Axos Financial Inc

RESULTS OF OPERATIONS

Comparison of the Three and Six Months Ended December 31, 2023 and 2022

For the three months ended December 31, 2023, we had net income of $151.8 million, or $2.62 per diluted share, compared to net income of $81.6 million, or $1.35 per diluted share, for the three months ended December 31, 2022. For the six months ended December 31, 2023, we had net income of $234.4 million, or $3.98 per diluted share, compared to net income of $140.0 million, or $2.31 per diluted share, for the six months ended December 31, 2022.

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:

6 Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.

7 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.

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

1. Average balances are obtained from daily data.

2. Annualized.

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

4. Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

5. Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees.

6. Margin lending is the significant component of the asset titled customer, broker-dealer and clearing receivables on the unaudited Condensed Consolidated Balance Sheets.

7. 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.

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

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

1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

Net Interest Income

For the three months ended December 31, 2023, net interest income totaled $228.6 million, an increase of $28.7 million and 14.4% compared to net interest income of $199.9 million for the three months ended December 31, 2022. For the three months ended December 31, 2023, net interest margin, defined as annualized net interest income divided by average interest-earning assets, increased by 6 basis points compared to the net interest margin of 4.49% for the three months ended December 31, 2022.

For the three months ended December 31, 2023, total interest and dividend income increased 41.16% from the three months ended December 31, 2022, primarily due to a $102.2 million increase in interest income from loans, attributable to a 156 basis point increase in rates earned and a $2.0 billion increase in average balances.

For the three months ended December 31, 2023, total interest expense increased 108.41% from the three months ended December 31, 2022, primarily due to a $85.1 million increase in interest expense from demand and savings deposits, attributable to a 170 basis point increase in rates paid and a $4.0 billion increase in average balances.

For the six months ended December 31, 2023, net interest income totaled $439.8 million, an increase of $59.4 million and 15.6% compared to net interest income of $380.4 million for the six months ended December 31, 2022. For the six months ended December 31, 2023, net interest margin, defined as annualized net interest income divided by average interest-earning assets, increased by 8 basis points compared to the net interest margin of 4.38% for the six months ended December 31, 2022.

For the six months ended December 31, 2023, total interest and dividend income increased 50.71% from the six months ended December 31, 2022, primarily due to a $220.8 million increase in interest income from loans, attributable to a 188 basis point increase in rates earned and a $2.0 billion increase in average balances.

For the six months ended December 31, 2023, total interest expense increased 159.3% from the six months ended December 31, 2022, primarily due to $191.7 million increase in interest expense from demand and savings deposits, attributable to a 215 basis point increase in rates paid and a $4.5 billion increase in average balances.

Provision for Credit Losses

The provision for credit losses was $13.5 million and $20.5 million for the three and six months ended December 31, 2023 compared to $3.0 million and $11.8 million for the three and six months ended December 31, 2022. The provision for credit losses for loans for the three and six months ended December 31, 2023 was primarily due to loan growth in the Commercial & Industrial - Non-RE portfolio and the loans acquired in the FDIC Loan Purchase. The provision for credit losses for unfunded commitments of $1.0 million and $2.3 million for the three and six months ended December 31, 2023, respectively, was primarily driven by an increase in the amount of Commercial Real Estate and Commercial and Industrial - Non-RE unfunded commitments. Provisions for credit losses are charged to income to bring the allowance for credit losses for loans and unfunded lending commitments to a level deemed appropriate by management based on the factors discussed under the heading “Financial Condition—Asset Quality and Allowance for Credit Losses - Loans.”

Non-Interest Income

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

For the three and six months ended December 31, 2023, non-interest income increased by $95.8 million or 338.2%, primarily due to a $92.4 million gain on the FDIC Loan Purchase and an increase in broker-dealer fee income, primarily driven by higher rates earned on cash sorting balances at non-affiliated banks.

Non-Interest Expense

The following table sets forth information regarding our non-interest expense:

For the three months ended December 31, 2023, non-interest expense increased $13.8 million, or 12.8%, primarily due to increases of:

•$9.2 million in salaries and related costs due to increased headcount and salaries;

•$3.7 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs; and

•$2.2 million in broker-dealer clearing charges primarily due to mutual fund clearing fees and corporate actions.

The increases were partially offset by a $2.5 million decrease in professional services, primarily due to reduced legal and consulting services.

For the six months ended December 31, 2023, non-interest expense increased $18.2 million, or 8.13%, primarily due to increases of:

•$18.0 million in salaries and related costs due to increased headcount and salaries;

•$5.8 million in data and operational processing expense primarily due to enhancements of core processing systems, customer interfaces and clearing and custody technology programs;

•$3.4 million in broker-dealer clearing charges primarily due to mutual fund clearing fees and corporate actions; and

•$2.9 million in advertising and promotional expenses due to increased deposit marketing.

The increases were partially offset by a $12.5 million decrease in general and administrative expenses, primarily reflecting the absence of a $16.0 million accrual in the prior year quarter for an adverse legal judgment that has not been finalized.

Provision for Income Taxes

Income tax expense was $65.6 million and $101.1 million for the three and six months ended December 31, 2023, compared to $35.7 million and $60.1 million for three and six months ended December 31, 2022. Our effective income tax rates for the three months ended December 31, 2023 and 2022 were 30.19% and 30.42%, respectively. Our effective income tax rates for the six months ended December 31, 2023 and 2022 were 30.14% and 30.04%, respectively.

SEGMENT RESULTS

Our Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to our Company’s financial condition and operating results and management’s regular review of the operating results of those services. Our Company operates through two operating segments: Banking Business and Securities Business. In order to reconcile the two segments to the consolidated totals, our Company includes parent-only activities and intercompany eliminations. Inter-segment transactions are eliminated in consolidation and primarily include non-interest income earned by the Securities Business segment and non-interest expense incurred by the Banking Business segment for cash sorting fees related to deposits sourced from Securities Business segment customers, as well as interest expense paid by the Banking Business segment to each of the wholly-owned subsidiaries of our Company and to our Company itself for their operating cash held on deposit with the Banking Business segment.

The following tables present the operating results of the segments:

Banking Business

For the three months ended December 31, 2023, our Banking Business segment had income before income taxes of $214.6 million, compared to income before taxes of $109.3 million for the three months ended December 31, 2022. For the six months ended December 31, 2023, our Banking Business segment had income before income taxes of $328.6 million, compared to income before taxes of $190.2 million for the six months ended December 31, 2022.

For the three and six months ended December 31, 2023, the Banking Business segment’s net interest income increased $28.1 million or 14.1%, and $57.6 million or 15.2%, respectively, compared to net interest income for the three and six months ended December 31, 2022. The increase in net interest income was primarily due to higher interest income from loans driven and from deposits in other financial institutions, primarily attributable to higher rates earned and average balances, partially offset by higher rates paid and higher average interest-bearing deposit balances.

For the three and six months ended December 31, 2023, the Banking Business segment’s non-interest income increased $93.2 million, or 883.0%, and $95.1 million, or 447.0%, respectively, compared to non-interest income for the three and six months ended December 31, 2022. The increase in non-interest income was primarily due to a $92.4 million on the FDIC Loan Purchase. For the six months ended December 31, 2023, higher non-interest income was further driven by increased prepayment penalty fee income, mortgage banking and servicing rights income and banking and service fee income.

For the three and six months ended December 31, 2023, the Banking Business segment’s non-interest expense increased $5.5 million or 5.7%, and $5.5 million or 2.8%, respectively, compared to non-interest expense for the three and six months ended December 31, 2022. The increase in non-interest expense was primarily due to increases in salaries and related costs from higher headcount and salaries and increases in data and operational costs from enhancement of core processing systems and customer interfaced offset by decreases in advertising and promotional expense from reduced cash sorting fees paid to our Securities Business. For the six months ended December 31, 2023, the increase in non-interest expense was further offset by the absence of a $16.0 million accrual in the prior year quarter for an adverse legal judgment that has not been finalized.

The following tables presents our Banking Business 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:

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.

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.

The following table sets forth the effects of changing rates and volumes on our Banking Business segment’s net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); and (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume). The change in interest due to both volume and rate has been allocated proportionally to each based on the relative changes attributable to volume and changes attributable to rate.

1 Purchased loans include loans, loan discounts and unearned fees related to the FDIC Loan Purchase.

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

Our Banking Business 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 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.

For the three and six months ended December 31, 2023, our Securities Business segment had income before income taxes of $10.8 million and $23.3 million, respectively, compared to income before income taxes of $15.6 million and $24.5 million for the three and six months ended December 31, 2022. respectively.

For the three and six months ended December 31, 2023, net interest income increased $1.2 million or 24.7%, and $2.5 million or 27.0%, respectively, compared to net interest income for the three and six months ended December 31, 2022. The increase was primarily driven by an increase in rates earned on interest-bearing cash deposit balances and margin lending and a lower average balances on lines of credit.

For the three months ended December 31, 2023, non-interest income decreased $3.4 million, or 9.3%, compared to non-interest income for the three months ended December 31, 2022. The decrease was primarily driven by lower broker dealer fee income. For the six months ended December 31, 2023, non-interest income increased $2.0 million, or 3.1%, compared to non-interest income for the six months ended December 31, 2022. The increase was primarily driven by higher advisory fees.

For the three and six months ended December 31, 2023, non-interest expense increased $2.7 million, or 10.7%, and $5.7 million or 11.5%, respectively, compared to non-interest expense for the three and six months ended December 31, 2022. The increase was primarily driven by higher salaries and related costs, higher broker dealer clearing charges offset by lower professional services expense.

The following table provides selected information for Axos Clearing: