Axos Financial, Inc. Q3 FY2026 Earnings Call

Greetings and welcome to the Axos Bank 3rd Quarter 2026 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Thank you, Diego. Good afternoon, everyone, and thank you for your interest in Axos. Joining us today for Axos Financial Inc.'s third quarter 2026 Financial Results Conference call are the company's President and Chief Executive Officer, Greg Gerbrandt, and Executive Vice President and Chief Financial Officer, Derek Walsh. Greg and Eric will provide prepared remarks on the financial and operational results for the quarter ended March 31, 2026, then open up the call to a Q&A. Before I begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast, and there will be an audio replay available in the investor relations section of the company's website, located at axosfinancial.com, for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, We also had issued an earnings supplement and 10-Q for this call. All of these documents can be found on AxosFinancial.com. With that, I'd like to turn the call over to Greg.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the third quarter of fiscal 2026 ended March 31, 2026. I thank you for your interest in Axos Financial. We generated another quarter of double-digit year-over-year growth in net interest income, ending loan and deposit balances, earnings per share, and book value. We generated almost $700 million in net loan growth linked quarter, resulting in an 11.2% year-over-year increase in net interest income. Excluding the interest income impact of FDIC purchased loans and two fewer days in the March 31, 2026 quarter compared to the December 31st, 2025 quarter, net interest income increased by $5.7 million on that linked quarter basis. We continue to generate high returns, as evidenced by the over 16% return on average common equity and 1.8% return on assets in the three months ended March 31st, 2026. Other highlights in the quarter include $6 million for the quarter ended March 31st, 2026, up from $53 million in the prior quarter and $33.4 million in the corresponding quarter a year ago. Of a $22 million legal settlement this quarter, not interest income was up approximately $10 million link quarter due to higher mortgage banking income, advisory fee, and the addition of rental income from the commercial office building we purchased in January of 2026 that will be used as our future headquarters. Net interest margin was 4.57% for the quarter ended March 31, 2026, compared to 4.94% in the prior quarter. Excluding the impact from the prepayments of FDIC purchased loans and two fewer days in the quarter ended March 31st, our net interest margin was down in line with last quarter's guidance of around 10 basis points. We continue to maintain a strong net interest margin with and without the benefit of the accretion from loans purchased from the FDIC, which has now dwindled to around 5 basis points of positive impact. Non-interest expenses were up $1.4 million link quarter to $186 million. We are seeing some of the benefits from our operational efficiency initiatives and artificial intelligence on our salaries and benefits, data processing, and other G&A expenses. The pending completion of the Genius Bank deposit acquisition also allowed us to moderate growth in advertising and promotional expenses in the March quarter. Net income was approximately $124.7 million in the quarter ended March 31st, up 18.5% from the $105.2 million in the prior year's third quarter. The leuded EPS was $2.15 for the quarter ended March 31st, compared to $1.81 in the third quarter of 2025, representing an 18.7% year-over-year increase. Total originations for investment, excluding single-family warehouse lending, were $5.1 billion for the three months ended March 31st. Loan growth was strong across a number of lending businesses, including capital calls, real estate lender finance, and equipment finance. Jumbo single-family loan balances were up slightly, while single-family warehouse had a seasonal decline of approximately $123 million. Ending loan balances grew by approximately $800 million link quarter, excluding single-family warehouse. Average loan yields from non-purchase loans for the three months ended March 31st were 7.23%, down from 7.63% in the prior quarter. The sequential decline was driven primarily by the full impact from the two 25 basis point rate cuts in the calendar Q4 2025. Average loan yields for purchased loans were 12.39% compared to 23.32% in the December 31st quarter. Purchased loan yields from the quarter ended December 31st benefited from one FDI-purchased loan paying approximately, paying off and paying, resulting in approximately $17 million of purchase discount accretion that was recognized in interest income. The FDIC purchased loans continue to perform, and all the loans in that portfolio remain New loan interest rates for the March quarter was 6.9% in both the single family and CNI portfolios, 6.7% in the multifamily portfolio, and 7.8% in our auto portfolio. Ending deposit balances were $22.4 billion, up 11.2% year-over-year. Demand, money market, and savings accounts represent 97% of total deposits at March 31st, increased by 13% year-over-year. We have a diverse mix of funding across a variety of business verticals, with consumer and small business representing 52% of total deposits, commercial cash, treasury management, and institutional representing 22%, commercial specialty representing 14%, AXO's fiduciary services representing 5%, AXO's securities 5%, and distribution partners representing 1%. Ending non-interest-bearing deposits were approximately $3.4 billion in the quarter ended March 31st, an increase of $143 million from the $3.25 billion in the prior quarter. We deliberately reduced higher cost savings and time deposits and temporarily increased Federal Home Loan Bank advances in anticipation of the roughly $2.3 billion of Genius Bank deposits coming in the June quarter. End of the quarter, around $1.1 billion. In addition to our ExoSecurities deposits on our balance sheet, we had approximately $415 million of deposits off balance sheet at partner banks. We remain focused on adding non-interest-bearing deposits from small business, custody, clearing, fiduciary services, and commercial and cash and treasury management. The outdated net interest margin was 4.57% for the quarter ended March 31st, compared to 4.94% in the quarter ended December 31st. The early payoff of an FDIC purchase loan in that second quarter increased net interest margin by approximately 25 basis points. Excluding the early loan payoffs, the purchase loan yield was 14.2% in the quarter ended December 31st, compared to 12.4% in the quarter ended March 31st. With the diminishing impact of the FDIC purchase loans, we expect reported net interest margin to stay roughly flat on an organic basis, excluding the impact of the deposit purchase premium from the acquired deposits, which we estimate to be around five basis points. The diversity of our lending channels provide us with flexibility to maintain strong loan and deposit growth while maintaining our net interest margin. Verdon had another strong quarter, contributing approximately $200 million of new loans and operating leases in the March quarter. We continued to identify opportunities to deepen our relationships with existing Verdon vendors and dealers, as well as accelerate growth in a few existing verticals that were previously constrained by capital and size limitations when Verdant was under private ownership. The synergy between the Verdant and non-Marine floor plan lending teams is starting to gain traction. We believe that our ability to provide a comprehensive retail and wholesale lending solution to top-tier original equipment manufacturers is a strategic advantage that we can leverage to win more deals. Demand in our commercial specialty real estate, fund finance, real estate lender finance, and asset-based lending programs remain strong. Pipelines in the jumbo single-family and multifamily areas are rebounding. We are making steady progress growing our loan pipelines in newer lending verticals, such as floor plan and retail marine lending. Taking all these factors into consideration, we are confident that we will generate loan growth in the low to mid-teens on an annual basis. There's an increase in non-interest income as a result of several recurring and one non-recurring item. Mortgage banking income was $3.7 million in the quarter, ended March 31st, up $2.2 million year-over-year due to a favorable servicing rights fair value adjustment. Advisory fee income was $9.4 million, up $1.3 million year-over-year. Banking and service fees in the quarter included a $22 million one-time favorable legal settlement and the addition of rental income from commercial office properties we purchased in January. Verding contributed approximately $23.7 million in non-interest income in the March quarter, compared to $18.9 million in the decision. The credit quality of our loan book remained strong, and our historic and current charge-offs remained low. Net charge-offs were 31 basis points in the quarter ended March 31st, compared to nine basis points in the year-ago quarter. We charged off $14 million of our principal balance in a C&I cash flow loan that was put on non-accrual over a year ago when we allocated a specific loan loss reserve. The remaining principal balance is approximately $17 million at March 31st on that loan, and we maintain a $10 million specific loan reserve on this balance. Excluding the charge-off related to that loan, total net charge-offs were $5.1 million in the three months ended March 31st, or eight basis points of annualized net charge-offs to average loans. Total non-performing assets were $180.4 million at the end of the quarter, down approximately $5 million from $185 million at the March 31st, 2025 quarter. Non-performing assets declined by approximately $27 million in the multifamily group, and commercial mortgages down by $19 million. One syndicated CNI shared national credit became delinquent this quarter, accounting for a $33 million sequential increase in our non-performing assets in the CNI loan area. We have taken over as agents in the syndicated loan and are actively working to resolve this non-performing loan. Total non-performing assets was 62 basis points at the March 31, 2026 time, down from 71 basis points at June 30, 2025. We remain well-reserved for our low levels of credit losses, with our allowance for credit losses to non-accrual loans equal to 192.2% at March 31, 2026. History and broker-dealer fees were up sequentially due to higher asset and transaction-based income. Total assets under custody administration were flat at $44 billion. Net new asset growth of approximately $140 million were offset by a decline in the stock market in the first three months of 2026. Cash sorting deposit balances were roughly flat quarter over quarter, despite significant market volatility. We continue to expand the scope and scale of artificial intelligence across the firm to a wide range of businesses and functional units. Having established the governance framework and infrastructure to educate, train, and deploy AI tools to all access team members, we are now focused on scaling the usage of artificial intelligence across more use cases. We have over 500 team members using Claude Enterprise to improve the speed, quality, and productivity of various workflows. Since the beginning of calendar 2026, the number of technical users of artificial intelligence tools has increased by 37%, increasing artificial intelligence's share of committed code to 90%. We are adding specialized agents to test various work products. We continue to evaluate M&A opportunities to augment growth from existing businesses and team liftouts. The verdant equipment leasing acquisition continues to perform well, with good progress across a variety of strategic and operational initiatives. Loan growth remains healthy, and profitability continues to improve. We have approximately $2.3 billion of online saving deposits from Genius Bank in February of 2026. These deposits are a perfect fit for us, and we're excited to offer additional banking, lending, and securities products to the roughly 60,000 individual Genius Bank digital banking clients. Approval last month, and I expect to complete the deposit, conversion, and client onboarding next month. This week, we announced a separate deposit acquisition of approximately $3.2 billion of IRA savings and CDs from Capital One. These are granular retirement savings accounts sourced through digital channels. We submitted our bank merger application for this transaction last week and are actively working with Capital One to determine the exact timing and mechanisms of a conversion and close in the second half of calendar 2026. These two operative tunistic acquisitions help us with incremental liquidity and funding for future organic and inorganic loan growth opportunities. Our disciplined growth and strong capital allows us to capitalize on organic and organic growth. The dynamics within the banking and fintech landscape have created a wealth of M&A opportunities that we intend to fully review. We continue to invest capital in areas where we see the best risk-adjusted returns and in tools, people, and processes. Now I'll turn the call over to Derek, who will have additional details on our financial results.

Thanks, Greg. Quick reminder that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at accessfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filing for additional details. Non-interest expenses were approximately $186 million for the three months ended March 31, 2020, at $1.4 million from the $184.6 million in the three months ended December 31, 2025. Salaries and benefits. Our non-interest expense categories, we are seeing some of the benefits from operational productivity initiatives, including the increased leverage. Our income tax rate was 24.6 percent in the three months ended March 31, 2026, compared to the 26.8 percent in the prior quarter. The primary reason for the sequential decline in our income tax rate was the benefit of RSU vestings and benefits derived from certain tax credits. In the opportunities that could provide future tax rate benefits, our Our expectation is to maintain an annual tax rate of approximately 26 to 27 percent, excluding these potential benefits. The decision for credit losses was $41 million in Q3-26 compared to $25 million in Q2-26. The primary driver of the quarter-over-quarter increase is $20 million for a C&I loan. We expect to maintain a loan loss reserve of approximately 1.3 to 1.4 percent of total loans and leases going forward. $103 million of multifamily and small balance commercial, $83 million, and $1.7 billion. We expect to broaden some of the Genius Bank deposits to reduce the temporary increase in borrowings in the March quarter and plan to use the remaining Genius Bank deposits to fund our consumer and commercial banking deposits to fund our strong loan growth.

At this time, we'll conduct our question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, ask a question, press star 1 on your telephone keypad. Your first question comes from Kyle Peterson with Needham & Company. Please state your question.

Great. Good afternoon. Thank you for taking the questions. I wanted to start off on some of the balance sheet moving pieces. I know there's a decent amount of stuff going on with the FHLB stuff and Genius coming on board. But I guess I noticed the securities balances also went up a decent amount this quarter. So I guess how much of that is managing some of the liquidity before the Genius deal closes? or I guess do you guys anticipate running at a bit higher securities book in the near term? I just want to think about how we should think about the mix over the next few quarters here.

Yeah, if you'll notice, cash went down as well. So we have internal policy minimums for the level of cash or liquid assets that we hold. And what we identified in the marketplace back in our helpful,

appreciate all the color there. And then, you know, maybe just a follow up, you know, pick on Capital Call, looks like it had a really nice quarter on the growth front there. So I guess I wanted to see if you guys could give any more color, you know, what is either on, you know, bigger draws with existing customers or how much are you adding new accounts and kind of teams adding to the pipeline. I just wanted to think more about new accounts and clients versus, you know, bigger drawdowns in utilization and, you know, how sustainable this kind of growth can be, at least in the near term.

Yeah, quite a few new clients. I wouldn't say there's any significantly greater drawdowns, although, you know, these, they tend, the lines you bring on tend to take a few quarters to reach, you know, They're where they tend to be, but bringing on a lot of new clients mostly. With respect to sustainability, I think that given the diversity of the loan book, it's often the case that different segments will outperform in any one quarter. So I don't expect that the cap call side growth will be as big as it was in the next quarter, but I still think it'll be.

Thank you.

It comes from Gary Tenner with DA Davidson. Please take your question.

I just wanted to ask on the credit front, you know, just looking at the allowance quarter over quarter and the increase there, was that pretty exclusively driven by the C&I non-accrual ad in the quarter or what other dynamics were at play in terms of the model on the allowance?

I appreciate that.

And then just in terms of that credit in particular, could you provide any additional color on the type of credit and timing of resolution, et cetera?

Yeah, it was a syndicated share national credit, bank syndicated credit. We were not the agent. A lot of times with these agents, I think they made concessions early on that they probably should have been a little bit tougher on. We're now the agent, and we're working with the sponsor, and, you know, we'll see where it goes. But we felt it was obviously, well, it's prudent to put it on nonaccrual and also to take a significant reserve against it. And, you know, I think, you know, over the next several quarters, we'll know exactly how that's going to impact in terms of reversing.

David Ciaverini with Jefferies. Please state your question.

Hey, guys. Brooks Dutton on for Dave this afternoon. Can you guys help us quantify the impact that temporary borrowings had on NIMM this quarter and whether that pressure should reverse as these borrowings roll off given the pending genius acquisition? Thanks.

So we were pointed to, for the most part, our deposits, but we're probably not going to, from a volume perspective,

we don't really intend to try to optimize, you know, a few base points here or there on NIMM just to, you know, we feel pretty good about where NIMM is being, you know, flattish going forward premium. And I think eventually we'll kind of be able to normalize that, but I don't want to introduce all those clients to the bank.

Great. Thank you very much.

Thank you. Your next question comes from Kelly Mata with KBW. Please say your question.

Hey, good afternoon. to answer the question. Maybe it's really nice how these two deposit acquisitions help provide avenues to fuel what's been really outstanding growth on your part. I'm wondering with, as we've seen with the genius deposits, I apologize, allowing you to maybe be a little more aggressive with repricing your own deposits. I'm wondering how you're viewing the Capital One deposits, maybe an average cost of those, and if similarly that's, you know, going to help you further price down funding, or it should be kind of a net add to deposits, just as we think through both the margin and overall size of the balance sheet? Yeah, no, those are great questions,

Kelly. Thank you. I think that we're kind of looking at these as ensuring that we're able to have the funding for the level of loan growth that we're looking forward to having it. I think certainly it does ensure that we don't have to price up deposits or to, you know, increase marketing budgets in order to fund ourselves, which I think is obviously very helpful. but I wouldn't really model in any, you know, significant sort of increase in NIM from our ability to say, well, now we're going to try to price down having that excess. You know, I think we feel pretty good. Well, I know I do, and I think Derek does too. We feel pretty good about the fact that we've been able to manage this rate cycle really well. almost, you know, we have NIM expansion on the way up and essentially, for the most part, maintain our net interest margin on the way down. And so that, you know, that is obviously assisted by this. And we probably would have had to increase market, you know, somewhat otherwise or be a little more aggressive on pricing. So I think it will help on balance. But I think that, you know, our guidance on NIM incorporates those acquisitions and how we're thinking about pricing with respect.

Got it. So as those come on, just as we kind of like think through the balance sheet then, in order to fund your growth, could we see a build in liquidity just as you kind of have the dry powder to deploy and just trying to properly handicap if there's, you know, a bigger balance sheet but a little pressure from the liquidity build there?

Yeah, I think we've strategically positioned the balance sheet for this quarter and this coming quarter's growth. I mean, might there be a little overhang potentially for this fiscal Q4 with relation to the genius deposits? But I think that, generally speaking, I think we've lined ourselves up well there, not to have much that's worth kind of modeling out. So from the Capital One, it will somewhat depend on the timing of that and, of course, on some of our own organic growth and opportunities there, that there might be a little bit more.

Maybe a last question for me is in regards to the burden acquisition. You've had, you know, some really nice boosts in your fee income related to that. As you kind of think ahead, you know, given your really strong pipelines across your businesses, Are you thinking through the operating leases versus on balance sheet? And it's fair to say some additional fee income growth from that, or should we see more of that added to the loan portfolio here, just as we think through, you know, your appetite for that?

Yeah, it's kind of tough to tell. I think I referenced last quarter that the operating leases are about one of every six or one-sixth of all the originations, roughly. depending on just opportunities and the nuances of the accounting around specific leases. Both the incentive standpoint and our business operation back office support are incented to help support and grow that business.

Understood. Thank you so much. I'll step back.

Thanks, Kelly.

Thank you. And a reminder to the audience to ask a question, press star 2 on your phone. Star 1 on your phone to ask a question, press star 2 to remove your question. Your next question comes from Liam Cuhill with Raymond James. Please say your question. For David. Hey, Liam.

So on your securities business, it sounds like client acquisition trends remain pretty positive despite the market volatility in the quarter. And we've talked about the opportunity to cross-sell potentially to genius customers, but do you maybe see similar opportunity with those Capital One clients? And could you maybe talk about some offerings that could be attractive to them?

Yeah, you know, I think over time, the Capital One clients are sensitive in some periods to certain kinds of cross-sell. They were not sensitive to securities cross-sell. I do think that there would be opportunities there on the Capital One clients with respect to some of those offerings just because, you know, these are retirement accounts. Right now they're very limited in their product types that they have offered and will obviously offer them greater product types. We have no restrictions on our ability to cross-sell securities products to those clients. I think over time, you know, as that develops, they can become more general banking clients as well. So I do think there's those opportunities.

Kelly touched on the operating leases a minute ago, but I was also curious to hear about other core non-interest income trends. I mean, can you discuss where you're seeing success and maybe how you expect core fees to move going forward?

Sure. I think one of the other things that in there, and Greg referenced it in his quotes or in his prepared remarks, was that there was 4 million or larger portfolios?

You know, we're really looking at some of each. So if you looked at our portfolio, we've got team acquisitions, we've got FinTechs disciplined, talk to people, we make sure that it's going to fit and that we're able to digest it. But so, you know, it really, I think there's a lot of videosyncrasy and a lot of times the individual circumstances with respect to, you know, people funding, just where different individuals and companies are and their life cycle help fuel different opportunities. And so, you know, we're always very active. We talk to a lot of people. We have conversations over long periods of time. We try to build relationships. And then so sometimes it looks like an accident or just something happens quickly, but it isn't really that. It's really then when they're ready to transact, we're there for them.

For all the color, I'll step back. Thank you.

Your next question comes from Edward Hemelgarn with Shaker Investment.

Yeah. How are you doing, Craig? Could you maybe walk me through the balance of loans throughout the quarter? If I'm looking at it correctly, your average balances barely grew from, if at all, from the ending balance at December 31st. Was there something else going on?

No, I think you may be comparing, like, I don't know if you're comparing end of average, but, yeah.

It's surprising because it's the first time I'd really noticed that there was this much of an adjustment. You have a, and something obviously is explaining, you know, your average balances grow similar to what the, or in excess of what your ending balances were the prior quarter.

Yeah, there was a number of prepays, some of which I don't think we were expecting. I think it was in January. But, yeah, I think average balance is still good. But that is important, right, because you only earn net interest income on what you're putting out. And if you're growing only at the end of the quarter, then that gets reflected next quarter, but not in the current quarter. So, yeah, no, I agree. I think everybody should stop using the quarter end as a mechanism of governing the speed at which they get things done. I agree with you 100%. I'm going to convey that message to everyone in the organization immediately. It will be the first time they've heard it.

Understandable. All right.

Good to talk to you.

Kelly Mata with KBW. Please do your questions.

Hey, thank you so much for letting me on for a follow-up. I just had a real quick one. Just wondering, given the really strong loan growth you're seeing, just wondering how competition is faring and spreads are holding up. I understand there's quite a bit of difference between businesses, but just trying to get a sense of the direction of loan yields from here.

Yeah, you know, I feel that spreads are stable, I'd say, from where we are. I think that there was, to the extent that there was compression, I feel like that, I'd say that compression has stopped. I do think that in some instances there's been, you know, some of the outflows in private credit and things like that have resulted in just a little bit of a different positive competitive dynamic, but it's not enough to say that you're taking back any of that compression that kind of happened over the prior year. but I feel pretty good about where we are now in general. I think we're going to have – there will be a credit here and there that, you know, they're going to be bargaining and fighting about, but I think we've done a pretty good job and have a pretty good max. And, you know, I think also with respect to, you know, some of the lending is a little bit higher spread, so I think we've got a pretty good max that allows us to keep spreads where they are.

Great. Thank you so much. Thank you.

Thank you. And there appears to be no additional questions at this time, so I'll hand the floor back to Johnny Lai for closing remarks.

Great. Thanks, everyone, for joining us, and we'll talk to you next quarter.

That concludes today's call. All parties may disconnect. Have a good day.