Axos Financial (AX) Q1 2024: Net Interest Margin Climbs to 4.36% as Loan Yields Reprice Higher

October 26, 2023 | By EarningsIQ Research

Axos Financial delivered another quarter of double-digit growth in loans and book value, with net interest margin expanding to a new cycle high as asset repricing outpaced rising deposit costs. The bank’s disciplined asset-liability management, specialty lending expansion, and digital transformation offer resilience amid industry volatility, while management’s conservative credit posture and capital deployment signal a focus on sustainable profitability. Investors should watch for continued loan repricing benefits and the ramp of new digital and advisory platforms as Axos navigates a complex rate and regulatory environment.

Summary

• Loan Repricing Drives NIM Expansion: Accelerated shift to floating and hybrid loans boosted net interest margin above guidance range.
• Specialty Lending and Digital Initiatives Gain Traction: Marine finance acquisition and Universal Digital Bank 2.0 rollout diversify growth levers.
• Credit Quality Remains Solid Amid CRE Watchpoints: Conservative structures and ongoing portfolio remixing underpin risk management.

Business Overview

Axos Financial is a digital-first bank and financial services platform focused on asset-based lending, deposit gathering, and securities services. The company generates revenue from net interest income on loans and deposits, fee income from its securities and advisory businesses, and specialty verticals such as marine finance and fiduciary services. Major segments include commercial and consumer banking, securities clearing and custody, and advisory services, with a growing emphasis on diversified, technology-enabled offerings.

Performance Analysis

Axos posted another quarter of robust growth, with net income and EPS both up 42% year-over-year and double-digit expansion in loans and deposits. Loan balances ended the quarter at $17 billion, up 3% sequentially and 11% year-over-year, led by commercial and single-family lending, while deliberate runoff continued in multifamily, auto, and small-balance CRE segments. The net interest margin (NIM) rose to 4.36%, beating the guided range as higher-yielding adjustable loans replaced lower-yielding hybrids, and average loan yields climbed to 7.85%.

Deposit growth remained resilient despite industry-wide competition and the strategic exit from digital asset-related accounts. Total deposits increased by $443 million, with checking and savings accounts representing 94% of balances and growing at a 16% annualized pace. Non-interest-bearing deposits were stable, and the deposit base remained granular and diversified across consumer, commercial, and fiduciary channels. The securities business contributed meaningfully to non-interest income, with broker-dealer and advisory fee income up 36% and 18% year-over-year, respectively.

• Margin Expansion Outpaces Deposit Cost Pressure: NIM increased 17 basis points sequentially, reflecting proactive loan mix management and asset repricing.
• Fee Income Leverage from Securities Platform: Quarterly pre-tax income from Axos Securities grew 41% year-over-year on higher client activity and interest rates.
• Credit Quality Stable but CRE Non-Performers Rise Modestly: Net charge-offs remained low at 4 basis points, though some uptick in non-performing loans was noted in select commercial portfolios.

Capital deployment was active, with $60 million of share repurchases during and after the quarter. The company maintained strong Tier 1 leverage and risk-based capital ratios, supporting ongoing growth and buybacks.

Executive Commentary

Strategic Positioning

1. Asset Repricing and Portfolio Management

Axos has aggressively shifted its loan book to floating and short-duration hybrid products, with 61% of loans now floating and only 7% fixed. This positions the bank to benefit from higher rates and quick repricing, while minimizing duration risk. The company’s decision to sunset longer-dated hybrids years ago is now paying off as legacy loans reprice into materially higher yields.

2. Specialty Lending and Acquisitions

The acquisition of LV Marine Finance added a new specialty vertical, bringing $50 million in floor plan loans and a $500 million servicing portfolio. This deal expands Axos’ cross-sell opportunities and diversifies its loan mix, while maintaining a focus on risk-adjusted returns and low leverage structures.

3. Digital and Advisory Platform Expansion

Universal Digital Bank 2.0, the refreshed consumer and mobile banking platform, launched in September, delivering enhanced user experience and integration across lending, deposit, and securities products. The beta launch of white-label banking for registered investment advisors (RIAs) and broker-dealers is expected within six months, aiming to drive incremental deposit and lending growth via advisor channels.

4. Capital Allocation Discipline

Axos continues to balance internal investments, targeted M&A, and opportunistic share repurchases, with $74 million of buybacks completed year-to-date at attractive valuations. The company’s strong capital ratios provide flexibility to support growth while returning capital to shareholders.

5. Conservative Credit and Regulatory Posture

Management emphasized prudent risk management, highlighting low loan-to-value ratios (LTVs) in CRE, substantial subordination in office exposures, and a deliberate exit from digital asset-related deposits in response to regulatory uncertainty. No legal or regulatory actions have arisen from prior digital asset activities, and exposure is now negligible.

Key Considerations

Axos’ first quarter performance underscores the benefits of its asset-sensitive balance sheet, diversified funding, and technology investments, but also surfaces areas of watchfulness as the cycle evolves.

Key Considerations:

• Loan Yield Tailwind: Large volumes of hybrid and adjustable loans are set to reprice into higher rates, sustaining NIM even if deposit costs rise further.
• Deposit Franchise Resilience: Growth in core checking and savings accounts, coupled with diversified commercial and fiduciary channels, supports funding stability and cost management.
• CRE Risk Management: While non-performing CRE loans ticked up, conservative LTVs and substantial subordination mitigate loss content; management remains vigilant on office and multifamily exposures.
• Digital Platform Monetization: Early engagement with Universal Digital Bank 2.0 and advisor white-label solutions could unlock incremental growth, but execution and client migration will be key.
• Expense Normalization and Efficiency: Professional services and deposit marketing costs elevated the efficiency ratio to 49%; management expects a range of 48.5% to 50% as revenue growth and hiring patterns stabilize.

Risks

Key risks include potential credit migration in CRE and C&I portfolios, especially if macro conditions deteriorate or if office and multifamily fundamentals weaken further. Deposit cost pressures and industry competition could compress margins if asset repricing benefits fade or if deposit betas rise. Regulatory and legal risks tied to prior digital asset exposure appear contained, but future fintech and specialty lending expansion may attract scrutiny. Expense growth and integration risk from acquisitions and new platform rollouts could pressure operating leverage if not managed tightly.

Forward Outlook

For Q2 2024, Axos guided to:

• Loan growth in the high single digits to low teens year-over-year
• Net interest margin in the 4.25% to 4.35% range

For full-year 2024, management maintained guidance for:

• Consistent NIM and loan growth trajectory

Management highlighted several factors that will shape results:

• Continued remixing of the loan portfolio toward higher-yielding adjustable products
• Gradual deposit growth from commercial, fiduciary, and advisory channels
• Expense growth tied to investments in people, technology, and marketing
• Potential for modest NIM compression if asset yields plateau or deposit costs accelerate

Takeaways

Axos’ strategic discipline in loan repricing, conservative credit structures, and digital expansion positions it well for continued profitable growth, even as industry headwinds persist.

• Asset Sensitivity Delivers: Rapid hybrid loan repricing and floating-rate origination are driving sustained margin expansion, offsetting funding cost pressures.
• Growth Levers Diversify: Specialty lending, digital banking, and advisor platforms are adding new sources of fee and interest income, broadening Axos’ growth runway.
• Execution on Credit and Capital: Conservative risk posture, strong capital ratios, and disciplined capital allocation underpin resilience, but investors should monitor CRE watchpoints and expense trends as growth initiatives scale.

Conclusion

Axos Financial’s Q1 2024 results demonstrate the strength of its asset-sensitive model, diversified funding, and disciplined capital allocation. As loan repricing and digital initiatives continue to ramp, the company remains well positioned to sustain profitable growth and navigate evolving macro and regulatory conditions.

Industry Read-Through

The quarter’s results highlight the value of proactive asset-liability management and specialty vertical diversification for mid-sized banks. Axos’ ability to grow loans, maintain NIM, and expand non-interest income stands in contrast to peers struggling with deposit competition and CRE risk. The deliberate exit from digital asset-related deposits and the focus on technology-enabled banking signal a broader industry pivot toward risk containment and digital transformation. Other regional and digital banks should note Axos’ mix shift, capital discipline, and willingness to invest in new growth engines while managing core credit and funding risks. As industry volatility persists, the bar for balance sheet agility and digital execution continues to rise.

AX Financials Banking Digital Banking Net Interest Margin Specialty Lending CRE Deposit Growth