed by dividing net income attributable to common stock by the sum of the weighted-average number of common shares outstanding and unvested participating RSUs. Diluted EPS includes the impact of dilutive potential common shares[94](index=94&type=chunk) | Metric (per share) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Basic EPS | $1.02 | $0.93 | $2.04 | $1.82 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | [8. COMMITMENTS AND CONTINGENCIES](index=27&type=section&id=8.%20COMMITMENTS%20AND%20CONTINGENCIES) No loans were in COVID-19 forbearance; significant off-balance-sheet commitments include **$2.48 billion** in loan originations and ongoing litigation - As of December 31, 2021, no loans were on forbearance status for a forbearance granted from any prior date due to the COVID-19 pandemic[96](index=96&type=chunk)[130](index=130&type=chunk) | Commitment Type (in millions) | Dec 31, 2021 | |:------------------------------|:-------------|\ | Fixed rate loan originations | $137.8 | | Variable rate loan originations | $2,345.2 | | Total loan originations | $2,483.0 | | Commitments to sell loans | $50.0 | - The company is a defendant in multiple class action and shareholder derivative lawsuits, which it is vigorously defending, but the eventual loss or range of loss cannot be reasonably predicted[102](index=102&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk)[108](index=108&type=chunk) [9. SEGMENT REPORTING](index=30&type=section&id=9.%20SEGMENT%20REPORTING) The company operates two segments, Banking and Securities Business, with allocated costs and management-based reporting not comparable to peers - The company operates through two reportable segments: Banking Business and Securities Business[110](index=110&type=chunk)[123](index=123&type=chunk)[172](index=172&type=chunk) - All significant intercompany balances and transactions have been eliminated in consolidation[27](index=27&type=chunk) - Segment results are compiled based upon the management reporting system and are not necessarily comparable with similar information published by other financial institutions or in accordance with generally accepted accounting principles[128](index=128&type=chunk)[129](index=129&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=32&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section discusses financial condition, operations, liquidity, off-balance sheet items, and capital resources, including non-GAAP measures - The discussion covers results of operations, financial condition, liquidity, off-balance sheet items, and capital resources, and should be read in conjunction with the annual 10-K and interim financial statements[118](index=118&type=chunk) - The report contains forward-looking statements that involve risks and uncertainties, and actual results may vary due to factors like the COVID-19 pandemic, interest rate changes, government regulation, and litigation[119](index=119&type=chunk) - The company uses non-GAAP financial measures like "adjusted earnings," "adjusted EPS," and "tangible book value per common share" to provide additional insights into operating performance and capital strength, excluding non-recurring acquisition-related costs[136](index=136&type=chunk)[137](index=137&type=chunk)[139](index=139&type=chunk) [SELECTED FINANCIAL DATA](index=34&type=section&id=SELECTED%20FINANCIAL%20DATA) Selected financial data shows total assets at **$15.5 billion**, net income of **$121.0 million** for H1 2021, and strong capital ratios | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Total assets | $15,547,947 | $14,265,565 | $14,393,267 | | Loans—net | $12,607,179 | $11,414,814 | $11,609,584 | | Total deposits | $12,269,172 | $10,815,797 | $11,463,136 | | Total stockholders' equity | $1,523,157 | $1,400,936 | $1,287,482 | | Capital Ratio | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:----------------------------------|:-------------|:-------------|:-------------| | Axos Financial, Inc.: | | | | | Tier 1 leverage capital | 9.42% | 8.82% | 8.68% | | Common equity tier 1 capital | 10.08% | 11.36% | 10.85% | | Axos Bank: | | | | | Tier 1 leverage capital | 10.13% | 9.45% | 9.08% | | Common equity tier 1 capital | 10.91% | 12.28% | 11.45% | | Income Statement Data (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net interest income | $145,568 | $134,092 | $292,210 | $261,419 | | Net income | $60,787 | $54,785 | $120,997 | $107,807 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | | Net interest margin | 4.10% | 3.94% | 4.16% | 3.89% | [RESULTS OF OPERATIONS](index=38&type=section&id=RESULTS%20OF%20OPERATIONS) Net income and adjusted earnings increased for Q4 and H1 2021, driven by higher net interest income and lower credit loss provisions - Net Income | $60,787 | $54,785 | $120,997 | $107,807 | | Diluted EPS | $1.00 | $0.91 | $1.99 | $1.79 | | Adjusted Earnings (Non-GAAP) | $62,917 | $56,566 | $125,146 | $111,407 | | Adjusted EPS (Non-GAAP) | $1.04 | $0.94 | $2.06 | $1.85 | [Net Interest Income](index=38&type=section&id=Net%20Interest%20Income) Net interest income increased by **8.6%** (Q4) and **11.8%** (H1) due to loan growth and lower deposit rates, improving net interest margin | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Income | $145,568 | $134,092 | $292,210 | $261,419 | | Total Interest and Dividend Income | $157,076 | $155,379 | $315,386 | $305,268 | | Total Interest Expense | $11,508 | $21,287 | $23,176 | $43,849 | | Metric | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:--------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Net Interest Margin | 4.10% | 3.94% | 4.16% | 3.89% | - Average non-interest bearing deposits increased significantly by **$1,695.0 million** and **$1,460.0 million** for the three and six months ended December 31, 2021, respectively, primarily from the deposits acquired through the acquisition of AAS, contributing to the decrease in average cost of funds[149](index=149&type=chunk)[150](index=150&type=chunk) [Provision for Credit Losses](index=41&type=section&id=Provision%20for%20Credit%20Losses) Provision for credit losses significantly decreased for Q4 and H1 2021 due to improved economic conditions and reduced COVID-19 disruptions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Provision for Credit Losses | $4,000 | $8,000 | $8,000 | $19,800 | - The decreases in the provision for credit losses were due to favorable changes in economic and business conditions resulting from reduced levels of disruptions from the COVID-19 pandemic[159](index=159&type=chunk) - Provisions for credit losses for the three and six months ended December 31, 2021, were primarily comprised of provisions in commercial real estate and consumer and auto due to growth in these segments of the loan portfolio[159](index=159&type=chunk) [Non-Interest Income](index=42&type=section&id=Non-Interest%20Income) Non-interest income increased in Q4 2021 due to AAS acquisition and prepayment fees, but decreased in H1 2021 from lower mortgage banking income | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Non-Interest Income | $30,787 | $28,718 | $57,489 | $64,573 | | Broker-dealer fee income | $14,367 | $6,287 | $26,133 | $11,989 | | Mortgage banking income | $4,612 | $10,651 | $9,865 | $30,218 | | Prepayment penalty fee income | $3,294 | $1,579 | $6,280 | $2,947 | | Banking and service fees | $8,486 | $10,045 | $15,166 | $18,929 | - The increase in broker-dealer fee income was driven by custody and mutual fund fees earned by the newly acquired AAS division[162](index=162&type=chunk) - The decrease in mortgage banking income and banking and service fees was due to non-recurring Emerald Prepaid Mastercard® and Refund Transfer products associated with H&R Block[162](index=162&type=chunk) [Non-Interest Expense](index=43&type=section&id=Non-Interest%20Expense) Non-interest expense increased for Q4 and H1 2021, primarily due to the AAS acquisition and company expansion, raising operational costs | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Total Non-Interest Expenses | $86,019 | $76,297 | $170,450 | $151,843 | | Salaries and related costs | $39,979 | $38,199 | $80,716 | $76,822 | | Data processing | $12,199 | $9,673 | $24,291 | $17,601 | | Depreciation and amortization | $6,785 | $5,862 | $12,513 | $12,048 | | Broker-dealer clearing charges | $3,678 | $2,451 | $7,683 | $4,708 | | General and administrative expense | $8,216 | $4,967 | $16,721 | $11,261 | - Increased staffing levels as a result of the AAS acquisition contributed to higher salaries and related costs, with staff increasing to **1,280** from **1,157** (**10.6%**) between December 31, 2021, and 2020[166](index=166&type=chunk) - Data processing expense increased primarily due to enhancements to customer interfaces and the Company's core processing systems[166](index=166&type=chunk) [Provision for Income Taxes](index=44&type=section&id=Provision%20for%20Income%20Taxes) Effective income tax rates for Q4 and H1 2021 were **29.59%** and **29.34%**, slightly lower due to stock compensation tax benefits | Metric | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Effective Tax Rate | 29.59% | 30.22% | 29.34% | 30.15% | - The change in effective income tax rates between periods are primarily the result of changes in tax benefits from stock compensation[171](index=171&type=chunk) [SEGMENT RESULTS](index=44&type=section&id=SEGMENT%20RESULTS) Banking Business drives income, while Securities Business reported a pre-tax loss for both periods due to higher non-interest expenses from the AAS acquisition - The company operates through two segments: Banking Business and Securities Business, with parent-only activities and intercompany eliminations reconciling to consolidated totals[172](index=172&type=chunk) | Segment Income Before Taxes (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Banking Business | $92,105 | $83,987 | $182,449 | $164,190 | | Securities Business | $(694) | $(480) | $(685) | $(1,154) | | Corporate/Eliminations | $(5,075) | $(4,994) | $(10,515) | $(8,687) | | Axos Consolidated | $86,336 | $78,513 | $171,249 | $154,349 | [Banking Business](index=45&type=section&id=Banking%20Business) Banking Business income before taxes increased for Q4 and H1 2021, driven by higher net interest income and lower credit loss provisions | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Income before taxes | $92,105 | $83,987 | $182,449 | $164,190 | | Net interest income | $142,259 | $132,166 | $284,500 | $255,174 | | Provision for credit losses | $4,000 | $8,000 | $8,000 | $19,800 | | Banking Business Ratios | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:-------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Efficiency ratio | 39.39% | 40.45% | 39.66% | 40.20% | | Return on average assets | 1.92% | 1.80% | 1.92% | 1.79% | | Net interest margin | 4.30% | 4.11% | 4.39% | 4.01% | - The Banking Business segment's net interest margin exceeds the consolidated net interest margin due to certain items not reflected in its calculation, such as the borrowing costs at the Parent Company and yields/costs associated with securities financing operations in the Securities Business[179](index=179&type=chunk) [Securities Business](index=48&type=section&id=Securities%20Business) Securities Business reported a pre-tax loss for Q4 and H1 2021, primarily due to increased non-interest expenses from the AAS acquisition | Metric (in thousands) | 3 Months Ended Dec 31, 2021 | 3 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------| | Income before taxes | $(694) | $(480) | $(685) | $(1,154) | | Net interest income | $4,506 | $4,260 | $10,682 | $9,154 | | Non-interest income | $16,454 | $6,572 | $29,560 | $12,356 | | Non-interest expense | $21,654 | $11,312 | $40,927 | $22,664 | - The increase in non-interest income was primarily attributable to the addition of AAS custody and mutual funds fees[192](index=192&type=chunk) - Non-interest expense increases were mainly due to higher salaries and related expenses, data processing, and broker-dealer clearing charges, largely driven by the AAS acquisition and increased activity[193](index=193&type=chunk) [FINANCIAL CONDITION](index=49&type=section&id=FINANCIAL%20CONDITION) Financial condition improved with total assets growing **9.0%** to **$15.5 billion**, driven by loan and deposit growth, alongside strong capital ratios - Total assets increased **$1,282.4 million**, or **9.0%**, to **$15.5 billion**, as of December 31, 2021, up from **$14.3 billion** at June 30, 2021[196](index=196&type=chunk) - The increase in total assets was mainly due to an increase of **$1,192.4 million** in net loans held for investment and an increase of **$80.6 million** in cash and cash equivalents[196](index=196&type=chunk) - Total liabilities increased **$1,160.2 million**, primarily due to growth in deposits of **$1,453.4 million**[196](index=196&type=chunk) [Balance Sheet Analysis](index=49&type=section&id=Balance%20Sheet%20Analysis) Total assets increased by **$1.28 billion** to **$15.5 billion**, primarily from loan growth and deposits, partially offset by reduced FHLB advances - Total assets increased **$1,282.4 million**, or **9.0%**, to **$15.5 billion**, as of December 31, 2021, up from **$14.3 billion** at June 30, 2021[196](index=196&type=chunk) - The increase in total assets was mainly due to an increase of **$1,192.4 million** in net loans held for investment and an increase of **$80.6 million** in cash and cash equivalents[196](index=196&type=chunk) - Total liabilities increased **$1,160.2 million**, primarily due to growth in deposits of **$1,453.4 million**, partially offset by a decrease of **$196.0 million** in advances from the FHLB and a decrease of **$150.2 million** in securities loaned[196](index=196&type=chunk) [Loans](index=50&type=section&id=Loans) Net loans held for investment grew **10.4%** to **$12.6 billion**, driven by **$4.6 billion** in originations, with strong growth in CRE and C&I - Net loans held for investment increased **10.4%** to **$12.6 billion** as of December 31, 2021, from **$11.4 billion** at June 30, 2021[198](index=198&type=chunk) - The increase in the loan portfolio was primarily due to loan originations of **$4.6 billion**, partially offset by loan repayments and other adjustments of **$3.4 billion**[198](index=198&type=chunk) | Loan Category (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Commercial Real Estate | $3,857,367 | $3,180,453 | | Commercial & Industrial - Non-RE | $1,631,811 | $1,123,869 | | Single Family - Mortgage & Warehouse | $4,281,646 | $4,359,472 | [Asset Quality and Allowance for Loan and Lease Losses](index=50&type=section&id=Asset%20Quality%20and%20Allowance%20for%20Loan%20and%20Lease%20Losses) Non-performing assets decreased to **$146.2 million** (**0.94%** of total assets), while the allowance for credit losses on loans increased to **$140.5 million** | Non-performing Assets (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Change | |:-------------------------------------|:-------------|:-------------|:-------| | Total non-performing loans | $145,933 | $145,195 | $738 | | Total non-performing assets | $146,184 | $151,977 | $(5,793)| | Non-performing loans to total loans | 1.14% | 1.26% | (0.12)%| | Non-performing assets to total assets | 0.94% | 1.07% | (0.13)%| - The decrease in non-performing assets of approximately **$5.8 million** was primarily attributable to resolutions of multifamily and commercial mortgage loans, and foreclosed real estate, while non-performing single-family loans increased by **$16.6 million**[202](index=202&type=chunk) | Allowance for Credit Losses - Loans (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:---------------------------------------------------|:-------------|:-------------| | Total Allowance for Credit Losses - Loans | $140,489 | $132,958 | | Allocation % of Allowance: Commercial Real Estate | 48.0% | 43.6% | | Allocation % of Allowance: Commercial and Industrial - Non-RE | 16.2% | 21.4% | [Investment Securities](index=51&type=section&id=Investment%20Securities) Total investment securities decreased to **$140.8 million**, primarily due to **$58.6 million** in principal repayments, partially offset by new purchases | Metric (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:--------------------------|:-------------|:-------------| | Total investment securities | $140,800 | $189,300 | - During the six months ended December 31, 2021, the company purchased securities for **$12.3 million** and received principal repayments of approximately **$58.6 million** in its available-for-sale portfolio[206](index=206&type=chunk) [Deposits](index=52&type=section&id=Deposits) Total deposits increased by **$1.5 billion** (**13.4%**) to **$12.3 billion**, driven by a **$1.4 billion** rise in non-interest bearing deposits | Deposit Type (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Change | |:----------------------------|:-------------|:-------------|:-------| | Total Deposits | $12,269,172 | $10,815,797 | $1,453,375 | | Non-interest bearing | $3,847,461 | $2,474,424 | $1,373,037 | | Interest bearing | $8,421,711 | $8,341,373 | $80,338 | | Time deposits | $1,286,415 | $1,512,841 | $(226,426)| - Non-interest bearing deposits increased **$1.4 billion**, or **55.5%**, primarily due to deposits provided by the AAS acquisition[208](index=208&type=chunk) - The total number of deposit accounts increased to **392,059** at December 31, 2021, from **385,609** at June 30, 2021[210](index=210&type=chunk) [Borrowings](index=52&type=section&id=Borrowings) Total borrowings decreased by **$156.9 million** (**27.3%**) to **$417.9 million**, mainly due to reduced FHLB advances and other borrowings | Borrowing Type (in thousands) | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:------------------------------------------|:-------------|:-------------|:-------------| | FHLB Advances | $157,500 | $353,500 | $182,500 | | Borrowings, subordinated notes and debentures | $260,435 | $221,358 | $418,480 | | Total borrowings | $417,935 | $574,858 | $600,980 | | Metric | Dec 31, 2021 | Jun 30, 2021 | Dec 31, 2020 | |:-------------------------------------|:-------------|:-------------|:-------------| | Weighted average cost of borrowings during the quarter | 2.64% | 2.93% | 2.97% | | Borrowings as a percent of total assets | 2.69% | 4.03% | 4.18% | - The company regularly uses advances from the FHLB to manage interest rate risk and liquidity, generally funding single family and multifamily mortgages and providing interest rate risk protection[213](index=213&type=chunk) [Stockholders' Equity](index=53&type=section&id=Stockholders'%20Equity) Stockholders' equity increased by **$122.2 million** to **$1.52 billion**, driven by net income and stock compensation, with no common stock repurchases | Metric (in millions) | Dec 31, 2021 | Jun 30, 2021 | Change | |:---------------------------|:-------------|:-------------|:-------| | Stockholders' equity | $1,523.2 | $1,400.9 | $122.3 | - The increase was the result of net income for the six months ended December 31, 2021, of **$121.0 million**, stock compensation expense of **$2.4 million**, partially offset by a **$1.2 million** decrease in other comprehensive income, net of tax[214](index=214&type=chunk) - During the three and six months ended December 31, 2021, the Company did not repurchase any common stock shares, with **$52.8 million** remaining under the Board authorized stock repurchase program[214](index=214&type=chunk)[247](index=247&type=chunk) [LIQUIDITY](index=53&type=section&id=LIQUIDITY) H1 2021 saw net cash outflows from operating and investing activities, offset by financing inflows from deposits, with substantial borrowing capacity ensuring liquidity | Cash Flow Activity (in thousands) | 6 Months Ended Dec 31, 2021 | 6 Months Ended Dec 31, 2020 | |:----------------------------------|:----------------------------|:----------------------------| | Operating Activities | $(76,773) | $284,417 | | Investing Activities | $(1,132,694) | $(1,015,293) | | Financing Activities | $1,290,048 | $223,552 | - The primary driver behind the increase in net cash inflows from financing activities was increased deposits provided in part, by the acquisition of AAS for the six months ended December 31, 2021[216](index=216&type=chunk) - As of December 31, 2021, the Bank had **$1,939.2 million** available immediately and **$3,449.5 million** available with additional collateral from the FHLB, **$2,433.9 million** available from the Federal Reserve Bank, and Axos Clearing had **$170.0 million** in uncommitted secured lines of credit[217](index=217&type=chunk)[218](index=218&type=chunk) [OFF-BALANCE SHEET COMMITMENTS](index=54&type=section&id=OFF-BALANCE%20SHEET%20COMMITMENTS) Off-balance sheet commitments include **$2.48 billion** in loan originations and **$50.0 million** in loan sales, with Axos Clearing's risks mitigated by indemnification agreements | Commitment Type (in millions) | Dec 31, 2021 | |:------------------------------|:-------------| | Loan originations | $2,483.0 | | Loan sales | $50.0 | - Axos Clearing's customer activities involve off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations, which is mitigated by indemnification clauses in clearing agreements with broker-dealers[220](index=220&type=chunk) [CAPITAL RESOURCES AND REQUIREMENTS](index=54&type=section&id=CAPITAL%20RESOURCES%20AND%20REQUIREMENTS) Axos Financial and Axos Bank met all regulatory capital requirements, classified as 'well capitalized,' with Axos Clearing also meeting its net capital requirements - As of December 31, 2021, both Axos Financial, Inc. and Axos Bank met all capital adequacy requirements and were "well capitalized" under the regulatory framework for prompt corrective action[222](index=222&type=chunk) | Regulatory Capital Ratios | Axos Financial, Inc. (Dec 31, 2021) | Axos Bank (Dec 31, 2021) | "Well Capitalized" Ratio | Minimum Capital Ratio | |:----------------------------------|:------------------------------------|:-------------------------|:-------------------------|:----------------------| | Tier 1 leverage | 9.42% | 10.13% | 5.00% | 4.00% | | Common equity tier 1 | 10.08% | 10.91% | 6.50% | 4.50% | | Tier 1 capital | 10.08% | 10.91% | 8.00% | 6.00% | | Total capital | 12.16% | 11.73% | 10.00% | 8.00% | - The Company and Bank elected the CECL 5-year transition guidance for calculating regulatory capital ratios[223](index=223&type=chunk) | Axos Clearing Net Capital (in thousands) | Dec 31, 2021 | Jun 30, 2021 | |:-----------------------------------------|:-------------|:-------------| | Net capital | $39,453 | $35,950 | | Excess Capital | $32,171 | $27,904 | | Net capital as a percentage of aggregate debit items | 10.84% | 8.94% | [QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=56&type=section&id=QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company manages interest rate risk via gap analysis and assesses rate shift impact on equity, while Securities Business market risk is managed through position limits - The company measures interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature or contractually re-price within a given period of time, known as the interest rate sensitivity gap[230](index=230&type=chunk) | Interest Rate Shift | Net Interest Income (First 12 Months) | Percentage Change from Base | Net Interest Income (Next 12 Months) | Percentage Change from Base | |:--------------------|:--------------------------------------|:----------------------------|:-------------------------------------|:----------------------------| | Up 200 basis points | $602,020 | 8.8% | $594,198 | 9.1% | | Base | $553,393 | 0% | $544,390 | 0% | | Down 100 basis points | $543,760 | (1.7)% | $527,446 | (3.1)% | | Interest Rate Shift | Net Present Value (in thousands) | Percentage Change from Base | Net Present Value as a Percentage of Assets | |:--------------------|:---------------------------------|:----------------------------|:--------------------------------------------| | Up 300 basis points | $1,527,926 | (0.8)% | 11.0% | | Up 200 basis points | $1,588,960 | 3.2% | 11.3% | | Up 100 basis points | $1,585,104 | 2.9% | 11.2% | | Base | $1,540,147 | 0% | 10.8% | | Down 100 basis points | $1,339,206 | (13.0)% | 9.3% | - The Securities Business is exposed to market risk primarily due to its role as a financial intermediary in customer transactions and trading activities, managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held[237](index=237&type=chunk)[238](index=238&type=chunk)[240](index=240&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS](index=58&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) This section refers to the detailed market risk disclosures within Management's Discussion and Analysis of Financial Condition and Results of Operations - This section refers to the detailed discussion on market risks provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk"[241](index=241&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=58&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls and procedures were effective as of December 31, 2021, acknowledging inherent limitations of control systems - The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021[242](index=242&type=chunk) - A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and its effectiveness can be limited by resource constraints and changes in business conditions[242](index=242&type=chunk) PART II – OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=59&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section incorporates Note 8 on commitments and contingencies, detailing ongoing class action lawsuits and other routine litigation - The information set forth in Note 8 – "Commitments And Contingencies" to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference[244](index=244&type=chunk) - The company may be a party to other claims or litigation that arise in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank, none of which are expected to have a material adverse effect[244](index=244&type=chunk) [ITEM 1A. RISK FACTORS](index=59&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces inherent business and industry risks, detailed in its Annual Report on Form 10-K, with other unanticipated factors potentially existing - The company faces a variety of risks that are inherent in its business and industry, described in more detail under Part 1, "Item 1A. Risk Factors" in its Annual Report on Form 10-K for the year ended June 30, 2021[245](index=245&type=chunk) - Other factors may also exist that the company cannot anticipate or currently does not consider to be significant based on information that is currently available[245](index=245&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=59&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) No common stock repurchases occurred in Q4 2021, though shares were retained for tax obligations, with **$52.8 million** remaining in the repurchase program | Metric | Quarter Ended Dec 31, 2021 | |:-------------------------------------|:---------------------------| | Number of Shares Purchased (Stock Repurchases) | 0 | | Shares Retained in Net Settlement | 2,278 | | Approximate Dollar Value of Shares that May be Purchased (in thousands) | $52,764 | - The Board of Directors authorized a program to repurchase up to **$100 million** of common stock on March 17, 2016, and extended it by an additional **$100 million** on August 2, 2019, which continues in effect until terminated[247](index=247&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=59&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) No defaults upon senior securities occurred during the reported period - No defaults upon senior securities occurred[248](index=248&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=59&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to Axos Financial, Inc[248](index=248&type=chunk) [ITEM 5. OTHER INFORMATION](index=60&type=section&id=ITEM%205.%20OTHER%20INFORMATION) No other information is reported under this item - No other information is reported under this item[257](index=257&type=chunk) [ITEM 6. EXHIBITS](index=60&type=section&id=ITEM%206.%20EXHIBITS) Exhibits filed with the 10-Q report include certifications, the 2014 Stock Incentive Plan, and Inline XBRL documents - The exhibits include CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act), the Amended and Restated 2014 Stock Incentive Plan, and various Inline XBRL taxonomy documents[250](index=250&type=chunk)[251](index=251&type=chunk)[252](index=252&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk)[255](index=255&type=chunk)[256](index=256&type=chunk) [SIGNATURES](index=61&type=section&id=SIGNATURES) The report is signed by the President and CEO, and EVP and CFO of Axos Financial, Inc. on January 27, 2022 - The report is signed by Gregory Garrabrants, President and Chief Executive Officer, and Derrick K. Walsh, Executive Vice President and Chief Financial Officer, on January 27, 2022[258](index=258&type=chunk)

Axos Financial, Inc. (NYSE:AX) Q1 2022 Earnings Conference Call October 28, 2021 5:00 PM ET Company Participants Johnny Lai - Vice President, Investor Relations & Corporate Development Greg Garrabrants - President & Chief Executive Officer Andy Micheletti - Executive Vice President, Finance Derrick Walsh - Executive Vice President & Chief Financial Officer Conference Call Participants Michael Perito - KBW Andrew Leisch - Piper Sandler Gary Tanner - D.A. Davidson Tim Coffey - Janney David Chiaverini - Wedbus ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) Axos Financial is a diversified financial services company operating through its Banking and Securities business segments - **Axos Financial** is a financial holding company with a diversified model, providing banking and securities products through online and low-cost distribution channels[9](index=9&type=chunk) - The company operates through two primary segments: the **Banking Business** and the **Securities Business**[13](index=13&type=chunk) - A key business strategy is to integrate the clearing and wealth management platforms with the banking platform to create a unified customer experience and generate low-cost deposits for the Banking Business[10](index=10&type=chunk) Financial Snapshot as of June 30, 2021 | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $14.3 | | Loans | $11.5 | | Total Deposits | $10.8 | | Borrowings | $0.6 | [Banking Business](index=6&type=section&id=Banking%20Business) The Banking Business segment focuses on nationwide asset origination and deposit generation through various digital channels - The Banking Business distributes deposit and loan products through multiple channels, including national online brands, affinity groups, commercial banking divisions, and commission-based sales forces[16](index=16&type=chunk)[17](index=17&type=chunk) - At June 30, 2021, **demand and savings accounts constituted 86.0% of total deposits**, reflecting a strong core deposit base[54](index=54&type=chunk) Loan Portfolio Composition (in thousands) | Loan Type | 2021 Amount | 2021 Percent | 2020 Amount | 2020 Percent | | :--- | :--- | :--- | :--- | :--- | | Single Family - Mortgage & Warehouse | $4,359,472 | 37.8% | $4,722,304 | 44.2% | | Multifamily and Commercial Mortgage | $2,470,454 | 21.4% | $2,263,054 | 21.1% | | Commercial Real Estate | $3,180,453 | 27.5% | $2,297,920 | 21.5% | | Commercial & Industrial - Non-RE | $1,123,869 | 9.7% | $885,320 | 8.3% | | Auto & Consumer | $362,180 | 3.1% | $341,365 | 3.1% | | Other | $58,316 | 0.5% | $193,479 | 1.8% | | **Total Loans Held for Investment** | **$11,554,744** | **100.0%** | **$10,703,442** | **100.0%** | Deposit Composition (in thousands) | Deposit Type | 2021 Amount | 2021 Rate | 2020 Amount | 2020 Rate | | :--- | :--- | :--- | :--- | :--- | | Non-interest-bearing | $2,474,424 | — | $1,936,661 | — | | Interest-bearing Demand | $3,369,845 | 0.15% | $3,456,127 | 0.37% | | Savings | $3,458,687 | 0.21% | $3,697,188 | 0.78% | | Time deposits | $1,512,841 | 1.22% | $2,246,718 | 1.91% | | **Total Deposits** | **$10,815,797** | **0.29%** | **$11,336,694** | **0.75%** | [Securities Business](index=16&type=section&id=Securities%20Business) The Securities Business provides clearing, custody, and digital investment advisory services through Axos Clearing and Axos Invest - Axos Clearing provides comprehensive back-office services, including trade execution, clearance, and record keeping to **69 financial organizations** as of June 30, 2021[67](index=67&type=chunk) - Axos Invest offers both self-directed and digital advisory services, which are integrated into the universal digital banking platform to create a holistic financial management ecosystem for customers[69](index=69&type=chunk) [Supervision and Regulation](index=20&type=section&id=Supervision%20and%20Regulation) The company and its subsidiaries are subject to extensive regulation by the Federal Reserve, OCC, FDIC, SEC, and FINRA - Axos Financial, Inc. is regulated as a savings and loan holding company by the **Federal Reserve**, while Axos Bank's primary regulator is the **OCC**, with the FDIC as its deposit insurer[90](index=90&type=chunk) - The Company and the Bank are subject to **Basel III capital rules**, requiring minimum ratios for risk-based capital, and both entities **exceeded the 'well-capitalized' thresholds** as of June 30, 2021[93](index=93&type=chunk)[95](index=95&type=chunk)[98](index=98&type=chunk) - The broker-dealer subsidiaries are subject to extensive regulation by the **SEC and FINRA**, including stringent net capital requirements under Rule 15c3-1 and customer protection rules[136](index=136&type=chunk)[141](index=141&type=chunk)[144](index=144&type=chunk) - Having surpassed **$10 billion in assets**, the Bank is now under the direct supervision of the **Consumer Financial Protection Bureau (CFPB)** and subject to the Durbin Amendment[127](index=127&type=chunk)[128](index=128&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from macroeconomic conditions, regulation, cybersecurity, and its mortgage-heavy loan portfolio [Risks Relating to Macroeconomic Conditions](index=30&type=section&id=Risks%20Relating%20to%20Macroeconomic%20Conditions) The company's performance is highly sensitive to interest rate changes, economic downturns, and the upcoming LIBOR transition - **Net interest income** is highly dependent on interest rate movements, as assets and liabilities reprice at different times and are tied to different indices[149](index=149&type=chunk) - A significant economic downturn, particularly in California where **72.4% of the mortgage portfolio is located**, could lead to higher loan delinquencies and write-downs[152](index=152&type=chunk)[179](index=179&type=chunk) - The planned discontinuation of **LIBOR** after 2021 introduces uncertainty and could adversely affect the value and performance of financial instruments indexed to it[155](index=155&type=chunk)[156](index=156&type=chunk) [Risks Related to COVID-19 and the Federal Paycheck Protection Program](index=32&type=section&id=Risks%20Related%20to%20COVID-19%20and%20the%20Federal%20Paycheck%20Protection%20Program) The COVID-19 pandemic introduces uncertainty and exposes the bank to compliance and credit risks related to the PPP - The COVID-19 pandemic has contributed to increased unemployment, financial market volatility, and a **higher risk of delinquencies, defaults, and foreclosures** in the company's loan portfolio[159](index=159&type=chunk) - Participation in the PPP subjects the bank to risks of **non-compliance with SBA rules**, which could lead to the denial of loan guarantees or require refunding of fees[166](index=166&type=chunk) [Risks Relating to our Business Operations](index=36&type=section&id=Risks%20Relating%20to%20our%20Business%20Operations) Operational risks include the subjectivity of accounting estimates, credit risk in the C&I portfolio, and ongoing litigation - The adoption of the **CECL accounting standard** for credit losses requires significant management judgment and could increase volatility in the allowance for credit losses[188](index=188&type=chunk)[189](index=189&type=chunk) - The broker-dealer business is subject to significant risks, including credit risk from counterparty failure, as exemplified by a **$15.3 million bad debt expense** in March 2019 from a correspondent default[197](index=197&type=chunk)[198](index=198&type=chunk) - The company faces ongoing litigation risk, including putative **class action and derivative lawsuits** alleging violations of federal securities laws, which could require significant management time and legal expenses[204](index=204&type=chunk)[205](index=205&type=chunk) [Technology Risks in our Online Business](index=43&type=section&id=Technology%20Risks%20in%20our%20Online%20Business) The company's online business model is heavily reliant on technology and faces risks from third-party providers and cybersecurity threats - The company relies substantially on **third-party service providers** for core banking and securities transaction technology, making it vulnerable to service interruptions or terminations[226](index=226&type=chunk)[227](index=227&type=chunk) - **Security breaches or cybersecurity attacks** could expose the company to loss of customer information, litigation, and significant legal and financial liability[233](index=233&type=chunk)[234](index=234&type=chunk) [Properties](index=46&type=section&id=Item%202.%20Properties) The company leases its principal executive offices in Las Vegas, Nevada and additional office space in San Diego, California - Principal offices are located at 9205 West Russell Road, Suite 400, Las Vegas, NV 89148[244](index=244&type=chunk) - The company leases approximately **27,100 sq. ft. in Las Vegas** (leases expire Dec 2023) and **182,000 sq. ft. in San Diego** (leases expire June 2030)[244](index=244&type=chunk) [Legal Proceedings](index=46&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in several class action and shareholder derivative lawsuits alleging violations of federal securities laws - The company is a defendant in a consolidated class action lawsuit (**In re BofI Holding, Inc. Securities Litigation**) alleging violations of the Securities Exchange Act of 1934[246](index=246&type=chunk) - A separate putative class action (**Mandalevy Case**) makes similar allegations based on a March 2017 media article[248](index=248&type=chunk) - **Six shareholder derivative actions** have been filed against certain officers and directors, alleging breach of fiduciary duty, mismanagement, and unjust enrichment[250](index=250&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=48&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the NYSE under 'AX', with earnings retained for growth and stock repurchases - The company's common stock trades on the New York Stock Exchange under the symbol **"AX"**[254](index=254&type=chunk) - The company has **never paid a cash dividend** on its common stock and does not expect to in the foreseeable future, retaining earnings for growth and repurchases[255](index=255&type=chunk) - A stock repurchase program authorizes up to **$200 million** in buybacks; in FY 2021, the company repurchased **$16.8 million** of stock, with **$52.8 million** remaining available[257](index=257&type=chunk) [Selected Financial Data](index=51&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of key financial data, showing growth in assets, loans, and net income Selected Financial Data (Fiscal Year Ended June 30, in thousands, except per share data) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Assets | $14,265,565 | $13,851,900 | $11,220,238 | | Loans, net | $11,414,814 | $10,631,349 | $9,382,124 | | Total Deposits | $10,815,797 | $11,336,694 | $8,983,173 | | Total Stockholders' Equity | $1,400,936 | $1,230,846 | $1,073,050 | | Net Interest Income | $538,742 | $477,611 | $408,605 | | Net Income | $215,707 | $183,438 | $155,131 | | Diluted EPS | $3.56 | $2.98 | $2.48 | | Return on Average Assets | 1.52% | 1.53% | 1.51% | | Return on Average Common Equity | 16.51% | 15.65% | 15.40% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=53&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income increased in fiscal 2021, driven by higher net interest income, while the company remains well-capitalized [Results of Operations](index=62&type=section&id=Results%20of%20Operations) Fiscal 2021 net interest income grew 12.8% due to lower funding costs, offsetting an increase in non-interest expense - The increase in net interest income was driven by a **$66.1 million decrease in interest expense**, primarily due to lower rates paid on deposits[309](index=309&type=chunk)[310](index=310&type=chunk)[311](index=311&type=chunk) - Non-interest income was boosted by a **$21.5 million increase in mortgage banking income**, but this was partially offset by a **$17.1 million decrease in banking and service fees**[314](index=314&type=chunk) Comparison of Key Income Statement Items (FY2021 vs. FY2020, in millions) | Item | FY 2021 | FY 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $538.7 | $477.6 | $61.1 | 12.8% | | Provision for Credit Losses | $23.8 | $42.2 | ($18.4) | -43.6% | | Non-Interest Income | $105.3 | $103.0 | $2.3 | 2.2% | | Non-Interest Expense | $314.5 | $275.8 | $38.7 | 14.0% | | Net Income | $215.7 | $183.4 | $32.3 | 17.6% | [Financial Condition](index=75&type=section&id=Financial%20Condition) Total assets grew 3.0% to $14.3 billion, though non-performing assets increased to 1.10% of total assets - Total assets increased by **$0.4 billion to $14.3 billion**, primarily due to an **$0.8 billion net increase in loans**, funded by a $0.9 billion decrease in cash[369](index=369&type=chunk) - The allowance for credit losses increased by **75.4% to $133.0 million**, representing **1.15% of total loans**, largely due to the adoption of the CECL accounting standard[378](index=378&type=chunk)[379](index=379&type=chunk) Non-Performing Assets (in thousands) | Metric | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Total non-performing loans and leases | $145,195 | $87,941 | | Total non-performing assets | $151,977 | $94,349 | | Non-performing assets as a % of total assets | 1.10% | 0.68% | [Liquidity and Capital Resources](index=78&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, with both the holding company and bank exceeding 'well-capitalized' minimums - Primary sources of liquidity are deposits and advances from the Federal Home Loan Bank (FHLB); at June 30, 2021, the company had **$2.3 billion in immediate borrowing capacity** from the FHLB[380](index=380&type=chunk)[381](index=381&type=chunk) - Axos Clearing maintained **excess net capital of $27.9 million** above its regulatory requirement of $8.0 million as of June 30, 2021[398](index=398&type=chunk) Regulatory Capital Ratios as of June 30, 2021 | Ratio | Axos Financial, Inc. | Axos Bank | "Well Capitalized" Minimum | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital | 11.36% | 12.28% | 6.50% | | Tier 1 capital | 11.36% | 12.28% | 8.00% | | Total capital | 13.78% | 13.21% | 10.00% | | Tier 1 leverage | 8.82% | 9.45% | 5.00% | [Controls and Procedures](index=85&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective as of June 30, 2021 - Management concluded that as of June 30, 2021, the company's **disclosure controls and procedures were effective**[422](index=422&type=chunk) - Management assessed **internal control over financial reporting as effective** as of June 30, 2021, based on the COSO framework; this assessment was audited by BDO USA, LLP, which issued an unqualified opinion[425](index=425&type=chunk)[426](index=426&type=chunk)[429](index=429&type=chunk) - Changes were made to internal controls over financial reporting due to the adoption of the new credit loss standard, **ASC 326**, on July 1, 2020[426](index=426&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=88&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[434](index=434&type=chunk)[435](index=435&type=chunk) [Executive Compensation](index=88&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[436](index=436&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=88&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[437](index=437&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=88&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[438](index=438&type=chunk) [Principal Accountant Fees and Services](index=88&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding accountant fees and services is incorporated by reference from the company's 2021 Proxy Statement - This section incorporates information by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[439](index=439&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=89&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[441](index=441&type=chunk)[442](index=442&type=chunk)

Axos Financial, Inc. (NYSE:AX) Q4 2021 Earnings Conference Call July 29, 2021 5:00 PM ET Company Participants Johnny Lai - IR Greg Garrabrants - President and CEO Andy Micheletti - EVP and CFO Conference Call Participants Andrew Leisch - Piper Sandler Marla Backer - Sidoti Gary Tenner - D.A. Davidson Michael Perito - KBW Steve Moss - B. Riley Securities Tim Coffey - Janney David Hirons - Wedbush Securities Edward Hemmelgarn - Shaker Investments Operator Hello and welcome to Axos Financial Q4 2021 Earnings C ...