Axos Financial Is Doing a Lot of Things Right

The banking business is all about hitting your numbers, and Axos Financial (NYSE: AX) is doing so with flying colors.

In this episode of "Beat and Raise," Fool contributors Jason Hall and Brian Withers discuss Axos' latest report, and Jason shares why he's so fond of the stock right now.

Brian Withers: Axos Financial.

Jason Hall: Yeah, so I've just been like the bank guy here lately, I'm doing my best Matt Frankel impersonation here. It's a poor Matt Frankel impersonation, I will be the first to admit. But I've talked about like, I have teased on Axos a little bit when I was on yesterday. I have to say it's two times book value, which is about where it trades right now if you look at this steady grind of low double-digit earnings growth and book value growth. Everything that's happening that Greg Garrabrants has done over there for the past dozen years. This is a hidden gem. Man, I love this bank right now, I really do.

Short version, what happened? Net income up 11%, earnings per share up 10%. All of the important things that you want to see a bank doing are happening there. Net interest income was up 8.6%. Grew loans, the loan book 6% and it's now $12.6 million. I can remember a few years ago. This was a business that was getting close to reaching the $10 billion in net assets mark, which was going to move it to the next level of regulator for banks, which is going to increase regulatory costs, regulatory scrutiny. Could this bank make that transition? They got there and they've grown their loan book 26%. On top of that, it's just, it's incredible what they've done and just continuing to scale up, net interest margin continues to get better. This is the variance between what they earn on interests and what they payout to depositors in interest. That's great, the bank continues to move up. Non-interest income was up 7.2%, so this is one of the things that Greg Garrabrants has done is brought in more financial services.

Lots of things that Axos does, not just at the consumer level, not just at the business level, but a lot of specialized services for things like trading, things for independent financial advisors that need a platform. They've built a platform for that. There's lots of things they are doing to diversify their revenue streams outside of just yield. Net interest margin, but also and fees. We continue to see very strong returns on average assets and on average equity. Again, your benchmarks on ROE and ROA are 10 and 1. -- 16.3% and 1.6% are very good.

The banking efficiency ratio. Again, because it's more than a bank now. It's added a lot of other financial services. The banking efficiency ratio is 39.4%. I can tell you, any bank that's below 60% is ecstatic. Their overall efficiency ratio is about 48%, which is still very good. Book value up 17.5% to $25.60 per share. Again, that works out to about two times book values where the stock trades for now. If you look at the stock price over the past 5 to 8 years, anytime you can pay two times book value and you held for 3 to 5 years, you made money and you probably beat the market.

Brian, I think the two things that I'm really focused on for Axos going forward. I have 99% faith that I always have to save that one% because just things happen. I have a tremendous amount of faith and Greg Garrabrants and his executive team over there. But this is a more complex business than it was when he took over right before --  in the middle of the global financial crisis. This isn't just a jumbo lender in Southern California anymore. They do a lot of things. They lend in a lot of business lending, commercial and industrial lending, and real estate, a lot of lending. Auto is a big growth for them. Then all of the services that they now do I think it's just really important that they continue to manage risks across all of those different lines of business effectively. I think it's something that they really need to focus on continuing to do well.

Brian Withers: Awesome. Vihan asked you, given that you cover banks and he says and Matt Frankel, [laughs] share whether you think Axos would be in the gold, silver or bronze in that sector.

Jason Hall: Definitely gold from what I was saying at the beginning, I think it should be pretty clear. I think the way that they've built the business, I think management was really prescient of everything that's happening with fintech. We talked about that earlier with Mastercard. Building a business that has some resilience and also some protection against the fintech stuff on the consumer side. I think it's made a really durable business. I'm going to share one more screen here just real quick because this really emphasizes it It might be a little bit hard to see because there is a ton of numbers, but I've highlighted some things that I want to focus on. Here's the thing, so its  interest-bearing demand and savings, its time deposits are both smaller than they were a year ago. Look at this noninterest-bearing number and the liabilities I want to --where is it -- their noninterest-bearing demand deposits is $1.7 billion larger. That's other people's money that they get to lend that they don't pay any interest on. That is incredible. That has improved their cost structure. Just, it's incredible. It's absolutely incredible, and that's why the returns continue to get better.