Axos Financial, Inc. Common Stock 2027 Q1 Earnings Call

Great. Thank you. And good afternoon, everyone. Thanks for your interest in Axos. Joining us today for Axos Financial Inc.'s first quarter 2027 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, 2026, 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 this call over to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement. All of these documents can be found on our investor relations website. With that, I'd like to turn the call over to Greg.

Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's first quarter fiscal 2027 earnings conference call for the quarter ended September 30, 2026. I thank you for interest in Axos Financial. Our core business fundamentals remain strong, with double-digit year-over-year growth in our net interest income, non-interest income, ending loan and deposit balances, earnings per share and book value per share. We continue to manage our interest rate risk well, with net interest margins expanding by 10 basis points linked quarter to 4.64%. We remain well-positioned for a higher for longer interest rate environment with de minimis unrealized losses in our securities portfolio and a $50 million unrealized gain in our loans held for investment. We closed the Capital One deposit acquisition in September, adding approximately $1.8 billion in IRA savings and CDs.

Additionally, our non-interest income growth has been broad-based, with contributions from our banking and lending businesses driving a 3.1% sequential increase to $63.8 million in the quarter ended September 30, 2026. Other highlights in the quarter include net interest income increased 4.2% linked quarter and 13.8% year-over-year, driven primarily by a sequential improvement in our net interest margin and the Verdant acquisition that closed in September 2025, respectively. Ending loan balances were $25.9 billion at September 30, up by $316.6 million quarter-over-quarter. Strong originations were offset by higher levels of payoffs in single-family mortgage and warehouse, multifamily, and small balance commercial real estate. We syndicated approximately $290 million of our capital call originations prior to the end of the quarter as we continue to build our capacity to agent a wider variety of deals.

Excluding capital call syndications, our net loan balances were up by over $600 million this quarter. Elevated levels of prepayments resulted in prepayment penalty fee income increasing from $650,000 in Q1 of 2026 to $6.8 million in Q1 of 2027. Banking and service fee income was also up significantly year-over-year due to the addition of non-interest income from Verdant and rental income from our future corporate office building. Non-interest expenses were $195.4 million for the three months ended September 30, 2026, down by approximately $10.5 million linked quarter. Our efficiency ratio was 49.46% in the quarter ended September 30, 2026, up slightly from the corresponding period a year ago, primarily due to higher depreciation and amortization expense from the four acquisitions we closed in the past year. Our securities business had a solid quarter.

Advisory fee income increased by approximately 10% year-over-year and contributed over $10 million in broker-dealer fee income in the current quarter. Net income was approximately $129.6 million in the quarter ended September 30, 2026, up 15.4% from the $112.4 million in the prior year's first quarter. Diluted earnings per share were $2.25 for the quarter that ended September 30, 2026, compared to $1.94 in the corresponding prior year quarter, representing a 16% year-over-year increase. We repurchased $7 million of common stock during the three months ended September 30, 2026, at an average price of $86.92 per share. From October 1 through October 23, we repurchased an additional $7 million of Axos common stock. We have approximately $112 million remaining in our current share repurchase authorization.

Total originations for investment, excluding single-family warehouse lending, were $5.7 billion for the three months ended September 30, 2026, compared to $4.2 billion in the first quarter of fiscal 2026. Loan growth was strong in commercial real estate specialty lending, real estate lender finance, equipment finance, and auto. Jumbo single family, multifamily, and small balance commercial loans were down by approximately $150 million quarter-over-quarter combined due to elevated levels of payoffs. Capital calls, which had been a strong growth area over the prior three quarters, saw ending loan balances decline by $345 million in the first quarter of fiscal 2027, with over $290 million of that decline resulting from our decision to sell down several deals that we agent. We expect capital call balances to resume growth in the December quarter.

The closing of a few large loans we anticipated in the September quarter are expected to fund and close in the December quarter this year. Loan demand remains strong. Pipelines are up across several lending categories, making us confident that we will generate loan growth in the low to mid-teens on an annual basis in fiscal 2027. Average loan yields for the 3 months ended September 30, 2026, were 7.48%, up by 11 basis points from the prior quarter. Average loan yields for non-purchase loans were 7.3%, and average yields for purchase loans were 11.5%, 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 7.1% in single-family residential mortgage, 6.6% in multifamily, 7% in C&I lending, and 7.8% in our auto portfolio.

Ending deposit balances were up 14% year-over-year to $25.4 billion as of September 30. Demand, money market, and savings accounts represent approximately 94% of total deposits, increased by 14.5% year-over-year. We have a diverse mix of funding across a variety of business verticals, with consumer and small business representing 61% of total deposits, commercial cash, treasury management and institutional representing 15%, commercial specialty representing 15%, Axos Fiduciary Services representing 5%, and Axos Securities at 4%. The Capital One IRA deposit acquisition closed September 21, adding approximately $900 million of savings deposits and $900 million of time deposits. We deployed some of the Capital One deposits by proactively reducing wholesale and other non-core deposits in the September quarter. With a strong loan pipeline, we expect to deploy the majority of the excess liquidity from the Capital One deposits by the end of calendar 2026.

Ending non-interest-bearing deposits were approximately $3.6 billion on September 30, 2026, down slightly from $3.8 billion as of June. The linked quarter change in non-interest-bearing deposits was primarily due to the decline in Axos Securities cash sorting deposits. Client cash sorting deposits ended the quarter at $1.5 billion, down from $1.7 billion at June 30. In addition to our Axos Securities deposits on our balance sheet, we had approximately $450 million of deposits off balance sheet at partner banks. We continue to add new clients in our small business cash, treasury management, and specialty deposit businesses. Total non-interest-bearing deposits accounts increased from approximately 58,000 as of June to over 60,000 as of September. Our lending and deposit businesses are well-positioned for continued profitable growth. Approximately 75% of our loans are floating and reprice in 30 days or less with any change in the index rate.

Given the dynamic nature of our loan portfolio, we have more flexibility than most other banks to quickly adjust to changes in the macroeconomic, competitive, and interest rate environment. Our diverse sources of funding provide granular deposits across a variety of consumer, small business, commercial, and specialty accounts. We continue to make incremental progress on deposit cross-sell across a variety of our lending channels. Our recent deposit acquisitions provide us with incremental liquidity to support our double-digit loan growth aspirations. We expect to migrate approximately $700 million of deposit balances from Arc's clients held at partner banks to Axos over the next few quarters. We expect our net interest margin to stay flat over the next few quarters.

Our balance sheet remains asset sensitive, and we expect to benefit from a full quarter of the 25 basis point September Fed rate hike to be largely offset by a full quarter of excess liquidity from the Capital One deposits in the quarter ended December 31st, 2026. We also expect some of the incremental margin benefits as the remaining lower rate single-family and multifamily mortgages originated prior to the Fed rate hike are replaced with higher yielding loans. In March 2027 quarter and beyond, we anticipate the lag in deposit repricing to counter a significant component of the margin benefits from the next few potential rate hikes. The quality of our loan book remains strong despite two isolated charge-offs we took this quarter. Net charge-offs were 109 basis points compared to 25 basis points in the prior quarter.

The increase in the quarter reflected two non-performing C&I loans we had allocated specific reserves for in the prior quarters, so these losses were largely covered by existing loan loss reserves. The borrowers of the two cash flow loans were in different industries, with fundamental and regulatory factors specific to each being the primary contributor to the deterioration in their underlying businesses. Excluding those two charge-offs, annualized net charge-offs to average total loans and leases were 8 basis points, in line with 9 basis points last quarter, which excluded a specific credit charge-off last quarter. 99.2% of our loans are current as of September 30th, 2026. Total non-performing assets were $157.5 million, down slightly from June 30th. Non-accrual loans declined $1.7 million, including a $5.2 million decline in C&I, and held roughly flat elsewhere.