Executive Summary / Key Takeaways

• Axos Financial (NYSE:AX) delivered a strong start to fiscal year 2026, reporting $1.6 billion in net loan growth, a 17% year-over-year increase in book value per share, and high returns with a nearly 16% return on average common equity and 1.8% return on average assets for the quarter ended September 30, 2025.
• The recent acquisition of Verdant Commercial Capital, LLC, which added approximately $1.2 billion in loans and leases, is a significant strategic move, expected to be accretive to EPS by 2-3% in FY26 and 5-6% in FY27, while enhancing Axos's equipment leasing business and diversifying its loan portfolio.
• Axos maintains a best-in-class net interest margin, with management guiding for the core NIM (ex-FDIC loan purchase accretion) to remain at the high end or slightly above the 4.25-4.35% target range, supported by a diverse, lower-cost deposit base and effective repricing strategies.
• Technological differentiation, particularly through aggressive AI implementation and low-code development, is a core competitive advantage, driving operational efficiency, accelerating software development, and enabling the creation of advanced platforms like the Axos Professional Workstation.
• The company anticipates low to mid-teens annual loan growth for the remainder of fiscal year 2026, fueled by strong originations across commercial lending, contributions from incubator businesses, slowing prepayment headwinds in mortgages, and the incremental impact of the Verdant acquisition.

A Digital-First Challenger in a Evolving Financial Landscape

Axos Financial, Inc. (NYSE:AX), established in 1999 as BofI Holding, Inc. and rebranded in 2018, has strategically evolved into a technology-driven, diversified financial services company. It leverages client-centric digital platforms to deliver scalable banking, clearing, custody, and investment advisory solutions to a broad spectrum of retail and business customers across the United States. This digital-first model is a foundational strength, enabling Axos to operate with a lean cost structure and offer streamlined services, positioning it as an agile challenger in an industry often dominated by larger, more traditional institutions.

The company's overarching strategy centers on diversified growth across its Banking and Securities Business Segments, underpinned by a relentless focus on operational efficiency and technological innovation. Axos Bank, the core of its Banking Business Segment, provides a comprehensive suite of consumer and commercial products, from checking and savings accounts to a wide array of lending solutions including residential mortgages, commercial real estate, fund and lender finance, asset-based loans, and auto loans. The Securities Business Segment, encompassing Axos Clearing, Axos Advisor Services (AAS), and Axos Invest, offers clearing, custody, and investment advisory services, generating significant fee income. This dual-segment approach allows Axos to capture diverse revenue streams and cross-sell products, enhancing client stickiness and overall profitability.

Technological Edge and Innovation: The Core Moat

Axos's competitive differentiation is deeply rooted in its advanced technological infrastructure and its aggressive adoption of cutting-edge tools like artificial intelligence (AI) and low-code development. This commitment to technology is not merely an operational enhancement; it is a strategic imperative that underpins its efficiency, scalability, and ability to innovate faster than many legacy competitors.

The company's core technology manifests in its proprietary digital platforms, which provide a qualitatively superior customer experience through seamless online and mobile banking. These platforms are designed for efficiency, allowing for faster processing of loan applications and account setups compared to more traditional banking models. A key development is the Axos Professional Workstation, a proprietary client service platform currently being rolled out to selected broker-dealer clients. This workstation is a cornerstone of Axos's technological modernization strategy in its securities business, designed to integrate banking products seamlessly for RIAs and brokers. Management anticipates this will offer a much more flexible and modern system than many large competitors' legacy systems, enabling holistic client service and cross-selling opportunities. The development of this workstation, utilizing a low-code platform, was achieved in approximately eight months, a timeline estimated to be three times faster and requiring one-third of the personnel compared to traditional development methods.

Axos is also rapidly expanding the scope of AI use cases across its entire enterprise, including risk and compliance, credit, operations, technology, legal, marketing, finance, and accounting. The tangible benefits are already evident: AI-powered tools are reducing the time required for tasks like taking a product from conceptualization to user experience readiness by over 90%, and automating the extraction of unstructured data from documents into structured formats. This focus on AI is expected to create greater operating leverage, improve the speed, quality, and cost of software development projects, and accelerate new product development. The Axos Client Portal (formerly Universal Digital Bank) is another example, serving as a retail platform for end clients of RIAs and broker-dealers, offering enhanced workflows and product access. These technological advancements are critical to Axos's competitive moat, contributing to lower operational costs, better margins, and a stronger market position by enabling rapid adaptation and superior service delivery.

Competitive Positioning in a Dynamic Market

Axos operates in a highly competitive financial services industry, facing off against both large diversified banks and specialized digital-first institutions. Against behemoths like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), Axos positions itself as a more agile, digital-native alternative. While these larger banks boast extensive global networks, vast resources, and broader service suites, Axos differentiates through its streamlined online services, personalized offerings, and a focus on efficiency for niche segments. For instance, Axos's digital platforms offer qualitatively greater convenience and faster account setup, contrasting with the more complex ecosystems of traditional banks. Its specialized lending capabilities, such as asset-backed financing, also carve out distinct market niches.

Compared to other digital-first players like Ally Financial (ALLY), Axos's competitive edge lies in its broader range of business banking products, offering more comprehensive solutions for commercial clients. While Ally excels in auto lending, Axos's versatility across both business and consumer services provides a wider appeal. Axos's technological advantages, particularly its AI-driven efficiency and low-code development, allow it to maintain cost leadership in online services and potentially achieve faster innovation cycles. This helps Axos counter the scale advantages of larger competitors by exploiting their digital agility weaknesses, potentially leading to increased market share in online segments and improved gross margins through cost savings.

However, Axos's smaller scale remains a competitive disadvantage, potentially leading to qualitatively lower margins and cash flow compared to its larger rivals. This vulnerability makes it susceptible to competitors with deeper pockets and broader market reach, particularly in competitive pricing scenarios. The banking industry's high barriers to entry, including stringent regulations and capital requirements, protect Axos from new fintech entrants but also benefit scaled competitors, implying ongoing threats to Axos's market share.

Robust Financial Performance and Strategic Growth

Axos Financial commenced fiscal year 2026 with a strong performance, demonstrating the effectiveness of its diversified strategy. For the three months ended September 30, 2025, net income was approximately $112.4 million, translating to diluted earnings per share of $1.94. This represents an increase from $110.7 million in net income and $1.92 diluted EPS in the prior quarter. Excluding one-time deal-related expenses and the allowance for credit loss adjustment related to the Verdant acquisition, adjusted net income and adjusted EPS were $119 million and $2.06 per share, respectively, marking a 7.3% increase from the linked quarter and almost 30% annually.

Net interest income for the quarter reached $291 million, an increase of approximately $11 million linked quarter, or 15.6% annualized. This growth was driven by balanced expansion across single-family mortgage warehouse, commercial specialty real estate, and auto lending. The net interest margin (NIM) stood at 4.75%, a 9 basis point decrease from the prior quarter, primarily due to holding excess liquidity, which exerted a 7 basis point drag. However, excluding this impact, the NIM was roughly flat quarter-over-quarter, showcasing the company's ability to maintain strong interest margins. Noninterest income also saw a healthy increase of approximately 13% year-over-year, fueled by higher banking service fees, mortgage banking income, and prepayment penalty fees.

Total assets grew by $2.6 billion, or 10.7%, to $27.4 billion at September 30, 2025, primarily due to an increase in loans, largely attributable to the Verdant acquisition, and higher cash and cash equivalents. Total on-balance sheet deposits increased 6.9% linked quarter and 11.5% year-over-year to $22.3 billion, with demand, money market, and savings accounts comprising 94% of total deposits and growing 9% year-over-year. Noninterest-bearing deposits reached approximately $3.4 billion, up $350 million from the prior quarter, benefiting from treasury management growth and increased cash sorting deposits.

The acquisition of Verdant Commercial Capital, LLC on September 30, 2025, for approximately $571.8 million in total consideration, significantly bolsters Axos's equipment leasing business by adding approximately $1.2 billion in loans and leases. This acquisition is strategically important as Verdant's long-duration fixed-rate loans and leases complement Axos's existing floating and hybrid loan portfolios. The transaction is expected to be accretive to EPS by 2-3% in fiscal year 2026 and 5-6% in fiscal year 2027.

Capital, Liquidity, and Risk Management

Axos maintains a robust capital position, with management expressing comfort with current capital ratios and believing the company holds excess capital relative to its needs. The company's high return on average common equity (nearly 16%) allows for strong internal capital generation, supporting loan growth while maintaining stable capital levels. As of September 30, 2025, Axos Financial, Inc. and Axos Bank met all capital adequacy requirements and were well-capitalized under regulatory frameworks.

Liquidity is strong, supported by a diverse and granular deposit base across consumer, commercial, and securities businesses. This diverse funding mix is expected to provide lower-cost funding for the newly acquired Verdant loans and leases. Axos strategically manages its funding costs, as evidenced by the recent issuance of $200 million in subordinated notes at a fixed 7% rate to redeem $160 million of existing subordinated debt that was set to reprice to approximately 9%.

Axos employs a conservative approach to credit risk management, which is evident in its asset quality metrics. Total nonaccrual loans to total loans improved by 5 basis points linked quarter, declining from 79 basis points as of June 30, 2025, to 74 basis points as of September 30, 2025. Total nonperforming assets remained flat linked quarter, representing 64 basis points of total assets. Management does not anticipate material losses from currently nonperforming loans in its single-family, multifamily, or commercial real estate portfolios, citing conservative loan-to-value ratios. The provision for credit losses of $17.3 million for the quarter ended September 30, 2025, was primarily driven by the post-acquisition provision for Verdant loans and leases, as well as loan growth and macroeconomic factors. Management views the 1.5% allowance for credit losses on Verdant's acquired portfolio as a prudent and conservative decision, given Verdant's historical loss rates of 25-30 basis points annually.

The company is acutely aware of industry-wide credit risks, particularly concerning fraud and structural sloppiness in syndicated deals, as highlighted by recent high-profile issues. Axos emphasizes its rigorous due diligence, including obtaining documents directly from title insurers to prevent fraud, and its careful structuring of deals to mitigate "lender-on-lender violence" in syndicated arrangements.

Outlook and Strategic Trajectory

Axos Financial's outlook for the remainder of fiscal year 2026 is characterized by continued growth and a commitment to operational efficiency. Management anticipates loan growth in the low to mid-teens range annually, driven by strong originations in commercial lending, increasing contributions from incubator businesses like floor plan lending, and a reduction in prepayment headwinds in the multifamily mortgage portfolio. The Verdant acquisition is expected to contribute an incremental $150 million to $200 million of net new loans and operating leases per quarter starting in Q2 FY26. The floor plan lending team, for example, is projected to achieve several hundred million dollars in funded assets and lines by March 31, 2026.

The consolidated net interest margin (excluding FDIC loan purchase accretion) is expected to remain at the high end of the 4.25-4.35% target range. This will be achieved by offsetting slightly lower new loan yields with reduced funding costs, a strategy supported by Axos's diverse deposit base and ongoing repricing efforts. The corporate tax rate is projected to be approximately 26-27% going forward, a 3 percentage point improvement, due to a change in California's tax calculation methodology.

Expense management remains a critical focus, with a target to keep personnel and professional services expense growth below 30% of the combined net interest and noninterest income growth. This discipline, coupled with aggressive AI implementation and low-code development, is expected to drive positive operating leverage. Axos is also actively exploring M&A opportunities, particularly in specialty finance businesses that offer unique niches and align with its digital platform and operational synergies. The current regulatory environment is viewed as favorable for accretive and strategic M&A.

Conclusion

Axos Financial stands as a compelling investment thesis, built on a foundation of digital innovation, diversified growth, and disciplined execution. The company's strategic evolution from a consumer-focused digital bank to a full-spectrum financial services firm, underpinned by its advanced technological stack and aggressive AI adoption, provides a significant competitive advantage in an increasingly digital world. This technological leadership translates into operational efficiencies, superior customer experiences, and a robust platform for future product development and cross-selling.

The strong financial performance in Q1 FY26, marked by solid loan and deposit growth, stable net interest margins, and high returns, demonstrates the efficacy of its strategy. The Verdant Commercial Capital acquisition further strengthens its lending capabilities and is expected to be a meaningful contributor to future earnings. With clear guidance for continued loan growth, stable margins, and disciplined expense control, Axos is well-positioned to capitalize on market opportunities. Its conservative approach to credit risk and strong capital base provide resilience, while its focus on technological innovation ensures long-term competitive relevance and sustained profitability for discerning investors.