10-Q: Axos Financial Q1 2026: Strategic Acquisition Boosts Assets

Axos Financial reports stable net income and diluted EPS for Q1 2026, driven by significant asset and deposit growth from the Verdant acquisition.

Summary

• Net income for the three months ended September 30, 2025, was $112.4 million, compared to $112.3 million for the same period in 2024.
• Diluted earnings per common share were $1.94 for Q1 2026, a slight increase from $1.93 for Q1 2025.
• Total assets increased by $2.6 billion, or 10.7%, to $27.4 billion at September 30, 2025, from $24.8 billion at June 30, 2025.
• Total deposits grew by $1.4 billion, or 6.9%, to $22.3 billion at September 30, 2025, from $20.8 billion at June 30, 2025.
• The acquisition of Verdant Commercial Capital, LLC was completed on September 30, 2025, adding approximately $1.2 billion of loans and leases and $212.6 million of equipment under operating lease arrangements.
• Net interest income decreased by $1.0 million, or 0.3%, to $291.1 million for Q1 2026, from $292.0 million for Q1 2025.
• Net interest margin decreased by 42 basis points to 4.75% for Q1 2026, down from 5.17% for Q1 2025.
• Provision for credit losses increased to $17.3 million for Q1 2026, compared to $14.0 million for Q1 2025, primarily due to the Verdant acquisition and loan growth.
• Non-interest income increased by $3.7 million, or 13.0%, to $32.3 million for Q1 2026, from $28.6 million for Q1 2025.
• Non-interest expense increased by $8.8 million, or 6.0%, to $156.2 million for Q1 2026, from $147.5 million for Q1 2025.
• The effective income tax rate decreased to 25.04% for Q1 2026, from 29.43% for Q1 2025.
• Non-performing assets remained flat at $175.4 million at September 30, 2025, compared to June 30, 2025, while non-performing assets as a percentage of total assets decreased to 0.64% from 0.71%.

Sentiment

Score: 7

Explanation: The company demonstrated stable net income and EPS despite a challenging interest rate environment and increased expenses from a significant acquisition. Strong asset and deposit growth, coupled with improved asset quality ratios and robust capital levels, indicate a healthy financial position and successful strategic execution. However, the decline in net interest margin and increased provision for credit losses present areas for monitoring.

Positives

• Net income and diluted EPS remained stable year-over-year despite a challenging interest rate environment and acquisition-related costs.
• Total assets increased significantly by 10.7% to $27.4 billion, driven by strategic growth including the Verdant acquisition.
• Total deposits grew by 6.9% to $22.3 billion, indicating strong funding capabilities.
• Non-interest income increased by 13.0%, primarily due to higher income on bank-owned life insurance (BOLI) policies and more favorable servicing rights fair value adjustments.
• Non-performing assets as a percentage of total assets decreased to 0.64% from 0.71%, reflecting improved asset quality relative to growth.
• The allowance for credit losses for loans to nonaccrual loans increased to 180.41% from 149.32%, indicating stronger coverage for potential loan losses.
• The effective income tax rate decreased to 25.04% from 29.43%, positively impacting net income.
• The company and Axos Bank met all regulatory capital adequacy requirements and were well capitalized at September 30, 2025.

Negatives

• Net interest income decreased by 0.3% year-over-year, indicating pressure on core banking profitability.
• Net interest margin decreased by 42 basis points to 4.75%, reflecting a challenging interest rate environment and increased funding costs.
• Total interest and dividend income decreased by 3.8%, primarily due to lower rates earned on deposits in other financial institutions and loans.
• Provision for credit losses increased by $3.3 million to $17.3 million, partly due to the Verdant acquisition and macroeconomic factors.
• Non-interest expense increased by 6.0%, driven by higher professional services (including acquisition-related costs), data and operational processing, and salaries.
• The Verdant acquisition incurred a net loss of $5.8 million for the three months ended September 30, 2025, reflecting post-acquisition provision for credit losses on acquired loans and leases.

Risks

• The ability to successfully integrate acquisitions, such as Verdant Commercial Capital, LLC, and realize the anticipated benefits of these transactions.
• Exposure to changes in the interest rate environment, monetary policy, and inflation, which can impact net interest income and asset valuations.
• Potential impacts from government regulation and changes in the competitive marketplace.
• Risks associated with credit quality, including the performance of the loan portfolio and the adequacy of the allowance for credit losses.
• The ability to attract and retain deposits and access other sources of liquidity in a competitive market.
• The outcome and effects of ongoing litigation, including the Derivative Action and the UFB Actions, which could result in financial losses or reputational damage.
• Market risk in the Securities Business Segment due to fluctuations in interest rates, market prices, investor expectations, and credit ratings of issuers.
• Credit risk in brokerage and trading activities arising from potential non-performance by counterparties, customers, or issuers of securities.

Future Outlook

The company expects approximately $1.2 million of pre-tax net gain related to cash flow hedges to be recognized in income over the next 12 months, with forecasted transactions hedged for up to 2.0 years. The company does not anticipate a significant impact on its financial condition or results from the adoption of ASU 2024-03 (operating expense disaggregation) and is currently evaluating adoption alternatives for ASU 2025-06 (internal-use software costs). Management believes its liquidity sources are stable and adequate for anticipated shortand long-term needs, with the ability to increase deposits and access other funding sources. The company may need to raise additional capital to support future growth and maintain its well-capitalized status.

Management Comments

• We believe our estimates and assumptions are reasonable under the circumstances.
• We believe the non-GAAP measures of adjusted earnings and adjusted EPS provide useful information about our operating performance.
• We believe excluding non-recurring acquisition-related costs and other costs provides investors with an alternative understanding of our core business.
• We believe tangible book value per common share is useful in evaluating our capital strength, financial condition, and ability to manage potential losses.
• We believe that the lower average LTV in the loan portfolio will continue to result in future lower average mortgage loan charge-offs when compared to many other comparable banks.
• Management believes that no conditions or events have occurred since September 30, 2025, that would materially adversely change our capital classifications.
• We view our liquidity sources to be stable and adequate for our anticipated needs and contingencies for both the shortand long-term.
• Due to the diversified sources of our deposits, while maintaining approximately 90% of our total Bank deposits in insured or collateralized accounts as of September 30, 2025, we believe we have the ability to increase our level of deposits, and have available other potential sources of funding, to address our liquidity needs for the foreseeable future.

Industry Context

The financial services industry is navigating a dynamic interest rate environment, which is reflected in Axos Financial's decreased net interest margin. The company's strategic acquisition of Verdant Commercial Capital aligns with broader industry trends of consolidation and diversification to enhance scale and service offerings. The continued focus on technology-driven digital banking platforms positions the company within the ongoing digital transformation of the banking sector. Adherence to robust regulatory capital adequacy requirements (Basel III) is critical for financial institutions, and Axos Financial's compliance demonstrates its commitment to industry standards for stability.

Comparison to Industry Standards

• The company's capital ratios (Tier 1 leverage of 10.26%, Common equity tier 1 capital of 11.66%, and Total capital of 15.20% for Axos Financial, Inc.) exceed the 'well capitalized' thresholds (5.0%, 6.5%, and 10.0% respectively) set by federal bank regulators, indicating strong capital health relative to industry regulatory benchmarks.
• Management believes that the lower average Loan-to-Value (LTV) in its loan portfolio will continue to result in future lower average mortgage loan charge-offs compared to many other comparable banks, suggesting a more conservative credit risk profile.
• Axos Clearing's net capital of $91.4 million and excess capital of $86.0 million demonstrate compliance with the SEC Uniform Net Capital Rule (Rule 15c3-1), exceeding the minimum requirements and indicating robust financial standing for a clearing broker-dealer.

Legal Proceedings

• **Derivative Action (In re BofI Holding, Inc.)**: The court granted defendants' motion to dismiss with prejudice on September 18, 2025, citing Plaintiffs' failure to plead demand futility. Plaintiffs filed a Notice of Appeal to the Ninth Circuit on October 17, 2025. Defendants dispute and intend to vigorously defend against the allegations. The plaintiff seeks damages on behalf of the company related to a former employment action and a settled securities class action.
• **UFB Actions (In re Axos Bank d/b/a UFB Direct Litigation, Pliszka et al. v. Axos Bank d/b/a UFB Direct, Ash et al. v. Axos Bank d/b/a UFB Direct)**: Three putative class action lawsuits alleging false or misleading rate representations by Axos Bank regarding its UFB products. Arbitrators in Pliszka (March 26, 2025) and Ash (June 3, 2025) found claims not subject to arbitration and remanded to District Court, while the arbitrator in Stempel (June 5, 2025) found claims arbitrable. On September 9, 2025, the court in the Consolidated Action granted Defendants' renewed motion to compel arbitration. Defendant disputes and intends to vigorously defend against the allegations. The company does not expect the ultimate outcome to have a material adverse effect on its consolidated results of operations, financial position, or cash flows.

Stakeholder Impact

• **Shareholders**: Stable net income and EPS, strong capital ratios, and a share repurchase program (though no repurchases this quarter) could be positive. The at-the-market equity offering could dilute existing shares if executed. Ongoing litigation creates uncertainty.
• **Employees**: Increased headcount and salaries contributed to higher non-interest expense. The Verdant acquisition likely integrated new employees.
• **Customers**: The Verdant acquisition enhances the equipment leasing business. The UFB Actions litigation relates to rate representations for UFB products, potentially impacting customer trust or product offerings.
• **Creditors**: Issuance of $200 million subordinated notes and redemption of $160.5 million notes impacts debt structure. Strong capital ratios and liquidity are positive for creditors.
• **Regulatory Authorities**: The company is in compliance with all capital adequacy requirements and subject to ongoing supervision.

Next Steps

• The company will provide required annual-only disclosures related to ASU 2023-09 in its Annual Report on Form 10-K for the fiscal year ended June 30, 2026.
• The company is currently evaluating how it plans to adopt ASU 2025-06 (internal-use software costs standard) from the three available adoption alternatives.
• The company intends to continue vigorously defending against allegations raised in the UFB Actions and the Derivative Action.
• The company may issue and sell common stock in at-the-market offerings with an aggregate offering price of up to $150,000,000.
• The company may need to raise additional capital to support further growth and maintain well-capitalized status.

Key Dates

Recommendation

Axos Financial demonstrated stable net income and EPS, strong asset growth, and robust capital. However, the decline in net interest margin and increased provision for credit losses warrant caution. The Verdant acquisition adds scale but also initial losses and integration risks. Ongoing litigation, though not expected to be materially adverse, adds a layer of uncertainty. The at-the-market equity offering, if utilized, could lead to dilution. The overall picture suggests a company navigating a complex environment with strategic moves, but without clear catalysts for significant upside or downside based solely on this filing, leading to a 'hold' recommendation for a seasoned investor.

Keywords

Axos Financial, AX, 10-Q, Quarterly Report, Banking, Financial Services, Digital Bank, Commercial Lending, Consumer Lending, Securities, Broker-Dealer, Wealth Management, Acquisition, Verdant Commercial Capital, Net Interest Income, Net Interest Margin, Credit Quality, Deposits, Loans, Capital Ratios, SEC Filing