Axos Financial Inc

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 March 31, 2024, our Banking Business segment had income before income taxes of $159.4 million, compared to income before taxes of $103.2 million for the three months ended March 31, 2023. For the nine months ended March 31, 2024, our Banking Business segment had income before income taxes of $488.0 million, compared to income before taxes of $293.4 million for the nine months ended March 31, 2023.

For the three and nine months ended March 31, 2024, the Banking Business segment’s net interest income increased $62.2 million or 31.7%, and $119.8 million or 20.8%, respectively, compared to net interest income for the three and nine months ended March 31, 2023, respectively. The increase in net interest income was primarily due to higher interest income from loans, 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 nine months ended March 31, 2024, the Banking Business segment’s non-interest income increased $1.2 million, or 11.4%, and $96.3 million, or 301.3%, respectively, compared to non-interest income for the three and nine months ended March 31, 2023, respectively. The increase in non-interest income for the three months ended March 31, 2024 was primarily due to higher mortgage banking and servicing rights income and higher banking and service fees. For the nine months ended March 31, 2024, higher non-interest income was primarily driven by the $92.4 million gain on the FDIC Loan Purchase in the three months ended December 31, 2023.

For the three and nine months ended March 31, 2024, the Banking Business segment’s non-interest expense increased $6.7 million, or 6.8%, and $12.2 million, or 4.1%, respectively, compared to non-interest expense for the three and nine months ended March 31, 2023. The increase in non-interest expense for the three months ended March 31, 2024 was primarily due higher salaries and related costs, higher data and operational processing expenses and increased professional services expense, partially offset by lower advertising and promotional expense. For the nine months ended March 31, 2024, the increase in non-interest expense was primarily due to higher salaries and related costs, higher data and operational processing expenses and increased FDIC fees, partially offset by the absence of a $16.0 million accrual in the prior year period for an adverse legal judgment that has not been finalized and lower advertising and promotional expense.

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 nine months ended March 31, 2024, our Securities Business segment had income before income taxes of $7.4 million and $30.7 million, respectively, compared to income before income taxes of $19.5 million and $44.0 million for the three and nine months ended March 31, 2023, respectively.

For the three and nine months ended March 31, 2024, net interest income increased $0.8 million or 12.6%, and $3.3 million or 21.1%, respectively, compared to net interest income for the three and nine months ended March 31, 2023. The increase was primarily driven by a decrease in average securities loaned balances and higher rates earned on margin loans.

For the three months ended March 31, 2024, non-interest income decreased $5.6 million, or 14.5%, compared to non-interest income for the three months ended March 31, 2023. For the nine months ended March 31, 2024, non-interest income decreased $3.5 million, or 3.4%, compared to non-interest income for the nine months ended March 31, 2023. The decreases were primarily driven by lower broker-dealer fee income, partially offset by higher advisory fee income.

For the three and nine months ended March 31, 2024, non-interest expense increased $7.4 million, or 29.2%, and $13.1 million or 17.4%, respectively, compared to non-interest expense for the three and nine months ended March 31, 2023. The increases were primarily driven by higher salaries and related costs, higher broker-dealer clearing charges and higher data and operational processing expenses.

The following table provides selected information for Axos Clearing: