Earnings call transcript: Axos Financial’s Q1 2026 earnings beat forecasts

Axos Financial Inc. (AX) reported robust earnings for the first quarter of fiscal 2026, surpassing analysts’ expectations with an earnings per share (EPS) of $2.07, compared to the forecasted $1.86. Revenue also exceeded projections, coming in at $323.39 million against an anticipated $319.16 million. Following the announcement, Axos Financial’s stock saw a modest increase of 0.7% in after-hours trading, closing at $78.77.

Key Takeaways

• Axos Financial’s EPS for Q1 2026 was $2.07, an 11.29% surprise over the forecast.
• Revenue for the quarter reached $323.39 million, surpassing expectations.
• Stock price increased by 0.7% in after-hours trading following the earnings release.
• The company completed its acquisition of Verdant Commercial Capital.
• Axos Financial anticipates continued loan growth and stable net interest margins.

Company Performance

Axos Financial demonstrated a strong start to fiscal 2026, with net income rising to $112.4 million from $110.7 million in the previous quarter. The company’s strategic acquisition of Verdant Commercial Capital and its focus on technological advancements, such as AI implementation and digital platform enhancement, are expected to bolster future growth. Loan originations increased by 11% quarter-over-quarter, and total deposits rose by 6.9% year-over-year, indicating a healthy market position.

Financial Highlights

• Revenue: $323.39 million, exceeding the forecast of $319.16 million.
• Earnings per share (EPS): $2.07, beating the expected $1.86.
• Net income: $112.4 million, up from $110.7 million in the previous quarter.
• Adjusted net income: $119 million.
• Net interest income: $291 million, marking a 15.6% annualized increase.

Earnings vs. Forecast

Axos Financial’s Q1 2026 results outperformed expectations, with a notable EPS surprise of 11.29%. The revenue surprise was 1.33%, indicating the company’s strong execution and market positioning. This performance aligns with Axos Financial’s historical trend of exceeding market forecasts, although the magnitude of the beat this quarter was particularly significant.

Market Reaction

Following the earnings announcement, Axos Financial’s stock price rose by 0.7% in after-hours trading, closing at $78.77. This movement reflects investor confidence in the company’s ability to deliver on its strategic initiatives and maintain robust financial performance. The stock remains within its 52-week range, having previously reached a high of $93.84 and a low of $54.46.

Outlook & Guidance

Looking ahead, Axos Financial anticipates loan growth in the low to mid-teens range and expects its net interest margin to remain between 4.25% and 4.35%. The Verdant acquisition is projected to add $150-$200 million in quarterly net loans, contributing to future earnings growth. The company also expects a corporate tax rate of around 26-27%.

Executive Commentary

"We had a strong start to our fiscal 2026," stated Greg Garrabrants, highlighting the company’s strategic focus and operational efficiency. He emphasized the impact of AI on Axos Financial’s efficiency and software development, stating, "AI is having an impact on our efficiency and software development." Garrabrants also reassured investors about the company’s credit risk management, noting, "We’re very careful and watchful... about credit structure."

Risks and Challenges

• Potential macroeconomic pressures that could impact loan growth.
• Integration risks associated with the Verdant acquisition.
• Fluctuations in interest rates affecting net interest margin.
• Competitive pressures in the financial services sector.
• Regulatory changes impacting operational strategies.

Q&A

During the earnings call, analysts inquired about Axos Financial’s credit risk management and fraud prevention strategies, seeking clarity on the Verdant acquisition’s strategic fit. The company detailed its technology modernization efforts and addressed capital allocation and M&A strategy, providing insights into its future growth plans.

Full transcript - Axos Financial Inc (AX) Q1 2026:

Carrie, Conference Call Operator: Greetings and welcome to the Axos Financial, Inc. First Quarter 2026 Earnings 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 during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Johnny Lai. Please go ahead.

Johnny Lai, Investor Relations, Axos Financial: 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 10Q 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.

Greg Garrabrants, President and Chief Executive Officer, Axos Financial: 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 Commercial Capital acquisition, which closed on September 30, 2025. A five 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 three months ended September 30, 2025.

Other highlights in the quarter include net interest income was $291 million for the three 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 three FDIC purchase 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 nine 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 Commercial Capital 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. Non-interest 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 non-accrual loans to total loans declined five basis points linked quarter, resulting in our non-accrual 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 at almost 30% annually.

Total originations for investment, excluding single-family mortgage warehouse lending, were over $4.2 billion for the three months ended September 30, representing an increase of 11% linked quarter, or 44% annualized. Commercial real estate specialty lending, auto lending, and single-family mortgage warehouse had strong originations and net loan growth this quarter. Average loan yields for the three months ended September 30 were 7.99%, in line with the prior quarter. Average loan yields for non-purchase loans were 7.66%, and average yields for purchase loans were 15.81%, which includes the accretion of our purchase price discount. The FDIC purchase 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 non-interest-bearing deposits were approximately $3.4 billion at the September quarter end, up by approximately $350 million from the prior quarter. Non-interest-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 non-interest-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 seven basis point drag on our net interest margin. Additionally, we issued approximately $200 million of subordinated debt in September 2025, which has a fixed annual interest rate of 7% for the first five 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 one basis point in the quarter ended September 30, 2025. We expect our consolidated net interest margin 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 had 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, 2025. 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 nine 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 non-performing assets remain flat quarter over quarter, representing 64 basis points of total assets compared to 71 basis points in the quarter ended June 30, 2025. Non-performing 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 non-performing 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 non-accrual this quarter, and the few larger C&I loans currently on non-accrual are still paying as agreed. We do not anticipate a material loss from loans currently classified as non-performing in our single-family, multifamily, or commercial real estate loan portfolios.

Net charge-offs to total assets were down five basis points quarter over quarter and six basis points year-over-year to 11 basis points for the three months ended September 30. Axos Clearing, which includes our correspondent clearing and our 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 liftouts.

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 six 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 six 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 four 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 loan 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 CSOL 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 operation 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-teens 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. 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 filing for additional details.

Non-interest expenses were approximately $156 million for the three months ended September 30, 2025, up by $5.6 million from the three months ended June 30, 2025. Excluding approximately $1.3 million of deal-related expenses from the Verdant Commercial Capital acquisition in September, total non-interest expenses were up by approximately $4.3 million on the linked quarter. Salaries and benefits 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 Commercial Capital acquisition on September 30, 2025, it did not have any impact on our operating non-interest expenses. Going forward, we expect the Verdant Commercial Capital acquisition to add approximately $8.5 million per quarter in non-interest 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 Garrabrants mentioned earlier, we acquired approximately $1 billion of loans and leases and $213 million of fixed asset operating leases in the Verdant Commercial Capital acquisition. Of the $1.2 billion of total Verdant Commercial Capital loans 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 non-interest 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 three 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. Thanks, Derrick. We are ready to take questions. Thank you. We will now be conducting a 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 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 key. That is Star 1 to ask a question. Our first question will come from Kyle Peterson with Needham & Company. Great. Thanks. Good afternoon, guys. Appreciate you taking the questions. I wanted to start off on credit. Obviously, there’s been some fairly high-profile headlines of late. Everything in your book looks pretty good, but I guess maybe any context of what you guys are seeing, particularly in any, whether it’s pipeline deals or anything that looks a little spooky or unattractive to you guys, or I guess kind of how are you guys thinking about new deals and structure and competition in your approach to credit right now? Sure. Thanks for the question, Kyle. Good to talk to you.

Just in speaking about the three deals that got a lot of press, we had seen those deals and turned those down for a variety of different reasons. We think there were some decent indicators there just based on structure that were problematic. I think that in late stages of credit cycles, people sometimes get pretty sloppy on structure. Frankly, you see that in some of the syndicated deals where the sort of lender-on-lender violence language wasn’t as strong as it should have been in certain cases. We’re very careful and watchful of that because we believe that that can be a problem on syndicated deals. We turned down deals for that. We pushed back. That’s an area that is less recognized but of a problem. You don’t need to—I personally view it as almost a form of fraud.

You have to just be very thoughtful about that because guys are reading things into this, and at minimum, it’s extraordinarily aggressive. The other types of more blatant fraud that went on there, like with respect to one of the three deals, was that people are actually forging documents and title insurance and telling banks that they have first liens on assets when they don’t. There’s always ways of going about trying to stop fraud, and there were ways in what we do that would not have allowed that to happen because we get certain documents directly from title insurers and things that would stop that from happening. I think that it’s always something that you have to look out for. I’ve always said I think fraud is one of the most dangerous potential issues that any lender has, particularly when they’re secured in the manner that we are.

In each and every segment, there are different types of risks and opportunities to mitigate those risks. I think we do a good job with it, but we’re continually on guard because people come up with new and interesting ways of doing bad things. Okay. Appreciate the detailed color there. And then I guess just a follow-up on fee income. Came in pretty strong this quarter, at least to what we had modeled. Just wanted to see, were there any one-timers or whether it was like a loan sales or anything like I know you guys had last quarter? I guess anything one-time and then 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 the run rate on that from here on out would be great.

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 non-interest income line item as we look forward. I think the one thing you do have— You mean per quarter or? Correct. Yeah. Per quarter. Thank you. The one thing you do have to just be thoughtful about is I think the team’s done a good job on the security side of growing out of the negative impact that hits their P&L when they—when rates go down. There’s only some of that that’s off balance sheet, like $500 million or whatever, but that’s still out there. It’s not massive, but you just should think about it. I mean, I think they’re going to be able to grow out of it. They did grow out of it, but that’s out there.

That’s one element that you should—and then obviously mortgage banking picks up. There’s probably a dead zone in there where somewhere mortgage bank is not picked up, but you end up with lower benefit from the zero-cost deposits through the sweeps. Okay. Yep. Okay. That’s really helpful. Thank you, guys, and nice quarter. Thank you, Scott. Moving next to Gary Tenner with DA Davidson. Thanks. Good afternoon. I had a follow-up on VCC. It was my assumption, at least, that the funding for the loans put on or the assets put on balance sheet was going to come from your excess cash, but you flagged the secured financing at quarter end. Is there a period of time that you have to keep that? Is it an attractive price for you? Can you kind of walk us through that?

We would love to take all that out and utilize the excess cash, and it would be a very wonderful day for us and our shareholders. These are term securitizations. They were done to match fund particular leases. There are cleanup calls that I think are all at 10%, Derrick. Yeah. They’re all at 10%. As soon as we can clean these up, we will because it would be cheaper to use our own deposits. Yeah, they’re on balance sheet. They’re term financing. We can’t do anything with them. Obviously, we’ll monitor them and see if any pricing comes in 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.

I don’t think that’s going to happen, just frankly. It’s possible. The performance of the leases has been very, very strong, so there’s no credit component to get anyone excited about that. You never know. Maybe somebody owns a small piece and they want to get rid of it or something like that. We can always look at that, unfortunately, but they’re going to be out. I do think that Verdant has a nice pipeline. They’re going to be growing. We put that $150 to $200 million growth target out there. I think they can exceed that, and I think they might this quarter. That also means that there will be the opportunity to fund those loans with our deposits. Deposits just ended up overshooting this quarter, not only from operational activity, but we obviously had a big quarter of growth coming.

There was another component that the timing of the acquisition sort of got delayed, and so they did another securitization. It was a pretty nice and tight spread. We talked about it, and I said, "I don’t really have an objection to it because there was a bunch of moving pieces to get the deal done." The good news is we’re well set up for strong loan growth. I think with this deal and everything else we’ve done, we raised our guidance on loan growth because we had that, even though we were certainly not hoping to be there, that high single digits to low teens, and now we have low teens to mid single digits or something. Mid teens, right? In any event, it’s better. Got it. Just to go back to the secured financing, just for modeling purposes, what’s the carrying cost of this?

Do you have that all? It’s a little north or about 5.5%, and they have a 3.7 weighted average in years. Okay. Great. Thanks for that. 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 benefits. Could you just comment on that? If you have it available, what the period end FDIC purchase loans are? It was really from the prior quarter. If you recall, we had a big bump of $12 million in the gain on sale in the mortgage banking last quarter. That sale occurred in the latter half of June, and that’s why the average balance was much higher for your purchase loans in the June quarter.

I think that was the only big one that we’ve had to pay off during the June and September quarter. That loan was a little over $100 million. I think this quarter’s average is relatively reflective of what the ending period figure is. Okay. Got it. Thank you. As a reminder, that is Star 1 if you’d like to ask a question. We’ll go next to Kelly Motta with KBW. Hey. Good afternoon. Thanks for the question. 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? Thank you. Yeah.

We’ve been accumulating capital and discussing that we believe we have excess relative to what we need. We feel very good about the capital ratios where they are and even having them go down a bit. The reality for us is we’re making over a 15% ROE. Any loan growth that’s sub that essentially allows us to stay roughly equal. Obviously, there’s some dividends to the holding company, things like that, but within that range, I feel very good about the profitability. I think just given if you look at the linked quarter income benefit, and it didn’t even include the $1 billion of the Verdant loans, that was nice growth. I think that strong income growth and the strong capital accretion is going to work well there.

I think we’ve done a really good job of bringing our loan loss reserve to a very strong place, including even with Verdant, where I think it was a prudent but conservative decision to bring it to 1.5% given that they’ve been averaging 25 and 30 basis points of loss over their period. They’ve been around five years, so that doesn’t mean you can guarantee that, but certainly bringing that to 1.5% is good. I feel very good about where we are in loan loss. I feel good about where we’re seeing the NPL sort of stuff shake out. I feel like the commercial real estate thing, which everybody was sort of agitated about, has certainly not come to fruition in any respect with respect to us. I think it’s good. We had much higher capital ratios than, frankly, we’ve ever had.

It was built for doing just what we did. We felt good about that deal and our ability to do it. You guys certainly make a lot to help replenish those. In terms of Greg, we got the Verdant deal. In your prepared remarks, it sounds like there might be some more opportunities on the acquisition side. Is there anything you can share with us in terms of types of deals that look attractive, how that’s shaping up, and kind of outlook from here? Thank you. Obviously, as I’m sure you well know and have to cover as these banks get together like kids at a frat party, there’s a lot of talk about all those things. We’re always active and looking and trying to understand what works and what doesn’t. In the case of Verdant, for example, it filled a particular niche.

It was a good national specialty vertical with bank quality management in an area that we didn’t have. There are a few other of those types of verticals that we always continue to look for and find the right partners. The bank side, there are a lot of different ways to look at bank acquisitions and see what works and what doesn’t. It has to be the right cultural strategic fit, or it has to be an incredible financial bargain. We’re very active in looking, and we’ll continue to do that and see what makes sense. Thank you. I’ll step back. Thank you. Moving on to David Feaster with Raymond James. Good afternoon, everybody. Hey, David. I wanted to talk on this Indifi issue. This has now become a dirty word. I appreciate your commentary a bit talking about it.

I was just hoping you could elaborate maybe a bit on where, obviously, there’s been some fraud, but where are you seeing the pressure points in the industry? Maybe compare and contrast a bit with what you do, the exposures that you’ve got, and how you monitor and manage collateral in the cash flows just to protect yourself because that seems like an incredibly important part about that. Right. It’s a broad category. If you just sort of go through this logically, single-family mortgage warehouse, right? You have MERS for that. There was some pretty—I mean, obviously, you’ve been around a long time. I’m not calling you old. I’m just saying you’ve been around a really, really, really, really long time, David.

You remember Taylor Bean and Whitaker and all those kind of things and Colonial and all that sort of stuff where essentially you showed up one day and your loans were pledged to someone else, right? That issue, I think, is more solved with MERS than others with respect to the types of loans that go through there. That’s the single-family warehouse side. Now, if you think about real estate lender finance where you have facilities that have crossed assets, what happened with respect to those other institutions was that essentially they were told they had first mortgages because they received title policies from the borrower themselves. Essentially, three different banks, I think, thought they all had first liens or the first liens that were created by the NDFI. Three different banks thought they had first liens on those first liens, right?

There are some pretty clear ways that you can figure that out. One way is not to get the information from the NDFI, right? At a fundamental level, there’s always this question of what do you trust, what do you don’t trust, how do you get it, how do you check it, right? There are some pretty clear ways to do that. I’m not going to paint them all out for all my competitors, but just to say that there are ways of making sure that doesn’t happen. Now, there’s obviously an element of how you monitor that and how you think about that with respect to the timing of it because some lenders cloud title like we do by recording a notice of assignment. If somebody else tries to lien that particular property, then there’s a notice of assignment there, and title company won’t work through that.

Others take the word of their partners for that, right? You always have these kind of things depending on how you think about it. Frankly, I think it’s always interesting to me in banking because it’s kind of beautiful to some extent because you get one thing that happens that’s idiosyncratic in a particular problem. I remember, it was single-family lending after 2008, 2009, and all these people come to me and say, "I can’t believe you’re doing single-family mortgages in Florida." I’m like, "Yeah, we weren’t doing them when the prices were super high, but now that they’ve fallen by the price they’ve fallen by 60%, we’re now doing it at 40% LTVs." Of course, no, we never lost a single penny on that, and we got high rates, right? I think you have to just ask yourself, what specifically are you talking about, right? That collateral’s there.

Now, the type of, quote, NDFI type of risk associated with non-real estate lender finance, if you actually think about it for even a small amount of time, is a very similar risk to a regular straight ABL deal, right? Somebody can make up invoices or a factoring. They can make up invoices. They can do all that kind of stuff. Whether you have an NDFI involved in it or not, if a borrower is committing fraud, the borrower can be committing fraud on the NDFI and on you, right? There are banks that finance factor receivable companies, right? There’s an NDFI that’s a factor receivable, and you’re financing that factor receivable. You could have the NDFI defraud you. You could also have end clients defraud you.

We had a small client, a direct borrower, where we had a full banking relationship, typical middle market style, more like small business style. One of the guys made up an invoice, right? There are different ways to catch them doing that. If you’re thinking about capital call lines, then there’s a whole different array of risks associated with that because often the LPs are very large funds. You’re getting them—the question is, how many of those do you get to sign waivers and defenses, right? There are all kinds of different things like that. I think if you step back and you say each of these areas have obviously their own benefits and disadvantages.

On one hand, if you put an NDFI between you and a client, if the NDFI is full of bad actors, which by far the vast majority of them are not, they’re highly professional individuals who’ve worked at some of the biggest and most prestigious institutions in the country their whole life. I’m not saying that doesn’t mean they can’t turn out to be a bad guy and be willing to commit to a life in San Quentin or something, but that’s not really what happens normally. I think, frankly, you’re much more likely to have fraud in small business and direct borrower loans on things like factoring and ABL, potentially, than you are in these large cross facilities. Those large cross facilities protect you because any individual idiosyncrasies there, as well as the NDFI capital, also protect you from those sorts of things.

Life, banking, it’s full of trade-offs, right? You just have to understand the nuances. That’s what it is. Yeah, that’s helpful. 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’s 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. Yeah, so they’ve got some accepted term sheets for some nice lines with some really strong borrowers.

The nature of that business requires that for any of the floor plan lines, you have to go out and get MVRAs, which are essentially repurchase obligations of the manufacturers, which is obviously an awesome thing because if somehow the asset doesn’t sell, then you can have the manufacturer take it back and pay you off. We have a lot of those executed in these areas, facilitated by those things. I think we’ll have several hundred million dollars, let’s say, by March 31, I would guess. Maybe that’s a little aggressive, of assets and lines funded in that business. That’s great. Just last one for me. I 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 and 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? Right. There’s really two main components to our tech modernization effort in the custody and clearing business. The team has named it Axos Complete, which is their marketing name for it. What it is, is it’s an Axos Professional Workstation. Right now, the workstations that are utilized by particularly the clearing team are truly antiquated FIS and those sort of things, and they’re not flexible. They’re not modern so that they can integrate through API everything, or do they have all the bank’s products that we want to be able to have through there?

That has been a really big push in the development side. It’s benefited from AI. It is out now to multiple test broker-dealers, and we’re getting feedback, and we have a rollout schedule there. What’s the benefit of that? Just specifically with respect to banking, there are a lot of other benefits, is that the banking products can be proxy enrolled, enrolled by the RIA. The RIA can get access to S block lending products, secured credit cards, all those kind of things that would be available as they become available at the bank. They can be made available to the RIA and the client and sold through to that client with recommendations to do that, right? That’s one piece of it. That piece is being rolled out.

It’ll be a six to seven-month rollout because we have to train a bunch of folks, and this is really the core system that they were using internally to do all their trading and everything else. The other component of it is really it’s one tech build with different ways of looking at it. Essentially, there’s the retail platform, which we used to call Universal Digital Bank, but as it becomes more and more available to doing a lot of other things besides banking, we’re calling it the Axos client portal now. That will allow the end clients of the RIAs and broker-dealers to be able not only to have access to a bunch of workflow to enhance their operations, but also access to products. That actually does work, and the RIAs are adopting it.

The platform that the RIAs use is actually something different, and over time, we’ll bring all of them together on it. There’s a few things we have to develop on Axos Professional Workstation to make it be the one workstation for everything, and that’s ongoing. I think at the end of all of this, I think we’re really going to have an extremely modern tech stack that will be able to be quickly modified and flexible for our institutional and end clients and really allow a very seamless way of interacting to cross all banking products or crypto or whatever we decide to do there. I think it’s really exciting. Everybody’s excited about it. I really do see it, even if it’s an outsourcing bid or what we’re doing internally, how much faster it is to develop. It’s a pretty big project, but it’s also going well. That’s great.

Thanks, everybody. Thank you. Thanks, David. We’ll go next to Tim Coffey with Janney Montgomery Scott. Hey, Katherine, everybody. Hey, guys. Hey. I’m trying to get my arms around expenses going forward. Obviously, a lot of moving pieces. None of it was. Tim, so am I. So am I, Tim. Okay. Let’s figure this out then. Is minor star an efficiency ratio, or is it expenses to average asset? What we’ve been saying as a hard cap, which I am sticking to and I have stuck to, and the Verdant deal throws it a little bit into, a little bit into, we’ll readjust to that with Verdant and rebaseline it, but that our personnel expense and professional services growth will be, the growth will be below 30% of the net interest income and non-interest income growth.

In other words, if we grow a dollar in net interest and non-interest income, we will not grow more than $0.30 in our personnel and our professional services expense. There might be one-time things every now and then or something, but that’s a pretty strong rail that we’re managing to, and we’ve been able to do that well. I think AI is helping. We would expect to be able to do that with Verdant too. We’ve given you the cost. I mean, Derrick gave you the cost directly of what Verdant’s going to add, and then you should just model that in and then expect that that growth is going to be underneath that. That doesn’t give it to you perfectly because obviously there’s other categories of growth besides professional services and personnel, but that’s 70+% of it.

There’s not like there’s going to be a ton of occupancy and other things. We believe we’re managing it pretty well. It’s a little bit tough to do it on an efficiency ratio basis because there’s obviously movements around margin and one-time payoffs of FDIC loans and all that kind of stuff. I think that’s kind of more a way. If you model in that kind of growth because everybody is watching their P’s and Q’s and trying to figure out what they can afford to get to that number, that’s not a bad way to do it. Okay. Great. That was my question. Thank you very much. Thank you, Tim. This now concludes our question and answer session. I would like to turn the floor back over to Johnny Lai for closing comments. Great. Thanks for everyone’s time, and we will talk to you next quarter. Thank you.

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

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