Axos Financial Inc. (NYSE:AX), the web-based financial services company formerly known as BofI Holding, announced its fourth-quarter and full-fiscal-year 2019 results after market trading on July 30, and based on Mr. Market's reaction on the 31st -- shares gained as much as 9% on the day and closed 6% higher -- investors were happy with the bounce-back result following a disappointing third-quarter report in May.

Axos finished fiscal 2019 with 9.5% earnings growth. With some well-timed share repurchases earlier in the year factored in, earnings per share increased almost 14% on strong double-digit growth in both net interest and noninterest income.

Person using online banking app on a smartphone.

Image source: Getty Images.

Moreover, the company delivered income growth even as it continues to spend more to build out its lending and business services lines, something that has, in the past, typically led to even better earnings growth in future quarters.

Let's take a closer look at how Axos delivered double-digit growth in many key areas, including on the bottom line, while also continuing its aggressive spending for the future.

A closer look at Axos' financial results

Here's how Axos performed across some key metrics:

Metric Q4 2019 Q4 2018 Change
Net income $40.6 million $37.1 million 9.5%
Net interest income $100.4 million $87.0 million 15.4%
Noninterest income $23.2 million $17.0 million 36.8%
Earnings per share $0.66 $0.58 13.8%
Adjusted EPS $0.68 $0.59 15.3%
Book value per share $17.47 $15.24 14.6%
Assets $11.2 billion $9.539 billion 17.6%
Noninterest expense $65.5 million $49.7 million 31.8%

Data Source: Axos Financial. 

As the table shows, Axos delivered strong growth across the board, even as its operating expenses -- for banks, noninterest expense is the equivalent metric -- jumped almost 32% higher.

Yet even the increase in operating expenses is starting to moderate a little. On the Q4 earnings call, CEO Greg Garrabrants pointed out that noninterest expenses, adjusted for the $15 million reserve it took related to a large clearing client, fell about $1 million from the third quarter to the fourth quarter.

How increased expenses should start paying off soon

Historically, Axos has counted on residential lending for a large portion of its earnings, and residential mortgages have made up the bulk of its loan book. And that still remains the case to a large degree: At the end of the fiscal year, $6 billion of Axos' loan book was secured by residential real estate, while only $1.7 billion was secured commercial real estate or commercial/industrial (C&I) lending and leasing. 

But on the earnings call, Garrabrants described how Axos' mix of future business was trending toward more and more commercial lending. Of the $1.2 billion in loans in the company's pipeline at the end of June, $444 million was C&I lending. As Garrabrants put it, Axos continues "to transition our portfolio away from single-family lending into C&I lending and commercial real estate lending."

The change in that pipeline mix is directly attributable to the company's recent investments in building a commercial lending business, essentially from scratch. The result, management expects, is a bank that's less reliant on -- and less exposed to -- the ups and downs of residential real estate. Moreover, commercial lending can offer even more profitable opportunities, so long as the company continues to demonstrate its history of excellent risk management in its lending business.

At the same time, fee-based income continues to grow apace. Much of this growth has come from acquisitions and partnerships Axos has made in recent years that have added operating expenses even while delivering higher noninterest income. A good example is the $6.7 million in higher broker-dealer income year over year, directly attributable to its recent acquisition of COR Clearing.

Looking ahead

With the Federal Reserve announcing a small interest rate cut on July 31, some investors expected Axos to announce it would be able to capitalize on the spread between rates it charges on loans, and what it must pay depositors. However, Axos didn't race to announce wider net interest margin, instead keeping the same guidance for a 3.8% to 4% range for its net interest margin in the near term. Axos finished Q4 at 3.81% net interest margin, at the bottom of its expected range for now.

Moreover, management didn't offer any detailed guidance for its next year, but Garrabrants did say, "We continue to believe that our jumbo single-family mortgage loan portfolio will grow in the low mid single-digit range in fiscal 2020," as well as the earlier look at the growth of its commercial lending pipeline, which should lead to double-digit growth in commercial lending next year as well.

However, Axos spent more than $100 million on acquisitions in fiscal 2019, and much of that was on businesses that will directly generate increased noninterest income, and will require substantial efforts to fully integrate with Axos. For instance, the COR Clearing business -- now called Axos Clearing -- has already led to the addition of thousands of high net worth clients via new broker-dealer relationships, something the company intends to leverage even further through the development of a portal for broker-dealer clients to directly integrate with Axos' other complementary financial services.

The big takeaway from Axos' fourth-quarter release and earnings call is that it has quickly rebounded from the third quarter and returned to the double-digit growth investors have gotten used to. With total assets barely above $11 billion, it remains a very small bank in the big picture -- and that should bode well for investors who are expecting it to continue delivering growth in the years ahead.

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