Earnings Call Transcript - AX Q1 2026

Operator, Operator

Greetings, and welcome to the Axos Financial, Inc. First Quarter 2026 Earnings Call and Webcast. Please note, this conference is being recorded. I will now turn the conference over to your host, Johnny Lai. Please go ahead.

Johnny Lai, Host

Thanks, Carrie. Good afternoon, everyone, and thanks for your interest in Axos. Joining us today for Axos Financial, Inc.'s First Quarter 2026 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will review and comment on the financial and operational results for the quarter ended September 30, 2025, and we will be available to answer questions after the prepared remarks. Before I begin, I would 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 the call over to Greg, I'd like to remind our listeners that in addition to the earnings press release, we also issued an earnings supplement and 10-Q for this call. All of the documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg.

Gregory Garrabrants, CEO

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 first quarter of fiscal 2026 ended September 30, 2025. I thank you for your interest in Axos Financial. We had a strong start to our fiscal 2026, generating $1.6 billion of net loan growth linked quarter, including $1 billion of loans and leases and on-balance sheet securitizations acquired in the Verdant acquisition, which closed on September 30, 2025. A 5 basis point linked quarter reduction in net charge-offs and a 17% year-over-year increase in book value per share. We continue to generate high returns as evidenced by the nearly 16% return on average common equity and the 1.8% return on average assets in the 3 months ended September 30, 2025. Other highlights in the quarter include net interest income was $291 million for the 3 months ended September 30, 2025, increasing by approximately $11 million linked quarter or 15.6% annualized. Net interest income growth benefited from balanced growth across single-family mortgage warehouse, commercial specialty real estate and auto lending. Net interest income in the prior year's comparable quarter ending September 30, 2024, included a benefit of approximately $17 million from the prepayment of 3 FDIC purchased loans. Excluding that one-time benefit, net interest income was up $16 million or 5.8% from fiscal Q1 of 2025 to fiscal Q1 of 2026. Net interest margin was 4.75% for the quarter ended September 30, 2025, down 9 basis points from 4.84% in the quarter ended June 30, 2025. Excluding the impact from holding excess liquidity, our net interest margin was roughly flat quarter-over-quarter. Since the Verdant acquisition closed on 9/30/2025, the transaction did not have any impact on our net interest income or net interest margin in this quarter end. We continue to maintain a best-in-class net interest margin with or without the benefit of the accretion from purchased loans from the FDIC. Noninterest income increased by approximately 13% year-over-year due to higher banking service fees, mortgage banking income and prepayment penalty fees. Total on-balance sheet deposits increased 6.9% year-over-year to $22.3 billion. Our diverse and granular deposit base across consumer and commercial banking and our securities businesses continues to support our growth and are expected to provide relatively lower cost of funding sources for the loans and leases acquired from Verdant relative to their prior capital structure. Total nonaccrual loans to total loans declined 5 basis points linked quarter, resulting in our nonaccrual loans to total loans improving from 79 basis points as of June 30, 2025 to 74 basis points as of September 30, 2025. Net income was approximately $112.4 million in the quarter ended September 30, 2025, up from $110.7 million in the quarter ended June 30, 2025. Diluted EPS was $1.94 for the quarter ended September 30 compared to $1.92 in the June quarter. Excluding the one-time deal-related expenses and allowance for credit loss adjustment for the Verdant acquisition, adjusted net income and adjusted EPS were $119 million and $2.06 per share, respectively, for the quarter ended September 30, a 7.3% increase from the linked quarter and almost 30% annually. Total originations for investment, excluding single-family warehouse lending, were over $4.2 billion for the 3 months ended September 30, representing an increase of 11% linked quarter or 44% annualized. Commercial real estate specialty lending, auto lending and single-family warehouse had strong originations and net loan growth this quarter. Average loan yields for the 3 months ended September 30 were 7.99%, in line with the prior quarter. Average loan yields for non-purchased loans were 7.66%, and average yields for purchased loans were 15.81%, which includes the accretion of our purchase price discount. The FDIC purchased loans continue to perform and all loans in that portfolio remain current. New loan interest rates for the September quarter were 7.2% in both the multifamily and C&I portfolios, and 7.3% in single-family, and 8.25% in our auto portfolio. Ending deposit balances of $22.3 billion were up 6.9% linked quarter and up 11.5% year-over-year. Demand money market and savings accounts representing 94% of total deposits at September 30 increased by 9% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 57% of total deposits, commercial cash, treasury management and institutional representing 22%, commercial specialty representing 11%, Axos Fiduciary Services representing 5% and Axos Securities, which is our custody and clearing business representing 5%. Ending noninterest-bearing deposits were approximately $3.4 billion at the September end quarter end, up by approximately $350 million from the prior quarter. Noninterest-bearing deposit balances benefited from continued growth of our treasury management business and from a large increase in cash sorting deposits that came in toward the end of the quarter. Client cash sorting deposits ended the quarter at around $1.1 billion, up by $95 million from the June quarter. In addition to our Axos Securities deposits on our balance sheet, we had approximately $460 million of deposits off balance sheet at partner banks. We remain focused on adding noninterest-bearing deposits from our custody, clearing, fiduciary services and commercial cash and treasury management verticals. Our consolidated net interest margin was 4.75% for the quarter ended September 30 compared to 4.84% in the quarter ended June 30. We had more excess liquidity in the quarter ended September 30 with average cash balances of approximately $2.5 billion compared to $2.15 billion of average cash balances in the prior quarter. This excess liquidity was a 7 basis point drag on our net interest margin. Additionally, we issued approximately $200 million of subordinated debt in September of 2025, which has a fixed annual interest rate of 7% for the first 5 years. We used part of the proceeds from the $200 million subordinated debt offering to pay off approximately $160 million of existing subordinated debt that was scheduled to move from a fixed annual interest rate of 4.875% to approximately 9% in October. The new subordinated debt issuance reduced our net interest margin by 1 basis point in the quarter ended September 30, 2025. We expect our consolidated net interest margin ex FDIC loan purchase accretion to stay at the high end of the 4.25% to 4.35% range we have targeted over the past year. While new loan yields are coming in slightly lower in certain lending categories due to recent Fed actions, our goal is to offset lower loan yields with reduced cost of funds. Our loan pipelines have improved over the past few quarters as a result of successfully expanding our distribution channels across commercial lending categories and increased contributions from teams we onboarded over the past few quarters. The floor plan lending team has a nice pipeline. We also believe we've moved past peak levels of prepayment in our multifamily loan portfolio, which have been a significant headwind to net loan growth over the past several quarters. We expect the Verdant acquisition to add an incremental $150 million to $200 million of net new loans and operating leases per quarter at attractive spreads starting in the second quarter of this fiscal year ending December 31. Taking all these factors into consideration, we expect loan growth to come in at the low to mid-teens range on an annual basis in the remaining 9 months of our fiscal year 2026. The credit quality of our loan book continues to be solid and our historical and current net charge-offs remain low. Total nonperforming assets remained flat linked quarter, representing 64 basis points of total assets compared to 71 basis points in the quarter ended June 30, 2025. Nonperforming assets declined by approximately $17 million in multifamily and commercial mortgages and by $7.4 million in commercial real estate, partially offset by increases in nonperforming assets in single-family mortgages due to a handful of loans with a weighted average loan-to-value of 57%. No new C&I loans were placed on nonaccrual this quarter and a few larger C&I loans currently on nonaccrual are still paying as agreed. We do not anticipate a material loss from loans currently classified as nonperforming in our single-family, multifamily or commercial real estate loan portfolios. Net charge-offs to total assets were down 5 basis points linked quarter and 6 basis points year-over-year to 11 basis points for the 3 months ended September 30. Axos Clearing, which includes our corresponding clearing and RIA custody business had a good quarter. Total assets under custody or administration increased from $39.4 billion at June 30 to $43 billion at September 30. Net new assets for our custody business were $1.1 billion in the September quarter, an acceleration in the net new asset momentum we have experienced over the past several quarters. This marks the first time that assets in Axos Clearing's custody and clearing business have exceeded $40 billion. The pipeline for new custody clients remains healthy. We continue to evaluate M&A opportunities to augment growth from existing businesses and team lift-outs. We successfully completed the acquisition of Verdant Commercial Capital, a vendor-based equipment leasing company at the end of September. Verdant's focus on originating small and mid-ticket leases nationally in 6 specialty verticals is a great enhancement to our commercial lending franchise. Their risk-adjusted returns, history of low credit losses, tech-enabled service model and the entrepreneurial spirit of the team members are a great strategic fit for Axos. Additionally, these long-duration fixed-rate loans and leases complement our existing floating and hybrid loans in our single-family mortgage and commercial specialty lending businesses. In addition to having access to lower cost of capital and funding, we believe the Verdant team will benefit from our operations and tech support. After meeting with the management sales, operations and credit team post-close, we are confident that we'll be able to generate meaningful growth from existing and new vendors and dealers in our 6 existing verticals. Over the medium to long term, we see additional opportunities to generate incremental growth from entering new verticals as well as cross-selling deposits and floor plan lending to larger strategic dealers and original equipment manufacturers. From a deal perspective, we paid a modest 10% premium on the roughly $40 million of book value of Verdant at September 30. The seller will also have an opportunity to earn up to $50 million over the next 4 years if the business generates a greater than 15% return on equity on an annual and cumulative basis. The transaction added approximately $1.2 billion in loans, leases and equipment operating leases, which include $1 billion of loans and leases and $213 million of equipment operating leases, which are recorded in other assets. We paid off $87 million of subordinated debt and $242 million of warehouse borrowings at closing and assumed $754 million of long-term securitization financing. From an income perspective, we recorded approximately $1.3 million in deal-related expenses in this quarter and added $7.8 million to allowances for loan loss, including the roughly $7.8 million additional CECL reserves that we realized at closing. The total allowance for credit losses for the acquired loans and leases was approximately $15.6 million or roughly 1.5% of the total outstanding loan and lease balances at September 30, which we added despite a loss history for Verdant well below 50 basis points annually. Our expectation is this acquisition will be accretive to our earnings per share by 2% to 3% in the fiscal year 2026 and by 5% to 6% in fiscal 2027. The current regulatory environment provides a favorable backdrop for additional accretive and strategic M&A transactions. Our strong capital, liquidity and profitability allow us to be disciplined and opportunistic in where we deploy excess capital. We remain hyper-focused on increasing productivity and implementing additional operational improvements to help us become more profitable and scalable. We have rapidly expanded the scope of workflows and use cases for artificial intelligence across the enterprise, including risk and compliance, credit, operations, technology, legal, marketing, finance and accounting and believe that further AI implementations will enable us to create greater operating leverage and improve the speed, quality and cost of software development projects and accelerate new product development. AI is having an impact on our efficiency and software development. We are in development on exciting products and technologies across our consumer, commercial and securities businesses. We are continually enhancing our all-in-one consumer and small business experience with an aggressive and exciting roadmap. This consumer platform is utilized by retail and end clients in our institutional custody and clearing business. We have begun the rollout of our recently developed Axos Professional Workstation to selected broker-dealer clients. This Professional Workstation is a centerpiece of a technological modernization strategy in our securities business that will allow us to integrate banking products in a seamless way for RIAs and brokers to more holistically serve their clients and provide a much more flexible and modern system than many of our large competitors' legacy systems. In closing, I'm excited about the opportunities we have to maintain our positive momentum in fiscal 2026 and beyond. With the Verdant team and other team hires we have made this last year, producing both loans and deposits, we feel more certain in our ability to grow loans in the low to mid-teen range annually, maintain margin in our forecasted range and other than the costs we added through the acquisition, accomplish our objective to gain operating leverage. Now I'll turn the call over to Derrick, who will provide additional details on our financial results.

Derrick Walsh, CFO

Thanks, Greg. A 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 axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Noninterest expenses were approximately $156 million for the 3 months ended September 30, 2025, up by $5.6 million from the 3 months ended June 30, 2025. Excluding approximately $1.3 million of deal-related expenses from the Verdant acquisition in September, total noninterest expenses were up by approximately $4.3 million on the linked quarter. Salaries and benefit expenses were $76.6 million, up by $1.6 million from the prior quarter ended June 30, 2025. The primary drivers of the quarter-over-quarter increase in salaries and benefits expenses were the addition of the floor plan lending team and a partial quarter of our annual merit compensation increase. Data and operating processing expenses were $22.1 million compared to $20.4 million in fiscal Q4 2025. The sequential increase in data processing expense was attributed to a handful of projects across different business units. Since we closed the Verdant acquisition on September 30, 2025, it did not have any impact on our operating noninterest expenses. Going forward, we expect the Verdant acquisition to add approximately $8.5 million per quarter in noninterest expenses. We remain focused on optimizing our operating expenses with a specific focus on AI implementation while making prudent investments to deliver positive operating leverage. As Greg mentioned earlier, we acquired approximately $1 billion of loans and leases and $213 million of fixed asset operating leases in the Verdant acquisition. Of the $1.2 billion of total Verdant loan and leases, approximately $762 million are on-balance sheet securitizations with a weighted average remaining life of 3.7 years. The net loan yield on these assets is between 3.75% to 4.5% above the 90-day SOFR rate. And the net spread of the on-balance sheet securitizations is between 2.57% and 3.07%. The interest income from the $1 billion of loans and leases will be recorded in interest income and the income from the operating leases will be recorded in noninterest income. For all new loans and leases, we expect to record an allowance for loan loss of approximately 1.5%. Next, our income tax rate was 25% for the 3 months ended June 30, 2025, compared to 29.4% in the corresponding year-ago period. The quarter ended September 30 was the first quarter that benefited from the impact of the new California budget, which included a change in our tax calculation methodology. Additionally, we had approximately a 1.9% benefit in our tax rate from RSU vesting in the September period. Going forward, we still expect our corporate tax rate to be approximately 26% to 27%, consistent with what we have guided previously. I'll wrap up with our loan pipeline and growth outlook. Our pipeline remains healthy at approximately $2.2 billion worth of loans as of October 24, 2025, consisting of $605 million of single-family residential jumbo mortgage, $78 million of gain on sale mortgage, $352 million of multifamily and small balance commercial loans, $76 million of auto and consumer, and $1.1 billion across our commercial verticals. We expect the combination of strong originations from our commercial lending businesses, growing contributions from incubator businesses such as floor plan lending, slowing prepayments in our multifamily lending business and incremental contributions from the Verdant equipment finance business to drive loan growth in the low to mid-teens year-over-year growth over the next 12 months, excluding the impact of the loan portfolio purchased from the FDIC or any other potential loan or asset acquisitions. With that, I'll turn the call back over to Johnny.

Johnny Lai, Host

Thanks, Derrick. We are ready to take questions.

Operator, Operator

Our first question will come from Kyle Peterson with Needham & Company.

Kyle Peterson, Analyst

I wanted to start off talking about credit. There have been some significant headlines recently. Everything in your portfolio looks quite stable. However, could you provide some insight into what you're observing, particularly regarding any potential pipeline deals or situations that seem concerning or unattractive? Also, how are you approaching new deals, structuring, and competition in your current credit strategy?

Gregory Garrabrants, CEO

Sure, thanks for the question, Kyle. It's great to talk with you. Regarding the three high-profile deals that received a lot of attention, we evaluated them and decided to decline for several reasons. We identified some structural issues that were concerning. It's common for people to become careless with structure towards the end of credit cycles, and this is evident in some syndicated deals where the language protecting lenders was not as robust as it should have been. We are very cautious and vigilant about this issue because it can lead to problems in syndicated deals. We have rejected offers due to these concerns, and this risk is often overlooked but significant. I see it almost as a type of fraud, which requires careful consideration because it can lead to misinterpretations. At the very least, the approach is exceedingly aggressive. Additionally, there have been instances of more overt fraud, such as document forgery and the misrepresentation of first liens on assets. There are always methods to combat fraud, and our practices include obtaining certain documents directly from title insurers, which helps prevent such occurrences. It's a constant concern that we must remain vigilant against. I believe fraud poses one of the greatest risks for any lender, especially those secured like we are. Each segment presents different risks and opportunities to address them, and I think we manage these well, but we must always be on the lookout as people devise new and innovative ways to engage in dishonesty.

Kyle Peterson, Analyst

Okay. I appreciate the detailed color there. And then I guess just a follow-up on fee income came in pretty strong this quarter, at least what we had modeled. Just wanted to see, were there any one-timers or like whether it was loan sales or anything like I know you guys said last quarter. But I guess anything onetime? And then I guess, just a refresher on any of the fee income potential contributions from Verdant, like if there's any operating leases or anything and how we should be mindful of like the run rate on that from here on out would be great.

Derrick Walsh, CFO

Yes, nothing from the fee income that was a one-timer in this past quarter from the Verdant profile. The expectation is a few million dollars will come through in that noninterest income line item as we look forward.

Gregory Garrabrants, CEO

Yes. It's important to consider that the team has effectively managed the securities side, mitigating the negative impact on their profits when interest rates decrease. There is some off-balance sheet exposure, around $500 million, which isn't huge, but it's something to keep in mind. I believe they can recover from this, as they have shown growth previously. Additionally, while mortgage banking is improving, there might be a period where it hasn't picked up fully, resulting in reduced benefits from zero-cost deposits through the sweeps.

Operator, Operator

And moving next to Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

I wanted to follow up on VCC. I initially assumed that the funding for the loans or the assets added to the balance sheet would not come from your excess cash, but you mentioned the secured financing at the end of the quarter. Is there a specific period that you need to maintain that? Is the pricing attractive for you? Could you provide some details on that?

Gregory Garrabrants, CEO

We would like to remove those and use the excess cash, which would be a great outcome for us and our shareholders. However, these are term securitizations created to fund specific leases. There are cleanup calls that are all at 10%. As soon as we can address these, we will, as it would be more cost-effective to use our own deposits. They are currently on our balance sheet and constitute term financing, so we cannot take any action with them at this time.

Derrick Walsh, CFO

We'll monitor them and see if any pricing comes in kind of through Bloomberg and through the markets in the same way that we picked up some of our sub debt at a cheaper rate. We'll do the same thing with the secured financings. If they're trading out there at a discount, we'll be jumping on that.

Gregory Garrabrants, CEO

I don't believe that's going to occur. To be honest, the performance of the leases has been exceptionally strong. Therefore, there's no credit aspect to generate excitement around that. However, you never know; perhaps someone might want to sell a small stake or something similar. We can always consider that. Unfortunately, they will be out. Nonetheless, I think that Verdant has a solid pipeline and is set to grow. We established a growth target of $150 million to $200 million, and I believe they could surpass that, possibly even this quarter. This also opens up the opportunity to fund those loans with our deposits, which exceeded expectations this quarter, not just from operational activities but also due to significant growth. Additionally, the timing of the acquisition was slightly delayed, leading to another successful securitization with a favorable spread. I mentioned that I had no objections to this because many factors needed to align for the deal to succeed. The good news is we are well-prepared for strong loan growth. With this deal and our other initiatives, we've raised our loan growth guidance. While we are not aiming for high single digits to low teens, we are now projecting low teens to mid-single digits, or even mid-teens. In any case, it's an improvement.

Gary Tenner, Analyst

Got it. And just to return to the secured financing, what is the carrying cost of this for modeling purposes?

Gregory Garrabrants, CEO

Do you have that?

Derrick Walsh, CFO

It's a little north or about 5.5%, and they have a 3.7% weighted average in years.

Gary Tenner, Analyst

Okay. Great. And then I just did have a follow-up in terms of the purchase loans. It looks like a pretty steep drop in the balance of average purchase loans in the quarter, but it didn't look like any kind of real outsized interest income or accretion benefit. So could you just comment on that? And then if you have it available, what the period end FDIC purchase loans are?

Derrick Walsh, CFO

Yes. It was really from the prior quarter. If you recall, we had a significant increase of $12 million in the gain on sale in mortgage banking last quarter. That sale occurred in the latter half of June, which is why the average balance for your purchase loans was much higher in the June quarter. I think that was the only major one we had to address during the June and September quarters. That loan amounted to just over $100 million. Therefore, I believe this quarter's average is quite reflective of the figure at the end of the period.

Operator, Operator

We'll go next to Kelly Motta with KBW.

Kelly Motta, Analyst

The balance sheet growth was remarkable, both organically as well as with the deal that you got. It looks like capital ratios have come down a bit. Greg, can you refresh us on how you're thinking about capital and your comfort here with being able to support potentially mid-teens loan growth, where those capital ratios you're comfortable with letting them go?

Gregory Garrabrants, CEO

Yes, we have been accumulating capital and believe we have excess compared to our needs. We are satisfied with our current capital ratios, even if they decrease slightly. We are generating over a 15% return on equity, so any loan growth below that will help us maintain balance. While there are some dividends to the holding company, I feel positive about our profitability. The recent quarters have shown income growth, and this doesn’t even account for the $1 billion in Verdant loans, which indicates strong growth. Additionally, we have effectively managed our loan loss reserves, bringing them to a solid level of 1.5%, especially considering Verdant's historical loss averages. This careful approach gives us confidence in our loan loss position. We are also pleased with how non-performing loans are developing and have not seen the issues anticipated in commercial real estate that others have expressed concern about. Overall, we maintain higher capital ratios than ever before, which were put in place for situations like this, and we are comfortable with our ability to support loan growth.

Kelly Motta, Analyst

Awesome. You certainly contribute a lot to help replenish those. Greg, regarding the Verdant deal, your prepared remarks suggest there might be additional acquisition opportunities. Can you share any details about the types of deals that are appealing, how things are developing, and what the outlook looks like from this point forward?

Gregory Garrabrants, CEO

Yes. As you might expect, these banks often come together to discuss various topics. We are constantly examining what strategies are effective and which are not. In the case of Verdant, it successfully addressed a specific niche, providing strong management in a national specialty area that we previously lacked. We continue to seek out similar opportunities and the right partners. When it comes to bank acquisitions, there are various approaches to determine what is beneficial. It’s crucial that there is a good cultural and strategic match, or that the deal presents an exceptional financial opportunity. We remain very proactive in our search and will keep exploring options that make sense.

Operator, Operator

And moving on to David Feaster with Raymond James.

David Feaster, Analyst

I wanted to discuss the NDFI issue, which has become quite controversial. I appreciate your comments about it, but I would like you to elaborate on where you are seeing pressure points in the industry. There has been some fraud, but can you compare and contrast this with your operations, the exposures you have, and how you monitor and manage collateral and cash flows to protect yourself? This seems to be an extremely important aspect.

Gregory Garrabrants, CEO

Certainly, it’s a broad topic. Let's consider single-family mortgage warehouses. MERS plays a crucial role there. You've seen situations, perhaps not to date but in the past, where loans were unexpectedly pledged to other parties. Fortunately, MERS addresses that issue more effectively than alternatives concerning the types of loans involved. Now, if we look at real estate lender finance with crossed assets, there have been cases where institutions believed they held first mortgages based on title policies, but multiple banks were under the same impression regarding their liens. There are clear methods to sort this out, primarily revolving around trust and verification processes. There are strategies to ensure these issues don't arise, though I won't disclose all the details to competitors. The way lenders monitor these situations varies; for instance, some document assignments which help prevent issues with property liens while others rely solely on partner assurances. Banking has its complexities and can be fascinating. After the 2008-09 crisis, there was skepticism about single-family mortgages, especially in places like Florida. While many were wary, we entered the market with lower loan-to-value ratios after significant price drops and faced no losses while securing better rates. It's necessary to consider specifics in these discussions. The risk associated with NDFIs outside of real estate lending bears resemblance to risks in traditional asset-based lending deals, where fraudulent behaviors can be present regardless of the presence of an NDFI. There can be instances of invoice fraud with borrowers, and we experienced that firsthand with a client who fabricated an invoice. For situations involving capital call lines, risks differ as they often involve substantial funds. The pertinent question is how many participants can waive certain defenses. Each area of lending comes with its own pros and cons. Inserting an NDFI can be beneficial if the entity operates professionally, which most do. While there’s always the potential for misconduct, fraud may be more prevalent in small businesses compared to larger facilities. The structures of these larger deals also mitigate risks from individual problems. Essentially, banking is about navigating trade-offs, and comprehending these subtleties is key to managing risk effectively.

David Feaster, Analyst

Yes. That's helpful. And I wanted to get a sense on the expansion in that floor plan space with the new team. Just kind of how that build-out and integration has been? It sounds like they've got a nice pipeline. I know we're still in the early stages there, but was just hoping to kind of get an update on that business line and any expectations you might have.

Gregory Garrabrants, CEO

They have some term sheets accepted for substantial lines with strong borrowers. The nature of this business requires obtaining MBRAs, which are essentially repurchase obligations from manufacturers. This is beneficial because if an asset doesn't sell, the manufacturer can take it back and reimburse you. We have a significant number of those executed in these areas. I estimate that by March 31, we will have several hundred million dollars in assets and funded lines in this business.

David Feaster, Analyst

That's great. And then just last one for me. Just wanted to get an update on the securities business and the white labeling within there of some banking products. I know this is still in the early stages, I believe, still in beta testing. But just kind of curious, maybe the build-out of the tech infrastructure in the securities segment broadly. And then when do you think we can roll out some of that white labeling of the banking products across the platform?

Gregory Garrabrants, CEO

There are two main components to our technology modernization efforts in the custody and clearing business, which we have branded as Axos Complete. This initiative involves the development of the Axos Professional Workstation. The existing workstations used by the clearing team are outdated and inflexible, lacking modern integrations through APIs and access to all the bank's products that we want. This has been a significant focus on the development side, benefiting from AI advancements. We are currently conducting tests with multiple broker-dealers, gathering feedback, and have a rollout schedule in place. The main advantage, particularly concerning banking, is that banking products can be proxy enrolled by the RIA, allowing access to lending products, secured credit cards, and more. As these products become available at the bank, they can also be made available to the RIA and their clients, along with recommendations. This rollout is expected to take about six to seven months as we need to train various staff since this core system is essential for trading and other operations. Additionally, there is a unified technical build with different perspectives, including the retail platform previously known as the Universal Digital Bank, now renamed the Axos Client Portal. This portal will enable end clients of RIAs and broker-dealers to enhance their operations and access a variety of products. The RIAs currently use a different platform, but we plan to integrate all systems over time. We are still developing certain features for the Axos Professional Workstation to ensure it serves as the comprehensive workstation. Overall, we anticipate having a very modern tech stack that is flexible and easily modifiable for our institutional and end clients, facilitating seamless interactions to cross-sell various products. This project is progressing well, and there is a lot of excitement surrounding it. Despite the scale of the project, we are seeing quicker development, whether through outsourcing or internal efforts.

Operator, Operator

And we'll go next to Tim Coffey with Janney Montgomery Scott.

Timothy Coffey, Analyst

I'm trying to get my arms around expenses going forward. Obviously, a lot of moving pieces. None of it was...

Gregory Garrabrants, CEO

So am I. Tim, so am I. So am I, Tim.

Timothy Coffey, Analyst

Okay. Let’s figure this out then. Is my North Star an efficiency ratio? Or is it expenses to average assets?

Gregory Garrabrants, CEO

We've consistently mentioned a hard cap that I am committed to, and with the Verdant deal, we will need to adjust our baseline accordingly. Our growth in personnel expenses and professional services will be less than 30% of the growth in net interest and noninterest income. This means for every dollar increase in those incomes, our personnel and professional services expenses will grow by no more than 30 cents. While there may be occasional one-time expenses, this is a solid guideline that we are adhering to. We have managed to maintain this well, and AI is contributing to that efficiency. We expect to apply the same principle with Verdant as well. Derrick provided the expected costs for Verdant, and you should factor that into your models, anticipating that growth will remain within that limit. This doesn’t capture everything perfectly since there are other growth categories besides professional services and personnel, but they account for over 70% of the total. We’re managing effectively, although it can be challenging to assess on an efficiency ratio basis due to fluctuations in margins and one-time payoffs from FDIC loans. If you incorporate that kind of growth model, it should help in planning as everyone is closely monitoring their expenditures to reach their financial goals.

Operator, Operator

And this now concludes our question-and-answer session. I would like to turn the floor back over to Johnny Lai for closing comments.

Johnny Lai, Host

Great. Thanks for everyone's time, and we will talk to you next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.