Executive Summary / Key Takeaways

• Axos Financial is a technology-driven, diversified financial services firm leveraging its digital platform and specialized teams to drive profitable growth across banking and securities segments.
• Recent financial performance demonstrates solid net interest income growth, supported by effective deposit cost management and loan portfolio expansion, despite headwinds from specific loan prepayments and increased operating expenses tied to strategic investments.
• The company maintains a strong capital position and liquidity profile, enabling opportunistic share repurchases and positioning it favorably for potential accretive acquisitions, while meeting all regulatory capital requirements.
• Axos's competitive advantage stems from its operational efficiency driven by proprietary technology, diversified funding sources, and a client-centric approach, particularly in its growing securities custody business.
• Management expects continued high single-digit to low teens annual organic loan growth and targets a core net interest margin at the high end of 4.25% to 4.35%, supported by strategic initiatives and disciplined expense management.

A Digital Foundation for Diversified Growth

Axos Financial, Inc. has transformed significantly since its founding in 1999 as a consumer-focused digital bank. Renamed from BofI Holding, Inc. in 2018, the company has evolved into a technology-driven financial services firm operating across two primary segments: the Banking Business and the Securities Business. This strategic evolution has positioned Axos as a competitor against a diverse set of financial institutions, from large digital banks like Ally Financial (ALLY) and Discover Financial Services (DFS) to fintech innovators like SoFi Technologies (SOFI) and traditional regional banks like KeyCorp (KEY). Axos differentiates itself through a digital-first model that aims for operational efficiency and a diversified revenue base, offering a range of deposit, lending, and securities services to consumers, businesses, and institutional clients nationwide.

The company's competitive standing is bolstered by its proprietary technology platforms. These platforms are designed to enhance efficiency and scalability across the business. For instance, Axos has leveraged low-code development in building its Axos Professional Workstation for clearing clients, aiming for better integration of banking and lending services. Artificial intelligence is being integrated into software development and workflows with the goal of enhancing efficiency and operating leverage. The modernization of the Axos Invest direct-to-consumer platform is intended to improve flexibility for adding new products faster and enhance the customer experience by reducing reliance on third-party integrations. These technological investments are central to Axos's strategy, contributing to its competitive moat by potentially lowering operating costs and improving service delivery compared to more traditional peers like KeyCorp, while also seeking to match the agility of fintechs like SoFi.

Axos's strategic initiatives extend beyond technology to targeted team hires and business development. The company has added specialized teams in areas like technology and life science banking in Silicon Valley and a middle market lending group to drive growth in specific national verticals. Efforts are also underway to scale teams added over the past year in commercial lending and deposit gathering. In the Securities segment, the focus is on adding net new assets in the custody business and consolidating back-office functions for efficiency. A white label banking platform has been soft-launched to select advisors, enabling them to offer Axos's banking products to their clients and fostering cross-selling opportunities. These initiatives collectively aim to diversify the business, enhance operational efficiency, and drive organic growth.

Performance Reflecting Strategic Execution

Axos's recent financial performance reflects the impact of its strategic initiatives and the prevailing market conditions. For the three months ended March 31, 2025, net interest income totaled $275.5 million, a 5.3% increase from the prior year period. This growth was primarily driven by lower rates paid on deposits and higher loan balances within the Banking Business Segment. Over the nine months ended March 31, 2025, net interest income grew by a more substantial 20.9% to $847.6 million, benefiting from higher loan balances and rates, as well as increased interest income from interest-earning deposits. The consolidated net interest margin for the quarter stood at 4.78%. Excluding the impact of accretion from the FDIC-acquired loan portfolio, management expects the core net interest margin to remain at the high end of their 4.25% to 4.35% target range, supported by effective deposit cost management.

Non-interest income for the three months ended March 31, 2025, saw a slight increase to $33.4 million, benefiting from higher banking and servicing fees, including income from Bank-Owned Life Insurance (BOLI) policies purchased during the nine-month period. However, for the nine months ended March 31, 2025, total non-interest income decreased significantly to $89.8 million, primarily due to the absence of the gain on the FDIC Loan Purchase recognized in the prior year period. Non-interest expense increased for both the three and nine months ended March 31, 2025, driven mainly by higher salaries and related costs due to increased headcount and salaries, as well as increased data and operational processing costs reflecting investments in technology and growth. Despite these increases, general and administrative expense saw a decrease, partially due to the payment of a legal judgment at an amount less than previously accrued.

The Securities Business Segment demonstrated improved profitability in the most recent quarter, with income before income taxes increasing by 23.0% year-over-year to $9.1 million, attributed to better operating expense control. While net interest income in this segment saw a slight decrease linked quarter, it increased over the nine-month period. Non-interest income in the Securities segment decreased year-over-year for both the three and nine-month periods, influenced by factors like lower cash sorting balances, although management notes stabilization and positive momentum in net new assets for the custody business, with $289 million added in the March 2025 quarter.

Asset Quality, Liquidity, and Capital Strength

Axos's asset quality metrics warrant close attention. The provision for credit losses increased for both the three and nine months ended March 31, 2025, primarily driven by loan growth, particularly in the commercial industrial - non-RE portfolio, and the quantitative impact of macroeconomic variables on the allowance for credit losses model. Non-performing assets also increased to $188.9 million at March 31, 2025, up from $115.8 million at June 30, 2024, representing 0.79% of total assets. This increase was mainly concentrated in non-accrual loans within the commercial industrial - non-RE portfolio, although management attributes this to idiosyncratic circumstances in specific loans rather than broad portfolio deterioration. They emphasize the conservative loan-to-value ratios and strong guarantees on their real estate-backed loans, expressing confidence in limited loss content. Net charge-offs saw a slight uptick to 0.09% annualized in the March 2025 quarter, primarily in single family - mortgage warehouse and multifamily/commercial mortgage portfolios.

Liquidity remains robust, with total assets increasing to $24.0 billion at March 31, 2025, driven by loan growth, and total liabilities increasing to $21.4 billion, primarily due to higher deposit balances. Deposits increased by 4.0% to $20.1 billion from June 30, 2024, with notable growth in interest-bearing demand and savings accounts. Axos maintains access to diverse funding sources, including FHLB advances, the FRBSF Discount Window, and unsecured lines of credit. The company's capital position is strong, with all regulatory capital ratios exceeding minimum requirements, and both the Company and the Bank classified as well capitalized as of March 31, 2025. Stockholders' equity increased by $313.3 million to $2.60 billion, largely due to net income generation. Axos actively manages its capital, repurchasing $27.9 million of common stock in the March 2025 quarter and an additional $30.3 million subsequent to quarter-end, with $78.7 million remaining under authorization. The company also established a $150 million at-the-market equity offering, signaling preparedness for potential future strategic opportunities, though no shares have been issued under it.

Outlook and Competitive Dynamics

Management's outlook points to continued organic loan growth in the high single-digit to low teens range annually. While acknowledging potential quarterly volatility influenced by loan payoffs and macroeconomic factors, they express optimism regarding improving pipelines in key areas like auto and multifamily lending, partly due to strategic adjustments and competitive dynamics. The core net interest margin is expected to remain strong, supported by the ability to manage funding costs down, offsetting potential yield compression from market competition and loan mix shifts. The Securities Business Segment is anticipated to contribute to future fee income growth, driven by increasing assets under custody and the rollout of new platforms like the Axos Professional Workstation and enhancements to Axos Invest.

The competitive landscape for Axos is dynamic. While facing competition from larger digital banks like Ally and Discover in consumer segments, Axos's diversified model, including its securities clearing business, provides a broader value proposition. Its technological efficiency offers a cost advantage over traditional banks like KeyCorp. However, it competes with fintechs like SoFi on innovation speed and brand recognition, and faces pricing pressure in lending from banks and nonbanks alike. Axos's strategy of focusing on specialized lending verticals and building strong commercial deposit relationships helps it carve out niches and secure lower-cost funding, differentiating it from more generalized competitors. The company's willingness to collaborate in the private credit space also positions it uniquely. Key risks to the outlook include potential deterioration in credit quality beyond current expectations, challenges in executing strategic technology and team initiatives, and the impact of ongoing litigation, although management does not anticipate material adverse effects from the latter.

Conclusion

Axos Financial's investment thesis is grounded in its evolution into a technology-driven, diversified financial services provider capable of generating strong returns through efficient operations and strategic growth initiatives. The company's recent performance demonstrates resilience in net interest income and effective capital management, including opportunistic share repurchases. While facing challenges in loan growth from prepayments and navigating a competitive pricing environment, Axos's investments in technology, specialized teams, and diversified funding sources position it to achieve its targeted organic growth and maintain a strong net interest margin. The focus on enhancing operational efficiency through AI and other technological advancements, coupled with the potential for growth in the Securities segment and strategic acquisitions, provides avenues for future value creation. Investors should monitor the pace of organic loan growth, the effectiveness of deposit cost management in a changing rate environment, and the successful execution of its technology and business development initiatives as key indicators of Axos's ability to sustain its above-average performance and navigate the evolving financial services landscape.