Axos Financial Inc

5. LOANS & ALLOWANCE FOR CREDIT LOSSES

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

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

1 Includes PCD loans of $284 million in Multifamily and Commercial Mortgage and $44.5 million in Commercial Real Estate as of June 30, 2024. For further detail on PCD loans refer to Note 1—“Organizations and Summary of Significant Accounting Policies.”

Accrued interest receivable on loans held for investment totaled $119.8 million and $77.9 million as of June 30, 2024 and 2023, respectively.

At June 30, 2024 and 2023, the Company pledged certain loans totaling $4,942.8 million and $5,128.4 million, respectively, to the FHLB and $8,197.2 million and $3,689.5 million, respectively, to the Federal Reserve Bank of San Francisco (“FRBSF”).

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

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

The allowance for credit losses increased primarily due to loan growth in the Commercial & Industrial-Non-RE, reflecting higher balances in capital call facilities, and due to the Multifamily and Commercial Mortgage and Commercial Real Estate loans acquired in the FDIC Loan Purchase. While charge-offs in the Auto & Consumer portfolio increased in the fiscal year ended June 30, 2024, compared to the fiscal year ended June 30, 2023, auto originations were lower in the current year and the portfolio balance is declining.

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

The following tables present a summary of the activity in the unfunded loan commitment liabilities for the periods indicated:

The following table presents LTVs for the Company’s real estate loans outstanding as of June 30, 2024:

The Company’s effective weighted-average LTV was 49.7% for loans within its real estate portfolio originated during the fiscal year ended June 30, 2024.

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

There wereno nonaccrual loans without an allowance for credit losses as of June 30, 2024 and 2023. There wasno interest income recognized on nonaccrual loans in the fiscal year ended June 30, 2024 and 2023.

Credit Quality Indicators. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans based on credit risk. The Company uses the following definitions for risk ratings.

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

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date after considering the obligor’s current net worth and paying capacity and the underlying collateral value less cost to acquire and sell in a timely manner.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The Company reviews and grades loans following a continuous review process, featuring coverage of all loan types and business lines at least quarterly. Continuous reviewing provides more effective risk monitoring because it immediately tests for potential impacts caused by changes in personnel, policy, products or underwriting standards.

The following tables present the composition of loans by portfolio segment, fiscal year of origination and credit quality indicator, and the amount of gross charge-offs:

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

Loans reaching 90+ days past due are generally placed on nonaccrual. As of June 30, 2024 and 2023, there were loans of $20.2 million and $14.1 million, respectively, over 90 days past due and still accruing interest as the Company expects to collect the principal and interest amounts due and such amounts are in the process of collection.

Single family mortgage loans in process of foreclosure were $20.1 million and $17.7 million as of June 30, 2024 and 2023, respectively.

Credit Risk Concentration

Concentrations of credit risk arise when a number of borrowers are engaged in similar business activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

Concentrations of 10% or more existed in the Single Family, Multifamily and Commercial Real Estate loan categories at June 30, 2024 and June 30, 2023.

At June 30, 2024, California accounted for 69.3% and New York accounted for 11.7% of loans in the Single Family loan category. California accounted for 49.6% and New York accounted for 38.9% of loans in the Multifamily loan category. New York accounted for 34.2% and Florida accounted for 10.4% of loans in the Commercial Real Estate loan category.

At June 30, 2023, California accounted for 71.4% and New York accounted for 11.0% of loans in the Single Family loan category. California accounted for 69.1% and New York accounted for 19.7% of loans in the Multifamily loan category. New York accounted for 37.5% and Florida accounted for 10.5% of loans in the Commercial Real Estate loan category.

Related Party Loans

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, which is summarized in the following table:

Loan Modifications to Borrowers Experiencing Financial Difficulty. The Company may grant certain modifications of loans to borrowers experiencing financial difficulty, which effective following the adoption of ASU 2022-02, are reported as financial difficulty modifications (“FDMs”). The Company’s modification programs provide various modifications to borrowers experiencing financial difficulty, which may include interest rate reductions, term extensions, payment delays and/or principal forgiveness. FDMs during the fiscal year ended June 30, 2024 were not significant.

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