9205 West Russell Road
9205 West Russell Road
Suite 400
Suite 400
Las Vegas, NV 89148
Las Vegas, NV 89148
www.axosfinancial.com
www.axosfinancial.com
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A X O S F I N A N C I A L , I N C .
2 0 1 9 A N N U A L R E P O R T
AXOS OFFICE LOCATIONS
Salt Lake City, UT
Omaha, NE
(Axos Clearing)
Kansas City, KS*
Columbus, OH
New York, NY*
Los Angeles, CA*
Las Vegas, NV
Orange County, CA*
San Diego, CA
Existing office locations
New office locations
*Commercial banking
Banking
TM
Evolved
EXECUTIVE OFFICERS
Gregory Garrabrants
President and
Chief Executive Officer
Eshel Bar-Adon
Executive Vice President
Specialty Finance and
Chief Legal Officer
Jill Bauer
Executive Vice President
Trustee and Fiduciary Services
Mary Ellen Ciafardini
Executive Vice President
Human Resources
Thomas Constantine
Executive Vice President
Chief Credit Officer
Jan Durrans
Executive Vice President
Chief of Staff and
Chief Performance Officer
James Fraser
Executive Vice President
Specialty Real Estate, C&I Lending
Raymond Matsumoto
Executive Vice President
Chief Operating Officer
Andrew J. Micheletti
Executive Vice President
Chief Financial Officer
David Park
Executive Vice President
Brian Swanson
Executive Vice President
Head of Consumer Bank
John Tolla
Executive Vice President
Chief Governance, Risk and
Compliance Officer
Derrick K. Walsh
Senior Vice President
Chief Accounting Officer
Commercial Banking and Treasury Management
CORPORATE HEADQUARTERS
BOARD OF DIRECTORS
Paul J. Grinberg
Chairman
Nicholas A. Mosich
Vice Chairman
James S. Argalas
J. Brandon Black
Tamara Bohlig
James J. Court
Uzair Dada
Gregory Garrabrants
Edward J. Ratinoff
Axos Financial, Inc.
9205 West Russell Road
Suite 400
Las Vegas, NV 89148
www.axosfinancial.com
INVESTOR RELATIONS
Johnny Lai
Vice President, Corporate Development
and Investor Relations
(858) 649-2218
jlai@axosfinancial.com
CORPORATE SECRETARY
Angela Lopez
Corporate Secretary,
Vice President Corporate Governance
(858) 704-6225
alopez@axosfinancial.com
TRANSFER AGENT
Computershare Investor Services
250 Royall Street
Canton, MA 02021
(800) 962-4284
www-us.computershare.com/investor
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
BDO USA, LLP
San Diego, California
key financial highlights in FY 2019
• Loan and lease originations increased 17.3%
• Net interest margin for the Banking Business segment
was stable year‐over‐year at 4.14%
• Book value per share increased 14.6% to $17.47
• Axos was named a top five performing U.S. large thrift for the
11th consecutive year by S&P Global Market Intelligence
key financial achievements in FY 2019
(IN BILLIONS)
$9.4
$8.4
FY
2018
FY
2019
TOTAL LOANS
11.3%
(IN BILLIONS)
$8.9
$8.0
FY
2018
FY
2019
TOTAL DEPOSITS
12.5%
We achieved a number of milestones in 2019, including record earnings of $155
million, a successful rebrand of Axos Financial, Inc. and Axos Bank, a transfer of listing
from NASDAQ to NYSE, the successful roll‐out of Universal Digital Bank (“UDB”), our
proprietary online banking software, the additions of a securities clearing and a digital
wealth management platform through the acquisitions of COR Clearing and WiseBanyan,
respectively, and signing a multi-‐year marketing partnership with Nationwide.
We grew our lending and banking businesses in a prudent and profitable manner, with
total loans increasing by 11.3% and deposits increasing by 12.5%. Investments we made
and the additions of deposits at a lower cost through opportunistic acquisitions of
,
Nationwide
s and MWABank’s consumer deposits and strategic acquisitions of Epiq’s
bankruptcy and fiduciary software‐enabled services and COR Clearing were instrumental
in our ability to maintain a stable net interest margin, despite competitive pressures for
loans and deposits from banks and non-banks and a flat yield curve.
Organic growth in our established businesses, coupled with strategic investments in
emerging businesses such as auto lending, commercial real estate and commercial
specialty lending, cash and treasury management, and our new securities servicing
and robo advisory businesses, position us well to maintain profitable growth in an ever
evolving competitive and economic environment.
Capital Allocation Strategy
We work tirelessly to maintain an efficient, high-
performing organization by managing our expenses,
continuously identifying and implementing productivity
enhancement initiatives, and allocating capital to
opportunities that provide the best risk-adjusted
returns to shareholders over the long-term. Because
we operate with a best-in-class efficiency ratio that
contributes to a strong return on equity, we are able
to generate excess regulatory capital in most years,
even after we fund our double-digit loan growth and
growth investments. We deployed some of our excess
AC Q U I S I T I O N S I N F Y 2 0 1 9
OPPORTUNISTIC
Nationwide Deposits COR Clearing
MWABank Deposits WiseBanyan
STRATEGIC
capital in fiscal 2019 to enhance our deposit franchise
and to expand into new businesses. In the first calendar
quarter of 2019, we completed the acquisitions of COR
Clearing and WiseBanyan. COR, now rebranded Axos
Clearing, provides securities clearing and custody,
margin lending and securities lending to introducing
broker dealers (“IBDs”) and independent registered
investment advisors (“RIAs”). WiseBanyan, rebranded
Axos Invest, was one of the first robo advisory platforms
to offer personal financial and wealth management
through a “freemium” model. The two companies form
a strong foundation for our new Securities Business,
which we now report in our segment financials.
In our 19-year history, we have grown the company
primarily through internal development of businesses
and through strategic partnerships such as H&R Block,
NetSpend, and Nationwide. Some, such as unsecured
consumer lending, required a relatively small upfront
investment, while others, such as our prepaid deposit
sponsorship business, took several years to build and scale.
EXCESS CAPITAL AND USES
(EXCESS CAPITAL IS DEFINED AS CAPITAL DOLLARS GREATER THAN 8.25% OF TIER 1 LEVERAGE RATIO IN MILLIONS)
$155.1M
$142.0M
EXCESS
CAPITAL
6 | 30 | 18
NET
INCOME
FY 2019
$99.0M
EXCESS
CAPITAL
6 | 30 | 19
ASSET
GROWTH
STOCK
BUYBACKS
ACQUISITION
NET
INTANGIBLES
<$56.4M>
<$67.1M>
<$74.6M>
The investment of excess capital into these new businesses
able to provide customized offerings to former Nation-
have been instrumental in diversifying our bank and
wide customers and tailor the user experience based on
adding new sources of asset generation, fee income,
client interactions and feedback. We are on track to add new
and low-cost deposits.
features to UDB such as account aggregation, a person-
We evaluate each internal investment and acquisition
opportunity relative to the prospective risk-reward of
buying back our own stock. Because all of our team
members, executives and board directors are Axos
shareholders, we make decisions that we believe will
generate the best returns over the long-term. In 2019,
alization engine and an enterprise data warehouse. When
fully implemented, these tools will improve our ability to
make timely, relevant offers to all new and existing con-
sumer banking and lending clients based on their specific
needs and reduce the time and effort required for clients
to use more of our services.
we paid $98 million in cash for four acquisitions and
Earlier this year in our commercial banking businesses,
$56.4 million to buy back our common stock.
we completed the integration of Axos Fiduciary Services
Strategic Initiatives
We are making good progress in our software and ser-
vices growth initiatives. In our consumer-centric busi-
nesses, we successfully onboarded over 40,000 deposit
customers from Nationwide and created a co-branded
digital consumer banking instance for them in UDB.
Through this flexible platform that we control, we are
(“AFS”), the business acquired from Epiq in 2018. Our
seasoned team of relationship managers and professionals
support hundreds of Chapter 7 bankruptcy trustees and
non-7 fiduciaries nationwide who use our software to
administer their clients’ cases. We see tremendous
opportunities to grow this countercyclical business, which
provides non-interest-bearing and low-cost deposits and
fee income, by adding new functionalities to our software.
AXOS FINANCIAL is greater than the sum of its parts
COMMERCIAL
Asset Backed Lending
CONSUMER
Auto Lending
SECURITIES
Clearing
Axos Fiduciary Services
Axos Advisors
Custody
Cash and Treasury Management
Prepaid BIN Sponsorship
Digital Wealth Management
Commercial Real Estate Lending
Refund Advance Lending
Margin Lending
Commercial Specialty
Real Estate Lending
Equipment Finance
Factoring
Lender Finance
Multifamily Lending
Refund Transfer
RIA/IBD Lending
Single Family Mortgage
Securities Lending
Unsecured Consumer Lending
Securities-Based
Warehouse Lending
Lines of Credit
Securities Strategy
Our vision for the Securities Business is to provide
a comprehensive set of technology, banking and
lending services to independent RIAs and IBDs.
Structural demographic and industry trends,
including an aging investor and advisor population,
the transition from commission- to fee-based
models in the wealth management industry,
more advisors leaving large wirehouses such as
Morgan Stanley and Merrill Lynch to start their
own advisory practices, and a growing need for
advisors to deploy leading-edge technologies in
their client-facing and back-office operations, are
creating tremendous opportunities for firms like
Axos to serve these needs. Firms such as Charles
Schwab, Fidelity and TD Ameritrade have generated
significant growth and value to their clients and
shareholders by serving the clearing, custody and
banking needs of RIAs and their customers. We will
Axos Invest
Digital Wealth and Personal
Financial Management
Axos Clearing
Securities Clearing and Custody
business and functional units. While this is a scaled
build-out that will span over the next few years,
we have all of the essential components in Axos
Clearing, Axos Invest and Universal Digital Bank
to achieve our goals. The pay-off is the ability
to expand and deepen our relationship with
thousands of advisors and millions of individuals
and become their primary financial services
partner throughout each phase of their lives.
capitalize on this large and growing addressable
In closing, I am proud of the entire Axos team for
market by focusing on service, technology and a
helping us achieve another successful year. We
more expansive set of banking and lending solutions
have established a strong foundation for sustained
for small- and medium-sized independent RIAs.
growth, but there is much more work to be done
Our Securities Business serves three overlapping
sets of customers – independent RIA and IBD
practices, principals and clients of the advisory
firms, and individuals not affiliated with an advisor
but looking to manage their personal finances. By
combining Axos Clearing,s back-end infrastructure
with Axos Bank,s and Axos Invest,s middle- and
client-facing technologies, we will be able to
provide all three sets of clients with an integrated,
easy-to-use platform to manage their banking and
investing needs. It is a bold and exciting strategic
initiative that requires detailed planning, lots of
testing and iterations, and collaboration across
in order to deliver on our longer-term aspirations.
While I share in your disappointment that our ac-
complishments and solid financial results have not
resulted in a commensurate performance in our
share price so far, I remain deeply committed to
ensuring that Axos continues to generate strong
operating results.
Respectfully,
Greg Garrabrants
President and Chief Executive Officer
2019 FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________________________________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-37709
__________________________________________________________________________________________
AXOS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
9205 West Russell Road, STE 400, Las Vegas, NV
(Address of principal executive offices)
33-0867444
(I.R.S. Employer
Identification No.)
89148
(zip code)
Registrant’s telephone number, including area code: (858) 649-2218
Title of each class
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $.01 par value
6.25% Subordinated Notes Due 2026
AX
AXO
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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 and posted on its corporate web site, if any, 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
Non-accelerated filer
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 Act).
Yes
No
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing sales price of the
common stock on the New York Stock Exchange of $24.89 on December 31, 2018 was $1,066,478,929.
The number of shares of the registrant’s common stock outstanding as of August 23, 2019 was 61,235,291.
__________________________________________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the period ended June 30, 2019 are incorporated by reference into Part III.
[This page intentionally left blank]
AXOS FINANCIAL, INC.
INDEX
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
1
1
23
34
34
35
36
37
37
39
41
70
70
70
70
74
75
75
75
75
75
75
76
76
79
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain various forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of
1995. Forward-looking statements include projections, statements of the plans, goals and objectives of management for future
operations, statements of future economic performance, assumptions underlying these statements, and other statements that are
not statements of historical facts. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,”
“seeks,” “estimates,” “should,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-
looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing
statements.
References in this report to the “Company,” “us,” “we,” “our,” “Axos Financial,” or “Axos” are all to Axos Financial, Inc. on a
consolidated basis. References in this report to “Axos Bank,” the “Bank,” or “our bank” are to Axos Bank, one of our consolidated
subsidiaries.
Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies,
many of which are difficult to predict and beyond the control of Axos or the Bank, which could cause our actual results to differ
materially from the results expressed or implied in such forward-looking statements. These and other risks, uncertainties and
contingencies are described in this Annual Report on Form 10-K, including under “Item 1A. Risk Factors”, and the Company’s
other reports filed with the Securities and Exchange Commission (the “SEC”) from time to time, including but are not limited to
the following:
The soundness of other financial institutions;
• Changes in interest rates;
• General economic and market conditions, including the risk of a significant economic downturn;
•
• Changes in regulation or regulatory oversight, and laws, including tax laws;
• Policies and regulations enacted by the Consumer Financial Protection Bureau;
• Changes in United States trade policies;
• Replacement of the LIBOR benchmark interest rate;
• Changes in real estate values;
• Possible defaults on our mortgage loans;
• Mortgage buying activity of Fannie Mae and Freddie Mac;
•
The adequacy of our allowance for loan and lease losses;
• Changes in the value of goodwill and other intangible assets;
• Our risk management processes and procedures effectiveness;
• Our acquisition of a broker-dealer business and entry into the investment advisory business;
• Changes to our size and structure;
• Our ability to acquire and integrate acquired companies;
• Changes in our relationship with H&R Block, Inc. and the financial benefits of that relationship;
•
• Our ability to access the equity capital markets;
• Access to adequate funding;
• Our ability to manage our growth and deploy assets profitably;
• Competition for customers from other banks and financial services companies;
• Our ability to maintain and enhance our brand;
• Reputational risk associated with any negative publicity;
• A natural disaster, especially in California;
• Our ability to retain the services of key personnel and attract, hire and retain other skilled managers;
• Possible exposure to environmental liability;
• Our dependence on third-party service providers for core banking technology;
• Privacy concerns relating to our technology that could damage our reputation or deter customers from using our products
The outcome or impact of current or future litigation involving the Company;
and services;
• Risk of systems failure and disruptions to operations; and
• Our reliance on continued and unimpeded access to the internet.
The forward-looking statements contained in this Annual Report are made on the basis of the views and assumptions of management
regarding future events and business performance as of the date this Annual Report is filed with the SEC. We do not undertake
any obligation to update these statements to reflect events or circumstances occurring after the date this report is filed.
i
PART I
ITEM 1. BUSINESS
Overview
Axos Financial, Inc., is a financial holding company, a diversified financial services company with over $11.2 billion in
assets that provides banking and securities products and services to its customers through its online and low-cost distribution
channels and affinity partners. Axos Bank has deposit and loan 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. The 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 securities
products and services are offered through Axos Clearing LLC, formerly known as COR Clearing, LLC (“Axos Clearing”), acquired
on January 28, 2019 and Axos Invest, Inc. (formally known as WiseBanyan, Inc.) (“Axos Invest”), acquired on February 26,
2019, which 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 Clearing is a clearing 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.
WiseBanyan Securities LLC, an introducing broker-dealer that is registered with the SEC and FINRA was acquired together with
Axos Invest on February 26, 2019. 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.
At June 30, 2019, we had total assets of $11,220.2 million, loans of $9,420.2 million, investment securities of $227.5
million, total deposits of $8,983.2 million and borrowings of $627.4 million. Because we do not incur the significantly higher
fixed operating costs inherent in a branch-based distribution system, we are able to rapidly grow our deposits and assets by providing
a better value to our customers and by expanding our low-cost distribution channels.
Our business strategy is to grow our loan and lease originations and our deposits to achieve increased economies of scale
and reduce the cost of products and services to our customers by leveraging our distribution channels and technology. We have
designed our online banking platform and our workflow processes to handle traditional banking functions with elimination of
duplicate and unnecessary paperwork and human intervention. Our charter allows us to operate in all fifty states, and our online
presence allows us increased flexibility to target a large number of loan and deposit customers based on demographics, geography
and service needs. Our low-cost distribution channels provide opportunities to increase our core deposits and increase our loan
originations by attracting new customers and developing new and innovative products and services. Our securities clearing and
custody and digital wealth management platforms provide a comprehensive set of technology, clearing, cash management and
lending services targeted at independent registered investment advisors and introducing broker-dealers, principals and clients of
advisory firms and individuals not affiliated with an investment advisor. Our plan to integrate our clearing and wealth management
platforms with our banking platform, will create an easy to use platform for customers banking and investing needs. Over time
we expect our Securities Business to generate additional low-cost deposits, which would be available to fund the Banking Business.
Our long-term business plan includes the following principal objectives:
• Maintain an annualized return on average common stockholders’ equity of 17.0% or better;
• Annually increase average interest-earning assets by 12% or more; and
• Maintain annualized efficiency ratio at the Bank to a level 40% or lower.
1
Segment Information
We operate through two operating segments: Banking Business and Securities 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 consumers 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.
The Securities Business includes the Clearing Broker-Dealer, Registered Investment Advisor, and Introducing Broker-
Dealer lines of businesses. These lines of business offer products independently to their own customers as well as to Banking
Business clients. The products offered by the lines of business in the Securities Business primarily generate net interest and non-
banking service fee income.
Segment results are determined 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 consolidated totals, we include parent-only activities and
intercompany eliminations.
BANKING BUSINESS
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, 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 rewards are not sufficient to support
our required return on equity.
Our distribution channels for our bank deposit and lending products include:
• Multiple national online banking brands with tailored products targeted to specific consumer segments;
• Affinity groups where we gain access to the affinity group’s members, and our exclusive relationships with
financial advisory firms;
• A business banking division focused on providing deposit products and loans to specific nationwide industry
verticals (e.g., Homeowners’ Associations) and small and medium size businesses;
• A commission-based lending sales force that operates from home offices focusing primarily on the origination
of single family and multifamily mortgage loans;
• A commission-based lending sales force that operates from our San Diego office focusing on commercial and
industrial loans to businesses;
• A commission-based leasing sales force that operates from our Salt Lake City office focusing on commercial
and industrial leases to businesses;
• A bankruptcy and non-bankruptcy trustee and fiduciary services team that operates from our Kansas City office
•
focusing on specialized software and consulting services that provide deposits; and
Inside sales teams that originate loans and deposits from self-generated leads, third-party purchase leads, and
from our retention and cross-sell of our existing customer base.
2
Banking Business - Asset Origination and Fee Income Businesses
We have built diverse loan origination and fee income businesses that generate attractive financial returns through our
digital distribution channels. We believe the diversity of our businesses and our direct and indirect distribution channels provide us
with increased flexibility to manage through changing market and operating environments.
Single Family Mortgage Secured Lending
We generate earning assets and fee income from our mortgage lending activities, which consist of originating and servicing
mortgages secured primarily by first liens on single family residential properties for consumers and for lender-finance businesses.
We divide our single family mortgage originations between loans we retain and loans we sell. Our mortgage banking business
generates fee income and gains from sales of those consumer single family mortgage loans we sell. Our loan portfolio generates
interest income and fees from loans we retain. We also provide home equity loans for consumers secured by second liens on single
family mortgages. Our lender-finance loans are secured by our first lien on single family mortgages and include warehouse lines
for third-party mortgage companies.
We originate fixed and adjustable rate prime residential mortgage loans using a paperless loan origination system and
centralized underwriting and closing process. We warehouse our mortgage banking loans and sell to investors prime conforming
and jumbo residential mortgage loans. Our mortgage servicing business includes collecting loan payments, applying principal and
interest payments to the loan balance, managing escrow funds for the payment of mortgage-related expenses, such as taxes and
insurance, responding to customer inquiries, counseling delinquent mortgagors and supervising foreclosures.
We originate single family mortgage loans for consumers through multiple channels on a retail, wholesale and correspondent
basis.
• Retail. We originate single family mortgage loans directly through i) our multiple national online banking brand
websites, where our customers can view interest rates and loan terms, enter their loan applications and lock in
interest rates directly online, ii) our relationships with large affinity groups and iii) our call center which uses
self-generated internet leads, third-party purchased leads, and cross-selling to our existing customer base.
• Wholesale. We have developed relationships with independent mortgage companies, cooperatives and individual
loan brokers and we manage these relationships and our wholesale loan pipeline through our originations systems
and websites. Through our secure website, our approved brokers can compare programs, terms and pricing on a
real time basis and communicate with our staff.
• Correspondent. We acquire closed loans from third-party mortgage companies that originate single family loans
in accordance with our portfolio specifications or the specifications of our investors. We may purchase pools of
seasoned, single-family loans originated by others during economic cycles when those loans have more attractive
risk-adjusted returns than those we may originate.
We originate lender-finance loans to businesses secured by first liens on single family mortgage loans from cross selling,
retail direct and through third-parties. Our warehouse customers are primarily generated through cross selling to our network of
third-party mortgage companies approved to wholesale our consumer mortgage loans. Other lender-finance customers are generated
by our commissions-based sales force dedicated to commercial & industrial lending who contact borrowers directly or through
individual loan brokers.
Multifamily Mortgage Secured Lending
We originate adjustable rate multifamily residential mortgage loans and project-based multifamily real-estate-secured loans
with interest rates that adjust based on U.S. Treasury security yields and London Interbank Offered Rate (“LIBOR”). Many of our
loans have initial fixed rate periods (three, five or seven years) before starting a regular adjustment period (annually, semi-annually
or monthly) as well as prepayment protection clauses, interest rate floors, ceilings and rate change caps.
We divide our multifamily residential mortgage originations between the loans we retain and the loans we sell. Our mortgage
banking business includes gains from those multifamily mortgage loans we sell. Our loan portfolio generates interest income and
fees from the loans we retain.
We originate multifamily mortgage loans using a commission-based commercial lending sales force that operates from
home offices across the United States or from our San Diego location. Customers are targeted through origination techniques such
as direct mail marketing, personal sales efforts, email marketing, online marketing and print advertising. Loan applications are
submitted electronically to centralized employee teams who underwrite, process and close loans. The sales force team members
operate regionally both as retail originators for apartment owners and wholesale representatives to other mortgage brokers.
3
Commercial Real Estate Secured and Commercial Lending
Our commercial real estate-secured lending consists of mortgages secured by first liens on commercial real estate.
Historically, we have limited our exposure to commercial real estate and have primarily purchased seasoned mortgages on small
commercial properties when they were offered as a part of a residential mortgage loan pool. In fiscal 2015, we began to originate
adjustable rate small balance commercial real estate loans with interest rates that adjust based on U.S. Treasury security yields and
LIBOR. Many of our loans have initial fixed rate periods (three, five or seven years) before starting a regular adjustment period
(annually, semi-annually or monthly) as well as prepayment protection clauses, interest rate floors, ceilings and rate change caps.
Our commercial and industrial lending (“C&I”) is primarily comprised of real estate-backed and asset-backed loans and
leases to businesses and non-bank lenders. We started our C&I lending in 2010 with a focus on business cash flow lending and have
subsequently moved to providing financing to non-bank lenders that originate lending products secured by residential and commercial
real estate assets. Our C&I lending has also expanded to other specialty commercial real estate lending types, as well as to other
asset-based lending secured by non-real estate-related collateral.
Our C&I group also provides leases to small businesses and middle market companies that use the funds to purchase
machinery, equipment and software essential to their operations. The lease terms are generally between two and ten years and
amortize primarily to full repayment, or in some cases, to a residual balance that is expected to be collected through the sale of the
collateral to the lessee or to a third party. The leases are offered nationwide to companies in targeted industries through a direct
sales force and through independent third party sales referrals.
Specialty Finance Factoring
Our specialty finance division engages 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
primarily highly rated insurance company payor. Purchases of state lottery prize or structured settlement annuity payments are
governed by specific state statutes requiring judicial approval of each transaction. No transaction is funded before an order approving
such transaction has been entered by a court of competent jurisdiction. Our commission-based sales force originates contracts for
the retail purchase of such payments from leads generated by our dedicated research department through the use of proprietary
research techniques. The Specialty Finance Division also utilizes direct mail and online marketing to generate leads. 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.
Prepaid Cards and Refund Transfer
Our prepaid cards division provides card issuing and bank identification number (“BIN”) sponsorship services to companies
who have developed payroll, general purpose reloadable, incentive and gift card programs. BIN Sponsorship includes issuing debit
and prepaid cards from BINs licensed to the Bank by the various payment networks, managing risk for all programs, overseeing
compliance with network and government regulations, and functioning as liaison between program managers and the payment
networks. These programs generate fee income and low-cost deposits.
We are also responsible for the primary oversight and control of a refund transfer program under an agreement with Emerald
Financial Services, LLC (“EFS”), a wholly owned subsidiary of H&R Block, Inc. (“H&R Block”). Under this program, the Bank
opens a temporary bank account for each H&R Block customer who is receiving an income tax refund and elects to defer payment
of his or her tax preparations fees. After the Internal Revenue Service and any state income tax authorities transfer the refund into
the customer’s account, the net funds are transferred to the customer and the temporary deposit account is closed. We earn a fixed
fee paid by H&R Block for each of the H&R Block customers electing a refund transfer.
Automobile Lending
Our automobile lending division originates prime loans to customers secured by new and used automobiles (“autos”). In
2015 and 2016 we added systems and personnel to increase our auto lending portfolio. We hold all of the auto loans that we have
originated and perform the loan servicing functions for these loans.
4
Other Consumer and Business Lending
We originate fixed rate term unsecured loans to individual borrowers in all fifty states. We offer loans between $5,000
and $35,000 with terms of twelve, twenty-four, thirty-six, forty-eight and sixty months to well qualified borrowers. The minimum
credit score is 680. All applicants apply digitally and are required to supply proof of income, identity and bank account
documentation. One hundred percent of loans are manually underwritten by a seasoned underwriter with a telephone interview
conducted in respect of every approved loan prior to funding. We source our unsecured loans through existing bank customers, lead
aggregators and additional marketing efforts.
Through our strategic partnerships division, our Bank establishes contractual relationships with third-party service providers
(“Program Managers”) possessing demonstrated expertise in managing programs involving marketing and processing financial
products such as credit, debit, and prepaid cards, and small business and consumer loans. These relationships include our relationships
with H&R Block, Netspend and BFS Capital, among others. As delineated by the related contracts, a Program Manager provides
program management services in its areas of expertise subject to our Bank’s continuing control and active supervision of the subject
program. Underwriting standards and credit decisioning remain with our Bank in all cases. Each of these relationships is designed
to allow our Bank to leverage the Program Manager’s knowledge and experience to distribute program-related financial products
to a broad base of customers. With respect to credit products, our Bank generally originates the resulting receivable for sale, but
may, in its discretion, retain such receivable. Our Bank performs extensive due diligence with respect to each Program Manager
and program, and maintains a regimen of comprehensive risk management and strict compliance oversight with respect to all
programs. Under agreements with EFS and H&R Block, our Bank uses our underwriting guidelines and credit policies to offer and
fund unsecured lines of credit to consumers primarily through the H&R Block tax preparation offices and earns interest income
and fee income. Our Bank retains 10% of these lines of credit and sells the remainder to H&R Block. Our Bank also originates or
purchases interest-free loans to consumers that are offered primarily through H&R Block tax preparation offices. Our Bank has a
limited guarantee from H&R Block that reduces our Bank’s credit exposure on these interest-free loans.
Our Bank also provides overdraft lines of credit for our qualifying deposit customers with checking accounts.
5
Portfolio Management
Our investment analysis capabilities are a core competency of our organization. We decide whether to hold originated
assets for investment or to sell them in the capital markets based on our assessment of the yield and risk characteristics of these
assets as compared to other available opportunities to deploy our capital. Because risk-adjusted returns available on acquisitions
may exceed returns available through retaining assets from our origination channels, we have elected to purchase loans and securities
(see discussion below) from time to time. Some of our loans and security acquisitions were purchased at discounts to par value,
which enhance our effective yield through accretion into income in subsequent periods.
Loan Portfolio Composition. The following table sets forth the composition of our loan and lease portfolio in amounts
and percentages by type of loan at the end of each fiscal year-end for the last five years:
2019
2018
At June 30,
2017
2016
2015
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Single family real
estate secured:
Mortgage
Home equity
$4,278,822
45.3% $4,198,941
49.3% $3,901,754
52.4% $3,678,520
57.5% $2,980,795
Warehouse and other
820,559
2,258
—%
8.7%
2,306
412,085
—%
4.8%
2,092
452,390
—%
6.1%
2,470
537,714
—%
8.4%
3,604
385,413
59.6%
0.1%
7.7%
Multifamily real estate
secured
Commercial real estate
secured
Auto and RV secured
Factoring
Commercial &
Industrial
Other
Total loans and leases
held for investment
Allowance for loan
and lease losses
Unamortized
premiums/discounts,
net of deferred loan
fees
Net loans and leases
held for investment
1,948,513
20.6% 1,800,919
21.1% 1,619,404
21.7% 1,373,216
21.5% 1,185,531
23.7%
326,154
290,894
93,091
3.4%
3.1%
1.0%
220,379
213,522
169,885
1,653,314
17.5% 1,481,051
35,705
0.4%
18,598
2.6%
2.5%
2.1%
17.4%
0.2%
162,715
154,246
160,674
992,232
3,754
2.2%
2.1%
2.1%
13.3%
0.1%
121,746
73,676
98,275
514,300
2,542
1.9%
1.2%
1.5%
8.0%
—%
61,403
13,140
122,200
248,584
601
1.2%
0.3%
2.4%
5.0%
—%
9,449,310
100.0% 8,517,686
100.0% 7,449,261
100.0% 6,402,459
100.0% 5,001,271
100.0%
(57,085)
(49,151)
(40,832)
(35,826)
(28,327)
(10,101)
(36,246)
(33,936)
(11,954)
(44,326)
$9,382,124
$8,432,289
$7,374,493
$6,354,679
$4,928,618
The following table sets forth the amount of loans maturing in our total loans held for investment based on the contractual
terms to maturity:
(Dollars in thousands)
June 30, 2019
Term to Contractual Maturity
Less Than Three
Months
Over Three
Months Through
One Year
Over One Year
Through Five
Years
Over Five Years
Total
$
501,409
$
772,607
$
1,630,409
$
6,544,885
$
9,449,310
6
The following table sets forth the amount of our loans at June 30, 2019 that are due after June 30, 2020 and indicates
whether they have fixed, floating or adjustable interest rates:
(Dollars in thousands)
Single family real estate secured:
Mortgage
Home equity
Warehouse and other
Multifamily real estate secured
Commercial real estate secured
Auto and RV secured
Factoring
Commercial & Industrial
Other
Total
Fixed
Floating or
Adjustable1
Total
$
72,858
$
4,173,792
$
613
13,211
52,880
14,934
290,731
82,993
329,933
32,948
1,645
177,083
1,851,655
300,620
—
—
779,398
—
$
891,101
$
7,284,193
$
4,246,650
2,258
190,294
1,904,535
315,554
290,731
82,993
1,109,331
32,948
8,175,294
1 Included in this category are hybrid mortgages (e.g., 5/1 adjustable rate mortgages) that carry a fixed rate for an introductory term before transitioning to an
adjustable rate.
Our mortgage loans are secured by properties primarily located in the western United States. The following table shows
the largest states and regions ranked by location of these properties:
State or Region
California—south1
California—north2
New York
Florida
Arizona
Washington
Illinois
Hawaii
Colorado
Texas
All other states
Percentage of Loan Principal Secured by Real Estate Located in State or Region
At June 30, 2019
Single family
Total Real Estate
Mortgage Loans
Mortgage
Home Equity
Multifamily
real estate
secured
Commercial
real estate
secured
55.12%
17.08%
9.47%
5.11%
1.66%
1.44%
1.46%
1.29%
0.99%
0.86%
5.52%
53.79%
15.46%
11.56%
6.91%
2.28%
1.07%
0.29%
1.80%
0.71%
0.70%
5.43%
100.00%
100.00%
52.08%
10.43%
11.38%
—%
2.25%
5.99%
—%
—%
—%
—%
17.87%
100.00%
58.30%
20.11%
4.67%
1.45%
0.48%
2.40%
3.92%
0.27%
1.45%
1.14%
5.81%
55.12%
21.66%
8.56%
1.78%
—%
0.82%
3.29%
0.23%
2.03%
1.36%
5.15%
100.00%
100.00%
1 Consists of mortgage loans secured by real property in California with ZIP Code ranges from 90000 to 92999.
2 Consists of mortgage loans secured by real property in California with ZIP Code ranges from 93000 to 96999.
The ratio of the loan amount to the value of the property securing the loan is called the loan-to-value ratio (“LTV”). The
following table shows the LTVs of our loan portfolio on weighted-average and median bases at June 30, 2019. The LTVs were
calculated by dividing (a) the loan principal balance less principal repayments by (b) the appraisal value of the property securing
the loan.
Single family
Total Real Estate
Mortgage Loans
Mortgage
Home Equity1
Multifamily
real estate
secured
Commercial
real estate
secured
Weighted Average LTV
Median LTV
55.50%
55.82%
57.23%
57.91%
29.68%
52.59%
52.59%
50.43%
49.10%
47.40%
1 Amounts represent combined LTV calculated by adding the current balances of both the first and second liens of the borrower and dividing that sum by an
independent estimated value of the property at the time of origination.
Our effective weighted-average LTV of 55.77% for real estate mortgage loans originated during the fiscal year ended
June 30, 2019 has resulted, and we believe will continue to result, in relatively low average loan defaults and favorable write-off
experience.
7
Loan Underwriting Process and Criteria. We individually underwrite the loans that we originate and all loans that we
purchase. For our brand partnership lending products, we construct or validate loan origination models to meet our minimum
standards as further described below. Our loan underwriting policies and procedures are written and adopted by our board of directors
and our credit committee. Credit extensions generated by the Bank conform to the intent and technical requirements of our lending
policies and the applicable lending regulations of our federal regulators.
In the underwriting process we consider all relevant factors including the borrower’s credit score, credit history, documented
income, existing and new debt obligations, the value of the collateral, and other internal and external factors. For all multifamily
and commercial loans, we rely primarily on the cash flow from the underlying property as the expected source of repayment, but
we also endeavor to obtain personal guarantees from all material owners or partners of the borrower. In evaluating a multifamily
or commercial credit, we consider all relevant factors including the outside financial assets of the material owners or partners,
payment history at the Bank or other financial institutions, and the management / ownership experience with similar properties or
businesses. In evaluating the borrower’s qualifications, we consider primarily the borrower’s other financial resources, experience
in owning or managing similar properties and payment history with us or other financial institutions. In evaluating the underlying
property, we consider primarily the recurring net operating income of the property before debt service and depreciation, the ratio
of net operating income to debt service and the ratio of the loan amount to the appraised value.
Lending Limits. As a savings association, we are generally subject to the same lending limit rules applicable to national
banks. With limited exceptions, the maximum amount that we may lend to any borrower, including related entities of the borrower,
at any one time may not exceed 15% of our unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus
for loans fully secured by readily marketable collateral. See “Regulation of Axos Bank” for further information. At June 30, 2019,
the Bank’s loans-to-one-borrower limit was $148.5 million, based upon the 15% of unimpaired capital and surplus measurement.
At June 30, 2019, our largest loan and single lending relationship was $140.0 million.
Loan and Lease Quality and Credit Risk. Historically, our level of non-performing mortgage loans as a percentage of our
loan and lease portfolio has been relatively low compared to the overall residential lending market. The economy and the mortgage
and consumer credit markets have stabilized. Additionally, we have recently increased our efforts to make loans to businesses
through lending programs that are not as seasoned as our mortgage lending. Therefore, we anticipate that our rate of non-performing
loans and leases may increase in the future, and we have provided an allowance for estimated loan and lease losses.
Non-performing assets are defined as non-performing loans and leases, real estate acquired by foreclosure or deed-in-lieu
thereof and repossessed vehicles. Generally, non-performing loans and leases are defined as nonaccrual loans and leases and loans
and leases 90 days or more overdue. Troubled debt restructurings (“TDRs”) are defined as loans that we have agreed to modify by
accepting below market terms either by granting interest rate concessions or by deferring principal or interest payments due to
financial difficulty of the customer. Our policy with respect to non-performing assets is to place such assets on nonaccrual status
when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual.
When a loan or lease is placed on nonaccrual status, previously accrued but unpaid interest will be deducted from interest income.
Our general policy is to not accrue interest on loans and leases past due 90 days or more, unless the individual borrower circumstances
dictate otherwise.
See Management’s Discussion and Analysis — “Asset Quality and Allowance for Loan and Lease Losses” for a history
of non-performing assets and allowance for loan and lease losses.
Investment Securities Portfolio. We classify each investment security according to our intent to hold the security to
maturity, trade the security at fair value or make the security available-for-sale. We invest available funds in government and high-
grade non-agency securities. Our investment policy, as established by our Board of Directors, is designed to maintain liquidity and
generate a favorable return on investment without incurring undue interest rate risk, credit risk or portfolio asset concentration risk.
Under our investment policy, we are currently authorized to invest in agency mortgage-backed obligations issued or fully guaranteed
by the United States government, non-agency mortgage-backed obligations, specific federal agency obligations, municipal
obligations, specific time deposits, negotiable certificates of deposit issued by commercial banks and other insured financial
institutions, investment grade corporate debt securities and other specified investments. We also buy and sell securities to facilitate
liquidity and to help manage our interest rate risk. During the quarter ended September 30, 2016, the Company elected to reclassify
all of its held-to-maturity securities to available-for-sale. See Note 4 – “Securities” to the Consolidated Financial Statements for
further information.
8
The following table sets forth the dollar amount of our securities portfolio by intent at the end of each of the last five fiscal
years:
(Dollars in thousands)
Fiscal year end
June 30, 2019
June 30, 2018
June 30, 2017
June 30, 2016
June 30, 2015
Available-for-Sale
Held-to-maturity
Fair Value
Carrying Amount
Trading
Fair Value
Total
$
227,513
$
180,305
264,470
265,447
163,361
— $
—
—
199,174
225,555
— $
—
8,327
7,584
7,832
227,513
180,305
272,797
472,205
396,748
The following table sets forth the expected maturity distribution of our mortgage-backed securities and the contractual
maturity distribution of our Non-RMBS securities and the weighted-average yield for each range of maturities:
(Dollars in thousands)
Amount
Yield1
Amount
Yield1
Total Amount
Due Within One
Year
At June 30, 2019
Due After One but
within Five Years
Yield1
Amount
Due After Five but
within Ten Years
Yield1
Amount
Due After Ten Years
Yield1
Amount
Available-for-sale
Mortgage-backed securities:
U.S. Agency2
Non-Agency3
Total Mortgage-
Backed Securities
Non-RMBS
U.S. agencies
Municipal
Asset-backed securities and
structured notes
$
9,486
2.47% $
862
2.65% $
2,905
2.65% $
2,674
2.57% $
3,045
13,489
5.00%
1,877
4.89%
5,938
4.60%
3,824
4.71%
1,850
2.16%
7.01%
$ 22,975
3.96% $
2,739
4.18% $
8,843
3.96% $
6,498
3.83% $
4,895
3.99%
$
1,682
$ 21,974
2.44% $
1,682
2.44% $
—
—% $
—
—% $
—
3.01% $
3,952
2.27% $
5,150
1.28% $
8,266
4.05% $
4,606
—%
3.70%
179,976
6.00%
16,918
7.43% 163,058
5.85%
—
—%
—
—%
Total Non-RMBS
$ 203,632
5.65% $ 22,552
6.15% $ 168,208
5.71% $
8,266
4.05% $
4,606
3.70%
Available-for-sale—Amortized
Cost
$ 226,607
5.48% $ 25,291
5.94% $ 177,051
5.63% $ 14,764
3.95% $
9,501
Available-for-sale—Fair Value
$ 227,513
5.48% $ 25,960
5.94% $ 178,194
5.63% $ 13,980
3.95% $
9,379
Total securities
$ 227,513
5.48% $ 25,960
5.94% $ 178,194
5.63% $ 13,980
3.95% $
9,379
3.85%
3.85%
3.85%
1 Weighted-average yield is based on amortized cost of the securities. Residential mortgage-backed security yields and maturities include impact of expected
prepayments and other timing factors such as interest rate forward curve. Yields presented in this table are adjusted for OTTI, which is non-accretable.
2 U.S. government-backed or government-sponsored enterprises including Fannie Mae, Freddie Mac and Ginnie Mae.
3 Private sponsors of securities collateralized primarily by pools of 1-4 family residential first mortgages. Primarily super senior securities and secured by prime,
Alt-A or pay-option ARM mortgages.
Our securities portfolio of $227.5 million at June 30, 2019 is composed of approximately 4.2% U.S. agency residential
mortgage-backed securities (“RMBS”) and other debt securities issued by the government-sponsored enterprises primarily, Fannie
Mae and Freddie Mac (each, a “GSE” and, together, the “GSEs”); 0.8% U.S. Treasury securities; 0.6% Alt-A, private-issue super
senior, first-lien RMBS; 5.1% Pay-Option ARM, private-issue super senior first-lien RMBS; 9.3% Municipal securities and 80.0%
asset-backed and whole business securities secured by consumer receivables. We had no commercial mortgage-backed securities
(“CMBS”), sub-prime RMBS, or bank pooled trust preferred securities at June 30, 2019.
9
We manage the credit risk of our non-agency RMBS by purchasing those securities which we believe have the most
favorable blend of historic credit performance and remaining credit enhancements including subordination, over collateralization,
excess spread and purchase discounts. Substantially all of our non-agency RMBS are super senior tranches protected against realized
loss by subordinated tranches. The amount of structural subordination available to protect each of our securities (expressed as a
percentage of the current face value) is known as credit enhancement. At June 30, 2019, the weighted-average credit enhancement
in our entire non-agency RMBS portfolio was 19.0%. The credit enhancement percentage and the ratings agency grade (e.g. “AA”)
do not consider additional credit protection available to the Bank, if needed, from its purchase discount. All of the Bank’s non-
agency RMBS purchases were at a discount to par and we do not solely rely upon nationally recognized statistical rating organizations
(“NRSRO”) ratings when determining classification. This change in Bank policy was brought about by changes in regulatory stance
regarding classification of securities as mandated by Congress under section 939A of the Dodd-Frank Act, which required any
reference to, or reliance on, NRSROs to be removed when determining the creditworthiness of securities. We have experienced
personnel monitor the performance and measure the security for impairment in accordance with regulatory guidance. As of June 30,
2019, 26.9% of our non-agency RMBS securities have been downgraded from investment grade at acquisition to below investment
grade. See Management’s Discussion and Analysis—“Critical Accounting Policies—Securities.”
Banking Business - Deposit Generation
We offer a full line of deposit products, which we source through both online and branch distribution channels using an
operating platform and marketing strategies that emphasize low operating costs and are flexible and scalable for our business. Our
full featured products and platforms, 24/7 customer service and our affinity relationships result in customer accounts with strong
retention characteristics. We continuously collect customer feedback and improve our processes to satisfy customer needs.
At June 30, 2019, we had $8,983.2 million in deposits of which $6,617.2 million, or 73.7% were demand and savings
accounts and $2,366.0 million, or 26.3% were time deposits. We generate deposit customer relationships through our distribution
channels including websites, sales teams, online advertising, print and digital advertising, financial advisory firms, affinity
partnerships and lending businesses which generate escrow deposits and other operating funds. Our distribution channels include:
• A business banking division, which focuses on providing deposit products nationwide to industry verticals (e.g.,
Homeowners’ Associations and Non-Profit) as well as cash management products to a variety of businesses through a
dedicated sales team;
• An online consumer platform that delivers an enhanced banking experience with tailored products targeted to specific
consumer segments. For example, one tailored product is designed for customers who are looking for full-featured demand
accounts and very competitive fees and interest rates, while another product targets primarily tech-savvy, Generation X
and Generation Y customers that are seeking a low-fee cost structure and a high-yield savings account;
• A concierge banking offer serving the needs of high net worth individuals with premium products and dedicated service;
•
Financial advisory firms who introduce their clients to our deposit products through Axos Advisor;
• Relationships with affinity groups where we gain access to the affinity group’s members;
• A call center that opens accounts through self-generated internet leads, third-party purchased leads, affinity relationships,
and our retention and cross-sell efforts to our existing customer base;
• A prepaid card division, which provides card issuing and BIN sponsorship services to companies and generates low cost
deposits; and
• A bankruptcy and non-bankruptcy trustee and fiduciary service business who introduce their clients to our deposit products.
Our online consumer banking platform is full-featured requiring only single sign-in with quick and secure access to
activity, statements and other features including:
Purchase Rewards. Customers can earn cash back by using their VISA® Debit Card at select merchants.
Mobile Banking. Customers can access with Touch ID on eligible devices, review account balances, transfer funds, deposit
checks and pay bills from the convenience of their mobile phone.
Mobile Deposit. Customers can instantly deposit checks from their smart phones using our Mobile App.
Online Bill Payment Service. Customers can automatically pay their bills online from their account.
Peer to Peer payments. Customers can securely send money via email or text messaging through this service.
My Deposit. Customers can scan checks with this remote deposit solution from their home computers. Scanned images
will be electronically transmitted for deposit directly to their account.
Text Message Banking. Customers can view their account balances, transaction history, and transfer funds between their
accounts via these text message commands from their mobile phones.
10
Unlimited ATM reimbursements. With certain checking accounts, Customers are reimbursed for any fees incurred using
an ATM (excludes international ATM transactions). This gives them access to any ATM in the nation, for free.
Secure Email. Customers can send and receive secure emails from our customer service department without concern for
the security of their information.
InterBank Transfer. Customers can transfer money to their accounts at other financial institutions from their online banking
platform.
VISA® Debit Cards or ATM Cards. Customers may choose to receive either a free VISA® Debit or an ATM card upon
account opening. Customers can access their accounts worldwide at ATMs and any other locations that accept VISA®
Debit cards.
Overdraft Protection. Eligible Customers can enroll in one of our overdraft protection programs.
Digital Wallets. Our Apple Pay™, Samsung Pay™ and Android Pay™ solutions provide the same ease to pay as a debit
card with an eligible device. The mobile experience is easy and seamless.
Cash Deposit through Reload @ the Register. Customers can visit any Walmart, Safeway, ACE Cash Express, CVS
Pharmacy, Dollar General, Dollar Tree, Family Dollar, Kroger, Rite Aid, 7-Eleven and Walgreens, and ask to load cash
into their account at the register. A fee is applied.
Our consumer and business deposit balances consisted of 66.5% and 33.5% of total deposits at June 30, 2019, respectively.
Our business deposit accounts feature a full suite of treasury and cash management products for our business customers including
online and mobile banking, remote deposit capture, analyzed business checking and money market accounts. We service our
business customers by providing them with a dedicated relationship manager and an experienced business banking operations
team.
Our deposit operations are conducted through a centralized, scalable operating platform which supports all of our
distribution channels. The integrated nature of our systems and our ability to efficiently scale our operations create competitive
advantages that support our value proposition to customers. Additionally, the features described above such as online account
opening and online bill-pay promote self-service and further reduce our operating expenses.
We believe our deposit franchise will continue to provide lower all-in funding costs (interest expense plus operating
costs) with greater scalability than branch-intensive banking models because the traditional branch model with high fixed operating
costs will experience continued declines in consumer traffic due to the decline in paper check deposits and due to growing consumer
preferences to bank online.
The number of deposit accounts at the end of each of the last five fiscal years is set forth below:
2019
2018
2017
2016
2015
At June 30,
Non-interest-bearing, prepaid and other
3,743,334
3,535,904
3,113,128
1,816,266
Checking and savings accounts
Time deposits
311,067
23,447
270,082
2,309
274,962
2,748
292,012
4,807
Total number of deposit accounts
4,077,848
3,808,295
3,390,838
2,113,085
553,245
31,461
5,515
590,221
11
Deposit Composition. The following table sets forth the dollar amount of deposits by type and weighted average interest
rates at the end of each of the last five fiscal years:
2019
2018
At June 30,
2017
2016
2015
(Dollars in thousands)
Amount
Rate1
Amount
Rate1
Amount
Rate1
Amount
Rate1
Amount
Rate1
Non-interest-bearing
$ 1,441,930
— $ 1,015,355
— $
848,544
— $
588,774
— $
309,339
—
Interest-bearing:
Demand
Savings
2,709,014
2.06% 2,519,845
1.60% 2,593,491
0.89% 1,916,525
0.63% 1,224,308
2,466,214
1.48% 2,482,430
1.31% 2,651,176
0.81% 2,484,994
0.69% 2,126,792
Total demand and savings
5,175,228
1.78% 5,002,275
1.46% 5,244,667
0.85% 4,401,519
0.66% 3,351,100
Time deposits
2,366,015
2.43% 1,967,720
2.32%
806,296
2.46% 1,053,758
1.96%
791,478
Total interest-bearing
7,541,243
1.99% 6,969,995
1.70% 6,050,963
1.06% 5,455,277
0.91% 4,142,578
0.48%
0.67%
0.60%
1.99%
0.87%
Total deposits
$ 8,983,173
1.67% $ 7,985,350
1.48% $ 6,899,507
0.93% $ 6,044,051
0.82% $ 4,451,917
0.81%
1 Based on weighted-average stated interest rates at the end of the period.
The following tables set forth the average balance, the interest expense and the average rate paid on each type of deposit
at the end of each of the last five fiscal years:
(Dollars in thousands)
Average
Balance
Interest
Expense
Avg. Rate
Paid
Average
Balance
Interest
Expense
Avg. Rate
Paid
Average
Balance
Interest
Expense
Avg. Rate
Paid
2019
2018
2017
For the Fiscal Year Ended June 30,
$ 1,494,040
$
25,321
1.69% $ 2,381,000
$
28,807
1.21% $ 2,197,000
$
16,049
2,412,793
2,322,039
36,070
55,689
1.49%
2.40%
2,325,238
990,635
25,206
25,838
1.08%
2.61%
2,422,769
941,919
18,507
21,938
Demand
Savings
Time deposits
Total interest-
bearing deposits
Total deposits
$ 7,456,157
$ 117,080
1.57% $ 6,749,817
$ 6,228,872
$ 117,080
1.88% $ 5,696,873
$
$
79,851
79,851
1.40% $ 5,561,688
1.18% $ 6,336,099
$
$
56,494
56,494
0.73%
0.76%
2.33%
1.02%
0.89%
(Dollars in thousands)
Demand
Savings
Time deposits
Total interest-bearing deposits
Total deposits
For the Fiscal Year Ended June 30,
Average
Balance
$
1,460,266
$
2,189,157
852,590
$
$
4,502,013
5,241,777
$
$
2016
Interest
Expense
8,750
15,861
18,056
42,667
42,667
Avg. Rate
Paid
Average
Balance
2015
Interest
Expense
Avg. Rate
Paid
0.60% $
1,549,207
$
0.72%
2.12%
1,313,088
790,661
0.95% $
3,652,956
0.81% $
3,908,277
$
$
10,165
10,544
14,024
34,733
34,733
0.66%
0.80%
1.77%
0.95%
0.89%
The following table shows the maturity dates of our certificates of deposit at the end of each of the last five fiscal years:
(Dollars in thousands)
2019
2018
At June 30,
2017
2016
2015
Within 12 months
13 to 24 months
25 to 36 months
37 to 48 months
49 months and thereafter
Total
$
1,306,072
$
1,259,119
$
187,536
$
497,825
$
373,999
351,374
99,502
126,525
482,542
97,226
11,118
35,981
564,276
14,149
74,631
3,305
526,675
41,668
5,463
71,518
437,284
$
2,366,015
$
1,967,720
$
806,296
$
1,053,758
$
73,118
36,991
4,605
302,765
791,478
12
The following table shows maturities of our time deposits having principal amounts of $100,000 or more at the end of
each of the last five fiscal years:
(Dollars in thousands)
Fiscal year end
June 30, 2019
June 30, 2018
June 30, 2017
June 30, 2016
June 30, 2015
SECURITIES BUSINESS
Term to Maturity
Within Three
Months
Over Three
Months to
Six Months
Over Six
Months to
One Year
Over One
Year
Total
$
151,176
$
363,486
$
376,714
$
335,201
$
1,226,577
96,837
71,771
100,048
37,842
75,464
21,137
133,603
189,604
33,125
71,266
228,532
106,826
41,569
606,892
539,726
386,837
246,995
771,066
1,001,909
721,109
Our 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. We offer 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. At June 30, 2019,
we provided services to 62 financial organizations, including correspondent broker-dealers and registered investment advisers.
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. We earn a spread equal to the difference between the amount we
pay to fund the margin loans and the amount of interest income we receive from our customers.
We conduct 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. The net revenues
for this business consist of the interest spreads generated on these activities.
We assist our brokerage customers in managing their cash balances and earn a fee through an insured bank deposit cash
sweep program.
Investment management. Through our digital wealth management business, Axos Invest, we provide our retail customers
with investment management services through a comprehensive and flexible technology platform. We expect to integrate our
digital wealth management platform into our universal digital banking platform in the near future, creating a seamless user
experience and a holistic personal financial management ecosystem. Our digital wealth management business generates fee income
from clients paying for premium services and deposits from uninvested cash balances.
Borrowings. In addition to deposits, we have historically funded our asset growth through advances from the Federal
Home Loan Bank of San Francisco (“FHLB”). Our bank can borrow up to 40% of its total assets from the FHLB, and borrowings
are collateralized by mortgage loans and mortgage-backed securities pledged to the FHLB. At June 30, 2019, the Company had
$458.5 million advances outstanding with another $2.0 billion available immediately, which represents a fully collateralized
position, for advances from the FHLB for terms up to ten years.
The Bank has federal funds lines of credit with two major banks totaling $35.0 million. At June 30, 2019, the Bank had
no outstanding balance on either line.
The Bank can also borrow from the Federal Reserve Bank of San Francisco (“FRB”), and borrowings may be collateralized
by commercial, consumer and mortgage loans as well as securities pledged to the FRB. Based on loans and securities pledged at
June 30, 2019, we had a total borrowing capacity of approximately $1.6 billion, none of which was outstanding. The Bank has
additional unencumbered collateral that could be pledged to the FRB Discount Window to increase borrowing liquidity.
Axos Clearing has a total of $155.0 million uncommitted secured lines of credit available for borrowing as needed. As
of June 30, 2019, there was $106.8 million outstanding. These credit facilities bear interest at rates based on the Federal Funds
rate and are due upon demand. The weighted average interest rate on the borrowings at June 30, 2019 was 3.84%.
Axos Clearing has a $35.0 million committed unsecured line of credit available for limited purpose borrowing. As of
June 30, 2019, there was $0.0 million outstanding. This credit facility bears interest at rates based on the Federal Funds rate and
13
are due upon demand. The unsecured line of credit requires Axos Clearing operate in accordance of specific covenants surrounding
capital and debt ratios. Axos Clearing was in compliance of all covenants as of June 30, 2019.
On December 16, 2004, we completed a transaction in which we formed a trust and issued $5.0 million of trust-preferred
securities. The net proceeds from the offering were used to purchase approximately $5.2 million of junior subordinated debentures
of our Company with a stated maturity date of February 23, 2035. The debentures are the sole assets of the trust. The trust preferred
securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indenture. We have the right
to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus
any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, for a
rate of 4.92% as of June 30, 2019, and is paid quarterly.
In March 2016, we completed the sale of $51.0 million aggregate principal amount of our 6.25% Subordinated Notes
due February 28, 2026 (the “Notes”). We received $51.0 million in gross proceeds as a part of this transaction, before the 3.15%
underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate of 6.25%
per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at our discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions.
On January 28, 2019, we 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. Interest accrues at a rate of 6.25% per annum. During
the three months ended June 30, 2019, $0.1 million of subordinated loans were repaid.
The table below sets forth the amount of our borrowings, the maximum amount of borrowings in each category during
any month-end during each reported period, the approximate average amounts outstanding during each reported period and the
approximate weighted average interest rate thereon at or for the last five fiscal years:
(Dollars in thousands)
Advances from the FHLB:
Average balance outstanding
2019
At or For The Fiscal Years Ended June 30,
2017
2018
2016
2015
$ 1,397,460
$ 1,296,120
$
798,982
$
855,029
$
700,805
Maximum amount outstanding at any month-end during the period
$ 3,424,000
$ 2,240,000
$ 1,317,000
$ 1,129,000
$ 1,075,000
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
Securities sold under agreements to repurchase:
Average balance outstanding
Maximum amount outstanding at any month-end during the period
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
Borrowings, subordinated notes and debentures:
Average balance outstanding
Maximum amount outstanding at any month-end during the period
Balance outstanding at end of period
Average interest rate at end of period
Average interest rate during period
MERGERS AND ACQUISITIONS
$
458,500
$
457,000
$
640,000
$
727,000
$
753,000
2.32%
2.35%
2.14%
1.76%
1.79%
1.55%
— $
5,575
— $
20,000
$
$
33,068
35,000
— $
— $
20,000
—%
—%
—%
4.11%
4.25%
4.43%
104,287
214,477
168,929
$
$
$
54,522
54,552
54,552
$
$
$
55,873
56,511
54,463
4.78%
5.39%
6.55%
6.70%
6.57%
6.62%
1.53%
1.31%
35,000
35,000
35,000
4.38%
4.44%
22,025
58,185
58,066
6.27%
5.90%
$
$
$
$
$
$
1.36%
1.27%
36,562
45,000
35,000
4.38%
4.47%
5,155
5,155
5,155
2.68%
2.77%
$
$
$
$
$
$
$
$
$
$
$
$
From time to time we undertake acquisitions or similar transactions consistent with our operating and growth
strategies. During the fiscal years ended June 30, 2019 and 2018, there were transactions that are discussed further in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Mergers and
Acquisitions.”
TECHNOLOGY
Our technology is built on a collection of enterprise and client platforms that have been purchased, developed in-house
or integrated with software systems to provide products and services to our customers. The implementation of our technology has
14
been conducted using industry best-practices and using standardized approaches in system design, software development, testing
and delivery. At the core of our infrastructure, we have designed and implemented secure and scalable hardware solutions to ensure
we meet the needs of our business. Our customer experiences were designed to address the needs of an internet-only bank and its
customers. Our websites and technology platforms drive our customer-focused and self-service engagement model, reducing the
need for human interaction while increasing our overall operating efficiencies. Our focus on internal technology platforms enable
continuous automation and secure and scalable processing environments for increased transaction capacity. We intend to continue
to improve and adapt technology platforms to meet business objectives and implement new systems with the goal of efficiently
enabling our business.
SECURITY
We recognize that information is a critical asset. How information is managed, controlled and protected has a significant
impact on the delivery of services. Information assets, including those held in trust, must be protected from unauthorized use,
disclosure, theft, loss, destruction and alteration.
We employ an information security program to achieve our security objectives. The program is designed to identify,
measure, manage and control the risks to system and data availability, integrity, and confidentiality, and to ensure accountability
for system actions.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We register our various Internet URL addresses with service companies, and work actively with bank regulators to identify
potential naming conflicts with competing financial institutions. Policing unauthorized use of proprietary information is difficult
and litigation may be necessary to enforce our intellectual property rights. We own certain Internet domain names. Domain names
in the United States and in foreign countries are regulated, and the laws and regulations governing the Internet are continually
evolving. Additionally, the relationship between regulations governing domain names and laws protecting intellectual property
rights is not entirely clear. As a result, in the future, we may be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademark and other intellectual property rights.
EMPLOYEES
At June 30, 2019, we had 1007 full-time equivalent employees. None of our employees are represented by a labor union
or are subject to a collective bargaining agreement. We have not experienced any work stoppage and consider our relations with
our employees to be satisfactory.
COMPETITION
The market for banking and financial services is intensely competitive, and we expect competition to continue to intensify
in the future. The Bank attracts deposits through its online acquisition channels. Competition for those deposits comes from a
wide variety of other banks, savings institutions, and credit unions. The Bank competes for these deposits by offering superior
service and a variety of deposit accounts at competitive rates.
In real estate lending, we compete against traditional real estate lenders, including large and small savings banks,
commercial banks, mortgage bankers and mortgage brokers. Many of our current and potential competitors have greater brand
recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources
and are capable of providing strong price and customer service competition. In order to compete profitably, we may need to reduce
the rates we offer on loans and leases and investments and increase the rates we offer on deposits, which may adversely affect our
overall financial condition and earnings. We may not be able to compete successfully against current and future competitors.
REGULATION
GENERAL
Axos Financial, Inc. (the “Company”) is regulated as a savings and loan holding company by the Board of Governors of
the Federal Reserve System (the “Federal Reserve”). The Company is required to file reports with, and otherwise comply with
the rules and regulations of, the Federal Reserve. The Bank, as a federal savings bank, is subject to regulation, examination and
supervision by the Office of the Comptroller of the Currency (“OCC”) as its primary regulator, 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. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July
21, 2010, created a new Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve that
has broad authority to issue regulations implementing numerous consumer laws, to which we are subject.
15
The regulation of savings and loan holding companies and savings associations is intended primarily for the protection
of depositors and not for the benefit of our stockholders. The following information describes aspects of the material laws and
regulations applicable to the Company and the Bank. The information below does not purport to be complete and is qualified in
its entirety by reference to all applicable laws and regulations. In addition, new and amended legislation, rules and regulations
governing the Company and the Bank are introduced from time to time by the U.S. government and its various agencies. Any such
legislation, regulatory changes or amendments could adversely affect the Company or the Bank, and no assurance can be given
as to whether, or in what form, any such changes may occur.
REGULATION OF FINANCIAL HOLDING COMPANY.
General. The Company is a unitary savings and loan holding company within the meaning of the Home Owners’ Loan
Act (“HOLA”), and is treated as a “financial holding company” under Federal Reserve rules. Accordingly, the Company is registered
as a savings and loan holding company with the Federal Reserve and is subject to the Federal Reserve’s regulations, examinations,
supervision and reporting requirements. In addition, the Federal Reserve has enforcement authority over the Company and its
subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution.
Capital. Savings and loan holding companies, such as the Company, were historically not subject to specific regulatory
capital requirements. However, pursuant to the Dodd-Frank Act, savings and loan holding companies are now subject to the same
capital and activity requirements as those applicable to bank holding companies. Moreover, the Dodd-Frank Act required that the
Federal Reserve promulgate consolidated capital requirements for depository institution holding companies that are not less
stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.
In July 2013, the Company’s primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator,
the OCC, published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking
organizations. The rules implement the Basel Committee’s December 2010 capital framework known as “Basel III” for
strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules
substantially revise the capital requirements applicable to depository institutions and their holding companies, including the
Company and the Bank, and are discussed in more detail below under “Regulation of Axos Bank – Regulatory Capital Requirements
and Prompt Corrective Action”.
Source of Strength. The Dodd-Frank Act extends the Federal Reserve “source of strength” doctrine to savings and loan
holding companies. Such policy requires holding companies to act as a source of financial strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of an institution’s financial distress. The regulatory agencies
have yet to issue joint regulations implementing this policy.
Change in Control. The federal banking laws require that appropriate regulatory approvals must be obtained before an
individual or company may take actions to “control” a bank or savings association. The definition of control found in the HOLA
is similar to that found in the Bank Holding Company Act of 1956 (“BHCA”) for bank holding companies. Both statutes apply a
similar three-prong test for determining when a company controls a bank or savings association. Specifically, a company has
control over either a bank or savings association if the company:
•
•
•
directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more
of the voting securities of a company;
controls in any manner the election of a majority of the directors (or any individual who performs similar functions in
respect of any company, including a trustee under a trust) of the board; or
directly or indirectly exercises a controlling influence over the management or policies of the bank.
Regulation LL, which was implemented in 2011 by the Federal Reserve, includes a specific definition of “control” similar
to the statutory definition, with certain additional provisions. Additionally, Regulation LL modifies the regulations for purposes
of determining when a company or natural person acquires control of a savings association or savings and loan holding company
under the HOLA or the Change in Bank Control Act (“CBCA”). In light of the similarity between the statutes governing bank
holding companies and savings and loan holding companies, the Federal Reserve uses its established rules and processes with
respect to control determinations under HOLA and the CBCA to ensure consistency between equivalent statutes administered by
the same agency.
Furthermore, the Federal Reserve may not approve any acquisition that would result in a multiple savings and
loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit such acquisition. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
16
In August 2018 the Company received approval from the Federal Reserve Bank of San Francisco and became
a savings and loan holding company that is treated as a financial holding company under the rules and regulations of the Federal
Reserve. Financial holding companies are generally permitted to affiliate with securities firms and insurance companies and engage
in other activities that are "financial in nature." Such activities include, among other things, securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval is required
for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.
REGULATION OF BANKING BUSINESS
General. As a federally-chartered savings and loan association whose deposit accounts are insured by FDIC, Axos Bank
is subject to extensive regulation by the FDIC and the OCC. Under the Dodd-Frank Act, the examination, regulation and supervision
of savings associations, such as Axos Bank, were transferred from the OTS to the OCC, the federal regulator of national banks
under the National Bank Act. The following discussion summarizes some of the principal areas of regulation applicable to the
Bank and its operations.
Insurance of Deposit Accounts. The FDIC administers a deposit insurance fund (the “DIF”) that insures depositors in
certain types of accounts up to a prescribed amount for the loss of any such depositor’s respective deposits due to the failure of
an FDIC member depository institution. As the administrator of the DIF, the FDIC assesses its member depository institutions
and determines the appropriate DIF premiums to be paid by each such institution. The FDIC is authorized to examine its member
institutions and to require that they file periodic reports of their condition and operations. The FDIC may also prohibit any member
institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC
also has the authority to initiate enforcement actions against savings associations, after giving the primary federal regulator the
opportunity to take such action. The FDIC may terminate an institution’s access to the DIF if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition. We do not know of any practice, condition or
violation that might lead to termination of our access to the DIF.
Axos Bank is a member depository institution of the FDIC and its deposits are insured by the DIF up to the applicable
limits, which are backed by the full faith and credit of the U.S. Government. Effective with the passing of the Dodd-Frank Act in
2010, the basic deposit insurance limit was permanently raised to $250,000, instead of the $100,000 limit previously in effect.
Regulatory Capital Requirements and Prompt Corrective Action. The prompt corrective action regulation of the OCC
requires mandatory actions and authorizes other discretionary actions to be taken by the OCC against a savings association that
falls within undercapitalized capital categories specified in OCC regulations.
The New Capital Rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios
that as of January 1, 2019, requires banking organizations to maintain a minimum “common equity Tier 1” (or “CET1”) ratio of
4.5%, a Tier 1 risk-based capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum
leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets).
A capital conservation buffer of 2.5% above each of these levels (phased in over three years starting in 2016, beginning
at 0.625% and increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019) is required for
banking institutions to avoid restrictions on their ability to make capital distributions, including the payment of dividends.
The New Capital Rules provide for a number of new deductions from and adjustments to CET1. These include, for
example, the requirement that deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such
categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on
January 1, 2015 and were phased in over three years for the Bank.
The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect our
regulatory capital position relative to that of our competitors, including those that may not be subject to the same regulatory
requirements as the Bank. Various aspects of Basel III continue to be subject to further evaluation and interpretation by the U.S.
banking regulators. As of June 30, 2019, the Company and the Bank remain well-capitalized under the currently enacted capital
adequacy requirements of Basel III, and remain well-capitalized when including implementation of the deductions and other
adjustments to CET1 on a fully phased-in basis.
In general, the prompt corrective action regulation prohibits an FDIC member institution from declaring any dividends,
making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment,
the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may
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accept brokered deposits only with a waiver from the FDIC, but are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or roll-over brokered deposits.
If the OCC determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging
in an unsafe and unsound practice, the OCC may, if the institution is well-capitalized, reclassify it as adequately capitalized. If
the institution is adequately capitalized, but not well-capitalized, the OCC may require it to comply with restrictions applicable
to undercapitalized institutions. If the institution is undercapitalized, the OCC may require it to comply with restrictions applicable
to significantly undercapitalized institutions. Finally, pursuant to an interagency agreement, the FDIC can examine any institution
that has a substandard regulatory examination score or is considered undercapitalized without the express permission of the
institution’s primary regulator.
Capital regulations applicable to savings associations such as the Bank also require savings associations to meet the
additional capital standard of tangible capital equal to at least 1.5% of total adjusted assets.
The Bank’s capital requirements are viewed as minimum standards and most financial institutions are expected to maintain
capital levels well above the minimum. In addition, OCC regulations provide that minimum capital levels greater than those
provided in the regulations may be established by the OCC for individual savings associations upon a determination that the
savings association’s capital is or may become inadequate in view of its circumstances. Axos Bank is not subject to any such
individual minimum regulatory capital requirement and the Bank’s regulatory capital exceeded all minimum regulatory capital
requirements as of June 30, 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
—Liquidity and Capital Resources.”
Stress Testing. Enhanced prudential standards for larger institutions mandated by the Dodd-Frank Act were implemented
by FRB regulation, which require additional risk management policies and practices and annual stress testing designed to determine
whether capital planning, assessment of capital adequacy and risk management practices of regulated bank and savings and loan
holding companies adequately protect them in the event of an economic downturn. The original FRB rules implemented stress
tests to be conducted by the FRB and company-run stress tests for institutions with total consolidated assets of $10 billion or more.
Our total assets exceeded $10 billion beginning with the quarter ending March 31, 2019.
However, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”) enacted
in May 2018 scaled back certain requirements of the Dodd-Frank Act, including the requirement to conduct an annual stress test
that projects performance under various economic scenarios. The annual stress test requirement no longer applies to the Company,
as a savings and loan holding company with less than $100 billion in total consolidated assets. Under the Economic Growth Act,
the Bank will also become exempt from Dodd-Frank Act stress testing effective November 25, 2019; however, the FRB has
extended the deadline for all regulatory requirements related to company-run stress testing for institutions with average total assets
of less than $100 billion until such effective date, thereby effectively exempting the Bank from stress-testing requirements as of
the enactment of the Economic Growth Act.
Notwithstanding the Economic Growth Act’s amendment of the Dodd-Frank Act stress testing requirements, the federal
banking agencies have indicated through interagency guidance that the capital planning and risk management practices of financial
institutions with total assets less than $100 billion would continue to be reviewed through the regular supervisory process. We
will continue to monitor our capital consistent with the safety and soundness expectations of the FRB and will continue to use
customized stress testing as part of our capital planning process
Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines
for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and
(viii) compensation, fees and benefits. The guidelines set forth safety and soundness standards that the federal banking regulatory
agencies use to identify and address problems at FDIC member institutions before capital becomes impaired. If the OCC determines
that the Bank fails to meet any standard prescribed by the guidelines, the OCC may require us to submit to it an acceptable plan
to achieve compliance with the standard. OCC regulations establish deadlines for the submission and review of such safety and
soundness compliance plans in response to any such determination. We are not aware of any conditions relating to these safety
and soundness standards that would require us to submit a plan of compliance to the OCC.
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Loans-to-One-Borrower Limitations. Savings associations generally are subject to the lending limits applicable to
national banks. With limited exceptions, the maximum amount that a savings association or a national bank may lend to any
borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral.
Savings associations are additionally authorized to make loans to one borrower by order of its regulator, in an amount not to exceed
the lesser of $30.0 million or 30% of unimpaired capital and surplus for the purpose of developing residential housing, if the
following specified conditions are met:
• The savings association is in compliance with its fully phased-in capital requirements;
• The loans comply with applicable loan-to-value requirements; and
• The aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus.
Qualified Thrift Lender Test. Savings associations must meet a qualified thrift lender, or “QTL,” test. This test may be
met either by maintaining a specified level of portfolio assets in qualified thrift investments as specified by the HOLA, or by
meeting the definition of a “domestic building and loan association” under the Internal Revenue Code of 1986, as amended, or
the “Code”. Qualified thrift investments are primarily residential mortgage loans and related investments, including mortgage
related securities. Portfolio assets generally mean total assets less specified liquid assets, goodwill and other intangible assets and
the value of property used in the conduct of the Bank’s business. The required percentage of qualified thrift investments under the
HOLA is 65% of “portfolio assets” (defined as total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business). An association must be in compliance with the QTL
test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Savings
associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. At June 30, 2019, the Bank was in compliance with its QTL requirement and met the
definition of a domestic building and loan association.
Liquidity Standard. Savings associations are required to maintain sufficient liquidity to ensure safe and sound operations.
As of June 30, 2019, Axos Bank was in compliance with the applicable liquidity standard.
Volcker Rule. Effective April 15, 2014, the federal banking agencies have adopted regulations with a conformance period
for certain features that lasted until July 21, 2017, to implement the provisions of the Dodd-Frank Act known as the Volcker Rule.
Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively,
“banking entities”), are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial
instruments and from acquiring or retaining an ownership interest in a “covered fund.” The term “covered fund” can include, in
addition to many private equity and hedge funds and other entities, certain collateralized mortgage obligations, collateralized debt
obligations and collateralized loan obligations, and other items, but does not include wholly owned subsidiaries, certain joint
ventures, or loan securitizations generally if the underlying assets are solely loans.
Trading in certain government obligations is not prohibited by the Volcker Rule, including obligations of or guaranteed
by the United States or an agency or government-sponsored entity of the United States, obligations of a State of the United States
or a political subdivision thereof, and municipal securities. Proprietary trading generally does not include transactions under
repurchase and reverse repurchase agreements, securities lending transactions and purchases and sales for the purpose of liquidity
management if the liquidity management plan meets specified criteria; nor does it generally include transactions undertaken in a
fiduciary capacity. In addition, activities eligible for exemption include, among others, certain brokerage, underwriting and
marketing activities, and risk-mitigating hedging activities with respect to specific risks and subject to specified conditions. As of
June 30, 2019, Axos Bank was in compliance with the Volcker Rule.
Transactions with Related Parties. The authority of the Bank to engage in transactions with “affiliates” (i.e., any company
that controls or is under common control with it, including the Company and any non-depository institution subsidiaries) is limited
by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of a savings
institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a
type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates
must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate
that is engaged in activities that are not permissible for bank holding companies, and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act generally prohibits loans by public companies to their executive officers and directors. However,
there is a specific exception for loans by financial institutions, such as the Bank, to its executive officers and directors that are
made in compliance with federal banking laws. Under such laws, our authority to extend credit to executive officers, directors,
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and 10% or more shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on its capital position and requires certain board
approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to
unaffiliated individuals and cannot involve more than the normal risk of repayment. There is an exception for loans made pursuant
to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to
insiders over other employees.
Capital Distribution Limitations. Regulations applicable to the Bank impose limitations upon all capital distributions
by savings associations, like cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of
another institution in a cash-out merger and other distributions charged against capital. Under these regulations, a savings association
may, in circumstances described in those regulations:
• Be required to file an application and await approval from the OCC before it makes a capital distribution;
• Be required to file a notice 30 days before the capital distribution; or
• Be permitted to make the capital distribution without notice or application to the OCC.
Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the
Community Reinvestment Act and related regulations of the OCC to help meet the credit needs of their communities, including
low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders
from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to
comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities and the denial of applications. In addition, an institution’s failure to comply with the Equal Credit Opportunity Act and
the Fair Housing Act could result in the OCC, other federal regulatory agencies or the Department of Justice, taking enforcement
actions against the institution. In the most recent Community Reinvestment Act Report, issued May 2019, the Bank received a
‘Satisfactory’ rating covering calendar years 2016, 2017, and 2018. To the best of our knowledge, Axos Bank continues to maintain
full compliance with each of the Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act and
we do not anticipate the Bank becoming the subject of any enforcement actions.
Federal Home Loan Bank (“FHLB”) System. The Bank is a member of the FHLB system. Among other benefits, each
FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance
with the policies and procedures established by the board of directors of the individual FHLB. As an FHLB member, the Bank is
required to own capital stock in a Federal Home Loan Bank in specified amounts based on either its aggregate outstanding principal
amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year
or its outstanding advances from the FHLB.
Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves
at specified levels against their transaction accounts (primarily checking, negotiable order of withdrawal (“NOW”), and Super
NOW checking accounts) and non-personal time deposits. At June 30, 2019, the Bank was in compliance with these requirements.
Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing
company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OCC and conduct
any activities of the subsidiary in compliance with regulations and orders of the OCC. The OCC has the power to require a savings
association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OCC determines to pose a serious
threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking
practices.
Consumer Laws and Regulations. The Dodd-Frank Act established the CFPB in order to regulate any person who offers
or provides personal, family or household financial products or services. The CFPB is an independent “watchdog” within the
Federal Reserve System to enforce and create “Federal consumer financial laws.” Banks as well as nonbanks are subject to any
rule, regulation or guideline created by the CFPB. Congress established the CFPB to create one agency in charge of protecting
consumers by overseeing the application and implementation of “Federal consumer financial laws,” which includes (i) rules, orders
and guidelines of the CFPB, (ii) all consumer financial protection functions, powers and duties transferred from other federal
agencies, such as the Federal Reserve, the OCC, the FDIC, the Federal Trade Commission, and the Department of Housing and
Urban Development, and (iii) a long list of consumer financial protection laws enumerated in the Dodd-Frank Act, such as the
Electronic Fund Transfer Act, the Consumer Leasing Act of 1976, the Alternative Mortgage Transaction Parity Act of 1982, the
Equal Credit Opportunity Act, the Expedited Funds Availability Act, the Truth in Lending Act and the Truth in Savings Act, among
many others. The CFPB has broad examination and enforcement authority, including the power to issue subpoenas and cease and
desist orders, commence civil actions, hold investigations and hearings and seek civil penalties, as well as the authority to regulate
disclosures, mandate registration of any covered person and to regulate what it considers unfair, deceptive, abusive practices.
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Depository institutions with more than $10 billion in assets and their affiliates are subject to direct supervision by the
CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. As of June 30,
2019, we had $11.2 billion in total assets, placing the Bank under the direct supervision and oversight of the CFPB. The laws and
regulations of the CFPB and other consumer protection laws and regulations to which the Bank is subject mandate certain disclosure
requirements and regulate the manner in which we must deal with customers when taking deposits from, making loans to, or
engaging in other types of transactions with, our customers.
A section of the Dodd-Frank Act, commonly referred to as the Durbin amendment, reduced the level of interchange fees
that could be charged by institutions with greater than $10 billion in total assets. The exemption for small issuers ceases to apply
as of July 1st of the year following the calendar year in which the issuer has total consolidated assets of $10 billion or more at
year-end. Since we have grown to hold total assets in excess of $10 billion beginning with the quarter ending March 31, 2019,
the Durbin amendment may reduce the amount of interchange fees that we can charge and could adversely affect our fee-sharing
prepaid card partnerships, such as with H&R Block.
Privacy Standards. The Gramm-Leach-Bliley Act (“GLBA”) modernized the financial services industry by establishing
a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other
financial service providers. The Bank is subject to OCC regulations implementing the privacy protection provisions of the GLBA.
These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices
and informing consumers of their rights to opt out of certain practices.
Anti-Money Laundering and Customer Identification. The U.S. government enacted the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”)
on October 26, 2001 in response to the terrorist events of September 11, 2001. The USA PATRIOT Act gives the federal government
broad powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. In February 2010, Congress re-enacted certain expiring
provisions of the USA PATRIOT Act.
REGULATION OF SECURITIES BUSINESS
In early 2019, we acquired COR Clearing, LLC (now Axos Clearing LLC), a correspondent clearing firm for broker-
dealers, and the WiseBanyan entities, an introducing broker and a registered investment adviser. The correspondent clearing firm
and introducing broker are broker-dealers registered with the SEC and members of FINRA and various other self-regulatory
organizations. Axos Clearing also uses various clearing organizations, including the Depository Trust Company, the National
Securities Clearing Corporation, and the Options Clearing Corporation.
Broker-dealers are subject to extensive laws, rules and regulations covering all aspects of the securities business, including
sales and trading practices, public offerings, publication of research reports, use and safekeeping of clients’ funds and securities,
capital adequacy, recordkeeping and reporting, the conduct of directors, officers, and employees, qualification and licensing of
supervisory and sales personnel, marketing practices, supervisory and organizational procedures intended to ensure compliance
with securities laws and to prevent improper trading on material nonpublic information, limitations on extensions of credit in
securities transactions, clearance and settlement procedures, and rules designed to promote high standards of commercial honor
and just and equitable principles of trade. Broker-dealers are also regulated by state securities administrators in those jurisdictions
where they do business. Regulators may conduct periodic examinations and review reports of our operations, performance, and
financial condition. Our margin lending is regulated by the Federal Reserve Board’s restrictions on lending in connection with
client purchases and short sales of securities, and FINRA rules also require our broker-dealers to impose maintenance requirements
based on the value of securities contained in margin accounts. The rules of the Municipal Securities Rulemaking Board, which
are enforced by the SEC and FINRA, apply to the municipal securities activities of Axos Clearing.
Violations of laws, rules and regulations governing a broker-dealer’s actions could result in censure, penalties and fines,
the issuance of cease-and-desist orders, the restriction, suspension, or expulsion from the securities industry of such broker-dealer,
its registered representatives, officers or employees, or other similar adverse consequences.
Significant new rules and regulations continue to arise as a result of the Dodd-Frank Act, including the implementation
of a more stringent fiduciary standard for broker-dealers and increased regulation of investment advisors. Compliance with these
provisions could result in increased costs. Moreover, to the extent the Dodd-Frank Act affects the operations, financial condition,
liquidity, and capital requirements of financial institutions with whom we do business, those institutions may seek to pass on
increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us.
Limitation on Businesses. The businesses that our broker-dealers may conduct are limited by its agreements with, and
its oversight by, FINRA, other regulatory authorities and federal and state law. Participation in new business lines, including
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trading of new products or participation on new exchanges or in new countries often requires governmental and/or exchange
approvals, which may take significant time and resources. In addition, our broker-dealers are operating subsidiaries of Axos, which
means its activities are further limited by those that are permissible for subsidiaries of financial holding companies, and as a result,
may be prevented from entering new businesses that may be profitable in a timely manner, if at all.
Net Capital Requirements. The SEC, FINRA and various other regulatory authorities have stringent rules and regulations
with respect to the maintenance of specific levels of net capital by regulated entities. Rule 15c3-1 of the Exchange Act (the “Net
Capital Rule”) requires that a broker-dealer maintain minimum net capital. Generally, a broker-dealer’s net capital is net worth
plus qualified subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational
charges. At June 30, 2019, our broker-dealers were in compliance with applicable net capital requirements.
The SEC, CFTC, FINRA and other regulatory organizations impose rules that require notification when net capital falls
below certain predefined thresholds. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a
broker-dealer, and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a broker-dealer
fails to maintain the required net capital, it may be subject to penalties and other regulatory sanctions, including suspension or
revocation of registration by the SEC or applicable regulatory authorities, and suspension or expulsion by these regulators could
ultimately lead to the broker-dealer’s liquidation. Additionally, the Net Capital Rule and certain FINRA rules impose requirements
that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to, and
approval from, the SEC and FINRA for certain capital withdrawals.
Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital. Such rules
require that a certain percentage of our assets be maintained in relatively liquid form and therefore act to restrict our ability to
withdraw capital from our broker-dealer entities, which in turn may limit our ability to pay dividends, repay debt or redeem or
purchase shares of our outstanding common stock. Any change in such rules or the imposition of new rules affecting the scope,
coverage, calculation or amount of capital requirements, or a significant operating loss or any unusually large charge against
capital, could adversely affect our ability to pay dividends, repay debt, meet our debt covenant requirements or to expand or
maintain our operations. In addition, such rules may require us to make substantial capital contributions into one or more of the
our broker-dealers in order for such subsidiaries to comply with such rules, either in the form of cash or subordinated loans made
in accordance with the requirements of all applicable net capital rules.
Customer Protection Rule. Our broker-dealers that hold customers’ funds and securities are subject to the SEC’s customer
protection rule (Rule 15c3-3 under the Exchange Act), which generally provides that such broker-dealers maintain physical
possession or control of all fully-paid securities and excess margin securities carried for the account of customers and maintain
certain reserves of cash or qualified securities.
Securities Investor Protection Corporation (“SIPC”). Our broker-dealers are subject to the Securities Investor Protection
Act and belong to SIPC, whose primary function is to provide financial protection for the customers of failing brokerage firms.
SIPC provides protection for customers up to $500,000, of which a maximum of $250,000 may be in cash.
Anti-Money Laundering. Our broker-dealers must also comply with the USA PATRIOT Act and other rules and
regulations, including FINRA requirements, designed to fight international money laundering and to block terrorist access to the
U.S. financial system. We are required to have systems and procedures to ensure compliance with such laws and regulations.
Investment Advisor. As an investment advisor registered with the SEC, our subsidiary Axos Invest, Inc. (doing business
as “WiseBanyan”) is subject to the requirements of the Investment Advisers Act of 1940, as amended, and the rules and regulations
promulgated thereunder (together, the “Advisers Act”), including examination by the SEC’s staff. Such requirements relate to,
among other things, fiduciary duties to clients, performance fees, maintaining an effective compliance program, solicitation
arrangements, conflicts of interest, advertising, limitations on agency and principal transactions between the advisor and advisory
clients, recordkeeping and reporting requirements, disclosure requirements, and general anti-fraud provisions. The SEC is
authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censure to
termination of an investment advisor’s registration. Investment advisors also are subject to certain state securities laws and
regulations. Failure to comply with the Advisers Act or other federal and state securities laws and regulations could result in
investigations, sanctions, profit disgorgement, fines or other similar consequences against us.
Volcker Rule. Provisions of the Volcker Rule and the final rules implementing the Volcker Rule also restrict certain
activities provided by the our broker-dealers, including proprietary trading and sponsoring or investing in “covered funds.”
Our broker-dealers are broker-dealers registered with the SEC, FINRA, all 50 U.S. states and the District of Columbia.
Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally FINRA, the
Municipal Securities Rulemaking Board and national securities exchanges. These self-regulatory organizations adopt rules (which
are subject to approval by the SEC) for governing its members and the industry. Broker-dealers are also subject to federal securities
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laws and SEC rules, as well as the laws and rules of the states in which a broker-dealer conducts business. Our broker-dealers are
members of, and are primarily subject to regulation, supervision and regular examination by FINRA.
The regulations to which broker-dealers are subject cover all aspects of the securities business, including, but not limited
to, sales and trade practices, net capital requirements, record keeping and reporting procedures, relationships and conflicts with
customers, the handling of cash and margin accounts, experience and training requirements for certain employees, the conduct of
investment banking and research activities and the conduct of registered persons, directors, officers and employees. Broker-dealers
are also subject to the privacy and anti-money laundering laws and regulations discussed herein. Additional legislation, changes
in rules promulgated by the SEC, securities exchanges, or self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC,
securities exchanges, self-regulatory organizations and states may conduct administrative and enforcement proceedings that can
result in censure, fine, suspension or expulsion of broker-dealers, their registered persons, officers or employees. The principal
purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than protection
of creditors and stockholders of broker-dealers.
AVAILABLE INFORMATION
Axos Financial, Inc. files reports, proxy and information statements and other information electronically with the SEC.
You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
DC 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. The SEC’s website site address is http://www.sec.gov. Our web site address is http://
www.axosfinancial.com, and we make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and amendments thereto available on our website free of charge.
ITEM 1A. RISK FACTORS
Risks Relating to Our Industry
Changes in interest rates could adversely affect our performance.
Our results of operations depend to a great extent on our net interest income, which is the difference between
the interest rates earned on interest-earning assets such as loans and leases and investment securities, and the interest rates paid
on interest-bearing liabilities such as deposits and borrowings. We are exposed to interest rate risk because our interest-earning
assets and interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates, as the two have different
time periods for adjustment and can be tied to different measures of rates. Interest rates are sensitive to factors that are beyond
our control, including general economic conditions and the policies of various governmental and regulatory agencies, including
the FRB. The monetary policies of the FRB, implemented through open market operations and regulation of the discount rate and
reserve requirements, affect prevailing interest rates. Loan and lease originations and repayment rates tend to increase with declining
interest rates and decrease with rising interest rates. On the deposit side, increasing interest rates generally lead to interest rate
increases on our deposit accounts. In the past few years prevailing interest rates have continued to increase, however the FRB
recently cut rates in July 2019. We manage the sensitivity of our assets and liabilities. However a decrease in interest rates could
cause borrowers to refinance higher rate loans at lower rates and under those circumstances, we would not be able to reinvest
those prepayments in assets earning interest rates as high as the rates on those prepaid loans. Meanwhile, large, unanticipated, or
rapid increase in market interest rates would likely have an adverse impact on our net interest income and a decrease in our
refinancing business and related fee income, and could cause an increase in delinquencies and non-performing loans and leases
in our adjustable-rate loans. In addition, interest rate volatility can affect the value of our loans and leases, investments and other
interest-rate sensitive assets and our ability to realize gains on the sale or resolution of these assets. There can be no assurance
that we will be able to successfully manage our interest rate risk.
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A significant economic downturn could result in increases in our level of non-performing loans and leases and/or
reduce demand for our products and services, which could have an adverse effect on our results of operations.
Our business and results of operations are affected by the financial markets and general economic conditions, including
factors such as the level and volatility of interest rates, inflation, home prices, unemployment and under-employment levels,
bankruptcies, household income and consumer spending. While the national economy and most regions have improved since the
financial crisis of 2008 and subsequent economic recession, we continue to operate in an uncertain economic environment due to
a variety of reasons, including but not limited to trade wars, geopolitical tensions, concerns about stability of the European Union
(“EU”), including Britain’s anticipated exit from the EU, volatile oil prices and emerging market crises. The risks associated with
our business become more acute in periods of a slowing economy or slow growth. A return or continuation of recessionary conditions
or negative events in the housing markets, including significant and continuing home price declines and increased delinquencies
and foreclosures, would adversely affect our mortgage and construction loans and result in increased asset write-downs. While
we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the
residential and commercial real estate markets. Declines in real estate values, an economic downturn or an increase in unemployment
levels may result in higher than expected loan and lease delinquencies and a decline in demand for our products and services.
These negative events may cause us to incur losses and may adversely affect our capital, financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in
the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and
other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions,
or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other
institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or
client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices
not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses
would not materially and adversely affect our results of operations.
Changes in laws, regulation or oversight or increased enforcement activities by regulatory agencies may increase our
costs and adversely affect our business and operations.
We operate in a highly regulated industry and are subject to oversight, regulation and examination by federal and/or state
governmental authorities under various laws, regulations and policies, which impose requirements or restrictions on our operations,
capitalization, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged and interest rates
paid on deposits. We must also comply with federal anti-money laundering, bank secrecy, tax withholding and reporting, and
various consumer protection statutes and regulations. A considerable amount of management time and resources is devoted to
oversight of, and development and implementation of controls and procedures relating to, compliance with these laws, regulations
and policies.
The laws, regulation and supervisory policies applicable to us are subject to regular modification and change. New or
amended laws, rules and regulations could impact our operations, increase our capital requirements or substantially restrict our
growth and adversely affect our ability to operate profitably by making compliance much more difficult or expensive, restricting
our ability to originate or sell loans, or further restricting the amount of interest or other charges or fees earned on loans or other
products. In addition, further regulation could increase the assessment rate we are required to pay to the FDIC, adversely affecting
our earnings. It is very difficult to predict future changes in regulation or the competitive impact that any such changes would
have on our business. Other changes to statutes, regulations, or regulatory policies, including changes in interpretation or
implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways including subjecting us
to additional costs, limiting the types of financial services and products we may offer, and increasing the ability of non-banks to
offer competing financial services and products.
In addition, the federal Bank Secrecy Act, the USA PATRIOT Act, and similar laws and regulations require financial
institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file suspicious activity
and currency transaction reports as appropriate. FinCEN is authorized to impose significant civil money penalties for violations
of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well
as the U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with
the rules enforced by the OFAC. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and
anti-money laundering regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability,
including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory
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approval to proceed with acquisitions and other strategic transactions, which would negatively impact our business, financial
condition, results of operations and prospects. Failure to maintain and implement adequate programs to combat money laundering
and terrorist financing could also have serious adverse reputational consequences for us.
Our failure to comply with current, or adapt to new or changing, laws, regulations or policies could result in enforcement
actions and sanctions against us by regulatory agencies, civil money penalties and/or reputation damage, along with corrective
action plans required by regulatory agencies, any of which could have a material adverse effect on our business, financial condition
and results of operations, and the value of our common stock.
Our recent acquisitions of broker-dealer and investment advisory businesses subjects us to new regulatory risks.
In early 2019, we acquired COR Clearing, a correspondent clearing firm for broker-dealers, and the WiseBanyan entities,
an introducing broker and a registered investment adviser. The correspondent clearing firm and introducing broker are broker-
dealers registered with the SEC and members of FINRA and various other self-regulatory organizations, which subjects us for the
first time to regulation by the SEC and FINRA, and potential new risks and uncertainties relating to compliance and potential
violations of laws, rules and regulations. Such violations could result in censure, penalties and fines, the issuance of cease-and-
desist orders, the restriction, suspension, or expulsion from the securities industry of the company or its officers or employees, or
other similar adverse consequences, any of which could cause us to incur losses and adversely affect our capital, financial condition
and results of operations. See “Business-Regulation--Regulation of Broker-Dealer and Investment Advisory Businesses.”
Recent changes to our size and structure will subject us to additional regulation, increased supervision and increased
costs.
In August 2018, the Company became a savings and loan holding company that is treated as a financial holding company
by the Federal Reserve Board. As such, the Company is required to act as a financial “source of strength” for the Bank. The term
“source of financial strength” is defined in the relevant statute as the ability of a company to provide financial assistance to such
insured depository institution in the event of the financial distress of such insured depository institution. Given the power provided
to the federal banking agencies in this provision, it is possible that the Company could be required to serve as a source of financial
strength for the Bank when we might not otherwise voluntarily choose to do so. In such event, if the Company did not hold or
was unable to raise necessary capital, we could become subject to negative or burdensome regulatory conditions that could
negatively impact our growth, financial condition and results of operations.
The Dodd-Frank Act imposes additional regulatory requirements on financial institutions with $10 billion or more in
total assets. The Company has grown to hold total assets in excess of $10 billion beginning with the quarter ending March 31,
2019. As a result, we are now subject to the following additional requirements:
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supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws;
a modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a
result of institutions with $10 billion or more in assets being required to bear a greater portion of the cost of raising
the reserve ratio to 1.35% as required by the Dodd-Frank Act;
heightened compliance standards under the Volcker Rule; and
enhanced supervision as a larger financial institution.
The imposition of these regulatory requirements and increased supervision may require additional commitment of financial
resources to regulatory compliance and may increase our cost of operations.
In addition, under the Durbin Amendment to the Dodd-Frank Act, institutions with $10 billion or more in assets are
subject to a cap on the interchange fees that may be charged in certain electronic debit and prepaid card transactions. The maximum
permissible interchange fee for electronic debit transactions is the sum of 21 cents per transaction and five basis points multiplied
by the value of the transaction. In addition, an issuer may charge up to one cent on each transaction as a fraud prevention adjustment
if the issuer meets certain fraud prevention standards. Assuming the Company exceeds $10 billion in assets on December 31,
2019, the Durbin amendment will reduce the amount of interchange fees that we can charge and could adversely affect our fee-
sharing prepaid card partnerships, such as with H&R Block starting in July 2020.
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Policies and regulations enacted by the Consumer Financial Protection Bureau may negatively impact our residential
mortgage loan business and compliance risk.
Our consumer business, including our mortgage and deposit businesses, may be adversely affected by the policies enacted
or regulations adopted by the CFPB which under the Dodd-Frank Act has broad rule-making authority over consumer financial
products and services. The CFPB is in the process of reshaping consumer financial protection laws through rule-making and
enforcement against unfair, deceptive and abusive acts or practices. The CFPB has broad rule-making authority to administer and
carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and
services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or
abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a
consumer financial product or service. The prohibition on “abusive” acts or practices is being clarified each year by CFPB
enforcement actions and opinions from courts and administrative proceedings. In January 2014, a series of final rules issued by
the CFPB to implement provisions in the Dodd-Frank Act related to mortgage origination and servicing went into effect and caused
an increase in the cost of originating and servicing residential mortgage loans. While it is difficult to quantify any future increases
in our regulatory compliance burden, the costs associated with regulatory compliance, including the need to hire additional
compliance personnel, may continue to increase.
Changes in United States trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact
the Company’s business, financial condition and results of operations.
In the past two years there has been substantial debate and controversy concerning changes to United States
trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting other countries, including China, the
European Union, Canada and Mexico and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed
have been imposed by the United States and other countries, and additional tariffs and retaliation tariffs have been proposed. If
prices of consumer goods or key industrial products increase materially as a result of tariffs, the ability of individual households
to service debt may be negatively impacted. This could adversely affect the Company’s financial condition and results of operations.
Replacement of the LIBOR benchmark interest rate may have an impact on our business, financial condition or results
of operations.
On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom,
announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and the submitting
LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative
reference rate. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals
by the Alternative Reference Rates Committee of the Federal Reserve Board. Other financial services regulators and industry
groups are evaluating the possible phase-out of LIBOR and the development of alternate reference rate indices or reference rates.
Many of our assets and liabilities are indexed to LIBOR. We are evaluating the potential impact of the possible replacement of
the LIBOR benchmark interest rate, but are not able to predict whether LIBOR will cease to be available after 2021, whether the
alternative rates the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR, or what the
impact of such a transition will have on our business, financial condition, or results of operations.The market transition away
from LIBOR to an alternative reference rate is complex and could have a range of adverse effects on our business, financial
condition and results of operations. In particular any such transition could:
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adversely affect the interest rates paid or received on, the revenue and expenses associate with, and the value of our
floating-rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, or other
securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of
LIBOR with an alternative reference rate;
result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of
certain fallback language in LIBOR-based securities; and
require the transition to or development of appropriate systems and analytics to effectively transition our risk
management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark.
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Risks Relating to Mortgage Loans and Mortgage-Backed Securities
Declining real estate values, particularly in California, could reduce the value of our loan and lease portfolio and impair
our profitability and financial condition.
The majority of the loans in our portfolio are secured by real estate. At June 30, 2019, approximately 72.2% of our
mortgage portfolio was secured by real estate located in California. In recent years, there has been significant volatility in real
estate values in California and in some cases the collateral for our real estate loans has become less valuable. If real estate values
decrease or more of our borrowers experience financial difficulties, we will experience increased charge-offs, as the proceeds
resulting from foreclosure may be significantly lower than the amounts outstanding on such loans. In addition, declining real estate
values frequently accompany periods of economic downturn or recession and increasing unemployment, all of which can lead to
lower demand for mortgage loans of the types we originate. A decline of real estate values or decline of the credit position of our
borrowers in California would have a material adverse effect on our business, prospects, financial condition and results of operations.
Many of our mortgage loans are unseasoned and defaults on such loans would harm our business.
At June 30, 2019, our multifamily residential loans were $1,948.5 million or 29.7% of our mortgage loans and our
commercial real estate loans were $326.2 million, or 5.0% of our mortgage loans. The payment on such loans is typically dependent
on the cash flows generated by the projects, which are affected by the supply and demand for multifamily residential units and
commercial property within the relative market. If the market for multifamily residential units and commercial property experiences
a decline in demand, multifamily and commercial borrowers may suffer losses on their projects and be unable to repay their loans.
If residential housing values were to decline and nationwide unemployment were to increase, we are likely to experience increases
in the level of our non-performing loans and foreclosed and repossessed vehicles in future periods.
We could recognize other-than-temporary impairment on securities held in our available-for-sale portfolio.
We analyze securities held in our portfolio for other-than-temporary impairment on a quarterly basis. The process for
determining whether impairment is other-than-temporary can involve difficult, subjective judgments about the future financial
performance of the issuer, market conditions, and the value of any collateral underlying the security in order to assess the probability
of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions
affecting issuers and the performance of the underlying collateral, we may be required to recognize other-than-temporary
impairment in future periods reducing future earnings and capital levels.
A decrease in the mortgage buying activity of Fannie Mae, Freddie Mac and Ginnie Mae or a failure by Fannie Mae,
Ginnie Mae and Freddie Mac to satisfy their obligations with respect to their RMBS could have a material adverse effect on our
business, financial condition and results of operations.
During the last three fiscal years we have sold approximatly $1,321.7 million of residential mortgage loans to Fannie
Mae, Freddie Mac and Ginnie Mae and, as of June 30, 2019, approximately 4.2% of our securities portfolio consisted of RMBS
issued or guaranteed by these GSEs. Since 2008, Fannie Mae and Freddie Mac have been in conservatorship, with its primary
regulator, the Federal Housing Finance Agency, acting as conservator. The United States government may enact structural changes
to one or more of the GSEs, including privatization, consolidation and/or a reduction in the ability of GSEs to purchase mortgage
loans or guarantee mortgage obligations. We cannot predict if, when or how the conservatorships will end, or what associated
changes (if any) may be made to the structure, mandate or overall business practices of either of the GSEs. Accordingly, there
continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form
and whether they will continue to meet their obligations with respect to their RMBS. A substantial reduction in mortgage purchasing
activity by the GSEs could result in a material decrease in the availability of residential mortgage loans and the number of qualified
borrowers, which in turn may lead to increased volatility in the residential housing market, including a decrease in demand for
residential housing and a corresponding drop in the value of real property that secures current residential mortgage loans, as well
as a significant increase in interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may
decrease, which would result in a decrease in mortgage loan revenues and a corresponding decrease in non-interest income. Any
decision to change the structure, mandate or overall business practices of the GSEs and/or the relationship among the GSEs, the
government and the private mortgage loan markets, or any failure by the GSEs to satisfy their obligations with respect to their
RMBS, could have a material adverse effect on our business, financial condition and results of operations.
The Tax Reform Act of 2017 resulted in certain changes that may affect our business.
The Tax Reform Act of 2017, enacted in December 2017, reduced the ceiling on the mortgage interest deduction
from $1,000,000 to $750,000 for indebtedness incurred in acquiring, constructing, or improving a residence. For mortgage
indebtedness incurred before December 15, 2017, the Tax Reform Act permits homeowners to maintain the current $1,000,000
ceiling. The Tax Reform Act also prohibits the deduction of interest on home equity indebtedness, and limits annual itemized
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deductions for state and local taxes (including state and local income, property, and sales taxes) to $10,000. The Bank originates
and holds a large amount of mortgage loans and mortgage backed securities. The reduction or elimination of these tax benefits
and other changes in federal income tax policies could have a material adverse effect on the demand for the Bank’s loan products
and the pricing and liquidity of the mortgage securities which the Bank holds. The reduction in the mortgage interest deduction
and limitation of itemized deductions for property taxes, particularly in higher priced states in which we operate, such as California,
could adversely affect the ability of some potential borrowers to obtain credit, otherwise reduce the demand for home purchases
and construction, and increase delinquencies or defaults on our mortgage assets, which could have a material adverse effect on
our business and results of operations.
Risks Relating to the Company
If our allowance for loan and lease losses, particularly in growing areas of lending such as commercial and industrial
(“C&I”) is not sufficient to cover actual loan and lease losses, our earnings, capital adequacy and overall financial condition
may suffer materially.
Our loans are generally secured by single family, multifamily and commercial real estate properties, each initially having
a fair market value generally greater than the amount of the loan secured. Although our loans and leases are typically secured, the
risk of default, generally due to a borrower’s inability to make scheduled payments on his or her loan, is an inherent risk of the
banking business. In determining the amount of the allowance for loan and lease losses, we make various assumptions and judgments
about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers, the value of the real estate
serving as collateral for the repayment of our loans and our loss history. Defaults by borrowers could result in losses that exceed
our loan and lease loss reserves. We have originated or purchased many of our loans and leases recently, so we do not have sufficient
repayment experience to be certain whether the established allowance for loan and lease losses is adequate. We may have to
establish a larger allowance for loan and lease losses in the future if, in our judgment, it becomes necessary. Any increase in our
allowance for loan and lease losses would increase our expenses and consequently may adversely affect our profitability, capital
adequacy and overall financial condition.
In addition, we continue to increase our emphasis on non-residential lending, particularly in C&I lending, and these types
of loans and leases are expected to comprise a larger portion of our originations and loan and lease portfolio in future periods. To
the extent that we fail to adequately address the risks associated with C&I lending, we may experience increases in levels of non-
performing loans and leases and be forced to take additional loan and lease loss reserves, which would adversely affect our net
interest income and capital levels and reduce our profitability. For further information about our C&I lending business, please
refer to “Business – Asset Origination and Fee Income Businesses – Commercial Real Estate Secured and Commercial Lending.”
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our
accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our
results of operations. Such methods, estimates, and judgments, include methodologies to value our securities, evaluate securities
for other-than-temporary impairment and estimate our allowance for loan and lease losses. These methods, estimates, and judgments
are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to
change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our
results of operations. These changes can be hard to predict and can materially impact how we record and report our financial
condition and results of operations. As an example, the Financial Accounting Standards Board issued accounting guidance, effective
for reporting periods beginning after December 15, 2019, related to the impairment of financial instruments, particularly the
allowance for loan losses. This guidance changes existing impairment recognition to a model that is based on expected losses
rather than incurred losses, which is intended to result in more timely recognition of credit losses. When adopted, this new standard
may increase our allowance for credit losses, which could materially affect our financial condition and future results of operations.
The extent of the increase, if any, will ultimately depend upon the nature and characteristics of our loan portfolio at the adoption
date, as well as the macroeconomic assumptions and forecasts used at that date. Therefore, the potential financial impact is
currently unknown.
Changes in the value of goodwill and other intangible assets could reduce our earnings.
The Company accounts for goodwill and other intangible assets in accordance with generally accepted accounting
principles (“GAAP”), which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least
annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and other intangible assets is
performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values
involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the
federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external
factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and
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may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future
date.
Our risk management processes and procedures may not be effective in mitigating our risks.
We have established processes and procedures intended to identify, measure, monitor and control material risks to which
we are subject, including, for example, credit risk, market risk, liquidity risk, strategic risk and operational risk. If the models
that we use to manage these risks are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected
losses or otherwise be adversely affected. In addition, the information we use in managing our credit and other risk may be
inaccurate or incomplete as a result of error or fraud, both of which may be difficult to detect and avoid. There may also be risks
that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes
are changed or new products and services are introduced. If our risk management framework does not effectively identify and
control our risks, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our
business, results of operations and financial condition
Our acquisition of a broker-dealer business subject us to a variety of risks associated with the securities industry.
On January 28, 2019, we acquired COR Clearing, a leading full-service correspondent clearing firm for independent
broker-dealers. In addition, in February 2019 we acquired an introducing broker as part of our acquisition of the WiseBanyan
entities. Our acquisition of these broker-dealer firms and entry into this business subjects us to a number of risks and challenges,
including risks related to our ability to integrate the acquired operations and the associated internal controls and regulatory functions
into our current operations, our ability to retain key personnel of the acquired operations, our ability to limit the outflow of acquired
deposits and successfully retain and manage acquired assets, our ability to retain existing correspondents who may choose to
perform their own clearing services, move their clearing business to one of our competitors or exit the business, our ability to
attract new customers and generate new assets in areas not previously served, and the possible assumption of risks and liabilities
related to litigation or regulatory proceedings involving the acquired operations.
In addition, entry into the broker-dealer business may subject us to new risks related to the movement of equity prices.
For example, if securities prices decline rapidly the value of our collateral could fall below the amount of the indebtedness secured
by these securities, and in rapidly appreciating markets, credit risk may increase due to short positions. The securities lending
and securities trading and execution businesses also subject us to credit risk if a counterparty fails to perform or if collateral
securing its obligations is insufficient. In securities transactions generally, we will be subject to credit risk during the period
between the execution of a trade and the settlement by the customer. Significant failures by our customers, including correspondents,
or clients to honor their obligations, or increases in their rates of default, together with insufficient collateral and reserves, could
have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, in March
2019, we suffered a $15.3 million bad debt expense due to a default by a correspondent customer arising from unauthorized
securities trades by an employee of the customer.
Our broker-dealer business also subjects us to new risks and uncertainties that are common in the securities industry,
including intense competition, extensive governmental regulation by the Securities and Exchange Commission and FINRA and
potentially new areas and types of litigation including lawsuits based on allegations concerning our correspondents. The SEC,
FINRA and other SROs and state securities commissions, among other regulatory bodies, can censure, fine, issue cease-and-desist
orders or suspend or expel a broker-dealer or any of its officers or employees. Clearing securities firms are subject to substantially
more regulatory control and examination than introducing brokers that rely on others to perform clearing functions. Similarly, the
attorneys general of each state could bring legal action to ensure compliance with state securities laws, and regulatory agencies
in foreign countries have similar authority. Our ability to comply with multiple laws and regulations pertaining to the securities
industry depends in large part on our ability to establish and maintain an effective compliance function. The failure to establish
and enforce reasonable compliance procedures, even if unintentional, could subject us to significant losses or disciplinary or other
actions.
Our broker-dealer business is also subject to the net capital requirements of the SEC, FINRA and various self-regulatory
organizations. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also
mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject
a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion
by FINRA and other regulatory bodies, and ultimately may require its liquidation.
Our entry into the investment advisory business subjects us to a variety of risks associated with investment performance
and advisory services.
On February 26, 2019, we acquired WiseBanyan, Inc., a registered investment adviser (“RIA”) that provides personal
financial and investment management services through a proprietary technology platform. Our investment advisory business is
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registered with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Federally registered
investment advisers are regulated and subject to examination by the SEC. The Advisers Act imposes numerous obligations on
RIAs, including fiduciary duties, disclosure obligations, recordkeeping and reporting requirements, marketing restrictions and
general anti-fraud prohibitions. Our failure to comply with the Advisers Act and associated rules and regulations of the SEC could
subject us to enforcement proceedings and sanctions for violations, including censure or termination of SEC registration, litigation
and reputational harm. In addition, our investment advisory business is subject to notice filings and the anti-fraud rules of state
securities regulators.
Our investment advisory business is also subject to various data privacy and cybersecurity laws designed to protect client
and employee personally identifiable information. These laws and regulations are increasing in complexity and number which has
resulted in greater compliance risk and cost for the business. The unauthorized access, use, theft or destruction of client or employee
personal, financial or other data could expose us to potential financial penalties and legal liability.
Additionally, poor investment returns and declines in client assets in our investment advisory business, due to either
general market conditions or under-performance (relative to our competitors or to benchmarks) by investment products, may affect
our ability to retain existing assets, prevent clients from transferring their assets out of products or their accounts, or inhibit our
ability to attract new clients or additional assets from existing clients. Any such poor performance could adversely affect our
investment advisory business and the advisory fees that we earn on client assets.
Our acquisitions involve integration and other risks.
In addition to the acquisitions discussed above, from time to time we undertake acquisitions of assets, deposits, lines of
business and other companies consistent with our operating and growth strategies. Acquisitions generally involve a number of
risks and challenges, including our ability to integrate the acquired operations and the associated internal controls and regulatory
functions into our current operations, our ability to retain key personnel of the acquired operations, our ability to limit the outflow
of acquired deposits and successfully retain and manage acquired assets, our ability to attract new customers and generate new
assets in areas not previously served, and the possible assumption of risks and liabilities related to litigation or regulatory proceedings
involving the acquired operations. Additionally, no assurance can be given that the operation of acquisitions would not adversely
affect our existing profitability, that we would be able to achieve results in the future similar to those achieved by the acquired
operations, that we would be able to compete effectively in the markets served by the acquired operations, or that we would be
able to manage any growth resulting from the transaction effectively. We also face the risk that the anticipated benefits of any
acquisition may not be realized fully or at all, or within the time period expected.
As a public company, we face the risk of shareholder lawsuits and other related or unrelated litigation, particularly if
we experience declines in the price of our common stock. We have been named as a party to purported class action and derivative
lawsuits, and we may be named in additional litigation, all of which could require significant management time and attention and
result in significant legal expenses.
As described in detail below in “Item 3 – Legal Proceedings,” putative class action lawsuits have been filed in the United
States District Court, Southern District of California, alleging, among other things, that our Company, Chief Executive Officer
and Chief Financial Officer violated the federal securities laws by failing to disclose the wrongful conduct that is alleged by a
former employee in a complaint, and that as a result the Company’s statements regarding its internal controls, and portions of its
financial statements, were false and misleading. Derivative lawsuits have also been filed against our management arising from
the same events, alleging breach of fiduciary duty, mismanagement, abuse of control and unjust enrichment. Regardless of the
merits, the expense of defending such litigation may have a substantial impact if our insurance carriers fail to cover the full cost
of the litigation, and the time required to defend the actions could divert management’s attention from the day-to-day operations
of our business, which could adversely affect our business, results of operations and cash flows. An unfavorable outcome in such
litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows. The
Company and its management deny any wrongdoing and are vigorously defending the referenced lawsuits.
We may seek additional capital but it may not be available when it is needed and limit our ability to execute our strategic
plan. In addition, raising additional equity capital would dilute existing shareholders’ equity interests and may cause our stock
price to decline.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In addition,
we may elect to raise additional capital to support the growth of our business or to finance acquisitions, if any, or we may elect to
raise additional capital for other reasons. We may seek to do so through the issuance of, among other things, our common stock
or securities convertible into our common stock, which could dilute existing shareholders’ interests in the Company.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions
and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot
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provide assurance on our ability to raise additional capital if needed or if it can be raised on terms acceptable to us. If we cannot
raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on our financial condition,
results of operations and prospects. In addition, raising equity capital will have a dilutive effect on the equity interests of our
existing shareholders and may cause our stock price to decline.
Access to adequate funding cannot be assured.
We have significant sources of liquidity as a result of our federal thrift structure, including deposits, brokered deposits,
the FHLB, repurchase lending facilities, and the FRB discount window. We rely primarily upon deposits and FHLB advances.
Our ability to attract deposits could be negatively impacted by a public perception of our financial prospects or by increased deposit
rates available at troubled institutions suffering from shortfalls in liquidity. The FHLB is subject to regulation and other factors
beyond our control. These factors may adversely affect the availability and pricing of advances to members such as the Bank.
Selected sources of liquidity may become unavailable to the Bank if it were to no longer be considered “well-capitalized.”
Our inability to manage our growth or deploy assets profitably could harm our business and decrease our overall
profitability, which may cause our stock price to decline.
Our assets and deposit base have grown substantially in recent years, and we anticipate that we will continue to grow
over time, perhaps significantly. To manage the expected growth of our operations and personnel, we will be required to manage
multiple aspects of the business simultaneously, including among other things: (i) improve existing and implement new transaction
processing, operational and financial systems, procedures and controls; (ii) maintain effective credit scoring and underwriting
guidelines; (iii) maintain sufficient levels of regulatory capital; and (iv) expand our employee base and train and manage this
growing employee base. In addition, acquiring other banks, asset pools or deposits may involve risks such as exposure to potential
asset quality issues, disruption to our normal business activities and diversion of management’s time and attention due to integration
and conversion efforts. If we are unable to manage growth effectively or execute integration efforts properly, we may not be able
to achieve the anticipated benefits of growth and our business, financial condition and results of operations could be adversely
affected.
In addition, we may not be able to sustain past levels of profitability as we grow, and our past levels of profitability should
not be considered a guarantee or indicator of future success. If we are not able to maintain our levels of profitability by deploying
growth in our deposits in profitable assets or investments, our net interest margin and overall level of profitability will decrease
and our stock price may decline.
We face strong competition for customers and may not succeed in implementing our business strategy.
Our business strategy depends on our ability to remain competitive. There is strong competition for customers from
existing banks and other types of financial institutions, including those that use the Internet as a medium for banking transactions
or as an advertising platform. Technology has also lowered barriers to entry and made it possible for non-banks offer products
and services traditionally provided by banks. Our competitors include large, publicly-traded, Internet-based banks, as well as
smaller Internet-based banks; “brick and mortar” banks, including those that have implemented websites to facilitate online banking;
and traditional banking institutions such as thrifts, finance companies, credit unions and mortgage banks. Some of these competitors
have been in business for a long time and have broader name recognition and a more established customer base. Most of our
competitors are larger and have greater financial and personnel resources. In order to compete profitably, we may need to reduce
the rates we offer on loans and leases and investments and increase the rates we offer on deposits, which actions may adversely
affect our business, prospects, financial condition and results of operations.
To remain competitive, we believe we must successfully implement our business strategy. Our success depends on, among
other things:
• Having a large and increasing number of customers who use our bank for their banking needs;
• Our ability to attract, hire and retain key personnel as our business grows;
• Our ability to secure additional capital as needed;
• The relevance of our products and services to customer needs and demands and the rate at which we and our
competitors introduce or modify new products and services;
• Our ability to offer products and services with fewer employees than competitors;
• The satisfaction of our customers with our customer service;
• Ease of use of our websites and smartphone applications;
• Our ability to provide a secure and stable technology platform for financial services that provides us with reliable
and effective operational, financial and information systems; and
31
•
Integration of our broker-dealer and registered investment-advisory businesses.
If we are unable to implement our business strategy, our business, prospects, financial condition and results of operations
could be adversely affected.
Our business depends on a strong brand, and failing to maintain and enhance our brand could hurt our ability to maintain
or expand our customer base.
The brand identities that we have developed will significantly contribute to the success of our business. On October 1,
2018, we changed the name of the Bank and the branding of most of our banking products to “Axos Bank”. Maintaining and
enhancing the “Axos Bank” brands (including our other trade styles and trade names) is critical to expanding our customer base.
We believe that the importance of brand recognition will increase due to the relatively low barriers to entry for our “brick and
mortar” competitors in the internet-based banking market. Our brands could be negatively impacted by a number of factors,
including data privacy and security issues, service outages, and product malfunctions. If our name change is not widely accepted
by customers or proves to be less popular than anticipated, if we fail to maintain and enhance our brands generally, or if we incur
excessive expenses in these efforts, our business, financial condition and results of operations may be adversely affected. In
addition, maintaining and enhancing our brand will depend on our ability to continue to provide high-quality products and services,
which we may not do successfully.
Our reputation and business could be damaged by negative publicity.
Reputational risk, including as a result of negative publicity, is inherent in our business. Negative publicity can result
from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate
governance, litigation, inadequate protection of customer data, illegal or unauthorized acts taken by third parties that supply
products or services to us, and ethical behavior of our employees. Damage to our reputation could adversely impact our ability
to attract new, and maintain existing, loan and deposit customers, employees and business relationships, and, particularly with
respect to our broker-dealer and registered investment advisor businesses, could result in the imposition of new regulatory
requirements, operational restrictions, enhanced supervision and/or civil money penalties. Such damage could also adversely
affect our ability to raise additional capital. Any such damage to our reputation could have a material adverse effect on our financial
condition and results of operations.
A natural disaster, especially in California, could harm our business.
Our Bank’s based in San Diego, California, and approximately 72.2% of our mortgage loan portfolio was secured by real
estate located in California at June 30, 2019. In addition, some of our computer systems that operate our internet websites and
their back-up systems are located in San Diego, California. Historically, California has been vulnerable to natural disasters.
Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters
could harm our operations directly through interference with communications, including the interruption or loss of our websites,
which would prevent us from gathering deposits, originating loans and leases and processing and controlling our flow of business,
as well as through the destruction of facilities and our operational, financial and management information systems. A natural
disaster or recurring power outages may also impair the value of our largest class of assets, our loan and lease portfolio, which is
comprised substantially of real estate loans. Uninsured or under-insured disasters may reduce borrowers’ ability to repay mortgage
loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans
through foreclosure and making it more likely that we would suffer losses on defaulted loans. Although we have implemented
several back-up systems and protections (and maintain standard business interruption insurance), these measures may not protect
us fully from the effects of a natural disaster. The occurrence of natural disasters in California could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our success depends in large part on the continuing efforts of a few individuals. If we are unable to retain these key
personnel or attract, hire and retain others to oversee and manage our company, our business could suffer.
Our success depends substantially on the skill and abilities of our senior management team, including our Chief Executive
Officer and President, Gregory Garrabrants, our Chief Financial Officer, Andrew J. Micheletti, and other employees that perform
multiple functions that might otherwise be performed by separate individuals at larger banks. The loss of the services of any of
these individuals or other key employees, whether through termination of employment, disability or otherwise, could have a
material adverse effect on our business. In addition, our ability to grow and manage our growth depends on our ability to continue
to identify, attract, hire, train, retain and motivate highly skilled executive, technical, managerial, sales, marketing, customer service
and professional personnel. The implementation of our business plan and our future success will depend on such qualified personnel.
Competition for such employees is intense, and there is a risk that we will not be able to successfully attract, assimilate or retain
sufficiently qualified personnel. If we fail to attract and retain the necessary personnel, our business, prospects, financial condition
32
and results of operations could be adversely affected.
We are exposed to risk of environmental liability with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate, including commercial real estate, and could
be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third
parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with
environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at
a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner
or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from the property. If we become subject to significant environmental
liabilities, our business, prospects, financial condition and results of operations could be adversely affected.
Technology Risks in our Online Business
We depend on third-party service providers for our core banking technology, and interruptions in or terminations of their
services could materially impair the quality of our services.
We rely substantially upon third-party service providers for our core banking technology and to protect us from bank
system failures or disruptions. This reliance may mean that we will not be able to resolve operational problems internally or on a
timely basis, which could lead to customer dissatisfaction or long-term disruption of our operations. Our operations also depend
upon our ability to replace a third-party service provider if it experiences difficulties that interrupt operations or if an essential
third-party service terminates. If these service arrangements are terminated for any reason without an immediately available
substitute arrangement, our operations may be severely interrupted or delayed. If such interruption or delay were to continue for
a substantial period of time, our business, prospects, financial condition and results of operations could be adversely affected.
Privacy concerns relating to our technology could damage our reputation and deter current and potential customers
from using our products and services.
Generally speaking, concerns have been expressed about whether internet-based products and services compromise the
privacy of users and others. Concerns about our practices with regard to the collection, use, disclosure or security of personal
information of our customers or other privacy related matters, even if unfounded, could damage our reputation and results of
operations. While we strive to comply with all applicable data protection laws and regulations, as well as our own posted privacy
policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others,
or could cause us to lose customers, which could potentially have an adverse effect on our business.
Misconduct by employees could also result in fraudulent, improper or unauthorized activities on behalf of clients or
improper use of confidential personal information. The Company may not be able to prevent employee errors or misconduct, and
the precautions the Company takes to detect this type of activity might not be effective in all cases. Employee errors or misconduct
could subject the Company to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on
our business.
In addition, as nearly all of our products and services are internet-based, the amount of data we store for our customers
on our servers (including personal information) has been increasing and will continue to increase. Any systems failure or
compromise of our security that results in the release of our customers’ data could seriously limit the adoption of our products and
services, as well as harm our reputation and brand and, therefore, our business. We may also need to expend significant resources
to protect against security breaches. System enhancements and updates may also create risks associated with implementing new
systems and integrating them with existing ones. Due to the complexity and interconnectedness of information technology systems,
the process of enhancing our layers of defense can itself create a risk of systems disruptions and security issues. In addition,
addressing certain information security vulnerabilities, such as hardware-based vulnerabilities, may affect the performance of our
information technology systems. The ability of our hardware and software providers to deliver patches and updates to mitigate
vulnerabilities in a timely manner can introduce additional risks, particularly when a vulnerability is being actively exploited by
threat actors.
The risk that these types of events could seriously harm our business is likely to increase as we add more customers and
expand the number of internet-based products and services we offer.
We have risks of systems failure and disruptions to operations.
The computer systems and network infrastructure utilized by us and others could be vulnerable to unforeseen problems.
This is true of both our internally developed systems and the systems of our third-party service providers. Our operations are
dependent upon our ability to protect computer equipment against damage from fire, power loss, telecommunication failure or
33
similar catastrophic events.
Any damage or failure that causes an interruption in our operations could adversely affect our business, prospects, financial
condition and results of operations.
If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of customers
to access our products and services, our products and services may be perceived as not being secure, customers may curtail or
stop using our products and services, and we may incur significant legal and financial exposure.
Our products and services involve the storage and transmission of customers’ proprietary information, and security
breaches could expose us to a risk of loss of this information, litigation, and potential liability. Our security measures may be
breached due to the actions of organized crime, hackers, terrorists, nation-states, activists and other outside parties, employee
error, failure to follow security procedures, malfeasance, or otherwise and, as a result, an unauthorized party may obtain access
to our data or our customers’ data. In addition, to access our products and services, our customers use personal computers,
smartphones, tablets, and other mobile devices that are beyond our control environment. Additionally, outside parties may attempt
to fraudulently induce employees or customers to disclose sensitive information in order to gain access to our data or our customers’
data. Other types of attacks may include computer viruses, malicious or destructive code, denial-of-service attacks, ransomware
or ransom demands to not expose security vulnerabilities in the Company’s systems or the systems of third parties. Any such
breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of
confidence in the security of our products and services that could potentially have an adverse effect on our business. Because the
techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are
not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative
measures. If an actual or perceived breach of our security occurs, including hacking or identity theft, the market perception of the
effectiveness of our security measures could be harmed and, as a result, we could lose customers, suffer employee productivity
losses, incur technology replacement and incident response costs, be subject to additional regulatory scrutiny, could subject us to
civil litigation and possible financial liability, which may have a material adverse effect on our business, financial condition and
results of operations.
Our business depends on continued and unimpeded access to the internet by us and our customers. Internet access
providers may be able to block, degrade, or charge for access to our website, which could lead to additional expenses and the
loss of customers.
Our products and services depend on the ability of our customers to access the internet and our website. Currently, this
access is provided by companies that have significant market power in the broadband and internet access marketplace, including
incumbent telephone companies, cable companies and mobile communications companies. Some of these providers have the
ability to take measures that could degrade, disrupt, or increase the cost of customer access to our products and services by restricting
or prohibiting the use of their infrastructure to access our website or by charging fees to us or our customers to provide access to
our website. Such interference could result in a loss of existing customers and/or increased costs and could impair our ability to
attract new customers, which could have a material adverse effect on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal offices are located at 9205 West Russell Road, STE 400, Las Vegas, NV 89148, both our Banking and
Securities segments conduct business at this location and our telephone number is (858) 649-2218. We have additional office space
located at 4350 La Jolla Village Drive, Suite 140, San Diego, California 92122. Our offices in Las Vegas consist of a total of
approximately 27,100 square feet under leases that expire December 31, 2023 and our San Diego facilities consist of a total of
approximately 174,000 square feet under leases that expire June 30, 2030.
34
ITEM 3. LEGAL PROCEEDINGS
We may from time to time become 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.
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.
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 has filed
its answering brief.
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
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 May 23, 2019, the Court dismissed the second amended complaint
with prejudice. On June 20, 2019, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
35
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
36
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Since October 1, 2018, our common stock has traded on the New York Stock Exchange under the symbol “AX”. Prior
to October 1, 2018, our common stock traded on the NASDAQ Global Select Market under the symbol “BOFI”. There were
61,235,291 shares of common stock outstanding held by approximately 34,000 shareholders as of August 23, 2019. The transfer
agent and registrar of our common stock is Computershare.
DIVIDENDS
The holders of record of our Series A preferred stock, which was issued in 2003 and 2004, are entitled to receive annual
dividends at the rate of six percent (6%) of the stated value per share, which stated value is $10,000 per share. Dividends on the
Series A preferred stock accrue and are payable quarterly. Dividends on the preferred stock must be paid prior and in preference
to any declaration or payment of any distribution on any outstanding shares of junior stock, including our common stock.
Other than dividends to be paid on our preferred stock, we currently intend to retain any earnings to finance the growth
and development of our business. Our board of directors has never declared or paid any cash dividends on our common stock and
does not expect to do so in the foreseeable future. Our ability to pay dividends, should our board of directors elect to do so, depends
largely upon the ability of the Bank to declare and pay dividends to us. Future dividends will depend primarily upon our earnings,
financial condition and need for funds, as well as government policies and regulations applicable to us and our bank that limit the
amount that may be paid as dividends without prior approval.
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Repurchases. On March 17, 2016, the Board of Directors of the Company, authorized a program to
repurchase up to $100 million of common stock. The new share repurchase authorization replaces the previous share repurchase
plan approved on July 5, 2005. 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 of Directors of the Company. Shares of common stock repurchased under this plan will be held as treasury shares. Program
life to date as of June 30, 2019, the Company has repurchased a total of $91.6 million or 3,242,843 common shares at an average
price of $28.25 per share with $8.4 million remaining under the current board authorized stock repurchase program. The Company
accounts for treasury stock using the cost method as a reduction of shareholders’ equity in the accompanying unaudited condensed
consolidated financial statements. On August 2, 2019, the Board of Directors of the Company authorized an additional program
to repurchase up to $100 million of AX common stock. This share repurchase authorization is in addition to the existing share
repurchase plan and has similar characteristics.
Net Settlement of Restricted Stock Awards. In November 2007 and October 2014, the stockholders of the Company
approved an amendment to the 2004 Stock Incentive Plan and approved the 2014 Stock Incentive Plan, respectively, which among
other changes permitted net settlement of stock issuances related to equity awards for purposes of payment of a grantee’s minimum
income tax obligation. During the fiscal year ended June 30, 2019, there were 317,757 restricted stock unit award shares which
were retained by the Company and converted to cash at the average rate of $31.20 per share to fund the grantee’s income tax
obligations.
37
The following table 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 fourth fiscal quarter ended June 30, 2019.
Period
Stock Repurchases (dollars in thousands)
Quarter Ended June 30, 2019
April 1, 2019 to April 30, 2019
May 1, 2019 to May 31, 2019
June 1, 2019 to June 30, 2019
For the Three Months Ended June 30, 2019
Stock Retained in Net Settlement
April 1, 2019 to April 30, 2019
May 1, 2019 to May 31, 2019
June 1, 2019 to June 30, 2019
For the Three Months Ended June 30, 2019
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
—
28.30
27.74
28.02
— $
— $
304,824
304,824
$
$
—
—
8,380
8,380
— $
149,039
155,785
304,824
$
$
$
2,040
160
160,158
162,358
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the aggregate number of securities to be issued under all of our stock
option and equity based compensation plans upon exercise of outstanding options, warrants and other rights and their weighted-
average exercise prices as of June 30, 2019. There were no securities issued under equity compensation plans not approved by
security holders.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(b)
Weighted-average exercise
price of outstanding
options and units granted
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
— $
N/A
— $
—
N/A
—
1,705,631
N/A
1,705,631
38
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be read in conjunction with “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and
footnotes included elsewhere in this Form 10-K.
(Dollars in thousands, except per share amounts)
2019
2018
2017
2016
2015
At or for the Fiscal Years Ended June 30,
Selected Balance Sheet Data:
Total assets
$
11,220,238
$
9,539,504
$
8,501,680
$
7,599,304
$
5,823,719
Loans, net of allowance for loan losses
9,382,124
8,432,289
7,374,493
6,354,679
4,928,618
Loans held for sale, at fair value
Loans held for sale, at cost
Allowance for loan losses
Securities—trading
Securities—available for sale
Securities—held to maturity
Securities borrowed
Customer, broker-dealer and clearing receivables
33,260
4,800
57,085
—
227,513
—
144,706
203,192
35,077
2,686
49,151
—
18,738
6,669
40,832
8,327
180,305
264,470
—
N/A
N/A
—
N/A
N/A
20,871
33,530
35,826
7,584
265,447
199,174
N/A
N/A
25,430
77,891
28,327
7,832
163,361
225,555
N/A
N/A
Total deposits
8,983,173
7,985,350
6,899,507
6,044,051
4,451,917
Securities sold under agreements to repurchase
Advances from the FHLB
Borrowings, subordinated debentures and other
borrowings
Securities loaned
Customer, broker-dealer and clearing payables
Total stockholders’ equity
Selected Income Statement Data:
Interest and dividend income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Net income attributable to common stock
Per Common Share Data:
Net income:
Basic
Diluted
Adjusted earnings per common share (Non-GAAP)
Book value per common share
Tangible book value per common share (Non-GAAP)
Weighted average number of common shares
outstanding:
Basic1
Diluted1
Common shares outstanding at end of period1
—
458,500
168,929
198,356
238,604
—
457,000
20,000
640,000
35,000
727,000
54,552
54,463
56,016
N/A
N/A
N/A
N/A
N/A
N/A
35,000
753,000
5,155
N/A
N/A
1,073,050
960,513
834,247
683,590
533,526
$
564,887
$
475,074
$
387,286
$
317,707
$
244,364
156,282
408,605
27,350
381,255
82,757
251,206
212,806
57,675
155,131
154,822
2.50
2.48
2.75
17.47
15.10
$
$
$
$
$
$
$
106,580
368,494
25,800
342,694
70,941
173,936
239,699
87,288
152,411
152,102
2.41
2.37
2.39
15.24
13.99
$
$
$
$
$
$
74,059
313,227
11,061
302,166
68,132
137,605
232,693
97,953
134,740
134,431
2.11
2.10
N/A
13.05
12.94
$
$
$
$
$
$
56,696
261,011
9,700
251,311
66,340
112,756
204,895
85,604
119,291
118,982
1.87
1.87
N/A
10.73
10.67
$
$
$
$
$
$
45,419
198,945
11,200
187,745
30,590
77,478
140,857
58,175
82,682
82,373
1.35
1.34
N/A
8.51
8.48
$
$
$
$
$
$
$
61,898,447
62,382,065
61,128,817
63,136,232
64,147,220
62,688,064
63,656,542
63,915,100
63,536,244
63,597,259
63,672,280
63,219,392
61,177,908
61,404,364
62,075,004
39
(Dollars in thousands, except per share amounts)
2019
2018
2017
2016
2015
At or for the Fiscal Years Ended June 30,
Performance Ratios and Other Data:
Loan and lease originations for investment
Loan originations for sale
Loan and lease purchases
Return on average assets
Return on average common stockholders’ equity
Interest rate spread2
Net interest margin3
Net interest margin - Banking segment only3
Efficiency ratio4
Efficiency ratio - Banking segment only4
Capital Ratios:
Equity to assets at end of period
Axos Financial, Inc:
$
$
$
6,934,259
1,471,906
11,009
$
$
$
5,922,801
1,564,165
$
$
4,182,701
1,375,443
— $
276,917
$
$
$
3,633,911
1,363,025
140,493
$
$
$
1.51%
15.40%
3.66%
4.07%
4.14%
51.12%
40.51%
1.68%
17.05%
3.79%
4.11%
4.14%
39.58%
34.55%
1.68%
17.78%
3.74%
3.95%
N/A
36.08%
N/A
1.75 %
19.43 %
3.70 %
3.91 %
N/A
34.44 %
N/A
3,271,911
1,048,982
2,452
1.61%
18.34%
3.79%
3.92%
N/A
33.75%
N/A
9.56%
10.07%
9.81%
8.99 %
9.16%
Tier 1 leverage (core) capital to adjusted average assets
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Axos Bank:
Tier 1 leverage (core) capital to adjusted average assets
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Axos Clearing:
Net capital
Excess capital
Net capital as percentage of aggregate debit item
Net capital in excess of 5% aggregate debit item
Asset Quality Ratios:
Net annualized charge-offs (recoveries) to average loans
outstanding5
Non-performing loans and leases to total loans and leases
Non-performing assets to total assets
Allowance for loan and lease losses to total loans and
leases held for investment at end of period
Allowance for loan and lease losses to non-performing
loans and leases
$
$
$
8.75%
11.43%
11.49%
12.91%
9.21%
12.14%
12.14%
12.89%
21,669
17,858
11.37%
12,142
0.19%
0.51%
0.50%
0.60%
9.45%
13.27%
13.34%
14.84%
8.88%
12.53%
12.53%
13.27%
N/A
N/A
N/A
N/A
0.19%
0.37%
0.43%
0.58%
9.95%
14.66%
14.75%
16.38%
9.60%
14.25%
14.25%
14.97%
N/A
N/A
N/A
N/A
0.06%
0.38%
0.35%
0.55%
9.12 %
14.42 %
14.53 %
16.36 %
8.78 %
14.00 %
14.00 %
14.75 %
N/A
N/A
N/A
N/A
(0.01)%
0.50 %
0.42 %
0.56 %
9.59%
14.98%
15.12%
15.91%
9.25%
14.58%
14.58%
15.38%
N/A
N/A
N/A
N/A
0.03%
0.62%
0.55%
0.57%
117.84%
157.40%
143.81%
112.45 %
91.88%
1 Common stock and per share amounts have been retroactively restated for the fiscal years ended June 30, 2015 presented to reflect the four-for-one split of the
Company’s common stock effected in the form of a stock dividend that was distributed on November 17, 2015.
2 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.
3 Net interest margin represents net interest income as a percentage of average interest-earning assets.
4 Efficiency ratio represents non-interest expense as a percentage of the aggregate of net interest income and non-interest income.
5 Net charge-offs do not include any amounts transferred to loans held for sale.
40
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains forward-looking statements that are based upon current expectations.
Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially
from those expressed or implied in our forward-looking statements due to various important factors, including those set forth
under “Risk Factors” in Item 1A. and elsewhere in this Form 10-K. The following discussion and analysis should be read together
with the “Selected Financial Data” and consolidated financial statements, including the related notes included elsewhere in this
Form 10-K.
OVERVIEW
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 (“Axos Nevada Holding” and collectively, the
“Company”). Axos Nevada Holding wholly owns it’s subsidiary Axos Securities, LLC, which indirectly wholly owns subsidiaries
Axos Clearing, LLC, a clearing broker dealer, Axos Invest, Inc. (doing business as “WiseBanyan”), a registered investment advisor,
and WiseBanyan Securities LLC, an introducing broker dealer. With approximately $10.6 billion in assets, Axos Bank provides
consumer and business banking products through its low-cost distribution channels and affinity partners. Axos Clearing LLC and
WiseBanyan, provide 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 NYSE under the symbol “AX” and is a component of the Russell 2000® Index and the S&P SmallCap 600® Index.
For more information on Axos Bank, please visit axosbank.com.
Net income for the fiscal year ended June 30, 2019 was $155.1 million compared to $152.4 million and $134.7 million
for the fiscal years ended June 30, 2018 and 2017, respectively. Net income attributable to common stockholders for the fiscal
year ended June 30, 2019 was $154.8 million, or $2.48 per diluted share compared to $152.1 million, or $2.37 per diluted share
and $134.4 million, or $2.10 per diluted share for the years ended June 30, 2018 and 2017, respectively. Growth in our interest
earning assets, particularly the loan and lease portfolio, and a reduced income tax rate were the primary reasons for the increase
in our net income from fiscal 2017 to fiscal 2019. Net interest income increased $40.1 million for the year ended June 30, 2019
compared to the year ended June 30, 2018.
Net interest income for the year ended June 30, 2019 was $408.6 million compared to $368.5 million and $313.2 million
for the years ended June 30, 2018 and 2017, respectively. The growth of net interest income from fiscal year 2017 through 2019
is primarily due to net loan and lease portfolio growth and deposit growth.
Provision for loan and lease losses for the year ended June 30, 2019 was $27.4 million, compared to $25.8 million and
$11.1 million for the years ended June 30, 2018 and 2017, respectively. The increase of $1.6 million for fiscal year 2019 is the
result of growth and changes in loan and lease mix in the portfolio. The increase of $14.7 million for fiscal year 2018 is the result
of an increase in Refund Advance loan fundings from $0.3 billion to $1.1 billion from 2017 to 2018, respectively, combined with
growth and changes in the loan and lease mix of the portfolio.
Non-interest income was $82.8 million compared to non-interest income of $70.9 million and $68.1 million for the fiscal
years ended June 30, 2019, 2018 and 2017. The increase from fiscal year 2018 to fiscal year 2019 was primarily the result of an
increase of $11.7 million in broker-dealer fees and $6.1 million in banking and service fees due to increased fees from our trustee
and fiduciary services, increased levels of prepayment penalty fee income of $2.0 million, partially offset by a mortgage banking
income decrease of $8.5 million. The increase from 2017 to 2018 was primarily due to increased banking and service fees due to
increased fees from our trustee and fiduciary services, increase in gain on sale-other primarily from sales of structured settlements,
decreased unrealized loss on securities partially offset by a decrease in realized gain from sale of securities, decreased levels of
prepayment penalty fee income, and decreased mortgage banking income.
Non-interest expense for the fiscal year ended June 30, 2019 was $251.2 million compared to $173.9 million and $137.6
million for the years ended June 30, 2018 and 2017, respectively. The increase was primarily due to an increase of $26.5 million
in staffing for lending, information technology infrastructure development, clearing services, trustee and fiduciary services and
regulatory compliance, an increase in depreciation and amortization of $7.9 million, an increase in data processing and internet
of $6.8 million, and an increase in other general and administrative costs of $20.2 million. Our staffing rose to 1007 full-time
equivalents compared to 801 and 681 at June 30, 2019, 2018 and 2017, respectively.
Total assets were $11,220.2 million at June 30, 2019 compared to $9,539.5 million at June 30, 2018. Assets grew $1,680.7
million or 17.6% during the last fiscal year, primarily due to an increase in the loan originations C&I and income property lending
and the acquisition of Axos Clearing LLC. The loan growth was funded primarily with growth in deposits.
41
Our future performance will depend on many factors: changes in interest rates, competition for deposits and quality loans,
the credit performance of our assets, regulatory actions, strategic transactions, and our ability to improve operating efficiencies.
See “Item 1A. Risk Factors.”
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 acquisitions and two asset acquisitions during the fiscal year ended June 30,
2019 and one business acquisition during the fiscal year ended June 30, 2018.
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 million of time deposits, from MWABank. Axos did not acquire 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.The Company purchased
the whole WiseBanyan business and has the entire voting interest. Goodwill is not expected to be deducted for tax purposes
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, and securities and margin lending 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 for a provisional amount of $34.9 million and an additional $20.1 million
in intangible assets as of the Acquisition Date. The estimated fair values of the acquired assets and assumed liabilities are subject
to refinement as additional information relative to closing date fair values becomes available. Any subsequent measurement period
adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting
adjustments will result in adjustments to goodwill no later than within the first 12 months following the closing date of acquisition.
Included in the professional services line of the statement of income the Company recognized $0.4 million in transaction costs.
The acquisition will enable the Company to expand its banking business to a new customer base through independent
broker-dealers and consumer account relationships, scale entry into wealth management securities custody through technology-
driven platforms, and increase and diversify fee revenue, all of which will improve key operating metrics. The goodwill recognized
results from the expected synergies and potential earnings from this combination.
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 $661.4 million 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, recorded in intangibles, commensurate with the fair market value of the
deposits purchased.
42
Bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. On April 4, 2018, the Company completed
the acquisition of the bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. (“Epiq”). The assets acquired by
the Company include comprehensive software solutions, trustee customer relationships, trade name, accounts receivable and fixed
assets. The business provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees
and fiduciaries in all fifty states. This business is expected to generate fee income from bank partners and bankruptcy cases, as
well as opportunities to source low cost deposits. No deposits were acquired as part of the transaction.
Under the terms of the purchase agreement, the aggregate purchase price included the payment of $70.0 million in cash.
The Company acquired assets with approximate fair values of $32.7 million of intangible assets, including customer relationships,
developed technologies, a covenant not to compete and the trade name, and $1.6 million of accounts receivable and fixed assets,
resulting in $35.7 million of goodwill. Transaction-related expenses were de minimis.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and results of operations is based upon our 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 consolidated financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts and disclosures in the 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.
Securities. We classify securities as either trading, available-for-sale or held-to-maturity. Trading securities are those
securities for which we have elected fair value accounting. Trading securities are recorded at fair value with changes in fair value
recorded in earnings each period. Securities available-for-sale are reported at estimated fair value, with unrealized gains and losses,
net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive
income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active
markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of
the expected cash flows available to the securities. For securities other than non-agency RMBS, we use observable market participant
inputs and categorize these securities as Level II in determining fair value. For non-agency RMBS securities, we use a level III
fair value model approach. To determine the performance of the underlying mortgage loan pools, we consider where appropriate
borrower prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes,
unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination.
We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the
underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates
are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by
(or decreased by) the forecasted increase or decrease in the national unemployment rate as well as the forecasted increase or
decrease in the national home price appreciation (HPA) index. The projections of loss severity rates are derived by the Company
from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted decrease or increase
in the HPA index. To determine the discount rates used to compute the present value of the expected cash flows for these non-
agency RMBS securities, we separate the securities by the borrower characteristics in the underlying pool. For example, non-
agency RMBS “Prime” securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-
A” securities generally have borrowers with lower FICO and less documentation of income. “Pay-option ARMs” are Alt-A securities
with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). Separate
discount rates are calculated for Prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant
assumptions for risk, capital and return on equity.
At each reporting date, we monitor our available-for-sale and held-to-maturity securities for other-than-temporary
impairment. The Company measures its debt securities in an unrealized loss position at the end of the reporting period for other-
than-temporary impairment by comparing 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 the present value over the fair value of the security (if
any) is the noncredit component of the impairment, only 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 the other-than-temporary-impairment is
recorded as a loss in earnings and the noncredit component is recorded as a charge to other comprehensive income, net of the
related income tax benefit.
43
For non-agency RMBS we determine the cash flow expected to be collected and calculate the present value for purposes
of testing for other-than-temporary impairment, by utilizing the same industry-standard tool and the same cash flows as those
calculated for fair values (discussed above). We compute cash flows based upon the underlying mortgage loan pools and our
estimates of prepayments, defaults, and loss severities. We input our projections for the underlying mortgages for the remaining
life of the security to determine the expected cash flows. 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 different from those used
to calculate fair value and are either the implicit rate calculated in each of our securities at acquisition or the last accounting yield
(ASC Topic 325-40-35). We calculate 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. We use this
discount rate in the industry-standard model to calculate the present value of the cash flows for purposes of measuring the credit
component of an other-than-temporary impairment of our debt securities.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level estimated to
provide for probable incurred losses in the loan and lease portfolio. Management determines the adequacy of the allowance based
on reviews of individual loans and leases and pools of loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires
estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the
provision for loan and lease losses, which is reduced by charge-offs and recoveries of loans previously charged-off. Allocations
of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management’s judgment,
may be uncollectible or impaired.
The allowance for loan and lease losses includes general reserves and may include specific reserves. Specific reserves
may be provided for impaired loans. All other impaired loans are written down through charge-offs to their realizable value and
no specific or general reserve is provided. A loan is measured for impairment generally two different ways. If the loan is primarily
dependent upon the borrower’s ability to make payments, then impairment is calculated by comparing the present value of the
expected future payments discounted at the effective loan rate to the carrying value of the loan. If the loan is collateral dependent,
the net proceeds from the sale of the collateral is compared to the carrying value of the loan. If the calculated amount is less than
the carrying value of the loan, the loan has impairment.
A general reserve is included in the allowance for loan and lease losses and is determined by adding the results of a
quantitative and a qualitative analysis to all other loans not measured for impairment at the reporting date. The quantitative analysis
determines the Bank’s actual annual historic charge-off rates and applies the average historic rates to the outstanding loan balances
in each loan class. The qualitative analysis considers one or more of the following factors: changes in lending policies and
procedures, changes in economic conditions, changes in the content of the portfolio, changes in lending management, changes in
the volume of delinquency rates, changes to the scope of the loan review system, changes in the underlying collateral of the loans,
changes in credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and
applied to those loans affected by the qualitative factors. The following portfolio segments have been identified: single family
secured mortgage, home equity secured mortgage, single family warehouse and other, multifamily secured mortgage, commercial
real estate mortgage, recreational vehicles and auto secured, factoring, C&I and other.
Business Combinations. Mergers and acquisitions are accounted for in accordance with ASC 805 “Business
Combinations” using the acquisition method of accounting. Assets and liabilities acquired and assumed are generally recorded at
their fair values as of the date of the transaction. The excess of purchase price over the fair value of assets acquired and liabilities
assumed is recorded as goodwill. Significant estimates and judgments are involved in the fair valuation and purchase price allocation
process.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished
from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles,
are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill)
are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.
Goodwill is subject to impairment testing at the reporting unit level, which is conducted at least annually. The Company
performs impairment testing during the third quarter of each year or when events or changes in circumstances indicate the assets
might be impaired. Based on the results, the Company determined that the estimated fair value exceeded its carrying value and
concluded that the goodwill and other identifiable intangible assets were fully recognized.
44
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, 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. Other costs are due to a $15.3 million bad debt expense related to a correspondent
customer of our clearing broker-dealer. 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’ core business.
Below is a reconciliation of net income to adjusted earnings and adjusted EPS (Non-GAAP) for the periods shown:
(Dollars in thousands, except per share amounts)
Net income
Acquisition-related costs
Excess FDIC expense
Other costs
Income taxes
Adjusted earnings (Non-GAAP)
Adjusted EPS (Non-GAAP)
For Twelve Months Ended
June 30,
2019
2018
$
$
$
155,131
6,714
1,111
15,299
(6,267)
171,988
2.75
$
$
$
152,411
1,470
—
—
(535)
153,346
2.39
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:
2019
At the Fiscal Years Ended June 30,
2017
2016
2018
(Dollars in thousands, except per share amounts)
Total stockholders’ equity
Less: preferred stock
Common stockholders’ equity
Less: mortgage servicing rights, carried at fair value
Less: goodwill and intangible assets
Tangible common stockholders’ equity (Non-GAAP) $
$ 1,073,050
5,063
1,067,987
9,784
134,893
923,310
$
$
960,513
5,063
955,450
10,752
67,788
876,910
$
$
834,247
5,063
829,184
7,200
—
821,984
$
$
683,590
5,063
678,527
3,943
—
674,584
$
$
2015
533,526
5,063
528,463
2,098
—
526,365
Common shares outstanding at end of period
61,128,817
62,688,064
63,536,244
63,219,392
62,075,004
Tangible book value per common share (Non-GAAP) $
15.10
$
13.99
$
12.94
$
10.67
$
8.48
45
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables set forth, for the periods indicated, 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 Fiscal Years Ended June 30,
2019
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
2018
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
2017
Interest
Income /
Expense
Average
Yields
Earned /
Rates
Paid
Average
Balance1
$ 8,974,820
$
525,317
5.85% $ 7,893,072
$
446,991
5.66% $ 6,819,102
$
358,849
5.26%
631,228
210,189
13,495
13,943
2.14%
6.63%
807,348
209,434
12,450
11,335
1.54%
5.41%
658,580
393,334
5,204
16,889
0.79%
4.29%
173,829
8,746
5.03%
N/A
N/A
—%
N/A
N/A
—%
41,078
3,386
8.24%
61,222
4,298
7.02%
55,577
6,344
11.41%
10,031,144
564,887
5.63%
8,971,076
475,074
5.30%
7,926,593
387,286
4.89%
(Dollars in thousands)
Assets:
Loans and leases2,3
Interest-earning
deposits in other
financial institutions
Investment securities
Securities borrowed and
margin lending
Stock of the regulatory
agencies
Total interest-earning
assets
Non-interest-earning
assets
234,993
Total assets
$ 10,266,137
100,380
$ 9,071,456
116,545
$ 8,043,138
Liabilities and
Stockholders’ Equity:
Interest-bearing demand
and savings
$ 3,906,833
$
61,391
1.57% $ 4,706,238
$
54,013
1.15% $ 4,619,769
$
34,556
Time deposits
2,322,039
55,689
2.40%
990,635
25,838
2.61%
941,919
21,938
Securities sold under
agreements to
repurchase
Securities loaned
Advances from the
FHLB
Borrowings,
subordinated notes and
debentures
Total interest-bearing
liabilities
Non-interest-bearing
demand deposits
Other non-interest-
bearing liabilities
1,227,285
76,651
Stockholders’ equity
1,010,113
—
221,469
—
748
—%
0.34%
5,575
N/A
229
N/A
4.11%
—%
33,068
N/A
1,465
N/A
1,397,460
32,834
2.35%
1,296,120
22,848
1.76%
798,982
12,403
1.55%
104,287
5,620
5.39%
54,522
3,652
6.70%
55,873
3,697
6.62%
7,952,088
156,282
1.97%
7,053,090
106,580
1.51%
6,449,611
74,059
1.15%
1,052,944
68,361
897,061
774,411
58,040
761,076
Total liabilities and
stockholders’ equity
Net interest income
Interest rate spread4
Net interest margin5
$ 10,266,137
$ 9,071,456
$ 8,043,138
$
408,605
$
368,494
$
313,227
3.66%
4.07%
3.79%
4.11%
3.74%
3.95%
1 Average balances are obtained from daily data.
2 Loans and leases include loans held for sale, loan and lease premiums, discounts and unearned fees.
3 Interest income includes reductions for amortization of loan and lease and investment securities premiums and earnings from accretion of discounts and loan
and lease fees. Loan and lease fee income is not significant. Also includes $28.7 million as of June 30, 2019, $29.3 million as of June 30, 2018 and $30.3 million
as of June 30, 2017 of loans that qualify for Community Reinvestment Act credit which are taxed at a reduced rate.
4 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.
5 Net interest margin represents net interest income as a percentage of average interest-earning assets.
46
0.75%
2.33%
4.43%
—%
RESULTS OF OPERATIONS
Our results of operations depend on our net interest income, which is the difference between interest income on interest-
earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth
in our interest earning assets and is subject to competitive factors in online banking and other markets. Our net interest income is
reduced by our estimate of loss provisions for our loan and lease portfolio. We also earn non-interest income primarily from
mortgage banking activities, banking products and service activity, our Securities Business, prepaid card fee income, prepayment
fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of other loans and investment
securities. Losses on investment securities reduce non-interest income. The largest component of non-interest expense is salary
and benefits, which is a function of the number of personnel, which increased from 801 full time employees at June 30, 2018 to
1007 full-time equivalent employees at June 30, 2019. We are subject to federal and state income taxes, and our effective tax rates
were 27.10%, 36.42% and 42.10% for the fiscal years ended June 30, 2019, 2018, and 2017, respectively. Other factors that affect
our results of operations include expenses relating to data processing, advertising, depreciation, occupancy, professional services,
and other miscellaneous expenses.
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2019 AND JUNE 30, 2018
Net Interest Income. Net interest income totaled $408.6 million for the fiscal year ended June 30, 2019 compared to
$368.5 million for the fiscal year ended June 30, 2018. 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 both, based on their relative absolute values.
(Dollars in thousands)
Increase (decrease) in interest income:
Loans and leases
Federal funds sold
Interest-earning deposits in other financial institutions
Investment securities
Securities borrowed and margin lending
Stock of the regulatory agencies
Total increase (decrease) in interest income
Increase (decrease) in interest expense:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to repurchase
Securities loaned
Advances from the FHLB
Other borrowings
Fiscal Year Ended June 30, 2019 vs 2018
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
62,915
$
15,411
$
78,326
(3,102)
41
8,746
(1,574)
—
4,147
2,567
—
662
$
$
$
$
67,026
$
22,787
(10,207) $
32,090
(229)
748
1,889
2,797
17,585
(2,239)
—
—
8,097
(829)
1,045
2,608
8,746
(912)
89,813
7,378
29,851
(229)
748
9,986
1,968
Total increase (decrease) in interest expense
$
27,088
$
22,614
$
49,702
Interest Income. Interest income for the fiscal year ended June 30, 2019 totaled $564.9 million, an increase of $89.8
million, or 18.9%, compared to $475.1 million in interest income for the fiscal year ended June 30, 2018 primarily due to growth
in volume of interest-earning assets from loan originations, primarily from commercial & industrial lending and the addition of
securities borrowed and margin lending from our new securities segment. Average interest-earning assets for the fiscal year ended
June 30, 2019 increased by $1,060.1 million compared to the fiscal year ended June 30, 2018 primarily due to loan and lease
originations for investment which increased $1,011.5 million during the year ended June 30, 2019. Yields on loans and leases
increased by 19 basis points to 5.85% for the fiscal year ended June 30, 2019, primarily due to increased yields in the single family,
income property, and commercial & industrial loan products. For the fiscal year ended June 30, 2019, the growth in average
balances contributed additional interest income of $67.0 million, which was supplemented by a $22.8 million increase in interest
income due to the increase in average rate. The average yield earned on our interest-earning assets increased to 5.63% for the
fiscal year ended June 30, 2019, up from 5.30% for the same period in 2018 primarily due to the increase in rate from loans and
47
leases. As a result of the Federal Reserve decisions to increase the Fed Funds rate over the last year we have marked up our
adjustable loans and have increased the market rates on new loans.
Interest Expense. Interest expense totaled $156.3 million for the fiscal year ended June 30, 2019, an increase of $49.7
million, or 46.6% compared to $106.6 million in interest expense during the fiscal year ended June 30, 2018, due primarily to
greater volume of time deposits due to acquisition from Nationwide Bank and increased rates on deposits and advances, as a result
of the Federal Reserve decisions to increase the Fed Funds rate over the last year. The average rate paid on all of our interest-
bearing liabilities increased to 1.97% for the fiscal year ended June 30, 2019 from 1.51% for the fiscal year ended June 30, 2018,
due primarily to increased rates on deposits and advances from FHLB. Average interest-bearing liabilities for the fiscal year ended
June 30, 2019 increased $899.0 million compared to fiscal 2018. The average rate on interest-bearing deposits increased to 1.57%
from 1.15% due to increases in prevailing deposit rates across the industry. The rates on advances from the FHLB also increased
to 2.35% from 1.76% due primarily to the Fed rate increases. The average rate on time deposits decreased to 2.40% for the fiscal
year ended June 30, 2019 from 2.61% for the fiscal year ended June 30, 2018, due to the lower rates on the time deposits acquired
from Nationwide. Average FHLB advances for the fiscal year ended June 30, 2019 increased $101.3 million, or 7.8% compared
to fiscal 2018. The average non-interest-bearing demand deposits were $1,227.3 million for the fiscal year ended June 30, 2019,
representing an increase of $174.3 million.
Provision for Loan and Lease Losses. Provision for loan and lease losses was $27.4 million for the fiscal year ended
June 30, 2019 and $25.8 million for fiscal 2018. The increase in the loan and lease loss provision was primarily due to loan portfolio
growth and a change in the loan and lease mix, including an increase in Refund Advance originations. The provisions are made
to maintain our allowance for loan and lease losses at levels which management believes to be adequate. The assessment of the
adequacy of our 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, loss history and changes in the volume and mix of loans and collateral values.
See “Asset Quality and Allowance for Loan and Lease Losses” for discussion of our allowance for loan and lease losses
and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our non-interest income:
(Dollars in thousands)
Realized gain on securities:
Unrealized loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale – other
Mortgage banking income
Broker-dealer fee income
Banking and service fees
Total non-interest income
For the Fiscal Year Ended June 30,
2019
2018
$
709
$
(18)
(1,666)
845
(821)
5,851
6,160
5,267
11,737
53,854
$
82,757
$
(6,271)
6,115
(156)
3,862
5,734
13,755
—
47,764
70,941
Our relationship with H&R Block began in fiscal 2016 and introduced seasonality into banking and service fees category
of non-interest income, with an increase during our second 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 March 31, 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”).
Non-interest income totaled $82.8 million for the fiscal year ended June 30, 2019 compared to non-interest income of
$70.9 million for fiscal 2018. The increase was primarily the result of an increase of $11.7 million in broker-dealer fee income
from our new securities segment, an increase of $6.1 million in banking and service fees due to trustee and fiduciary services,
increased levels of prepayment penalty fee income of $2.0 million, an increase in realized gain on sale of securities of $0.7 million,
a $0.4 million increase in gain on sale-other, partially offset by a decrease in mortgage banking income of $8.5 million, and an
increase in net unrealized loss on securities of $0.7 million. Banking and service fees includes H&R Block-branded product fees,
deposit fees, fee income from prepaid card sponsors, and certain C&I loan fees. The primary non-interest income-generating H&R
Block products and services that led to the increased banking and service fees are EPC and RT. For the fiscal year ended June 30,
48
2019, EPC decreased $0.2 million to $7.8 million from $8.0 million for fiscal 2018. For the fiscal year ended June 30, 2019, RT
decreased $0.2 million to $12.3 million from $12.5 million for fiscal 2018.
Included in gain on sale – other are sales of unsecured and secured consumer and business loans originated through
introductions from our third-party partner relationships, for example H&R Block-branded Emerald Advance, and sales of structured
settlement annuity and state lottery 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 are originated for sale from time to time depending
upon management’s assessment of interest rate risk, liquidity, and offers containing favorable terms and if originated for sale
would be classified on our balance sheet as loans held for sale.
Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods
shown:
(Dollars in thousands)
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Professional services
FDIC and regulator fees
Broker-dealer clearing charges
Real estate owned and repossessed vehicles
General and administrative expenses
Total non-interest expense
For the Fiscal Year Ended June 30,
2019
2018
$
127,433
$
24,150
14,710
16,471
8,571
11,916
9,005
2,822
913
35,215
$
251,206
$
100,975
17,400
15,500
8,574
6,063
5,280
4,860
—
260
15,024
173,936
Non-interest expense totaled $251.2 million for the fiscal year ended June 30, 2019, an increase of $77.3 million compared
to fiscal 2018. Salaries and related costs increased $26.5 million, or 26.2%, in fiscal 2019 due to increased staffing levels to support
growth in staffing for lending, information technology infrastructure development, regulatory compliance, trustee and fiduciary
services and additions from our Securities Business. Our staff increased to 1007 from 801 or 25.72% between fiscal 2019 and
2018 and increased to 801 from 681 or 17.62% between fiscal 2018 and 2017.
Data processing and internet expense increased $6.8 million, primarily due to the additions from our Securities Business
and enhancements to customer interfaces and the Bank’s core processing system.
Advertising and promotion expense decreased $0.8 million, primarily due to decreased mortgage lead generation and
deposit marketing costs partially offset by increased rebranding costs.
Depreciation and amortization, increased $7.9 million primarily due to the amortization of intangibles from recent
acquisitions, depreciation on lending and deposit platform enhancements and infrastructure development, and additions from our
Securities Business.
Occupancy and equipment expense increased $2.5 million, in order to support increased deposit and loan production and
additions from our Securities Business.
Professional services, which include accounting and legal fees, increased $6.6 million in fiscal 2019 compared to 2018.
The increase in professional services was primarily due to increased compliance, audit, legal and consulting expenses, and additions
from our Securities Business.
The change in our cost of Federal Deposit Insurance Corporation (“FDIC”) and OCC standard regulatory charges increased
by $4.1 million in fiscal 2019 compared to fiscal 2018. As a result of the overall growth of the Bank’s average liabilities. As an
FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC.
Broker-dealer clearing charges were $2.8 million for the fiscal year ended June 30, 2019. These expenses are related to
the cost associated with introducing broker-dealer customer trades in our Securities Business.
General and administrative expenses increased by $20.2 million in fiscal 2019 compared to 2018. The increases were
primarily due to a $15.3 million increase in our Securities Business bad debt reserve in order to cover potential losses resulting
49
from unauthorized securities trades at a correspondent customer, costs to support loan and deposit production and increased
insurance costs.
Income Tax Expense. Income tax expense was $57.7 million for the fiscal year ended June 30, 2019 compared to $87.3 million
for fiscal 2018. Our effective tax rates were 27.10% and 36.42% for the fiscal year ended June 30, 2019 and 2018, respectively.
As a result of legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on
December 22, 2017, during the quarter ended December 31, 2017, the Company revised its estimated annual effective rate to
reflect a change in the federal statutory rate from 35.0% to 21.0%. The Tax Act makes broad and complex changes to the U.S. tax
code that affect the Company’s fiscal year ended June 30, 2018, including reducing the U.S. federal corporate statutory tax rate
to 21.0% beginning January 1, 2018, which results in a blended federal corporate statutory tax rate of 28.1% for the Company’s
fiscal year ended June 30, 2018 that is based on the applicable tax rates before and after the Tax Act and the number of days in
the fiscal year.
During the quarter ended December 31, 2017, the Company revalued the deferred tax balance to reflect the new corporate
tax rate, which resulted in a decrease in net deferred tax assets of $9,189. As a result, income tax expense reported for the fiscal
year ended June 30, 2018 was adjusted to reflect the effects of the change in the tax law and the application of the newly enacted
rates to existing deferred balances.
Additionally, the Company received tax credits for the year ended June 30, 2019, which reduced the effective tax rate by
approximately 1.55% compared to June 30, 2018.
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:
(Dollars in thousands)
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
(Dollars in thousands)
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
Banking Business
Fiscal Year Ended June 30, 2019
Banking
Business
Securities
Business
Corporate/
Eliminations
Axos
Consolidated
$
$
404,500
27,350
70,917
192,588
$
255,479
$
$
7,564
—
12,071
34,430
(14,795) $
(3,459) $
—
(231)
24,188
(27,878) $
408,605
27,350
82,757
251,206
212,806
Fiscal Year Ended June 30, 2018
Banking
Business
Securities
Business
Corporate/
Eliminations
Axos
Consolidated
$
$
371,661
25,800
70,788
152,877
263,772
$
$
— $
—
—
—
— $
(3,167) $
—
153
21,059
(24,073) $
368,494
25,800
70,941
173,936
239,699
For the fiscal year ended June 30, 2019, we had pre-tax income of $255.5 million compared to pre-tax income of $263.8
million for the fiscal year ended June 30, 2018. For the fiscal year ended June 30, 2019, the decrease in pre-tax income was
primarily related to increased operating costs.
50
We consider the ratios shown in the table below to be key indicators of the performance of our Banking Business segment:
Efficiency ratio
Return on average assets
Interest rate spread
Net interest margin
Fiscal Year Ended
June 30, 2019
June 30, 2018
40.51%
1.83%
3.72%
4.14%
34.55%
1.82%
3.83%
4.14%
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 Holding 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.
51
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 twelve months ended June 30, 2019 and 2018:
(Dollars in thousands)
Assets:
Loans and Leases 2,3
Interest-earning deposits in other
financial institutions
Investment securities 3
Stock of the regulatory agencies, at cost
Total interest-earning assets
Non-interest-earning assets
Total Assets
Liabilities and Stockholder's Equity:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to
repurchase
Advances from the FHLB
Borrowings, subordinated notes and
debentures
Total interest-bearing liabilities
Non-interest-bearing demand deposits
Other non-interest-bearing liabilities
Stockholder's equity
Total Liabilities and
Stockholders' Equity
For the Fiscal Years Ended June 30,
Average
Balance 1
2019
Interest
Income/
Expense
Average Yields
Earned/Rates
Paid
Average
Balance 1
2018
Interest
Income/
Expense
Average Yields
Earned/Rates
Paid
$
8,974,624
$
525,307
5.85% $
7,893,047
$
446,989
540,047
12,285
2.27%
807,348
12,450
13,929
3,378
554,899
61,845
55,689
—
32,834
31
150,399
208,234
40,000
9,762,905
189,802
9,952,707
3,964,429
$
2,322,039
$
$
—
1,397,460
1,112
7,685,040
1,236,508
58,004
973,155
11,332
4,292
475,063
54,481
25,838
229
22,848
4
103,400
6.69%
8.45%
5.68%
209,412
61,222
8,971,029
93,109
$
9,064,138
1.56% $
4,764,859
$
2.40%
990,635
—%
2.35%
2.70%
1.96%
5,575
1,296,120
97
7,057,286
1,056,413
65,289
885,150
$
9,952,707
$
9,064,138
5.66%
1.54%
5.41%
7.01%
5.30%
1.14%
2.61%
4.11%
1.76%
4.12%
1.47%
$
404,500
Net interest income
Interest rate spread 4
Net interest margin 5
1 Average balances are obtained from daily data.
2 Loans and leases include loans held for sale, loan premiums and unearned fees.
3 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 $28.7 million and $29.3 million of Community Reinvestment Act loans which are taxed at a reduced rate for the 2019
and 2018 twelve-month periods, respectively.
371,663
4.14%
3.72%
4.14%
3.83%
$
4 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.
5 Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
52
Net Interest Income. Net interest income totaled $404.5 million for the fiscal year ended June 30, 2019 compared to
$371.7 million million for the fiscal year ended June 30, 2018. 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 both, based on their relative absolute values.
(Dollars in thousands)
Increase (decrease) in interest income:
Loans and leases
Interest-earning deposits in other financial institutions
Investment securities
Stock of the regulatory agencies
Total increase (decrease) in interest income
Increase (decrease) in interest expense:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to repurchase
Advances from the FHLB
Other borrowings
Total increase (decrease) in interest expense
Fiscal Year Ended June 30, 2019 vs 2018
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
$
$
62,907
$
15,411
$
78,318
(4,915)
(64)
(1,681)
4,750
2,661
767
56,247
$
23,589
(10,228) $
32,090
(229)
1,889
27
17,592
(2,239)
—
8,098
(1)
$
$
(165)
2,597
(914)
79,836
7,364
29,851
(229)
9,987
26
$
23,549
$
23,450
$
46,999
The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
The Banking segment’s net interest income for the fiscal year ended June 30, 2019 totaled $404.5 million, an increase
of 8.8%, compared to net interest income of $371.7 million for the fiscal year ended June 30, 2018. The growth of net interest
income is primarily due to increased average earnings assets from net loan and lease portfolio growth and increased average yields
earned on interest-earning assets, partially offset by volume increases in time deposits and increased rates on interest bearing
demand and savings deposits and FHLB advances.
The Banking segment’s non-interest income increased $0.1 million from $70.8 million to $70.9 million for the fiscal year
ended June 30, 2018 compared to the fiscal year ended June 30, 2019. The increase in non-interest income for the fiscal year ended
June 30, 2019, was primarily the result of an increase of $4.6 million in banking and service fees primarily due to fee income from
our trustee and fiduciary services, an increase of $2.0 million in prepayment penalty fee income, an increase in realized gain on
sale of securities of $0.9 million, a $0.4 million increase in gain on sale-other, partially offset by a decrease in mortgage banking
income of $7.2 million, and an increase in net unrealized loss on securities of $0.7 million. Banking and service fees includes
H&R Block-branded product fees, deposit fees, fee income from prepaid card sponsors, and certain C&I loan fees. The primary
non-interest income-generating H&R Block products and services that led to the increased banking and service fees are EPC and
RT. For the fiscal year ended June 30, 2019, EPC decreased $0.2 million to $7.8 million from $8.0 million for fiscal 2018. For
the fiscal year ended June 30, 2019, RT decreased $0.2 million to $12.3 million from $12.5 million for fiscal 2018.
Non-interest expense totaled $192.6 million for the fiscal year ended June 30, 2019, an increase of $39.7 million compared
to fiscal 2018. Salaries and related costs increased $14.8 million, or 18.2%, in fiscal 2019 due to increased staffing levels to support
growth in staffing for lending, information technology infrastructure development, regulatory compliance, and the trustee and
fiduciary services, a $6.9 million increase in depreciation and amortization for amortization of fiduciary services intangibles and
systems enhancements, a $4.6 million increase in data processing and internet expense for loan and deposit systems enhancements,
a $4.0 million increase in FDIC and OCC standard regulatory charges due to growth of the Bank’s average liabilities and an
increase in short-term brokered deposits as we positioned the Bank for the acquisition of the Nationwide Bank deposits, a $3.8
million increase in other and general expense, a $3.4 million increase in professional services, and a $2.1 million increase in
occupancy expense.
53
Securities Business
For the fiscal year ended June 30, 2019, our Securities Business segment had a loss before taxes of $14.8 million. 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. For the fiscal year ended June 30, 2019, the loss was primarily due to a $15.3 million bad debt
expense related to a correspondent customer of our clearing broker-dealer.
Net interest income for the fiscal year ended June 30, 2019, was $7.6 million. In the Securities business, interest is earned
on 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 fiscal year ended June 30, 2019, was $12.1 million, the result of $8.9 million of
clearing and custodial related fees and $3.1 million in fees earned on FDIC insured bank deposits.
Non-interest expenses was $34.4 million during the fiscal year ended June 30, 2019, other and general expenses were
$16.4 million, due to a $15.3 million bad debt expense related to a correspondent customer of our clearing broker-dealer. Salaries
and related costs were $8.3 million, professional services were $3.0 million, broker-dealer clearing charges were $2.8 million,
and data processing and internet expenses were $2.1 million.
Selected information concerning the Securities Business segment follows:
(Dollars in thousands)
Compensation as a % of net revenue
FDIC insured program balances at the Bank (end of period)
Customer margin balances (end of period)
Customer funds on deposit, including short credits (end of period)
Clearing:
Total tickets
Correspondents (end of period)
Securities lending:
Interest-earning assets – stock borrowed (end of period)
Interest-bearing liabilities – stock loaned (end of period)
$
$
$
$
$
As of and for the Three Months
ended June 30, 2019
35.0%
341,576
189,193
206,469
595,962
62
203,192
198,356
54
COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2018 AND JUNE 30, 2017
Net Interest Income. Net interest income totaled $368.5 million for the fiscal year ended June 30, 2018 compared to
$313.2 million for the fiscal year ended June 30, 2017. 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 both, based on their relative absolute values.
(Dollars in thousands)
Increase/(decrease) in interest income:
Loan and Leases
Interest-earning deposits in other financial institutions
Investment securities
Stock of the FHLB, at cost
Total increase/(decrease) in interest income
Increase/(decrease) in interest expense:
Interest-bearing demand and savings
Time deposits
Securities sold under agreements to repurchase
Advances from the FHLB
Other borrowings
Fiscal Year Ended June 30, 2018 vs 2017
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
$
$
59,441
$
28,701
$
$
$
1,393
(9,217)
592
52,209
660
1,174
(1,137)
8,577
(90)
$
$
5,853
3,663
(2,638)
35,579
18,797
2,726
(99)
1,868
45
88,142
7,246
(5,554)
(2,046)
87,788
19,457
3,900
(1,236)
10,445
(45)
Total increase/(decrease) in interest expense
$
9,184
$
23,337
$
32,521
Interest Income. Interest income for the fiscal year ended June 30, 2018 totaled $475.1 million, an increase of $87.8
million, or 22.7%, compared to $387.3 million in interest income for the fiscal year ended June 30, 2017 primarily due to growth
in volume of interest-earning assets from loan originations, primarily from commercial & industrial lending as well as accretion
from origination fees from Refund Advance loans. Fundings of Refund Advance loans increased from $0.3 billion to $1.1 billion
for the fiscal years ended June 30, 2017 and June 30, 2018, respectively. Average interest-earning assets for the fiscal year ended
June 30, 2018 increased by $1,044.5 million compared to the fiscal year ended June 30, 2017 primarily due to loan and lease
originations for investment which increased $1,740.1 million during the year ended June 30, 2018. Yields on loans and leases
increased by 40 basis points to 5.66% for the fiscal year ended June 30, 2018, primarily due to increased yields in the single family,
commercial & industrial and H&R Block-branded loan products. For the fiscal year ended June 30, 2018, the growth in average
balances contributed additional interest income of $52.2 million, which was supplemented by a $35.6 million increase in interest
income due to the increase in average rate. The average yield earned on our interest-earning assets increased to 5.30% for the
fiscal year ended June 30, 2018, up from 4.89% for the same period in 2017 primarily due to the increase in rate from loans and
leases. As a result of the Federal Reserve decisions to increase the Fed Funds rate over the last year we have marked up our
adjustable loans and have increased the market rates on new loans. A contributing factor to the increase of loans and leases income
is the amortization of origination fees for H&R Block-branded products.
Interest Expense. Interest expense totaled $106.6 million for the fiscal year ended June 30, 2018, an increase of $32.5
million, or 43.9% compared to $74.1 million in interest expense during the fiscal year ended June 30, 2017, due primarily to
increased rates on deposits and advances, as a result of the Federal Reserve decisions to increase the Fed Funds rate over the last
year. The average rate paid on all of our interest-bearing liabilities increased to 1.51% for the fiscal year ended June 30, 2018 from
1.15% for the fiscal year ended June 30, 2017, due primarily to increased rates on deposits and advances from FHLB. Average
interest-bearing liabilities for the fiscal year ended June 30, 2018 increased $603.5 million compared to fiscal 2017. The average
rate on interest-bearing demand and savings deposits increased to 1.15% from 0.75% due to increases in prevailing deposit rates
across the industry. The rates on advances from the FHLB also increased to 1.76% from 1.55% due primarily to the Fed rate
increases. The average rate on time deposits increased to 2.61% for the fiscal year ended June 30, 2018 from 2.33% for the fiscal
year ended June 30, 2017, due to Fed rate increases. Average FHLB advances for the fiscal year ended June 30, 2018 increased
$497.1 million, or 62.2% compared to fiscal 2017. The average non-interest-bearing demand deposits were $1,052.9 million for
the fiscal year ended June 30, 2018, representing an increase of $278.5 million.
Provision for Loan and Lease Losses. Provision for loan and lease losses was $25.8 million for the fiscal year ended
June 30, 2018 and $11.1 million for fiscal 2017. The increase in the loan and lease loss provision was primarily due to the increase
55
in Refund Advance loan fundings from $0.3 billion to $1.1 billion during fiscal 2017 and 2018, respectively, combined with overall
loan portfolio growth. The provisions are made to maintain our allowance for loan and lease losses at levels which management
believes to be adequate. The assessment of the adequacy of our 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, loss history and changes in the
volume and mix of loans and collateral values.
See “Asset Quality and Allowance for Loan and Lease Losses” for discussion of our allowance for loan and lease losses
and the related loss provisions.
Non-interest Income. The following table sets forth information regarding our non-interest income:
(Dollars in thousands)
Total realized gain (loss) on securities
Unrealized loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Net impairment loss recognized in earnings
Fair value gain (loss) on trading securities
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale-other
Mortgage banking income
Banking and service fees
Total non-interest income
For the Fiscal Year Ended June 30,
2018
2017
(18)
(6,271)
6,115
(156)
—
(156)
3,862
5,734
13,755
47,764
$
70,941
$
3,920
(10,937)
8,973
(1,964)
743
(1,221)
4,574
4,487
14,284
42,088
68,132
Our relationship with H&R Block began in fiscal 2016 and introduced seasonality into banking and service fees category
of non-interest income, with an increase during our second 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 March 31, 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”).
Non-interest income totaled $70.9 million for the fiscal year ended June 30, 2018 compared to non-interest income of
$68.1 million for fiscal 2017. The increase was primarily the result of an increase of $5.7 million in banking and service fees due
to H&R Block-branded products and service fee income, a $1.2 million increase in gain on sale-other primarily from sales of
structured settlements and lottery receivables, and a decrease in net unrealized loss on securities of $1.1 million, partially offset
by a decrease in realized gain from sale of securities of $3.9 million, decreased levels of prepayment penalty fee income of $0.7
million, and a decrease in mortgage banking income of $0.5 million. Banking and service fees includes H&R Block-branded
product fees, deposit fees, fee income from prepaid card sponsors, and certain C&I loan fees. The primary non-interest income-
generating H&R Block products and services that led to the increased banking and service fees are EPC and RT. For the fiscal
year ended June 30, 2018, EPC increased $0.2 million to $8.0 million from $7.8 million for fiscal 2017. For the fiscal year ended
June 30, 2018, RT decreased $0.3 million to $12.5 million from $12.8 million for fiscal 2017.
Included in gain on sale – other are sales of unsecured and secured consumer and business loans originated through
introductions from our third-party partner relationships, for example H&R Block-branded Emerald Advance, and sales of structured
settlement annuity and state lottery 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 are classified on our balance
sheet as loans held for sale. Increased originations and favorable terms during fiscal 2018 resulted in an increase in gain on sale
from structured settlement annuity and state lottery receivables.
56
Non-interest Expense. The following table sets forth information regarding our non-interest expense for the periods
shown:
(Dollars in thousands)
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Professional services
FDIC and regulator fees
Real estate owned and repossessed vehicles
Other general and administrative
Total non-interest expense
For the Fiscal Year Ended June 30,
2018
2017
100,975
$
17,400
15,500
8,574
6,063
5,280
4,860
260
15,024
173,936
$
81,821
13,323
9,367
6,094
5,612
4,980
4,330
498
11,580
137,605
$
$
Non-interest expense totaled $173.9 million for the fiscal year ended June 30, 2018, an increase of $36.3 million compared
to fiscal 2017. Salaries and related costs increased $19.2 million, or 23.4%, in fiscal 2018 due to increased staffing levels to support
growth in the Bank’s staffing for lending, information technology infrastructure development, regulatory compliance, and the
trustee and fiduciary services. Our staff increased to 801 from 681 or 17.62% between fiscal 2018 and 2017 and increased to 681
from 647 or 5.26% between fiscal 2017 and 2016.
Data processing and internet expense increased $4.1 million, primarily due to enhancements to customer interfaces and
the Bank’s core processing system.
Advertising and promotion expense increased $6.1 million, primarily due to additional lead generation costs, increased
deposit marketing and rebranding costs.
Depreciation and amortization, increased $2.5 million primarily due to depreciation on lending platform enhancements
and infrastructure development and amortization of intangibles.
Occupancy and equipment expense increased $0.5 million, in order to support increased production and office space for
additional employees.
Professional services, which include accounting and legal fees, increased $0.3 million in fiscal 2018 compared to 2017.
The increase in professional services was primarily due to increased legal expenses, partially offset by increased insurance
reimbursements.
The change in our cost of Federal Deposit Insurance Corporation (“FDIC”) and OCC standard regulatory charges increased
by $0.5 million in fiscal 2018 compared to fiscal 2017. The overall growth of the Bank’s liabilities has been offset by the generally
favorable change in the FDIC deposit insurance premium calculation. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premiums to the FDIC.
General and administrative expenses increased by $3.4 million in fiscal 2018 compared to 2017. The increases were
primarily due to costs to support loan and deposit production.
Income Tax Expense. Income tax expense was $87.3 million for the fiscal year ended June 30, 2018 compared to $98.0
million for fiscal 2017. Our effective tax rates were 36.42% and 42.10% for the fiscal year ended June 30, 2018 and 2017,
respectively.
As a result of legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on
December 22, 2017, during the quarter ended December 31, 2017, the Company revised its estimated annual effective rate to
reflect a change in the federal statutory rate from 35.0% to 21.0%. The Tax Act makes broad and complex changes to the U.S. tax
code that will affect our fiscal year ending June 30, 2018, including reducing the U.S. federal corporate statutory tax rate to 21.0%
beginning January 1, 2018, which results in a blended federal corporate statutory tax rate of 28.1% for the Company’s fiscal year
ending June 30, 2018 that is based on the applicable tax rates before and after the Tax Act and the number of days in the fiscal
year.
During the quarter ended December 31, 2017, the Company revalued the deferred tax balance to reflect the new corporate
tax rate, which resulted in a decrease in net deferred tax assets of $9.2 million. As a result, income tax expense reported for the
57
fiscal year ended June 30, 2018 was adjusted to reflect the effects of the change in the tax law and the application of the newly
enacted rates to existing deferred balances.
Additionally, the Company received tax credits for the year ended June 30, 2018. These tax credits reduced the effective
tax rate by approximately 2.38%. Lastly, the Company adopted ASU 2016-09 effective July 1, 2017. As a result of the adoption,
the Company recorded $2.4 million of income tax benefits for the fiscal year ended June 30, 2018, respectively, related to excess
tax benefits from stock compensation. Prior to 2018, such excess tax benefits were generally recorded directly in stockholders’
equity. This new accounting standard may potentially increase the volatility in the Company’s effective tax rates.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2019 AND JUNE 30, 2018
Our total assets increased $1,680.7 million, or 17.6%, to $11,220.2 million, as of June 30, 2019, up from $9,539.5 million
at June 30, 2018. The loan and lease portfolio increased $949.8 million on a net basis, primarily from portfolio loan and lease
originations and purchases of $6,945.3 million less principal repayments and other adjustments of $5,995.5 million. Investment
securities increased $47.2 million primarily due to purchases, partially offset by repayments and sales. Total liabilities increased
by $1,568.2 million or 18.3%, to $10,147.2 million at June 30, 2019, up from $8,579.0 million at June 30, 2018. The increase in
total liabilities resulted primarily from growth in deposits of $997.8 million, consumer, broker-dealer and clearing payables of
$238.6 million, and securities loaned of $198.4 million.
Stockholders’ equity increased by $112.5 million, or 11.7%, to $1,073.1 million at June 30, 2019, up from $960.5 million
at June 30, 2018. The increase was the result of $155.1 million in net income for the fiscal year, $13.5 million vesting and issuance
of RSUs and stock-based compensation expense, partially offset by $56.4 million in stock repurchases, $0.6 million unrealized
gain in other comprehensive income, net of tax, and $0.3 million in dividends declared on preferred stock. On March 17, 2016,
the Board of Directors of the Company, authorized a program to repurchase up to $100.0 million of common stock. As of June 30,
2019, the Company has repurchased a total of $91.6 million, or 3,242,843 common shares at an average price of $28.25 per share
with $8.4 million remaining under the 2016 board authorized stock repurchase program. On August 2, 2019, the Board of Directors
of the Company authorized an additional program to repurchase up to $100 million of AX common stock. This share repurchase
authorization is in addition to the existing share repurchase plan and has similar characteristics.
58
ASSET QUALITY AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Non-performing loans and leases and foreclosed assets or “non-performing assets” consisted of the following:
(Dollars in thousands)
Non-performing assets:
Non-accrual loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Commercial real estate secured
Total non-accrual loans secured by real estate
Auto and recreational vehicle secured
Commercial & Industrial
Other
Total non-performing loans and leases
Foreclosed real estate
Repossessed vehicles
Total non-performing assets
2019
2018
At June 30,
2017
2016
2015
$
46,005
$
28,446
$
23,377
$
28,400
$
22,842
—
2,108
—
48,113
115
—
216
48,444
7,449
36
16
232
—
28,694
60
2,361
111
31,226
9,385
206
16
4,255
—
27,648
157
314
274
28,393
1,353
60
33
2,218
254
30,905
278
—
676
31,859
207
45
9
5,399
2,128
30,378
453
—
—
30,831
1,225
15
$
55,929
$
40,817
$
29,806
$
32,111
$
32,071
Total non-performing loans and leases as a percentage of total loans and
leases
Total non-performing assets as a percentage of total assets
0.51%
0.50%
0.37%
0.43%
0.38%
0.35%
0.50%
0.42%
0.62%
0.55%
Our non-performing assets increased to $55.9 million at June 30, 2019 from $40.8 million at June 30, 2018. The increase in
non-performing assets during the fiscal year ended June 30, 2019 was substantially comprised of an increase in non-performing loans
and leases of $17.2 million. Non-performing assets as a percentage of total assets increased to 0.50% at June 30, 2019 from 0.43% at
June 30, 2018. The increase in non-performing assets during the fiscal year ended June 30, 2018 compared to June 30, 2017 was
comprised of a increase in foreclosed real estate of $8.0 million and an increase in non-performing loans and leases of $2.8 million.
The increase in non-performing loans and leases is primarily the result of increased single family residential real estate secured
loans during the year ended June 30, 2019, partially offset by a decrease in non-performing commercial and industrial loans. The
increase in non-performing loans and leases as a percentage of total loans and leases is the result of a small number of well secured
real estate backed loans. Approximately 94.97% of the Bank’s non-performing loans and leases are single family first mortgages that
carry in aggregate a loan to original appraisal value of the underlying properties of 44.94%.
At June 30, 2019, our $46.0 million in single family non-performing loans represents 60 loans in 17 states ranging in amount
from $9,000 to $5.0 million. At June 30, 2018, our $28.4 million in single family non-performing loans represents 47 loans in 17 states
ranging in amount from $9,000 to $5.0 million. The Bank has already taken impairment charge-offs of $2.2 million on the non-
performing single family loans at June 30, 2019. Our $2.1 million in multifamily non-performing loans represents three loans in two
states at June 30, 2019, with impairment charge-offs taken in the amount of $0.0 million. At June 30, 2018 the $0.2 million of non-
performing multifamily loans represented one loan in one state, with impairment charge-offs taken in the amount of $0.1 million. At
June 30, 2018 and 2019, we had no non-performing commercial real estate loans.
The $115,000 in non-performing automobile and recreational vehicle (“RV”) loans represents 11 loans ranging in amount
from $1,000 to $26,000 at June 30, 2019. The $60,000 in non-performing automobile and RV loans represented 7 loans ranging in
amount from $1,000 to $21,000 at June 30, 2018. Foreclosed real estate of $7.4 million at June 30, 2019 represents three single family
properties. Foreclosed real estate of $9.4 million at June 30, 2018 represented three single family properties. All foreclosed real estate
is measured at the lower of carrying value or fair value less costs to sell. Repossessed vehicles of $36,000 includes eighteen vehicles
with fair values ranging in amount from $1 to $26,000 at June 30, 2019, compared to $206,000 at June 30, 2018, which includes twenty-
two vehicles with fair values ranging in amount from $1 to $28,000. Impaired loans are generally adjusted through charge-offs against
the allowance for loan and lease losses.
The $216,000 in non-performing other loans represents thirteen loans ranging in amount from $10,000 to $28,000 at June 30,
2019, compared to $111,000 at June 30, 2018 which includes seven loans ranging in amount from $9,000 to $23,000.
59
We have experienced growth in our non-performing single family mortgage loans over the last five years; however, we believe
that the write-downs taken as of June 30, 2019 on these non-performing loans and the low average LTVs on the balance of our single
family mortgage real estate loans in our portfolio make our future risk of loss better than other banks with significant exposure to real
estate loans. If average nationwide residential housing values decline or if nationwide unemployment increases, we are likely to
experience growth in the level of our non-performing loans and leases, foreclosed real estate and repossessed vehicles in future periods.
Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses in an amount that we believe is
sufficient to provide adequate protection against probable incurred losses in our loan and lease portfolio. We evaluate quarterly the
adequacy of the allowance based upon reviews of individual loans and leases, recent loss experience, current economic conditions,
risk characteristics of the various categories of loans and leases and other pertinent factors. The evaluation is inherently subjective, as
it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by
the provision for loan and lease losses, which is charged against current period operating results. The allowance is decreased by the
amount of charge-offs of loans and leases deemed uncollectible and increased by recoveries of loans and leases previously charged
off.
The allowance for loan and lease losses includes general reserves and may include specific reserves. Specific reserves may
be provided for impaired loans considered TDRs. All other impaired loans and leases are written down through charge-offs to their
realizable value. A loan or lease is measured for impairment generally two different ways. If the loan or lease is primarily dependent
upon the borrower to make payments, then impairment is calculated by comparing the present value of the expected future payments
discounted at the effective interest rate to the carrying value of the loan or lease. If the loan or lease is collateral dependent, the net
proceeds from the sale of the collateral is compared to the carrying value of the loan or lease. If the calculated amount is less than the
carrying value of the loan or lease, the loan or lease has impairment.
A general reserve is included in the allowance for loan and lease losses and is determined by adding the results of a quantitative
and a qualitative analysis to all other loans and leases not measured for impairment at the reporting date. The quantitative analysis
determines the Bank’s actual annual historic charge-off rates and applies the average historic rates to the outstanding loan and lease
balances in each pool, the product of which is the general reserve amount. The qualitative analysis considers one or more of the following
factors: changes in lending policies and procedures, changes in economic conditions, changes in the content of the portfolio, changes
in lending management, changes in the volume of delinquency rates, changes to the scope of the loan and lease review system, changes
in the underlying collateral of the loans and leases, changes in credit concentrations and any changes in the requirements to the credit
loss calculations. A loss rate is estimated and applied to those loans and leases affected by the qualitative factors.
The assessment of the adequacy of the Company’s 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 provides general loan loss reserves for its auto and RV loans based upon the borrower credit score at the time
of origination and the Company’s loss experience to date. The Company obtains updated credit scores for its auto and RV borrowers
approximately every six months. The updated credit score will result in a higher or lower general loan loss allowance depending on
the change in borrowers’ FICO scores and the resulting shift in loan balances among the five FICO bands from which the Company
measures and calculates its reserves. For the general loss reserve, the Company does not use individually updated credit scores or
valuations for the real estate collateralizing its real estate loans.
The allowance for loan and lease losses for the auto and RV loan portfolio at June 30, 2019 was determined by classifying
each outstanding loan according to the original FICO score and providing loss rates. The Company had $290,779 (dollars in thousands)
of auto and RV loan balances subject to general reserves as follows: FICO greater than or equal to 770: $129,836; 715 – 769: $106,966;
700 – 714: $29,491; 660 – 699: $22,169 and less than 660: $2,317.
The Company provides general loan loss reserves for mortgage loans 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 stratifying the outstanding unpaid
balance for each loan by the LTV and applying a loss rate. At June 30, 2019, the LTV groupings for each significant mortgage class
were as follows (dollars in thousands):
The Company had $4,232,817 of single family mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 60%: $2,453,398; 61% – 70%: $1,339,076; 71% – 80%: $439,268; and greater than 80%: $1,075.
The Company had $1,946,405 of multifamily mortgage portfolio loan balances subject to general reserves as follows: LTV
less than or equal to 55%: $999,879; 56% – 65%: $613,655; 66% – 75%: $322,364; 76% – 80%: $9,307 and greater than 80%: $1,200.
During the quarter ended March 31, 2011, the Company divided the LTV analysis into two classes, separating the purchased loans
from the loans underwritten directly by the Company.
60
Based on historical performance, the Company concluded that multifamily loans originated by the Bank require lower estimated
loss rates than multifamily loans purchased. In fiscal years 2002 through 2004 the Company originated $137 million of primarily 30-
year multifamily mortgage loans using the same basic underwriting criteria and accounting for 20%, 25% and 19% of the total average
balance of the loan portfolio for fiscal year 2004, 2003 and 2002, respectively. The Company intentionally slowed its multifamily and
single family origination volume in 2005 through 2009 based upon the overall loosening of credit standards by competitors and the
economic downturn. Since 2009, the economy has stabilized and competitive underwriting standards have strengthened allowing the
Company to resume its originations. Since 2014, our weighted average of multifamily loans is equal to 21.6% of the total loan portfolio.
For these reasons, the Company believes that its historical underwriting experience originating multifamily loans allows the Company
to use its historical loss rate as a reasonable indicator of risk. The historic loss or quantitative component of the Company’s general
loan loss allowance is supplemented with a qualitative factor including a volume-based adjustment. At June 30, 2019 and June 30,
2018, all of the qualitative components of the general loan loss allowance for multifamily loans accounted for 100% and 100% of the
total multifamily allowance, respectively.
The Bank originates and purchases mortgage loans with terms that may include repayments that are less than the repayments
for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit payments
that may be smaller than interest accruals. 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 Company’s Credit Committee monitors and performs reviews of interest only loans. Adverse trends reflected in
the Company’s delinquency statistics, grading and classification of interest only loans would be reported to management and the Board
of Directors. As of June 30, 2019, the Company had $1.3 billion of interest only loans and $1.6 million of option ARM mortgage loans.
Through June 30, 2019, the net amount of deferred interest on these loan types was not material to the financial position or operating
results of the Company.
The Company had $326,154 of commercial real estate loan balances subject to general reserves as follows: LTV less than or
equal to 50%: $168,706; 51% – 60%: $75,861; 61% – 70%: $59,442; 71% – 80%: $22,145 and greater than 80%: $0.
The Company’s commercial secured portfolio consists of business loans well-collateralized by real estate. The Company’s
other portfolio consists of receivables factoring for businesses and consumers. The Company allocates its allowance for loan and lease
losses 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.
We believe the weighted average LTV percentage at June 30, 2019 of 55.50% for our entire real estate loan portfolio is lower
and more conservative than most banks which has resulted, and is expected to continue to result in the future, in lower average mortgage
loan charge-offs when compared to the real estate loan portfolios of other comparable banks.
Seasonal fluctuations in the Other loan classification and its associated allowance for loan and lease losses primarily relate
to tax season H&R Block-related loan products. These products are generally short term in nature, in that they are intended to be repaid
within a few weeks or months of origination; if they are not repaid timely, they are generally charged off in their entirety at 120 days
delinquent, consistent with regulatory guidance for unsecured consumer loan products. The Company provides general loan loss reserves
for its H&R Block-related loans based upon prior years’ loss experience with consideration for current year loan performance. The
increase in provision for loan and lease losses in the Other loan classification from $17.1 million to $17.8 million for the fiscal year
ended June 30, 2018 and 2019, the increase in charge-offs from $14.6 million to $16.6 million for the fiscal year ended June 30, 2018
and 2019 and the increase in allowance transfers to held-for-sale from $2.3 million to $2.4 million for the fiscal year ended June 30,
2018 and 2019 were primarily due to the increase in Refund Advance loan fundings from $1.1 billion to $1.2 billion during the quarters
ended March 31, 2018 and March 31, 2019, respectively, as well as the Company’s continued funding of Emerald Advance loans.
During fiscal 2019 the Company was the sole provider of the Refund Advance product. The increase in provision for loan and lease
losses in the Other loan classification from $5.3 million to $17.1 million for the fiscal year ended June 30, 2017 and 2018, respectively,
and the increase in charge-offs from $3.5 to $14.6 million for the fiscal year ended June 30, 2017 and 2018 were primarily due to the
increase in Refund Advance loan fundings from $0.3 billion to $1.1 billion during the quarters ended March 31, 2017 and March 31,
2018, respectively, as well as the Company’s continued funding of Emerald Advance loans. The increase in provision for loan and
lease losses in the Other loan classification from $2.8 million to $5.3 million for the fiscal year ended June 30, 2016 and 2017,
respectively, and the increase in charge-offs from $0 to $3.5 million for the fiscal year ended June 30, 2016 and 2017 were primarily
due to the Company’s participation in the Refund Advance loan program during which $0.3 billion of loans were purchased during the
quarter ended March 31, 2017, as well as its continued funding of Emerald Advance loans. There is no long-term impact on the loan
and lease portfolio credit quality, because substantially all of the tax season H&R Block-related loan products are either collected,
charged-off or sold by the end of the Company’s fiscal year. While they do incur higher proportional default and charge-off rates than
the remainder of the Company’s loan and lease portfolio, these asset quality attributes are within expectations of the design of the
products.
61
The following table sets forth the changes in our allowance for loan and lease losses, by portfolio class for the dates indicated:
Single Family Real Estate Secured:
(Dollars in
thousands) Mortgage
Home
Equity
Warehouse
and Other
Multi-
family
Real
Estate
Secured
Commercial
Real Estate
Secured
Auto
and RV
Secured
Factoring
Commercial
& Industrial
Other
Total
Total
Allowance
as a % of
Total
Loans
$
7,959
$
134
$
1,259
$
3,785
$
1,035
$
812
$
279
$
3,048
$
62
$18,373
0.51%
6,305
(747)
147
(1)
(43)
32
620
—
—
922
(344)
—
224
(156)
—
288
(271)
124
13
—
—
2,834
(5)
11,200
—
—
— (1,561)
12
315
13,664
122
1,879
4,363
1,103
953
292
5,882
69
28,327
0.57%
Balance at
June 30,
2014
Provision for
loan losses
Charge-offs
Recoveries
Balance at
June 30,
2015
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2016
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2017
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2018
Provision for
loan and
lease losses
Charge-offs
Transfers to
held for sale
Recoveries
Balance at
June 30,
2019
5,040
(205)
(134)
(3)
—
38
23
(6)
(23)
—
25
19
(18)
(1)
—
14
14
—
167
18,666
2,308
(1,115)
—
113
19,972
632
(271)
—
35
20,368
1,317
(799)
—
396
806
—
—
—
(311)
(114)
—
—
(1,056)
(147)
—
982
854
(339)
—
147
2,685
3,938
882
1,615
(387)
—
—
—
323
—
—
377
110
(23)
—
39
990
(433)
—
207
2,298
4,638
1,008
2,379
69
(287)
—
—
372
—
—
—
(159)
1,390
—
—
—
(803)
—
212
(47)
1,748
2,800
9,700
—
—
—
245
156
—
—
—
401
44
—
—
—
—
—
(808)
— (2,727)
(2,727)
—
—
1,334
7,630
142
35,826
0.56%
2,251
5,316
11,061
— (3,502)
(5,096)
— (1,828)
(1,828)
—
108
869
9,881
236
40,832
0.55%
6,357
17,113
25,800
— (14,617)
(15,979)
— (2,307)
(2,307)
—
544
805
2,080
5,010
849
3,178
445
16,238
969
49,151
0.58%
(12)
4,247
(1,022)
—
—
11
—
—
—
—
—
109
195
—
—
—
2,605
(1,156)
—
191
(112)
2,286
17,846
27,350
—
—
—
(1,149)
(16,559)
(19,663)
— (2,356)
(2,356)
—
1,896
2,603
$
21,282
$
13
$
6,327
$
4,097
$
1,044
$ 4,818
$
333
$
17,375
$ 1,796
$57,085
0.60%
At June 30, 2019, the entire allowance for loan and lease losses for each portfolio class was calculated as a contingent
impairment (ASC 450, Contingencies for Gain and Loss). When specific loan and lease impairment analysis is performed under ASC
310-10, the impairment is either recorded as a charge-off to the loan and lease loss allowance or, if such loan is a TDR, the impairment
is recorded as a specific loan and lease loss allowance.
62
The following table sets forth our allowance for loan and lease losses by portfolio class:
2019
2018
At June 30,
2017
2016
2015
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
Amount of
Allowance
Amount of
Allowance
Amount of
Allowance
Loan
Category
as a %
of Total
Loans
$
21,282
45.3% $
20,368
49.3% $
19,972
52.4% $
18,666
57.5% $
13,664
13
6,327
—%
8.7%
14
2,080
—%
4.8%
19
2,298
—%
6.1%
23
2,685
—%
8.4%
122
1,879
59.6%
0.1%
7.7%
4,097
20.6%
5,010
21.1%
4,638
21.7%
3,938
21.5%
4,363
23.7%
1,044
4,818
333
17,375
1,796
3.4%
3.1%
1.0%
17.5%
0.4%
849
3,178
445
16,238
969
2.6%
2.5%
2.1%
17.4%
0.2%
1,008
2,379
401
9,881
236
2.2%
2.1%
2.1%
13.3%
0.1%
882
1,615
245
7,630
142
1.9%
1.2%
1.5%
8.0%
—%
1,103
953
292
5,882
69
1.2%
0.3%
2.4%
5.0%
—%
$
57,085
100.0% $
49,151
100.0% $
40,832
100.0% $
35,826
100.0% $
28,327
100.0%
(Dollars in thousands)
Single family real estate
secured:
Mortgage
Home equity
Warehouse & Other
Multifamily real estate
secured
Commercial real estate
secured
Auto & RV secured
Factoring
Commercial & Industrial
Other
Total
The Company’s allowance for loan and lease losses increased $7.9 million or 16.1% from June 30, 2018 to June 30, 2019. As
a percentage of the outstanding loan balance the Company’s loan and lease loss allowance was 0.60% at June 30, 2019 and 0.58% at
June 30, 2018. Provisions for loan loss were $27.4 million for fiscal 2019 and $25.8 million for fiscal 2018. The Company’s loan and
lease loss provisions for fiscal 2019 compared to 2018 increased by $1.6 million as a result of loan and lease portfolio growth and a
change in the loan and lease mix, including an increase in Refund Advance originations.
Charge-offs, net of recoveries, for fiscal 2019 increased $0.2 million, decreased $0.1 million and remained unchanged for
single family mortgage, multifamily and commercial real estate secured loans, respectively. Charge-offs, net of recoveries, for the auto
& RV portfolio increased $0.4 million for fiscal 2019. Charge-offs, net of recoveries, for the Other portfolio increased $0.6 million for
fiscal 2019. For fiscal 2018 charge-offs, net of recoveries, decreased $0.8 million, increased $0.4 million and increased $16,000 for
single family mortgage, multifamily and commercial real estate secured loans, respectively. Charge-offs, net of recoveries, for the
Other portfolio increased $10.7 million for fiscal 2018.
Between June 30, 2018 and 2019, the Bank’s total allowance for loan and lease losses as a proportion of the loan and lease
portfolio increased 2 basis points primarily due to a change in the loan and lease mix.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. For Axos Bank, our sources of liquidity include deposits, borrowings, payments and maturities of outstanding
loans, sales of loans, maturities or gains on sales of investment securities and other short-term investments. While scheduled loan
payments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally invest
excess funds in overnight deposits and other short-term interest-earning assets. We use cash generated through retail deposits, our
largest funding source, to offset the cash utilized in lending and investing activities. Our short-term interest-earning investment
securities are also used to provide liquidity for lending and other operational requirements. As an additional source of funds, we
have two credit agreements. Axos Bank can borrow up to 40% of its total assets from the FHLB. Borrowings are collateralized
by pledging certain mortgage loans and investment securities to the FHLB. Based on loans and securities pledged at June 30,
2019, we had a total borrowing availability of approximately $2.0 billion available immediately, which represents a fully
collateralized position, for advances from the FHLB for terms up to ten years. The Bank can also borrow from the discount window
at the FRB. FRB borrowings are collateralized by commercial loans, consumer loans and mortgage-backed securities pledged to
the FRB. Based on loans and securities pledged at June 30, 2019, we had a total borrowing capacity of approximately $1.6 billion,
all of which was available for use. At June 30, 2019, we also had $35.0 million in unsecured federal funds lines of credit with two
major banks under which there were no borrowings outstanding.
63
In the past, we have used long-term borrowings to fund our loans and to minimize our interest rate risk. Our future
borrowings will depend on the growth of our lending operations and our exposure to interest rate risk. We expect to continue to
use deposits and advances from the FHLB as the primary sources of funding our future asset growth.
Axos Clearing has a total of $155.0 million uncommitted secured lines of credit available for borrowing as needed. As
of June 30, 2019, there was $106.8 million outstanding. These credit facilities bear interest at rates based on the Federal Funds
rate and are due upon demand. The weighted average interest rate on the borrowings at June 30, 2019 was 3.84%.
Axos Clearing has a $35.0 million committed unsecured line of credit available for limited purpose borrowing. As of
June 30, 2019, there was none outstanding. This credit facility bears interest at rates based on the Federal Funds rate and are due
upon demand. The unsecured line of credit requires Axos Clearing operate in accordance with specific covenants surrounding
capital and debt ratios. Axos Clearing was in compliance of all covenants as of June 30, 2019.
In December 2004, we completed a transaction in which we formed a trust and issued $5.0 million of trust-preferred
securities. The net proceeds from the offering were used to purchase approximately $5.2 million of junior subordinated debentures
of our company with a stated maturity date of February 23, 2035. The debentures are the sole assets of the trust. The trust preferred
securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indenture. We have the right
to redeem the debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indenture plus
any accrued but unpaid interest through the redemption date. Interest accrues at the rate of three-month LIBOR plus 2.4%, for a
rate of 4.92% as of June 30, 2019, with interest paid quarterly starting in February 2005. We entered into this transaction to provide
additional regulatory capital to our Bank to support its growth.
In February 2015, we filed a shelf registration with the SEC which allows us to issue up to $350.0 million through the
sale of debt securities, common stock, preferred stock and warrants.
In March 2016, we completed the sale of $51.0 million aggregate principal amount of our 6.25% Subordinated Notes
due February 28, 2026 (the “Notes”). We received $51.0 million in gross proceeds as a part of this transaction, before the 3.15%
underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate of 6.25%
per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at the our discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions described
in the Indenture.
In March 2018, we filed a post-effective amendment to deregister all securities unsold under the February 2015 shelf
registration and subsequently, we filed a new shelf registration with the SEC which allows us to issue up to $350.0 million through
the sale of debt securities, common stock, preferred stock and warrants.
In January 2019, we 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. Interest accrues at a rate of 6.25% per annum. During
the fiscal year ended June 30, 2019, $0.1 million of subordinated loans were repaid.
Off-Balance Sheet Commitments. At June 30, 2019, we had commitments to originate loans with an aggregate outstanding
principal balance of $752.8 million, commitments to sell loans with an aggregate outstanding principal balance at the time of sale
of $94.2 million, and no commitments to purchase loans, investment securities or any other unused lines of credit. See Item 3.
Legal Proceedings for further information on pending litigation in which we are involved.
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 June 30,
2019 totaled $1.3 billion. 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. We believe, however, based on past experience,
that 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.
64
The following table presents our contractual obligations for long-term debt, time deposits, and operating leases by payment
date:
At June 30, 2019
Payments Due by Period
(Dollars in thousands)
Long-term debt obligations1, 2
Time deposits2
Operating lease obligations3
Total
Total
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
$
$
559,832
$
302,104
$
127,629
$
35,486
$
2,497,083
91,834
1,347,281
8,634
490,890
17,411
179,278
18,288
3,148,749
$
1,658,019
$
635,930
$
233,052
$
94,613
479,634
47,501
621,748
1 Long-term debt includes advances from the FHLB and Subordinated notes and debentures.
2 Amounts include principal and interest due to recipient.
3 Payments are for the lease of real property.
Capital 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 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 June 30, 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 June 30, 2019, our Company and Bank met all the capital adequacy requirements to which they
were subject to and were “well capitalized” under the regulatory framework for prompt corrective action. Management believes
that no conditions or events have occurred since June 30, 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.
65
The Bank’s and Company’s capital amounts, capital ratios and requirements were as follows:
Axos Financial, Inc.
Axos Bank
June 30, 2019
June 30, 2018
June 30, 2019
June 30, 2018
“Well
Capitalized”
Ratio
Minimum
Capital
Ratio
(Dollars in thousands)
Regulatory Capital:
Tier 1
Common equity tier 1
Total capital (to risk-weighted assets)
$ 1,053,855
$ 993,650
$
$
938,143
$ 893,338
933,080
$ 888,275
$
$
$
932,366
$ 837,985
932,366
$ 837,985
989,678
$ 887,297
Assets:
Average adjusted
Total risk-weighted
Regulatory Capital Ratios:
Tier 1 leverage (core) capital to
adjusted average assets
Common equity tier 1 capital (to risk-
weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
$10,717,011
$9,450,894
$10,124,487
$9,509,891
$ 8,161,588
$6,694,963
$ 7,679,738
$6,686,634
8.75%
9.45%
9.21%
8.88%
5.00%
4.00%
11.43%
13.27%
12.14%
12.53%
6.50%
4.50%
11.49%
12.91%
13.34%
14.84%
12.14%
12.89%
12.53%
13.27%
8.00%
10.00%
6.00%
8.00%
Beginning January 1, 2016, Basel III implements 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 June 30,
2019, the Company and Bank are in compliance with the capital conservation buffer requirement, which increases the three risk-
based capital ratios 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 ratios will be 7.0%, 8.5% and 10.5%, respectively.
Securities Business
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. On June 30, 2019 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 June 30, 2019, the net capital position of Axos Clearing was as follows:
(Dollars in thousands)
Net capital
Less: required net capital
Excess capital
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
Axos Clearing
21,669
3,811
17,858
11.37%
12,142
$
$
$
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 June 30, 2019, the Company had a
deposit requirement of $198.3 million and maintained a deposit of $204.7 million.
66
Certain broker-dealers have chosen to maintain brokerage customer accounts at the 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 June 30, 2019, the Company had a deposit requirement
of $3.4 million and maintained a deposit of $1.7 million. On July 1, 2019, Axos Clearing made a deposit to satisfy the deposit
requirement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the sensitivity of income and capital to changes in interest rates, foreign currency exchange
rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest
rate risk. Changes in interest rates can have a variety of effects on our business. In particular, changes in interest rates affect our
net interest income, net interest margin, net income, the value of our securities portfolio, the volume of loans originated, and the
amount of gain or loss on the sale of our loans.
We are exposed to different types of interest rate risk. These risks include lag, repricing, basis, prepayment and lifetime
cap risk, each of which is described in further detail below:
Lag/Repricing Risk. Lag risk results from the inherent timing difference between the repricing of our adjustable rate
assets and our liabilities. Repricing risk is caused by the mismatch of repricing methods between interest-earning assets and interest-
bearing liabilities. Lag/repricing risk can produce short-term volatility in our net interest income during periods of interest rate
movements even though the effect of this lag generally balances out over time. One example of lag risk is the repricing of assets
indexed to the monthly treasury average (“MTA”). The MTA index is based on a moving average of rates outstanding during the
previous 12 months. A sharp movement in interest rates in a month will not be fully reflected in the index for 12 months resulting
in a lag in the repricing of our loans and securities based on this index. We expect more of our interest-earning liabilities will
mature or reprice within one year than will our interest-bearing assets, resulting in a one year negative interest rate sensitivity gap
(the difference between our interest rate sensitive assets maturing or repricing within one year and our interest rate sensitive
liabilities maturing or repricing within one year, expressed as a percentage of total interest-earning assets). In a rising interest rate
environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a
greater increase in its yield on assets relative to its cost on liabilities, and thus an increase in its net interest income.
Basis Risk. Basis risk occurs when assets and liabilities have similar repricing timing but repricing is based on different
market interest rate indices. Our adjustable rate loans that reprice are directly tied to indices based upon U.S. Treasury rates,
LIBOR, Eleventh District Cost of Funds and the Prime rate. Our deposit rates are not directly tied to these same indices. Therefore,
if deposit interest rates rise faster than the adjustable rate loan indices and there are no other changes in our asset/liability mix,
our net interest income will likely decline due to basis risk.
Prepayment Risk. Prepayment risk results from the right of customers to pay their loans prior to maturity. Generally,
loan prepayments increase in falling interest rate environments and decrease in rising interest rate environments. In addition,
prepayment risk results from the right of customers to withdraw their time deposits before maturity. Generally, early withdrawals
of time deposits increase during rising interest rate environments and decrease in falling interest rate environments. When estimating
the future performance of our assets and liabilities, we make assumptions as to when and how much of our loans and deposits will
be prepaid. If the assumptions prove to be incorrect, the asset or liability may perform differently than expected. In the last three
fiscal years, the Bank has experienced high rates of loan prepayments due to historically low interest rates and a low LTV loan
portfolio.
Lifetime Cap Risk. Our adjustable rate loans have lifetime interest rate caps. In periods of rising interest rates, it is possible
for the fully indexed interest rate (index rate plus the margin) to exceed the lifetime interest rate cap. This feature prevents the
loan from repricing to a level that exceeds the cap’s specified interest rate, thus adversely affecting net interest income in periods
of relatively high interest rates. On a weighted average basis, our adjustable rate loans at June 30, 2019 had lifetime rate caps that
were 610 basis points greater than their current stated note rates. If market rates rise by more than the interest rate cap, we will
not be able to increase these loan rates above the interest rate cap.
The principal objective of our asset/liability management is to manage the sensitivity of Market Value of Equity (“MVE”)
to changing interest rates. Asset/liability management is governed by policies reviewed and approved annually by our board of
directors. Our board of directors has delegated the responsibility to oversee the administration of these policies to the Bank’s asset/
liability committee (“ALCO”). The interest rate risk strategy currently deployed by ALCO is to primarily use “natural” balance
sheet hedging. ALCO makes adjustments to the overall MVE sensitivity by recommending investment and borrowing strategies.
The management team then executes the recommended strategy by increasing or decreasing the duration of the investments and
borrowings, resulting in the appropriate level of market risk the board wants to maintain. Other examples of ALCO policies
designed to reduce our interest rate risk include limiting the premiums paid to purchase mortgage loans or mortgage-backed
67
securities. This policy addresses mortgage prepayment risk by capping the yield loss from an unexpected high level of mortgage
loan prepayments. At least once a quarter, ALCO members report to our board of directors the status of our interest rate risk profile.
We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing
liabilities that mature 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 result in 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 mature
at a faster rate than one with a negative gap, which would tend to reduce the growth in its net interest income.
Banking Business
The following table sets forth the amounts of interest earning assets and interest bearing liabilities that were outstanding
at June 30, 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
Six Months or
Less
Over Six
Months Through
One Year
June 30, 2019
Over One
Year
through
Five Years
Over Five
Years
$
642,908
$
$
— $
—
$
(Dollars in thousands)
Interest-earning assets:
Cash and cash equivalents
Mortgage-backed and other investment securities1
Stock of the FHLB, at cost
Loans, net of allowance for loan and lease losses2
Loans held for sale
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits3
Advances from the FHLB
Other borrowings
Total interest-bearing liabilities
Other non-interest-bearing liabilities
Stockholders’ equity
Total liabilities and equity
Net interest rate sensitivity gap
Cumulative gap
197,094
17,250
4,473,342
38,060
5,368,654
—
5,368,654
1,158,509
261,000
28,830
—
541
—
9,055
—
1,228,965
3,673,261
—
—
1,229,506
3,682,316
$
$
—
1,229,506
5,323,226
25,000
—
1,448,339
5,348,226
—
—
—
—
1,448,339
3,920,315
3,920,315
$
$
$
5,348,226
(4,118,720)
(198,405)
—
3,682,316
662,351
142,500
—
804,851
—
—
804,851
2,877,465
2,679,060
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
19,138
—
6,546
—
25,684
—
25,684
422,723
30,000
57,093
509,816
—
—
509,816
(484,132)
2,194,928
$
$
$
$
$
Total
642,908
225,828
17,250
9,382,114
38,060
10,306,160
260,653
10,566,813
7,566,809
458,500
85,923
8,111,232
1,445,904
1,009,677
10,566,813
2,194,928
2,194,928
21.30%
21.30%
Net interest rate sensitivity gap—as a % of interest-
earning assets
Cumulative gap—as a % of cumulative interest-
earning assets
38.04%
(39.96)%
27.92%
(4.70)%
38.04%
(1.93)%
25.99%
21.30 %
1 Comprised of U.S. government securities, mortgage-backed securities and other securities, which are classified as trading and available-for-sale. The table
reflects contractual repricing dates.
2 The table reflects either contractual repricing dates, or maturities.
3 The table assumes that the principal balances for demand deposit and savings accounts will reprice in the first year.
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
68
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.
Our net interest margin for the fiscal year ended June 30, 2019 remained flat at 4.14% compared to the fiscal year ended
June 30, 2018. During the fiscal year ended June 30, 2019, interest income earned on loans and on mortgage backed securities
was influenced by the amortization of premiums and discounts on purchases, and interest expense paid on deposits and new
borrowings were influenced by the Fed Funds rate.
The following table indicates the sensitivity of net interest income movements to parallel instantaneous shocks in interest
rates for the 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:
(Dollars in thousands)
Up 200 basis points
Base
Down 200 basis points
As of June 30, 2019
First 12 Months
Next 12 Months
Net Interest Income
Percentage Change
from Base
Net Interest Income
Percentage Change
from Base
$
$
$
403,391
392,343
379,278
2.8 % $
— % $
(3.3)% $
395,181
393,690
388,170
0.4 %
— %
(1.4)%
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 MVE. We analyze the MVE sensitivity to an immediate parallel and sustained shift in interest rates derived
from current U.S. 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 the falling interest rate scenarios, we used a 100 basis points decrease due to
limitations inherent in the current rate environment.
The following table indicates the sensitivity of MVE to the interest rate movement as described above:
(Dollars in thousands)
Up 300 basis points
Up 200 basis points
Up 100 basis points
Base
Down 100 basis points
As of June 30, 2019
Market Value of Equity
Percentage
Change from Base
MVE as a
Percentage of Assets
$
$
$
$
$
1,242,360
1,197,416
1,094,106
949,817
809,450
30.8 %
26.1 %
15.2 %
— %
(14.8)%
11.8%
11.2%
10.2%
8.7%
7.4%
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, the results included in the tables
above 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 changes 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.
69
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 June 30, 2019, Axos Clearing held municipal obligations, these positions were classified as held for sale securities
and had maturities greater than 10 years.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and
Qualitative Disclosures About Market Risk.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following financial statements are filed as a part of this report beginning on page F-1:
DESCRIPTION
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at June 30, 2019 and 2018
Consolidated Statements of Income for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended June 30, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
PAGE
F-1
F-3
F-4
F-5
F-6
F-7
F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, under supervision and with the participation of
the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures,
as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of June 30, 2019, the disclosure controls and procedures were effective to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Management’s Report On Internal Control Over Financial Reporting. Management is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(1)
promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal
executive and principal financial officers and effected by the board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of our assets;
70
•
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2019. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control—Integrated Framework (2013 version). The Company has excluded the acquisitions of COR
Clearing, Inc. and WiseBanyan, Inc. representing approximately: (i) less than 6% total assets; (ii) 2% of net interest income; (iii)
14% of non-interest income; and (iv) less than 1% of net income for the year ended June 30, 2019, from the scope of management’s
report on internal control over financial reporting. Based on this assessment, management has determined that our internal control
over financial reporting as of June 30, 2019 is effective.
BDO USA, LLP has audited the effectiveness of the company’s internal control over financial reporting as of June 30,
2019, as stated in their report dated August 27, 2019.
Changes in Internal Control Over Financial Reporting. During the fiscal year ended June 30, 2019, the Company
completed acquisitions of Axos Securities Business, which are being integrated into the Company’s operations. As part of the
integration activities, management applied controls and procedures to the Axos Securities Business and enhanced Company-wide
controls to reflect the risks inherent in the Axos Securities Business. There were no other changes in the Company’s internal control
over financial reporting during the the quarter ended June 30, 2019 (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
71
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Axos Financial, Inc.
Las Vegas, Nevada
Opinion on Internal Control over Financial Reporting
We have audited Axos Financial, Inc.’s (the “Company’s”) internal control over financial reporting as of June 30, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of June 30, 2019 and 2018, the related consolidated statements
of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30,
2019, and the related notes and our report dated August 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As indicated in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the
internal controls of the 2019 acquisitions, which are included in the consolidated balance sheet of the Company as of June 30,
2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year
then ended. These acquisitions combined constituted approximately 5.75% of total assets as of June 30, 2019, and approximately
1.85% of revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting
of the 2019 acquisitions because of the timing of these acquisitions. Our audit of internal control over financial reporting of the
Company also did not include an evaluation of the internal control over financial reporting of the 2019 acquisitions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
72
/s/ BDO USA, LLP
San Diego, California
August 27, 2019
73
ITEM 9B. OTHER INFORMATION
None.
74
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item with respect to directors and executive officers is incorporated herein by reference
to the information contained in the section captioned “Election of Directors” and “Executive Compensation” in our definitive
Proxy Statement for the 2019 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after June 30, 2019 (the “Proxy Statement”).
The information with respect to our audit committee and our audit committee financial expert is incorporated herein by
reference to the information contained in the section captioned “Committees of the Board of Directors” in the Proxy Statement.
The information with respect to our Code of Ethics is incorporated herein by reference to the information contained in the section
captioned “Corporate Governance—Code of Business Conduct” in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to the information contained in the section
captioned “Executive Compensation” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information called for by this item is incorporated herein by reference to the information contained in the sections
captioned “Principal Holders of Common Stock” and “Security Ownership of Directors and Named Executive Officers” in the
Proxy Statement.
Information regarding securities authorized for issuance under equity compensation plans is disclosed above in Item 5,
which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item is incorporated herein by reference to the information contained in the sections
captioned “Related Transactions And Other Matters” and “Corporate Governance—Board of Directors Composition and
Independence” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item is incorporated herein by reference to the information contained in the section
captioned “Independent Registered Public Accounting Firm” in the Proxy Statement.
75
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1).
Financial Statements: See Part II, Item 8—Financial Statements and Supplementary data.
(a)(2).
(a)(3).
Exhibit
Number
2.1
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
3.2
4.1
4.2
4.3
4.4
Financial Statement Schedules: All financial statement schedules have been omitted as they are either not required, not applicable, or the
information is otherwise included.
Exhibits:
Description
Incorporated By Reference to
Agreement and Plan of Merger, by and among Axos
Clearing, LLC, Axos Clarity MergeCo., Inc., Cor
Securities Holdings, Inc., the Seller Parties thereto and
the Holder Representative, dated September 28, 2018
Exhibit 2.1 to the Current Form 8-K filed on October 1, 2018.
Certificate of Incorporation of the Company, filed with
the Delaware Secretary of State on July 6, 1999
Exhibit 3.1 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on August 19, 1999
Exhibit 3.5 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on February 25, 2003
Exhibit 3.6 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on January 25, 2005
Exhibit 3.2 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Certificate Eliminating Reference to a Series of Shares
from the Certificate of Incorporation of the Company
Exhibit 3.3 to the Current Report on Form 8-K filed on September 7, 2011.
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on October 25, 2013
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on November 5, 2015
Certificate of Amendment of Certificate of
Incorporation of the Company, filed with the Delaware
Secretary of State on September 11, 2018
Exhibit 3.1 to the Current Report on Form 8-K filed on October 28, 2013.
Exhibit 3.1 to the Current Report on Form 8-K filed on November 6, 2015.
Exhibit 3.1 to the Current Report on Form 8-K filed on September 11, 2018.
By-laws
Exhibit 3.4 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
Certificate of Designation-Series A – 6% Cumulative
Nonparticipating Perpetual Preferred Stock,
Convertible through January 1, 2009
Exhibit 3.3 to the Registration Statement on Form S-1/A (File No. 333-121329) filed
on January 26, 2005.
Subordinated Indenture, dated as of March 3, 2016,
between BofI Holding, Inc. and U.S. Bank National
Association, as trustee.
First Supplemental Indenture, dated as of March 3,
2016, between BofI Holding, Inc. and U.S. Bank
National Association, as trustee.
Exhibit 4.1 to the Current Report on Form 8-K filed on February 26, 2016.
Exhibit 4.2 to the Current Report on Form 8-K filed on February 26, 2016.
Global Note to represent the 6.25% Subordinated
Notes due February 28, 2026 of BofI Holding, Inc.
Exhibit 4.3 to the Current Report on Form 8-K filed on February 26, 2016.
76
Exhibit
Number
4.5
4.6
4.7
10.1
10.2*
10.3*
10.4*
10.5*
10.6
10.7*
Description
Incorporated By Reference to
Amendment No.1 dated March 24, 2016 to First
Supplemental Indenture, dated as of March 3, 2016,
between BofI Holding, Inc. and U.S. Bank National
Association, as trustee.
Exhibit 4.1 to the Current Report on Form 8-K filed on March 24, 2016.
Form of Common Stock Certificate of the Company
Exhibit 4.1 to the Current Report on Form 8-K filed on September 12, 2018.
Description of Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934
Form of Indemnification Agreement between the
Company and each of its executive officers and
directors
Filed herewith.
Exhibit 10.1 to the Registration Statement on Form S-1/A (File No. 333-121329)
filed on February 24, 2005.
Amended and Restated 1999 Stock Option Plan, as
amended
Exhibit 10.2 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
2004 Stock Incentive Plan, as amended November 20,
2007
Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
2004 Employee Stock Purchase Plan, including forms
of agreements thereunder
Exhibit 10.4 to the Registration Statement on Form S-1 (File No. 333-121329) filed
on December 16, 2004.
First Amended Employment Agreement, dated April
22, 2010, between Bank of Internet USA and Andrew
J. Micheletti.
Exhibit 99.1 to the Current Report on Form 8-K filed on April 28, 2010.
Amended and Restated Declaration of Trust of BofI
Trust I dated December 16, 2004
Exhibit 10.10 to the Registration Statement on Form S-1/A (File No. 333-121329)
filed on January 26, 2005.
Amended and Restated Employment Agreement, dated
May 26, 2011, between the Company and subsidiaries,
and Gregory Garrabrants
Exhibit 99.1 to the Current Report on Form 8-K filed on May 27, 2011.
10.7.1*
Second Amended and Restated Employment
Agreement, dated June 30, 2017, between the
Company and subsidiaries, and Gregory Garrabrants
Exhibit 99.1 to the Current Report on Form 8-K filed on July 7, 2017.
10.8
Lease Agreement dated December 5, 2011 between La
Jolla Village, LLC and the Company
Exhibit 99.1 to the Current Report on Form 8-K filed on December 9, 2011.
10.9*
BofI Holding, Inc. 2014 Stock Incentive Plan
10.10*
10.11*
10.12*
Amendment to BofI Holding, Inc. 2014 Stock
Incentive Plan
Description of Amendment to Employment Letter
between Eshel Bar-Adon and BofI Federal Bank
Description of Amendment to Employment Letter
between Brian Swanson and BofI Federal Bank
Appendix A to the Definitive Proxy Statement on Schedule 14A, filed on September
8, 2014.
Exhibit 10.10 to the Annual Report on Form 10-K filed on August 24, 2017.
Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on May 6, 2014.
Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on May 6, 2014.
10.12.1*
Description of Amendment to Employment Letter
between Brian Swanson and BofI Federal Bank
Exhibits 99.1 and 99.2 to the Current Report on Form 8-K filed on January 15, 2015.
10.13
Program Management Agreement, dated August 31,
2015, by and among BofI Federal Bank, H&R Block,
Inc. and Emerald Financial Services, LLC
Exhibit 10.1 (Program Management Agreement) to Form 8-K filed by H&R Block,
Inc. on September 1, 2015. ***
10.13.1
Emerald Advance Receivables Participation
Agreement, dated August 31, 2015, by and among
BofI Federal Bank, H&R Block, Inc., Emerald
Financial Services, LLC and HRB Participant I, LLC
Exhibit 10.2 to the Current Report on Form 8-K filed by H&R Block, Inc. on
September 1, 2015. ***
10.13.2
Guaranty Agreement, dated August 31, 2015, by and
among BofI Federal Bank and H&R Block, Inc.
Exhibit 10.3 to the Current Report on Form 8-K filed by H&R Block, Inc. on
September 1, 2015. ***
77
Exhibit
Number
10.14*
10.15
10.16
Description
Incorporated By Reference to
Description of Amendment to Employment Letter
between Thomas Constantine and BofI Federal Bank
Exhibit 10.16 to the Annual Report on Form 10-K filed on August 26, 2015.
Office Space Lease Between Pacifica Tower LLC and
BofI Holding, Inc.
Exhibit 10.1 to the Current Report on Form 8-K filed on May 18, 2018.
Sixth Amendment to Office Space Lease Between
4350 La Jolla Village LLC and BofI Holding, Inc.
Exhibit 10.2 to the Current Report on Form 8-K filed on May 18, 2018.
10.17
Purchase Agreement between Nationwide Bank and
BofI Federal Bank, dated August 3, 2018
Exhibit 99.1 to the Current Report on Form 8-K filed on August 3, 2018
Guaranty of Payment and Performance of Agreement
and Plan of Merger, executed by the Company in favor
of Cor Securities Holdings, Inc. on September 28,
2018
Subsidiaries of the Company consist of Axos Bank
(federal charter), BofI Trust I (Delaware charter),
Axos Clearing LLC (Delaware), and Axos Invest, Inc.
(Delaware)
Exhibit 10.1 to the Current Report on Form 8-K filed on October 1, 2018
Consent of BDO USA, LLP, Independent Registered
Public Accounting Firm
Filed herewith.
Power of Attorney, incorporated by reference to the
signature page to this report.
Signature page to this report.
Chief Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith.
Filed herewith.
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.
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.
10.18
21.1
23.1
24.1
31.1
31.2
32.1
32.2
101.INS**
XBRL Instance Document
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tags are embedded within the inline XBRL document.
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*Indicates management contract or compensatory plan, contract or arrangement.
**XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
***Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the Securities and
Exchange Commission upon request copies of any omitted schedule. A list of the omitted schedules and exhibits is set forth on the final page of the exhibit, and
is incorporated herein by reference.
78
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 27, 2019
AXOS FINANCIAL, INC.
By:
/s/ Gregory Garrabrants
Gregory Garrabrants
President and Chief Executive Officer
79
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Gregory Garrabrants and Andrew J. Micheletti, jointly and severally, his or her attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant as of August 27, 2019 in the capacities indicated:
Signature
Title
/s/ Gregory Garrabrants
Gregory Garrabrants
/s/ Andrew J. Micheletti
Andrew J. Micheletti
/s/ Derrick K. Walsh
Derrick K. Walsh
/s/ Paul Grinberg
Paul Grinberg
/s/ Nicholas A. Mosich
Nicholas A. Mosich
/s/ James S. Argalas
James S. Argalas
/s/ J. Brandon Black
J. Brandon Black
/s/ Gary Burke
Gary Burke
/s/ James Court
James Court
/s/ Edward J. Ratinoff
Edward J. Ratinoff
/s/ Uzair Dada
Uzair Dada
Chief Executive Officer (Principal Executive Officer), Director
Chief Financial Officer (Principal Financial Officer)
Chief Accounting Officer (Principal Accounting Officer)
Chairman
Vice Chairman
Director
Director
Director
Director
Director
Director
80
AXOS FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2019 and 2018
Consolidated Statements of Income for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended June 30, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
PAGE
F-1
F-3
F-4
F-5
F-6
F-7
F-9
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Axos Financial, Inc.
Las Vegas, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Axos Financial, Inc. (the “Company”) as of June 30, 2019 and
2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the
three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period
ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated August 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on
the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for loan and lease losses
As described in Notes 1 and 5 to the Company’s consolidated financial statements, the Company has a gross loan and lease portfolio
of $9.4 billion and related allowance for loan and lease losses of $57.1 million as of June 30, 2019. The Company’s allowance for
loan and lease losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the
credit quality and the estimation of inherent losses within the loan and lease portfolio. The allowance for loan and lease losses
includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not
measured for impairment at the reporting date.
In calculating the allowance for loan and lease losses, the Company considers relevant credit quality indicators for each loan and
lease segment, stratifies loans and leases by risk rating, and estimates losses for each loan and lease type based upon their nature
and risk profile. This process requires significant management judgment in the review of the loan and lease portfolio and assignment
of risk ratings based upon the characteristics of loans and leases. In addition, estimation of losses inherent within the portfolio
requires significant management judgment, particularly where the Company has not incurred sufficient historical losses and has
utilized observable peer data in forming its estimate. Auditing these complex judgments and assumptions involves especially
challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including
F-1
the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Testing the design and operating effectiveness of controls relating to management’s review of loans and leases, assignment
of risk ratings, consistency of application of accounting policies and appropriateness of utilization of observable peer data
when there are limited incurred historical losses.
• Evaluating the reasonableness of assumptions and sources of data used by management in forming the qualitative loss factors
by performing retrospective review of historic loan and lease loss experience and analyzing historical data used in developing
the assumptions, including assessment of whether there were additional qualitative considerations relevant to the portfolio.
• Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing
whether such inputs and factors were relevant, reliable, and reasonable for the purpose used.
• Testing the appropriateness of the Company’s loan rating policy and the consistency of its application.
• Testing the mathematical accuracy and computation of the allowance for loan and lease losses by re-performing or
independently calculating significant elements of the allowance based on relevant source documents.
Accounting for Acquisitions
As described in Notes 2 and 9 to the Company’s consolidated financial statements, the Company had two significant acquisitions
during the year ended June 30, 2019: (i) the acquisition of approximately $2.4 billion in deposits and a bank branch from Nationwide
Bank, and (ii) the acquisition of Cor Securities Holdings, Inc. for a purchase price of approximately $88.4 million. As a result of
these acquisitions, management was required to evaluate whether the assets and liabilities acquired constituted a business and
determine estimated fair values of the assets and liabilities at the acquisition date.
The Company’s determination of fair values of certain identifiable tangible and intangible assets and the determination of whether
the acquired assets and liabilities constitute a business is complex and included the following areas of management’s judgments:
(i) application of accounting guidance related to business combinations, (ii) significant unobservable inputs and assumptions
utilized by management in determining the fair values of certain identifiable tangible and intangible assets, and (iii) changes in
certain assumptions could have a significant impact on the fair values of the identifiable tangible and intangible assets acquired.
Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to
address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Assessing management’s application of accounting guidance related to business combinations and management’s
determination of whether a transaction was an acquisition of a business as defined within the ASC 805 framework.
• Assessing the reasonableness of significant underlying assumptions through (i) evaluating historical performance of the target
entity, (ii) assessing performance against market trends, industry metrics, and guideline companies, and (iii) performing
sensitivity analysis and evaluating potential effect of changes in certain assumptions.
• Utilizing BDO valuation specialist to assist in assessing complex assumptions incorporated into the various valuation models,
including performing sensitivity analysis around the discounted cash flow or net asset value assumptions and terminal value
assumptions.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2013.
San Diego, California
August 27, 2019
F-2
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par and stated value)
ASSETS
Cash and due from banks
Cash segregated for regulatory purposes
Federal funds sold
Total cash, cash equivalents, cash segregated, and federal funds sold
Securities - available for sale
Stock of regulatory agencies
Loans held for sale, carried at fair value
Loans held for sale, carried at lower of cost or fair value
Loans and leases—net of allowance of $57,085 as of June 2019 and $49,151 as of June
2018
Mortgage servicing rights, carried at fair value
Other real estate owned and repossessed vehicles
Securities borrowed
Customer, broker-dealer and clearing receivables
Goodwill and other intangible assets—net
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Advances from the Federal Home Loan Bank
Borrowings, subordinated notes and debentures
Securities loaned
Customer, broker-dealer and clearing payables
Accounts payable and accrued liabilities and other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS’ EQUITY:
At June 30,
2019
2018
$
$
$
$
511,125
346,143
100
857,368
227,513
20,276
33,260
4,800
9,382,124
9,784
7,485
144,706
203,192
134,893
194,837
$ 11,220,238
$
1,441,930
7,541,243
8,983,173
458,500
168,929
198,356
238,604
99,626
10,147,188
622,750
—
100
622,850
180,305
17,250
35,077
2,686
8,432,289
10,752
9,591
—
—
67,788
160,916
9,539,504
1,015,355
6,969,995
7,985,350
457,000
54,552
—
—
82,089
8,578,991
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 June 2019 and June 2018
Common stock—$0.01 par value; 150,000,000 shares authorized, 66,563,922 shares issued
and 61,128,817 shares outstanding as of June 2019, 65,796,060 shares issued and
62,688,064 shares outstanding as of June 2018
Additional paid-in capital
Accumulated other comprehensive income (loss)—net of tax
Retained earnings
Treasury stock, at cost; 5,435,105 shares as of June 2019 and 3,107,996 shares as of June
2018
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
5,063
5,063
666
389,945
16
826,170
658
366,515
(613)
671,348
(148,810)
1,073,050
$ 11,220,238
$
(82,458)
960,513
9,539,504
See accompanying notes to the consolidated financial statements.
F-3
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except earnings per share)
INTEREST AND DIVIDEND INCOME:
Loans and leases, including fees
Securities borrowed and customer receivables
Investments
Total interest and dividend income
INTEREST EXPENSE:
Deposits
Advances from the Federal Home Loan Bank
Securities loaned
Other borrowings
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income, after provision for loan and lease losses
NON-INTEREST INCOME:
Realized gain (loss) on sale of securities
Other-than-temporary loss on securities:
Total impairment losses
Loss (gain) recognized in other comprehensive income
Net impairment loss recognized in earnings
Fair value gain (loss) on trading securities
Total unrealized loss on securities
Prepayment penalty fee income
Gain on sale - other
Mortgage banking income
Broker-dealer fee income
Banking and service fees
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and related costs
Data processing and internet
Advertising and promotional
Depreciation and amortization
Occupancy and equipment
Broker-dealer clearing charges
Professional services
FDIC and regulatory fees
Real estate owned and repossessed vehicles
General and administrative expense
Total non-interest expense
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME
NET INCOME ATTRIBUTABLE TO COMMON STOCK
COMPREHENSIVE INCOME
Basic earnings per share
Diluted earnings per share
Year Ended June 30,
2018
2017
2019
$
525,317
8,746
30,824
564,887
117,080
32,834
748
5,620
156,282
408,605
27,350
381,255
$
446,991
—
28,083
475,074
79,851
22,848
—
3,881
106,580
368,494
25,800
342,694
358,849
—
28,437
387,286
56,494
12,403
—
5,162
74,059
313,227
11,061
302,166
709
(18)
3,920
(1,666)
845
(821)
—
(821)
5,851
6,160
5,267
11,737
53,854
82,757
127,433
24,150
14,710
16,471
8,571
2,822
11,916
9,005
913
35,215
251,206
212,806
57,675
155,131
154,822
155,760
2.50
2.48
$
$
$
$
$
(6,271)
6,115
(156)
—
(156)
3,862
5,734
13,755
—
47,764
70,941
100,975
17,400
15,500
8,574
6,063
—
5,280
4,860
260
15,024
173,936
239,699
87,288
152,411
152,102
151,311
2.41
2.37
$
$
$
$
$
(10,937)
8,973
(1,964)
743
(1,221)
4,574
4,487
14,284
—
42,088
68,132
81,821
13,323
9,367
6,094
5,612
—
4,980
4,330
498
11,580
137,605
232,693
97,953
134,740
134,431
142,531
2.11
2.10
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-4
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
NET INCOME
Net unrealized gain (loss) from available-for-sale securities, net of tax expense (benefit) of $562,
$(2,449), and $3,363 for the years ended June 30, 2019, 2018 and 2017, respectively.
Other-than-temporary impairment on securities recognized in other comprehensive income, net of
tax expense (benefit) of $(251), $1,918 and $3,195 for the years ended June 30, 2019, 2018 and
2017, respectively.
Reclassification of net (gain) loss from available-for-sale securities included in income, net of tax
expense (benefit) of $191, $(104) and $1,536 for the years ended June 30, 2019, 2018 and 2017,
respectively.
Other comprehensive income (loss)
Comprehensive income
Year Ended June 30,
2019
2018
2017
$
155,131
$
152,411
$
134,740
1,741
(5,493)
5,218
(594)
4,197
4,957
(518)
629
196
(1,100)
(2,384)
7,791
$
155,760
$
151,311
$
142,531
See accompanying notes to the consolidated financial statements.
F-5
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AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Year Ended June 30,
2019
2018
2017
$
155,131
$
152,411
$
134,740
Accretion of discounts on securities
Net accretion of discounts on loans and leases
Amortization of borrowing costs
Stock-based compensation expense
Valuation of financial instruments carried at fair value
Net (gain)/loss on sale of investment securities
Impairment charge on securities
Provision for loan and lease losses
Broker-dealer reserve for bad debt
Deferred income taxes
Origination of loans held for sale
Unrealized (gain) loss on loans held for sale
Gain on sales of loans held for sale
Proceeds from sale of loans held for sale
Change in fair value of mortgage servicing rights
(Gain) loss on sale of other real estate and foreclosed assets
Depreciation and amortization
Net changes in assets and liabilities which provide (use) cash:
Accrued interest receivable
Securities borrowed
Customer, broker-dealer and clearing receivables
Other assets
Securities loaned
Customer, broker-dealer and clearing payables
Accrued interest payable
Accounts payable and accrued liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
Proceeds from sales of securities
Proceeds from repayment of securities
Purchase of stock of regulatory agencies
Proceeds from redemption of stock of regulatory agencies
Origination of loans and leases held for investment
Proceeds from sale of loans held for investment
Origination of mortgage warehouse loans, net
Purchases of loans and leases, net of discounts and premiums
Principal repayments on loans and leases
Proceeds from sales of other real estate owned and repossessed assets
Cash paid for deposit acquisition
Cash paid for acquisition
Acquisition of business activity, net of cash paid
Purchases of furniture, equipment and software
Net cash used in investing activities
F-7
(264)
(30,176)
208
23,439
—
(709)
821
27,350
15,298
(8,686)
(624)
(29,381)
208
20,399
—
18
156
25,800
—
17,034
(2,766)
(4,859)
208
14,535
(743)
(3,920)
1,964
11,061
—
(2,220)
(1,471,906)
(1,564,165)
(1,375,443)
(252)
(11,427)
(253)
(19,489)
222
(18,771)
1,481,911
1,576,353
1,433,068
3,362
(283)
16,471
(12,300)
13,192
13,684
(15,264)
(4,685)
(1,506)
1,129
9,883
204,421
83
(258)
8,574
(31)
(42)
6,094
(6,082)
4,511
—
—
(40,988)
—
—
469
27,650
167,915
—
—
807
—
—
(383)
466
198,498
(146,886)
(100,503)
(249,909)
15,863
93,779
(204,206)
203,611
52,714
139,338
(33,966)
79,923
161,048
307,456
(66,294)
60,210
(6,756,832)
(5,895,902)
(4,068,990)
119,881
(126,491)
(11,525)
20,719
(26,899)
—
31,918
(113,711)
(269,886)
5,846,349
4,818,558
3,427,818
2,202
(14,747)
—
67,343
(20,082)
1,832
—
(70,002)
—
(11,817)
367
—
—
—
(8,758)
(931,741)
(1,026,005)
(788,731)
AXOS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Repayment of the Federal Home Loan Bank term advances
Net proceeds (repayment) of Federal Home Loan Bank other advances
Net proceeds (repayment) of other borrowings
Tax payments related to settlement of restricted stock units
Repurchase of treasury stock
Tax benefit from vesting of restricted stock grants
Cash dividends paid on preferred stock
Net proceeds from issuance of subordinated notes
Net cash provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds
Income taxes paid
Transfers to other real estate and repossessed vehicles
Transfers from loans and leases held for investment to loans held for sale
Transfers from loans held for sale to loans and leases held for investment
Loans held for investment sold, cash not received
Securities transferred from held-to-maturity to available for sale portfolio
Preferred stock dividends declared but not paid
Year Ended June 30,
2019
2018
2017
$
997,823
$
1,085,843
$
(147,500)
149,000
21,700
(9,916)
(56,437)
—
(232)
7,400
961,838
234,518
622,850
857,368
152,756
64,117
850
106,911
1,714
$
$
$
$
$
$
$
— $
— $
77
$
$
$
$
$
$
$
$
$
$
$
(30,000)
(153,000)
(20,000)
(9,952)
(35,183)
—
(309)
—
837,399
(20,691)
643,541
622,850
106,112
79,628
10,113
31,207
3,969
17,742
$
$
$
$
$
$
$
$
855,456
(95,000)
8,000
(15,000)
(6,532)
—
432
(309)
—
747,047
156,814
486,727
643,541
74,442
102,482
1,982
2,935
2,790
—
— $
— $
194,153
—
See accompanying notes to the consolidated financial statements.
F-8
AXOS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2019, 2018 AND 2017
(Dollars in thousands, except per share and stated value amounts)
1. ORGANIZATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation. The consolidated financial statements include the accounts of Axos Financial,
Inc. 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, WiseBanyan, Inc., a registered investment advisor,
and WiseBanyan Securities, LLC, an introducing broker dealer. All significant intercompany balances have been eliminated in
consolidation.
Axos Financial, Inc. was incorporated in the State of Delaware on July 6, 1999 for the purpose of organizing and launching
an Internet-based savings bank. Axos Bank (the “Bank”), which opened for business over the Internet on July 4, 2000, is subject
to regulation and examination by the Office of the Comptroller of the Currency (“OCC”), its primary regulator. The Federal Deposit
Insurance Corporation (“FDIC”) insures the Bank’s deposit accounts up to the maximum allowable amount.
Use of Estimates. In preparing consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan and lease losses, the assessment for other-than-
temporary impairment on investment securities and the fair value of certain financial instruments.
Business. The Bank provides consumer and business banking products through the online distribution channels and affinity
partners. The Bank’s deposit products are demand accounts, savings accounts and time deposits marketed to consumers and
businesses located in all fifty states. The Bank’s primary lending products are residential single family and multifamily mortgage
loans. The Bank’s business is primarily concentrated in the State of California and is subject to the general economic conditions
of that state.
Cash and Cash Equivalents. The Bank’s cash, due from banks, money market mutual funds and federal funds sold, all
of which have original maturities within 90 days, consist of cash and cash equivalents. Net cash flows are reported for customer
deposit transactions.
Cash segregated for regulatory purposes. Federal Reserve Board regulations require depository institutions to maintain
certain minimum reserve balances. Included within this are cash balances required by the Federal Reserve Bank of San Francisco
of the Bank. In addition this line item includes qualified deposits in special reserve bank accounts for the exclusive benefit of Axos
Clearing customers in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934 (the “Exchange Rate”) and other
regulations.
Interest Rate Risk. The Bank’s assets and liabilities are generally monetary in nature and interest rate changes have an
effect on the Bank’s performance. The Bank decreases the effect of interest rate changes on its performance by striving to match
maturities and interest sensitivity between loans and deposits. A significant change in interest rates could have a material effect on
the Bank’s results of operations.
Concentration of Credit Risk. The Bank’s loan portfolio was collateralized by various forms of real estate with
approximately 72.2% of the mortgage portfolio located in California at June 30, 2019. The Bank’s loan portfolio contains
concentrations of credit in multifamily, single family, commercial, and home equity loans. The Bank believes its underwriting
standards combined with its low LTV requirements substantially mitigate the risk of loss which may result from these concentrations.
Brand Partnership Products. Through its strategic partnerships division, the Bank has agreements with third-party service
providers (“Program Managers”) possessing demonstrated expertise in managing programs involving marketing and processing
financial products such as credit, debit, and prepaid cards, and small business and consumer loans. These relationships include the
Company’s relationships with H&R Block, Inc., Netspend and BFS Capital, among others. As delineated by the related contracts,
a Program Manager provides program management services in its areas of expertise subject to the Bank’s continuing control and
active supervision of the subject program. Underwriting standards and credit decisioning remain with the Bank in all cases. Each
of these relationships is designed to allow the Bank to leverage the Program Manager’s knowledge and experience to distribute
F-9
program-related financial products to a broad and increasing base of customers. With respect to credit products, the Bank generally
originates the resulting receivable for sale, but may, in its discretion, retain such receivable. The Bank performs extensive due
diligence with respect to each Program Manager and program, and maintains a regimen of comprehensive risk management and
strict compliance oversight with respect to all programs.
Through our agreement with H&R Block, Inc. (“H&R Block”) and its wholly-owned subsidiaries the Bank provides H&R
Block-branded financial products and services. The products and services that represent the primary focus and the majority of
transactional volume that the Bank processes are described in detail below.
The first product is Emerald Prepaid Mastercard® services. The Bank entered into agreements to offer this product in
August 2015. Under the agreements, the Bank is responsible for the primary oversight and control of the prepaid card programs
of a wholly-owned subsidiary of H&R Block. The Bank holds the prepaid card customer deposits for those cards issued under the
prepaid programs in non-interest bearing accounts and earns a fixed fee paid by H&R Block’s subsidiary for each automated
clearing house (“ACH”) transaction processed through the prepaid card customer accounts. A portion of H&R Block’s customers
use the Emerald Card as an option to receive federal and state income tax refunds. The prepaid customer deposits are included in
non-interest bearing deposit liabilities on the balance sheet of the Company and the ACH fee income is included in the income
statement under the line banking and service fees.
The second product is Refund Transfer. The Bank entered into agreements to offer this product in August 2015. The Bank
is responsible for the primary oversight and control of the refund transfer program of a wholly-owned subsidiary of H&R Block.
The Bank opens a temporary bank account for each H&R Block customer who is receiving an income tax refund and elects to
defer payment of his or her tax preparation fees. After the Internal Revenue Service and any state income tax authorities transfer
the refund into the customer’s account, the net funds are transferred to the customer and the temporary deposit account is closed.
The Bank earns a fixed fee paid by H&R Block for each of the H&R Block customers electing a Refund Transfer. The fees are
earned primarily in the quarters ending March 31st and are included in the income statement under the line banking and service
fees.
The third product is Emerald Advance. The Bank entered into agreements to offer this product in August 2015. Under the
agreements the Bank is responsible for the underwriting guidelines and credit policies for unsecured consumer lines of credit
offered to H&R Block customers. The Bank offers and funds unsecured lines of credit to consumers primarily through the H&R
Block tax preparation offices and earns interest income and fee income. The Bank retains 10% of the Emerald Advance and sells
the remainder to H&R Block. Emerald Advance is a seasonal product and the was no remaining balance as of June 30, 2019. The
lines of credit are included in loans and leases on the balance sheet of the Company and the interest income and fee income are
included in the income statement under the line loans and leases interest and dividend income.
The fourth product is an interest-free Refund Advance loan. The Bank exclusively originated and funded all of H&R
Block’s interest-free Refund Advance loans to tax preparation clients for the 2019 and 2018 tax seasons. The Bank performed the
credit underwriting, loan origination, and funding associated with the interest-free Refund Advance loans in the current tax season
and received fees from H&R Block for operating the program. No fee is charged to the tax preparation client. Repayment of the
Refund Advance loan is deducted from the client’s tax refund proceeds; if an insufficient refund to repay the Refund Advance loan
is received, there is no recourse to the client, no negative credit reporting occurs in respect of the client and no collection efforts
are made against the client. This agreement is an expansion of the services Axos provided to H&R Block in the 2017 tax season
when the Bank participated through purchases of the loans with other providers in the Refund Advance loan program. During the
2017 tax season, the Bank purchased the Refund Advance loans from a third-party bank at a discount and recorded the accretion
of the loan discount as interest income, reported on the income statement under the interest and dividend income line item. During
the 2018 tax season, the Bank recorded the fees received from H&R Block as interest income on loans, reported on the income
statement under the interest and dividend income line item.
The H&R Block-branded financial services products introduce seasonality into the Company’s quarterly reports on Form
10-Q in the unaudited condensed consolidated income statements through the banking and service fees category of non-interest
income and the other general and administrative category of non-interest expense, with the peak income and expense in these
categories typically occurring during the Company’s third fiscal quarter ended March 31.
F-10
Securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has both the
positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold
before maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax. Securities available-for-sale are reported at estimated fair value, with unrealized gains and
losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other
comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted
prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net
present value of the expected cash flows available to the securities. For securities other than non-agency RMBS, we use observable
market participant inputs and categorize these securities as Level II in determining fair value. Trading securities refer to certain
types of assets that banks hold for resale at a profit or when the Company elects to account for certain securities at fair value.
Increases or decreases in the fair value of trading securities are recognized in earnings as they occur. During the quarter ended
September 30, 2016, the Company elected to reclassify all of its held-to-maturity securities to available-for-sale. See Note 4 –
“Securities” for further information.
Gains and losses on securities sales are based on a comparison of sales proceeds and the amortized cost of the security
sold using the specific identification method. Purchases and sales are recognized on the trade date. Interest income includes
amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized or accreted using the level-
yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The
Company’s portfolios of available-for-sale securities are reviewed quarterly for other-than-temporary impairment. In performing
this review, management considers (1) the length of time and extent that fair value has been less than amortized cost, (2) the financial
condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security
and (4) how to record an impairment by assessing whether the Company intends to sell it or is more likely than not that it will be
required to sell a security in an unrealized loss position before the Company recovers the security’s amortized cost. If either of
these criteria for (4) is met, the entire difference between amortized cost and fair value is recognized in earnings. Alternatively, if
neither of the criteria for (4) are met, the amount of impairment recognized in earnings is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other comprehensive income. The credit loss is defined as the
difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans and Leases. Loans and leases that management has the intent and ability to hold for the foreseeable future or until
maturity are reported at the principal balance outstanding, net of unearned interest, deferred purchase premiums and discounts,
deferred loan and lease origination fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the
unpaid principal balance. Premiums and discounts on loans purchased as well as loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level-yield method.
The Company provides equipment financing to its customers through a variety of lease arrangements. The most common
arrangement is a direct financing (capital) lease. For direct financing leases, lease receivables are recorded on the balance sheet
but the leased property is not, although the Company generally retains legal title to the leased property until the end of each lease.
Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value,
less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized
over the life of the lease portfolio. Leases acquired in an acquisition are initially measured and recorded at their fair value on the
acquisition date. Purchase discounts or premiums on acquired leases are recognized as an adjustment to interest income over the
contractual life of the leases using the effective interest method or taken into income when the related leases are paid off. All
equipment financing leases are subject to our allowance for loans and leases.
Recognition of interest income on all portfolio segments is generally discontinued at the time the loan or lease is 90 days
delinquent unless the loan and lease is well secured and in process of collection. Past due status is based on the contractual terms
of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not received for loans and leases placed on nonaccrual, is reversed against interest
income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to
accrual status. Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Seasonal fluctuations in the Other loan classification and its associated allowance for loan and lease losses primarily relate
to tax season H&R Block-related loan products. These products are generally short term in nature, in that they are intended to be
repaid within a few weeks or months of origination; if they are not repaid timely, they are generally charged off in their entirety at
120 days delinquent, consistent with regulatory guidance for unsecured consumer loan products. The Company provides general
loan loss reserves for its H&R Block-related loans based upon prior years’ loss experience with consideration for current year loan
performance. While they do incur higher proportional default and charge-off rates than the remainder of the Company’s loan and
lease portfolio, these asset quality attributes are within expectations of the design of the products.
F-11
Loans Held for Sale. U.S. government agency (“agency”) loans originated and intended for sale in the secondary market
are carried at fair value. Net unrealized gains and losses are recognized through mortgage banking income in the income statement.
The Bank sells its mortgage loans with either servicing released or servicing retained depending upon market pricing. Gains and
losses on loan sales are recorded as mortgage banking income or other gains on sale, based on the difference between sales proceeds
and carrying value. Non-agency loans held for sale are carried at the lower of cost or fair value. 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.
Loans that were originated with the intent and ability to hold for the foreseeable future (loans held for investment) but
which have been subsequently designated as being held for sale for risk management or liquidity needs are carried at the lower of
cost or fair value calculated using pools of loans with similar characteristics.
There may be times when loans have been classified as held for sale and cannot be sold. Loans transferred to a long-term
investment classification from held-for-sale are transferred at the lower of cost or fair value on the transfer date. Any difference
between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest
method. A loan cannot be classified as a long-term investment unless the Bank has both the ability and the intent to hold the loan
for the foreseeable future or until maturity.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level estimated to
provide for probable incurred losses in the loan and lease portfolio held for investment. Management determines the adequacy of
the allowance based on reviews of individual loans and leases and pools of loans, recent loss experience, current economic conditions,
the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and
requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased
by the provision for loan and lease losses, which is charged against current period operating results, and recoveries of loans and
leases previously charged-off. The allowance is decreased by the amount of charge-offs of loans and leases deemed uncollectible.
Allocations of the allowance may be made for specific loans and leases but the entire allowance is available for any loan or lease
that, in management’s judgment, should be charged off.
The allowance for loan and lease losses includes general reserves and may include specific reserves. Specific reserves
may be provided for impaired loans and leases considered Troubled Debt Restructurings (“TDRs”). All other impaired loans and
leases are written down through charge-offs to the fair value of collateral, less estimated selling cost, and no specific or general
reserve is provided. A loan or lease is impaired when, based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. Loans and leases for
which terms have been modified resulting in a concession and for which the borrower is experiencing financial difficulties are
considered TDRs and classified as impaired. A loan or lease is measured for impairment generally two different ways. If the loan
or lease is primarily dependent upon the borrower to make payments, then impairment is calculated by comparing the present value
of the expected future payments discounted at the effective loan rate to the carrying value of the loan. If the loan or lease is collateral
dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan or lease. If the calculated
amount is less than the carrying value of the loan or lease, the loan or lease has impairment.
A general reserve is included in the allowance for loan and lease losses and is determined by adding the results of a
quantitative and a qualitative analysis to all other loans and leases not measured for impairment at the reporting date. The quantitative
analysis determines the Bank’s actual annual historic charge-off rates for the previous three fiscal years and applies the average
historic rates to the outstanding loan and lease balances in each pool, the product of which is the general reserve amount. The
qualitative analysis considers one or more of the following factors: changes in lending policies and procedures, changes in economic
conditions, changes in the content of the portfolio, changes in lending management, changes in the volume of delinquency rates,
changes to the scope of the loan and lease review system, changes in the underlying collateral of the loans and leases, changes in
credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and applied to
those loans and leases affected by the qualitative factors. The following portfolio segments have been identified: single family
secured mortgage, home equity secured mortgage, single family warehouse and other, multi-family secured mortgage, commercial
real estate and land secured mortgage, auto secured and recreational vehicles, factoring, commercial and industrial (“C&I”) and
other.
General loan and lease loss reserves are calculated by grouping each mortgage loan or lease by collateral type and by
grouping the LTV ratios of each loan within the collateral type. An estimated allowance rate for each LTV group within each type
of loan and lease is multiplied by the total principal amount in the group to calculate the required general reserve attributable to
that group. Management uses an allowance rate that provides a larger loss allowance for loans with greater LTV ratios. General
loan loss reserves for C&I loans are determined through a loan level grading system to base its projected loss rates. A matrix was
created with a base loss rate with additional potential industry and volume risk adjustments, to calculate a loss rating for each deal.
F-12
Given the lack of historical loss experience for this segment at the Company, an allowance loss range is based upon historical peer
loss rates. General loan loss reserves for consumer loans are calculated by grouping each loan by credit score (e.g., FICO) at
origination and applying an estimated allowance rate to each group. In addition to credit score grading, general loan loss reserves
are increased for all consumer loans determined to be 90 days or more past due. Specific reserves or direct charge-offs are calculated
when an internal asset review of a loan or lease identifies a significant adverse change in the financial position of the borrower or
the value of the collateral. The specific reserve or direct charge-off is based on discounted cash flows, observable market prices
or the estimated value of underlying collateral.
Specific loan or lease charge-offs on impaired loans or leases are recorded as a write-off and a decrease to the allowance
in the period the impairment is identified. A loan or lease is classified as a TDR when management determines that an existing
borrower is in financial distress and the borrower’s loan or lease terms are modified to provide the borrower a financial concession
(e.g., lower payment) that would not otherwise be provided by another lender based upon borrower’s current financial condition.
TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows
using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan or lease, the loan or lease is
reported, net, at the fair value of the collateral less cost to sell. For TDRs that subsequently default, the Company determines the
amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.
If the present value of estimated cash flows under the modified terms of a TDR discounted at the original loan or lease
effective rate is less than the book value of the loan or lease before the TDR, the excess is specifically allocated to the loan or lease
in the allowance for loan and lease losses.
Mortgage Servicing Rights. Mortgage servicing assets are recognized when rights are acquired through sale of loans.
The Company measures its servicing asset using the fair value method. Under the fair value method, the servicing rights are included
in other assets on the consolidated balance sheet at fair value. The changes in fair value are reported in earnings in the period in
which the changes occur and the adjustments are included in Non-Interest Income - Mortgage banking income in the consolidated
statements of income.
Mortgage Banking Derivatives. Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary
market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives.
Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on
the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate
locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in
the fair values of these derivatives are included in mortgage banking income.
Furniture, Equipment and Software. Fixed asset purchases in excess of five hundred dollars are capitalized and recorded
at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to
seven years. Leasehold improvements are amortized over the lesser of the assets’ useful lives or the lease term. Furniture, equipment
and software are included in the other assets line on the consolidated balance sheet.
Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred
tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.
Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between
the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws. The Company records a valuation allowance when management believes it is more likely than not that deferred tax assets
will not be realized. An income tax position will be recognized as a benefit only if it is more likely than not that it will be sustained
upon IRS examination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company recognizes interest and/or
penalties related to income tax matters in income tax expense. The Company adopted ASU 2016-09 effective July 1, 2017. As a
result of the adoption, the Company recorded $2.0 million and $2.4 million of income tax benefits for the fiscal year ended June
30, 2019 and June 30, 2018, respectively, related to excess tax benefits from stock compensation. Prior to 2018, such excess tax
benefits were generally recorded directly in stockholders’ equity. This accounting standard may potentially increase the volatility
in the Company’s effective tax rates.
Securities Borrowed and Securities Loaned. Securities borrowed and securities loaned transactions are reported as
collateralized financings and recorded at the amount of cash collateral advanced or received. Securities borrowed transactions
require the Company to deposit cash with the lender. With respect to securities loaned, the Company receives collateral in the form
of cash in an amount in excess of the fair value of securities loaned. The Company monitors the fair value of securities borrowed
and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.
Customer, Broker-Dealer and Clearing Receivables and Payables. Customer, broker-dealer and clearing receivables
include receivables of the Company’s broker-dealer subsidiaries, which represent amounts due on cash and margin transactions
F-13
and are generally collateralized by securities owned by clients. These receivables, primarily consisting of floating-rate loans
collateralized by customer-owned securities, are charged interest at rates similar to other such loans made throughout the industry.
The receivables are reported at their outstanding principal balance net of allowance for doubtful accounts. When a receivable is
considered to be impaired, the amount of the impairment is generally measured based on the fair value of the securities acting as
collateral, which is measured based on current prices from independent sources, such as listed market prices or broker-dealer price
quotations. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected
in the balance sheet. Also included in these accounts are receivables and payables from brokers and dealers and clearing organizations
as well as securities failed to deliver and receive.
Business Combinations. Mergers and acquisitions are accounted for in accordance with ASC 805 “Business
Combinations” using the acquisition method of accounting. Assets and liabilities acquired and assumed are generally recorded at
their fair values as of the date of the transaction. The excess of purchase price over the fair value of assets acquired and liabilities
assumed is recorded as goodwill. Significant estimates and judgments are involved in the fair valuation and purchase price allocation
process.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of an acquisition over the fair value of
the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished
from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles,
are amortized over their estimated useful lives and subject to periodic impairment testing. Intangible assets (other than goodwill)
are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives.
Goodwill is subject to impairment testing at the reporting unit level, which is conducted at least annually. The Company
performs impairment testing during the third quarter of each year or when events or changes in circumstances indicate the assets
might be impaired.
The Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing updated qualitative factors, the Company determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, it does not have to perform the two-step
goodwill impairment test. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment
test are judgmental and often involve the use of significant estimates and assumptions. Similarly, estimates and assumptions are
used in determining the fair value of other intangible assets. Estimates of fair value are primarily determined using discounted cash
flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected
future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of
appropriate market comparables. Future events could cause the Company to conclude that goodwill or other intangibles have
become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse
impact on the Company’s financial condition and results of operations.
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 restricted stock units (“RSU”). 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 has granted restricted stock units under the 2004 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 Plan, restricted stock units have no shareholder rights, meaning they are not
entitled to dividends and are considered nonparticipating. These nonparticipating restricted stock units are not included in the basic
earnings per common share calculation and are included in the diluted earnings per common share calculation using the treasury
stock method.
Stock-Based Compensation. Compensation cost is recognized for stock options and restricted stock unit awards issued
to employees, based on the fair value of these awards at the date of grant. A Black–Scholes model is utilized to estimate fair value
of the stock options, while market price of the Company’s common stock at the date of grant is used for restricted stock unit awards,
except for the Chief Executive Officer’s restricted stock unit awards under an employment agreement effective July 1, 2017. For
F-14
the Chief Executive Officer’s restricted stock unit awards under an employment agreement effective July 1, 2017, a Monte Carlo
simulation is utilized to estimate the value of path-dependent options in order to determine the fair value of the restricted stock
unit award. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards
with only a service condition that have a graded vesting schedule, compensation cost is recognized on a straight-line basis over
the requisite service period for the entire award. For awards that contain a market condition and have a graded vesting schedule
compensation cost is recognized using an accelerated attribution method over the requisite service period for the awards.
Stock of Regulatory Agencies. The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members
are required to own a certain amount of FHLB stock based on the level of borrowings and other factors. FHLB stock is carried
at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.
Axos Securities is a member of the Depository Trust & Clearing Corporation (DTCC), a financial services company
providing clearing and settlement services to the financial markets. Members are required to own a certain amount of DTCC
stock based on the clearing levels and other factors. DTCC stock is carried at fair value, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par value.
Cash Surrender Value of Life Insurance. The Bank has purchased life insurance policies on certain key executives. Bank
owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which
is the cash surrender value adjusted for other amounts due that are probable at settlement. Cash surrender value of life insurance
is included in the other assets line on the consolidated balance sheet.
Loan Commitments and Related Financial Instruments. Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded. The allowance for loan commitments is included in Accounts payable and accrued
liabilities and other liabilities and adjustments to the allowance run through provision for loan and lease loses.
Comprehensive Income. Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available-for-sale, which are also recognized as separate
components of equity.
Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business,
are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are now such matters that will have a material effect on the financial statements.
Dividend Restriction. Banking regulations require maintaining certain capital levels and may limit the dividends paid by
the Bank to the holding company. As of June 30, 2019, there are no dividend restrictions on the Bank or the Company.
Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in Note 3. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect the estimates.
Revenue Recognition. On July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606)”, and all subsequent amendments using a modified retrospective approach. The implementation of the new standard
did not have a material impact on the measurement, timing, or recognition of revenue. Accordingly, no cumulative effect adjustment
to opening retained earnings was deemed necessary. Results for reporting periods beginning after July 1, 2018 are presented under
Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting
under Topic 605.
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The standard affects all entities that either enter into contracts with customers to transfer goods or services or enter into
contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other guidance.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities.
In addition, certain non-interest income streams such as gain or loss associated with mortgage servicing rights, financial guarantees,
derivatives, and income from bank owned life insurance are also not within the scope of the new guidance. Topic 606 is applicable
to non-interest income such as deposit related fees, interchange fees, merchant related income. However, the recognition of these
revenue streams did not change significantly upon adoption of Topic 606. Non-interest income considered to be within the scope
of Topic 606 is discussed below.
F-15
Deposit Service Fees. Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed
business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s
performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized,
over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based,
and therefore, the Company’s performance obligation is satisfied and related revenue recognized, when incurred. Payment for
service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’
accounts.
Fees, Exchange, and Other Service Charges. Fees, exchange, and other service charges are primarily comprised of debit
and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily
comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks
such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company
cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit
and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire
transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and
other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.
Payment is typically received immediately or in the following month.
Broker dealer clearing fees. The Company earns revenues for executing, settling and clearing securities transactions for
other broker-dealers on a fully disclosed basis. Trade execution and clearing services, when provided together, represent a single
performance obligation as the services are not separately identifiable in the context of the contract. Revenues associated with
combined trade execution and clearing services, as well as trade execution services on a standalone basis, are recognized at a point
in time on trade-date. The Company believes that the performance obligation is satisfied on the trade date because that is when
the underlying security or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been
transferred to/from the customer. The Company also earns revenues for custody services which are separately identifiable and
represent a distinct performance obligation which is recognized over time as the customer simultaneously receives and consumes
the benefits. Certain clearing or custody related fees represent a modification of the original contract as they are distinct services.
All trade and execution services are priced at their standalone selling price. Clearing and other fees are generally deducted from
the introducing brokers’ commissions on a monthly basis.
Bankruptcy Trustee and Fiduciary Service Fees. Bankruptcy Trustee and Fiduciary Service income is primarily comprised
of fees earned from the Monthly Basis Point Fee and Bank Account Service Charge. The products and services provided to the
Trustee also indirectly provide additional deposits to the other banks. One of the uses of the increased deposits by the other banks
is to fund the fees paid. The performance obligation is satisfied when the deposits are increased (or decreased) at the end of each
month. The expected value method will be used to calculate and record the estimated revenue at the beginning of each month with
a subsequent reconciliation to actual at the end of each month.
The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for
the periods indicated.
(Dollars in thousands, except per share data)
Non-interest income
Deposit service fees
Card fees
Broker-dealer clearing fees
Bankruptcy trustee and fiduciary service fees
Non-interest income (in-scope of Topic 606)
Non-interest income (out-of-scope of Topic 606)
Total non-interest income
June 30,
2019
2018
$
$
3,513
5,340
11,737
7,036
27,626
55,131
82,757
$
$
3,219
3,623
—
1,991
8,833
62,108
70,941
Contract Balances. A contract asset or receivable is recognized if the Company performs a service or transfers a good in
advance of receiving consideration. A contract liability is recognized if the Company receives consideration (or has the unconditional
right to receive consideration) in advance of performance. As of June 30, 2019, the Company’s contract assets and liabilities were
not considered material.
F-16
Contract Acquisition Costs. The Company uses the practical expedient to expense contract acquisition costs when the
asset that would have resulted from capitalizing these costs would have been amortized in less than one year. In adopting the
guidance in Topic 606, the Company did not capitalize any contract acquisition costs.
Other. Income from bank owned life insurance is accounted for in accordance with ASC 325, Investments - Other. Lending
related income includes fees earned from gains or losses on the sale of loans, SBA income, and letter of credit fees. Gains and
losses on the sale of loans and SBA income are recognized pursuant to ASC 860, Transfers and Servicing. Fees related to standby
letters of credit are accounted for in accordance with ASC 440, Commitments. Net gain or loss on sales / valuations of repossessed
and other assets is presented as a component of non-interest expense, but may also be presented as a component of non-interest
income in the event that a net gain is recognized. Net gain or loss on sales of repossessed and other assets are accounted for in
accordance with ASC 610, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.
New Accounting Pronouncements.
Accounting Standards Adopted During Fiscal 2019
In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 326):Restricted Cash. This ASU will amend
the guidance in ASC Topic 230, Statement of Cash Flows, and is intended to reduce the diversity in the classification and presentation
of changes in restricted cash on the statement of cash flows. The amendments within this ASU will require that the reconciliation
of the beginning-of-period and end-of-period cash and cash equivalents amounts shown on the statement of cash flows include
restricted cash and restricted cash equivalents. If restricted cash and restricted cash equivalents are presented separately from cash
and cash equivalents on the balance sheet, an entity will be required to reconcile the amounts presented on the statement of cash
flows to the amounts on the balance sheet. An entity will also be required to disclose information regarding the nature of the
restrictions. ASU 2016-18 requires retrospective application and is effective for fiscal years beginning after December 15, 2018
and interim periods within those fiscal years, with early adoption permitted. The Company adopted this standard on March 31,
2019. The new guidance did not have a significant impact on the Company’s consolidated financial statements at the time of
adoption.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities
is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a
business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions.
Under the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of
similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The
new standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. The
Company adopted this standard on July 1, 2018. The new guidance did not have a significant impact on the Company’s consolidated
financial statements at the time of adoption.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment: The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating
Step 2 from the goodwill impairment test. In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill,
an entity had to determine the fair value at the impairment date of its assets and liabilities, including any unrecognized assets and
liabilities, following a procedure that would be required in determining the fair value of assets acquired and liabilities assumed in
a business combination. Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing
the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount
over the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting
unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting
unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for a public business entity that is an
SEC filer for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The new
guidance did not have a significant impact on the Company’s consolidated financial statements at the time of adoption.
Accounting Standards Issued But Not Yet Adopted
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. The new standard establishes
a right-of-use model that requires a lessee to record a right of use asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASUs 2016-02, 2018-10 and 2018-11 are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is anticipated
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
F-17
in the financial statements, with certain practical expedients available. The Company has completed its review of contracts and
does not expect a material impact on the Company’s consolidated financial statements and regulatory capital and risk-weighted
assets or results from operations.
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 has completed the development the of implementation plan and is in the process of model development.
The Company expects ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued guidance within ASU 2017-08, Premium Amortization on Purchased Callable Debt
Securities. The amendments in ASU 2017-08 to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, shorten the
amortization period for certain purchased callable debt securities held at a premium to the earliest call date, which more closely
align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.
Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.
The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to
maturity. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of adoption. The amendments in this ASU are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance is not
expected to have a significant impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The ASU expands and refines hedge accounting for both financial and non-financial risk
components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements,
and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge
effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. The new standard must be adopted using a modified retrospective transition with a
cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company does not anticipate
that this guidance will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued guidance within ASU 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting. The amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the
accounting for share-based payment awards issued to employees and nonemployees. Changes to the accounting for nonemployee
awards include: 1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date,
instead of the previous requirement to remeasure the awards through the performance completion date; 2) for performance
conditions, compensation cost associated with the award will be recognized when achievement of the performance condition is
probable, rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification
(equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible
instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under
ASC 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. The Company’s share-based payment awards to nonemployees
consist only of grants made to the Company’s nonemployee Directors as compensation solely related to each individual’s role as
a nonemployee Director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to
its nonemployee Directors in the same manner as share-based payment awards for its employees. Accordingly, the amendments
in this guidance will not have an effect on the accounting for the Company’s share-based payment awards to its nonemployee
Directors.
In August 2018, the FASB issued guidance within ASU 2018-13, Fair Value Measurement Disclosure Framework (Topic
820) - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 require a nonpublic
entity to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
Public companies are also now required to disclose the changes in unrealized gains and losses for the period included in other
comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements. Under current GAAP, entities are required to disclose a roll
forward for Level 3 fair value measurements. The amendments in this ASU related to changes in unrealized gains and losses, the
range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative
F-18
description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented
in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their
effective date. Early adoption is permitted upon issuance of this ASU. The Company does not anticipate that this guidance will
have a material impact on its consolidated financial statements. The Company will adopt this standard on July 1, 2019.
2. ACQUISITIONS
The Company completed two business acquisitions and two asset acquisitions during the fiscal year ended June 30, 2019
and one business acquisition during the fiscal year ended June 30, 2018. 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 Company has included the financial results of the acquired businesses in its
consolidated financial statements subsequent to the acquisition dates. The business acquisitions have been accounted for under
the acquisition method of accounting. The assets, both tangible and intangible, were recorded at their estimated fair values as of
the transaction date. The Company made significant estimates and exercised judgment in estimating fair values and accounting
for such acquired assets and liabilities. 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 acquire 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.The Company purchased
the whole WiseBanyan business and has the entire voting interest. Goodwill is not expected to be deducted for tax purposes.
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, and securities and margin lending 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 for a provisional amount of $34.9 million and an additional $20.1 million
in intangible assets as of the Acquisition Date. The estimated fair values of the acquired assets and assumed liabilities are subject
to refinement as additional information relative to closing date fair values becomes available. Any subsequent measurement period
adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting
adjustments will result in adjustments to goodwill no later than within the first 12 months following the closing date of acquisition.
Included in the professional services line of the statement of income the Company recognized $0.4 million in transaction costs.
The acquisition will enable the Company to expand its banking business to a new customer base through independent
broker-dealers and consumer account relationships, scale entry into wealth management through technology-driven platforms,
and increase and diversify fee revenue, all of which will improve key operating metrics. The goodwill recognized results from the
expected synergies and potential earnings from this combination.
F-19
The consideration paid for COR Securities common equity was $88.4 and the provisional fair values of acquired identifiable
assets and liabilities assumed as of the Acquisition Date were as follows:
(Dollars in thousands)
ASSETS
Cash and due from banks
Cash segregated for regulatory purposes
Securities, available for sale
Stock of the regulatory agencies, at cost
Securities borrowed
Customer, broker-dealer and clearing receivables
Other assets
Total identifiable assets
LIABILITIES
Borrowings, subordinated notes and debentures
Securities loaned
Customer, broker-dealer and clearing payables
Accounts payable and accrued liabilities
Total identifiable liabilities
Provisional resulting goodwill
Intangible assets
Total cash paid
Borrowings, subordinated notes and debentures issued
Total fair value of consideration paid
January 28, 2019
$
$
$
$
$
$
$
$
16,604
142,016
9,585
2,431
157,898
234,352
5,487
568,373
85,100
203,041
240,110
7,383
535,634
35,501
20,120
80,860
7,500
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 $661.4 million 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, recorded in intangibles, commensurate with the fair market value of the
deposits purchased.
Bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. On April 4, 2018, the Company completed
the acquisition of the bankruptcy trustee and fiduciary services business of Epiq Systems, Inc. (“Epiq”). The assets acquired by
the Company include comprehensive software solutions, trustee customer relationships, trade name, accounts receivable and fixed
assets. The business provides specialized software and consulting services to Chapter 7 bankruptcy and non-Chapter 7 trustees
and fiduciaries in all fifty states. This business is expected to generate fee income from bank partners and bankruptcy cases, as
well as opportunities to source low cost deposits. No deposits were acquired as part of the transaction.
Under the terms of the purchase agreement, the aggregate purchase price included the payment of $70.0 million in cash.
The Company acquired assets with approximate fair values of $32.7 million of intangible assets, including customer relationships,
developed technologies, a covenant not to compete and the trade name, and $1.6 million of accounts receivable and fixed assets,
resulting in $35.7 million of goodwill. Transaction-related expenses were de minimis.
F-20
The following table sets forth the approximate fair value of assets acquired from Epiq on the consolidated balance sheets
as of April 4, 2018:
(Dollars in thousands)
Fair value of consideration paid
Cash
Total consideration paid
Fair value of assets acquired
Intangible assets
Other assets
Total assets
Fair value of net assets acquired
Goodwill incident to acquisition
April 4, 2018
70,002
70,002
32,720
1,563
34,283
34,283
35,719
$
$
$
$
$
$
The Company recognized goodwill of $35.7 million as of April 4, 2018, which is calculated as the excess of the
consideration exchanged as compared to the fair value of identifiable assets acquired. Goodwill resulted from expanded product
lines and low-cost funding opportunities and is expected to be deductible for tax purposes. During the fiscal year ended June 30,
2019, the Company settled the working capital with Epiq. See Note 9 to the consolidated financial statements for further information
on goodwill and other intangible assets.
3. 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. ASC Topic 820 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 standard describes three levels of inputs that
may be used to measure fair value:
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. Level 2 assets include securities with
quoted prices that are traded less frequently than exchange-traded instruments and whose value is determined
using a pricing model with inputs that are observable in the market or can be derived principally from or
corroborated by observable market data.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is
determined using pricing models such as discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value requires significant management judgment or
estimation.
When available, the Company generally uses quoted market prices to determine fair value. In some cases where a market
price is available, the Company will make use of acceptable practical expedients (such as matrix pricing) to calculate fair value,
in which case the items are classified in Level 2.
The Company considers relevant and observable market prices in its valuations where possible. The frequency of
transactions, the size of the bid-ask spread and the nature of the participants are some of the factors the Company uses to help
determine whether a market is active and orderly or inactive and not orderly. Price quotes based upon transactions that are not
orderly are not considered to be determinative of fair value and are given little, if any, weight in measuring fair value.
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use,
where possible, current market-based or independently sourced market parameters, such as interest rates, credit spreads, housing
value forecasts, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level
input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some
significant inputs that are readily observable.
F-21
The following section describes the valuation methodologies used by the Company to measure various financial
instruments at fair value, including an indication of the level in the fair-value hierarchy in which each instrument is generally
classified:
Securities—trading and available-for-sale. Trading securities are recorded at fair value. Available-for-sale securities are
recorded at fair value and consist of residential mortgage-backed securities (“RMBS”) issued by U.S. agencies, RMBS issued by
non-agencies, municipal securities as well as other Non-RMBS securities. Fair value for U.S. agency securities and municipal
securities are generally based on quoted market prices of similar securities used to form a dealer quote or a pricing matrix. There
continues to be significant illiquidity in the market for RMBS issued by non-agencies, impacting the availability and reliability of
transparent pricing. As orderly quoted market prices are not available, the Level 3 fair values for these securities are determined
by the Company utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the
securities from the underlying mortgage assets. The Company computes Level 3 fair values for each non-agency RMBS in the
same manner (as described below) whether available-for-sale or held-to-maturity.
To determine the performance of the underlying mortgage loan pools, the Company estimates prepayments, defaults, and
loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates
and borrower attributes such as credit score and loan documentation at the time of origination. The Company inputs for each
security a projection of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for
the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company
from the historic default rate observed in the pool of loans collateralizing the security, increased by and decreased by the forecasted
increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from
the historic loss severity rate observed in the pool of loans, increased by or decreased by the forecasted increase or decrease in the
national home price appreciation (“HPA”) index. The largest factors influencing the Company’s modeling of the monthly default
rate are unemployment and HPA, as a strong correlation exists. The most updated unemployment rate reported in May 2019 was
3.6%. Consensus estimates for unemployment are that the rate will begin to increase. Going forward, the Company is projecting
lower monthly default rates. The Company projects that severities will continue to improve.
To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS
securities, the Company separates the securities by the borrower characteristics in the underlying pool. Specifically, “prime”
securities generally have borrowers with higher FICO scores and better documentation of income. “Alt-A” securities generally
have borrowers with a lower FICO and less documentation of income. “Pay-option ARMs” are Alt-A securities with borrowers
that tend to pay the least amount of principal (or increase their loan balance through negative amortization). The Company calculates
separate discount rates for prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions
for risk, capital and return on equity. The range of annual default rates used in the Company’s projections at June 30, 2019 are
from 1.5% up to 10.2%. The range of loss severity rates applied to each default used in the Company’s projections at June 30,
2019 are from 40.0% up to 68.3% based upon individual bond historical performance. The default rates and the severities are
projected for every non-agency RMBS security held by the Company and will vary monthly based upon the actual performance
of the security and the macroeconomic factors discussed above. The Company applies its discount rates to the projected monthly
cash flows, which already reflect the full impact of all forecasted losses using the assumptions described above. When calculating
present value of the expected cash flows at June 30, 2019, the Company computed its discount rates as a spread between 272 and
686 basis points over the LIBOR Index using the LIBOR forward curve.
The Bank’s estimate of fair value for non-agency securities using Level 3 pricing is highly subjective and is based on the
Bank’s estimate of voluntary prepayments, default rates, severities and discount margins, which are forecasted monthly over the
remaining life of each security. Changes in one or more of these assumptions can cause a significant change in the estimated fair
value. For further details see the table later in this note that summarizes quantitative information about level 3 fair value
measurements.
Loans Held for Sale. Loans held for sale at fair value are primarily single-family residential loans. The fair value of
residential loans held for sale is determined by pricing for comparable assets or by existing forward sales commitment prices with
investors.
F-22
Impaired Loans and Leases. Impaired loans and leases are loans and leases which are inadequately protected by the
current net worth and paying capacity of the borrowers or the collateral pledged. The accrual of interest income has been discontinued
for impaired loans and leases. The impaired loans and leases are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. The Company assesses loans and leases individually and identifies impairment
when the loan or lease is classified as impaired or has been restructured or management has serious doubts about the future
collectibility of principal and interest, even though the loans and leases may currently be performing. The fair value of an impaired
loan or lease is determined based on an observable market price or current appraised value of the underlying collateral. The fair
value of impaired loans and leases with specific write-offs or allocations of the allowance for loan and lease losses are generally
based on recent real estate appraisals or internal valuation analyses consistent with the methodology used in real estate appraisals
and include other third-party valuations and analysis of cash flows. These appraisals and analyses are updated at least on an annual
basis. The Company primarily obtains real estate appraisals and in the rare cases where an appraisal cannot be obtained, the
Company performs an internal valuation analysis. These appraisals and analyses may utilize a single valuation approach or a
combination of approaches including comparable sales and income approaches. The sales comparison approach uses at least three
recent similar property sales to help determine the fair value of the property being appraised. The income approach is calculated
by taking the net operating income generated by the collateral property of the rent collected and dividing it by an assumed
capitalization rate. Adjustments are routinely made in the process by the appraisers to account for differences between the
comparable sales and income data available. When measuring the fair value of the impaired loan or lease based upon the projected
sale of the underlying collateral, the Company subtracts the costs expected to be incurred for the transfer of the underlying collateral,
which includes items such as sales commissions, delinquent taxes and insurance premiums. These adjustments to the estimated
fair value of nonaccrual loans and leases may result in increases or decreases to the provision for loan and lease losses recorded
in current earnings. Such adjustments are typically significant and result in a Level 3 classification for the inputs for determining
fair value.
Other Real Estate Owned and Repossessed Vehicles. Non-recurring adjustments to certain commercial and residential
real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value,
less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In
cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Mortgage Servicing Rights. The Company initially records all mortgage servicing rights (“MSRs”) at fair value and
accounts for MSRs at fair value during the life of the MSR, with changes in fair value recorded through mortgage banking income
in the income statement. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization
involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. Market expectations
about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to
changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan
prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount
rate used in calculating present value, which is imputed from observable market activity and market participants and results in
Level 3 classification. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate
would reduce the estimated fair value of the MSRs asset.
Mortgage Banking Derivatives. In connection with mortgage banking activities, the Company enters into commitments
to fund mortgage loans (interest rate locks) and forward sale commitments for the future delivery of these mortgage loans. If
interest rates increase, the value of the Company’s interest rate locks are adversely impacted. The Company attempts to economically
hedge the risk of the overall change in the fair value of interest rate locks with forward sales commitments.
The fair value of interest rate locks is estimated based on changes in mortgage interest rates from the date the interest on
the loan is locked, adjusted for items such as estimated fallout and costs to originate the loan.
The fair value of forward sale commitments is based upon prices in active secondary markets for identical securities or
based on quoted market prices of similar assets used to form a dealer quote or a pricing matrix. If no such quoted price exists, the
fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific
attributes of each commitment.
F-23
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring
basis. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement:
(Dollars in thousands)
ASSETS:
Securities—Available-for-Sale:
Agency Debt
Agency RMBS
Non-Agency RMBS
Municipal
Asset-backed securities and structured notes
Total—Securities—Available-for-Sale
Loans Held for Sale
Mortgage servicing rights
Other assets—Derivative instruments
LIABILITIES:
Other liabilities—Derivative instruments
(Dollars in thousands)
ASSETS:
Securities—Available-for-Sale:
Agency RMBS
Non-Agency RMBS
Municipal
Asset-backed securities and structured notes
Total—Securities—Available-for-Sale
Loans Held for Sale
Mortgage servicing rights
Other assets—Derivative Instruments
LIABILITIES:
Other liabilities—Derivative instruments
$
$
$
$
$
$
$
$
$
$
$
$
June 30, 2019
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
— $
1,685
$
—
—
—
—
— $
— $
— $
— $
— $
9,586
—
21,162
182,055
214,488
33,260
$
$
— $
— $
— $
— $
—
13,025
—
—
13,025
$
— $
9,784
1,978
732
$
$
$
June 30, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
— $
12,926
$
—
—
—
— $
— $
— $
— $
— $
—
20,212
129,724
162,862
35,077
$
$
— $
— $
— $
— $
17,443
—
—
17,443
$
— $
10,752
1,321
368
$
$
$
1,685
9,586
13,025
21,162
182,055
227,513
33,260
9,784
1,978
732
12,926
17,443
20,212
129,724
180,305
35,077
10,752
1,321
368
F-24
The following table presents 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:
(Dollars in thousands)
Assets:
Opening Balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses for the period:
Included in earnings—Sale of securities
Included in earnings—Fair value gain(loss) on
trading securities
Included in earnings—Mortgage banking income
Included in other comprehensive income
Purchases, issues, sales and settlements:
Purchases
Issues
Sales
Settlements
Other-than-temporary impairment
Closing balance
Change in unrealized gains or losses for the period
included in earnings for assets held at the end of the
reporting period
$
$
Year Ended June 30, 2019
Securities-
Trading:
Collateralized
Debt
Obligations
Securities-
Available-for-
Sale: Non-
Agency RMBS
Mortgage
Servicing
Rights
Derivative
Instruments,
net
Total
$
— $
17,443
$
10,752
$
953
$
29,148
—
—
—
—
—
—
—
—
—
—
—
—
—
(133)
—
—
766
—
—
(2,058)
(2,172)
(821)
—
—
—
—
(3,362)
—
2,394
—
—
—
—
—
—
—
—
293
—
—
—
—
—
—
— $
13,025
$
9,784
$
1,246
$
—
—
(133)
—
(3,069)
766
2,394
—
(2,058)
(2,172)
(821)
24,055
— $
(133) $
(3,362) $
293
$
(3,202)
(Dollars in thousands)
Assets:
Opening Balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses for the period:
Included in earnings—Sale of securities
Included in earnings—Fair value gain(loss) on
trading securities
Included in earnings—Mortgage banking income
Included in other comprehensive income
Purchases, issues, sales and settlements:
Purchases
Issues
Sales
Settlements
Other-than-temporary impairment
Closing balance
Change in unrealized gains or losses for the period
included in earnings for assets held at the end of the
reporting period
$
$
Year Ended June 30, 2018
Securities-
Trading:
Collateralized
Debt
Obligations
Securities-
Available-for-
Sale: Non-
Agency RMBS
Mortgage
Servicing
Rights
Derivative
Instruments,
net
Total
$
8,327
$
71,503
$
7,200
$
1,026
$
88,056
—
—
282
—
—
—
—
—
(8,609)
—
—
—
—
(300)
—
—
(1,629)
—
—
(44,270)
(7,705)
(156)
—
—
—
—
(83)
—
3,635
—
—
—
—
—
—
—
—
(73)
—
—
—
—
—
—
— $
17,443
$
10,752
$
953
$
—
—
(18)
—
(156)
(1,629)
3,635
—
(52,879)
(7,705)
(156)
29,148
— $
(300) $
(83) $
(73) $
(456)
F-25
The table below summarizes the quantitative information about Level 3 fair value measurements as of the dates
indicated:
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Inputs
Range (Weighted Average)
June 30, 2019
Securities – Non-agency RMBS
Mortgage Servicing Rights
Derivative Instruments
(Dollars in thousands)
Securities – Non-agency RMBS
Mortgage Servicing Rights
Derivative Instruments
$
$
$
$
$
$
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%)
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%)
1,246
Sales Comparison Approach
Projected Sales Profit of Underlying
Loans
0.4 to 0.8% (0.6%)
Fair Value
Valuation Technique
Unobservable Inputs
Range (Weighted Average)
June 30, 2018
17,443
Discounted Cash Flow
Projected Constant Prepayment Rate,
Projected Constant Default Rate,
Projected Loss Severity,
Discount Rate over LIBOR
2.5 to 25.8% (14.1%)
1.5 to 10.6% (5.1%)
40.0 to 68.0% (58.9%)
2.7 to 7.1% (4.2%)
10,752
Discounted Cash Flow
Projected Constant Prepayment Rate,
Life (in years),
Discount Rate
6.0 to 26.6% (9.1%)
2.4 to 9.5 (6.9)
9.5 to 13.0% (9.9%)
953
Sales Comparison Approach
Projected Sales Profit of Underlying
Loans
0.1 to 0.4% (0.3%)
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 changes in unrealized gains and losses and interest income recorded in earnings for Level
3 trading assets and liabilities that are still held at the periods indicated:
(Dollars in thousands)
Interest income on investments
Fair value adjustment
Total
2019
Year Ended June 30,
2018
2017
$
$
— $
—
— $
— $
—
— $
311
743
1,054
F-26
The table below summarizes the fair value of assets measured for impairment on a non-recurring basis:
(Dollars in thousands)
Impaired loans and leases:
Single family real estate secured:
Mortgage
Multifamily real estate secured
Auto and RV secured
Other
Total
Other real estate owned and foreclosed assets:
Single family real estate
Autos and RVs
Total
(Dollars in thousands)
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
Total
Other real estate owned and foreclosed assets:
Single family real estate
Autos and RVs
Total
June 30, 2019
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Balance
$
$
$
$
— $
—
—
—
— $
— $
—
— $
— $
—
—
—
— $
— $
—
— $
46,005
2,108
115
216
48,444
7,449
36
7,485
June 30, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
$
$
$
— $
—
—
—
—
—
— $
— $
—
— $
— $
—
—
—
—
—
— $
— $
—
— $
28,446
16
232
60
2,361
111
31,226
9,385
206
9,591
$
$
$
$
$
$
$
$
46,005
2,108
115
216
48,444
7,449
36
7,485
Balance
28,446
16
232
60
2,361
111
31,226
9,385
206
9,591
Impaired loans and leases measured for impairment on a non-recurring basis using the fair value of the collateral for
collateral-dependent loans have a carrying amount of $48,444 at June 30, 2019 and life to date charge-offs of $3,503. Impaired
loans had a related allowance of $422 at June 30, 2019. At June 30, 2018, such impaired loans had a carrying amount of $31,226
and life to date charge-offs of $3,294, and a related allowance of $278.
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 $7,485 after charge-offs of $1,008 at June 30, 2019. Our other real estate owned and foreclosed
assets had a net carrying amount was $9,591 after charge-offs of $301 during the year ended June 30, 2018.
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 non-accrual as of June 30, 2019 and June 30, 2018.
F-27
The aggregate fair value, contractual balance (including accrued interest), and unrealized gain was as follows:
(Dollars in thousands)
Aggregate fair value
Contractual balance
Gain
2019
33,260
32,342
918
$
$
$
$
At June 30,
2018
35,077
34,415
662
$
$
2017
18,738
18,311
427
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:
(Dollars in thousands)
Interest income
Change in fair value
Total
2019
1,006
544
1,550
$
$
$
$
At June 30,
2018
903
181
1,084
$
$
2017
602
(514)
88
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:
(Dollars in thousands)
Fair Value Valuation Technique
Unobservable Input
Range (Weighted Average)1
June 30, 2019
Impaired loans and leases:
Single family real estate secured:
Mortgage
Multifamily real estate secured
Auto and RV secured
Other
$
$
$
$
46,005
Sales comparison
approach
Adjustment for differences between the
comparable sales
-83.2 to 80.0% (-2.0%)
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%)
115
Sales comparison
approach
Adjustment for differences between the
comparable sales
-49.0 to 24.0% (2.6%)
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
Autos and RVs
$
$
7,449
Sales comparison
approach
Adjustment for differences between the
comparable sales
-46.3 to 53.0% (5.3%)
36
Sales comparison
approach
Adjustment for differences between the
comparable sales
-13.6 to 56.3% (8.0%)
1 For impaired loans and other real estate owned 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.
F-28
(Dollars in thousands)
Fair Value Valuation Technique
Unobservable Input
Range (Weighted Average)1
June 30, 2018
Impaired loans and leases:
Single family real estate secured:
Mortgage
Home equity
Multifamily real estate secured
Auto and RV secured
Commercial & Industrial
Other
$
$
$
$
$
$
28,446
16
232
60
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach and income
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales and adjustments for
differences in net operating income
expectations, capitalization rate
-48.8 to 66.7% (2.3%)
0.0 to 14.9% (7.4%)
-15.5 to 46.4% (15.4%)
Sales comparison
approach
Adjustment for differences between the
comparable sales
-2.0 to 71.5% (24.0%)
2,361 Discounted cash flow
Discount Rate
-33.8 to 0.0% (-16.9%)
111 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%)
-1.0 to 2.5% (0.8%)
Other real estate owned and foreclosed assets:
Single family real estate
Autos and RVs
$
$
9,385
206
Sales comparison
approach
Sales comparison
approach
Adjustment for differences between the
comparable sales
Adjustment for differences between the
comparable sales
-14.1 to 27.3% (0.5%)
-33.9 to 60.5% (7.9%)
1 For impaired loans and other real estate owned 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.
F-29
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of financial instruments at year-end were as follows:
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Loans held for sale, at fair value
Loans held for sale, at lower of cost or fair value
Loans and leases held for investment—net
Securities borrowed
Customer, broker-dealer and clearing receivables
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Total deposits
Advances from the Federal Home Loan Bank
Borrowings, subordinated notes and debentures
Securities loaned
Customer, broker-dealer and clearing payables
Accrued interest payable
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Securities trading
Loans held for sale, at fair value
Loans held for sale, at lower of cost or fair value
Loans and leases held for investment—net
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Total deposits
Advances from the Federal Home Loan Bank
Subordinated notes and debentures
Accrued interest payable
June 30, 2019
Carrying
Amount
Level 1
Level 2
Level 3
Total Fair
Value
$
857,368
$
857,368
$
— $
— $
857,368
227,513
33,260
4,800
9,382,124
144,706
203,192
38,988
9,784
8,983,173
458,500
168,929
198,356
238,604
2,882
—
—
—
—
—
—
—
—
—
—
—
—
—
—
214,488
33,260
—
—
—
—
—
—
8,758,861
461,156
169,212
—
—
2,882
13,025
—
4,990
227,513
33,260
4,990
9,630,061
9,630,061
144,720
203,355
38,988
9,784
—
—
—
198,197
229,987
—
144,720
203,355
38,988
9,784
8,758,861
461,156
169,212
198,197
229,987
2,882
June 30, 2018
Carrying
Amount
Level 1
Level 2
Level 3
Total Fair
Value
$
622,850
$
622,850
$
— $
— $
622,850
180,305
35,077
2,686
8,432,289
26,729
10,752
7,985,350
457,000
54,552
1,753
—
—
—
—
—
—
—
—
—
—
162,862
35,077
—
—
—
—
7,584,928
453,326
51,693
1,753
17,443
—
2,734
180,305
35,077
2,734
8,466,494
8,466,494
26,729
10,752
26,729
10,752
—
—
—
—
7,584,928
453,326
51,693
1,753
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.
F-30
4. SECURITIES
The amortized cost, carrying amount and fair value for the securities available-for-sale for the following periods were:
(Dollars in thousands)
Mortgage-backed securities (RMBS):
U.S agencies1
Non-agency2
Total mortgage-backed securities
Non-RMBS:
U.S. agencies1
Municipal
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
(Dollars in thousands)
Mortgage-backed securities (RMBS):
U.S. agencies1
Non-agency2
Total mortgage-backed securities
Non-RMBS:
Municipal
Asset-backed securities and structured notes
Total Non-RMBS
Total debt securities
June 30, 2019
Available-for-sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
9,486
13,489
22,975
1,682
21,974
179,976
203,632
226,607
$
$
179
226
405
3
16
2,088
2,107
2,512
$
$
(79) $
(690)
(769)
9,586
13,025
22,611
—
(828)
(9)
(837)
(1,606) $
1,685
21,162
182,055
204,902
227,513
June 30, 2018
Available-for-sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
13,102
$
19,384
32,486
20,953
127,558
148,511
152
116
268
2
2,267
2,269
$
180,997
$
2,537
$
$
(328) $
(2,057)
(2,385)
12,926
17,443
30,369
(743)
(101)
(844)
(3,229) $
20,212
129,724
149,936
180,305
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 prime, Alt-
A or pay-option ARM mortgages.
The Company’s non-agency RMBS available-for-sale portfolio with a total fair value of $13,025 at June 30, 2019 consists
of fourteen different issues of super senior securities. During the fiscal year ended June 30, 2018, the Company sold its two
mezzanine z-tranche securities for a gain of $153.
Debt securities with evidence of credit quality deterioration since issuance and for which it is probable at purchase that
the Company will be unable to collect all of the par value of the security are accounted for under ASC Topic 310-30, Loans and
Debt Securities Acquired with Deteriorated Credit Quality (“ASC Topic 310-30”). Under ASC Topic 310-30, the excess of cash
flows expected at acquisition over the purchase price is referred to as the accretable yield and is recognized in interest income
over the remaining life of the security. During the fiscal year ended June 30, 2018, the Company sold its one senior support security
for a loss of $861.
The face amounts of debt securities available-for-sale that were pledged to secure borrowings at June 30, 2019 and 2018
were $3,555 and $2,540 respectively.
F-31
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:
June 30, 2019
Available-for-sale securities in loss position for
More Than 12
Months
Less Than 12
Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
44
32
76
—
101
101
177
$
$
(2) $
(1)
(3)
$
4,612
8,527
13,139
(77) $
(689)
(766)
$
4,656
8,559
13,215
(79)
(690)
(769)
—
12,997
(828)
12,997
(828)
(1)
(1)
(4) $
1,779
14,776
27,915
$
(8)
(836)
(1,602) $
1,880
14,877
28,092
$
(9)
(837)
(1,606)
June 30, 2018
Available-for-sale securities in loss position for
More Than 12
Months
Less Than 12
Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
12
36
48
(1) $
(1)
(2)
6,825
15,867
22,692
$
(327) $
(2,056)
(2,383)
$
6,837
15,903
22,740
(328)
(2,057)
(2,385)
1,740
(17)
12,326
(726)
14,066
(743)
9,489
11,229
11,277
$
(30)
(47)
(49) $
6,163
18,489
41,181
$
(71)
(797)
(3,180) $
15,652
29,718
52,458
$
(101)
(844)
(3,229)
$
$
$
$
(Dollars in thousands)
RMBS:
U.S. agencies
Non-agency
Total RMBS securities
Non-RMBS:
Municipal debt
Asset-backed securities and structured
notes
Total Non-RMBS
Total debt securities
(Dollars in thousands)
RMBS:
U.S. agencies
Non-agency
Total RMBS securities
Non-RMBS:
Municipal debt
Asset-backed securities and structured
notes
Total Non-RMBS
Total debt securities
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.
There were twenty-six securities that were in a continuous loss position at June 30, 2018 for a period of more than 12 months.
There were eleven securities that were in a continuous loss position at June 30, 2018 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:
F-32
(Dollars in thousands)
Beginning balance
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
2019
At June 30,
2018
(15,528) $
— $
2017
(20,865)
(821)
(7)
(342)
—
—
(821) $
(149)
15,684
—
(1,622)
7,301
(15,528)
$
$
At June 30, 2019, one non-agency RMBS with a total carrying amount of $3,143 was determined to have cumulative
credit losses of $821. Cumulative credit losses of $1,964 were recognized in earnings during fiscal 2017, $156 was recognized in
earnings during fiscal 2018 and $821 was recognized in earnings through other-than-temporary impairment, during fiscal 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 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
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 flows 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 3 – Fair Value. 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 fiscal year ended June 30, 2018, total proceeds of $8,700 and net realized gains of $282 were realized from
the sale of two trading securities with a carrying value of $8,327. During the fiscal year ended June 30, 2019, the company sold
six available-for-sale securities with a carrying value of $15,131 resulting in a $709 gain.
The gross gains and losses realized through earnings upon the sale of available-for-sale securities were as follows:
(Dollars in thousands)
Proceeds
Gross realized gains
Gross realized loss
Net gain on securities
2019
At June 30,
2018
2017
$
$
$
15,863
842
(133)
709
$
$
$
$
$
44,013
1,269
(1,569)
(300) $
161,048
7,386
(3,466)
3,920
F-33
The Company records unrealized gains and unrealized losses in accumulated other comprehensive loss as follows:
(Dollars in thousands)
Available-for-sale debt securities—net unrealized gains
Available-for-sale debt securities—non-credit related
Subtotal
Tax (provision) benefit
Net unrealized gain (loss) on investment securities in accumulated other
comprehensive loss
$
$
At June 30,
2019
2018
$
905
(845)
60
(44)
16
$
(692)
—
(692)
79
(613)
The expected maturity distribution of the Company’s mortgage-backed securities and the contractual maturity distribution
of the Company’s Non-RMBS securities:
(Dollars in thousands)
RMBS—U.S. agencies1:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total RMBS—U.S. agencies1
RMBS—Non-agency:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total RMBS—Non-agency
Non-RMBS:
Due within one year
Due one to five years
Due five to ten years
Due after ten years
Total Non-RMBS
Total
June 30, 2019
Available-for-sale
Amortized
Cost
Fair
Value
$
862
$
2,905
2,674
3,045
9,486
1,877
5,938
3,824
1,850
13,489
22,552
168,208
8,266
4,606
203,632
226,607
$
$
861
2,917
2,708
3,100
9,586
1,820
5,699
3,659
1,847
13,025
23,279
169,578
7,613
4,432
204,902
227,513
1 Residential mortgage-backed security (RMBS) distributions include impact of expected prepayments and other timing factors.
F-34
5. LOANS, LEASES & ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Company’s single family, commercial and multifamily loans, the allowance methodology takes into consideration
the risk that the original borrower information may have adversely changed in two ways. First, in calculating the quantitative factor
for the Company’s general loan and lease loss allowance, the actual loss experience is tracked and stratified by original LTV and year
of origination. As a result, the Company uses relatively higher loss rates across the LTV bands for loans originated and purchased in
years 2005 through 2008 compared to the same LTV ranges for loans originated before 2005 or after 2008. Second, the Company
uses a number of qualitative factors to reflect additional risk. One qualitative loss factor is real estate valuation risk which is applied
to each LTV band primarily based upon the year the real estate loan was originated or purchased. Based upon price appreciation
indices, multifamily property values in years 2005 through 2008 experienced significant declines. As a result, the Company applies
a relatively higher qualitative loss factor rate across the LTV bands for loans originated and purchased in years 2005 through 2008
compared to the same LTV ranges for loans originated or purchased before 2005 or after 2008. Lastly, the Company separates its
allowance for loan and lease losses into loans originated and purchased categories in order to reflect the additional risk associated
with purchased loans.
For the Company’s home equity loans, the allowance methodology takes into consideration the risk that the original borrower
information may have adversely changed in two ways. First, in calculating the quantitative factor for the Company’s general loan loss
allowance, the actual loss experience is tracked and stratified by original combined LTV (“CLTV”) of the first and second liens. As
a result, the Company allocates higher loss rates in proportion to the greater the CLTV. Second, the Company uses a number of
qualitative factors to reflect additional risk. The Company does not have any individual purchased home equity loans in its portfolio
and given the limited time frame under which the Company originated home equity loans, 2006-2009, no additional risk allocation
is used.
For the Company’s single family – warehouse lines, the allowance methodology takes into consideration the structure of
these loans, as they remain in the portfolio for a short period (usually less than a month) and have higher credit protection allocated
compared to traditional single family originations. A matrix was created to reflect most current operating levels of capital and line
usage, which calculates a loss rating to assign to each originator.
For the Company’s factoring loans, the allowance methodology takes into consideration the credit quality of the insurance
company or state. The Company obtains credit ratings for these entities through agencies such as A.M. Best and allocates an allowance
allocation based on these ratings.
For the Company’s C&I leveraged loans, equipment finance leases and bridge loans, the allowance methodology incorporates
a loan level grading system, which generally aligns with the credit rating. Industry loss rates are applied to determine the loss allowance
for each of these loans based upon their internal grading. The credit rating incorporates multiple borrower attributes including, but
not limited to, underlying collateral and pledged assets, income generated by the property or assets, borrower’s liquidity and access
to liquid funds, strength of the borrower’s industry, stability of the borrower’s market, the size of the company, collateral diversity,
facility exit strategies and borrower guarantees. Equipment direct finance leases are derecognized from the balance sheet and the net
investment in the lease is recorded. This net investment is the sum of the present value of future lease payments and any unguaranteed
residual value. Interest income is recorded using the effective interest rate of the lease.
For the Company’s automobile (“auto”) and recreational vehicle (“RV”) loan portfolio, the allowance methodology takes
into consideration potential adverse changes to the borrower’s financial condition since time of origination. The general loan loss
reserves for auto and RV are stratified based upon borrower FICO scores. First, to account for potential deterioration of borrower’s
credit history since time of origination, due to downturn in the economy or other factors, the Company uses the origination FICO
scores to drive the allowance on a semi-annual basis. The Company believes that current borrower credit history is a better predictor
of potential loss than that was used at time of origination. Second, the Company uses qualitative factors such as; changes in the
economy, volume, and changes in the underlying collateral to capture additional risk when finalizing its calculation of the allowance
for loan and lease losses.
Loan and lease segment risk characteristics. The Company considers its loan and lease classes to be the same as its loan
and lease segments. The following are loan and lease segment risk characteristics of the Company’s loan and lease portfolio:
Single family mortgage secured. The Company originates both fixed-rate and adjustable-rate loans secured by one-to-four
family residences located in the U.S. The Company’s lending policies generally limit the maximum LTV ratio on one-to-four family
loans to 80% of the lesser of the appraised value or the purchase price, plus pledged collateral. Terms of maturity typically range from
15 to 30 years. The Company attempts to mitigate residential lending risks by adhering to its underwriting policies in evaluating the
collateral and the credit-worthiness of the borrower.
Home equity. The Company also originates home equity lines of credit and second mortgage loans. Home equity lines of
credit and second mortgage loans have a greater credit risk than one-to-four family residential mortgage loans because they are secured
by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company. The Company
F-35
attempts to mitigate residential lending risks by adhering to its underwriting policies in evaluating the collateral and the credit-
worthiness of the borrower.
Warehouse and other. Single family warehouse loans consist of short-term, secured advances to mortgage bankers on a
revolving basis. These facilities enable the mortgage originators to close loans in their own names and temporarily finance inventories
of closed mortgage loans until they can be sold to an approved investor. Commercial specialty and lender finance loans secured by
single family real estate are originated to businesses secured by first liens on single family mortgage loans. These loans are generally
collateralized by single family mortgage loans that are secured by first liens on single family real estate. The Company attempts to
mitigate residential lending risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the
borrower.
Multifamily. The Company originates loans secured by multifamily real estate (more than four units). These loans involve
a greater degree of risk than one-to-four family residential mortgage loans as these loans are usually greater in amount, dependent on
the cash flow capacity of the project, and may be more difficult to evaluate and monitor. Repayment of loans secured by multifamily
properties frequently depends on the successful operation and management of the properties. Consequently, repayment of such loans
may be affected by adverse conditions in the real estate market or economy. The Company attempts to mitigate these risks by thoroughly
evaluating the global financial condition of the borrower, the management experience of the borrower, and the quality of the collateral
property securing the loan.
Commercial real estate. The Company originates loans across the U.S. secured by small commercial real estate properties.
These are primarily cash flow loans that share characteristics of both real estate and commercial business loans. The primary source
of repayment is frequently cash flow from the operation of the collateral property and secondarily through liquidation of the collateral.
These loans are generally higher risk than other classifications of loans in that they typically involve higher loan amounts, are dependent
on the management experience of the owners, and may be adversely affected by conditions in the real estate market or the economy.
Owner-occupied commercial real estate loans are generally of lower credit risk than non-owner occupied commercial real estate loans
as the borrowers’ businesses are likely dependent on the properties. Underwriting for these loans is primarily dependent on the
repayment capacity derived from the operation of the occupying business rather than rents paid by third parties. The Company attempts
to mitigate these risks by generally limiting the maximum LTV ratio to 65%-80%, depending on property type, and scrutinizing the
financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.
Auto and RV. Auto and RV loans primarily consist of direct and indirect auto loans and legacy RV loans. These auto and
RV loans were originated across the U.S. The collateral for these auto and RV loans is comprised of a mix of new and used autos and
RVs. Auto and RV loans generally have shorter terms to maturity than mortgage loans. Auto and RV loans generally involve a greater
degree of risk than do residential mortgage loans, particularly in the case of auto and RV loans, which are secured by rapidly depreciating
and mobile assets. In such cases, any repossessed collateral for a defaulted auto and RV loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The Company attempts
to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.
Factoring. Factoring loans are originated through the wholesale and retail purchase of state lottery prize and structured
settlement annuities. These annuities are high credit quality deferred payment receivables having a state lottery commission or primarily
highly rated insurance company payor. Purchases of state lottery prize or structured settlement annuities are governed by specific
state statutes requiring judicial approval of each transaction. No transaction is funded before an order approving such transaction has
been entered by a court of competent jurisdiction. The Company’s commission-based sales force originates contracts for the retail
purchase of such payments from leads generated by the Company’s dedicated research department through the use of proprietary
research techniques. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-
worthiness of the state or insurer.
Commercial and industrial. Commercial and industrial loans and leases are primarily made based on the operating cash
flows of the borrower or conversion of working capital assets to cash and secondarily on the underlying collateral provided by the
borrower. The cash flows of borrowers may be volatile and the value of the collateral securing these loans and leases may be difficult
to measure. Most commercial and industrial loans and leases are secured by the assets being financed or other business assets such
as accounts receivable or inventory and generally include personal guarantees based on a review of personal financial statements.
Although commercial and industrial loans and leases are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment, because
accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. Accordingly, the repayment
of a commercial and industrial loan or lease primarily depends on the credit-worthiness of the borrower and guarantors, while the
liquidation of collateral is a secondary and potentially insufficient source of repayment. The Company attempts to mitigate these risks
by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of borrowers and
guarantors.
Other. The Company originates other loans, which include unsecured consumer loans and other small balance business and
consumer loans. Other consumer loans generally have shorter terms to maturity than mortgage loans. Other consumer loans generally
F-36
involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured. In
such cases, it is not possible to repossess collateral for a defaulted consumer loan and as such there may not exist an adequate source
of repayment of the outstanding loan balance as a result of the absence of security. The Company attempts to mitigate these risks by
adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.
The following table sets forth the composition of the loan and lease portfolio as of the dates indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
Home equity
Warehouse and other1
Multifamily real estate secured
Commercial real estate secured
Auto and RV secured
Factoring
Commercial & Industrial
Other
Total gross loans and leases
Allowance for loan and lease losses
At June 30,
2019
2018
$
4,278,822
$
2,258
820,559
1,948,513
326,154
290,894
93,091
1,653,314
35,705
9,449,310
(57,085)
(10,101)
9,382,124
$
4,198,941
2,306
412,085
1,800,919
220,379
213,522
169,885
1,481,051
18,598
8,517,686
(49,151)
(36,246)
8,432,289
Unaccreted discounts and loan and lease fees
Total net loans and leases
$
1 The balance of single family warehouse loans was $301,999 at June 30, 2019 and $175,508 at June 30, 2018. The remainder of the balance was attributable to
commercial specialty and lender finance loans secured by single family real estate.
The following table summarizes activity in the allowance for loan and lease losses for the periods indicated:
(Dollars in thousands)
Balance—beginning of period
Provision for loan and lease loss
Charged off
Transfers to held for sale
Recoveries
Balance—end of period
2019
At June 30,
2018
2017
$
$
$
49,151
27,350
(19,663)
(2,356)
2,603
$
40,832
25,800
(15,979)
(2,307)
805
57,085
$
49,151
$
35,826
11,061
(5,096)
(1,828)
869
40,832
Loans loans held for investment transfered to loans held for sale classification are carried at the lower of cost or fair value.
At the time of transfer into the held for sale classification, any amount by which cost exceeds fair value is accounted for as a charge
against the allowance for loan and lease losses, shown in the transfers to held for sale in the table above.
The following table summarizes the composition of the impaired loans and leases:
(Dollars in thousands)
Nonaccrual loans and leases—90+ days past due plus other
nonaccrual loans and leases
Troubled debt restructured loans and leases—non-accrual
Troubled debt restructured loans and leases—performing
Total impaired loans and leases
$
$
F-37
2019
At June 30,
2018
2017
47,821
623
—
48,444
$
$
30,197
1,029
—
31,226
$
$
26,815
1,578
—
28,393
At June 30, 2019, the carrying value of impaired loans and leases is net of write offs of $2,415. At June 30, 2019, $48,444
of impaired loans and leases had no specific allowance allocations. The average carrying value of impaired loans and leases was
$39,468 and $30,420 for the fiscal years ended June 30, 2019 and 2018, respectively. The interest income recognized during the
periods of impairment is insignificant for those loans and leases impaired at June 30, 2019 or 2018. At June 30, 2019 and 2018, there
were no loans or leases still accruing past due 90 days or more, unless the Company received principal and interest from the servicer
despite the borrower’s delinquency. Cash receipts for loans and leases impaired is recorded against principal. The Company considers
the servicer’s recovery of such advances in evaluating whether such loans should continue to accrue. A loan or lease is considered
impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan or lease agreement. Factors that we consider in determining
impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when
due. Loans or leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan or
lease’s effective interest rate or the fair value of the collateral if repayment of the loan or lease is expected from the sale of collateral.
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 refinanced related party loan in the amount of $1,306 during the fiscal
year ended June 30, 2019. During the fiscal year 2018, the Company originated no new related party loans and did not execute any
interest rate modifications of existing loans. Total principal payments on related party loans were $461 and $341 during the years
ended June 30, 2019 and 2018, respectively. At June 30, 2019 and 2018, these loans amounted to $13,342 and $8,956, respectively,
and are included in loans held for investment. Interest earned on these loans was $326 and $81 during the years ended June 30, 2019
and 2018, respectively.
The Company’s loan and lease portfolio consists of approximately 11.7% fixed interest rate loans and 88.3% adjustable
interest rate loans as of June 30, 2019. The Company’s adjustable rate loans are generally based upon indices using U.S. Treasury
rates, LIBOR and Eleventh District Cost of Funds.
At June 30, 2019 and 2018, purchased loans serviced by others were $57,667 or 0.61% and $64,536 or 0.76% respectively,
of the loan portfolio.
Allowance for Loan and Lease Losses. The Company is committed to maintaining the allowance for loan and lease losses
at a level that is considered to be commensurate with estimated probable incurred credit losses 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 the
Company believes that the allowance for loan and lease losses is adequate at June 30, 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.
Allowance for Credit Loss Disclosures. 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. Based on historical performance, the Company
divides the LTV analysis into two classes, separating purchased loans from the loans underwritten directly by the Company since
mortgage loans originated by the Company experience lower estimated loss rates.
The Company provides general loan loss reserves for its auto and RV loans based upon the borrower’s credit score at the
time of origination and the Company’s loss experience to date. The Company obtains updated credit scores for its auto and RV
borrowers approximately every six months. The updated credit score will result in a higher or lower general loan loss allowance
depending on the change in borrowers’ FICO scores and the resulting shift in loan balances among the five FICO bands from which
the Company measures and calculates its reserves. For the general loss reserve, the Company does not use individually updated credit
scores or valuations for the real estate collateralizing its real estate loans.
The allowance for loan and lease losses for the auto and RV loan portfolio at June 30, 2019 was determined by classifying
each outstanding loan according to the original FICO score and providing loss rates.
The Company provides general loan loss reserves for mortgage loans based upon the size and class of the mortgage loan
and the LTV at date of origination. The allowance for each class is determined by dividing the outstanding unpaid balance for each
loan by the LTV and applying a loss rate.
The Company originates and purchases mortgage loans with terms that may include repayments that are less than the
repayments for fully amortizing loans, including interest only loans, option adjustable-rate mortgages, and other loan types that permit
payments that may be smaller than interest accruals. The Companies 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 Company’s Credit Committee monitors and performs reviews of interest only loans. Adverse trends
reflected in the Company’s delinquency statistics, grading and classification of interest only loans would be reported to management
F-38
and the Board of Directors. As of June 30, 2019, the Company had $1.3 billion of interest only loans and $1.6 million of option
adjustable-rate mortgage loans. Through June 30, 2019, the net amount of deferred interest on these loan types was not material to
the financial position or operating results of the Company.
The Company’s commercial real estate secured portfolio consists of loans well collateralized by commercial real estate.
The Company’s commercial and industrial portfolio primarily consists of real estate-backed and asset-backed loans and
leases to businesses and non-bank lenders. The Company’s other portfolios consist of receivables factoring for businesses and
consumers and other small balance business and consumer loans. The Company allocates its allowance for loan and lease losses for
these asset types based on qualitative factors which consider various attributes captured in the credit rating, the value of the collateral
and the financial position of the issuer of the receivables.
F-39
The following tables summarize activity in the allowance for loan and lease losses by portfolio classes for the periods
indicated:
Single Family
June 30, 2019
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Other
Total
Balance at July 1, 2018
$
20,368
$
14
$
2,080
$
5,010
$
849
$
3,178
$
445
$
16,238
$
969
$
49,151
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
1,317
(799)
—
396
Balance at June 30, 2019
$
21,282
$
—
—
11
13
(12)
4,247
(1,022)
—
—
—
—
—
109
195
—
—
—
2,605
(1,156)
—
191
(112)
—
—
—
2,286
(1,149)
—
—
17,846
27,350
(16,559)
(19,663)
(2,356)
1,896
(2,356)
2,603
$
6,327
$
4,097
$
1,044
$
4,818
$
333
$
17,375
$
1,796
$
57,085
Single Family
June 30, 2018
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Other
Total
Balance at July 1, 2017
$
19,972
$
19
$
2,298
$
4,638
$
1,008
$
2,379
$
401
$
9,881
$
236
$
40,832
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
632
(271)
—
35
Balance at June 30, 2018
$
20,368
$
(18)
(1)
—
14
14
69
(287)
—
—
372
—
—
—
(159)
—
—
—
1,390
(803)
—
212
44
—
—
—
6,357
17,113
25,800
—
—
—
(14,617)
(15,979)
(2,307)
(2,307)
544
969
805
$
49,151
$
2,080
$
5,010
$
849
$
3,178
$
445
$
16,238
$
Single Family
June 30, 2017
(Dollars in thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
&
Industrial
Consumer
& Other
Total
Balance at July 1, 2016
$
18,666
$
23
$
2,685
$
3,938
$
882
$
1,615
$
245
$
7,630
$
142
$
35,826
Provision for loan and
lease loss
Charge-offs
Transfers to held for sale
Recoveries
2,308
(1,115)
—
113
Balance at June 30, 2017
$
19,972
$
(6)
(23)
—
25
19
(387)
—
—
—
323
—
—
377
110
(23)
—
39
990
(433)
—
207
156
—
—
—
2,251
—
—
—
$
2,298
$
4,638
$
1,008
$
2,379
$
401
$
9,881
$
5,316
(3,502)
(1,828)
108
236
11,061
(5,096)
(1,828)
869
$
40,832
F-40
The following tables present our loans and leases evaluated individually for impairment by portfolio class for the periods
indicated:
June 30, 2019
Unpaid
Principal
Balance
Principal
Balance
Adjustment1
Recorded
Investment
Accrued
Interest/
Origination
Fees
Related
Allocation of
General
Allowance
Related
Allocation of
Specific
Allowance
Total
4,874
2,237
326
40,758
1,418
2,108
10
216
51,947
$
$
1,775
1,142
221
348
17
—
—
—
3,503
$
$
3,099
1,095
105
40,410
1,401
2,108
10
216
48,444
$
$
255
—
4
731
109
9
$
3,354
1,095
109
41,141
1,510
2,117
10
216
49,552
—
—
1,108
$
0.55%
0.04%
0.51%
0.01%
0.52%
$
$
— $
—
—
393
12
3
1
13
422
—%
$
—
—
—
—
—
—
—
—
—
—%
June 30, 2018
Unpaid
Principal
Balance
Principal
Balance
Adjustment1
Recorded
Investment
Accrued
Interest/
Origination
Fees
Related
Allocation of
General
Allowance
Related
Allocation of
Specific
Allowance
Total
$
1,584
3,598
$
951
1,739
$
633
1,859
$
480
369
24,607
1,394
16
172
248
309
47
—
—
—
232
60
24,560
1,394
16
172
78
—
—
2
—
21
—
—
$
711
1,859
$
— $
—
232
62
24,560
1,415
16
172
—
—
247
14
1
9
—
—
—
—
—
—
—
—
—
—
—%
Total
As a % of total gross loans and leases
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.
0.34%
0.34%
0.38%
0.04%
$
$
$
$
$
$
$
—
101
—%
111
29,138
7
278
—%
111
32,331
—
3,294
111
29,037
$
(Dollars in thousands)
With no related allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Auto and RV secured
In-house originated
With an allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Other
Total
As a % of total gross loans and leases
$
(Dollars in thousands)
With no related allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Multifamily real estate secured
Purchased
Auto and RV secured
In-house originated
With an allowance recorded:
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Commercial & Industrial
Other
F-41
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:
June 30, 2019
Single Family
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
(Dollars in thousands)
Mortgage
Allowance for loan and lease losses:
Ending allowance balance attributable to loans and leases:
Individually evaluated for
impairment–
general allowance
Individually evaluated for
impairment–
specific allowance
Collectively evaluated for
impairment
Total ending allowance
balance
Loans and leases:
Loans and leases
individually evaluated for
impairment 1
Loans and leases
collectively evaluated for
impairment
Principal loan and lease
balance
Unaccreted discounts and
loan and lease fees
Total recorded investment
in loans and leases
$
405
$
— $
— $
3
$
— $
1
$
— $
— $
13
$
422
—
20,877
—
13
—
—
—
—
6,327
4,094
1,044
4,817
—
333
—
—
—
17,375
1,783
56,663
$
21,282
$
13
$
6,327
$
4,097
$
1,044
$
4,818
$
333
$
17,375
$
1,796
$
57,085
$
46,005
$
— $
— $
2,108
$
— $
115
$
— $
— $
216
$
48,444
4,232,817
4,278,822
2,258
2,258
820,559
1,946,405
326,154
290,779
93,091
1,653,314
35,489
9,400,866
820,559
1,948,513
326,154
290,894
93,091
1,653,314
35,705
9,449,310
8,724
66
(1,773)
5,090
649
2,631
(21,627)
(3,169)
(692)
(10,101)
$ 4,287,546
$
2,324
$
818,786
$ 1,953,603
$
326,803
$
293,525
$
71,464
$
1,650,145
$
35,013
$ 9,439,209
1 Loans and leases evaluated for impairment include TDRs that have been performing for more than six months.
June 30, 2018
Single Family
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV
secured
Factoring
Commercial
& Industrial
Other
Total
(Dollars in thousands)
Mortgage
Allowance for loan and lease losses:
Ending allowance balance attributable to loans and leases:
Individually evaluated for
impairment –
general allowance
Individually evaluated for
impairment –
specific allowance
Collectively evaluated for
impairment
Total ending allowance
balance
Loans and leases:
Loans and leases
individually evaluated for
impairment 1
Loans and leases
collectively evaluated for
impairment
Principal loan and lease
balance
Unaccreted discounts and
loan and lease fees
Total recorded investment
in loans and leases
$
$
261
$
1
$
— $
— $
— $
— $
— $
9
$
7
$
278
— $
— $
— $
— $
— $
— $
— $
— $
— $
—
20,107
13
2,080
5,010
849
3,178
445
16,229
962
48,873
$
20,368
$
14
$
2,080
$
5,010
$
849
$
3,178
$
445
$
16,238
$
969
$
49,151
$
28,446
$
16
$
— $
232
$
— $
60
$
— $
172
$
111
$
29,037
4,170,495
4,198,941
2,290
2,306
412,085
1,800,687
220,379
213,462
169,885
1,480,879
18,487
8,488,649
412,085
1,800,919
220,379
213,522
169,885
1,481,051
18,598
8,517,686
9,187
48
(706)
5,063
836
2,065
(48,039)
(3,884)
(816)
(36,246)
$ 4,208,128
$
2,354
$
411,379
$ 1,805,982
$
221,215
$
215,587
$
121,846
$
1,477,167
$
17,782
$ 8,481,440
1 Loans and leases evaluated for impairment include TDRs that have been performing for more than six months.
F-42
Credit Quality Disclosure. Nonaccrual loans and leases consisted of the following as of the dates indicated:
(Dollars in thousands)
Nonaccrual loans and leases:
Single Family Real Estate Secured:
Mortgage
In-house originated
Purchased
Home Equity
In-house originated
Multifamily Real Estate Secured
In-house originated
Purchased
Total nonaccrual loans secured by real estate
Auto and RV Secured
Commercial and Industrial
Other
Total nonaccrual loans and leases
Nonaccrual loans and leases to total loans and leases
At June 30,
2019
2018
$
$
43,509
$
2,496
—
2,108
—
48,113
115
—
216
48,444
$
0.51%
25,193
3,253
16
—
232
28,694
60
2,361
111
31,226
0.37%
Approximately 1.29% of our nonaccrual loans and leases at June 30, 2019 were considered TDRs, compared to 3.30% at
June 30, 2018. Borrowers who 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 performing and return
to accrual status. Approximately 94.97% of the Bank’s nonaccrual loans and leases are single family first mortgages already written
down to 44.94% in aggregate, of the original appraisal value of the underlying properties.
The following tables provide the outstanding unpaid balance of loans and leases that are performing and nonaccrual by
portfolio class as of the dates indicated:
Single Family
June 30, 2019
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
& Industrial
Other
Total
Performing
$ 4,232,817
$
2,258
$
820,559
$ 1,946,405
$
326,154
$
290,779
$
93,091
$
1,653,314
$
35,489
$ 9,400,866
Nonaccrual
46,005
—
—
2,108
—
115
—
—
216
48,444
Total
$ 4,278,822
$
2,258
$
820,559
$ 1,948,513
$
326,154
$
290,894
$
93,091
$
1,653,314
$
35,705
$ 9,449,310
June 30, 2018
Single Family
(Dollars in
thousands)
Mortgage
Home
Equity
Warehouse
& Other
Multi-
family real
estate
secured
Commercial
real estate
secured
Auto and
RV secured
Factoring
Commercial
& Industrial
Other
Total
Performing
$ 4,170,495
$
2,290
$
412,085
$ 1,800,687
$
220,379
$
213,462
$
169,885
$
1,478,690
$
18,487
$ 8,486,460
Nonaccrual
28,446
16
—
232
—
60
—
2,361
111
31,226
Total
$ 4,198,941
$
2,306
$
412,085
$ 1,800,919
$
220,379
$
213,522
$
169,885
$
1,481,051
$
18,598
$ 8,517,686
F-43
Interest recognized on performing loans temporarily modified as TDRs was $0, $0, and $7 for the years ended June 30, 2019,
2018 and 2017 respectively. The average balances of performing TDRs and nonaccrual loans was $0 and $39,468 for the year ended
June 30, 2019, $0 and $30,420 for the year ended June 30, 2018 and $125 and $34,154 for the year ended June 30, 2017, respectively.
The Company had no TDRs classified as performing loans at June 30, 2019 or 2018.
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 as to 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 loan and lease 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.
F-44
The following tables present the composition of our loan and lease portfolio by credit quality indicator as of the dates
indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Warehouse and other1
In-house originated
Multifamily real estate secured
In-house originated
Purchased
Commercial real estate secured
In-house originated
Purchased
Auto and RV secured
In-house originated
Factoring
Commercial & Industrial
Other
Total
Pass
Special
Mention
Substandard
Doubtful
Total
June 30, 2019
$
4,155,408
38,534
$
37,219
598
$
44,568
2,496
$
— $
—
4,237,195
41,628
2,258
—
—
742,297
21,600
56,662
1,890,524
54,514
318,628
7,525
290,691
93,091
1,651,506
35,260
9,280,236
$
427
—
—
—
68
—
1,722
229
61,863
$
$
2,108
940
—
—
135
—
86
216
107,211
$
—
—
—
—
—
—
—
—
—
—
— $
—%
2,258
820,559
1,893,059
55,454
318,628
7,525
290,894
93,091
1,653,314
35,705
9,449,310
As of % of gross loans and leases
1 The $56.7 million included in the substandard column for Warehouse and other single family real estate secured category consists of a single loan,
which was fully repaid in July 2019.
98.2%
1.1%
0.7%
100.0%
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Warehouse and other
In-house originated
Multifamily real estate secured
In-house originated
Purchased
Commercial real estate secured
In-house originated
Purchased
Auto and RV secured
In-house originated
Factoring
Commercial & Industrial
Other
Total
Pass
Special
Mention
Substandard
Doubtful
Total
June 30, 2018
$
4,113,537
36,024
$
19,403
461
$
26,264
3,252
$
— $
—
4,159,204
39,737
2,290
412,085
1,731,068
64,663
212,235
6,226
213,455
169,885
1,471,433
18,369
8,451,270
$
$
—
—
3,983
—
—
1,918
—
—
5,460
118
31,343
$
16
—
—
1,205
—
—
67
—
1,969
111
32,884
—
—
—
—
—
—
—
—
2,189
—
2,189
$
$
2,306
412,085
1,735,051
65,868
212,235
8,144
213,522
169,885
1,481,051
18,598
8,517,686
As of % of gross loans and leases
99.2%
0.4%
0.4%
—%
100.0%
F-45
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 tables provide the outstanding unpaid balance of loans and leases that are past due 30 days or more by portfolio
class as of the dates indicated:
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Other
Total
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total
June 30, 2019
$
12,008
$
15,616
$
35,700
$
228
1,684
476
250
—
—
155
229
1,458
1,588
17
216
63,324
1,686
3,272
648
695
$
14,646
$
16,000
$
38,979
$
69,625
As a % of gross loans and leases
0.15%
0.17%
0.41%
0.73%
(Dollars in thousands)
Single family real estate secured:
Mortgage
In-house originated
Purchased
Home equity
In-house originated
Multifamily real estate secured
In-house originated
Auto and RV secured
In-house originated
Commercial & Industrial
Other
Total
As a % of gross loans and leases
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total
June 30, 2018
$
$
$
7,830
354
$
3,240
105
22,009
1,183
$
33,079
1,642
—
410
284
300
79
9,257
0.11%
$
—
—
22
—
111
3,478
0.04%
$
16
—
9
2,362
111
25,690
$
16
410
315
2,662
301
38,425
0.30%
0.45%
F-46
6. OFFSETTING OF SECURITIES FINANCING AGREEMENTS
The Company enters into securities borrowed and securities loaned transactions. The Company executes these transactions
to facilitate customer match-book activity, cover short positions and customer securities lending. The Company manages credit
exposure from certain transactions by entering into master securities lending agreements. The relevant agreements allow for the
efficient closeout of transactions, liquidation and set-off of collateral against the net amount owed by the counterparty following
a default. Default events generally include, among other things, failure to pay, insolvency or bankruptcy of a counterparty.
The following table presents information about the offsetting of these instruments and related collateral amounts as of
June 30, 2019:
(Dollars in thousands)
Assets:
Securities borrowed
Liabilities:
Securities loaned
Gross
Assets /
Liabilities
Amounts
Offset
Net Balance
Sheet
Amount
Financial
Collateral
Net Assets /
Liabilities
$
$
144,706
198,356
$
$
— $
144,706
— $
198,356
$
$
144,706
198,356
$
$
—
—
The securities loaned transactions represent equities with an overnight and open maturity classification.
F-47
7. CUSTOMER, BROKER-DEALER AND CLEARING RECEIVABLES AND PAYABLES
Customer, broker-dealer and clearing receivables and payables consisted of the following at June 30, 2019:
(Dollars in thousands)
Receivables:
Customers
Broker-dealer and clearing organizations:
Receivable from broker-dealers1
Securities failed to deliver
Other
Total customer, broker-dealer and clearing receivables
Payables:
Customers
Broker-dealer and clearing organizations:
Payable to broker-dealers
Securities failed to receive
Total customer, broker-dealer and clearing payables
1. Includes broker-dealer reserve for bad debt of $17.1 million.
8. FURNITURE, EQUIPMENT AND SOFTWARE
June 30, 2019
188,384
11,022
3,092
694
203,192
219,162
10,995
8,447
238,604
$
$
$
$
A summary of the cost and accumulated depreciation and amortization for leasehold improvements, furniture, equipment and
software is as follows:
(Dollars in thousands)
Leasehold improvements
Furniture and fixtures
Computer hardware and equipment
Software
Total
Less accumulated depreciation and amortization
Furniture, equipment and software—net1
1Furniture, equipment and software are included in the other assets line on the consolidated balance sheet.
At June 30,
2019
2018
5,481
$
7,049
20,991
41,930
75,451
(42,280)
33,171
$
1,953
5,418
13,863
27,605
48,839
(27,385)
21,454
$
$
Depreciation and amortization expense in respect of leasehold improvements, furniture, equipment and software for the years
ended June 30, 2019, 2018 and 2017 was $11,667, $7,923 and $6,094, respectively.
9. GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill of $71.2 million as of June 30, 2019 increased from the $35.7 million at June 30, 2018 as a
result of the acquisition of COR Clearing, which is a full-service correspondent clearing firm for introducing broker-dealers.
Company recorded goodwill on April 4, 2018 incident to its acquisition of the bankruptcy trustee and fiduciary services business
of Epiq.
Management has evaluated and continues to monitor all key factors impacting the carrying value of the Company’s
recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market
capitalization, business climate, economic factors or other negative events that may be outside the control of management could
result in material non-cash impairment charges in the future.
F-48
The following table summarizes the activity in the Company’s goodwill balance as of the dates indicated:
(Dollars in thousands)
Balance at July 1, 2018
Goodwill incident to acquisitions
Balance at June 30, 2019
Total
35,719
35,503
71,222
$
$
The Company’s acquired intangible assets are summarized as follows as of the dates indicated:
(Dollars in thousands)
Covenant not to
compete
Customer relationships
Customer deposit
intangible
Developed technologies
Trade name
June 30, 2019
June 30, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
930
$
291
$
639
$
930
$
58
$
31,310
13,545
23,050
290
1,886
1,436
1,720
121
29,424
12,109
21,330
169
9,820
—
21,680
290
243
—
326
24
651
$
872
9,577
—
21,354
266
32,069
Total intangible assets
$
69,125
$
5,454
$
63,671
$
32,720
$
The weighted-average useful lives of intangible assets at the time of acquisition were as follows:
Covenant not to compete
Customer relationships
Customer deposit intangible
Developed technologies
Trade name
Weighted-Average
Useful Lives (Years)
4
12
10
5
3
The amortization expense for intangible assets that are subject to amortization was $4,803 for the year ended June 30,
2019. Each intangible asset subject to amortization is amortized using the straight-line method over the estimated useful life of
the asset. Estimated future amortization expense related to finite-lived intangible assets at June 30, 2019 is as follows:
(Dollars in thousands)
For the fiscal year ending June 30,
2020
2021
2022
2023
2024
Thereafter
Total
Amortization Expense
$
$
9,503
9,795
8,441
8,020
7,551
20,361
63,671
F-49
10. DEPOSITS
Deposit accounts are summarized as follows:
(Dollars in thousands)
Non-interest bearing
Interest bearing:
Demand
Savings
Time deposits:
$250 and under
Greater than $250
Total time deposits
Total interest bearing2
Total deposits
At June 30,
2019
2018
Amount
Rate1
Amount
Rate1
$
1,441,930
—% $
1,015,355
—%
2,709,014
2,466,214
5,175,228
1,866,811
499,204
2,366,015
7,541,243
2.06%
1.48%
1.78%
2.47%
2.27%
2.43%
1.99%
2,519,845
2,482,430
5,002,275
1,837,274
130,446
1,967,720
6,969,995
$
8,983,173
1.67% $
7,985,350
1.60%
1.31%
1.46%
2.34%
2.05%
2.32%
1.70%
1.48%
1 Based on weighted-average stated interest rates at end of period.
2 The total interest-bearing includes brokered deposits of $1,124.0 million and $2,055.9 million as of June 30, 2019 and June 30, 2018, respectively, of which $796.7
million and $1,692.8 million, respectively, are time deposits classified as $250 and under.
The scheduled maturities of time deposits are as follows:
(Dollars in thousands)
Within 12 months
13 to 24 months
25 to 36 months
37 to 48 months
49 to 60 months
Thereafter
Total
At June 30,
2019
1,306,072
351,374
99,502
126,525
24,978
457,564
2,366,015
$
$
At June 30, 2019 and 2018, the Company had deposits from certain executive officers, directors and their affiliates in the amount
of $5,623 and $4,964, respectively.
F-50
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At June 30, 2019 and 2018, the Company’s fixed-rate FHLB advances had interest rates that ranged from 1.36% to 2.89% with
a weighted average of 2.39% and ranged from 1.36% to 3.32% with a weighted average of 2.14%, respectively.
Fixed-rate advances from FHLB are scheduled to mature as follows:
(Dollars in thousands)
Within one year1
After one but within two years
After two but within three years
After three but within four years
After four but within five years
After five years
Total
At June 30,
2019
2018
Amount
Weighted-
Average Rate
Amount
Weighted-
Average Rate
$
286,000
65,000
50,000
27,500
—
30,000
2.38% $
2.30%
2.47%
2.08%
—%
2.82%
229,500
55,000
65,000
50,000
27,500
30,000
$
458,500
2.39% $
457,000
2.02%
1.79%
2.30%
2.47%
2.08%
2.82%
2.14%
1. Within one year category includes of term advances of $231,000 and $147,500 at June 30, 2019 and 2018, respectively.
The Company’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid balance of
$4,684,088 and $4,687,166 at June 30, 2019 and 2018, respectively, by the Company’s investment in capital stock of the FHLB of San
Francisco and by its investment in mortgage-backed securities. Generally, each advance carries a prepayment penalty and is payable in
full at its maturity date.
The maximum amounts advanced at any month-end during the period from the FHLB were $3,424,000, $2,240,000, and
$1,317,000 during the years ended June 30, 2019, 2018, and 2017, respectively. At June 30, 2019, the Company had $1,952,094 available
immediately and $350 available with additional collateral for advances from the FHLB for terms up to ten years.
12. BORROWINGS, SUBORDINATED NOTES AND DEBENTURES
The following table sets forth the composition of the borrowings, subordinated notes and debentures as of the dates indicated:
(Dollars in thousands)
Borrowings from other banks
Subordinated loans
Subordinated notes
Subordinated debentures
Less unamortized issuance costs
Total borrowings, subordinated notes and debentures
June 30, 2019
June 30, 2018
$
$
106,800
$
7,400
51,000
5,155
1,426
168,929
$
—
—
51,000
5,155
1,603
54,552
Borrowings from other banks. Axos Clearing has a total of $155.0 million uncommitted secured lines of credit available for
borrowing as needed. As of June 30, 2019, there was $106.8 million outstanding. These credit facilities bear interest at rates based on
the Federal Funds rate and are due upon demand. The weighted average interest rate on the borrowings at June 30, 2019 was 3.84%.
Axos Clearing has a $35.0 million committed unsecured line of credit available for limited purpose borrowing. As of June 30,
2019, there was $0.0 million outstanding. This credit facility bears interest at rates based on the Federal Funds rate and are due upon
demand. The unsecured line of credit requires Axos Clearing operate in accordance of specific covenants surrounding capital and debt
ratios. Axos Clearing was in compliance of all covenants as of June 30, 2019.
Subordinated Loans. The Company issued subordinated notes totaling $7.5 million on January 28, 2019, 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. Interest accrues at a rate of
6.25% per annum. During the three months ended June 30, 2019, $0.1 million of subordinated loans were repaid.
Subordinated Notes. In March 2016, the Company completed the sale of $51,000 aggregate principal amount of its 6.25%
Subordinated Notes due February 28, 2026 (the “Notes”). The Company received $51,000 in gross proceeds as a part of this transaction,
F-51
before the 3.15% underwriting discount and other offering expenses. The Notes mature on February 28, 2026 and accrue interest at a rate
of 6.25% per annum, with interest payable quarterly. The Notes may be redeemed on or after March 31, 2021, which date may be extended
at the Company’s discretion, at a redemption price equal to principal plus accrued and unpaid interest, subject to certain conditions.
Junior Subordinated Debentures. On December 13, 2004, the Company entered into an agreement to form an unconsolidated
trust which issued $5,000 of trust preferred securities in a transaction that closed on December 16, 2004. The net proceeds from the
offering were used to purchase $5,155 of junior subordinated debentures (“Debentures”) of the Company with a stated maturity date of
February 23, 2035. The Debentures are the sole assets of the trust. The trust preferred securities are mandatorily redeemable upon maturity,
or upon earlier redemption as provided in the indenture. The Company has the right to redeem the Debentures in whole (but not in part)
on or after specific dates, at a redemption price specified in the indenture plus any accrued but unpaid interest through the redemption
date. Interest accrues at the rate of three-month LIBOR plus 2.4% for a rate of 4.92% as of June 30, 2019, with interest paid quarterly
starting February 16, 2005.
The Bank has the ability to borrow short-term from the Federal Reserve Bank Discount Window. At June 30, 2019 and 2018
there were no amounts outstanding and the available borrowings from this source were $1,601,962 and $917,017, respectively. The 2019
available borrowings would be collateralized by residential real estate loans, certain C&I loans. The Bank has additional unencumbered
collateral that could be pledged to the Federal Reserve Bank Discount Window to increase borrowing liquidity.
The Bank has federal funds lines of credit with two major banks totaling $35,000. At June 30, 2019 and 2018 the Bank had no
outstanding balances on these lines.
13. INCOME TAXES
The provision for income taxes is as follows:
(Dollars in thousands)
Current:
Federal
State
Deferred:
Federal
State
Total
2019
At June 30,
2018
2017
$
42,065
$
50,170
$
24,296
66,361
(5,483)
(3,203)
(8,686)
57,675
$
20,084
70,254
15,509
1,525
17,034
$
87,288
$
74,053
26,120
100,173
(1,886)
(334)
(2,220)
97,953
The differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
Statutory federal tax rate
Increase (decrease) resulting from:
State taxes—net of federal tax benefit
Tax reform deferred tax remeasurement
Cash surrender value
Tax credits
Non-taxable income
Excess benefit RSU vesting
Other
Effective tax rate
2019
At June 30,
2018
2017
21.00 %
28.10 %
35.00 %
8.66 %
— %
(0.06)%
(1.55)%
(0.15)%
(0.95)%
0.15 %
27.10 %
7.85 %
3.83 %
(0.02)%
(2.38)%
(0.19)%
(1.00)%
0.23 %
36.42 %
7.23 %
— %
(0.03)%
(0.19)%
(0.28)%
— %
0.37 %
42.10 %
F-52
The components of the net deferred tax asset are as follows:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses and charge-offs
State taxes
Stock-based compensation expense
Unrealized net (gains) losses on securities
Deferred bonus / vacation
Securities impaired
Deferred loan fees
Net operating loss carryforward
Total deferred tax assets
Deferred tax liabilities:
Acquisition intangible asset
FHLB stock dividend
Other assets—prepaids
Depreciation and amortization
Unrealized net gains on securities
Total deferred tax liabilities
Net deferred tax asset1
1Net deferred tax asset is included in the other assets line on the consolidated balance sheet.
At June 30,
2019
2018
$
$
24,356
2,087
5,435
—
1,307
268
2,138
3,130
38,721
(6,367)
(837)
(1,839)
(5,598)
(118)
(14,759)
23,962
$
$
15,829
2,164
3,432
225
761
—
1,372
—
23,783
—
(833)
(1,513)
(3,480)
—
(5,826)
17,957
The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As of June 30, 2019 and 2018, the Company believes that it will have
sufficient earnings to realize its deferred tax asset and has not provided an allowance.
The following is a reconciliation of the beginning and ending amount of unrecognized tax positions for the periods presented:
(Dollars in thousands)
Balance—beginning of period
Additions—current year tax positions
Additions—prior year tax positions
Reductions—prior year tax positions
Total liability for unrecognized tax positions—end of period
2019
2018
2017
$
$
1,135
$
107
—
(158)
1,084
$
865
142
149
(21)
1,135
$
$
880
180
17
(212)
865
The Company is subject to federal income tax and income tax of state taxing authorities. The Company’s federal income tax
returns for the years ended June 30, 2016, 2017, and 2018 and its state taxing authorities income tax returns for the years ended June 30,
2015, 2016, 2017 and 2018 are open to audit under the statutes of limitations by the Internal Revenue Service and state taxing authorities.
As a result of legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22,
2017, during the quarter ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the
federal statutory rate from 35.0% to 21.0%. The Tax Act makes broad and complex changes to the U.S. tax code that affect the Company’s
fiscal year ended June 30, 2018, including reducing the U.S. federal corporate statutory tax rate to 21.0% beginning January 1, 2018,
which results in a blended federal corporate statutory tax rate of 28.1% for the Company’s fiscal year ended June 30, 2018 that is based
on the applicable tax rates before and after the Tax Act and the number of days in the fiscal year.
During the quarter ended December 31, 2017, the Company revalued the deferred tax balance to reflect the new corporate tax
rate, which resulted in a decrease in net deferred tax assets of $9,189. As a result, income tax expense reported for the fiscal year ended
June 30, 2018 was adjusted to reflect the effects of the change in the tax law and the application of the newly enacted rates to existing
deferred balances.
During the quarter ended March 31, 2019 the Company acquired COR Securities Holdings. The Company recognized a deferred
tax liability of $2.2 million. The ending COR Securities Holding deferred tax liability for the quarter ended June 30, 2019 has been
updated to reflect activity since the acquisition.
F-53
Additionally, the Company received tax credits for the year ended June 30, 2019. These tax credits reduced the effective tax rate
by approximately 1.55%.
14. STOCKHOLDERS’ EQUITY
Common Stock. Changes in common stock issued and outstanding were as follows:
2019
At June 30,
2018
2017
Issued
Outstanding
Issued
Outstanding
Issued
Outstanding
Beginning of year:
65,796,060
62,688,064
65,115,932
63,536,244
64,513,494
63,219,392
Repurchase of treasury stock
Common stock issued through
grants of restricted stock units
—
(2,009,352)
—
(1,233,491)
—
—
767,862
450,105
680,128
385,311
602,438
316,852
End of year:
66,563,922
61,128,817
65,796,060
62,688,064
65,115,932
63,536,244
Common Stock Repurchases. On March 17, 2016, the Board of Directors of the Company, authorized a program to repurchase
up to $100 million of common stock. The new share repurchase authorization replaces the previous share repurchase plan approved on
July 5, 2005. 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 of Directors of the Company. As of June 30,
2019, the Company has repurchased a total of $91.6 million, or 3,242,843 common shares at an average price of $28.25 per share with $8.4
million remaining under the current board authorized stock repurchase program. The Company accounts for treasury stock using the cost
method as a reduction of shareholders’ equity in the accompanying consolidated financial statements. On August 2, 2019, the Board of
Directors of the Company authorized an additional program to repurchase up to $100 million of AX common stock. This share repurchase
authorization is in addition to the existing share repurchase plan and has similar characteristics.
Preferred Stock. On October 28, 2003, the Company commenced a private placement of Series A-6% Cumulative
Nonparticipating Perpetual Preferred Stock (the “Series A preferred stock”). The Series A preferred stock pays a six percent (6%) per
annum cumulative dividend payable quarterly and the Company’s right to redeem some or all of the remaining 515 shares at $10,000
face value outstanding shares.
During the fiscal year ended June 30, 2004, the Company issued $6,750 of Series A preferred stock, convertible through January 1,
2009, representing 675 shares at $10,000 face value, less issuance costs of $113. Before the expiration of the conversion right, holders
of the Series A converted 160 shares of Series A preferred to common stock. The Company has declared dividends to holders of its Series
A preferred stock totaling $309 for each of the years ended June 30, 2019, 2018, and 2017, respectively.
15. STOCK-BASED COMPENSATION
The Company has an equity incentive plan, the 2014 Stock Incentive Plan (“2014 Plan”), which provides for the granting of
non-qualified and incentive stock options, restricted stock and restricted stock units, stock appreciation rights and other awards to
employees, directors and consultants. The Plan is designed to encourage selected employees and directors to improve operations and
increase profits, and to accept or continue employment or association with the Company through participation in the growth in the value
of the common stock. The Plan requires that option exercise prices be not less than fair market value per share of common stock on the
option grant date for incentive and non-qualified options. The options issued under the Plans generally vest in between three and five
years. Option expiration dates are established by the Plans’ administrator but may not be later than ten years after the date of the grant.
2014 Stock Incentive Plan. In September and October 2014, the Company’s Board of Directors and stockholders approved the
2014 Plan, respectively. The maximum number of shares of common stock available for issuance under the 2014 Plan is 3,680,000.
Restricted Stock Units. During the fiscal year ended June 30, 2017, the Company’s Board of Directors granted 555,611 restricted
stock units to employees and directors. The chief executive officer received 288,000 restricted stock units, which vest ratably on each of
the four fiscal year ends after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2017, vest over
three years, one-third on each anniversary of the grant date and 570,764 shares were vested and issued and 92,251 shares were canceled
as of June 30, 2017.
F-54
During the fiscal year ended June 30, 2018, the Company’s Board of Directors granted 587,022 restricted stock units to employees
and directors. The chief executive officer received 160,000 restricted stock units, which vest ratably on each of the four fiscal year ends
after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2018, vest over three years, one-third
on each anniversary of the grant date and 629,755 shares were vested and issued and 123,858 shares were canceled as of June 30, 2018.
During the fiscal year ended June 30, 2019, the Company’s Board of Directors granted 623,249 restricted stock units to employees
and directors. The chief executive officer received 480,000 restricted stock units, which vest ratably on each of the four fiscal year ends
after the issue date. All other restricted stock unit awards granted during the year ended June 30, 2019, vest over three years, one-third
on each anniversary of the grant date and 699,223 shares were vested and issued and 90,909 shares were canceled as of June 30, 2019.
Effective July 1, 2017 the Company entered into an employment agreement with its Chief Executive Officer (the “Agreement”)
that authorizes an award of restricted stock units (the “RSU award”). The RSU award is an equity-based award and carries a service
condition and a market condition that incorporates a measurement of the Company’s total stock return to shareholders in comparison to
the total stock return of the ABA Nasdaq Community Bank Index. The accounting grant date of the RSU award is July 1, 2017 and
expensing of the RSU award began on this date at the fair value measurement amount as determined by the Company’s valuation process.
The Company utilized a Monte Carlo simulation to estimate the value of path-dependent options and determined the fair value using an
expected return based on the 5-year US Treasury constant maturity rate, an equity volatility based on 6-month and 1-year historical daily
trading history, market capitalization, and stock price for the RSU award. As of July 1, 2017, the estimated fair value of the RSU award
was $20.5 million, which vests in five tranches over a total period of nine years. Unrecognized compensation expense to be expensed
over the remaining seven years related to the non-vested RSU award is $11.6 million at June 30, 2019 and is included in the table below.
The actual RSU award in future years is determined by the actual performance of Company’s total stock return in comparison to the total
stock return of the ABA Nasdaq Community Bank Index.
The Company’s income before income taxes and net income for the years ended June 30, 2019, 2018 and 2017 included stock
compensation expense of $23,439, $20,399 and $14,535, respectively. The income tax benefit was $6,351, $7,429 and $6,119, respectively.
The Company recognizes compensation expense based upon the grant-date fair value divided by the service period between each vesting
date.
F-55
At June 30, 2019 unrecognized compensation expense related to non-vested awards aggregated to $37,214 and is expected to
be recognized in future periods as follows:
(Dollars in thousands)
For the fiscal year ending June 30:
2020
2021
2022
2023
2024
Thereafter
Total
Stock Award
Compensation Expense
$
$
17,875
11,818
4,928
1,427
734
432
37,214
The following table presents the status and changes in restricted stock units for the periods indicated:
Restricted Stock
Units1
Weighted-Average
Grant-Date Fair Value1
Non-vested balance at June 30, 2016
Granted
Vested
Canceled
Non-vested balance at June 30, 2017
Granted
Vested
Canceled
Non-vested balance at June 30, 2018
Granted
Vested
Canceled
Non-vested balance at June 30, 2019
1,059,726
$
843,611
(570,764)
(92,251)
1,240,322
747,022
(629,755)
(123,858)
1,233,731
1,103,249
(699,223)
(90,909)
1,546,848
$
$
$
22.53
21.13
20.86
20.26
22.52
26.53
22.55
23.38
24.84
34.68
26.74
29.46
30.73
The total fair value of shares vested during the years ended June 30, 2019, 2018 and 2017 was $22,100, $20,866 and $12,941,
respectively.
F-56
16. EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted EPS:
(Dollars in thousands, except per share data)
Earnings Per Common Share
Net income
Preferred stock dividends
Net income attributable to common shareholders
Average common shares issued and outstanding
Average unvested RSUs
Total qualifying shares
Earnings per common share
Diluted Earnings Per Common Share
Dilutive net income attributable to common shareholders
Average common shares issued and outstanding
Dilutive effect of average unvested RSUs
Total dilutive common shares outstanding
Diluted earnings per common share
17. COMMITMENTS AND CONTINGENCIES
2019
155,131
(309)
154,822
61,898,447
—
61,898,447
2.50
154,822
61,898,447
483,618
62,382,065
$
$
$
$
At June 30,
2018
$
$
$
$
152,411
(309)
152,102
63,058,854
77,378
63,136,232
2.41
152,102
63,136,232
1,010,988
64,147,220
2017
134,740
(309)
134,431
63,358,886
297,656
63,656,542
2.11
134,431
63,656,542
258,558
63,915,100
2.48
$
2.37
$
2.10
$
$
$
$
$
Operating Leases. The Company leases office space under operating lease agreements scheduled to expire at various dates. The
Company pays property taxes, insurance and maintenance expenses related to its leases. Rent expense for the years ended June 30, 2019,
2018, and 2017 was $7,802, $5,429, and $5,108, respectively.
Pursuant to the terms of these non-cancelable lease agreements in effect at June 30, 2019, future minimum lease payments are
as follows:
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
Future minimum
lease payments
$
$
8,634
8,376
9,035
9,284
9,004
47,501
91,834
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.
F-57
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 has filed its answering brief.
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 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 May 23, 2019, the Court dismissed the second amended complaint with prejudice. On June 20, 2019, the plaintiff filed a
notice of appeal to the United States Court of Appeals for the Ninth Circuit.
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.
18. OFF-BALANCE-SHEET ACTIVITIES
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
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.
F-58
At June 30, 2019, the Company had fixed and variable rate commitments to originate or purchase loans and leases with an
aggregate outstanding principal balance of $65,768 and $687,078 for total commitments to originate of $752,846. For June 30, 2019, the
Company’s fixed rate commitments to originate had a weighted-average rate of 3.92%. For June 30, 2018, the Company had fixed and
variable rate commitments to originate or purchase loans and leases with an aggregate outstanding principal balance of $86,453 and
$720,582 for total commitments to originate of $785,980. For June 30, 2018, the Company’s fixed rate commitments to originate had a
weighted average rate of 4.68%. At June 30, 2019, the Company also had fixed and variable rate commitments to sell loans with an
aggregate outstanding principal balance of $92,320 and $1,897 for total commitments to sell of $94,217. For June 30, 2018, the Company
had fixed and variable rate commitments to sell of $86,453 and $1,131 for total commitments to sell of $87,584. At June 30, 2019 and
2018, 66.1% and 61.9% of the commitments to originate loans are matched with commitments to sell related to conforming single family
loans classified as held for sale, respectively.
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. As of June 30, 2019, non-customer and customer margin
securities of approximately $441,081 and stock borrowings of approximately $144,706 were available to the Company to utilize as
collateral on various borrowings or for other purposes. The Company utilized $198,356 of these available securities as collateral for
securities loaned, $154,994 for bank loans, and $5,750 for OCC margin requirements.
19. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and Bank are subject to regulatory capital adequacy requirements promulgated by federal bank regulatory
agencies. Failure by the 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 the consolidated financial statements. The Federal Reserve establishes
capital requirements for the Company and the OCC has similar requirements for the Bank. The following tables present regulatory
capital information for the Company and Bank. Information presented for June 30, 2019, reflects the Basel III capital requirements
that became effective January 1, 2015 for both the Company and Bank. Under these capital requirements and the regulatory framework
for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the
Company and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The
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 the Company and Bank to maintain certain minimum capital amounts
and ratios. Federal bank regulators require the 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%. At June 30, 2019, the Company and Bank met all the capital adequacy requirements to
which they were subject. At June 30, 2019, the Company and Bank were “well capitalized” under the regulatory framework for prompt
corrective action. To be “well capitalized,” the 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. Management believes
that no conditions or events have occurred since June 30, 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 the Company’s and Bank’s further growth
and to maintain their “well capitalized” status.
F-59
The Bank’s capital amounts, capital ratios and capital requirements under Basel III were as follows:
(Dollars in thousands)
Regulatory Capital:
Tier 1
Common equity tier 1
Total capital (to risk-weighted
assets)
Assets:
Average adjusted
Total risk-weighted
Regulatory Capital Ratios:
Tier 1 leverage (core) capital to
adjusted average assets
Common equity tier 1 capital (to
risk-weighted assets)
Tier 1 capital (to risk-weighted
assets)
Total capital (to risk-weighted
assets)
Axos Financial, Inc.
Axos Bank
June 30, 2019
June 30, 2018
June 30, 2019
June 30, 2018
“Well
Capitalized”
Ratio
Minimum
Capital
Ratio
$
$
938,143
933,080
$ 1,053,855
$
$
$
893,338
888,275
993,650
$
$
$
932,366
932,366
989,678
$
$
$
837,985
837,985
887,297
$ 10,717,011
$ 9,450,894
$ 10,124,487
$ 9,509,891
$ 8,161,588
$ 6,694,963
$ 7,679,738
$ 6,686,634
8.75%
9.45%
9.21%
8.88%
5.00%
4.00%
11.43%
13.27%
12.14%
12.53%
6.50%
4.50%
11.49%
13.34%
12.14%
12.53%
8.00%
6.00%
12.91%
14.84%
12.89%
13.27%
10.00%
8.00%
Beginning January 1, 2016, Basel III implements 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 will be 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 June 30, 2019,
the Company and Bank are in compliance with the capital conservation buffer requirement. The final provision related to this follows
implements a new capital conservation buffer requirement for a banking organization to maintain a common equity capital ratio more
than 2.5% above the minimum common equity Tier 1 capital, Tier 1 capital and total risk-based capital ratios in order to avoid
limitations on capital distributions, including dividend payments, and certain discretionary bonus payments. The capital conservation
buffer requirement was phased in, beginning on January 1, 2016 at 0.625%, with additional 0.625% percent increments annually, and
became fully phased in at 2.5% on January 1, 2019. Inclusive of the fully phased-in capital conservation buffer, the common equity
Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively. A banking
organization with a buffer of less than the required amount is subject to increasingly stringent limitations on such distributions and
payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions
or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5% or less at
the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar
quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and
associated tax effects not already reflected in net income.
Securities Business
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. On June 30, 2019, 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.
F-60
At June 30, 2019, the net capital position of Axos Clearing was as follows:
(Dollars in thousands)
Net capital
Less: required net capital
Excess capital
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
Axos Clearing
21,669
3,811
17,858
11.37%
12,142
$
$
$
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 June 30, 2019, the Company had a deposit
requirement of $198.3 million and maintained a deposit of $204.7 million.
Certain broker-dealers have chosen to maintain brokerage customer accounts at the 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 June 30, 2019, the Company had a deposit requirement
of $3.4 million and maintained a deposit of $1.7 million. On July 1, 2019, Axos Clearing made a deposit to satisfy the deposit
requirement.
20. EMPLOYEE BENEFIT PLAN
The Company has two 401(k) plans whereby substantially all of its employees may participate in one of the plans. Employees
may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Company provides an employer
matching contribution to each of the 401(k) plans based on an employee’s designated deferral of their eligible compensation. For the
fiscal years ended June 30, 2019, 2018, and 2017, expenses attributable to the plans amounted to $2,391, $1,501, and $1,288, respectively.
F-61
21. PARENT-ONLY CONDENSED FINANCIAL INFORMATION
The following Axos Financial, Inc. (Parent company only) financial information should be read in conjunction with the
consolidated financial statements of the Company and the other notes to the consolidated financial statements:
Axos Financial, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and due from banks
Loans
Other assets
Investment in subsidiary
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Borrowings, subordinated notes and debentures
Accounts payable and accrued liabilities and other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
At June 30,
2019
2018
$
$
$
26,907
10
18,761
1,106,078
1,151,756
62,129
16,577
78,706
1,073,050
1,151,756
$
108,085
20
10,238
905,159
1,023,502
54,521
8,468
62,989
960,513
1,023,502
$
$
$
$
Axos Financial, Inc. (Parent Company Only)
STATEMENTS OF INCOME
(Dollars in thousands)
Interest income
Interest expense
Net interest (expense) income
Net interest (expense) income, after provision for loan losses
Non-interest income (loss)
Non-interest expense and tax benefit1
Income (loss) before dividends from subsidiary and equity in
undistributed income of subsidiary
Dividends from subsidiary
Equity in undistributed earnings of subsidiary
Net income
Comprehensive income
Year Ended June 30,
2019
2018
2017
$
472
$
479
$
3,931
(3,459)
(3,459)
—
15,143
(18,602)
80,000
93,733
155,131
155,760
$
$
3,648
(3,169)
(3,169)
153
11,825
(14,841)
69,800
97,452
152,411
151,311
$
$
$
$
621
3,613
(2,992)
(2,992)
—
8,561
(11,553)
6,400
139,893
134,740
142,531
1 Includes tax benefits of $10,749, $11,140, and $8,518 for the years ended June 30, 2019, 2018, and 2017, respectively.
F-62
Axos Financial, Inc. (Parent Company Only)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
2019
Year Ended June 30,
2018
2017
$
155,131
$
152,411
$
134,740
Accretion of discounts on securities
Amortization of borrowing costs
Impairment charge on securities
Net gain on investment securities
Stock-based compensation expense
Equity in undistributed earnings of subsidiary
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities
Origination of loans and leases held for investment
Proceeds from principal repayments on loans
Investment in subsidiary
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax effect from vesting of restricted stock units
Tax payments related to the settlement of restricted stock units
Repurchase of treasury stock
Proceeds from issuance of subordinated notes
Cash dividends on preferred stock
Net cash provided by (used in) financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
$
—
208
—
—
23,439
(93,733)
(8,477)
7,986
84,554
—
(844)
854
(106,557)
(106,547)
—
(9,916)
(56,437)
7,400
(232)
(59,185)
(81,178)
108,085
26,907
$
(2)
208
—
(153)
20,399
(97,452)
(4,938)
5,528
76,001
162
—
9
(4,000)
(3,829)
7
(9,958)
(35,183)
—
(309)
(45,443)
26,729
81,356
108,085
$
—
208
(1)
—
14,535
(139,893)
469
316
10,374
—
—
8
—
8
432
(6,532)
—
—
(309)
(6,409)
3,973
77,383
81,356
F-63
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease
losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Net income attributable to common stock
Basic earnings per share
Diluted earnings per share
(Dollars in thousands, except per share data)
Interest and dividend income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease
losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Net income attributable to common stock
Basic earnings per share
Diluted earnings per share
23. SEGMENT REPORTING
Quarters Ended in Fiscal Year 2019
June 30,
March 31,
December 31,
September 30,
141,643
41,206
100,437
2,800
97,637
23,224
65,536
55,325
14,691
40,634
40,557
0.66
0.66
$
$
$
$
$
169,208
40,039
129,169
19,000
110,169
26,098
81,815
54,452
15,631
38,821
38,744
0.63
0.63
$
$
$
$
$
131,239
38,519
92,720
4,950
87,770
16,892
50,933
53,729
14,894
38,835
38,757
0.62
0.62
$
$
$
$
$
122,797
36,518
86,279
600
85,679
16,543
52,922
49,300
12,459
36,841
36,764
0.59
0.58
Quarters Ended in Fiscal Year 2018
June 30,
March 31,
December 31,
September 30,
118,898
31,850
87,048
3,900
83,148
16,977
49,673
50,452
13,335
37,117
37,040
0.59
0.58
$
$
$
$
$
144,880
28,197
116,683
16,900
99,783
23,525
45,434
77,874
26,621
51,253
51,176
0.82
0.80
$
$
$
$
$
107,785
23,572
84,213
4,000
80,213
17,099
40,809
56,503
24,845
31,658
31,580
0.50
0.49
$
$
$
$
$
103,511
22,961
80,550
1,000
79,550
13,340
38,020
54,870
22,487
32,383
32,306
0.51
0.50
$
$
$
$
$
$
$
$
$
$
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.
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.
F-64
The Securities Business includes the Clearing Broker-Dealer, Registered Investment Advisor, and Introducing Broker-
Dealer lines of businesses. These lines of business offer products such as clearing and execution of securities transactions, margin
lending to correspondents and their customers, and lending proprietary and conduit securities independently to their own customers
as well as to Banking Business clients. The products offered by the lines of business in the Securities Business primarily generate
net interest and non-banking service fee income.
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. All costs, except certain corporate administration costs and income taxes, have been allocated
to the reportable segments. Therefore, combined amounts agree to the consolidated totals.
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, goodwill, and assets of the segments:
(Dollars in thousands)
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
(Dollars in thousands)
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
(Dollars in thousands)
Goodwill
Total assets
(Dollars in thousands)
Goodwill
Total assets
Year Ended June 30, 2019
Banking
Business
Securities
Business
Corporate/
Eliminations
Axos
Consolidated
$
$
404,500
27,350
70,917
192,588
$
255,479
$
$
7,564
—
12,071
34,430
(14,795) $
(3,459) $
—
(231)
24,188
(27,878) $
408,605
27,350
82,757
251,206
212,806
Year Ended June 30, 2018
Banking
Business
Securities
Business
Corporate/
Eliminations
$
371,661
$
— $
25,800
70,788
152,877
—
—
—
$
263,772
$
— $
June 30, 2019
Axos
Consolidated
368,494
25,800
70,941
173,936
239,699
(3,167) $
—
153
21,059
(24,073) $
Banking
Business
Securities
Business
Corporate/
Eliminations
$
— $
Axos
Consolidated
71,222
35,501
645,650
$
7,775
$
11,220,238
35,721
10,566,813
$
$
June 30, 2018
Banking
Business
Securities
Business
Corporate/
Eliminations
Axos
Consolidated
35,719
9,539,504
— $
$
8,339
35,719
9,531,165
$
$
— $
— $
F-65
$
$
$
$
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.7
As of August 27, 2019, Axos Financial, Inc. (the “Company”) has two classes of securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) our common stock and (2) our 6.25% subordinated
notes due 2026.
DESCRIPTION OF COMMON STOCK
We may issue, from time to time, shares of our common stock, the general terms and provisions of which are summarized
below. This summary does not purport to be complete and is subject to, and is qualified in its entirety by express reference to, the
provisions of our Certificate of Incorporation and Bylaws.
General
We are authorized to issue up to 150,000,000 shares of common stock, par value $0.01 per share. As of August 23, 2019, there
were 66,736,295 shares of common stock issued and 61,235,291 shares of common stock outstanding. Under our Certificate of
Incorporation, we have the authority to issue an aggregate of 150,000,000 shares of common stock. We have also previously
granted stock options and restricted stock units representing the right to purchase or receive shares of our common stock under
our equity incentive plans.
Listing of the Common Stock
The common stock is listed for trading on the New York Stock Exchange under the symbol “AX.”
Dividends
Subject to preferences that may be applicable to any of the outstanding shares of our preferred stock, and subject to compliance
with limitations imposed by law, the holders of our common stock are entitled to receive ratably those dividends, if any, as may
be declared from time to time by our board of directors out of legally available funds.
Voting Rights
Each holder of our common stock is entitled to one vote for each share held of record on all matters submitted to a vote of
the stockholders, including the election of directors. Under our certificate of incorporation and bylaws, our stockholders will not
have cumulative voting rights. Because of this, the holders of a majority of the shares of our common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if they should so choose.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the
net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the
satisfaction of any liquidation preferences granted to the holders of any outstanding shares of our preferred stock, including our
Series A preferred stock and any other series of preferred stock which we may designate in the future.
Rights and Preferences
Holders of our common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking
fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock, including our
Series A preferred stock and any series of preferred stock which we may designate in the future.
Fully Paid and Nonassessable
All outstanding shares of our common stock are, fully paid and nonassessable.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Computershare Trust Company, N.A.
Certain Anti-takeover Effects
General. Certain provisions of our Certificate of Incorporation, our Bylaws and the Delaware General Corporation Law (the
“DGCL”) could make it more difficult to consummate an acquisition of control of us by means of a tender offer, a proxy fight,
open market purchases or otherwise in a transaction not approved by our Board of Directors, regardless of whether our stockholders
support the transaction. The summary of the provisions set forth below does not purport to be complete and is qualified in its
entirety by reference to our Certificate of Incorporation, our Bylaws and the DGCL.
Business Combinations. Section 203 of the DGCL restricts a wide range of transactions (“business combinations”) between
a corporation and an interested stockholder. An “interested stockholder” is, generally, any person who beneficially owns, directly
or indirectly, 15% or more of the corporation’s outstanding voting stock. Business combinations are broadly defined to include
(i) mergers or consolidations with, (ii) sales or other dispositions of more than 10% of the corporation’s assets to, (iii) certain
transactions resulting in the issuance or transfer of any stock of the corporation or any subsidiary to, (iv) certain transactions
resulting in an increase in the proportionate share of stock of the corporation or any subsidiary owned by, or (v) receipt of the
benefit (other than proportionately as a stockholder) of any loans, advances or other financial benefits by, an interested stockholder.
Section 203 provides that an interested stockholder may not engage in a business combination with the corporation for a period
of three years from the time of becoming an interested stockholder unless (a) the Board of Directors approved either the business
combination or the transaction which resulted in the person becoming an interested stockholder prior to the time that person became
an interested stockholder; (b) upon consummation of the transaction which resulted in the person becoming an interested
stockholder, that person owned at least 85% of the corporation’s voting stock (excluding, for purposes of determining the voting
stock outstanding, but not the outstanding voting stock owned by the interested stockholder, shares owned by persons who are
directors and also officers and shares owned by certain employee stock plans); or (c) the business combination is approved by the
Board of Directors and authorized by the affirmative vote of at least 66 2/3% of the outstanding voting stock not owned by the
interested stockholder.
Advance Notice Provisions. Stockholders seeking to nominate candidates to be elected as directors at an annual meeting or
to bring business before an annual meeting must comply with an advance written procedure specified in our Bylaws. Only persons
who are nominated by or at the direction of our board, or by a stockholder who has given timely written notice to our Secretary
before the meeting to elect directors as specified in our Bylaws, will be eligible for election as directors.
At any stockholders’ meeting the business to be conducted is limited to business brought before the meeting by or at the
direction of the board of directors, or a stockholder who has given timely written notice to our Secretary in compliance with the
advance written procedure specified in our Bylaws.
Special Stockholder Meetings. Under our Bylaws, only our Chairman of the Board, President, or Secretary (upon receipt of
a written request of a majority of the directors then in office), may call special meetings of stockholders. Stockholders do not
have the authority to call special meetings of stockholders.
Additional Authorized Shares of Capital Stock. The additional shares of authorized common stock and preferred stock available
for issuance under our Certificate of Incorporation could be issued at such times, under such circumstances and with such terms
and conditions as to impede a change in control.
Limitation of Liability; Indemnification
Our Certificate of Incorporation and Bylaws provide that we will indemnify all of our directors and officers to the fullest
extent permitted by Delaware law. Our Certificate of Incorporation and Bylaws also authorize us to indemnify our employees and
other agents, at our option, to the fullest extent permitted by Delaware law. We have entered into agreements to indemnify our
directors and officers, in addition to indemnification provided for in our charter documents. These agreements, among other things,
provide for the indemnification of our directors and officers for expenses, including attorneys’ fees, judgments, fines and settlement
amounts incurred by any person in any action or proceeding, including any action by or in the right of our company, arising out
of that person’s services as a director or officer of our company or any other company or enterprise to which that person provides
services at our request to the fullest extent permitted by applicable law.
Delaware law permits a corporation to provide in its Certificate of Incorporation that a director of the corporation shall not
be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except
for liability for any breach of the director’s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or for any transaction from
which the director derived an improper personal benefit. Our Certificate of Incorporation provides for the elimination of personal
liability of a director for breach of fiduciary duty to the extent permitted by Delaware law.
The limitation of liability and indemnification provisions in our Certificate of Incorporation and Bylaws may discourage
stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood
of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and our stockholders.
Furthermore, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage
awards against directors and officers as required by these indemnification provisions.
We maintain insurance on behalf of our officers and directors, insuring them against liabilities that they may incur in such
capacities or arising out of this status.
DESCRIPTION OF 6.25% SUBORDINATED NOTES DUE 2026
The following description of certain material terms of our 6.25% subordinated notes due 2026 (the “Notes”) does not purport
to be complete. The following description is subject to, and is qualified in its entirety by reference to, the Subordinated Indenture,
dated as of March 3, 2016, between the Company and U.S. Bank National Association, as trustee, the First Supplemental Indenture,
dated as of March 3, 2016, between the Company and U.S. Bank National Association, as trustee, and Amendment No.1, dated
March 24, 2016, to First Supplemental Indenture, dated as of March 3, 2016, between the Company and U.S. Bank National
Association, as trustee (referred to collectively herein as the “indenture”).
General
We have issued Notes in an aggregate principal amount of $51,000,000. The Notes were issued in minimum denominations
of $25 and integral multiples of $25 in excess thereof. The Notes have a maturity date of February 28, 2026 (or if such day is not
a business day, the following business day). The indenture does not require the maintenance of any financial ratios or specified
levels of net worth or liquidity. The Notes do not have a sinking fund.
Interest Rate
Interest on the Notes accrue from and including their initial date of issuance to, but excluding, the maturity date or earlier
acceleration or redemption at an annual rate equal to 6.25%, and is payable quarterly in arrears on May 31, August 31, November
30 and February 28 (February 29 in case of a leap year) of each year, beginning on May 31, 2016, to the record holders at the
close of business on the preceding May 15, August 15, November 15 and February 15, as applicable (whether or not a business
day).
Interest payments include accrued interest from and including the date of original issuance, or, if interest has already been
paid, from the last date in respect of which interest has been paid or duly provided for to, but excluding, the next succeeding
interest payment date, the maturity date or the redemption date, as the case may be. The amount of interest payable for any interest
payment period, including interest payable for any partial interest payment period, will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The term "interest payment period" refers to the quarterly period from and including an
interest payment date to, but excluding, the next succeeding interest payment date. In the event that any date on which interest is
payable on the Notes is not a business day, payment of the interest payable on such date will be made on the next succeeding day
that is a business day (and without any interest or other payment in respect of any such delay). Interest not paid on any payment
date accrues and compounds quarterly at a rate per year equal to the rate of interest on the Notes until paid. References to "interest"
include interest accruing on the Notes and other unpaid amounts and additional interest, as applicable.
"Business day" means any day that is not a Saturday, a Sunday or a day on which banking institutions located in New York,
New York and Chicago, Illinois are generally authorized or obligated by law or executive order to be closed.
Ranking
The payment of the principal of and interest on the Notes is expressly subordinated, to the extent and in the manner set forth
in the indenture, to the prior payment in full of amount and all existing and future senior debt. Subject to the qualifications
described below, the term senior debt is defined in the indenture to mean all of the Company’s:
•
•
•
indebtedness for borrowed or purchased money, whether or not evidenced by bonds, debentures, notes, or other written
instruments;
obligations under letters of credit;
indebtedness or other obligations with respect to commodity contracts, interest rate and currency swap agreements, cap,
floor, and collar agreements, currency spot and forward contracts, and other similar agreements or arrangements designed
to protect against fluctuations in currency exchange or interest rates; and
•
guarantees, endorsements (other than by endorsement of negotiable instruments for collection in the ordinary course of
business), and other similar contingent obligations in respect of obligations of others of a type described in the preceding
bullets, whether or not classified as a liability on a balance sheet prepared in accordance with accounting principles
generally accepted in the United States;
in each case, whether outstanding on the date that we entered into the indenture or arising after that time, and other than obligations
ranking on a parity with the Notes or ranking junior to the Notes.
Indebtedness and obligations that rank junior to the Notes under the terms of the indenture would include (i) our junior
subordinated debentures underlying our outstanding trust preferred securities, and (ii) any other indebtedness the terms of which
provide that such indebtedness ranks junior to the Notes, with respect to which the Notes will rank senior in right of payment and
upon liquidation.
All liabilities of the Bank and other subsidiaries, and liabilities arising during our subsidiaries' ordinary course of business,
will be effectively senior to the Notes to the extent of the assets of such subsidiaries, as we are a holding company. Because the
Company is a savings and loan holding company, over the term of the Notes it may need to rely primarily on dividends from Axos
Bank (the “Bank”), which is a regulated financial institution, to pay interest and principal on its outstanding debt obligations and
to make dividends and other payments on its other securities. Regulatory rules may restrict our ability to withdraw capital from
the Bank by dividends or other means.
In the event of any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment of debt, composition, or
other similar proceeding relating to the Company or its property; any proceeding for the liquidation, dissolution, or other winding
up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy proceedings; or any
assignment by the Company for the benefit of creditors, all of our obligations to holders of our senior debt will be entitled to be
paid in full before any payment or distribution, whether in cash, securities or other property, can be made on account of the principal
of or interest on the Notes. Only after payment in full of all amounts owing with respect to any senior debt will the holders of the
Notes, together with the holders of any of our obligations ranking on a parity with the Notes, be entitled to be paid from our
remaining assets the amounts due and owing on account of unpaid principal of and interest on the Notes.
In the event and during the continuation of any default in the payment of the principal of or any premium or interest on any
senior debt beyond any applicable grace period with respect to such senior debt, or in the event that any event of default with
respect to any senior debt shall have occurred and be continuing permitting the holders of such senior debt (or the trustee on behalf
of the holders of such senior debt) to declare such senior debt due and payable prior to the date on which it would otherwise have
become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and
such acceleration shall have been rescinded or annulled, or in the event any judicial proceeding shall be pending with respect to
any such default in payment or event of default, then no payment shall be made by the Company on account of the principal of
or interest on the Notes or on account of the purchase or other acquisition of any Notes.
By reason of the above subordination in favor of the holders of our senior debt, in the event of our bankruptcy or insolvency,
holders of our senior debt may receive more, ratably, and holders of the Notes may receive less, ratably, than our other creditors.
The Notes do not limit our or our subsidiaries' ability to incur additional debt, including debt that ranks senior or pari passu
in right of payment and upon our liquidation to the Notes. The Notes will be effectively subordinated to all of the existing and
future indebtedness and other liabilities of our subsidiaries, including the Bank.
Optional Redemption
The Company may redeem the Notes in $25 increments in whole at any time or in part from time to time on or after March
31, 2021, which date may be extended at the Company's discretion, at a redemption price equal to their principal amount plus
accrued and unpaid interest to, but excluding, the date of redemption; provided that if the Notes are not redeemed in whole, at
least $10 million aggregate principal amount of the Notes must remain outstanding after giving effect to such redemption. In
addition, we may not redeem the Notes in part if the principal amount has been accelerated and such acceleration has not been
rescinded or unless all accrued and unpaid interest has been paid in full on all outstanding Notes for all interest payment periods
terminating on or before the redemption date. The Notes may not otherwise be redeemed prior to maturity, except that we may
also, at our option, redeem the Notes before the maturity date in whole, at any time, or in part from time to time, upon the occurrence
of:
•
a “Tax Event” defined in the First Supplemental Indenture to mean the receipt by us of an opinion of independent tax
counsel to the effect that an amendment to, or change (including any announced prospective change) in, the laws or any
regulations of the United States or any political subdivision or taxing authority, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or regulations, which change or amendment
becomes effective or which pronouncement or decision is announced on or after the date of the issuance of the Notes,
resulting in more than an insubstantial risk that the interest payable on the Notes is not, or within 90 days of receipt of
such opinion of tax counsel, will not be, deductible by us, in whole or in part, for U.S. federal income tax purposes;
•
a “Tier 2 Capital Event” defined in the First Supplemental Indenture to mean the receipt by us of an opinion of independent
bank regulatory counsel to the effect that, as a result of (a) any amendment to, or change (including any announced
prospective change) in, the laws or any regulations thereunder of the United States or any rules, guidelines or policies of
an applicable regulatory authority for the Company or (b) any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of original issuance of the Notes, the Subordinated Notes do not constitute, or
within 90 days of the date of such opinion will not constitute, Tier 2 Capital (or its then equivalent if we were subject to
such capital requirement) for purposes of capital adequacy guidelines of the Board of Governors of the Federal Reserve
(or any successor regulatory authority with jurisdiction over savings and loan holding companies), as then in effect and
applicable to us that would preclude the Notes from being included as Tier 2 Capital; or
•
the Company is required to register as an investment company pursuant to the Investment Company Act of 1940.
Under the Federal Reserve Board’s (“FRB”) current risk-based capital guidelines applicable to savings and loan holding
companies, any redemption of the Notes will be subject to prior approval of the FRB.
Redemption Procedures
If we give a notice of redemption in respect of any Notes, then prior to the redemption date, we will irrevocably deposit
with the trustee or a paying agent for the Notes funds sufficient to pay the applicable redemption price of, and (unless the redemption
date is an interest payment date) accrued interest on, the Notes to be redeemed. Notwithstanding the foregoing, interest payable
on or prior to the redemption date for any Notes called for redemption will be payable to the holders of the Notes on the relevant
record dates for the related interest payment dates.
Once notice of redemption has been given in accordance with the terms of the indenture and funds deposited as required,
then upon the date of the deposit, all rights of the holders of the Notes so called for redemption will cease, except the right of the
holders of the Notes to receive the redemption price and any interest payable in respect of the Notes on or prior to the redemption
date and the Notes will cease to be outstanding on the redemption date. In the event that the Company defaults in the payment of
the redemption price in respect of Notes called for redemption, interest on the Notes will continue to accrue at the then applicable
rate from the redemption date originally established by us for the Notes to the date the redemption price is actually paid.
Subject to applicable law (including, without limitation, U.S. federal securities law), we or our subsidiaries may at any time
and from time to time purchase outstanding Notes by tender, in the open market or by private agreement.
If less than all of the Notes are to be redeemed, the particular Notes to be redeemed will be selected not more than 45 days
prior to the redemption date by the trustee, from the outstanding Notes not previously called for redemption, by such method as
the trustee in its sole discretion deems fair and appropriate and which may provide for the selection for redemption of portions of
the principal amount of any Notes, provided that the unredeemed portion of the principal amount of any Notes shall be in an
authorized denomination (which shall not be less than the minimum authorized denomination) for such Notes. The trustee will
promptly notify us in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption,
the principal amount thereof to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder
of Notes to be redeemed at its registered address. Unless we default in payment of the redemption price on the Notes, on and after
the redemption date, interest will cease to accrue on the Notes or portions called for redemption.
Denominations
The Notes are issued only in denominations of $25 each and integral multiples of $25 in excess thereof. The Notes are held
in book-entry form only, in the name of The Depository Trust Company or its nominee.
Events of Default; Limitations on Suits
Under the indenture, an event of default will occur with respect to the Notes only upon the occurrence of any one of the
following events:
•
•
•
the entry of a decree or order for relief in respect of the Company by a court having jurisdiction in the premises in an
involuntary case under any applicable bankruptcy, insolvency, or reorganization law, now or hereafter in effect, and the
decree or order continues unstayed and in effect for a period of 60 consecutive days;
the commencement by the Company of a voluntary case under any applicable bankruptcy, insolvency, or reorganization
law, now or hereafter in effect, or the consent by the Company to the entry of a decree or order for relief in an involuntary
case under any such law; or
in the event a receiver, conservator or similar official is appointed for the Company's principal banking subsidiary
(currently, the Bank).
If an event of default occurs, the outstanding principal amount and all accrued but unpaid interest on the Notes will become
due and payable immediately. The foregoing provision would, in the event of the bankruptcy or insolvency involving the Company,
be subject as to enforcement to the broad equity powers of a federal bankruptcy court and to the determination by that court of
the nature and status of the payment claims of the holders of the Notes. Subject to certain conditions, but before a judgment or
decree for payment of the money due has been obtained, an acceleration may be annulled by the holders of a majority in principal
amount of the outstanding Notes.
There is no automatic acceleration or right of acceleration in the case of a default in the payment of principal of or interest
on the Notes or in our non-performance of any other obligation under the Notes or the indenture. If we default in our obligation
to pay any interest on the Notes when due and payable and such default continues for a period of 30 days, or if we default in our
obligation to pay the principal amount due upon maturity, or if we breach any covenant or agreement contained in the indenture,
then the trustee may, subject to certain limitations and conditions, seek to enforce its rights and the rights of the holders of Notes
of the performance of any covenant or agreement in the indenture.
The indenture provides that, subject to the duty of the trustee upon the occurrence of an event of default to act with the
required standard of care, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of Notes unless such holders shall have offered to the trustee reasonable indemnity or
security against the costs, expenses and liabilities which may be incurred by it in complying with such request or direction. Subject
to certain provisions, the holders of a majority in principal amount of the outstanding Notes will have the right to direct the time,
method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred
on the trustee with respect to the Notes.
No holder of Notes will have any right to institute any proceeding, judicial or otherwise, with respect to the indenture, or
for the appointment of a receiver or trustee, or for any other remedy under the indenture, unless:
•
•
•
•
•
such holder has previously given written notice to the trustee of a continuing event of default with respect to the
Notes;
the holders of not less than 25% in principal amount of the Notes shall have made written request to the trustee to
institute proceedings in respect of such event of default in its own name as trustee under the indenture;
such holder or holders have offered to the trustee reasonable indemnity against the costs, expenses, and liabilities
to be incurred in complying with such request;
the trustee for 60 days after its receipt of such notice, request, and offer of indemnity has failed to institute any
such proceeding; and
no direction inconsistent with such written request has been given to the trustee during such 60 day-period by the
holders of a majority in principal amount of the outstanding Notes.
In any event, the indenture provides that no such holder or holders shall have any right under the indenture to affect, disturb
or prejudice the rights of any other holder, or to obtain priority or preference over any of the other holders or to enforce any right
under the indenture, except in the manner provided in the indenture and for the equal and ratable benefit of all holders of Notes.
Satisfaction, Discharge and Defeasance
So long as no event of default has occurred and is continuing, we may elect to discharge certain of our obligations under
the indenture with respect to the Notes on the terms and subject to the conditions precedent contained in the indenture (referred
to as a “Defeasance”) by:
•
•
irrevocably depositing with the trustee, as trust funds in trust, money or U.S. government obligations (generally, securities
that are obligations of or guaranteed by the United States of America), or a combination of money and U.S. government
obligations, in each case sufficient, without reinvestment, in the opinion of a nationally recognized firm of independent
public accountants, to pay and discharge the principal of and interest on the Notes on the date on which the principal
becomes due and payable in accordance with the terms of the Notes or the indenture, whether at the stated maturity date,
or by declaration of acceleration, call for redemption, or otherwise; and
satisfying certain other conditions precedent specified in the indenture, including, among other things, the delivery of an
opinion of counsel that the holders of the Notes will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of the Defeasance and will be subject to federal income tax in the same amounts, in the same manner,
and at the same times as would have been the case if the Defeasance had not occurred.
A Defeasance will not relieve the Company of our obligation to pay when due the principal of and interest on the Notes if
the Notes are not paid from the money or U.S. government obligations held in trust by the trustee for payment thereof.
Modification and Waiver
The indenture provides that we and the trustee may modify or amend the indenture with or, in certain cases, without the
consent of the holders of a majority in principal amount of outstanding Notes; provided, however, that with respect to the Notes,
any modification or amendment may not, without the consent of the holder of each outstanding Note affected thereby:
•
•
•
•
change the stated maturity of the principal of, or any installment of interest on, any Note;
reduce the principal amount or rate of interest of any Note;
the place of payment where any Note or any interest is payable;
impair the right to institute suit for the enforcement of any payment on or after its stated maturity;
• modify the provisions of the indenture with respect to the subordination of the Notes in a manner adverse to the holders
of the Notes; or
•
reduce the percentage in principal amount of the outstanding Notes the consent of whose holders is required for any
supplemental indenture, or the consent of whose holders is required for any waiver of compliance with the provisions of
or defaults under the indenture and the consequences thereof under the indenture.
In addition, the holders of not less than a majority in aggregate principal amount of the outstanding Notes may, on behalf of
all holders of Notes, waive compliance by us with certain terms, conditions and provisions of the indenture, as well as any past
default and/or the consequences of default, other than any default in the payment of principal or interest or any breach in respect
of a covenant or provision that cannot be modified or amended without the consent of the holder of each outstanding Note.
Consolidation, Merger or Sale of Assets
The indenture provides that we may not consolidate with or merge into any other person or convey, transfer or lease our
assets substantially as an entirety to any person, and we may not permit any other person to consolidate with or merge into us or
to convey, transfer or lease its assets substantially as an entirety to us, unless:
•
if we consolidate with or merge into any other person or convey, transfer or lease our assets substantially as an
entirety to any other person, the person formed by such consolidation or into which we merge, or the person that
acquires our assets, is a corporation organized and validly existing under the laws of the United States of America,
any of its states or the District of Columbia, which person must expressly assume, by a supplemental indenture,
the due and punctual payment of the principal of and interest on the Notes and the performance or observance of
our covenants under the indenture;
•
immediately after giving effect to such transaction and treating any indebtedness that becomes an obligation of us
or our subsidiaries as a result of such transaction as having been incurred by us or such subsidiary at the time of
such transaction, no event of default under the indenture, and no event which, after notice or lapse of time or both,
would become an event of default, shall have happened and be continuing; and
• we have complied with our obligations to deliver certain documentation to the trustee.
Governing Law
The indenture and the Notes are governed by, and construed in accordance with, the laws of the State of New York without
regard to the principles of conflict of laws.
Listing of the Notes
The Notes are listed for trading on the New York Stock Exchange under the symbol “AXO.”
Book-Entry System-The Depository Trust Company
The Notes are represented by one or more fully registered global certificates, each of which we refer to as a global security.
Each such global security is deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name
of DTC or a nominee thereof. Initial settlement for the Notes will be made in same day funds. Secondary market trading between
DTC participants will occur in the ordinary way in accordance with DTC's rules. Unless and until it is exchanged in whole or in
part for Notes in definitive form, no global security may be transferred except as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of
such successor.
Beneficial interests in the Notes are represented through book-entry accounts of financial institutions acting on behalf of
beneficial owners as direct and indirect participants in DTC.
So long as DTC, or its nominee, is a registered owner of a Note, DTC or its nominee, as the case may be, are considered
the sole owner or holder of the Notes represented by such Note for all purposes under the indenture. Except as provided below,
the actual owners of the Notes represented by a Note (the "beneficial owner") will not be entitled to have the Notes represented
by such Note registered in their names, will not receive or be entitled to receive physical delivery of the Notes in definitive form
and will not be considered the owners or holders thereof under the indenture.
Accordingly, each person owning a beneficial interest in a Note must rely on the procedures of DTC and, if such person is
not a participant of DTC (a "participant"), on the procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the indenture. We understand that under existing industry practices, in the event that the
Company requests any action of holders of the Notes or that an owner of a beneficial interest is entitled to give or take under the
indenture, DTC would authorize the participants holding the relevant beneficial interests to give or take such action, and such
participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise
act upon the instructions of beneficial owners. Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants, as defined below, and by participants and indirect participants to beneficial owners will be
governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
About the Trustee
U.S. Bank National Association is the trustee under the indenture and is the principal paying agent and registrar for the
Notes. We have entered, and from time to time may continue to enter, into banking, lending or other relationships with U.S. Bank
or its affiliates.
The trustee under the indenture may resign or be removed with respect to one or more series of debt securities under the indenture
and a successor trustee may be appointed to act with respec
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Axos Financial, Inc.
Las Vegas, Nevada
We hereby consent to the incorporation by reference in the Registration Statements on Form S--3 ASR (No.333-223434) and Forms
S-8 (No.333-199691 and 333-124702) of Axos Financial, Inc. of our reports dated August 27, 2019, relating to the consolidated
financial statements, and the effectiveness of Axos Financial, Inc.’s internal control over financial reporting, which appear in this
Form 10-K.
/s/ BDO USA, LLP
San Diego, California
August 27, 2019
Exhibit 31.1
CERTIFICATION
AXOS FINANCIAL, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gregory Garrabrants, certify that:
1.
I have reviewed this annual report on Form 10-K of Axos Financial, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting or, caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: August 27, 2019
/s/ GREGORY GARRABRANTS
GREGORY GARRABRANTS
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
AXOS FINANCIAL, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Andrew J. Micheletti, certify that:
1.
I have reviewed this annual report on Form 10-K of Axos Financial, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting or, caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: August 27, 2019
/s/ ANDREW J. MICHELETTI
ANDREW J. MICHELETTI
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CEO CERTIFICATION PURSUANT TO SECTION 906
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Axos Financial, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2019, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory Garrabrants, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of
my knowledge that:
(a)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 27, 2019
/s/ GREGORY GARRABRANTS
GREGORY GARRABRANTS
President and Chief Executive Officer
(Principal Executive Officer)
CFO CERTIFICATION PURSUANT TO SECTION 906
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Axos Financial, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2019, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew J. Micheletti, Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge that:
(a)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 27, 2019
/s/ ANDREW J. MICHELETTI
ANDREW J. MICHELETTI
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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AXOS OFFICE LOCATIONS
Salt Lake City, UT
Omaha, NE
(Axos Clearing)
Kansas City, KS*
Columbus, OH
New York, NY*
Los Angeles, CA*
Las Vegas, NV
Orange County, CA*
San Diego, CA
Existing office locations
New office locations
*Commercial banking
Banking
Evolved
TM
EXECUTIVE OFFICERS
Gregory Garrabrants
President and
Chief Executive Officer
Eshel Bar-Adon
Executive Vice President
Specialty Finance and
Chief Legal Officer
Jill Bauer
Executive Vice President
Trustee and Fiduciary Services
Mary Ellen Ciafardini
Executive Vice President
Human Resources
Thomas Constantine
Executive Vice President
Chief Credit Officer
Jan Durrans
Executive Vice President
Chief of Staff and
Chief Performance Officer
James Fraser
Executive Vice President
Specialty Real Estate, C&I Lending
Raymond Matsumoto
Executive Vice President
Chief Operating Officer
Andrew J. Micheletti
Executive Vice President
Chief Financial Officer
David Park
Executive Vice President
Commercial Banking and Treasury Management
Brian Swanson
Executive Vice President
Head of Consumer Bank
John Tolla
Executive Vice President
Chief Governance, Risk and
Compliance Officer
Derrick K. Walsh
Senior Vice President
Chief Accounting Officer
BOARD OF DIRECTORS
Paul J. Grinberg
Chairman
Nicholas A. Mosich
Vice Chairman
James S. Argalas
J. Brandon Black
Tamara Bohlig
James J. Court
Uzair Dada
Gregory Garrabrants
Edward J. Ratinoff
CORPORATE HEADQUARTERS
Axos Financial, Inc.
9205 West Russell Road
Suite 400
Las Vegas, NV 89148
www.axosfinancial.com
INVESTOR RELATIONS
Johnny Lai
Vice President, Corporate Development
and Investor Relations
(858) 649-2218
jlai@axosfinancial.com
CORPORATE SECRETARY
Angela Lopez
Corporate Secretary,
Vice President Corporate Governance
(858) 704-6225
alopez@axosfinancial.com
TRANSFER AGENT
Computershare Investor Services
250 Royall Street
Canton, MA 02021
(800) 962-4284
www-us.computershare.com/investor
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
BDO USA, LLP
San Diego, California
9205 West Russell Road
9205 West Russell Road
Suite 400
Suite 400
Las Vegas, NV 89148
Las Vegas, NV 89148
www.axosfinancial.com
www.axosfinancial.com
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