Axos Financial, Inc. Q3 FY2025 earnings call

• Delivered solid results with over $700 million of net loan growth linked quarter, stable net interest margins, and 19% year-over-year increase in book value per share.
• Deployed excess capital to repurchase approximately $28 million of common stock in the quarter and an additional $30.3 million after quarter end.
• Total on-balance sheet deposits increased 5.4% year-over-year to $20.1 billion, with a diverse deposit base across consumer and commercial banking and securities businesses.
• Loan pipelines improved in auto and multifamily lending, and better execution in commercial lending categories like equipment leasing contributed to improved loan growth and pipelines.
• Securities business had initiatives such as development of Axos professional workstation, use of AI in software development, and modernizing technology infrastructure for Axos Invest.

Axos Financial delivered solid results in the third quarter of fiscal 2025. Net interest income was $275 million for the 3 months ended March 31, 2025, up 5.3% from the prior year period. Net interest margin was 4.78% for the quarter, down 5 basis points from the prior year. Total on-balance sheet deposits increased 5.4% year-over-year to $20.1 billion. The securities segment had pre-tax income increase by 23.6% year-over-year to $9.1 million due to better operating expense control. Net loan growth was over $700 million linked quarter, with nonpurchased loans for investment growing $700 million, a 3.6% linked quarter increase or 14.5% annualized.

• Expect loan growth to be in the high single-digit to low teens annual basis, though there may be variance due to prepays, tariffs, and interest rates.
• Net interest margin ex FDIC loan purchase accretion is expected to stay in the 4.25% to 4.35% range targeted over the past year.
• Potential for more variance in quarter-to-quarter loan growth due to uncertainty regarding the pace and timing of prepays and impact of tariffs and interest rates on loan demand.

• Uncertainty regarding interest rates, economy, and yield curve could impact loan growth.
• California tax apportionment proposal could change the taxation of financial institutions, potentially reducing the effective tax rate by approximately 3% and requiring remeasurement of deferred tax assets.
• Volatility in certain C&I segments and logistical deals has led to caution in certain lending areas.

Q: Kyle Peterson from Needham Company asks about loan growth and cautious areas in lending.

A: Gregory Garrabrants mentions shying away from logistical C&I deals and certain segments with unique exposure, but pipelines are good and spread compression is being pushed back against.

Q: Andrew Liesch from Piper Sandler asks about investment efficiency and net interest income.

A: Derrick Walsh states net interest income should step up as average loan growth increases in the next quarter, and Gregory Garrabrants notes a 3 basis point net spread compression with expectations for margin to hold up.

Q: Gary Tenner from D.A. Davidson asks about special mention substandard loans and ACL build.

A: Gregory Garrabrants mentions loans paying off or being sold at par, and Derrick Walsh explains CECL model inputs including economic factors like tariff fears impacting C&I reserve and housing price indexes affecting real estate reserve.

Q: Kelly Motta from KBW asks about capital buybacks and M&A.

A: Gregory Garrabrants states there's excess capital and it's a good opportunity to buy back stock, and mentions interest in wealth and custody M&A, but notes high multiples make it challenging.

Q: Edward Hemmelgarn from Shaker Investments asks about equity ratio and AI spending.

A: Gregory Garrabrants discusses balance sheet changes and risk-weighted assets, and explains AI use in software development, code refactoring, and document processing to improve efficiency