Axos Financial (AX) Q3 2023: Deposits Surge $1B as Diversified Funding Offsets Industry Volatility
Axos Financial leveraged market dislocation to add $1 billion in deposits while maintaining robust credit discipline and capital strength. The bank’s diversified funding model and proactive risk management enabled stable net interest margins despite rising deposit costs and sector turmoil. With excess liquidity and a strong loan pipeline, Axos is positioned to capitalize on both organic and opportunistic growth as industry disruption persists.
Summary
- Deposit Influx Amid Turmoil: Axos captured new clients and grew deposits as peers faced outflows.
- Risk-Based Lending Discipline: Tightened underwriting and low LTVs preserved credit quality and loan yields.
- Strategic Expansion Pipeline: Investments in technology and team acquisitions set up future growth levers.
Business Overview
Axos Financial is a technology-driven, nationwide bank offering consumer and commercial banking, securities clearing, and wealth management solutions. The company generates revenue from net interest income on loans and deposits, as well as fee-based income in its securities and advisory segments. Its primary business lines include residential and multifamily lending, commercial real estate, specialty lending (Crestle, lender finance), auto loans, and a growing securities custody and clearing platform.
Performance Analysis
Axos delivered broad-based growth in Q3 2023, with double-digit increases in earnings per share, book value, and both loan and deposit balances. The bank’s net interest margin (NIM) remained resilient at 4.42%, a slight sequential decline largely attributable to excess liquidity held for risk management. Despite sector-wide deposit competition, Axos grew deposits by $1 billion, driven by new consumer and commercial clients seeking stability after high-profile bank failures.
Loan growth was solid but deliberately moderated, with management pulling back in auto and small-balance CRE while emphasizing higher-yielding C&I, multifamily, and single-family mortgages. Credit quality remained robust, with net charge-offs at just four basis points, and the loan portfolio maintained low loan-to-value (LTV) ratios across key segments. The securities business, including custody and clearing, contributed meaningfully to fee income, benefiting from higher rates and increased client activity.
- Deposit Franchise Flexibility: Axos’ deposit base is 90% insured or collateralized, with a diverse mix across consumer, business, and institutional channels.
- Loan Portfolio Mix Shift: 57% of loans are floating rate, and the average portfolio duration is just two years, supporting NIM stability.
- Securities Segment Upswing: Broker-dealer fees rose 40% sequentially and 166% YoY, highlighting the impact of rising rates and platform enhancements.
Capital levels improved further, with Tier 1 leverage above regulatory minimums and ample liquidity on hand. Axos repurchased $32 million in stock during the quarter, underscoring confidence in its valuation and capital position.
Executive Commentary
"We took advantage of anxiety in the marketplace following the three bank failures in March and added new consumer and commercial banking clients. The diversity and optionality of our deposit franchise is a valuable differentiator that will allow us to maintain a strong net interest margin in a highly competitive market for deposits."
Greg Garabrantz, President and Chief Executive Officer
"Our loan growth outlook is based on a gradual rebound in single-family jumbo mortgage originations coupled with low prepayments in that business, double-digit growth in our Crestle and lender finance businesses, and flat to declining auto and unsecured lending. We believe that moderating our pace of loan growth and building capital levels until the economy and the banking industry rebound is a prudent tradeoff."
Derek Walsh, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Opportunistic Deposit Gathering During Sector Stress
Axos capitalized on sector-wide uncertainty to attract new deposits from clients seeking safety and diversification. The bank’s ability to add $1 billion in deposits, with 90% insured or collateralized, underscores the strength and flexibility of its funding model. Management emphasized aggressive outreach and new account openings across all channels, signaling further momentum in deposit gathering.
2. Proactive Credit and Risk Management
Loan growth was intentionally moderated, with management tightening underwriting in auto and small-balance CRE while focusing on low-LTV, high-yield segments. The bank’s portfolio is predominantly floating-rate and short-duration, supporting both risk management and earnings stability. Conservative credit policies and a focus on collateralized lending have kept net charge-offs minimal and positioned Axos to withstand economic stress.
3. Technology and Platform Investments
Axos is investing in its Universal Core system to reduce clearing costs and unlock new client segments in its securities business. Integration of banking and securities platforms aims to drive cross-sell opportunities with RIAs and brokers, while automation and process improvements are expected to enhance operational efficiency and scalability. The white label rollout and new product launches (such as the S-Block credit card) are set to deepen client engagement and broaden Axos’ addressable market.
4. Capital Allocation Optionality
With strong capital and liquidity, Axos is positioned to pursue share buybacks, team acquisitions, and opportunistic loan purchases from distressed peers. The recent $100 million increase in repurchase authorization signals a willingness to return capital as warranted, while management continues to evaluate inorganic growth opportunities that fit its risk-return framework.
Key Considerations
This quarter highlights Axos’ differentiated strategy in a volatile banking environment, balancing growth with discipline and leveraging technology for scale.
Key Considerations:
- Deposit Durability and Cost: Sustained deposit growth and retention will be crucial as competitors intensify rate offers and clients seek higher yields.
- Credit Quality Vigilance: Continued focus on low-LTV lending and risk management is vital as macro uncertainty and CRE scrutiny persist.
- Platform Buildout Execution: Timely delivery and adoption of Universal Core and integrated banking/securities offerings will determine the pace of fee income growth and client wins.
- Capital Deployment Flexibility: Axos’ strong capital position provides levers for buybacks or opportunistic acquisitions, but disciplined execution is necessary to avoid overextension.
Risks
Axos faces risks from rising deposit costs, potential credit deterioration in CRE and consumer segments, and execution challenges in technology transformation. Regulatory scrutiny of CRE concentrations and industry-wide pressure on funding costs could impact margins and loan growth. While management’s conservative stance and diversified model mitigate some exposures, sustained sector volatility and macro headwinds remain key watchpoints for investors.
Forward Outlook
For Q4, Axos guided to:
- Loan growth in the high single digits to low teens year-over-year
- Net interest margin (NIM) of 4.25% to 4.35% for the next few quarters
For full-year 2023, management maintained a prudent outlook:
- Loan growth to be driven by single-family jumbo rebound, Crestle and lender finance expansion, with auto and unsecured lending flat to down
Management cited the need to maintain excess liquidity and build capital, balancing growth with caution amid ongoing economic and industry uncertainty.
- Higher deposit balances will create a modest NIM drag but support stability
- Opportunistic loan purchases or team acquisitions could supplement organic growth
Takeaways
Axos’ diversified funding, robust credit discipline, and technology investments differentiate it in a fragile banking sector.
- Resilient Funding Model: Axos’ ability to grow insured deposits and maintain NIM highlights the strength of its multi-channel franchise and risk-based pricing.
- Strategic Growth Levers: Investments in core systems and cross-sell platforms are designed to unlock higher margin fee income and deepen client relationships.
- Watch for Execution on Tech and M&A: The pace of Universal Core rollout, RIA onboarding, and any opportunistic loan or team acquisitions will be key markers for future upside or risk.
Conclusion
Axos Financial’s Q3 performance underscores the value of a diversified, technology-enabled banking model in a turbulent industry landscape. With a strong balance sheet, disciplined lending, and a robust deposit pipeline, the company is well positioned to capitalize on both organic and inorganic growth opportunities as peers retrench.
Industry Read-Through
Axos’ results and commentary highlight the growing premium on funding stability, credit risk management, and digital platform agility across regional banking. The company’s success in attracting deposits during sector turmoil signals that clients are increasingly seeking security, FDIC coverage, and digital access. Axos’ ability to maintain margin and credit quality, while investing in technology and cross-sell channels, sets a benchmark for peers facing similar headwinds. Industry participants should monitor Axos’ progress in platform integration and opportunistic capital deployment, as these strategies may become more prevalent among regional banks aiming to differentiate and scale in a volatile environment.