Companies: 10,793     total market cap: $139.375 T
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Axos Financial
AX
#3053
Rank
$5.24 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$92.50
Share price
-1.19%
Change (1 day)
61.80%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Axos Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Axos Financial - 10-Q quarterly report FY2020 Q2


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

☒
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended December 31, 2019

☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-37709
axosfinancialcolorpnga32.jpg
AXOS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
33-0867444
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
9205 West Russell Road, STE 400, Las Vegas, NV                     89148
(Address of principal executive offices)                    (zip code)
Registrant’s telephone number, including area code: (858) 649-2218
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value
AX
New York Stock Exchange
6.25% Subordinated Notes Due 2026
AXO
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒

Accelerated filer
☐

Non-accelerated filer  
☐

Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ☐  Yes    ☒  No
The number of shares outstanding of the registrant’s common stock on the last practicable date: 61,349,034 shares of common stock, $0.01 par value per share, as of January 22, 2020.


AXOS FINANCIAL, INC.
INDEX

 
Page
PART I – FINANCIAL INFORMATION
1
 
 
ITEM 1.       FINANCIAL STATEMENTS
1
Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2019 and June 30, 2019
1
Condensed Consolidated Statements of Income (unaudited) for the six months ended December 31, 2019 and 2018
2
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the six months ended December 31, 2019 and 2018
3
Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the three and six months ended December 31, 2019 and 2018
4
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2019 and 2018
6
Notes to Condensed Consolidated Financial Statements
7
 
 
ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
35
SELECTED FINANCIAL DATA
38
RESULTS OF OPERATIONS
40
FINANCIAL CONDITION
52
LIQUIDITY
56
OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
57
CAPITAL RESOURCES AND REQUIREMENTS
59
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
60
 
 
ITEM 3:       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
63
 
 
ITEM 4:       CONTROLS AND PROCEDURES
63
 
 
PART II – OTHER INFORMATION
64
 
 
ITEM 1.       LEGAL PROCEEDINGS
64
 
 
ITEM 1A.    RISK FACTORS
64
 
 
ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
65
 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
65
 
 
ITEM 4.     MINE SAFETY DISCLOSURES
65
 
 
ITEM 5.       OTHER INFORMATION
65
 
 
ITEM 6.       EXHIBITS
66
 
 
SIGNATURES
67


PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except par and stated value)
December 31,
2019
 
June 30,
2019
ASSETS
 
 
 
Cash and cash equivalents
$
773,300

 
$
511,225

Cash segregated for regulatory purposes
252,875

 
346,143

Total cash, cash equivalents, and cash segregated
1,026,175

 
857,368

Securities:
 
 
 
Trading
1,740

 
—

Available-for-sale
208,026

 
227,513

Stock of regulatory agencies
20,276

 
20,276

Loans held for sale, carried at fair value
36,092

 
33,260

Loans held for sale, lower of cost or fair value
3,430

 
4,800

Loans and leases—net of allowance for loan and lease losses of $59,514 as of December 31, 2019 and $57,085 as of June 30, 2019
10,141,397

 
9,382,124

Mortgage servicing rights, carried at fair value
11,262

 
9,784

Other real estate owned and repossessed vehicles
7,556

 
7,485

Goodwill and other intangible assets—net
130,534

 
134,893

Securities borrowed
168,114

 
144,706

Customer, broker-dealer and clearing receivables
244,379

 
203,192

Other assets
270,307

 
194,837

TOTAL ASSETS
$
12,269,288

 
$
11,220,238

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
2,609,311

 
$
1,441,930

Interest bearing
7,505,029

 
7,541,243

Total deposits
10,114,340

 
8,983,173

Advances from the Federal Home Loan Bank
257,500

 
458,500

Borrowings, subordinated notes and debentures
62,233

 
168,929

Securities loaned
206,199

 
198,356

Customer, broker-dealer and clearing payables
305,669

 
238,604

Accounts payable and accrued liabilities and other liabilities
162,595

 
99,626

Total liabilities
11,108,536

 
10,147,188

COMMITMENTS AND CONTINGENCIES (Note 10)

 

STOCKHOLDERS’ EQUITY:

 

Preferred stock—$0.01 par value; 1,000,000 shares authorized:
 
 
 
Series A—$10,000 stated value and liquidation preference per share; 515 shares issued and outstanding as of December 31, 2019 and June 30, 2019
5,063

 
5,063

Common stock—$0.01 par value; 150,000,000 shares authorized; 66,915,478 shares issued and 61,338,386 shares outstanding as of December 31, 2019; 66,563,922 shares issued and 61,128,817 shares outstanding as of June 30, 2019
669

 
666

Additional paid-in capital
399,806

 
389,945

Accumulated other comprehensive income (loss)—net of tax
(247
)
 
16

Retained earnings
908,096

 
826,170

Treasury stock, at cost; 5,577,092 shares as of December 31, 2019 and 5,435,105 shares as of June 30, 2019
(152,635
)
 
(148,810
)
Total stockholders’ equity
1,160,752

 
1,073,050

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
12,269,288

 
$
11,220,238



See accompanying notes to the condensed consolidated financial statements.

1

AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except earnings per common share)
2019
 
2018
 
2019
 
2018
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans and leases, including fees
$
136,602

 
$
123,275

 
$
270,489

 
$
239,868

Securities borrowed and customer receivables
3,865

 
—

 
9,207

 
—

Investments
6,821

 
7,964

 
13,937

 
14,168

Total interest and dividend income
147,288

 
131,239

 
293,633

 
254,036

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
32,914

 
25,985

 
71,720

 
54,666

Advances from the Federal Home Loan Bank
4,495

 
11,574

 
6,259

 
18,482

Securities loaned
163

 
—

 
449

 
—

Other borrowings
1,296

 
960

 
3,482

 
1,889

Total interest expense
38,868

 
38,519

 
81,910

 
75,037

Net interest income
108,420

 
92,720

 
211,723

 
178,999

Provision for loan and lease losses
4,500

 
4,950

 
7,200

 
5,550

Net interest income, after provision for loan and lease losses
103,920

 
87,770

 
204,523

 
173,449

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Realized gain (loss) on sale of securities
—

 
—

 
—

 
(133
)
Prepayment penalty fee income
2,006

 
2,467

 
3,418

 
3,371

Gain on sale – other
1,924

 
1,943

 
5,746

 
5,076

Mortgage banking income
2,224

 
792

 
5,018

 
2,607

Broker-dealer fee income
5,555

 
—

 
11,211

 
—

Banking and service fees
9,498

 
11,690

 
17,350

 
22,514

Total non-interest income
21,207

 
16,892

 
42,743

 
33,435

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and related costs
33,958

 
29,146

 
70,675

 
59,808

Data processing
7,410

 
4,913

 
15,221

 
9,648

Depreciation and amortization
6,040

 
3,567

 
11,264

 
6,583

Advertising and promotional
4,043

 
3,205

 
7,833

 
7,630

Professional services
3,112

 
2,345

 
4,701

 
4,203

Occupancy and equipment
3,122

 
1,797

 
5,960

 
3,399

FDIC and regulatory fees
939

 
1,528

 
1,130

 
4,454

Broker-dealer clearing charges
1,860

 
—

 
3,868

 
—

General and administrative expense
6,481

 
4,432

 
11,780

 
8,130

Total non-interest expense
66,965

 
50,933

 
132,432

 
103,855

INCOME BEFORE INCOME TAXES
58,162

 
53,729

 
114,834

 
103,029

INCOME TAXES
16,867

 
14,894

 
32,753

 
27,353

NET INCOME
$
41,295

 
$
38,835

 
$
82,081

 
$
75,676

NET INCOME ATTRIBUTABLE TO COMMON STOCK
$
41,217

 
$
38,757

 
$
81,926

 
$
75,521

COMPREHENSIVE INCOME
$
40,515

 
$
39,015

 
$
81,818

 
$
76,062

Basic earnings per common share
$
0.67

 
$
0.62

 
$
1.34

 
$
1.21

Diluted earnings per common share
$
0.67

 
$
0.62

 
$
1.32

 
$
1.20


See accompanying notes to the condensed consolidated financial statements.

2

AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
NET INCOME
$
41,295

 
$
38,835

 
$
82,081

 
$
75,676

Net unrealized gain (loss) from available-for-sale securities, net of tax expense (benefit) of $(327) and $67 for the three and $(110) and $20 for six months ended December 31, 2019 and 2018, respectively.
(780
)
 
180

 
(263
)
 
292

Reclassification of net (gain) loss from available-for-sale securities included in income, net of tax expense (benefit) of $(39) for the six months ended December 31, 2018
—

 
—

 
—

 
94

Other comprehensive income (loss)
(780
)
 
180

 
(263
)
 
386

Comprehensive income
$
40,515

 
$
39,015

 
$
81,818

 
$
76,062


See accompanying notes to the condensed consolidated financial statements.



3

AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2019
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
 
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
 
 
 
 
BALANCE—September 30, 2019
515

 
$
5,063

 
66,837,037

 
(5,549,442
)
 
61,287,595

 
$
668

 
$
394,904

 
$
866,879

 
$
533

 
$
(151,807
)
 
$
1,116,240

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
41,295

 
—

 
—

 
41,295

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(780
)
 
—

 
(780
)
Cash dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(78
)
 
—

 
—

 
(78
)
Stock-based compensation expense
and restricted stock unit vesting
—

 
—

 
78,441

 
(27,650
)
 
50,791

 
1

 
4,902

 
—

 
—

 
(828
)
 
4,075

BALANCE—December 31, 2019
515

 
$
5,063

 
66,915,478

 
(5,577,092
)
 
61,338,386

 
$
669

 
$
399,806

 
$
908,096

 
$
(247
)
 
$
(152,635
)
 
$
1,160,752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2018
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
 
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
 
 
 
 
BALANCE—September 30, 2018
515

 
$
5,063

 
66,043,642

 
(3,211,911
)
 
62,831,731

 
$
660

 
$
373,364

 
$
708,112

 
$
(407
)
 
$
(86,545
)
 
$
1,000,247

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
38,835

 
—

 
—

 
38,835

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
180

 
—

 
180

Cash dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(78
)
 
—

 
—

 
(78
)
Purchase of treasury stock
—

 
—

 
—

 
(1,704,528
)
 
(1,704,528
)
 
—

 
—

 
—

 
—

 
(47,881
)
 
(47,881
)
Stock-based compensation expense
and restricted stock unit vesting
—

 
—

 
125,759

 
(45,219
)
 
80,540

 
2

 
4,325

 
—

 
—

 
(1,229
)
 
3,098

BALANCE—December 30, 2018
515

 
$
5,063

 
66,169,401

 
(4,961,658
)
 
61,207,743

 
$
662

 
$
377,689

 
$
746,869

 
$
(227
)
 
$
(135,655
)
 
$
994,401


4

 
For the Six Months Ended December 31, 2019
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
BALANCE—June 30, 2019
515

 
$
5,063

 
66,563,922

 
(5,435,105
)
 
61,128,817

 
$
666

 
$
389,945

 
$
826,170

 
$
16

 
$
(148,810
)
 
$
1,073,050

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
82,081

 
—

 
—

 
82,081

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(263
)
 
—

 
(263
)
Cash dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(155
)
 
—

 
—

 
(155
)
Stock-based compensation expense
and restricted stock unit vesting
—

 
—

 
351,556

 
(141,987
)
 
209,569

 
3

 
9,861

 
—

 
—

 
(3,825
)
 
6,039

BALANCE—December 31, 2019
515

 
$
5,063

 
66,915,478

 
(5,577,092
)
 
61,338,386

 
$
669

 
$
399,806

 
$
908,096

 
$
(247
)
 
$
(152,635
)
 
$
1,160,752


 
For the Six Months Ended December 31, 2018
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Income Tax
 
Treasury
Stock
 
Total
 
 
 
 
Number of Shares
 
 
 
(Dollars in thousands)
Shares
 
Amount
 
Issued
 
Treasury
 
Outstanding
 
Amount
 
BALANCE—June 30, 2018
515

 
$
5,063

 
65,796,060

 
(3,107,996
)
 
62,688,064

 
$
658

 
$
366,515

 
$
671,348

 
$
(613
)
 
$
(82,458
)
 
$
960,513

Net income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
75,676

 
—

 
—

 
75,676

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
386

 
—

 
386

Cash dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(155
)
 
—

 
—

 
(155
)
Purchase of treasury stock
—

 
—

 
—

 
(1,704,528
)
 
(1,704,528
)
 
—

 
—

 
—

 
—

 
(47,881
)
 
(47,881
)
Stock-based compensation expense
and restricted stock unit vesting
—

 
—

 
373,341

 
(149,134
)
 
224,207

 
4

 
11,174

 
—

 
—

 
(5,316
)
 
5,862

BALANCE—December 31, 2018
515

 
$
5,063

 
66,169,401

 
(4,961,658
)
 
61,207,743

 
$
662

 
$
377,689

 
$
746,869

 
$
(227
)
 
$
(135,655
)
 
$
994,401



See accompanying notes to the condensed consolidated financial statements.

5
Table of Contents
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Six Months Ended
 
December 31,
(Dollars in thousands)
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
82,081

 
$
75,676

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Accretion of discounts on securities
483

 
(211
)
Net accretion on securities and loans and leases
(606
)
 
(926
)
Amortization of borrowing costs
104

 
104

Amortization of operating lease right of use asset
(2,680
)
 
—

Stock-based compensation expense
9,864

 
11,178

Net (gain) loss on sale of investment securities
—

 
133

Provision for loan and lease losses
7,200

 
5,550

Deferred income taxes
(1,414
)
 
(276
)
Origination of loans held for sale
(994,004
)
 
(913,132
)
Unrealized (gain) loss on loans held for sale
23

 
227

Gain on sales of loans held for sale
(10,764
)
 
(7,683
)
Proceeds from sale of loans held for sale
999,908

 
939,295

Change in fair value of mortgage servicing rights
1,272

 
854

(Gain) loss on sale of other real estate and foreclosed assets
(71
)
 
(202
)
Depreciation and amortization
11,264

 
6,583

Net changes in assets and liabilities which provide (use) cash:
 
 
 
Securities borrowed
(23,408
)
 
—

Customer, broker-dealer and clearing receivables
(41,187
)
 
—

Other assets
33,755

 
2,330

Securities loaned
7,843

 
—

Customer, broker-dealer and clearing payables
67,065

 
—

Accounts payable and other liabilities
(18,074
)
 
(3,968
)
Net cash provided by (used in) operating activities
128,654

 
115,532

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities
(139,490
)
 
(68,786
)
Proceeds from sales of securities
—

 
1,927

Proceeds from repayment of securities
157,703

 
30,863

Purchase of stock of regulatory agencies
(27,532
)
 
(97,459
)
Proceeds from redemption of stock of regulatory agencies
27,532

 
97,459

Origination of loans and leases held for investment
(2,766,687
)
 
(3,141,647
)
Proceeds from sale of loans and leases held for investment
14,587

 
39,408

Origination of mortgage warehouse loans, net
(130,231
)
 
(44,970
)
Proceeds from sales of other real estate owned and repossessed assets
412

 
1,506

Cash paid for deposit acquisition
—

 
(14,747
)
Purchases of loans and leases, net of discounts and premiums
—

 
(11,525
)
Principal repayments on loans and leases
2,090,614

 
2,549,781

Purchases of furniture, equipment and software
(6,064
)
 
(10,963
)
Net cash used in investing activities
(779,156
)
 
(669,153
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in deposits
1,131,166

 
355,170

Net (repayment) proceeds of the Federal Home Loan Bank term advances
30,000

 
(132,500
)
Net (repayment) proceeds of Federal Home Loan Bank other advances
(231,000
)
 
18,000

Repayments of borrowings
(106,800
)
 
—

Tax payments related to settlement of restricted stock units
(3,825
)
 
(5,316
)
Repurchase of treasury stock
—

 
(47,881
)
Cash dividends paid on preferred stock
(232
)
 
(155
)
Net cash provided by financing activities
819,309

 
187,318

NET CHANGE IN CASH AND CASH EQUIVALENTS
168,807

 
(366,303
)
CASH AND CASH EQUIVALENTS—Beginning of year
$
857,368

 
$
622,850

CASH AND CASH EQUIVALENTS—End of period
$
1,026,175

 
$
256,547

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowed funds
$
81,728

 
$
74,220

Income taxes paid
$
27,671

 
$
20,300

Transfers to other real estate and repossessed vehicles
$
446

 
$
386

Transfers from loans and leases held for investment to loans held for sale
$
40,025

 
$
58,098

Loans and leases held for investment sold, cash not received
$
28,742

 
$
33,996

Operating lease liabilities for obtaining right of use assets
$
79,746

 
$
—

See accompanying notes to the condensed consolidated financial statements.

6

AXOS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2019 AND 2018
(Dollars in thousands, except per share and stated value amounts)
(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed 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 (the “Axos Nevada Holding” and collectively, the “Company”). Axos Nevada Holding wholly owns its subsidiary Axos Securities, LLC, which wholly owns subsidiaries Axos Clearing LLC (“Axos Clearing”), a clearing broker dealer, Axos Invest, Inc., a registered investment advisor, and Axos Invest LLC, an introducing broker dealer. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the six months ended December 31, 2019 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2019 included in our Annual Report on Form 10-K. Certain reclassifications to dividend and interest income line items for the six months ended December 31, 2019 have been made to conform to the current period presentation. The reclassifications had no effect on total dividend and interest income, net interest income, net income or stockholders’ equity for any period.
Business Segments. 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. Please refer to “Note 12 - Segment Reporting” for further information on the reporting for the Company’s two business segments.
New Accounting Standards
Accounting Standards Adopted During Fiscal 2020
Leases. In February 2016, the FASB issued ASU 2016-02, Leases, as amended in July 2018 by ASU 2018-10 Codification Improvements to Topic 842, Leases and ASU 2018-11 Leases (Topic 842): Targeted Improvements. On July 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The Company elected to recognize leases existing on July 1, 2019 through a modified retrospective transition approach. The Company will not adjust comparative periods based on the newly adopted guidance. Upon adoption, the Company also recognized right-of-use assets $77.8 million and lease liabilities of $79.7 million.
Lessor Arrangements. The Company provides equipment financing to its customers through a variety of lessor arrangements. Direct financing leases and sales-type leases are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased property less unearned income, which is accreted to interest income over the lease terms using methods that approximate the interest method. Operating lease income is recognized on a straight-line basis. Leases generally do not contain non-lease components.
Lessee Arrangements. Substantially all of the Company’s lessee arrangements are operating leases. Under these arrangements, the Company records right-of-use assets and lease liabilities at lease commencement. Right-of-use assets are reported in other assets on the December 31, 2019 unaudited Condensed Consolidated Balance Sheet, and the related lease liabilities are reported in accounts payable and accrued liabilities and other liabilities. All leases are recorded on the unaudited Condensed Consolidated Balance Sheet except leases with an initial term less than 12 months for which the Company made the short-term lease election. Lease expense is recognized on a straight-line basis over the lease term and is recorded in occupancy and equipment expense in the unaudited Condensed Consolidated Statements of Income.

7

The Company made an accounting policy election not to separate lease and non-lease components of a contract that is or contains a lease for its real estate and equipment leases. As such, lease payments represent payments on both lease and non-lease components. At lease commencement, lease liabilities are recognized based on the present value of the remaining lease payments and discounted using the Company’s incremental borrowing rate. Right-of-use assets initially equal the lease liability, adjusted for any lease payments made prior to lease commencement and for any lease incentives.
Accounting Standards Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale debt securities through an allowance account. ASU 2016-13 also requires certain incremental disclosures. ASU 2016-13 should be applied on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the statement of financial condition as of the date of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The guidance will be effective for the Company’s financial statements that include periods beginning July 1, 2020. The Company’ working group is progressing in accordance with its implementation plan, has significantly completed model development, and plans to review the Company’s methodology and model with third-party consultants in the next two quarters. The Company expects ASU 2016-13 to have a material impact on the Company’s unaudited condensed consolidated financial statements.


2.
REVENUE RECOGNITION

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2019
 
2018
 
2019

2018
Non-interest income
 
 
 
 
 
 
 
Deposit service fees
$
2,475

 
$
2,471

 
$
2,837

 
$
2,679

Card fees
1,291

 
1,166

 
2,621

 
2,920

Broker-dealer clearing fees
5,555

 
—

 
11,211

 
—

Bankruptcy trustee and fiduciary service fees
359

 
2,007

 
1,224

 
4,210

Non-interest income (in-scope of Topic 606)
9,680

 
5,644

 
17,893

 
9,809

Non-interest income (out-of-scope of Topic 606)
11,527

 
11,248

 
24,850

 
23,626

Total non-interest income
$
21,207

 
$
16,892

 
$
42,743

 
$
33,435



3.
ACQUISITIONS
The Company completed two business acquisitions and two asset acquisitions during the fiscal year ended June 30, 2019. The Company had no acquisitions during the six months ended December 31, 2019. The pro forma results of operations and the results of operations for the acquisitions since the acquisition date have not been separately disclosed because the effects were not material to the consolidated financial statements. The purchase transactions are detailed below.
MWABank deposit acquisition. On March 15, 2019, the Bank closed the deposit assumption agreement with MWA Bank and acquired approximately $173 million of deposits, including approximately $151 million of checking, savings and money market accounts and $22 million of time deposits, from MWABank. Axos did not assume any assets, employees or branches in this transaction. The Bank received cash equal to the book value of the deposit liabilities.
WiseBanyan. On February 26, 2019 the Company’s subsidiary, Axos Securities, LLC, had completed the acquisition of WiseBanyan Holding, Inc. and its subsidiaries (collectively “WiseBanyan”). Headquartered in Las Vegas, Nevada, WiseBanyan is a provider of personal financial and investment management services through a proprietary technology platform. WiseBanyan currently serves approximately 24,000 clients with approximately $150 million of assets under management. The Company paid $3.2 million in cash to acquire the assets of WiseBanyan and recorded $2.7 million in intangible assets.
COR Securities Holdings. On January 28, 2019 (“Acquisition Date”), Axos Clearing, LLC and Axos Clarity MergeCo., Inc. completed the acquisition of COR Securities Holdings Inc.(“COR Securities”), the parent company of COR Clearing LLC
(“COR Clearing”), pursuant to the terms of the Agreement and Plan of Merger, dated as of September 28, 2018 (the “Merger Agreement”).
Headquartered in Omaha, Nebraska, COR Clearing is a full-service correspondent clearing firm for independent broker-dealers. Established as a part of Mutual of Omaha Insurance Company and spun off as Legent Clearing in 2002, COR Clearing provides clearing, settlement, custody, securities and margin lending, and technology solutions to more than sixty introducing broker-dealers and 90,000 customers. The total cash consideration of approximately $80.9 million was funded with existing capital. The Company issued subordinated notes totaling $7.5 million to the principal stockholders of COR Securities in an equal principal amount, with a maturity of 15 months, to serve as the sole source of payment of indemnification obligations of the principal stakeholders of COR Securities under the Merger Agreement.
The acquisition of COR Securities is being accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The Company recorded goodwill of $35.5 million and an additional $20.1 million in intangible assets as of the Acquisition Date. Included in the professional services line of the statement of income the Company recognized $0.4 million in transaction costs.
The consideration paid for COR Securities common equity and the provisional fair values of acquired identifiable assets and liabilities assumed as of the Acquisition Date were as follows:
(Dollars in thousands)
January 28, 2019
ASSETS
 
Cash and due from banks
$
16,604

Cash segregated for regulatory purposes
142,016

Securities, available for sale
9,585

Stock of the regulatory agencies, at cost
2,431

Furniture, equipment and software—net
—

Securities borrowed
157,898

Customer, broker-dealer and clearing receivables
234,352

Other assets
5,487

Total identifiable assets
$
568,373

 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Notes payable to banks
$
85,100

Securities loaned
203,041

Customer, broker-dealer and clearing payables
240,110

Deferred income tax
—

Accounts payable and accrued liabilities
7,383

Total identifiable liabilities
$
535,634

 

Goodwill
$
35,501

Intangible assets
20,120

Total cash purchase price
$
80,860

Notes issued
$
7,500

Total fair value of consideration paid
88,360


Nationwide Bank deposit acquisition. On November 16, 2018, the Bank completed the acquisition of substantially all of Nationwide Bank’s (“Nationwide”) deposits at the time of closing, adding $2.4 billion in deposits, including $0.7 billion in checking, savings and money market accounts and $1.7 billion in time deposit accounts. The Bank received cash for the deposit balances transferred less a premium of $13.5 million, commensurate with the fair market value of the deposits purchased.

4.
FAIR VALUE

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting Standards Codification Topic 820, Fair Value Measurement, also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and June 30, 2019. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
 
December 31, 2019
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
ASSETS:
 
 
 
 
 
 
 
Securities—Trading: Municipal
$
—

 
$
1,740

 
$
—

 
$
1,740

Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency Debt1
$
—

 
$
1,689

 
$
—

 
$
1,689

Agency RMBS1
—

 
12,171

 
—

 
12,171

Non-Agency RMBS2
—

 
—

 
12,787

 
12,787

Municipal
—

 
10,376

 
—

 
10,376

Asset-backed securities and structured notes
—

 
171,003

 
—

 
171,003

Total—Securities—Available-for-Sale
$
—

 
$
195,239

 
$
12,787

 
$
208,026

Loans Held for Sale
$
—

 
$
36,092

 
$
—

 
$
36,092

Mortgage servicing rights
$
—

 
$
—

 
$
11,262

 
$
11,262

Other assets—Derivative instruments
$
—

 
$
—

 
$
1,348

 
$
1,348

LIABILITIES:
 
 
 
 
 
 
 
   Other liabilities—Derivative instruments
$
—

 
$
—

 
$
331

 
$
331

 
 
 
 
 
 
 
 
 
June 30, 2019
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
 
Securities—Available-for-Sale:
 
 
 
 
 
 
 
Agency Debt1
$
—

 
$
1,685

 
$
—

 
$
1,685

Agency RMBS1
—

 
9,586

 
—

 
9,586

Non-Agency RMBS2
—

 
—

 
13,025

 
13,025

Municipal
—

 
21,162

 
—

 
21,162

Asset-backed securities and structured notes
—

 
182,055

 
—

 
182,055

Total—Securities—Available-for-Sale
$
—

 
$
214,488

 
$
13,025

 
$
227,513

Loans Held for Sale
$
—

 
$
33,260

 
$
—

 
$
33,260

Mortgage servicing rights
$
—

 
$
—

 
$
9,784

 
$
9,784

Other assets—Derivative instruments
$
—

 
$
—

 
$
1,978

 
$
1,978

LIABILITIES:
 
 
 
 
 
 
 
Other liabilities—Derivative instruments
$
—

 
$
—

 
$
732

 
$
732

1 
U.S. government-backed or government sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
2 
Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by Alt-A or pay-option ARM mortgages.

8

The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
 
For the Three Months Ended
 
December 31, 2019
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening balance
$
13,132

 
$
10,632

 
$
1,727

 
$
25,491

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Mortgage banking income
—

 
(589
)
 
(710
)
 
(1,299
)
Included in other comprehensive income
151

 
—

 
—

 
151

Purchases/originations
—

 
1,219

 
—

 
1,219

Settlements
(496
)
 
—

 
—

 
(496
)
Closing balance
$
12,787

 
$
11,262

 
$
1,017

 
$
25,066

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—

 
$
(589
)
 
$
(710
)
 
$
(1,299
)
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
December 31, 2019
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening Balance
$
13,025

 
$
9,784

 
$
1,246

 
$
24,055

Total gains or losses for the period:
 
 
 
 
 
 


Included in earnings—Mortgage banking income
—

 
(1,272
)
 
(229
)
 
(1,501
)
Included in other comprehensive income
840

 
—

 
—

 
840

Purchases
—

 
2,750

 
—

 
2,750

Settlements
(1,078
)
 
—

 
—

 
(1,078
)
Closing balance
$
12,787

 
$
11,262

 
$
1,017

 
$
25,066

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—

 
$
(1,272
)
 
$
(229
)
 
$
(1,501
)

9

 
For the Three Months Ended
 
December 31, 2018
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening balance
$
14,970

 
$
11,216

 
$
992

 
$
27,178

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Mortgage banking income
—

 
(566
)
 
(523
)
 
(1,089
)
Included in other comprehensive income
108

 
—

 
—

 
108

Purchases/originations
—

 
565

 
—

 
565

Settlements
(657
)
 
—

 
—

 
(657
)
Closing balance
$
14,421

 
$
11,215

 
$
469

 
$
26,105

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
—

 
$
(566
)
 
$
(523
)
 
$
(1,089
)
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
December 31, 2018
(Dollars in thousands)
Securities – Available-for-Sale: Non-Agency RMBS
 
Mortgage Servicing Rights
 
Derivative Instruments, net
 
Total
 
 
 
 
 
 
 
 
Opening Balance
$
17,443

 
$
10,752

 
$
953

 
$
29,148

Total gains or losses for the period:
 
 
 
 
 
 
 
Included in earnings—Sale of securities
(133
)
 
—

 
—

 
(133
)
Included in earnings—Mortgage banking income
—

 
(854
)
 
(484
)
 
(1,338
)
Included in other comprehensive income
550

 
—

 
—

 
550

Purchases
—

 
1,317

 
—

 
1,317

Sales
(2,058
)
 
—

 
—

 
(2,058
)
Settlements
(1,381
)
 
—

 
—

 
(1,381
)
Closing balance
$
14,421

 
$
11,215

 
$
469

 
$
26,105

 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period
$
(133
)
 
$
(854
)
 
$
(484
)
 
$
(1,471
)

The table below summarizes the quantitative information about level 3 fair value measurements as of the dates indicated:
 
December 31, 2019
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Non-agency RMBS
$
12,787

Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
2.5 to 24.8% (11.4%)
1.5 to 6.1% (3.3%)
40.0 to 68.3% (59.8%)
2.7 to 5.7% (3.7%)
Mortgage Servicing Rights
$
11,262

Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
3.4 to 29.0% (9.6%)
1.9 to 9.7 (6.6)
9.5 to 13.0% (9.8%)
Derivative Instruments
$
1,017

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.3 to 0.6% (0.4%)
 
June 30, 2019
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securities – Non-agency RMBS
$
13,025

Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
2.9 to 32.5% (10.0%)
1.5 to 10.2% (4.4%)
40.0 to 68.3% (59.4%)
2.7 to 6.9% (4.1%)
Mortgage Servicing Rights
$
9,784

Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
4.7 to 33.7% (10.1%)
1.9 to 8.8 (6.4)
9.5 to 13.0% (9.8%)
Derivative Instruments
$
1,246

Sales Comparison Approach
Projected Sales Profit of Underlying Loans
0.4 to 0.8% (0.6%)


10


The significant unobservable inputs used in the fair value measurement of the Company’s residential mortgage-backed securities are projected prepayment rates, probability of default, and projected loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the projected loss severity and a directionally opposite change in the assumption used for projected prepayment rates.
The table below summarizes assets measured for impairment on a non-recurring basis:
 
December 31, 2019
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
Impaired Loans and Leases:
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
—

 
$
—

 
$
49,090

 
$
49,090

Multifamily real estate secured
—

 
—

 
1,198

 
1,198

Commercial real estate secured
—

 
—

 
1,931

 
1,931

Auto and RV secured
—

 
—

 
206

 
206

Other
—

 
—

 
312

 
312

Total
$
—

 
$
—

 
$
52,737

 
$
52,737

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single family real estate
$
—

 
$
—

 
$
7,420

 
$
7,420

Autos and RVs
—

 
—

 
136

 
136

Total
$
—

 
$
—

 
$
7,556

 
$
7,556

 
 
 
 
 
 
 
 
 
June 30, 2019
(Dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance
Impaired Loans and Leases:
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
—

 
$
—

 
$
46,005

 
$
46,005

Multifamily real estate secured
—

 
—

 
2,108

 
2,108

Auto and RV secured
—

 
—

 
115

 
115

Other
—

 
—

 
216

 
216

Total
$
—

 
$
—

 
$
48,444

 
$
48,444

Other real estate owned and foreclosed assets:
 
 
 
 
 
 
 
Single family real estate
$
—

 
$
—

 
$
7,449

 
$
7,449

Autos and RVs
—

 
—

 
36

 
36

Total
$
—

 
$
—

 
$
7,485

 
$
7,485



Impaired loans and leases measured for impairment on a non-recurring basis using the fair value of the collateral for collateral-dependent loans and leases have a carrying amount of $52,737, after charge-offs of $601 for the six months ended December 31, 2019, life to date charge-offs of $5,089, life to date interest payments applied to principal of $1,190 for total life to date principal balance adjustments of $6,279. Impaired loans had a related allowance of $395 at December 31, 2019.

Other real estate owned and foreclosed assets, which are measured at the lower of carrying value or fair value less costs to sell, had a net carrying amount of $7,556 after charge-offs of $17 for the six months ended December 31, 2019.

11

The Company has elected the fair value option for Agency loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of December 31, 2019 and June 30, 2019.
As of December 31, 2019 and June 30, 2019, the aggregate fair value of loans held for sale, carried at fair value, contractual balance (including accrued interest), and gain was as follows:
(Dollars in thousands)
December 31, 2019
 
June 30, 2019
Aggregate fair value
$
36,092

 
$
33,260

Contractual balance
35,193

 
32,342

Gain
$
899

 
$
918

The total amount of gains and losses from changes in fair value included in earnings for the period indicated below for loans held for sale were:
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2019
 
2018
 
2019
 
2018
Interest income
$
291

 
$
252

 
$
596

 
$
566

Change in fair value
(728
)
 
(630
)
 
(252
)
 
(711
)
Total
$
(437
)
 
$
(378
)
 
$
344

 
$
(145
)


12

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:
 
December 31, 2019
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans and leases:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
49,090

Sales comparison approach
Adjustment for differences between the comparable sales
-15.3 to 18.5% (0.9%)
Multifamily real estate secured
$
1,198

Sales comparison approach, income approach,
Discounted cash flows
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate
4.5 to 15.0% (9.3%)
Commercial real estate secured
$
1,931

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations
1.4 to 1.4% (1.4%)
Auto and RV secured
$
206

Sales comparison approach
Adjustment for differences between the comparable sales
-63.2 to 13.2% (-21.6%)
Other
$
312

Discounted cash flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate
0.0 to 0.0% (0.0%)
0.0 to 10.0% (5.0%)
100.0 to 100.0% (100.0%)
-3.2 to 2.2% (-0.5%)
Other real estate owned and foreclosed assets:
 
 
 
Single family real estate
$
7,420

Sales comparison approach
Adjustment for differences between the comparable sales
8.8 to 18.7% (16.7%)
Autos and RVs
$
136

Sales comparison approach
Adjustment for differences between the comparable sales
-1.7 to 8.4% (1.5%)
1 For impaired loans, other real estate owned and foreclosed assets the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the property being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.

 
June 30, 2019
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Input
Range (Weighted Average) 1
Impaired loans and leases:
 
 
 
 
Single family real estate secured:
 
 
 
 
Mortgage
$
46,005

Sales comparison approach
Adjustment for differences between the comparable sales
-83.2 to 80% (-2.0%)
Multifamily real estate secured
$
2,108

Sales comparison approach and income approach
Adjustment for differences between the comparable sales and adjustments for differences in net operating income expectations, capitalization rate
-87.9 to 102.7% (-0.1%)
Auto and RV secured
$
115

Sales comparison approach
Adjustment for differences between the comparable sales
-49.0 to 24.0% (2.6%)
Other
$
216

Discounted cash flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate
0.0 to 0.0% (0.0%)
0.0 to 10.0% (5.0%)
100.0 to 100.0% (100.0%)
-2.2 to 1.1% (-0.6%)
Other real estate owned and foreclosed assets:
 
 
 
Single family real estate
$
7,449

Sales comparison approach
Adjustment for differences between the comparable sales
-46.3 to 53.0% (5.3%)
Autos and RVs
$
36

Sales comparison approach
Adjustment for differences between the comparable sales
-13.6 to 56.3% (8.0%)

1 For impaired loans, other real estate owned and foreclosed assets the ranges shown may vary positively or negatively based on the comparable sales reported in the current appraisal. In certain instances, the range can be significant due to small sample sizes and in some cases the property being valued having limited comparable sales with similar characteristics at the time the current appraisal is conducted.


13

Fair value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31, 2019 and June 30, 2019 were as follows:
 
December 31, 2019
 
 
 
Fair Value
 
 
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,026,175

 
$
1,026,175

 
$
—

 
$
—

 
$
1,026,175

Securities trading
1,740

 
—

 
1,740

 
—

 
1,740

Securities available-for-sale
208,026

 
—

 
195,239

 
12,787

 
208,026

Loans held for sale, at fair value
36,092

 
—

 
36,092

 
—

 
36,092

Loans held for sale, at lower of cost or fair value
3,430

 
—

 
—

 
3,476

 
3,476

Loans and leases held for investment—net
10,141,397

 
—

 
—

 
10,367,699

 
10,367,699

Securities borrowed
168,114

 
—

 
—

 
168,064

 
168,064

Customer, broker-dealer and clearing receivables
244,379

 
—

 
—

 
244,330

 
244,330

Mortgage servicing rights
11,262

 
—

 
—

 
11,262

 
11,262

Financial liabilities:
 
 
 
 
 
 
 
 


Total deposits
10,114,340

 
—

 
9,754,175

 
—

 
9,754,175

Advances from the Federal Home Loan Bank
257,500

 
—

 
260,756

 
—

 
260,756

Borrowings, subordinated notes and debentures
62,233

 
—

 
65,530

 
—

 
65,530

Securities loaned
206,199

 
—

 
—

 
206,199

 
206,199

Customer, broker-dealer and clearing payables
305,669

 
—

 
—

 
271,841

 
271,841

 
June 30, 2019
 

 
Fair Value
 
 
(Dollars in thousands)
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
857,368

 
$
857,368

 
$
—

 
$
—

 
$
857,368

Securities available-for-sale
227,513

 
—

 
214,488

 
13,025

 
227,513

Loans held for sale, at fair value
33,260

 
—

 
33,260

 
—

 
33,260

Loans held for sale, at lower of cost or fair value
4,800

 
—

 
—

 
4,990

 
4,990

Loans and leases held for investment—net
9,382,124

 
—

 
—

 
9,630,061

 
9,630,061

Securities borrowed
144,706

 
—

 
—

 
144,720

 
144,720

Customer, broker-dealer and clearing receivables
203,192

 
—

 
—

 
203,355

 
203,355

Mortgage servicing rights
9,784

 
—

 
—

 
9,784

 
9,784

Financial liabilities:

 
 
 
 
 
 
 

Total deposits
8,983,173

 
—

 
8,758,861

 
—

 
8,758,861

Advances from the Federal Home Loan Bank
458,500

 
—

 
461,156

 
—

 
461,156

Borrowings, subordinated notes and debentures
168,929

 
—

 
169,212

 
—

 
169,212

Securities loaned
198,356

 
—

 
—

 
198,197

 
198,197

Customer, broker-dealer and clearing payables
238,604

 
—

 
—

 
229,987

 
229,987

The methods and assumptions, not previously presented, used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans and leases or deposits that reprice frequently and fully. For fixed rate loans and leases, deposits, borrowings or subordinated debt and for variable rate loans and leases, deposits, borrowings or subordinated debt with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. A discussion of the methods of valuing trading securities, available for sale securities and loans held for sale can be found earlier in this footnote. The carrying amount of stock of regulatory agencies approximates the estimated fair value of this investment. The fair value of off-balance sheet items is not considered material.

14

5.
SECURITIES
The amortized cost, carrying amount and fair value for the trading and available-for-sale securities at December 31, 2019 and June 30, 2019 were:
 
December 31, 2019
 
Trading
 
Available-for-sale
(Dollars in thousands)
Fair
Value
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Mortgage-backed securities (RMBS):
 
 
 
 
 
 
 
 
 
U.S. agencies1
$
—

 
$
12,062

 
$
137

 
$
(28
)
 
$
12,171

Non-agency2
—

 
12,411

 
867

 
(491
)
 
12,787

Total mortgage-backed securities
—

 
24,473

 
1,004

 
(519
)
 
24,958

Non-RMBS:
 
 
 
 
 
 
 
 
 
U.S. agencies1
—

 
1,689

 
—

 
—

 
1,689

Municipal
1,740

 
10,539

 
20

 
(183
)
 
10,376

Asset-backed securities and structured notes
—

 
170,796

 
1,008

 
(801
)
 
171,003

Total Non-RMBS
1,740

 
183,024

 
1,028

 
(984
)
 
183,068

Total debt securities
$
1,740

 
$
207,497

 
$
2,032

 
$
(1,503
)
 
$
208,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
Trading
 
Available-for-sale
(Dollars in thousands)
Fair
Value
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Mortgage-backed securities (RMBS):
 
 
 
 
 
 
 
 
 
U.S. agencies1
$
—

 
$
9,486

 
$
179

 
$
(79
)
 
$
9,586

Non-agency2
—

 
13,489

 
226

 
(690
)
 
13,025

Total mortgage-backed securities
—

 
22,975

 
405

 
(769
)
 
22,611

Non-RMBS:
 
 
 
 
 
 
 
 
 
U.S. agencies1
—

 
1,682

 
3

 
—

 
1,685

Municipal
—

 
21,974

 
16

 
(828
)
 
21,162

Asset-backed securities and structured notes
—

 
179,976

 
2,088

 
(9
)
 
182,055

Total Non-RMBS
—

 
203,632

 
2,107

 
(837
)
 
204,902

Total debt securities
$
—

 
$
226,607

 
$
2,512

 
$
(1,606
)
 
$
227,513

1 
U.S. government-backed or government sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
2 
Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities secured by Alt-A or pay-option ARM mortgages.

The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $12,787 at December 31, 2019 consists of fourteen different issues of super senior securities.
The face amounts of debt securities available-for-sale that were pledged to secure borrowings at December 31, 2019 and June 30, 2019 were $3,462 and $3,555 respectively.

15

The securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
December 31, 2019
 
Available-for-sale securities in loss position for
 
Less Than
12 Months
 
More Than
12 Months
 
Total
(Dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
RMBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies
$
3,316

 
$
(8
)
 
$
4,368

 
$
(20
)
 
$
7,684

 
$
(28
)
Non-agency
30

 
(1
)
 
8,088

 
(489
)
 
8,118

 
(490
)
Total RMBS securities
3,346

 
(9
)
 
12,456

 
(509
)
 
15,802

 
(518
)
Non-RMBS:
 
 
 
 
 
 
 
 
 
 
 
Municipal debt
—

 
—

 
2,998

 
(183
)
 
2,998

 
(183
)
Asset-backed securities and structured notes
100,843

 
(795
)
 
1,561

 
(7
)
 
102,404

 
(802
)
Total Non-RMBS
100,843

 
(795
)
 
4,559

 
(190
)
 
105,402

 
(985
)
Total debt securities
$
104,189

 
$
(804
)
 
$
17,015

 
$
(699
)
 
$
121,204

 
$
(1,503
)
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
Available-for-sale securities in loss position for
 
Less Than
12 Months
 
More Than
12 Months
 
Total
(Dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
RMBS:
 
 
 
 
 
 
 
 
 
 
 
U.S. agencies
$
44

 
$
(2
)
 
$
4,612

 
$
(77
)
 
$
4,656

 
$
(79
)
Non-agency
32

 
(1
)
 
8,527

 
(689
)
 
8,559

 
(690
)
Total RMBS securities
76

 
(3
)
 
13,139

 
(766
)
 
13,215

 
(769
)
Non-RMBS:
 
 
 
 
 
 
 
 
 
 
 
Municipal debt
—

 
—

 
12,997

 
(828
)
 
12,997

 
(828
)
Asset-backed securities and structured notes
101

 
(1
)
 
1,779

 
(8
)
 
1,880

 
(9
)
Total Non-RMBS
101

 
(1
)
 
14,776

 
(836
)
 
14,877

 
(837
)
Total debt securities
$
177

 
$
(4
)
 
$
27,915

 
$
(1,602
)
 
$
28,092

 
$
(1,606
)

There were eighteen securities that were in a continuous loss position at December 31, 2019 for a period of more than 12 months.There were five securities that were in a continuous loss position at December 31, 2019 for a period of less than 12 months. There were twenty-one securities that were in a continuous loss position at June 30, 2019 for a period of more than 12 months.There were three securities that were in a continuous loss position at June 30, 2019 for a period of less than 12 months.
The following table summarizes amounts of anticipated credit loss recognized in the income statement through other-than-temporary impairment charges, which reduced non-interest income:
 
For the Six Months Ended
 
December 31,
(Dollars in thousands)
2019
 
2018
Beginning balance
$
(821
)
 
$
—

Additions for the amounts related to the credit loss for which an other-than-temporary impairment was not previously recognized
—

 
—

Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized
—

 
—

Credit losses realized for securities sold
—

 
—

Ending balance
$
(821
)
 
$
—



At December 31, 2019, one non-agency RMBS with a total carrying amount of $3,567 was determined to have cumulative credit losses of $821 of which none was recognized in earnings during the three months ended December 31, 2019. The Company measures its non-agency RMBS in an unrealized loss position at the end of the reporting period for other-than-temporary impairment by comparing

16

the present value of the cash flows currently expected to be collected from the security with its amortized cost basis. If the calculated present value is lower than the amortized cost, the difference is the credit component of an other-than-temporary impairment of its debt securities. The excess of present value over the fair value of the security, if any, is the noncredit component of the other-than-temporary impairment. If the Company does not intend to sell the security and will not be required to sell the security before recovery of its amortized cost basis, the credit component of other-than-temporary impairment is recorded as a loss in earnings and the noncredit component of other-than-temporary impairment is recorded in comprehensive income, net of the related income tax benefit. If the Company does not intend to hold the security, or will be required to sell the security prior to a recovery of the amortized cost basis of the security, the credit component and noncredit component of the other-than-temporary impairment is recorded as a loss in earnings.
To determine the cash flow expected to be collected and to calculate the present value for purposes of testing for other-than-temporary impairment, the Company utilizes the same industry-standard tool and the same cash flows as those calculated for Level 3 fair values as discussed in Note 4 – “Fair Value” in our Annual Report on Form 10-K for the year ended June 30, 2019. The discount rates used to compute the present value of the expected cash flows for purposes of testing for the credit component of the other-than-temporary impairment are either the implicit rate calculated in each of the Company’s securities at acquisition or the last accounting yield. The Company calculates the implicit rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the case of pay-option ARMs) without prepayment assumptions. Once the discount rate (or discount margin in the case of floating rate securities) is calculated as described above, the discount is used in the industry-standard model to calculate the present value of the cash flows.
During the three months ended December 31, 2018, the company sold available-for-sale security with a carrying value of $2,059 for $1,927 resulting in a $133 loss. During the three months ended December 31, 2019, the company sold trading securities with a carrying value of $4,364 resulting in a gain of $35 and no available-for-sale securities.
 
 
 
 
 
 
 
 

The Company had recorded unrealized gains and unrealized losses in accumulated other comprehensive loss as follows:
(Dollars in thousands)
December 31,
2019
 
June 30,
2019
Available-for-sale debt securities—net unrealized gains (losses)
$
529

 
$
905

Available-for-sale debt securities—non-credit related losses
(845
)
 
(845
)
Subtotal
(316
)
 
60

Tax benefit (expense)
69

 
(44
)
Net unrealized gain (loss) on investment securities in accumulated other comprehensive income (loss)
$
(247
)
 
$
16




17

The expected maturity distribution of the Company’s mortgage-backed securities and the contractual maturity distribution of the Company’s Non-RMBS securities classified as available-for-sale were:

December 31, 2019

 
Available for sale
(Dollars in thousands)
 
Amortized
Cost
 
Fair
Value
RMBS—U.S. agencies1:
 
 
 
 
Due within one year
 
$
1,536

 
$
1,540

Due one to five years
 
5,193

 
5,213

Due five to ten years
 
2,635

 
2,672

Due after ten years
 
2,698

 
2,746

Total RMBS—U.S. agencies1
 
12,062

 
12,171

RMBS—Non-agency:
 
 
 
 
Due within one year
 
2,155

 
2,184

Due one to five years
 
5,896

 
5,958

Due five to ten years
 
3,436

 
3,545

Due after ten years
 
924

 
1,100

Total RMBS—Non-agency
 
12,411

 
12,787

Non-RMBS:
 
 
 
 
Due within one year
 
41,129

 
41,444

Due one to five years
 
136,464

 
136,366

Due five to ten years
 
770

 
730

Due after ten years
 
4,661

 
4,528

Total Non-RMBS
 
183,024

 
183,068

Total
 
$
207,497

 
$
208,026


1 Residential mortgage-backed security (RMBS) distributions include impact of expected prepayments and other timing factors.


18

6.
LOANS, LEASES & ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table sets forth the composition of the loan and lease portfolio as of the dates indicated:
(Dollars in thousands)
December 31, 2019
 
June 30, 2019
Single family real estate secured:
 
 
 
Mortgage
$
4,137,395

 
$
4,281,080

Warehouse
432,230

 
301,999

Financing1
471,435

 
518,560

Multifamily secured - mortgage and financing
2,171,711

 
1,948,513

Commercial real estate secured - mortgage
393,543

 
326,154

Auto and RV secured
309,290

 
290,894

Commercial & Industrial
2,167,314

 
1,662,629

Other
111,945

 
119,481

Total gross loans and leases
10,194,863

 
9,449,310

Allowance for loan and lease losses
(59,514
)
 
(57,085
)
Unaccreted discounts and loan and lease fees
6,048

 
(10,101
)
Total net loans and leases
$
10,141,397

 
$
9,382,124


1Single family real estate secured: Financing consists of commercial specialty and lender finance loans secured by single family real estate.

Allowance for Loan and Lease Losses. We are committed to maintaining the allowance for loan and lease losses (sometimes referred to as the “allowance”) at a level that is considered to be commensurate with estimated probable incurred credit losses in the portfolio. The assessment of the adequacy of the Company’s allowance for loan and lease losses is based upon a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, changes in the volume and mix of loans, collateral values and charge-off history. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While the Company believes that the allowance for loan and lease losses is adequate at December 31, 2019, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent risks in the loan and lease portfolio.

19

The following tables summarize activity in the allowance for loan and lease losses by portfolio classes for the periods indicated:
 
For the Three Months Ended December 31, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV Secured
 
Commercial & Industrial
 
Other
 
Total
Balance at October 1, 2019
$
20,573

 
$
1,140

 
$
3,741

 
$
5,308

 
$
1,104

 
$
4,927

 
$
20,719

 
$
1,715

 
$
59,227

Provision for loan and lease losses
(264
)
 
288

 
(150
)
 
(105
)
 
87

 
404

 
2,175

 
2,065

 
4,500

Charge-offs
(145
)
 
—

 
—

 
—

 
—

 
(344
)
 
(4,132
)
 
(765
)
 
(5,386
)
Recoveries
70

 
—

 
—

 
119

 
—

 
77

 
—

 
907

 
1,173

Balance at December 31, 2019
$
20,234

 
$
1,428

 
$
3,591

 
$
5,322

 
$
1,191

 
$
5,064

 
$
18,762

 
$
3,922

 
$
59,514

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2018
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV Secured
 
Commercial & Industrial
 
Other
 
Total
Balance at October 1, 2018
$
21,709

 
$
496

 
$
1,433

 
$
4,926

 
$
855

 
$
3,615

 
$
15,885

 
$
1,201

 
$
50,120

Provision for loan and lease losses
1,276

 
119

 
1,289

 
(93
)
 
119

 
670

 
(155
)
 
1,725

 
4,950

Charge-offs
(739
)
 
—

 
—

 
—

 
—

 
(311
)
 
(549
)
 
(601
)
 
(2,200
)
Recoveries
3

 
—

 
—

 
—

 
—

 
39

 
—

 
794

 
836

Balance at December 31, 2018
$
22,249

 
$
615

 
$
2,722

 
$
4,833

 
$
974

 
$
4,013

 
$
15,181

 
$
3,119

 
$
53,706

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV Secured
 
Commercial & Industrial
 
Other
 
Total
Balance at July 1, 2019
$
21,295

 
$
996

 
$
5,331

 
$
4,097

 
$
1,044

 
$
4,818

 
$
17,514

 
$
1,990

 
$
57,085

Provision for loan and lease losses
(1,088
)
 
432

 
(1,740
)
 
1,106

 
147

 
712

 
5,380

 
2,251

 
7,200

Charge-offs
(151
)
 
—

 
—

 
—

 
—

 
(619
)
 
(4,132
)
 
(1,561
)
 
(6,463
)
Recoveries
178

 
—

 
—

 
119

 
—

 
153

 
—

 
1,242

 
1,692

Balance at December 31, 2019
$
20,234

 
$
1,428

 
$
3,591

 
$
5,322

 
$
1,191

 
$
5,064

 
$
18,762

 
$
3,922

 
$
59,514

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2018
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV Secured
 
Commercial & Industrial
 
Other
 
Total
Balance at July 1, 2018
$
20,382

 
$
523

 
$
1,557

 
$
5,010

 
$
849

 
$
3,178

 
$
16,282

 
$
1,370

 
$
49,151

Provision for loan and lease losses
2,206

 
92

 
1,165

 
(286
)
 
125

 
1,292

 
48

 
908

 
5,550

Charge-offs
(740
)
 
—

 
—

 
—

 
—

 
(544
)
 
(1,149
)
 
(992
)
 
(3,425
)
Recoveries
401

 
—

 
—

 
109

 
—

 
87

 
—

 
1,833

 
2,430

Balance at December 31, 2018
$
22,249

 
$
615

 
$
2,722

 
$
4,833

 
$
974

 
$
4,013

 
$
15,181

 
$
3,119

 
$
53,706




20

The following tables present our loans and leases evaluated individually for impairment by portfolio class:
 
December 31, 2019
(Dollars in thousands)
Unpaid
Principal Balance
 
Principal Balance Adjustment1
 
Recorded Investment
 
Accrued Interest /
Origination Fees
 
Total
 
Related Allocation of General Allowance
 
Related Allocation of Specific Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
$
2,540

 
$
522

 
$
2,018

 
$
141

 
$
2,159

 
$
—

 
$
—

     Purchased
1,579

 
975

 
604

 
—

 
604

 
—

 
—

Auto and RV secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
398

 
257

 
141

 
6

 
147

 
—

 
—

     Purchased
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
3,262

 
3,262

 
—

 
332

 
332

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
45,517

 
391

 
45,126

 
852

 
45,978

 
359

 
—

     Purchased
1,536

 
194

 
1,342

 
91

 
1,433

 
7

 
—

Multifamily secured - mortgage and financing:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
1,198

 
—

 
1,198

 
16

 
1,214

 
1

 
—

Commercial real estate secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
1,931

 
—

 
1,931

 
20

 
1,951

 
2

 
—

Auto and RV secured
78

 
13

 
65

 
1

 
66

 
7

 
—

Other
977

 
665

 
312

 
—

 
312

 
19

 
—

Total
$
59,016

 
$
6,279

 
$
52,737

 
$
1,459

 
$
54,196

 
$
395

 
$
—

As a % of total gross loans and leases
0.58
%
 
0.06
%
 
0.52
%
 
0.01
%
 
0.53
%
 
—
%
 
—
%

 
June 30, 2019
(Dollars in thousands)
Unpaid Principal Balance
 
Principal Balance Adjustment1
 
Recorded Investment
 
Accrued Interest /
Origination Fees
 
Total
 
Related Allocation of General Allowance
 
Related Allocation of Specific Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
$
4,874

 
$
1,775

 
$
3,099

 
$
255

 
$
3,354

 
$
—

 
$
—

     Purchased
2,237

 
1,142

 
1,095

 
—

 
1,095

 
—

 
—

Auto and RV secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
326

 
221

 
105

 
4

 
109

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
40,758

 
348

 
40,410

 
731

 
41,141

 
393

 
—

     Purchased
1,418

 
17

 
1,401

 
109

 
1,510

 
12

 
—

Multifamily secured - mortgage and financing:
 
 
 
 
 
 
 
 
 
 
 
 
 
     In-house originated
2,108

 
—

 
2,108

 
9

 
2,117

 
3

 
—

Auto and RV Secured
10

 
—

 
10

 
—

 
10

 
1

 
—

Other
216

 
—

 
216

 
—

 
216

 
13

 
—

Total
$
51,947

 
$
3,503

 
$
48,444

 
$
1,108

 
$
49,552

 
$
422

 
$
—

As a % of total gross loans and leases
0.55
%
 
0.04
%
 
0.51
%
 
0.01
%
 
0.52
%
 
—
%
 
—
%

1 
Impaired loans with an allowance recorded do not have any charge-offs. Principal balance adjustments on impaired loans with an allowance recorded represent interest payments that have been applied to the book balance as a result of the loans’ non-accrual status.










21

The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment and based on impairment evaluation method:
 
December 31, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV secured
 
Commercial & Industrial
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment – general allowance
$
366

 
$
—

 
$
—

 
$
1

 
$
2

 
$
7

 
$
—

 
$
19

 
$
395

Individually evaluated for impairment – specific allowance
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Collectively evaluated for impairment
19,868

 
1,428

 
3,591

 
5,321

 
1,189

 
5,057

 
18,762

 
3,903

 
59,119

Total ending allowance balance
$
20,234

 
$
1,428

 
$
3,591

 
$
5,322

 
$
1,191

 
$
5,064

 
$
18,762

 
$
3,922

 
$
59,514

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
49,090

 
$
—

 
$
—

 
$
1,198

 
$
1,931

 
$
206

 
$
—

 
$
312

 
$
52,737

Loans and leases collectively evaluated for impairment
4,088,305

 
432,230

 
471,435

 
2,170,513

 
391,612

 
309,084

 
2,167,314

 
111,633

 
10,142,126

Principal loan and lease balance
4,137,395

 
432,230

 
471,435

 
2,171,711

 
393,543

 
309,290

 
2,167,314

 
111,945

 
10,194,863

Unaccreted discounts and loan and lease fees
9,282

 
—

 
(1,517
)
 
4,492

 
581

 
2,681

 
(4,049
)
 
(5,422
)
 
6,048

Total recorded investment in loans and leases
$
4,146,677

 
$
432,230

 
$
469,918

 
$
2,176,203

 
$
394,124

 
$
311,971

 
$
2,163,265

 
$
106,523

 
$
10,200,911


 
June 30, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV secured
 
Commercial & Industrial
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment – general allowance
$
405

 
$
—

 
$
—

 
$
3

 
$
—

 
$
1

 
$
—

 
$
13

 
$
422

Individually evaluated for impairment – specific allowance
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Collectively evaluated for impairment
20,890

 
996

 
5,331

 
4,094

 
1,044

 
4,817

 
17,514

 
1,977

 
56,663

Total ending allowance balance
$
21,295

 
$
996

 
$
5,331

 
$
4,097

 
$
1,044

 
$
4,818

 
$
17,514

 
$
1,990

 
$
57,085

Loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans and leases individually evaluated for impairment
$
46,005

 
$
—

 
$
—

 
$
2,108

 
$
—

 
$
115

 
$
—

 
$
216

 
$
48,444

Loans and leases collectively evaluated for impairment
4,235,075

 
301,999

 
518,560

 
1,946,405

 
326,154

 
290,779

 
1,662,629

 
119,265

 
9,400,866

Principal loan and lease balance
4,281,080

 
301,999

 
518,560

 
1,948,513

 
326,154

 
290,894

 
1,662,629

 
119,481

 
9,449,310

Unaccreted discounts and loan and lease fees
8,790

 
—

 
(1,773
)
 
5,090

 
649

 
2,631

 
(3,188
)
 
(22,300
)
 
(10,101
)
Total recorded investment in loans and leases
$
4,289,870

 
$
301,999

 
$
516,787

 
$
1,953,603

 
$
326,803

 
$
293,525

 
$
1,659,441

 
$
97,181

 
$
9,439,209





22

Credit Quality Disclosures. Nonaccrual loans and leases consisted of the following as of the dates indicated:
(Dollars in thousands)
December 31,
2019
 
June 30,
2019
Single Family Real Estate Secured:
 
 
 
Mortgage:
 
 
 
In-house originated
$
47,144

 
$
43,509

Purchased
1,946

 
2,496

Multifamily secured - mortgage and financing:
 
 
 
In-house originated
1,198

 
2,108

Commercial real estate secured:
 
 
 
In-house originated
1,931

 
—

Total nonaccrual loans secured by real estate
52,219

 
48,113

Auto and RV secured
206

 
115

Other
312

 
216

Total nonaccrual loans and leases
$
52,737

 
$
48,444

Nonaccrual loans and leases to total loans and leases
0.52
%
 
0.51
%


Approximately 1.06% of our nonaccrual loans and leases at December 31, 2019 were considered TDRs, compared to 1.29% at June 30, 2019. Borrowers that make timely payments after TDRs are considered non-performing for at least six months. Generally, after six months of timely payments, those TDRs are reclassified from the nonaccrual loan and lease category to the performing loan and lease category and any previously deferred interest income is recognized. Approximately 93.08% of the Bank’s nonaccrual loans and leases are single family first mortgages already written down to 50.51% in aggregate, of the original appraisal value of the underlying properties.
The following tables present the outstanding unpaid balance of loans and leases that are performing and nonaccrual by portfolio class:
 
December 31, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV secured
 
Commercial & Industrial
 
Other
 
Total
Performing
$
4,088,305

 
$
432,230

 
$
471,435

 
$
2,170,513

 
$
391,612

 
$
309,084

 
$
2,167,314

 
$
111,633

 
$
10,142,126

Nonaccrual
49,090

 
—

 
—

 
1,198

 
1,931

 
206

 
—

 
312

 
52,737

Total
$
4,137,395

 
$
432,230

 
$
471,435

 
$
2,171,711

 
$
393,543

 
$
309,290

 
$
2,167,314

 
$
111,945

 
$
10,194,863


 
June 30, 2019
 
Single Family Real Estate Secured
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Mortgage
 
Warehouse
 
Financing
 
MF secured
 
CRE secured
 
Auto and RV secured
 
Commercial & Industrial
 
Other
 
Total
Performing
$
4,235,075

 
$
301,999

 
$
518,560

 
$
1,946,405

 
$
326,154

 
$
290,779

 
$
1,662,629

 
$
119,265

 
$
9,400,866

Nonaccrual
46,005

 
—

 
—

 
2,108

 
—

 
115

 
—

 
216

 
48,444

Total
$
4,281,080

 
$
301,999

 
$
518,560

 
$
1,948,513

 
$
326,154

 
$
290,894

 
$
1,662,629

 
$
119,481

 
$
9,449,310



From time to time the Company modifies loan terms temporarily for borrowers who are experiencing financial stress. These loans are performing and accruing and will generally return to the original loan terms after the modification term expires.

The Company had no TDRs classified as performing loans at December 31, 2019 or June 30, 2019.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


23

The Company’s loan modifications primarily included single family, multifamily and commercial loans of which included one or a combination of the following: a reduction of the stated interest rate or delinquent property taxes that were paid by the Bank and either repaid by the borrower over a one year period or capitalized and amortized over the remaining life of the loan. The Company’s loan modifications also included RV loans in which borrowers were able to make interest-only payments for a period of six months to one year which then reverted back to fully amortizing.
Credit Quality Indicators
The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases based on credit risk. The Company uses the following definitions for risk ratings.
Pass. Loans and leases classified as pass are well protected by the current net worth and paying capacity of the obligor or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Special Mention. Loans and leases classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or of the institution’s credit position at some future date.
Substandard. Loans and leases classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The Company reviews and grades loans and leases following a continuous review process, featuring coverage of all loan and lease types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.

24


The following table presents the composition of the Company’s loan and lease portfolio by credit quality indicators:
 
December 31, 2019
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
 
 
    In-house originated
$
3,999,728

 
$
53,215

 
$
49,382

 
$
—

 
$
4,102,325

    Purchased
32,962

 
162

 
1,946

 
—

 
35,070

Warehouse
429,543

 
2,687

 
—

 
—

 
432,230

Financing
423,062

 
48,373

 
—

 
—

 
471,435

Multifamily secured - mortgage and financing
 
 
 
 
 
 
 
 
 
    In-house originated
2,112,687

 
11,188

 
2,071

 
—

 
2,125,946

    Purchased
44,840

 
—

 
925

 
—

 
45,765

Commercial real estate secured - mortgage
 
 
 
 
 
 
 
 
 
    In-house originated
385,208

 
—

 
1,931

 
—

 
387,139

    Purchased
6,404

 
—

 
—

 
—

 
6,404

Auto and RV secured
308,714

 
183

 
393

 
—

 
309,290

Commercial & Industrial
2,143,057

 
17,005

 
7,252

 
—

 
2,167,314

Other
111,479

 
236

 
230

 
—

 
111,945

Total
$
9,997,684

 
$
133,049

 
$
64,130

 
$
—

 
$
10,194,863

As a % of total gross loans and leases
98.1
%
 
1.3
%
 
0.6
%
 
—
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
(Dollars in thousands)
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
 
 
    In-house originated
$
4,157,665

 
$
37,219

 
$
44,568

 
$
—

 
$
4,239,452

    Purchased
38,534

 
598

 
2,496

 
—

 
41,628

Warehouse
301,999

 
—

 
—

 
—

 
301,999

Financing
440,298

 
21,600

 
56,662

 
—

 
518,560

Multifamily secured - mortgage and financing
 
 
 
 
 
 
 
 
 
    In-house originated
1,890,524

 
427

 
2,108

 
—

 
1,893,059

    Purchased
54,514

 
—

 
940

 
—

 
55,454

Commercial real estate secured - mortgage
 
 
 
 
 
 
 
 
 
    In-house originated
318,629

 
—

 
—

 
—

 
318,629

    Purchased
7,525

 
—

 
—

 
—

 
7,525

Auto and RV secured
290,691

 
68

 
135

 
—

 
290,894

Commercial & Industrial
1,660,821

 
1,722

 
86

 
—

 
1,662,629

Other
119,036

 
229

 
216

 
—

 
119,481

Total
$
9,280,236

 
$
61,863

 
$
107,211

 
$
—

 
$
9,449,310

As a % of total gross loans and leases
98.2
%
 
0.7
%
 
1.1
%
 
—
%
 
100.0
%




25

The Company considers the performance of the loan and lease portfolio and its impact on the allowance for loan and lease losses. The Company also evaluates credit quality based on the aging status of its loans and leases. During the year, the Company holds certain short-term loans that do not have a fixed maturity date that are treated as delinquent if not paid in full 90 days after the origination date.
The following table provides the outstanding unpaid balance of loans and leases that are past due 30 days or more by portfolio class as of the period indicated:
 
December 31, 2019
(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
In-house originated
$
8,625

 
$
11,564

 
$
36,175

 
$
56,364

Purchased
503

 
10

 
852

 
1,365

Multifamily secured - mortgage and financing
425

 
—

 
—

 
425

Commercial real estate secured - mortgage
—

 
1,084

 
—

 
1,084

Auto and RV secured
1,467

 
515

 
144

 
2,126

Commercial & Industrial
1,141

 
—

 
—

 
1,141

Other
355

 
250

 
256

 
861

Total
$
12,516

 
$
13,423

 
$
37,427

 
$
63,366

As a % of total gross loans and leases
0.12
%
 
0.13
%
 
0.37
%
 
0.62
%
 
 
 
 
 
 
 
 
 
June 30, 2019
(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
 
 
 
 
 
 
 
In-house originated
$
12,008

 
$
15,616

 
$
35,700

 
$
63,324

Purchased
228

 
—

 
1,458

 
1,686

Multifamily secured - mortgage and financing
1,684

 
—

 
1,588

 
3,272

Auto and RV secured
476

 
155

 
17

 
648

Other
250

 
229

 
216

 
695

Total
$
14,646

 
$
16,000

 
$
38,979

 
$
69,625

As a % of total gross loans and leases
0.15
%
 
0.17
%
 
0.41
%
 
0.74
%



26

7.
LEASES
The Company determines if an arrangement is a lease at inception. Operating leases with a term of greater than one year are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s unaudited condensed consolidated balance sheets. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. Leases of low-value assets are assessed on a lease-by-lease basis to determine the need for balance sheet capitalization. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate commensurate with the lease term based on the information available at the lease commencement date in determining the present value of lease payments. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent the future rental expenses associated with operating leases, and the incremental borrowing rates are based on publicly available interest rates. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. Rental expense for lease payments is recognized on a straight-line basis over the lease term and is included in occupancy and equipment, net within our unaudited condensed consolidated statements of operations.
The components of lease expense were as follows:
(Dollars in thousands)
 
Three Months Ended December 31, 2019
For the Six Months Ended December 31, 2019
Operating Lease Expense
 
$
2,597

$
5,235


Supplemental cash flow information related to leases was as follows:
(Dollars in thousands)
 
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities for operating leases:
 
 
Operating cash flows
 
$
3,689

ROU assets obtained in the exchange for lease liabilities:
 
 
ROU assets obtained in exchange for lease liabilities
 
$
—

ROU assets recognized upon adoption of new lease standard
 
$
77,794


Supplemental balance sheet information related to leases was as follows:
(Dollars in thousands)
 
December 31, 2019
Operating lease right-of-use assets
 
$
73,767

Operating lease liabilities
 
$
77,200

Weighted-average remaining lease term (in years):
 
 
Operating leases
 
9.76 years

Weighted-average discount rate:
 
 
Operating leases
 
2.90
%





27

Maturities of lease liabilities at December 31, 2019 were as follows:
(Dollars in thousands)
 
Operating Leases
Remainder of 2020
 
$
4,614

2021
 
8,569

2022
 
9,226

2023
 
9,486

2024
 
9,078

Thereafter
 
48,423

Total lease payments
 
89,396

Less: present value discount
 
(12,196
)
Total Lease Liability
 
$
77,200



8.
EQUITY AND STOCK-BASED COMPENSATION
Common Stock Repurchases. On March 17, 2016, the Board of Directors of the Company (the “Board”), authorized a program to repurchase up to $100 million of common stock and extended the program by $100 million on August 2, 2019. The Company may repurchase shares on the open market or through privately negotiated transactions at times and prices considered appropriate, at the discretion of the Company, and subject to its assessment of alternative uses of capital, stock trading price, general market conditions and regulatory factors. The repurchase program does not obligate the Company to acquire any specific number of shares. The share repurchase program will continue in effect until terminated by the Board. During the six months ended December 31, 2019, the Company did not repurchase any of the $8.4 million remaining under the previous Board authorized stock repurchase program or the $100.0 million under the new authorization. The Company accounts for treasury stock using the cost method as a reduction of stockholders’ equity in the accompanying unaudited condensed consolidated financial statements.
Restricted Stock Units. During the six months ended December 31, 2019 and 2018, the Company granted 380,765 and 752,662 restricted stock unit awards (“RSUs”) to employees and directors, respectively. RSUs granted during these quarters generally vest over three years, one-third on each anniversary date, except for any RSUs granted to the Company’s CEO, which vest one-fourth on each fiscal year end.
The Company’s income before income taxes and net income for the six months ended December 31, 2019 and 2018 include stock award expense of $9,811 and $11,175, with total income tax benefit of $2,798 and $2,967, respectively. The Company recognizes compensation expense based upon the grant-date fair value divided by the vesting and the service period between each vesting date. At December 31, 2019, unrecognized compensation expense related to non-vested awards aggregated to $34,687 and is expected to be recognized in future periods as follows:
(Dollars in thousands)
Stock Award
Compensation
Expense
For the fiscal year remainder:
 
2020
$
9,669

2021
14,219

2022
7,733

2023
1,900

2024
734

Thereafter
432

Total
$
34,687




28

The following table presents the status and changes in restricted stock units for the periods indicated:
 
Restricted
Stock Units
 
Weighted-Average
Grant-Date
Fair Value
Non-vested balance at June 30, 2018
1,233,731

 
$
24.84

Granted
1,103,249

 
34.68

Vested
(699,223
)
 
26.74

Canceled
(90,909
)
 
29.46

Non-vested balance at June 30, 2019
1,546,848

 
$
30.73

Granted
380,765

 
25.76

Vested
(351,556
)
 
27.18

Canceled
(82,615
)
 
29.78

Non-vested balance at December 31, 2019
1,493,442

 
$
30.35


The total fair value of shares vested for the three and six months ended December 31, 2019 was $2,349 and $9,531. The total fair value of shares vested for the three and six months ended December 31, 2018 was $3,420 and $13,188.
9.
EARNINGS PER COMMON SHARE
Earnings per common share (“EPS”) are presented under two formats: basic EPS and diluted EPS. Basic EPS is computed by dividing the net income attributable to common stock (net income after deducting dividends on preferred stock) by the sum of the weighted-average number of common shares outstanding during the year and the unvested average of participating RSUs. Diluted EPS is computed by dividing the sum of net income attributable to common stock and dividends on diluted preferred stock by the sum of the weighted-average number of common shares outstanding during the year and the impact of dilutive potential common shares, such as nonparticipating RSUs, stock options and convertible preferred stock.
The Company accounts for unvested stock-based compensation awards containing non-forfeitable rights to dividends or dividend equivalents (collectively, “dividends”) as participating securities and includes the awards in the EPS calculation using the two-class method. The Company had granted restricted stock units under the 2004 Stock Incentive Plan to certain directors and employees, which entitle the recipients to receive non-forfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities. Under the two class method, all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities, based on their respective rights to receive dividends. Under the 2014 Stock Incentive Plan, RSUs have no stockholder rights, meaning they are not entitled to dividends and are considered nonparticipating. These nonparticipating RSUs are not included in the basic EPS calculation and are included in the diluted EPS calculation using the treasury stock method.
The following table presents the calculation of basic and diluted EPS:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Earnings Per Common Share
 
 
 
 
 
 
 
Net income
$
41,295

 
$
38,835

 
$
82,081

 
$
75,676

Preferred stock dividends
(78
)
 
(78
)
 
(155
)
 
(155
)
Net income attributable to common stockholders
$
41,217

 
$
38,757

 
$
81,926

 
$
75,521

Average common shares outstanding
61,315,590

 
62,336,779

 
61,281,127

 
62,566,188

Total qualifying shares
61,315,590

 
62,336,779

 
61,281,127

 
62,566,188

Earnings per common share
$
0.67

 
$
0.62

 
$
1.34

 
$
1.21

Diluted Earnings Per Common Share
 
 
 
 
 
 
 
Dilutive net income attributable to common stockholders
$
41,217

 
$
38,757

 
$
81,926

 
$
75,521

Average common shares issued and outstanding
61,315,590

 
62,336,779

 
61,281,127

 
62,566,188

Dilutive effect of average unvested RSUs
623,398

 
338,097

 
619,506

 
480,745

Total dilutive common shares outstanding
61,938,988

 
62,674,876

 
61,900,633

 
63,046,933

Diluted earnings per common share
$
0.67

 
$
0.62

 
$
1.32

 
$
1.20



29


10.
COMMITMENTS AND CONTINGENCIES
Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2019, the Company had commitments to originate $53,301 in fixed rate loans and leases and $665,718 in variable rate loans, totaling an aggregate outstanding principal balance of $719,019. For December 31, 2019, the Company’s fixed rate commitments to originate had a weighted-average rate of 3.46%. At December 31, 2019, the Company also had commitments to sell $82,610 in fixed rate loans and $1,350 in variable rate loans, totaling an aggregate outstanding principal balance of $83,960.
Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
In the normal course of business, Axos Clearing’s customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and Axos Clearing has to purchase or sell the financial instrument underlying the contract at a loss. Axos Clearing’s clearing agreements with broker-dealers for which it provides clearing services requires them to indemnify Axos Clearing if customers fail to satisfy their contractual obligation.
Litigation. On October 15, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative class action lawsuit styled Golden v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District of California (the “Golden Case”). On November 3, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a second putative class action lawsuit styled Hazan v. BofI Holding, Inc., et al, and also brought in the United States District Court for the Southern District of California (the “Hazan Case”). On February 1, 2016, the Golden Case and the Hazan Case were consolidated as In re BofI Holding, Inc. Securities Litigation, Case #: 3:15-cv-02324-GPC-KSC (the “Class Action”), and the Houston Municipal Employees Pension System was appointed lead plaintiff. The plaintiffs allege that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a complaint filed in connection with a wrongful termination of employment lawsuit filed on October 13, 2015 (the “Employment Matter”) and that as a result the Company’s statements regarding its internal controls, as well as portions of its financial statements, were false and misleading. On March 21, 2018, the Court entered a final order dismissing the Class Action with prejudice. Subsequently, the plaintiff filed a notice of appeal and opening brief, the Company has filed its answering brief and argument in the appeal from dismissal was held.
On April 3, 2017, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative class action lawsuit styled Mandalevy v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District of California (the “Mandalevy Case”). The Mandalevy Case seeks monetary damages and other relief on behalf of a putative class that has not been certified by the Court. The complaint in the Mandalevy Case (the “Mandalevy Complaint”) alleges a class period that differs from that alleged in the First Class Action, and that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a March 2017 media article. The Mandalevy Case has not been consolidated into the First Class Action. On December 7, 2018, the Court entered a final order granting the defendants’ motion and dismissing the Mandalevy Case with prejudice. Subsequently, the plaintiff filed a notice of appeal and opening brief and the Company filed its answering brief, on May 8, 2019.
The Company and the other named defendants dispute the allegations of wrongdoing advanced by the plaintiffs in the Class Action, the Mandalevy Case, and in the Employment Matter, as well as those plaintiffs’ statement of the underlying factual circumstances, and are vigorously defending each case.
In addition to the First Class Action and the Mandalevy Case, two separate shareholder derivative actions were filed in December, 2015, purportedly on behalf of the Company. The first derivative action, Calcaterra v. Garrabrants, et al, was filed in

30

the United States District Court for the Southern District of California on December 3, 2015. The second derivative action, Dow v. Micheletti, et al, was filed in the San Diego County Superior Court on December 16, 2015. A third derivative action, DeYoung v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 22, 2016, a fourth derivative action, Yong v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 29, 2016, a fifth derivative action, Laborers Pension Trust Fund of Northern Nevada v. Allrich et al, was filed in the United States District Court for the Southern District of California on February 2, 2016, and a sixth derivative action, Garner v. Garrabrants, et al, was filed in the San Diego County Superior Court on August 10, 2017. Each of these six derivative actions names the Company as a nominal defendant, and certain of its officers and directors as defendants. Each complaint sets forth allegations of breaches of fiduciary duties, gross mismanagement, abuse of control, and unjust enrichment against the defendant officers and directors. The plaintiffs in these derivative actions seek damages in unspecified amounts on the Company’s behalf from the officer and director defendants, certain corporate governance actions, and an award of their costs and attorney’s fees.
The United States District Court for the Southern District of California ordered the four above-referenced derivative actions pending before it to be consolidated and appointed lead counsel in the consolidated action. On June 7, 2018, the Court entered an order granting defendant’s motion for judgment on the pleadings, but giving the plaintiffs limited leave to amend by June 28, 2018. The plaintiffs failed to file an amended complaint, and instead plaintiffs filed on June 28, 2018 a motion to stay the case pending resolution of the securities class action and Employment Matter. On August 10, 2018, defendants filed an opposition to plaintiffs’ motion. On September 11, 2018, the plaintiffs filed a second amended complaint. On October 16, 2018, defendants filed a motion to dismiss the second amended complaint. On October 16, 2018, defendants filed a motion to dismiss the second amended complaint. The Court dismissed the second amended complaint with prejudice on May 23, 2019. On June 20, 2019, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit and subsequently opening and answering briefs were filed.
The two derivative actions pending before the San Diego County Superior Court have been consolidated and have been stayed by agreement of the parties.
In view of the inherent difficulty of predicting the outcome of each legal action, particularly since claimants seek substantial or indeterminate damages, it is not possible to reasonably predict or estimate the eventual loss or range of loss, if any, related to each legal action.
11.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted related party loans collateralized by real property to certain executive officers, directors and their affiliates. There was one new related party loan in the amount of $0.6 million funded under the provisions of the employee loan program and one refinance of an existing loan during the six months ended December 31, 2019, and one new loan and no refinances of existing loans during the six months ended December 31, 2018.

31

12.
SEGMENT REPORTING

The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Company operates through two operating segments: Banking Business and Securities Business.
Banking Business. The Banking Business includes a broad range of banking services including online banking, concierge banking, prepaid card services, and mortgage, vehicle and unsecured lending through online and telephonic distribution channels to serve the needs of consumer and small businesses nationally. In addition, the Banking Business focuses on providing deposit products nationwide to industry verticals (e.g., Title and Escrow), cash management products to a variety of businesses, and commercial & industrial and commercial real estate lending to clients. The Banking Business also includes a bankruptcy trustee and fiduciary service that provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees and fiduciaries.
Securities Business. The Securities Business consists of two sets of products and services, securities services provided to third-party securities firms and investment management provided to consumers.
Securities services includes fully disclosed clearing services through Axos Clearing to FINRA- and SEC-registered member firms for trade execution and clearance as well as back office services such as record keeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of securities. Providing financing to our brokerage customers for their securities trading activities through margin loans that are collateralized by securities, cash, or other acceptable collateral. Securities lending activities that include borrowing and lending securities with other broker-dealers. These activities involve borrowing securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required settlement date, and lending securities to other broker dealers for similar purposes.
Investment management includes our digital wealth management business, which provides our retail customers with investment management services through a comprehensive and flexible technology platform.
There are no material inter-segment sales or transfers. The accounting policies used by each reportable segment are the same as those discussed in Note 1- “Organizations and Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended June 30, 2019. All costs, except certain corporate administration costs and income taxes, have been allocated to the reportable segments. Therefore, combined amounts agree to the unaudited condensed consolidated totals.

32

In order to reconcile the two segments to the unaudited condensed consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results, goodwill, and assets of the segments:
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2019
(Dollars in thousands)
Banking
Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
105,340

 
$
4,037

 
$
(957
)
 
$
108,420

Provision for loan losses
4,500

 
—

 
—

 
4,500

Non-interest income
16,225

 
6,284

 
(1,302
)
 
21,207

Non-interest expense
53,253

 
10,455

 
3,257

 
66,965

Income before taxes
$
63,812

 
$
(134
)
 
$
(5,516
)
 
$
58,162


 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2018
(Dollars in thousands)
Banking
Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
93,481

 
$
—

 
$
(761
)
 
$
92,720

Provision for loan losses
4,950

 
—

 
—

 
4,950

Non-interest income
16,892

 
—

 
—

 
16,892

Non-interest expense
45,188

 
—

 
5,745

 
50,933

Income before taxes
$
60,235

 
$
—

 
$
(6,506
)
 
$
53,729


 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2019
(Dollars in thousands)
Banking
Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
204,812

 
$
9,183

 
$
(2,272
)
 
$
211,723

Provision for loan losses
7,200

 
—

 
—

 
7,200

Non-interest income
32,015

 
12,685

 
(1,957
)
 
42,743

Non-interest expense
103,886

 
21,519

 
7,027

 
132,432

Income before taxes
$
125,741

 
$
349

 
$
(11,256
)
 
$
114,834


 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2018
(Dollars in thousands)
Banking
Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
180,492

 
$
—

 
$
(1,493
)
 
$
178,999

Provision for loan losses
5,550

 
—

 
—

 
5,550

Non-interest income
33,435

 
—

 
—

 
33,435

Non-interest expense
91,230

 
—

 
12,625

 
103,855

Income before taxes
$
117,147

 
$
—

 
$
(14,118
)
 
$
103,029


 
 
 
 
 
 
 
 
 
December 31, 2019
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Goodwill
$
35,721

 
$
35,501

 
$
—

 
$
71,222

Total Assets
$
11,550,782

 
$
626,142

 
$
92,364

 
$
12,269,288



33

 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Goodwill
$
35,721

 
$
—

 
$
—

 
$
35,721

Total Assets
$
9,796,674

 
$
—

 
$
13,422

 
$
9,810,096




34

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of Axos Financial, Inc. and subsidiaries (the “Company”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K for the year ended June 30, 2019, and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.
Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include changes in the interest rate environment, economic conditions, changes in the competitive marketplace, risks associated with credit quality, the outcome and effects of pending class action litigation filed against the Company and other risk factors discussed under the heading “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 and in our Annual Report on Form 10-K for the year ended June 30, 2019, which has been filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.
General
Our Company, the holding company for Axos Bank (the “Bank”), is a diversified financial services company with approximately $12.3 billion in assets that provides consumer and business banking products through its online, low-cost distribution channels and affinity partners. Our Bank has deposit and loan and lease customers nationwide including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. Our Bank generates fee income from consumer and business products including fees from loans originated for sale and transaction fees earned from processing payment activity. Our wholly-owned subsidiaries, Axos Clearing LLC (“Axos Clearing”) and Axos Invest, Inc. (“Axos Invest”), generate interest and fee income by providing 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 New York Stock Exchange and is a component of the Russell 2000® Index and the S&P SmallCap 600® Index.
Our Bank is a federal savings bank wholly-owned by our Company and regulated by the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition. As a depository institution with more than $10 billion in assets, our Bank and our affiliates are subject to direct supervision by the Consumer Financial Protection Bureau (“CFPB”).
Axos Clearing is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”). Axos Invest is a Registered Investment Advisor under the Investment Advisers Act of 1940, that is registered with the SEC, and Axos Invest LLC is an introducing broker-dealer that is registered with the SEC and FINRA.
We distribute our deposit products through a wide range of retail distribution channels, and our deposits consist of demand, savings and time deposits accounts. We distribute our loan products through our retail, correspondent and wholesale channels, and the loans we retain are primarily first mortgages secured by single family real property and by multifamily real property as well as commercial & industrial loans to businesses. Our mortgage-backed securities consist of mortgage pass-through securities issued by government-sponsored entities and non-agency collateralized mortgage obligations and asset-backed mortgage-backed securities issued by private sponsors. We believe our flexibility to adjust our asset generation channels has been a competitive advantage allowing us to avoid markets and products where credit fundamentals are poor or risks and rewards are not sufficient to support our required return on equity.

35

Segment Information
The Company determines reportable segments based on what separate financial information is available and what segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. We operate through two segments: Banking Business and Securities Business.
Banking Business. The Banking Business includes a broad range of banking services including online banking, concierge banking, prepaid card services, and mortgage, vehicle and unsecured lending through online and telephonic distribution channels to serve the needs of consumer and small businesses nationally. In addition, the Banking Business focuses on providing deposit products nationwide to industry verticals (e.g., Title and Escrow), cash management products to a variety of businesses, and commercial & industrial and commercial real estate lending to clients. The Banking Business also includes a bankruptcy trustee and fiduciary service that provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees and fiduciaries.
Securities Business. The Securities Business consists of two sets of products and services, securities services provided to third-party securities firms and investment management provided to consumers.
Securities services includes fully disclosed clearing services through Axos Clearing to FINRA- and SEC-registered member firms for trade execution and clearance as well as back office services such as record keeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance and custody of securities. We provide financing to our brokerage customers for their securities trading activities through margin loans that are collateralized by securities, cash, or other acceptable collateral. Securities lending activities include borrowing and lending securities with other broker-dealers. These activities involve borrowing securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required settlement date, and lending securities to other broker dealers for similar purposes.
Investment management includes our digital wealth management business, which provides our retail customers with investment management services through a comprehensive and flexible technology platform.
Segment results are compiled based upon the management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions or in accordance with generally accepted accounting principles.
The Company evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. Certain corporate administration costs and income taxes have not been allocated to the reportable segments. Therefore, in order to reconcile the two segments to the unaudited condensed consolidated totals, we include parent-only activities and intercompany eliminations.
Mergers and Acquisitions
From time to time we undertake acquisitions or similar transactions consistent with our Company’s operating and growth strategies. We completed two business acquisition and two asset acquisitions during the fiscal year ended June 30, 2019, with no new acquisition activity during the six months ended December 31, 2019. Additionally, in October 2019, the Bank renewed its agreement with H&R Block to be the exclusive provider of interest-free Refund Advance loans to customers during the 2020 tax season. Further discussion of our Brand Partnership Products can be found under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2019.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe 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.
Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2019 audited consolidated financial statements and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended June 30, 2019.

36


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, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious as to their use of such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors’ understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.
We define net income without the after-tax impact of non-recurring acquisition-related costs (including amortization of intangible assets related to acquisitions), and excess FDIC expense, and other costs (unusual or non-recurring charges), (“adjusted earnings”), a non-GAAP financial measure. Excess FDIC expense is defined as the higher insurance costs associated with increased levels of short-term brokered deposits in anticipation of the acquisition of deposits from Nationwide Bank. Adjusted earnings per diluted common share (“adjusted EPS”), a non-GAAP financial measure, is calculated by dividing non-GAAP adjusted earnings by the average number of diluted common shares outstanding during the period. We believe the non-GAAP measures of adjusted earnings and adjusted EPS provide useful information about the Bank’s operating performance. Excluding the non-recurring acquisition related costs, excessive FDIC expense, and other costs provides investors with an understanding of Axos’ business without these non-recurring costs.
Below is a reconciliation of net income to adjusted earnings and adjusted EPS (Non-GAAP) for the periods shown:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Net income
$
41,295

 
$
38,835

 
$
82,081

 
$
75,676

Acquisition-related costs
2,330

 
1,064

 
3,977

 
2,133

Excess FDIC expense
—

 
—

 
—

 
1,111

Income taxes
(676
)
 
(295
)
 
(1,134
)
 
(861
)
Adjusted earnings (Non-GAAP)
$
42,949

 
$
39,604

 
$
84,924

 
$
78,059

Adjusted EPS (Non-GAAP)
$
0.69

 
$
0.63

 
$
1.37

 
$
1.24


We define book value adjusted for goodwill and other intangible assets as tangible book value (“tangible book value”),
a non-GAAP financial measure. Tangible book value is calculated using common stockholders’ equity minus mortgage servicing rights, goodwill and other intangible assets. Tangible book value per common share, a non-GAAP financial measure, is calculated by dividing tangible book value by the common shares outstanding at the end of the period. We believe tangible book value per common share is useful in evaluating the Company’s capital strength, financial condition, and ability to manage potential losses.
Below is a reconciliation of total stockholders’ equity to tangible book value (Non-GAAP) as of the dates indicated:
 
December 31,
(Dollars in thousands)
2019
 
2018
Total stockholders’ equity
$
1,160,752

 
$
994,401

Less: preferred stock
5,063

 
5,063

Common stockholders’ equity
1,155,689

 
989,338

Less: mortgage servicing rights, carried at fair value
11,262

 
11,215

Less: goodwill and other intangible assets
130,534

 
79,829

Tangible common stockholders’ equity (Non-GAAP)
$
1,013,893

 
$
898,294

Common shares outstanding at end of period
61,338,386

 
61,207,743

Tangible book value per common share (Non-GAAP)
$
16.53

 
$
14.68



37

SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data concerning the periods indicated:
AXOS FINANCIAL, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands)
December 31,
2019
 
June 30,
2019
 
December 31,
2018
Selected Balance Sheet Data:
 
 
 
 
 
Total assets
$
12,269,288

 
$
11,220,238

 
$
9,810,096

Loans and leases—net of allowance for loan and lease losses
10,141,397

 
9,382,124

 
9,017,550

Loans held for sale, carried at fair value
36,092

 
33,260

 
16,135

Loans held for sale, lower of cost or fair value
3,430

 
4,800

 
2,883

Allowance for loan and lease losses
59,514

 
57,085

 
53,706

Securities—trading
1,740

 
—

 
—

Securities—available-for-sale
208,026

 
227,513

 
216,785

Securities borrowed
168,114

 
144,706

 
—

Customer, broker-dealer and clearing receivables
244,379

 
203,192

 
—

Total deposits
10,114,340

 
8,983,173

 
8,340,520

Advances from the FHLB
257,500

 
458,500

 
342,500

Borrowings, subordinated notes and debentures

62,233

 
168,929

 
54,625

Securities loaned
206,199

 
198,356

 
—

Customer, broker-dealer and clearing payables
305,669

 
238,604

 
—

Total stockholders’ equity
1,160,752

 
1,073,050

 
994,401

 
 
 
 
 
 
Capital Ratios:
 
 
 
 
 
Equity to assets at end of period
9.46
%
 
9.56
%
 
10.14
%
Axos Financial, Inc.:
 
 
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
8.88
%
 
8.75
%
 
9.41
%
Common equity tier 1 capital (to risk-weighted assets)
11.29
%
 
11.43
%
 
12.50
%
Tier 1 capital (to risk-weighted assets)
11.35
%
 
11.49
%
 
12.57
%
Total capital (to risk-weighted assets)
12.65
%
 
12.91
%
 
14.01
%
Axos Bank:
 
 
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
9.16
%
 
9.21
%
 
9.03
%
Common equity tier 1 capital (to risk-weighted assets)
11.55
%
 
12.14
%
 
12.06
%
Tier 1 capital (to risk-weighted assets)
11.55
%
 
12.14
%
 
12.06
%
Total capital (to risk-weighted assets)
12.25
%
 
12.89
%
 
12.80
%
Axos Clearing, LLC:
 
 
 
 
 
Net capital
31,917

 
21,669

 
N/A

Excess capital
27,056

 
17,858

 
N/A

Net capital as a percentage of aggregate debit items
13.13
%
 
11.37
%
 
N/A

Net capital in excess of 5% aggregate debit items
19,765

 
12,142

 
N/A





38

AXOS FINANCIAL, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION

 
At or for the Three Months Ended
 
At or for the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Selected Income Statement Data:
 
 
 
 
 
 
 
Interest and dividend income
$
147,288

 
$
131,239

 
$
293,633

 
$
254,036

Interest expense
38,868

 
38,519

 
81,910

 
75,037

Net interest income
108,420

 
92,720

 
211,723

 
178,999

Provision for loan and lease losses
4,500

 
4,950

 
7,200

 
5,550

Net interest income after provision for loan and lease losses
103,920

 
87,770

 
204,523

 
173,449

Non-interest income
21,207

 
16,892

 
42,743

 
33,435

Non-interest expense
66,965

 
50,933

 
132,432

 
103,855

Income before income tax expense
58,162

 
53,729

 
114,834

 
103,029

Income tax expense
16,867

 
14,894

 
32,753

 
27,353

Net income
$
41,295

 
$
38,835

 
$
82,081

 
$
75,676

Net income attributable to common stock
$
41,217

 
$
38,757

 
$
81,926

 
$
75,521

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.62

 
$
1.34

 
$
1.21

Diluted
$
0.67

 
$
0.62

 
$
1.32

 
$
1.20

Adjusted earnings (Non-GAAP)
$
0.69

 
$
0.63

 
$
1.37

 
$
1.24

Book value
$
18.84

 
$
16.16

 
$
18.84

 
$
16.16

Tangible book value (Non-GAAP)
$
16.53

 
$
14.68

 
$
16.53

 
$
14.68

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
61,315,590

 
62,336,779

 
61,281,127

 
62,566,188

Diluted
61,938,988

 
62,674,876

 
61,900,633

 
63,046,933

Common shares outstanding at end of period
61,338,386

 
61,207,743

 
61,338,386

 
61,207,743

Common shares issued at end of period
66,915,478

 
66,169,401

 
66,915,478

 
66,169,401

 
 
 
 
 
 
 
 
Performance Ratios and Other Data:
 
 
 
 
 
 
 
Loan and lease originations for investment
$
1,435,152

 
$
1,855,336

 
$
2,896,918

 
$
3,205,515

Loan originations for sale
$
666,192

 
$
610,165

 
$
994,004

 
$
913,132

Loan and lease purchases
$
—

 
$
11,009

 
$
—

 
$
11,009

Return on average assets
1.42
%
 
1.59
%
 
1.43
%
 
1.58
%
Return on average common stockholders’ equity
14.35
%
 
15.29
%
 
14.57
%
 
15.14
%
Interest rate spread1
3.37
%
 
3.48
%
 
3.35
%
 
3.44
%
Net interest margin2
3.87
%
 
3.87
%
 
3.81
%
 
3.82
%
Net interest margin2 – Banking Business Segment only
3.94
%
 
3.90
%
 
3.89
%
 
3.85
%
Efficiency ratio3
51.66
%
 
46.47
%
 
52.04
%
 
48.89
%
Efficiency ratio3 – Banking Business Segment only
43.81
%
 
40.94
%
 
43.87
%
 
42.65
%
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
Net annualized charge-offs to average loans and leases
0.17
%
 
0.06
%
 
0.10
%
 
0.02
%
Non-performing loans and leases to total loans and leases
0.52
%
 
0.35
%
 
0.52
%
 
0.35
%
Non-performing assets to total assets
0.49
%
 
0.40
%
 
0.49
%
 
0.40
%
Allowance for loan and lease losses to total loans and leases held for investment at end of period
0.58
%
 
0.59
%
 
0.58
%
 
0.59
%
Allowance for loan and lease losses to non-performing loans and leases
112.85
%
 
124.88
%
 
112.85
%
 
124.88
%
1  
Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the annualized weighted average
rate paid on interest-bearing liabilities.
2 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
3 Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.

39

RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 2019 and 2018
For the three months ended December 31, 2019, we had net income of $41.3 million compared to net income of $38.8 million for the three months ended December 31, 2018. Net income attributable to common stockholders was $41.2 million or $0.67 per diluted share for the three months ended December 31, 2019 compared to net income attributable to common shareholders of $38.8 million, or $0.62 per diluted share for the three months ended December 31, 2018. For the six months ended December 31, 2019, we had net income of $82.1 million compared to net income of $75.7 million for the six months ended December 31, 2018. Net income attributable to common stockholders was $81.9 million, or $1.32 per diluted share for the six months ended December 31, 2019 compared to net income attributable to common shareholders of $75.5 million, or $1.20 per diluted share for the six months ended December 31, 2018. For the three and six months ended December 31, 2019, the increase in net income was primarily due to growth in net interest income and non-interest income, partially offset by an increase in non-interest expense.

Adjusted earnings and adjusted EPS, non-GAAP measures, which exclude non-recurring costs related to mergers and acquisitions (including amortization of intangible assets related to acquisitions) and excess FDIC expense, increased 8.4% to $42.9 million and 9.5% to $0.69, respectively, for the quarter ended December 31, 2019 compared to $39.6 million and $0.63, respectively, for the quarter ended December 31, 2018. Adjusted earnings and adjusted EPS increased 8.8% to $84.9 million and 10.5% to $1.37, respectively, for the six months ended December 31, 2019 compared to $78.1 million and $1.24, respectively, for the six months ended December 31, 2018.
Net Interest Income
Net interest income for the three and six months ended December 31, 2019 totaled $108.4 million and $211.7 million, an increase of 16.9% and 18.3%, compared to net interest income of $92.7 million and $179.0 million for the three and six months ended December 31, 2018. The growth of net interest income for both the three and six months ended December 31, 2019 is primarily due to increased average earnings assets from net loan and lease portfolio growth, partially offset by volume and rate increases in deposits.
Total interest and dividend income during the three and six months ended December 31, 2019 increased 12.2% to $147.3 million and 15.6% to $293.6 million, respectively, compared to $131.2 million and $254.0 million during the three and six months ended December 31, 2018. The increases in interest and dividend income for the three and six months ended December 31, 2019 was primarily attributable to the continued growth in average earning assets from loan and lease originations, as well as the addition of securities borrowed and margin lending from our Securities Business. The average balance of interest-earning loans and leases increased 11.7% and 12.5% for the three and six months ended December 31, 2019 compared to the three and six months ended December 31, 2018.
Total interest expense was $38.9 million and $81.9 million for the three and six months ended December 31, 2019, an increase of $0.3 million or 0.9% and of $6.9 million or 9.2% as compared with the three and six months ended December 31, 2018, respectively. The increase for the three months ended December 31, 2019 compared to the same 2018 period was due primarily to increased average interest-bearing liabilities which grew 7.3%. Interest-bearing savings and demand deposits grew by $1,013.6 million and $909.1 million and time deposits grew by $342.3 million and $542.2 million for the three and six months ending December 31, 2018 and 2019, respectively.
For the three months ended December 31, 2019, the net interest margin, defined as annualized net interest income divided by average earning assets, was stable at 3.87% compared to the three months ended December 31, 2018. For the six months ended December 31, 2019, the net interest margin decreased from 3.82% to 3.81% compared to the six months ended December 31, 2018.

40

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the three months ended December 31, 2019 and 2018:
 
For the Three Months Ended
 
December 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
 
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases3, 4
$
9,827,007

 
$
136,602

 
5.56
%
 
$
8,800,280

 
$
123,275

 
5.60
%
Interest-earning deposits in other financial institutions
755,275

 
3,240

 
1.72
%
 
512,922

 
2,905

 
2.27
%
Securities4
202,266

 
3,051

 
6.03
%
 
210,171

 
3,465

 
6.59
%
Securities borrowed and margin lending5
400,771

 
3,865

 
3.86
%
 
—

 
—

 
—
%
Stock of the regulatory agencies
32,601

 
530

 
6.50
%
 
56,389

 
1,594

 
11.31
%
Total interest-earning assets
11,217,920

 
147,288

 
5.25
%
 
9,579,762

 
131,239

 
5.48
%
Non-interest-earning assets
382,178

 
 
 
 
 
219,849

 
 
 
 
Total assets
$
11,600,098

 
 
 
 
 
$
9,799,611

 

 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
4,473,537

 
$
17,418

 
1.56
%
 
$
3,459,892

 
$
12,941

 
1.50
%
Time deposits
2,537,155

 
15,496

 
2.44
%
 
2,194,901

 
13,044

 
2.38
%
Securities loaned
212,412

 
163

 
0.31
%
 
—

 
—

 
—
%
Advances from the FHLB
948,464

 
4,495

 
1.90
%
 
1,982,717

 
11,574

 
2.33
%
Borrowings, subordinated notes and debentures
84,576

 
1,296

 
6.13
%
 
58,963

 
960

 
6.51
%
Total interest-bearing liabilities
8,256,144

 
38,868

 
1.88
%
 
7,696,473

 
38,519

 
2.00
%
Non-interest-bearing demand deposits
1,756,495

 
 
 
 
 
1,057,233

 
 
 
 
Other non-interest-bearing liabilities
438,551

 
 
 
 
 
27,158

 
 
 
 
Stockholders’ equity
1,148,908

 
 
 
 
 
1,018,747

 
 
 
 
Total liabilities and stockholders’ equity
$
11,600,098

 
 
 
 
 
$
9,799,611

 
 
 
 
Net interest income
 
 
$
108,420

 
 
 
 
 
$
92,720

 
 
Interest rate spread6
 
 
 
 
3.37
%
 
 
 
 
 
3.48
%
Net interest margin7
 
 
 
 
3.87
%
 
 
 
 
 
3.87
%
1 
Average balances are obtained from daily data.
2 
Annualized.
3 
Loans and leases include loans held for sale, loan premiums and unearned fees.
4 
Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans and leases include average balances of $28.6 million and $29.3 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2019 and 2018 three-month periods, respectively.
5 
Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited condensed consolidated balance sheets.
6 
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.
7 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.





41

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the six months ended December 31, 2019 and 2018:
 
For the Six Months Ended
 
December 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
 
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases3, 4
$
9,706,230

 
$
270,489

 
5.57
%
 
$
8,629,328

 
$
239,868

 
5.56
%
Interest-earning deposits in other financial institutions
745,878

 
7,473

 
2.00
%
 
511,692

 
5,473

 
2.14
%
Securities4
205,662

 
5,633

 
5.48
%
 
195,155

 
6,478

 
6.64
%
Securities borrowed and margin lending5
421,943

 
9,207

 
4.36
%
 
—

 
—

 
—
%
Stock of the regulatory agencies
26,439

 
831

 
6.29
%
 
46,067

 
2,217

 
9.63
%
Total interest-earning assets
11,106,152

 
293,633

 
5.29
%
 
9,382,242

 
254,036

 
5.42
%
Non-interest-earning assets
368,121

 
 
 
 
 
208,788

 
 
 
 
Total assets
$
11,474,273

 
 
 
 
 
$
9,591,030

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
4,829,469

 
$
40,779

 
1.69
%
 
$
3,920,398

 
$
30,342

 
1.55
%
Time deposits
2,511,527

 
30,941

 
2.46
%
 
1,969,282

 
24,324

 
2.47
%
Securities loaned
326,161

 
449

 
0.28
%
 
—

 
—

 
—
%
Advances from the FHLB
627,617

 
6,259

 
1.99
%
 
1,635,301

 
18,482

 
2.26
%
Borrowings, subordinated notes and debentures
132,077

 
3,482

 
5.27
%
 
56,776

 
1,889

 
6.65
%
Total interest-bearing liabilities
8,426,851

 
81,910

 
1.94
%
 
7,581,757

 
75,037

 
1.98
%
Non-interest-bearing demand deposits
1,604,911

 
 
 
 
 
954,025

 
 
 
 
Other non-interest-bearing liabilities
313,235

 
 
 
 
 
52,552

 
 
 
 
Stockholders’ equity
1,129,276

 
 
 
 
 
1,002,696

 
 
 
 
Total liabilities and stockholders’ equity
$
11,474,273

 
 
 
 
 
$
9,591,030

 
 
 
 
Net interest income
 
 
$
211,723

 
 
 
 
 
$
178,999

 
 
Interest rate spread6
 
 
 
 
3.35
%
 
 
 
 
 
3.44
%
Net interest margin7
 
 
 
 
3.81
%
 
 
 
 
 
3.82
%
1 
Average balances are obtained from daily data.
2 
Annualized.
3 
Loans and leases include loans held for sale, loan premiums and unearned fees.
4 
Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans and leases include average balances of $28.8 million and $29.5 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2019 and 2018 six-month periods, respectively.
5 
Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited condensed consolidated balance sheets.
6 
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.
7 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

42

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume) for the three and six months ended December 31, 2019 and 2018:

 
For the Three Months Ended
 
For the Six Months Ended
 
December 31, 2019
 
December 31, 2019
 
2019 vs 2018
 
2019 vs 2018
 
Increase (Decrease) Due to
 
Increase (Decrease) Due to
(Dollars in thousands)
Volume
 
Rate
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
Total
Increase
(Decrease)
Increase / (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases
$
14,217

 
$
(890
)
 
$
13,327

 
$
30,186

 
$
435

 
$
30,621

Interest-earning deposits in other financial institutions
1,154

 
(819
)
 
335

 
2,377

 
(377
)
 
2,000

Securities
(114
)
 
(300
)
 
(414
)
 
334

 
(1,179
)
 
(845
)
Securities borrowed and margin lending
3,865

 
—

 
3,865

 
9,207

 
—

 
9,207

Stock of the regulatory agencies
(530
)
 
(534
)
 
(1,064
)
 
(764
)
 
(622
)
 
(1,386
)
 
$
18,592

 
$
(2,543
)
 
$
16,049

 
$
41,340

 
$
(1,743
)
 
$
39,597

Increase / (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
3,939

 
$
538

 
$
4,477

 
$
7,511

 
$
2,926

 
$
10,437

Time deposits
2,111

 
341

 
2,452

 
6,715

 
(98
)
 
6,617

Securities loaned
163

 
—

 
163

 
449

 
—

 
449

Advances from the FHLB
(5,229
)
 
(1,850
)
 
(7,079
)
 
(10,238
)
 
(1,985
)
 
(12,223
)
Borrowings, subordinated notes and debentures
395

 
(59
)
 
336

 
2,055

 
(462
)
 
1,593

 
$
1,379

 
$
(1,030
)
 
$
349

 
$
6,492

 
$
381

 
$
6,873


Provision for Loan and Lease Losses
The loan and lease loss provision was $4.5 million for the three months ended December 31, 2019 compared to $5.0 million for the three months ended December 31, 2018. The loan and lease loss provision was $7.2 million for the six months ended December 31, 2019 compared to $5.6 million for the six months ended December 31, 2018. The decrease in the loan and lease loss provision for the three months ended December 31, 2019 was primarily the result of changes in loan and lease portfolio mix. The increase in the loan and lease loss provision for the six months ended December 31, 2019 was primarily the result of loan portfolio growth and changes in the loan mix. Provisions for loan and lease losses are charged to income to bring the allowance for loan and lease losses to a level deemed appropriate by management based on the factors discussed under “Financial Condition—Asset Quality and Allowance for Loan and Lease Losses.”

43

Non-Interest Income
The following table sets forth information regarding our non-interest income for the periods shown:
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2019
 
2018
 
Inc (Dec)
 
2019
 
2018
 
Inc (Dec)
Realized gain (loss) on sale of securities
$
—

 
$
—

 
$
—

 
$
—

 
$
(133
)
 
$
133

Prepayment penalty fee income
2,006

 
2,467

 
(461
)
 
3,418

 
3,371

 
47

Gain on sale – other
1,924

 
1,943

 
(19
)
 
5,746

 
5,076

 
670

Mortgage banking income
2,224

 
792

 
1,432

 
5,018

 
2,607

 
2,411

Broker-dealer fee income
5,555

 
—

 
5,555

 
11,211

 
—

 
11,211

Banking and service fees
9,498

 
11,690

 
(2,192
)
 
17,350

 
22,514

 
(5,164
)
Total non-interest income
$
21,207

 
$
16,892

 
$
4,315

 
$
42,743

 
$
33,435

 
$
9,308

Non-interest income increased $4.3 million to $21.2 million for the three months ended December 31, 2019. The increase was the result of the addition of broker dealer fees of $5.6 million due to the acquisitions in our Securities Business segment and a $1.4 million increase in mortgage banking income, partially offset by a $2.2 million decrease in banking and service fees and a $0.5 million decrease in prepayment penalty fee income. Non-interest income increased $9.3 million to $42.7 million for the six months ended December 31, 2019. The increase was primarily the result of the addition of broker-dealer fees of $11.2 million due to the acquisitions in our Securities Business segment, a $2.4 million increase in mortgage banking income, and an increase of $0.7 million in gain on sale-other, due to a sale of lottery receivables, partially offset by a $5.2 million decrease in banking and service fees.
Our relationship with H&R Block began in fiscal 2016 and introduced seasonality into the banking and service fees category of non-interest income, with an increase during our second fiscal quarter and the peak income in this category typically occurring during our third fiscal quarter ended March 31. Therefore, banking and services fees for the three months ended December 31, 2019 are not indicative of results to be expected for other quarters during the fiscal year. Historically, the primary non-interest income generating H&R Block products and services that lead to the increased banking and service fees are Emerald Prepaid Mastercard® (“EPC”) and Refund Transfer (“RT”). RT revenue is earned primarily in the quarter ended March 31. For the three months ended December 31, 2019 compared to the three months ended December 31, 2018, EPC was down slightly at $1.2 million compared to $1.4 million, respectively. For the six months ended December 31, 2019 and 2018, EPC revenue was flat at $2.7 million.
Included in gain on sale – other are sales of correspondent loans that are collateralized by non-mortgage assets and sales of structured settlement annuity receivables. We engage in the wholesale and retail purchase of state lottery prize and structured settlement annuity payments. These payments are high credit quality deferred payment receivables having a state lottery commission or investment grade (top two tiers) insurance company payor. The Bank originates contracts for the retail purchase of such payments and classifies these under the heading of Factoring in the loan portfolio. Factoring yields are typically higher than mortgage loan rates. Typically, the gain received upon sale of these payment streams is greater than the gain received from an equivalent amount of mortgage loan sales. Since 2013, pools of structured settlement receivables have been originated for sale depending upon management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and maybe classified on our balance sheet as loans held for sale, lower of cost or fair value.

44

Non-Interest Expense
The following table sets forth information regarding our non-interest expense for the periods shown:
 
For the Three Months Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in thousands)
2019
 
2018
 
Inc (Dec)
 
2019
 
2018
 
Inc (Dec)
Salaries and related costs
$
33,958

 
$
29,146

 
$
4,812

 
$
70,675

 
$
59,808

 
$
10,867

Data processing
7,410

 
4,913

 
2,497

 
15,221

 
9,648

 
5,573

Advertising and promotional
4,043

 
3,205

 
838

 
7,833

 
7,630

 
203

Depreciation and amortization
6,040

 
3,567

 
2,473

 
11,264

 
6,583

 
4,681

Professional services
3,112

 
2,345

 
767

 
4,701

 
4,203

 
498

Occupancy and equipment
3,122

 
1,797

 
1,325

 
5,960

 
3,399

 
2,561

FDIC and regulatory fees
939

 
1,528

 
(589
)
 
1,130

 
4,454

 
(3,324
)
Broker-dealer clearing charges
1,860

 
—

 
1,860

 
3,868

 
—

 
3,868

General and administrative expense
6,481

 
4,432

 
2,049

 
11,780

 
8,130

 
3,650

Total non-interest expenses
$
66,965

 
$
50,933

 
$
16,032

 
$
132,432

 
$
103,855

 
$
28,577

Non-interest expense, which is comprised primarily of compensation, data processing expenses, occupancy, advertising and promotional and other operating expenses, was $67.0 million for the three months ended December 31, 2019, up from $50.9 million for the three months ended December 31, 2018. Non-interest expense was $132.4 million for the six months ended December 31, 2019, up from $103.9 million for the six months ended December 31, 2018. Increases for the three and six months ended December 31, 2019 were primarily due to the acquisitions in our Securities Business segment.
Total salaries and related costs increased $4.8 million to $34.0 million for the three months ended December 31, 2019 compared to $29.1 million for the three months ended December 31, 2018 and total salaries and related costs increased $10.9 million to $70.7 million for the six months ended December 31, 2019 compared to $59.8 million for the six months ended December 31, 2018. The increase in compensation expense for the three and six months ended December 31, 2019 was primarily due to the staffing additions from the aforementioned acquisitions and increased staffing levels to support growth in the Banking segment, specifically for deposits, lending, information technology infrastructure development, and compliance activities. Our staff increased to 1,031 from 873, or 18.1% between December 31, 2019 and 2018, including the addition of staff from the acquisitions in our Securities Business segment.
Data processing expense increased $2.5 million and $5.6 million for the three and six months ended December 31, 2019, compared to the three and six month periods ended December 31, 2018, respectively. The increases were primarily due to the acquisitions in our Securities Business segment and enhancements to customer interfaces and the Bank’s core processing system.
Advertising and promotional expense increased $0.8 million and $0.2 million for the three and six months ended December 31, 2019, compared to the three and six months ended December 31, 2018, respectively. The increase for the three and six months ended December 31, 2019 was primarily related to lead generation and deposit marketing.
Depreciation and amortization expense increased $2.5 million and $4.7 million for the three and six months ended December 31, 2019, compared to the three and six months ended December 31, 2018, respectively. The increases were primarily due to amortization of intangibles, depreciation on lending platform enhancements and infrastructure development, and additions from our Securities Business.
Professional services, which include accounting and legal fees, increased $0.8 million for the three months and $0.5 million for the six months ended December 31, 2019, compared to the three and six month periods last year, respectively. Professional services charges increased due primarily to increased legal and consulting fees for the three and six months ended December 31, 2019, respectively.
Occupancy and equipment expense increased $1.3 million and $2.6 million for the three and six months ended December 31, 2019 compared to the three and six months ended December 31, 2018, in order to support increased production and office space for additional employees and due to the acquisitions in our Securities Business segment.
Our cost of FDIC and regulatory fees decreased $0.6 million and $3.3 million for the three and six months ended December 31, 2019, compared to the three and six month period last year, respectively. The decrease for the three and six months ended December 31, 2019 was due to a small bank assessment credit received from the FDIC. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.

45

Broker-dealer clearing charges increased $1.9 million and $3.9 million for the three and six months ended December 31, 2019 compared to the three and six months ended December 31, 2018. The increase was attributable to the addition of the Securities Business.
Other general and administrative costs increased by $2.0 million and $3.7 million for the three and six months ended December 31, 2019, compared to the three and six month period ended December 31, 2018, respectively. The increases were primarily related to costs supporting loan and deposit production and the Securities Business.
Provision for Income Taxes
Our effective income tax rates (income tax provision divided by net income before income tax) for the three months ended December 31, 2019 and 2018 were 29.00% and 27.72%, respectively. Our effective income tax rates for the six months ended December 31, 2019 and 2018 were 28.52% and 26.55%, respectively. The change in effective income tax rates between periods are primarily the result of changes in tax benefits from stock compensation.
SEGMENT RESULTS
The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services. The Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, the Company includes parent-only activities and intercompany eliminations. The following tables present the operating results of the segments:
 
For the Three Months Ended December 31, 2019
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
105,340

 
$
4,037

 
$
(957
)
 
$
108,420

Provision for loan losses
4,500

 
—

 
—

 
4,500

Non-interest income
16,225

 
6,284

 
(1,302
)
 
21,207

Non-interest expense
53,253

 
10,455

 
3,257

 
66,965

Income before taxes
$
63,812

 
$
(134
)
 
$
(5,516
)
 
$
58,162


 
For the Three Months Ended December 31, 2018
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
93,481

 
$
—

 
$
(761
)
 
$
92,720

Provision for loan losses
4,950

 
—

 
—

 
4,950

Non-interest income
16,892

 
—

 
—

 
16,892

Non-interest expense
45,188

 
—

 
5,745

 
50,933

Income before taxes
$
60,235

 
$
—

 
$
(6,506
)
 
$
53,729


 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2019
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
204,812

 
$
9,183

 
$
(2,272
)
 
$
211,723

Provision for loan losses
7,200

 
—

 
—

 
7,200

Non-interest income
32,015

 
12,685

 
(1,957
)
 
42,743

Non-interest expense
103,886

 
21,519

 
7,027

 
132,432

Income before taxes
$
125,741

 
$
349

 
$
(11,256
)
 
$
114,834



46

 
 
 
 
 
 
 
 
 
For the Six Months Ended December 31, 2018
(Dollars in thousands)
Banking Business
 
Securities Business
 
Corporate/Eliminations
 
Axos Consolidated
Net interest income
$
180,492

 
$
—

 
$
(1,493
)
 
$
178,999

Provision for loan losses
5,550

 
—

 
—

 
5,550

Non-interest income
33,435

 
—

 
—

 
33,435

Non-interest expense
91,230

 
—

 
12,625

 
103,855

Income before taxes
$
117,147

 
$
—

 
$
(14,118
)
 
$
103,029

Banking Business
For the three months ended December 31, 2019, our Banking Business segment had income before taxes of $63.8 million compared to net income of $60.2 million for the three months ended December 31, 2018. For the six months ended December 31, 2019, we had net income of $125.7 million compared to net income of $117.1 million for the six months ended December 31, 2018. For the three and six months ended December 31, 2019, the increase in net income was primarily related to increased net interest income.
We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment:
 
At or for the Three Months Ended
 
At or for the Six Months Ended
 
December 31, 2019

 
December 31, 2018

 
December 31, 2019

 
December 31, 2018

Efficiency ratio
43.81
%
 
40.94
%
 
43.87
%
 
42.65
%
Return on average assets
1.66
%
 
1.77
%
 
1.67
%
 
1.75
%
Interest rate spread
3.47
%
 
3.52
%
 
3.42
%
 
3.49
%
Net interest margin
3.94
%
 
3.90
%
 
3.89
%
 
3.85
%
Our Banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our Banking Business and reduce our consolidated net interest margin, such as the borrowing costs at our Parent 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 that particularly decrease net interest margin.


47

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents our Banking segment’s information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the three months ended December 31, 2019 and 2018:
 
For the Three Months Ended
 
December 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
 
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases3, 4
$
9,825,725

 
$
136,602

 
5.56
%
 
$
8,800,039

 
$
123,276

 
5.60
%
Interest-earning deposits in other financial institutions
629,407

 
2,634

 
1.67
%
 
512,922

 
2,905

 
2.27
%
Securities4
199,716

 
3,052

 
6.11
%
 
210,171

 
3,465

 
6.59
%
Stock of the regulatory agencies
29,577

 
528

 
7.14
%
 
56,389

 
1,591

 
11.29
%
Total interest-earning assets
10,684,425

 
142,816

 
5.35
%
 
9,579,521

 
131,237

 
5.48
%
Non-interest-earning assets
211,833

 
 
 
 
 
199,369

 
 
 
 
Total assets
$
10,896,258

 
 
 
 
 
$
9,778,890

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand and savings
$
4,498,675

 
$
17,485

 
1.55
%
 
$
3,542,240

 
$
13,108

 
1.48
%
Time deposits
2,537,155

 
15,496

 
2.44
%
 
2,194,901

 
13,044

 
2.38
%
Advances from the FHLB
948,475

 
4,495

 
1.90
%
 
1,982,717

 
11,574

 
2.33
%
Borrowings, subordinated notes and debentures
—

 
—

 
—
%
 
4,355

 
30

 
2.76
%
Total interest-bearing liabilities
7,984,305

 
37,476

 
1.88
%
 
7,724,213

 
37,756

 
1.96
%
Non-interest-bearing demand deposits
1,766,740

 
 
 
 
 
1,066,158

 
 
 
 
Other non-interest-bearing liabilities
78,492

 
 
 
 
 
17,608

 
 
 
 
Stockholders’ equity
1,066,721

 
 
 
 
 
970,911

 
 
 
 
Total liabilities and stockholders’ equity
$
10,896,258

 
 
 
 
 
$
9,778,890

 
 
 
 
Net interest income
 
 
$
105,340

 
 
 
 
 
$
93,481

 
 
Interest rate spread5
 
 
 
 
3.47
%
 
 
 
 
 
3.52
%
Net interest margin6
 
 
 
 
3.94
%
 
 
 
 
 
3.90
%
1 
Average balances are obtained from daily data.
2 
Annualized.
3 
Loans and leases include loans held for sale, loan premiums and unearned fees.
4 
Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans and leases include average balances of $28.0 million and $29.3 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2019 and 2018 three-month periods, respectively.
5 
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
6 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.





48

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents our Banking segment’s information regarding (i) average balances; (ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and (vi) net interest margin for the six months ended December 31, 2019 and 2018:
 
For the Six Months Ended
 
December 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
 
Average
Balance1
 
Interest
Income/
Expense
 
Average Yields
Earned/Rates
Paid2
Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans and leases3, 4
$
9,705,585

 
$
270,489

 
5.57
%
 
$
8,629,198

 
$
239,868

 
5.56
%
Interest-earning deposits in other financial institutions
606,871

 
5,961

 
1.96
%
 
511,692

 
5,473

 
2.14
%
Securities4
203,975

 
5,633

 
5.52
%
 
195,155

 
6,477

 
6.64
%
Stock of the regulatory agencies
23,414

 
827

 
7.06
%
 
46,067

 
2,214

 
9.61
%
Total interest-earning assets
10,539,845

 
282,910

 
5.37
%
 
9,382,112

 
254,032

 
5.42
%
Non-interest-earning assets
201,775

 

 


 
194,133

 

 


Total assets
$
10,741,620

 

 


 
$
9,576,245

 

 


Liabilities and Stockholders’ Equity:

 

 


 

 

 


Interest-bearing demand and savings
$
4,851,899

 
$
40,898

 
1.69
%
 
$
4,010,549

 
$
30,704

 
1.53
%
Time deposits
2,511,527

 
30,941

 
2.46
%
 
1,969,282

 
24,324

 
2.47
%
Advances from the FHLB
627,622

 
6,259

 
1.99
%
 
1,635,301

 
18,482

 
2.26
%
Borrowings, subordinated notes and debentures
—

 
—

 
—
%
 
2,195

 
30

 
2.73
%
Total interest-bearing liabilities
7,991,048

 
78,098

 
1.95
%
 
7,617,327

 
73,540

 
1.93
%
Non-interest-bearing demand deposits
1,615,396

 

 

 
961,049

 

 


Other non-interest-bearing liabilities
82,420

 

 

 
46,266

 

 


Stockholders’ equity
1,052,756

 

 

 
951,603

 

 


Total liabilities and stockholders’ equity
$
10,741,620

 

 

 
$
9,576,245

 

 


Net interest income

 
$
204,812

 

 

 
$
180,492

 


Interest rate spread5

 

 
3.42
%
 

 

 
3.49
%
Net interest margin6

 

 
3.89
%
 

 

 
3.85
%
1 
Average balances are obtained from daily data.
2 
Annualized.
3 
Loans and leases include loans held for sale, loan premiums and unearned fees.
4 
Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loans and leases include average balances of $28.1 million and $29.5 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2019 and 2018 six-month periods, respectively.
5 
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
6 
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.



49

Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth the effects of changing rates and volumes on our net interest income for our Banking segment. 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); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume) for the three and six months ended December 31, 2019 and 2018:

 
For the Three Months Ended
 
For the Six Months Ended
 
December 31, 2019
 
December 31, 2019
 
2019 vs 2018
 
2019 vs 2018
 
Increase (Decrease) Due to
 
Increase (Decrease) Due to
(Dollars in thousands)
Volume
 
Rate
 
 
Total
Increase
(Decrease)
 
Volume
 
Rate
 
Total
Increase
(Decrease)
Increase / (decrease) in interest income:



 
 

 



 

Loans and leases
$
14,215


$
(889
)
 
 
$
13,326

 
$
30,186


$
435

 
$
30,621

Interest-earning deposits in other financial institutions
586


(857
)
 
 
(271
)
 
971


(483
)
 
488

Securities
(168
)

(245
)
 
 
(413
)
 
284


(1,128
)
 
(844
)
Stock of the regulatory agencies
(600
)

(463
)
 
 
(1,063
)
 
(901
)

(486
)
 
(1,387
)
 
$
14,033


$
(2,454
)
 
 
$
11,579

 
$
30,540


$
(1,662
)
 
$
28,878

Increase / (decrease) in interest expense:



 
 

 



 

Interest-bearing demand and savings
$
3,725


$
652

 
 
$
4,377

 
$
6,803


$
3,391

 
$
10,194

Time deposits
2,111


341

 
 
2,452

 
6,715


(98
)
 
6,617

Advances from the FHLB
(5,229
)

(1,850
)
 
 
(7,079
)
 
(10,238
)

(1,985
)
 
(12,223
)
Borrowings, subordinated notes and debentures
(30
)

—

 
 
(30
)
 
(30
)

—

 
(30
)
 
$
577


$
(857
)
 
 
$
(280
)
 
$
3,250


$
1,308

 
$
4,558

The Banking segment’s net interest income for the three and six months ended December 31, 2019 totaled $105.3 million and $204.8 million, an increase of 12.7% and 13.5%, compared to net interest income of $93.5 million and $180.5 million for the three and six months ended December 31, 2018, respectively. The growth of net interest income for both the three and six months ended December 31, 2019 is primarily due to increased average earnings assets from net loan and lease portfolio growth and a reduced level of advances from the FHLB, partially offset by volume increases in interest-bearing demand and savings deposits and time deposits.
The Banking segment’s non-interest income decreased $0.7 million from $16.9 million to $16.2 million and decreased $1.4 million from $33.4 million to $32.0 million for the three and six months ended December 31, 2019 compared to the three and six months ended December 31, 2018, respectively. The $0.7 million decrease in non-interest income for the three months ended December 31, 2019, was primarily the result of a decrease in banking service fees of $2.3 million and $0.5 million in prepayment penalty fee income, partially offset by an increase of $2.0 million in mortgage banking income. The $1.4 million decrease in non-interest income for the six months ended December 31, 2019, was primarily the result of a $5.2 million decrease in banking and service fees, primarily due to reduced fee income from Axos Fiduciary Services, partially offset by $2.9 million increase in mortgage banking income and a $0.7 million increase in gain on sale-other.
The Banking segment’s non-interest expense increased $8.0 million and $12.7 million for the three and six months ended December 31, 2019 compared to the three and six months ended December 31, 2018, respectively. For the three months ended December 31, 2019 compared to the three months ended December 31, 2018, the $8.0 million increase of non-interest expense was primarily due to a $1.9 million increase of salaries and related expenses related to staffing increase to support the overall growth of the Bank, a $1.9 million increase of depreciation and amortization, a $1.0 million increase in data processing expense, a $1.3 million increase of occupancy and equipment, and a $0.8 million increase in other and general expense. For the six months ended December 31, 2019 compared to the six months ended December 31, 2018, the $12.7 million increase was primarily due to a $7.2 million increase in salaries and related expenses related to staffing increases to support the overall growth of the Bank, a $3.5 million increase in depreciation and amortization, a $2.7 million increase in data processing expense, $2.1 million increase in occupancy and equipment, partially offset by a decrease of $3.5 million for FDIC and regulatory fees due to a regulatory credit.

50

Securities Business
Income for the three and six months ended December 31, 2019, our Securities Business segment had a loss before taxes of $0.1 million and income of $0.3 million, respectively. The Securities Business segment was created as a result of acquisitions during the three months ended March 31, 2019, meaning there is no comparative 2018 period.
The following table provides our Securities Business operating results:
(Dollars in thousands)
Three Months Ended December 31, 2019
Six Months Ended December 31, 2019
Net interest income
$
4,037

$
9,183

Non-interest income
6,284

12,685

Non-interest expense
10,455

21,519

Income (Loss) before income taxes
$
(134
)
$
349

Net interest income for the three and six months ended December 31, 2019, was $4.0 million and $9.2 million. 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.
The non-interest income during the three and six months ended December 31, 2019, was $6.3 million and $12.7 million, respectively, primarily the result of clearing and custodial related fees.
Non-interest expenses were $10.5 million and $21.5 million during the three and six months ended December 31, 2019. For the three month period ended December 31, 2019, the non-interest expense was primarily a result of $4.7 million in salaries and related expense, $1.9 million broker-dealer clearing charges, $1.4 million in data processing, $0.6 million in depreciation and amortization, and $1.0 million in other and general expense. For the six month period ended December 31, 2019, the non-interest expense was primarily a result of $9.3 million in salaries and related expense, $3.9 million in broker-dealer clearing charges, $2.8 million in data processing, $1.2 depreciation and amortization, $1.3 million professional services, and $2.1 million in general and other expense.
Selected information concerning the Securities segment follows as of and for the three months ended:
(Dollars in thousands)
December 31, 2019
 
June 30, 2019
Compensation as a % of net revenue
37.9
%
 
35.0
%
FDIC insured program balances at the Bank (end of period)
$
357,629

 
$
341,576

Customer margin balances (end of period)
$
226,231

 
$
189,193

Customer funds on deposit, including short credits (end of period)
$
96,237

 
$
206,469

 

 
 
Clearing:

 
 
Total tickets
744,365

 
595,962

Correspondents (end of period)
63

 
62

 

 
 
Securities lending:

 
 
Interest-earning assets – stock borrowed (end of period)
$
168,114

 
$
203,192

Interest-bearing liabilities – stock loaned (end of period)
$
206,199

 
$
198,356



51

FINANCIAL CONDITION
Balance Sheet Analysis
Total assets increased $1,049.1 million, or 9.3%, to $12,269.3 million, as of December 31, 2019, up from $11,220.2 million at June 30, 2019. The increase in total assets was primarily due to an increase of $759.3 million in net loans and leases held for investment and assets added from our acquisitions. Total liabilities increased $961.3 million, primarily from growth in deposits of $1,131.2 million and liabilities added from our acquisitions, partially offset by a $201.0 million decrease in advances from the FHLB.
Loans and Leases
Net loans and leases held for investment increased 8.1% to $10,141.4 million at December 31, 2019 from $9,382.1 million at June 30, 2019. The increase in the loan and lease portfolio was primarily due to loan and lease originations of $2,896.9 million, partially offset by loan and lease repayments and other adjustments of $2,137.6 million during the six months ended December 31, 2019.
The following table sets forth the composition of the loan and lease portfolio as of the dates indicated:
 
December 31, 2019
 
June 30, 2019
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
4,137,395

 
40.6
%
 
$
4,281,080

 
45.3
%
Warehouse
432,230

 
4.2
%
 
301,999

 
3.2
%
Financing1
471,435

 
4.6
%
 
518,560

 
5.5
%
Multifamily secured - mortgage and financing
2,171,711

 
21.3
%
 
1,948,513

 
20.6
%
Commercial real estate secured - mortgage
393,543

 
3.9
%
 
326,154

 
3.5
%
Auto and RV secured
309,290

 
3.0
%
 
290,894

 
3.1
%
Commercial & Industrial
2,167,314

 
21.2
%
 
1,662,629

 
17.6
%
Other
111,945

 
1.1
%
 
119,481

 
1.3
%
Total gross loans and leases
10,194,863

 
100.0
%
 
9,449,310

 
100.2
%
Allowance for loan and lease losses
(59,514
)
 
 
 
(57,085
)
 
 
Unaccreted discounts and loan and lease fees
6,048

 
 
 
(10,101
)
 
 
Total net loans and leases
$
10,141,397

 
 
 
$
9,382,124

 
 
1Single family real estate secured: Financing consists of commercial specialty and lender finance loans secured by single family real estate.
The Bank originates some interest only loans with terms that include repayments that are less than the repayments for fully amortizing loans. The Bank’s lending guidelines for interest only loans are adjusted for the increased credit risk associated with these loans by requiring borrowers with such loans to borrow at LTVs that are lower than standard amortizing ARM loans and by calculating debt to income ratios for qualifying borrowers based upon a fully amortizing payment, not the interest only payment. The Bank monitors and performs reviews of interest only loans. Adverse trends reflected in delinquency statistics, grading and classification of interest only loans would be reported to management and the Board of Directors. As of December 31, 2019, the Company had $1,246.0 million of interest only mortgage loans. Through December 31, 2019, the net amount of deferred interest on interest only loans was not material to our financial position or operating results.

52

Asset Quality and Allowance for Loan and Lease Losses
Non-performing Assets
Non-performing loans and leases are comprised of loans and leases past due 90 days or more on nonaccrual status and other nonaccrual loans and leases. Non-performing assets include non-performing loans and leases plus other real estate owned and repossessed vehicles. At December 31, 2019, our non-performing loans and leases totaled $52.7 million, or 0.52% of total gross loans and leases and our non-performing loans and leases and foreclosed assets or “non-performing assets” totaled $60.3 million, or 0.49% of total assets.
Non-performing assets consisted of the following as of the dates indicated:
(Dollars in thousands)
December 31, 2019
 
June 30, 2019
 
Inc (Dec)
Non-performing assets:
 
 
 
 
 
Non-accrual loans and leases:
 
 
 
 
 
Single family real estate secured:
 
 
 
 
 
Mortgage
$
49,090

 
$
46,005

 
$
3,085

Multifamily secured - mortgage and financing
1,198

 
2,108

 
(910
)
Commercial real estate secured - mortgage
1,931

 
—

 
1,931

Total non-performing loans secured by real estate
52,219

 
48,113

 
4,106

Auto and RV secured
206

 
115

 
91

Other
312

 
216

 
96

Total non-performing loans and leases
52,737

 
48,444

 
4,293

Foreclosed real estate
7,420

 
7,449

 
(29
)
Repossessed—Auto and RV
136

 
36

 
100

Total non-performing assets
$
60,293

 
$
55,929

 
$
4,364

Total non-performing loans and leases as a percentage of total loans and leases
0.52
%
 
0.51
%
 
0.01
 %
Total non-performing assets as a percentage of total assets
0.49
%
 
0.50
%
 
(0.01
)%
Total non-performing assets increased from $55.9 million at June 30, 2019 to $60.3 million at December 31, 2019. As a percentage of total assets, non-performing assets decreased from 0.50% at June 30, 2019 to 0.49% at December 31, 2019. The non-performing assets increase of approximately $4.4 million, was primarily the result of increases in non-performing single family real estate secured mortgage loans.
A troubled debt restructuring is a concession made to a borrower experiencing financial difficulties, typically permanent or temporary modifications of principal and interest payments or an extension of maturity dates. When a loan is delinquent and classified as a troubled debt restructuring no interest is accrued until the borrower demonstrates over time (typically six months) that it can make payments. When a loan is considered a troubled debt restructuring and is on nonaccrual, it is considered non-performing and included in the table above. There were no performing troubled debt restructurings at December 31, 2019 and June 30, 2019.
Allowance for Loan and Lease Losses
We are committed to maintaining the allowance for loan and lease losses at a level that is considered to be commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While we believe that the allowance for loan and lease losses is adequate at December 31, 2019, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent risks in the loan and lease portfolio.
The assessment of the adequacy of our allowance for loan and lease losses is based upon a range of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans and leases, change in volume and mix of loans and leases, collateral values and charge-off history.
The Company provide general loan loss reserves for our auto and RV loans based upon the borrower credit score at the time of origination and loss experience to date. The allowance for loan loss for the auto and RV loan portfolio at December 31, 2019 was determined by classifying each outstanding loan according to the semi-annually refreshed FICO score and providing loss rates. We had $309.1 million of auto and RV loan balances subject to general reserves as follows: FICO greater than or equal to 770: $134.7 million; 715 – 769: $114.0 million; 700 – 714: $32.7 million; 660 – 699: $25.0 million and less than 660: $2.7 million.

53

General loan loss reserves for mortgage loans are based upon the size and class of the mortgage loan and the loan-to-value ratio (“LTV”) at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each loan by the loan-to-value and applying quantitative and qualitative loss rates. The LTV groupings for each significant mortgage class are as follows:
The Company had $4,088.3 million of single family mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 60%: $2,484.5 million; 61% – 70%: $1,349.4 million; 71% – 80%: $253.1 million; greater than 80%: $1.2 million.
The Company had $2,170.5 million of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV less than or equal to 55%: $1,172.1 million; 56% – 65%: $656.6 million; 66% – 75%: $331.6 million; 76% – 80%: $5.5 million and greater than 80%: $4.7 million.
The Company had $391.6 million of commercial real estate loan balances subject to general reserves as follows: LTV less than or equal to 50%: $201.6 million; 51% – 60%: $90.9 million; 61% – 70%: $77.6 million; and 71% – 80%: $21.5 million.
The commercial secured portfolio consists of business loans well-collateralized by residential real estate. The other portfolio consists of receivables factoring for businesses and consumers. We allocate the allowance for loan loss for these asset types based on qualitative factors which consider the value of the collateral and the financial position of the issuer of the receivables.
The weighted average LTV percentage for our entire real estate loan portfolio was 55% at December 31, 2019. We believe that this percentage is lower and more conservative than most banks, which results in lower average mortgage loan charge-offs when compared to many other comparable banks.
While we anticipate that such level of charge-offs will continue into the future, given the uncertainties surrounding the improvement of the U.S. economy, we may experience an increase in the relative amount of charge-offs and we may be required to increase our loan and lease loss provisions in the future to provide a larger loss allowance for one or more of our loan and lease types.
The following table summarizes impaired loans and leases as of:
(Dollars in thousands)
December 31, 2019
 
June 30, 2019
Non-performing loans and leases—90+ days past due plus other non-accrual loans and leases
$
52,180

 
$
47,821

Troubled debt restructuring loans—non-accrual
557

 
623

Total impaired loans and leases
$
52,737

 
$
48,444


The following table reflects management’s allocation of the allowance for loan and lease losses by loan and lease category and the ratio of each loan and lease category to total loans and leases as of the dates indicated:
 
December 31, 2019
 
June 30, 2019
(Dollars in thousands)
Amount
of
Allowance
 
Allocation
as a % of
Allowance
 
Amount
of
Allowance
 
Allocation
as a % of
Allowance
Single family real estate secured:
 
 
 
 
 
 
 
Mortgage
$
20,234

 
34.0
%
 
$
21,295

 
37.4
%
Warehouse
1,428

 
2.4
%
 
996

 
1.7
%
Financing
3,591

 
6.0
%
 
5,331

 
9.3
%
Multifamily secured - mortgage and financing
5,322

 
8.9
%
 
4,097

 
7.2
%
Commercial real estate secured - mortgage
1,191

 
2.0
%
 
1,044

 
1.8
%
Auto and RV secured
5,064

 
8.5
%
 
4,818

 
8.4
%
Commercial & Industrial
18,762

 
31.6
%
 
17,514

 
30.7
%
Other
3,922

 
6.6
%
 
1,990

 
3.5
%
Total
$
59,514

 
100.0
%
 
$
57,085

 
100.0
%
The loan and lease loss provision was $4.5 million and $5.0 million for the three months ended December 31, 2019 and 2018, respectively. The loan and lease loss provision was $7.2 million and $5.6 million for the six months ended December 31, 2019 and 2018, respectively. The decrease in the loan and lease loss provision for the three months ended December 31, 2019 was primarily the result of changes in loan portfolio mix. The increase in the loan and lease loss provision for the six months ended December 31, 2019 was primarily the result of loan portfolio growth and changes in the loan mix. We believe that the lower average

54

LTV in the mortgage loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks. Our general loan and lease loss reserves are based upon historical losses and expected future trends. The resolution of our existing other real estate owned and non-performing loans should not have a significant adverse impact on operating results.
Investment Securities
Total investment securities were $209.8 million as of December 31, 2019, compared with $227.5 million at June 30, 2019. During the six months ended December 31, 2019, we purchased securities for $139.4 million, and received principal repayments of approximately $157.7 million in our available-for-sale portfolio. The remainder of the change for the available-for-sale portfolio is attributable to accretion and other activities.
Deposits
Deposits increased a net $1,131.2 million, or 12.6%, to $10,114.3 million at December 31, 2019, from $8,983.2 million at June 30, 2019. Non-interest bearing deposits increased $1,167.4 million, or 81.0% , to $2,609.3 million at December 31, 2019, from $1,441.9 million at June 30, 2019. The primary driver for the increase for the December 2019 period are due to increased deposits from the Bank’s bankruptcy trustee and fiduciary services channel.
The following table sets forth the composition of the deposit portfolio as of the dates indicated:
 
December 31, 2019
 
June 30, 2019
(Dollars in thousands)
Amount
 
Rate1
 
Amount
 
Rate1
Non-interest bearing
$
2,609,311

 
—
%
 
$
1,441,930

 
—
%
Interest-bearing:
 
 
 
 
 
 
 
Demand
2,531,817

 
1.46
%
 
2,709,014

 
2.06
%
Savings
2,491,029

 
1.38
%
 
2,466,214

 
1.48
%
Total interest-bearing demand and savings
5,022,846

 
1.42
%
 
5,175,228

 
1.78
%
Time deposits:
 
 
 
 
 
 
 
$250 and under2
1,828,933

 
2.49
%
 
1,866,811

 
2.47
%
Greater than $250
653,250

 
2.10
%
 
499,204

 
2.27
%
Total time deposits
2,482,183

 
2.39
%
 
2,366,015

 
2.43
%
Total interest bearing2
7,505,029

 
1.74
%
 
7,541,243

 
1.99
%
Total deposits
$
10,114,340

 
1.29
%
 
$
8,983,173

 
1.67
%
1 Based on weighted-average stated interest rates at end of period.
2 The total interest-bearing includes brokered deposits of $907.9 million and $1,124.0 million as of December 31, 2019 and June 30, 2019, respectively, of which $714.4 million and $796.7 million, respectively, are time deposits classified as $250 and under.

The following table sets forth the number of deposit accounts by type as of the date indicated:
 
December 31, 2019
 
June 30, 2019
 
December 31, 2018
Non-interest bearing, prepaid and other
4,372,046

 
3,743,334
 
2,994,290

Checking and savings accounts
303,033

 
311,067
 
300,452

Time deposits
22,154

 
23,447
 
26,208

Total number of deposit accounts
4,697,233

 
4,077,848
 
3,320,950

The net increase of 628,712 of non-interest bearing, prepaid and other accounts for the six months ended December 31, 2019 was primarily the result of the seasonality of the H&R Block-branded products. Our non-interest bearing, prepaid and other accounts contain two omnibus accounts that when condensed for regulatory reporting purposes result in 21,104 accounts as of December 31, 2019.


55

Borrowings
The following table sets forth the composition of our borrowings and the interest rates at the dates indicated:
 
 
December 31, 2019
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
 
Balance
 
Weighted Average Rate
FHLB Advances
 
$
257,500

 
2.28
%
 
$
458,500

 
2.39
%
 
$
342,500

 
2.32
%
Borrowings, subordinated notes and debentures
 
62,233

 
6.30
%
 
168,929

 
3.84
%
 
54,625

 
6.53
%
Total borrowings
 
$
319,733

 
3.06
%
 
$
627,429

 
2.78
%
 
$
397,125

 
2.90
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost of borrowings during the quarter
 
2.24
%
 
 
 
2.91
%
 
 
 
2.46
%
 
 
Borrowings as a percent of total assets
 
2.6
%
 
 
 
5.6
%
 
 
 
4.0
%
 
 
At December 31, 2019, total borrowings amounted to $319.7 million, down $307.7 million, or 49.0%, from June 30, 2019 and down $77.4 million or 19.5% from December 31, 2018. Total borrowings represented 2.6% of total assets and had a weighted-average cost of 2.24% at December 31, 2019, compared with 5.6% of total assets at a weighted-average cost of 2.91% at June 30, 2019 and 4.0% of total assets at a weighted-average cost of 2.46% at December 31, 2018.
We regularly use advances from the FHLB to manage our interest rate risk and, to a lesser extent, manage our liquidity position. Generally, FHLB advances with terms between three and ten years have been used to fund the purchase of single family and multifamily mortgages and to provide us with interest rate risk protection should rates rise.
Stockholders’ Equity
Stockholders’ equity increased $87.7 million to $1,160.8 million at December 31, 2019 compared to $1,073.1 million at June 30, 2019. The increase was the result of our net income for the six months ended December 31, 2019 of $82.1 million, vesting and issuance of RSUs of $6.0 million, partially offset by $0.2 million of dividends declared on preferred stock.

LIQUIDITY
Cash flow information is as follows:
 
For the Six Months Ended
 
December 31,
(Dollars in thousands)
2019
 
2018
Operating Activities
$
128,654

 
$
115,532

Investing Activities
$
(779,156
)
 
$
(669,153
)
Financing Activities
$
819,309

 
$
187,318

During the six months ended December 31, 2019, we had net cash inflows from operating activities of $128.7 million compared to inflows of $115.5 million for the six months ended December 31, 2018, primarily due to net income for each period. Net operating cash inflows and outflows fluctuate primarily due to the timing of the following: originations of loans held for sale, proceeds from loan sales, securities borrowed and loaned, and customer, broker-dealer and clearing receivables and payables.
Net cash outflows from investing activities totaled $779.2 million for the six months ended December 31, 2019, while outflows totaled $669.2 million for the same period in fiscal year 2019. The increase was primarily due to a decrease in repayments of loans and leases in the fiscal 2020 period compared to the same period in the prior year.
Our net cash provided by financing activities totaled $819.3 million for the six months ended December 31, 2019, and $187.3 million for the six months ended December 31, 2018. Net cash provided by financing activities increased primarily due to a net increase in deposits for the six months ended December 31, 2019.
During the six months ended December 31, 2019, the Bank could borrow up to 40.0% of its total assets from the FHLB. Borrowings are collateralized by the pledge of certain mortgage loans and investment securities to the FHLB. At December 31, 2019, the Company had $2,486.1 million available immediately and $179.0 million available with additional collateral. At December 31, 2019, we also had two unsecured federal funds purchase lines with two different banks totaling $35.0 million, under which no borrowings were outstanding.

56

The Bank has the ability to borrow short-term from the Federal Reserve Bank of San Francisco Discount Window. At December 31, 2019, the Bank did not have any borrowings outstanding and the amount available from this source was $1,432.2 million. The credit line is collateralized by consumer loans and mortgage-backed securities.
Axos Clearing has a total of $230.0 million uncommitted secured lines of credit available for borrowing as needed. As of December 31, 2019, there was none outstanding. These credit facilities bear interest at rates based on the Federal Funds rate and are due upon demand.
Axos Clearing has a $50.0 million committed unsecured line of credit available for limited purpose borrowing. As of December 31, 2019, there was none outstanding. This credit facility bears interest at rates based on the Federal Funds rate and are due upon demand.
We believe our liquidity sources to be stable and adequate for our anticipated needs and contingencies. We believe we have the ability to increase our level of deposits and borrowings to address our liquidity needs for the foreseeable future.
OFF-BALANCE SHEET COMMITMENTS
At December 31, 2019, we had commitments to originate loans with an aggregate outstanding principal balance of $719.0 million, and commitments to sell loans with an aggregate outstanding principal balance of $84.0 million. We have no commitments to purchase loans, leases, investment securities or any other unused lines of credit.
In the normal course of business, Axos Clearing’s customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose Axos Clearing to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and Axos Clearing has to purchase or sell the financial instrument underlying the contract at a loss. Axos Clearing’s clearing agreements with broker-dealers for which it provides clearing services requires them to indemnify Axos Clearing if customers fail to satisfy their contractual obligation.
Litigation. On October 15, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative class action lawsuit styled Golden v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District of California (the “Golden Case”). On November 3, 2015, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a second putative class action lawsuit styled Hazan v. BofI Holding, Inc., et al, and also brought in the United States District Court for the Southern District of California (the “Hazan Case”). On February 1, 2016, the Golden Case and the Hazan Case were consolidated as In re BofI Holding, Inc. Securities Litigation, Case #: 3:15-cv-02324-GPC-KSC (the “Class Action”), and the Houston Municipal Employees Pension System was appointed lead plaintiff. The plaintiffs allege that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a complaint filed in connection with a wrongful termination of employment lawsuit filed on October 13, 2015 (the “Employment Matter”) and that as a result the Company’s statements regarding its internal controls, as well as portions of its financial statements, were false and misleading. On March 21, 2018, the Court entered a final order dismissing the Class Action with prejudice. Subsequently, the plaintiff filed a notice of appeal and opening brief and the Company has filed its answering brief and argument in the appeal from dismissal was held.
On April 3, 2017, the Company, its Chief Executive Officer and its Chief Financial Officer were named defendants in a putative class action lawsuit styled Mandalevy v. BofI Holding, Inc., et al, and brought in United States District Court for the Southern District of California (the “Mandalevy Case”). The Mandalevy Case seeks monetary damages and other relief on behalf of a putative class that has not been certified by the Court. The complaint in the Mandalevy Case (the “Mandalevy Complaint”) alleges a class period that differs from that alleged in the First Class Action, and that the Company and other named defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose wrongful conduct that was alleged in a March 2017 media article. The Mandalevy Case has not been consolidated into the First Class Action. On December 7, 2018, the Court entered a final order granting the defendants’ motion and dismissing the Mandalevy Case with prejudice. Subsequently, the plaintiff filed a notice of appeal and opening brief and the Company filed its answering brief, on May 8, 2019.
The Company and the other named defendants dispute the allegations of wrongdoing advanced by the plaintiffs in the Class Action, the Mandalevy Case, and in the Employment Matter, as well as those plaintiffs’ statement of the underlying factual circumstances, and are vigorously defending each case.
In addition to the First Class Action and the Mandalevy Case, two separate shareholder derivative actions were filed in December, 2015, purportedly on behalf of the Company. The first derivative action, Calcaterra v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on December 3, 2015. The second derivative action, Dow v. Micheletti, et al, was filed in the San Diego County Superior Court on December 16, 2015. A third derivative action, DeYoung

57

v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 22, 2016, a fourth derivative action, Yong v. Garrabrants, et al, was filed in the United States District Court for the Southern District of California on January 29, 2016, a fifth derivative action, Laborers Pension Trust Fund of Northern Nevada v. Allrich et al, was filed in the United States District Court for the Southern District of California on February 2, 2016, and a sixth derivative action, Garner v. Garrabrants, et al, was filed in the San Diego County Superior Court on August 10, 2017. Each of these six derivative actions names the Company as a nominal defendant, and certain of its officers and directors as defendants. Each complaint sets forth allegations of breaches of fiduciary duties, gross mismanagement, abuse of control, and unjust enrichment against the defendant officers and directors. The plaintiffs in these derivative actions seek damages in unspecified amounts on the Company’s behalf from the officer and director defendants, certain corporate governance actions, and an award of their costs and attorney’s fees.
The United States District Court for the Southern District of California ordered the four above-referenced derivative actions pending before it to be consolidated and appointed lead counsel in the consolidated action. On June 7, 2018, the Court entered an order granting defendant’s motion for judgment on the pleadings, but giving the plaintiffs limited leave to amend by June 28, 2018. The plaintiffs failed to file an amended complaint, and instead plaintiffs filed on June 28, 2018 a motion to stay the case pending resolution of the securities class action and Employment Matter. On August 10, 2018, defendants filed an opposition to plaintiffs’ motion. On September 11, 2018, the plaintiffs filed a second amended complaint. On October 16, 2018, defendants filed a motion to dismiss the second amended complaint. The Court dismissed the second amended complaint with prejudice on May 23, 2019. On June 20, 2019, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit and subsequently opening and answering briefs were filed.
The two derivative actions pending before the San Diego County Superior Court have been consolidated and have been stayed by agreement of the parties.
In view of the inherent difficulty of predicting the outcome of each legal action, particularly since claimants seek substantial or indeterminate damages, it is not possible to reasonably predict or estimate the eventual loss or range of loss, if any, related to each legal action.
CONTRACTUAL OBLIGATIONS
The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs. Our time deposits due within one year of December 31, 2019 totaled $1,204.5 million. We believe the large percentage of time deposits that mature within one year reflects customers’ hesitancy to invest their funds long term. If these maturing deposits do not remain with us, we may be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on deposits and borrowings than we currently pay on time deposits maturing within one year. However, based on past experience we believe a significant portion of our time deposits will remain with us. We believe we have the ability to attract and retain deposits by adjusting interest rates offered.
The following table presents certain of our contractual obligations as of the period indicated:
 
As of December 31, 2019
 
 
 
Payments Due by Period1
(Dollars in thousands)
Total
 
Less Than One Year
 
One To Three Years
 
Three To Five Years
 
More Than Five Years
Long-term debt obligations2
$
366,671

 
$
96,580

 
$
91,164

 
$
51,016

 
$
127,911

Time deposits2
2,515,142

 
1,223,527

 
685,820

 
196,974

 
408,821

Operating lease obligations3
89,396

 
8,435

 
18,694

 
18,276

 
43,991

Total
$
2,971,209

 
$
1,328,542

 
$
795,678

 
$
266,266

 
$
580,723

1 
Our contractual obligations include long-term debt, time deposits and operating leases as shown. We had no capitalized leases or material commitments for capital expenditures at December 31, 2019.
2 
Amounts include principal and interest due to recipient.
3 
Payments are for leases of real property.

58

CAPITAL RESOURCES AND 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 unaudited condensed 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 December 31, 2019, reflects the Basel III capital requirements that became effective January 1, 2015 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 December 31, 2019, our Company and Bank met all the capital adequacy requirements to which they were subject and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since December 31, 2019 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 Consolidated and Bank’s estimated capital amounts, capital ratios and capital requirements under Basel III were as follows:
 
Axos Financial, Inc.
 
Axos Bank
 
“Well 
Capitalized”
Ratio
 
Minimum Capital
Ratio
(Dollars in millions)
December 31, 2019
 
June 30,
2019
 
December 31, 2019
 
June 30,
2019
 
Regulatory Capital:
 
 
 
 
 
 
 
 
 
 
 
Tier 1
$
1,030

 
$
938

 
$
991

 
$
932

 
 
 
 
Common equity tier 1
$
1,025

 
$
933

 
$
991

 
$
932

 
 
 
 
Total capital (to risk-weighted assets)
$
1,148

 
$
1,054

 
$
1,050

 
$
990

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Average adjusted
$
11,466

 
$
10,717

 
$
10,820

 
$
10,124

 
 
 
 
Total risk-weighted
$
9,078

 
$
8,162

 
$
8,574

 
$
7,680

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Regulatory Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage (core) capital to adjusted average assets
8.88
%
 
8.75
%
 
9.16
%
 
9.21
%
 
5.00
%
 
4.00
%
Common equity tier 1 capital (to risk-weighted assets)
11.29
%
 
11.43
%
 
11.55
%
 
12.14
%
 
6.50
%
 
4.50
%
Tier 1 capital (to risk-weighted assets)
11.35
%
 
11.49
%
 
11.55
%
 
12.14
%
 
8.00
%
 
6.00
%
Total capital (to risk-weighted assets)
12.65
%
 
12.91
%
 
12.25
%
 
12.89
%
 
10.00
%
 
8.00
%
Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. At December 31, 2019, our Company and Bank are in compliance with the capital conservation buffer requirement, which increases by 0.625% each year through 2019, at which point, the common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratio minimums will be 7.0%, 8.5% and 10.5%, respectively.
Securities Business

59

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Axos Clearing, is subject to the SEC Uniform Net Capital (Rule 15c3-1 of the Exchange Act). Under this rule, the Company has elected to operate under the alternate method and is required to maintain minimum net capital of $250,000 or 2% of aggregate debit balances arising from client transactions, as defined. Under the alternate method, the Company may not repay subordinated debt, pay cash distributions, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.
At December 31, 2019, the net capital position of Axos Clearing was as follows:
(Dollars in thousands)
Axos Clearing
Net capital
$
31,917

Less: required net capital
4,861

Excess Capital
$
27,056

 
 
Net capital as a percentage of aggregate debit items
13.13
%
Net capital in excess of 5% aggregate debit items
$
19,765

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 December 31, 2019, the Company had a deposit requirement of $96.2 million and maintained a deposit of $80.2 million. On January 2, 2020, the company made a deposit in the amount of $18.0 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 December 31, 2019, the Company had a deposit requirement of $8.9 million and maintained a deposit of $16.0 million. On January 2, 2020, the Company made a withdrawal in the amount of $6.6 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature or contractually re-price within a given period of time. The difference, or the interest rate sensitivity gap, provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or to have its asset yields adjusted upward, which would cause the yield on its assets to increase at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets reprice at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.

60

Banking Business
The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding at December 31, 2019 and the portions of each financial instrument that are expected to mature or reset interest rates in each future period:
 
Term to Repricing, Repayment, or Maturity at
 
December 31, 2019
(Dollars in thousands)
Six Months or Less
 
Over Six
Months Through
One Year
 
Over One
Year Through
Five Years
 
Over Five
Years
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
896,055

 
$
—

 
$
—

 
$
—

 
$
896,055

Securities1
229,080

 
5,557

 
3,775

 
11,839

 
250,251

Stock of the regulatory agencies
17,250

 
—

 
—

 
—

 
17,250

Loans and leases—net of allowance for loan loss
5,291,194

 
1,195,264

 
3,653,408

 
(56,964
)
 
10,082,902

Loans held for sale
39,522

 
—

 
—

 
—

 
39,522

Total interest-earning assets
6,473,101

 
1,200,821

 
3,657,183

 
(45,125
)
 
11,285,980

Non-interest earning assets
—

 
—

 
—

 
—

 
264,802

Total assets
$
6,473,101

 
$
1,200,821

 
$
3,657,183

 
$
(45,125
)
 
$
11,550,782

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
1,494,172

 
$
4,768,776

 
$
891,719

 
$
374,542

 
$
7,529,209

Advances from the FHLB
25,000

 
55,000

 
117,500

 
60,000

 
257,500

Borrowings, subordinated notes and debentures
35,596

 
—

 
—

 
40,984

 
76,580

Total interest-bearing liabilities
1,554,768

 
4,823,776

 
1,009,219

 
475,526

 
7,863,289

Other non-interest-bearing liabilities
—

 
—

 
—

 
—

 
2,623,242

Stockholders’ equity
—

 
—

 
—

 
—

 
1,064,251

Total liabilities and equity
$
1,554,768

 
$
4,823,776

 
$
1,009,219

 
$
475,526

 
$
11,550,782

Net interest rate sensitivity gap
$
4,918,333

 
$
(3,622,955
)
 
$
2,647,964

 
$
(520,651
)
 
$
3,422,691

Cumulative gap
$
4,918,333

 
$
1,295,378

 
$
3,943,342

 
$
3,422,691

 
$
3,422,691

Net interest rate sensitivity gap—as a % of total interest earning assets
43.58
%
 
(32.10
)%
 
23.46
%
 
(4.61
)%
 
30.33
%
Cumulative gap—as % of total interest earning assets
43.58
%
 
11.48
 %
 
34.94
%
 
30.33
 %
 
30.33
%
1 
Comprised of agency and non-agency mortgage-backed securities, municipal securities and other non-agency debt securities, which are classified as available-for-sale.
The above table provides an approximation of the projected re-pricing of assets and liabilities at December 31, 2019 on the basis of contractual maturities, adjusted for anticipated prepayments of principal and scheduled rate adjustments. The loan and securities prepayment rates reflected herein are based on historical experience. For the non-maturity deposit liabilities, we use decay rates and rate adjustments based upon our historical experience. Actual repayments of these instruments could vary substantially if future experience differs from our historic experience.
Although “gap” analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment.

61

The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest rates for the future 1-12 months and 13-24 months’ time periods. For purposes of modeling net interest income sensitivity the Bank assumes no growth in the balance sheet other than for retained earnings:
 
As of December 31, 2019
 
First 12 Months
 
Next 12 Months
(Dollars in thousands)
Net Interest Income
 
Percentage Change from Base
 
Net Interest Income
 
Percentage Change from Base
Up 200 basis points
$
448,812

 
8.2
 %
 
$
434,263

 
5.4
 %
Base
$
414,944

 
—
 %
 
$
411,929

 
—
 %
Down 200 basis points
$
384,116

 
(7.4
)%
 
$
392,034

 
(4.8
)%
We attempt to measure the effect market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. We analyze the market value of equity sensitivity to an immediate parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising interest rate scenarios, the base market interest rate forecast was increased by 100, 200 and 300 basis points. For falling interest rate scenarios, we used a 100 basis point decrease due to limitations inherent in the current rate environment.
The following table indicates the sensitivity of market value of equity to the interest rate movement described above:
 
As of December 31, 2019
(Dollars in thousands)
Net
Present Value
 
Percentage Change from Base
 
Net
Present
Value as a
Percentage
of Assets
Up 300 basis points
$
1,254,167

 
8.7
 %
 
10.9
%
Up 200 basis points
$
1,271,746

 
10.2
 %
 
10.9
%
Up 100 basis points
$
1,235,407

 
7.0
 %
 
10.5
%
Base
$
1,154,219

 
—
 %
 
9.7
%
Down 100 basis points
$
1,078,118

 
(6.6
)%
 
9.0
%
The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of interest rates, asset prepayments, runoffs in deposits and changes in repricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Furthermore, these computations do not take into account any actions that we may undertake in response to future changes in interest rates. Those actions include, but are not limited to, making change in loan and deposit interest rates and changes in our asset and liability mix.
Securities Business
Our Securities Business is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.
Our Securities Business is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest earning assets including customer and correspondent margin loans and securities borrowing activities. Our exposure to interest rate risk is also from our funding sources including customer and correspondent cash balances, bank borrowings and securities lending activities. Interest rates on customer and correspondent balances and securities produce a positive spread with rates generally fluctuating in parallel.
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.
At December 31, 2019, Axos Clearing held municipal obligations, these positions were classified as trading securities and had maturities greater than 10 years.

62

Our Securities Business is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.
Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4.
CONTROLS AND PROCEDURES
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
On January 28, 2019, the Company completed its acquisition of Axos Clearing. The Company is in the process of integrating the internal controls over financial reporting of Axos Clearing with the rest of the Company. Other than the foregoing, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

63

PART II—OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
The information set forth in Note 10 – “Commitments And Contingencies” to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference.
In addition, from time to time we 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 such matters are expected to have a material adverse effect on the Company’s financial condition, results of operations or business.

ITEM 1A.
RISK FACTORS
We face a variety of risks that are inherent in our business and our industry. These risks are described in more detail under Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2019. We encourage you to read these factors in their entirety. Moreover, other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currently available. The following supplements the risk factors in our Annual Report on Form 10-K referenced above:
Recent changes to our size and structure could subject us to increased costs.
The current term of the Program Management Agreement with H&R Block ends on June 30, 2022, and may be terminated early by H&R Block in the event that Axos no longer qualifies as exempt from the provisions of the Dodd-Frank Act known as the “Durbin Amendment”.  Such provisions limit the level of interchange fees that may be charged by institutions with greater than $10 billion in total assets, beginning July 1st of the following year in which the institution exceeds such size.  Because the Company’s total assets exceeded $10 billion on December 31, 2019, the Durbin Amendment applies to us starting in July 2020.  However, we have the right to avoid early termination of the Program Management Agreement by compensating H&R Block for the loss of its actual interchange income.  We estimate that such compensation could total approximately $25 million pre-tax annually, approximately $18.0 million after tax or $0.28 per diluted common share, although the actual amount would vary based upon the number and type of interchange transactions generated by the Emerald Card Program.


64

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth our market repurchases of Axos common stock and the Axos common shares retained in connection with net settlement of restricted stock awards during the quarter ended December 31, 2019. On August 2, 2019, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $100 million of the Company’s stock. The new share repurchase authorization is in addition to the previous share repurchase program approved on March 17, 2016. On March 17, 2016, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $100 million of the Company’s stock. The Company may repurchase shares of common stock on the open market or through privately negotiated transactions at times and prices considered appropriate, at the discretion of the Company, and subject to its assessment of alternative uses of capital, stock trading price, general market conditions and regulatory factors. The stock repurchase programs do not obligate the Company to acquire any specific number of shares and will continue in effect until terminated by the Board of Directors of the Company. Shares of common stock repurchased under these programs will be held as treasury shares. During the quarter ended December 31, 2019, there were no shares purchased under the programs.
(Dollars in thousands, except per share data)
Number
of Shares
Purchased
 
Average Price
Paid Per Shares
 
Total Number of
Shares
Purchased as Part of Publicly  Announced
Plans or Programs
 
Approximate Dollar value of
Shares that May
Yet be Purchased
Under the Plans
or Programs
Stock Repurchases
 
 
 
 
 
 
 
Quarter Ended December 31, 2019
 
 
 
 
 
 
 
October 1, 2019 to October 31, 2019
—

 
$
—

 
—

 
$
108,380

November 1, 2019 to November 30, 2019
—

 
$
—

 
—

 
$
108,380

December 1, 2019 to December 31, 2019
—

 
$
—

 
—

 
$
108,380

For the Three Months Ended December 31, 2019
—

 
$
—

 
—

 
$
108,380

 
 
 
 
 
 
 
 
Stock Retained in Net Settlement
 
 
 
 
 
 
 
October 1, 2019 to October 31, 2019
758

 
 
 
 
 
 
November 1, 2019 to November 30, 2019
350

 
 
 
 
 
 
December 1, 2019 to December 31, 2019
26,542

 
 
 
 
 
 
For the Three Months Ended December 31, 2019
27,650

 
 
 
 
 
 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.    MINE SAFETY DISCLOSURES
None.

ITEM 5.    OTHER INFORMATION
None.


65

ITEM 6.
EXHIBITS

Exhibit
Number
Description
 
Incorporated By Reference to
 
 
 
 
31.1
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
31.2
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
Filed herewith.
 
 
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
Filed herewith.
 
 
 
 
101.LAB
XBRL Taxonomy Label Linkbase Document
 
Filed herewith.
 
 
 
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
 
Filed herewith.
 
 
 
 
101.DEF
XBRL Taxonomy Definition Document
 
Filed herewith.
 
 
 
 
101.INS
XBRL Instance Document
 
The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
 
 
 




66

SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
 
Axos Financial, Inc.
 
 
 
 
 
 
Dated:
January 29, 2020
 
By:    
 
/s/ Gregory Garrabrants
 
 
 
 
 
Gregory Garrabrants
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Dated:
January 29, 2020
 
By:    
 
/s/ Andrew J. Micheletti
 
 
 
 
 
Andrew J. Micheletti
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
 

67

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