Axos Financial Earnings Call: Growth Strong, Margins Tighten

Axos Financial ((AX)) has held its Q2 earnings call. Read on for the main highlights of the call.

Axos Financial Earnings Call Highlights Strong Growth Amid Manageable Headwinds

Axos Financial’s latest earnings call struck an overall upbeat tone, emphasizing strong growth in loans, deposits, and profitability, underpinned by improving credit quality and a meaningful boost from the Verdant acquisition. While management acknowledged rising non-interest expenses, higher provisions, and modest pressure on net interest margin (NIM) as near-term headwinds, the broader message was that Axos is executing well on a diversified growth strategy, generating robust returns on equity and assets, and positioning Verdant as an accretive, strategic growth engine.

Powerful Loan Growth Momentum

Axos delivered roughly $1.0 billion of net loan growth quarter-over-quarter, with contributions spread across several lines: single-family mortgage warehouse, commercial specialty real estate, equipment finance, and fund finance. Management highlighted that the company entered January with approximately $800 million more in starting loan balances than the prior quarter and expects to add another $600–$800 million in loans this quarter. This sustained growth, across both consumer and commercial segments, underscores Axos’s ability to originate assets at attractive yields even in a competitive environment.

Net Interest Income Up, Margin Stable on an Adjusted Basis

Net interest income (NII) climbed to $331.6 million, an increase of about $41 million (14%) from the prior quarter. Excluding a one-time FDIC loan prepayment accretion item, NII was still up around $23 million, or 8%. Reported NIM improved to 4.94%, up 19 basis points quarter-over-quarter. When stripping out the one-time FDIC benefit and the impact of Verdant financing, adjusted NIM was roughly 4.72%, essentially flat versus the prior period. The message for investors: core spread income is rising with balance sheet growth, even as management prepares the market for modest margin compression ahead.

Profitability and EPS Growth Remain Standout

Axos turned in net income of about $128.4 million, up 22.6% year-over-year, with diluted earnings per share of $2.22, a 23.3% annual increase. Returns were particularly notable, with return on average common equity topping 17% and return on assets near 1.8%, levels that compare favorably with many peers. This combination of double-digit EPS growth and strong returns suggests that Axos is not merely growing its balance sheet, but doing so in a capital-efficient and profitable way.

Deposits and Funding Show Strong Inflows

The bank reported ending deposits of $23.2 billion, a 44.3% surge from the prior quarter and a 16.5% increase year-over-year, reflecting strong funding momentum. Importantly, demand, money market, and savings balances—which represent about 96% of deposits—were up 17% year-over-year. Average non-interest-bearing deposits rose to approximately $3.5 billion from $3.0 billion in the prior quarter, providing a valuable low-cost funding base. These trends signal growing customer franchise strength and help support Axos’s robust loan growth without overreliance on higher-cost wholesale funding.

Fee Income Surges, Powered by Verdant

Total non-interest income jumped to $53.4 million, up 65% from $32.3 million in the prior quarter, as fee-based lines of business kicked in alongside the Verdant acquisition. Verdant contributed approximately $18.9 million in non-interest income, while Axos recognized $24.3 million of Verdant-originated interest income and $14.1 million of operating lease income. This mix of interest and fee revenue from Verdant adds diversification to Axos’s earnings stream and reduces dependence on pure spread income.

Healthy Originations and a Solid Loan Pipeline

Total originations excluding single-family warehouse lending reached $5.6 billion for the quarter, up 35% sequentially, or roughly 140% annualized. The pipeline remains strong at about $2.2 billion as of late January, with a diversified composition: single-family jumbo, multifamily, small-balance commercial, auto/consumer, and commercial lending. This breadth across product types and borrower segments suggests that Axos’s growth is not overly reliant on any single category, providing some resilience against sector-specific slowdowns.

Credit Metrics Improve, Reserves Remain Strong

Asset quality moved in the right direction, with total nonaccrual loans to total loans declining from 74 basis points to 61 basis points quarter-over-quarter. Nonperforming assets fell by roughly $19 million, improving from 64 basis points of assets to 56 basis points. Net charge-offs to total assets dropped to just 4 basis points, down 7 basis points from the previous quarter and 6 basis points year-over-year. Axos also maintains a robust allowance for credit losses, covering nonaccrual loans by about 216%. For investors, these trends signal that rapid loan growth is not coming at the expense of underwriting discipline.

Custody and Securities Segment Continue to Scale

The company’s securities and custody business also showed progress, with assets under custody or administration rising to $44.4 billion from $43.0 billion. Net new custody assets were nearly $1.0 billion in December and $2.0 billion over the first six months of fiscal 2026. Segment operating income improved to $9.7 million from $7.8 million sequentially. This non-bank, fee-oriented business line provides an additional, less rate-sensitive earnings driver and supports Axos’s broader strategy of diversification.

Verdant Acquisition Emerging as a Key Growth Driver

The Verdant acquisition, completed at the end of September, is beginning to show clear strategic and financial benefits. Verdant added about $430 million of loans and leases and roughly $780 million of on-balance-sheet securitizations at closing, and contributed around $130 million of net new loans and leases in December alone. Management expects Verdant to generate EPS accretion at the high end of the original range—2–3% in fiscal 2026 and 5–6% in fiscal 2027—and forecasts Verdant-originated loan growth of approximately $150 million per quarter. While Verdant introduces some seasonality and more lease-driven fee income, it broadens Axos’s lending capabilities and enhances growth prospects.

Rising Non-Interest Expenses Weigh on Operating Leverage

Non-interest expenses increased to about $184.6 million from $156.3 million in the prior quarter. Verdant-related costs were a key driver, including roughly $7.8 million in additional salaries and benefits and about $14.8 million in depreciation and amortization tied to acquired assets. A one-time general and administrative accrual of around $7 million also pushed costs higher. Management reiterated a medium-term target to keep salary, benefits, and professional services expense growth at or below 30% of revenue growth, but the latest quarter highlights that executing on this operating leverage target will require careful cost control as integration and growth investments continue.

Higher Provisions Reflect Growth, Not Deterioration

Provision for credit losses rose to $25.25 million from approximately $17.12 million in the prior quarter. Management linked the increase primarily to strong commercial loan growth, which carries a higher provision requirement per dollar of net loans than some consumer categories. An additional roughly $2.8 million provision was recorded for unfunded commitments in commercial real estate specialty and commercial & industrial lending. Given the simultaneous improvement in actual credit metrics, the higher provision appears driven more by portfolio expansion and prudence than by deteriorating credit conditions.

NIM Pressures and One-Time Accretion Effects

Reported NIM benefited this quarter from a one-time FDIC purchased loan prepayment that produced about $17.1 million of accretion, as well as securitization-related impacts. Management cautioned that, on an adjusted basis, investors should expect NIM to face roughly 5–6 basis points of pressure going forward as these one-offs fade and funding costs remain competitive. Verdant financing had about a 3 basis point negative effect on NIM in the quarter, reflecting the cost of funding the newly acquired portfolio, even as Verdant boosts overall earnings and fee income.

Reduced FDIC Accretion as a Tailwind

As payoffs and maturities roll through the FDIC-acquired loan portfolio, the ongoing benefit from accretion is expected to decline. Forward-looking regular accretion from the signature FDIC purchase is now projected at around $6.5 million per quarter, lower than the elevated level seen this quarter due to the one-time prepayment. While FDIC accretion will still add 10–15 basis points to NIM going forward, the reduction diminishes a previously outsized source of margin tailwind, making core spread management and asset mix more important.

Seasonality and Mix Shifts from Verdant and Leasing

Management noted that Verdant’s business is seasonal, typically stronger in the June quarter and softer in the March quarter. In addition, a portion of Verdant-originated balances are structured as operating leases rather than traditional loans, meaning some revenue shows up as fee income instead of interest income. This introduces quarter-to-quarter variability in the mix of interest versus non-interest income and can make reported NIM somewhat noisier, even if overall economic returns remain attractive.

Expense Discipline Targets Under the Microscope

While Axos reiterated its goal of keeping salaries, benefits, and professional services cost growth at or below 30% of revenue growth, near-term realities include higher depreciation and Verdant-related costs that are pushing up total non-interest expense. Investors will be watching for evidence that management can bend the expense curve back toward its stated targets once integration and one-time items moderate, which will be key to preserving the bank’s strong operating leverage and high returns.

Timing and Calendar Effects Cloud Near-Term Comparisons

Management also flagged a technical headwind: the March quarter has two fewer calendar days, which is expected to reduce net interest income by roughly 2% on a quarter-over-quarter basis, all else equal. This timing factor, combined with the tapering of one-time accretion and modest NIM compression, may make sequential comparisons look softer even if underlying loan and deposit growth remain solid.

Guidance Points to Continued Growth with Modest Margin Drift

Looking ahead, Axos is guiding to continued strong loan growth in the low-to-mid-teens annually, supported by a current quarter goal of adding about $600–$800 million in loans and a $2.2 billion pipeline spanning jumbo single-family, multifamily, auto/consumer, and commercial lending. Verdant is expected to contribute roughly $150 million of loan balance per quarter and deliver EPS accretion toward the high end of the previously outlined ranges for fiscal 2026 and 2027. On the margin front, management assumes adjusted NIM will decline modestly by about 5–6 basis points from the normalized 4.72% level, to around 4.66%, as one-time FDIC accretion and securitization benefits normalize. FDIC purchase-loan accretion should still add 10–15 basis points to NIM, with regular accretion at roughly $6.5 million per quarter, though the March calendar effect is expected to trim net interest income by around 2%. On expenses, the company aims to keep salaries, benefits, and professional services growth at or below 30% of revenue growth, supported by strong deposit inflows and a funding mix increasingly anchored by low-cost, non-interest-bearing deposits.

In summary, Axos Financial’s earnings call painted a picture of a fast-growing, highly profitable institution balancing strong loan and deposit growth with disciplined credit risk and an increasingly diversified revenue base. While higher expenses, elevated provisions tied to growth, and modest NIM pressure pose near-term challenges, management’s guidance and the early success of the Verdant acquisition suggest that earnings power should continue to expand. For investors, the key themes are sustained double-digit EPS growth potential, resilient asset quality, and a strategic shift toward more fee and lease income that could support valuation over the long term.