Axos Financial Inc

5. LOANS & ALLOWANCE FOR CREDIT LOSSES

The Company categorizes the loan portfolio intosix segments: Single Family - Mortgage & Warehouse, Multifamily and Commercial Mortgage, Commercial Real Estate, Commercial & Industrial - Non Real Estate, Auto & Consumer and Other. For further detail of the segments of the Company’s loan portfolio, refer to Note 1—“Organizations and Summary of Significant Accounting Policies” in the 2023 Form 10-K.

The following table sets forth the composition of the loan portfolio:

1 Includes PCD loans of $296.7 million in Multifamily and Commercial Mortgage and $44.5 million in Commercial Real Estate as of December 31, 2023. For further detail on PCD loans refer to Note 1—“Summary of Significant Accounting Policies”.

Accrued interest receivable on loans held for investments totaled $107.7 million and $77.9 million as of December 31, 2023 and June 30, 2023, respectively.

At December 31, 2023 and June 30, 2023, the Company has pledged certain loans totaling $5,155.8 million and $5,128.4 million, respectively, to the Federal Home Loan Bank (“FHLB”) and $3,915.0 million and $3,689.5 million, respectively, to the Federal Reserve Bank of San Francisco (“FRBSF”).

The following table presents the components of the provision for credit losses:

The following tables summarize activity in the allowance for credit losses - loans by portfolio segment:

For the three and six months ended December 31, 2023, the allowance for credit losses for loans increased primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and the loans acquired in the FDIC Loan Purchase.

Loan products within each portfolio contain varying collateral types which impact the estimate of the loss given default utilized in the calculation of the allowance. For further discussion of the model method of estimating expected lifetime credit losses to Note 1—“Organizations and Summary of Significant Accounting Policies” within the 2023 Form 10-K.

The following tables present a summary of the activity in the allowance for credit losses for off-balance sheet lending commitments:

The increase in the allowance for off-balance sheet lending commitments at December 31, 2023 compared to June 30, 2023, was primarily driven by an increase in the amount of Commercial Real Estate and Commercial and Industrial - Non-RE unfunded commitments.

The following table presents loan-to-value (“LTV”) for the Company’s real estate loans outstanding as of December 31, 2023:

The Company’s effective weighted-average LTV was 48.6% for real estate loans originated during the three months ended December 31, 2023.

Credit Quality Disclosures. The following tables provide the composition of loans that are performing and nonaccrual by portfolio segment:

There wereno nonaccrual loans without an allowance for credit losses as of December 31, 2023 and June 30, 2023. There wasno interest income recognized on nonaccrual loans in the three months ended December 31, 2023 and 2022.

Credit Quality Indicators. The Company categorizes loans 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. The Company analyzes loans individually by classifying the loans based on credit risk. The Company uses the following definitions for risk ratings.

Pass. Loans classified as pass are well protected by the current net worth and paying capacity of the obligor or by the fair value of any underlying collateral, less cost to acquire and sell in a timely manner.

Special Mention. Loans 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 of the institution’s credit position at some future date.

Substandard. Loans 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 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 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 following a continuous review process, featuring coverage of all loan 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.

The following tables presents the composition of loans by portfolio segment, fiscal year of origination and credit quality indicator, and the amount of gross charge-offs for the six months ended December 31, 2023:

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses and evaluates credit quality based on the aging status of its loans. Certain short-term loans do not have a fixed maturity date and are treated as delinquent if not paid in full 90 days after the origination date.

The following tables provide the aging of loans by portfolio segment:

Loans reaching 90+ days past due are generally placed on non-accrual. As of December 31, 2023 and June 30, 2023, there were loans of $31.3 million and $14.1 million, respectively, over 90 days past due and still accruing interest as the Company expects to collect the principal and interest amounts due.

Single family mortgage loans in process of foreclosure were $18.5 million and $17.7 million as of December 31, 2023 and June 30, 2023, respectively.

Loan Modifications to Borrowers Experiencing Financial Difficulty. The Company may grant certain modifications of loans to borrowers experiencing financial difficulty, which effective July 1, 2023, are reported as financial difficulty modifications (“FDMs”). The Company’s modification programs provide various modifications to borrowers experiencing financial difficulty which may include interest rate reductions, term extensions, payment delays and/or principal forgiveness. There were no FDMs during the three and six months ended December 31, 2023.

Prior to adoption of ASU 2022-02, the Company accounted for certain modifications as troubled debt restructurings (“TDRs”). Approximately 1.77% of our nonaccrual loans were considered TDRs at June 30, 2023. Borrowers that made timely payments after TDRs were considered non-performing for at leastsix months. Generally, after six months of timely payments, those TDRs were reclassified from the nonaccrual loan category to the performing loan category and any previously deferred interest income was recognized. The Company hadno TDRs classified as performing loans at June 30, 2023.