SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Mar. 31, 2021

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of Axos Financial, Inc. (“Axos”) and its wholly owned subsidiaries, Axos Bank (the “Bank”) and Axos Nevada Holding, LLC (the “Axos Nevada Holding”) and collectively, the “Company”. Axos Nevada Holding wholly owns its subsidiary Axos Securities, LLC, which wholly owns subsidiaries Axos Clearing LLC (“Axos Clearing”), a clearing broker dealer, Axos Invest, Inc., a registered investment advisor, and Axos Invest LLC, an introducing broker dealer. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the nine months ended March 31, 2021 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in the audited annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended June 30, 2020 included in our Annual Report on Form 10-K.

As a result of the change from adopting Accounting Standard Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments” and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326”) on July 1, 2020, the Company updated categorization of the loan portfolio. For comparability purposes, certain reclassifications have been made to the presentation of loan categories as of June 30, 2020 and as of and for the nine months then ended March 31, 2020 to conform with current presentation adopted under ASC 326. The Company reclassified its loan categories to align with the classes adopted for the measurement of credit losses under ASC 326. The reclassification had no impact on the total loan balances or the allowance for credit losses - loans.


Loans and Leases - Carrying Amount
(Dollars in thousands)	Single Family Real Estate Secured - Mortgage	Single Family Real Estate Secured - Warehouse	Single Family Real Estate Secured - Financing	Multifamily Real Estate Secured - Mortgage and Financing	Commercial Real Estate - Mortgage	Commercial & Industrial	Auto & RV - Secured	Other	Total
Balance July 1, 2020 Pre-ASC 326 Adoption	$4,244,563	$474,318	$682,477	$2,303,216	$371,176	$2,094,322	$291,452	$241,918	$10,703,442
Commercial Real Estate - Mortgage to Multifamily and Commercial Mortgage	—	—	—	371,176	(371,176)	—	—	—	—
Multifamily and Single Family Financing loans to Commercial Real Estate	—	—	(679,054)	(411,338)	1,090,392	—	—	—	—
Real estate secured Commercial & Industrial to Commercial Real Estate	—	—	—	—	1,207,528	(1,207,528)	—	—	—
Unsecured Consumer loans to Auto & Consumer	—	—	—	—	—	—	49,913	(49,913)	—
Single Family Warehouse and Mortgage combined	477,741	(474,318)	(3,423)	—	—	—	—	—	—
Other reclassifications	—	—	—	—	—	(1,474)	—	1,474	—
Balance July 1, 2020 Post ASC 326 Adoption	$4,722,304	$—	$—	$2,263,054	$2,297,920	$885,320	$341,365	$193,479	$10,703,442
Loan Category Post-ASC 326 Adoption	Single Family - Mortgage & Warehouse	N/A	N/A	Multifamily and Commercial Mortgage	Commercial Real Estate	Commercial & Industrial - Non RE	Auto & Consumer	Other	Total


Allowance for Credit Losses
(Dollars in thousands)	Single Family Real Estate Secured - Mortgage	Single Family Real Estate Secured - Warehouse	Single Family Real Estate Secured - Financing	Multifamily Real Estate Secured - Mortgage and Financing	Commercial Real Estate - Mortgage	Commercial & Industrial	Auto & RV - Secured	Other	Total
Balance July 1, 2020 Pre-ASC 326 Adoption	$24,041	$1,860	$5,094	$6,318	$1,456	$22,863	$5,738	$8,437	$75,807
Reclassification	1,860	(1,860)	(5,094)	(1,600)	19,596	(12,909)	3,723	(3,716)	—
Balance July 1, 2020 Post Reclassification	$25,901	$—	$—	$4,718	$21,052	$9,954	$9,461	$4,721	$75,807
Loan Category Post-ASC 326 Adoption	Single Family - Mortgage & Warehouse	N/A	N/A	Multifamily and Commercial Mortgage	Commercial Real Estate	Commercial & Industrial - Non RE	Auto & Consumer	Other	Total

Allowance for Credit Losses. The allowance for credit losses (“ACL”) is a valuation account that offsets the amortized cost basis of loans and net investment in leases. Under ASC 326, amortized cost is the basis on which the ACL is determined. Amortized cost is principal outstanding, net of any purchase premiums and discounts and net of any deferred loan fees and costs.

Credit losses are charged off when the Company believes that collectability of at least some portion of outstanding principal is unlikely. These charge-offs are recorded as a reversal, thereby reducing, the allowance for credit losses. Recoveries on loans previously charged off are recorded as a provision to, thereby increasing, the allowance for credit losses. The allowance for credit losses is maintained at a level needed to absorb expected credit losses over the contractual life, considering the effects of prepayments, of the loan portfolio as of the reporting date. Determining the adequacy of the allowance is complex and requires judgment by Management about the effect of matters that are inherently uncertain. As such, a future assessment of current conditions may require material adjustments to the allowance.

The Company’s process for determining expected life-time credit losses entails a loan-level, model-based approach and requires consideration of a broad range of relevant information relating to historical loss experience, current economic conditions as well as reasonable and supportable forecasts.

A credit loss is estimated for all loans. Consequently, the Company stratifies the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively.

The Company defines a segment as the level at which the Company develops a systematic methodology to determine the allowance for credit losses. Additionally, the Company can further stratify loans of similar type, risk attributes and methods for monitoring credit risk. The Company categorizes the loan portfolio into six segments: Single Family - Mortgage & Warehouse, Multifamily and Commercial Mortgage, Commercial Real Estate, Commercial & Industrial - Non Real Estate, Auto & Consumer and Other – refer to Note 4 – “Loans & Allowance for Credit Losses” for further detail of the segments and classes within.

The method for estimating expected life-time credit losses includes, among other things, the following main components: 1) The use of a probability of default (“PD”)/loss given default (“LGD”) model; 2) defining a number of economic scenarios across the benign to adverse spectrum; 3) an initial and reasonable forecast period of one year for all loan segments; and 4) a reversion period of 18 months using a linear transition to historical loss rates for each loan pool. After the reversion period, the historical loss rate is applied over the remaining contractual life of loan.

Given the inherent limitations of a solely quantitative model, qualitative adjustments are included to arrive at the ending calculated loss amount in order to account for data points not captured from quantitative inputs alone.

Qualitative criteria we consider includes, among other things, the following:

•Regulatory and Legal - matters that may impact the timeliness and/or amounts of repayments;

•Concentration - portfolio composition and loan concentration;

•Collateral Dependency - changes in collateral values;

•Lending/Underwriting Standards - current lending policies and the effects of any new policies;

•Nature and Volume - loan production volume and mix;

•Loan Trends - credit performance trends, including a borrower’s financial condition and credit rating.

On a quarterly basis, Management convenes a Credit Review meeting in which current information and trends are collectively assessed to forecast future economic impact for purposes of assessing the adequacy of the ACL. The forecasted direction and magnitude of change with respect to future economic conditions is then assessed against the estimate in the model.

Accrued Interest. Accrued interest receivable is excluded from amortized cost and is presented separately in “Other Assets” on the unaudited Condensed Consolidated Balance Sheets. Additionally, the Company does not estimate an allowance for credit losses on accrued interest receivable as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. When a loan is placed on non-accrual status, which occurs when a borrower becomes delinquent by 90 days, interest previously accrued, but not collected, is reversed against current period interest income.

Individually Assessed Loans. Credit loss is estimated for any individual loan on a collective basis, unless an individual loan’s credit characteristics has deteriorated below a range of the overall group, in which case the loan would then be individually assessed. Individually assessed loans are measured for credit loss based on present value of future expected cash flows, discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent.

Available-for-Sale Debt Securities. Unrealized credit losses will be recognized through an allowance for credit losses instead of an adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not, that it will be required to sell the security before recovery of its amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For available-for-sale debt securities that do not meet the above conditions, the Company evaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, Management considers the extent to which fair value is less than amortized cost and unfavorable conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recognized for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. All other changes in fair value of the security that have not been recognized through an allowance for credit losses are recognized in other comprehensive income. Changes in the allowance for credit losses, if any, are recognized as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes an available-for-sale investment security is uncollectible or when either of the criteria regarding intent or requirement to sell is met.

Loan Commitments. Loans commitments not unconditionally cancellable are subject to an estimate of credit loss under a current expected credit loss model. The Company’s process for determining the estimate of credit loss on loan commitments is the same as it is on loans. Refer to detail of Allowance on Credit Losses above.

New Accounting Standards

Accounting Standards Adopted During Fiscal 2021

Financial Instruments. Credit Losses. On July 1, 2020, the Company adopted ASC 326. The update replaces incurred loss models based on the probable recognition threshold with a current expected credit loss model to estimate all credit losses over the contractual life for financial instruments carried at amortized cost and certain off-balance sheet credit exposures, such as loan commitments. The new model requires consideration of a broader range of relevant information, such as historical loss experience, current economic conditions and reasonable and supportable forecasts. The change will generally result in earlier, accelerated loss recognition. For available-for-sale debt securities, unrealized credit losses will be recognized through an allowance for credit losses rather than as adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept. No credit loss adjustment on available-for-sale debt securities resulted upon adoption of ASC 326.

The Company adopted this standard using the modified retrospective transition method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Prior period amounts are not retroactively adjusted. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date.