Business context and reporting period
The supplied filing is BofI Holding, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015 (fiscal third quarter 2015), not an Axos Financial, Inc. filing or a 2014 Q3 report as specified in the request. BofI operated BofI Federal Bank, a branchless bank offering nationwide consumer and business banking, with approximately $5.5 billion in assets.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Quarterly and nine-month results compare periods ended March 31.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $50.7 | $35.7 | $143.7 | $96.6 |
| Provision for loan losses | $2.9 | $1.6 | $8.3 | $3.1 |
| Non-interest income | $8.4 | $5.2 | $20.3 | $17.7 |
| Non-interest expense | $20.3 | $14.3 | $56.7 | $44.2 |
| Net income | $21.1 | $14.6 | $58.3 | $39.9 |
| Diluted EPS | $1.35 | $1.00 | $3.81 | $2.76 |
| Net interest margin | 3.85% | 3.89% | 3.90% | 3.92% |
- Quarterly net income rose about 44%; nine-month net income rose about 46%. Growth in net interest income reflected loan and deposit expansion, while net interest margin edged lower as asset yields declined more than funding costs.
- At March 31, total assets were $5,528.5 million, up 25.6% from June 30, 2014. Net loans were $4,641.3 million, deposits $4,368.8 million, and stockholders’ equity $496.0 million.
- Cash and cash equivalents were $228.6 million. Nine-month operating cash flow was $95.1 million; investing cash outflow was $1,074.2 million and financing cash inflow was $1,052.1 million.
- Borrowings totaled $623.2 million, down $337.0 million since June 30, 2014; this included $583.0 million of FHLB advances and $35.0 million of repurchase agreements. Deposits increased $1,327.2 million, or 43.6%.
- Bank regulatory capital ratios were 9.32% tier 1 leverage, 14.75% common equity tier 1, and 15.51% total capital. The filing states the Bank met requirements and was well capitalized.
Material changes versus comparable periods
- Loan growth drove much of the expansion: gross loans rose to $4,711.7 million from $3,592.9 million at June 30, 2014. Single-family mortgage and multifamily balances were the largest categories.
- Non-performing loans increased to $33.7 million, or 0.72% of gross loans, from $20.4 million, or 0.57%, at June 30, 2014. Management attributed much of the increase to two single-family residential loans. Non-performing assets reached $36.0 million, or 0.65% of assets.
- The allowance for loan losses rose to $25.5 million from $18.4 million. Provision expense increased, which management primarily attributed to portfolio growth. Annualized net charge-offs remained low at 0.04% for the nine-month period.
- Operating costs rose with business expansion: nine-month salaries and related costs increased $8.2 million, and staff grew 29.2% year over year to 438. The nine-month efficiency ratio improved to 34.60% from 38.63%.
- The company completed a $50 million ATM share offering and had sold $13 million under a new $50 million ATM program by March 31, 2015.
Outlook, commentary, risks and unusual items
- No specific earnings or balance-sheet guidance was provided. Management said liquidity sources were stable and adequate for anticipated needs, and believed it could increase deposits and borrowings if needed.
- A deposit purchase agreement would transfer approximately $125 million in FDIC-insured deposits, subject to OCC approval and closing conditions; closing was targeted for calendar Q2 2015.
- Liquidity included $1,649.6 million available immediately from the FHLB, $35.0 million of unused unsecured bank lines, and $9.8 million available at the Federal Reserve discount window. Brokered deposits were $708.4 million. Time deposits due within one year totaled approximately $409 million; retention and replacement funding costs are risks.
- Interest-rate sensitivity modeling showed net interest income up 3.22% in the first 12 months under a 200-basis-point rate increase, but down 6.86% in the following 12 months. Market-value-of-equity modeling showed a 30.8% decline under an immediate 300-basis-point increase. Management cautioned that these estimates depend on assumptions and are not predictions of actual results.
- Investment securities included non-agency mortgage-backed securities with significant Level 3 valuation estimates. Nine-month net impairment loss recognized in earnings was $2.2 million; management’s valuation depends on assumptions about defaults, prepayments, loss severity and discount rates.
- Management identified economic conditions, interest rates, competition and credit quality as risks. It reported no material legal proceedings and effective disclosure controls as of quarter-end; it also cautioned that controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is BofI Holding, Inc., quarter ended March 31, 2015, despite the Axos Financial, Inc. and 2014 Q3 request metadata.
- Review the increase in non-performing loans, particularly the two single-family loans cited by management, and subsequent loan performance and loss provisioning.
- Assess the sustainability of rapid loan and deposit growth, funding mix and reliance on brokered deposits, alongside upcoming time-deposit maturities.
- Check the assumptions and sensitivity of Level 3 securities valuations and the modeled impact of interest-rate changes.
- Verify completion and terms of the proposed $125 million deposit transfer and the remaining capacity and dilution implications of the new ATM offering.