Axos seeks boost in deposits, fee income with latest niche deal

Axos Financial in San Diego is preparing to enter a business that could deliver sizable streams of low-cost deposits and fee income.

The $10 billion-asset company, previously known as BofI Holding, announced earlier this week that it is buying COR Clearing in Omaha, Neb., for $85 million in cash. The deal, the third the company has struck since April, is expected to close in the first half of 2019.

COR Clearing, which was spun off from Mutual of Omaha in 2002, is a correspondent clearing firm for independent broker-dealers. The firm focuses on clearing, settlement and custody, as well as securities and margin lending. COR also offers technology solutions. It works with more than 60 broker-dealers and 90,000 clients.

“We’re making sure we have a full-service digital bank, so integrating securities capabilities into that platform is important,” Gregory Garrabrants, Axos' CEO, said in an interview. COR Clearing's clients “inherently need banking products,” Garrabrants added.

Beyond providing cross-selling opportunities, COR Clearing’s technology platform can serve as a springboard for Axos to snag more clients and enter new markets.

“We believe that COR Clearing’s growth potential has been constrained by its prior ownership structure," Garrabrants said. "With our support we can increase the number of introducing broker-dealers and grow our services to registered investment advisers."

COR Clearing will operate as an independent unit of Axos Financial, Garrabrants said. Carlos Salas will remain COR Clearing's CEO.

The acquisition “is expected to provide us with significant additional liquidity, capital and resources to provide scale, accelerate our expansion of service offerings and better address a broader range of the brokerage and advisory markets,” Salas said in a press release announcing the deal.

COR Clearing should bring Axos, the parent of Axos Bank, about $35 million in annual fee income and $470 million of what Garrabrants termed “sticky and low-cost deposits.”

Axos said it expects the deal to be 6% accretive to its earnings per share in the full year of combined operations. It should take about three years for Axos to earn back any dilution to its tangible book value.

The deal was viewed favorably by Michael Perito, an analyst at Keefe, Bruyette & Woods.

“Axos continues to prove that it has an active M&A pipeline of creative, niche deals that allow the bank to try and build market share in less competitive market segments,” Perito said in a note to clients.

Adding deposits makes sense for Axos. While deposits rose by 16% in the second quarter from a year earlier, the company's loan-to-deposit ratio stood at nearly 105% on June 30, well above the industry average of 72.27%, according to Federal Deposit Insurance Corp. data.

The acquisition is the latest in a wave of niche deals for Axos, which began largely as an internet bank. Most of its deals have focused on deposit gathering, which is growing in importance as interest rates rise.

In August, it struck a deal to buy $3 billion of deposits from the insurance giant Nationwide. That deal is expected to close next month. In April, Axos bought the bankruptcy trustee and fiduciary services businesses of Epiq Services for $70 million in cash.

As with COR, Epiq's business lines, which provide specialty software and consulting services, are expected to generate fee income, and bring in up to $1 billion in deposits. The deal’s ultimate success will be determined by how many trustees agree to move their accounts to Axos Bank.

The company is “ahead of schedule with onboarding” Epiq's clients, Garrabrants said. “We want them to use our full banking services, not just our software."