BofI Holding, Inc. (now associated with Axos Financial) — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2011 (fiscal 2012 second quarter). The filing names the registrant as BofI Holding, Inc.; it is not filed under the name Axos Financial. Unless otherwise noted, amounts below are in U.S. dollars.
Business context and financial results
BofI Holding’s principal subsidiary, BofI Federal Bank, operated a nationwide branchless banking business. It originated and purchased residential and multifamily mortgages, made selected business and specialty-finance loans, and gathered deposits through online, affinity and wholesale channels.
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $19.1 million | $14.1 million | $37.3 million | $26.8 million |
| Provision for loan losses | $1.6 million | $1.6 million | $4.0 million | $3.2 million |
| Non-interest income | $3.0 million | $1.9 million | $7.6 million | $4.0 million |
| Non-interest expense | $9.2 million | $6.2 million | $18.8 million | $11.4 million |
| Net income | $6.7 million | $4.9 million | $13.2 million | $9.8 million |
| Diluted EPS | $0.54 | $0.45 | $1.14 | $0.89 |
- Quarterly net interest income increased 35.5%, largely due to growth in average earning assets and loan balances. Net interest margin declined to 3.60% from 3.72%; six-month margin was 3.62% versus 3.64%.
- Mortgage banking income rose to $3.0 million in the quarter from $1.8 million, alongside higher loan-sale originations. Management’s non-GAAP “core earnings” were $6.8 million for the quarter and $13.6 million for six months; these exclude after-tax realized and unrealized securities gains and losses.
- Quarterly non-interest expense rose $3.0 million year over year, principally reflecting higher compensation, staffing and office expansion. The bank reported 200 full-time equivalent staff, compared with 40 a year earlier.
Financial position, cash flow and capital
- At December 31, 2011, total assets were $2.224 billion, up 14.6% from June 30, 2011. Net loans held for investment were $1.527 billion, up from $1.325 billion; deposits were $1.553 billion, up from $1.340 billion.
- Cash and cash equivalents were $22.3 million. Six-month operating cash flow was positive $13.1 million, investing cash flow was negative $268.8 million, and financing cash flow was positive $268.9 million. Financing inflows included deposit growth and common and preferred stock issuances.
- Borrowings included $130 million of repurchase agreements, $330 million of Federal Home Loan Bank advances, and $5.2 million of subordinated debentures and other borrowings. The company reported $250.5 million of brokered deposits.
- Stockholders’ equity was $193.6 million, versus $147.8 million at June 30. The bank reported an 8.27% Tier 1 leverage ratio, 13.19% Tier 1 risk-based capital ratio and 13.77% total risk-based capital ratio, and was classified as “well capitalized.”
- Reported available liquidity included $153.3 million immediately available from the FHLB and a further $356.4 million available with additional collateral, $20 million of unused unsecured federal funds lines, and $110.3 million available from the Federal Reserve discount window.
Material changes, outlook and risks
- Loan growth was funded substantially by deposits and borrowings. The loan mix shifted toward single-family mortgages and commercial secured and other loans; the latter increased to $123.4 million from $66.6 million at June 30.
- Nonperforming loans increased to $11.8 million, or 0.76% of gross loans, from $9.6 million, or 0.72%, at June 30. Nonperforming assets fell to $14.3 million from $19.2 million, mainly following sales and write-downs of foreclosed assets. The allowance for loan losses was $8.1 million, or 0.53% of gross loans.
- The company recognized $1.3 million of net securities impairment losses in earnings for the six months. Significant non-agency mortgage-backed securities and trading securities used Level 3 valuation assumptions; management disclosed that a 100-basis-point increase in the trading-security discount margin would reduce fair value and pretax income by $690,000.
- Management cited economic and credit-quality uncertainty, potential future charge-offs and provision increases, interest-rate and competitive risks, and the risk that maturing deposits may not remain. Time deposits of $619.4 million were due within one year. The company also noted callable repurchase agreements and FHLB advances.
- Interest-rate sensitivity analysis showed modeled market value of equity falling 5.8% under an immediate 100-basis-point rate increase and 25.0% under a 300-basis-point increase. Management cautioned that these estimates depend on assumptions and are not forecasts of actual results.
- No specific earnings or financial guidance was provided. The filing said management believed liquidity sources were adequate for anticipated needs and contingencies and believed the allowance was adequate at period-end, while noting that future results and reserves remain subject to economic and portfolio risks.
- During the period, the company issued $19.5 million of Series B convertible preferred stock and $13.3 million net proceeds from a common-stock offering. The Series B shares carry a 6% non-cumulative preferred dividend and are convertible at an initial approximate price of $16.15 per common share.
Key facts for investors to verify
- Confirm the registrant and reporting-period mapping: this is a BofI Holding, Inc. filing for the quarter ended December 31, 2011, not a filing under the Axos Financial name.
- Assess whether loan growth, mortgage banking gains and deposit funding can be sustained without further margin compression or higher funding costs.
- Track delinquency, nonperforming loans, charge-offs, allowance coverage and the performance of multifamily, purchased mortgage and RV/auto exposures.
- Review the assumptions and sensitivity of Level 3 securities valuations and the potential for further impairment charges.
- Evaluate deposit concentration and repricing/refinancing exposure, including brokered deposits, near-term time-deposit maturities, and callable repurchase agreements and FHLB advances.
- Check the effects of preferred-stock conversion, dividends, and the common-stock issuance on common shareholders’ earnings and dilution.