Business context and reporting period
The supplied filing is BofI Holding, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2016 (fiscal 2017 second quarter), covering BofI Holding and its wholly owned BofI Federal Bank. The request metadata names Axos Financial, Inc.; the filing itself identifies the registrant as BofI Holding, Inc.
The company operated a nationwide, branchless banking business focused on consumer and commercial deposits and lending, including single-family and multifamily mortgages, commercial and industrial loans, and specialty finance. H&R Block-branded products added seasonal deposits and fee activity.
Financial performance and condition
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net interest income | $76.4 million, up 20.9% year over year | $146.1 million, up 19.5% |
| Provision for loan and lease losses | $4.1 million, versus $3.4 million | $6.0 million, versus $5.8 million |
| Non-interest income | $16.7 million, versus $16.2 million | $31.4 million, versus $26.0 million |
| Non-interest expense | $33.3 million, up from $27.4 million | $66.2 million, up from $50.4 million |
| Net income | $32.3 million, versus $28.1 million | $61.2 million, versus $53.7 million |
| Diluted earnings per share | $0.50, versus $0.44 | $0.94, versus $0.84 |
- Quarterly net interest margin was 4.00%, down 10 basis points year over year; the six-month margin was 3.89%, down 18 basis points. The six-month interest rate spread was 3.71%, versus 3.92%.
- Quarterly return on average assets was 1.66% and return on average common equity was 17.49%, compared with 1.77% and 18.81%, respectively, in the prior-year quarter. The quarterly efficiency ratio rose to 35.78% from 34.57%.
- At December 31, total assets were $8.17 billion, including net loans and leases of $6.81 billion and cash and cash equivalents of $707.6 million. Deposits were $6.61 billion; borrowings were $756.4 million, comprising $665.0 million of FHLB advances, $35.0 million of repurchase agreements, and $56.4 million of subordinated notes, debentures and other.
- Compared with June 30, 2016, assets increased 7.5%, net loans and leases grew 7.2%, deposits grew 9.4%, and stockholders’ equity rose to $753.7 million from $683.6 million. Equity was 9.23% of period-end assets.
- Six-month operating cash flow was $83.2 million; investing activities used $366.8 million and financing activities provided $504.6 million. Cash and cash equivalents increased to $707.6 million from $486.7 million at fiscal year-end.
- Non-performing loans and leases were $34.6 million, or 0.50% of gross loans, and non-performing assets were $35.5 million, or 0.43% of assets. The allowance was $40.9 million, equal to 0.60% of loans and 118.42% of non-performing loans.
- Company and bank regulatory capital ratios exceeded the disclosed well-capitalized thresholds; the bank’s total risk-based capital ratio was 14.88% and its Tier 1 leverage ratio was 9.36%.
Material changes versus the prior comparable period
- Net income improved, chiefly alongside loan growth and higher net interest income. Average loans and leases increased 22.4% in the quarter and 23.6% in the six-month period year over year.
- Funding costs rose: interest expense increased 40.6% for the quarter and 43.3% for six months, while average rates paid on interest-bearing liabilities increased 15 and 16 basis points, respectively. Management attributed this to deposit and borrowing mix and the addition of $51 million of 6.25% subordinated notes issued in March 2016.
- Expenses grew faster than non-interest income, reflecting higher staffing, technology and customer-account support, advertising, and H&R Block product costs. Staff increased 18.2% year over year to 631.
- Loan mix shifted toward commercial and industrial lending: C&I balances rose to $763.8 million from $514.3 million at June 30. Non-performing loans remained 0.50% of loans, while non-performing assets rose slightly as a percentage of assets.
- In September 2016, the company reclassified all $194.2 million of held-to-maturity securities to available-for-sale, citing uncertainty around policy, accounting and interest-rate conditions. It recognized a $3.6 million unrealized gain in other comprehensive income; the filing says the reclassification prevents use of HTM classification for at least one year.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or financial guidance. Management said it believed liquidity sources were stable and adequate for anticipated needs and contingencies, and that deposits and borrowings could be increased as needed.
- Management cited sensitivity to interest rates, economic conditions, competition and credit quality. Its modeled parallel rate shock showed net interest income down 9.5% in the first 12 months under a 200-basis-point decline, and down 14.7% in the following 12 months. These are scenario estimates, not forecasts, and depend on assumptions.
- Liquidity included $1.388 billion of immediately available FHLB capacity, $35 million of unused unsecured federal funds lines, and $1.747 billion of Federal Reserve discount-window availability. Brokered deposits totaled $1.032 billion.
- There were $604.8 million of commitments to originate loans and leases and $77.9 million of commitments to sell loans. Time deposits due within one year were reported as $340.6 million in the discussion; the contractual-obligations table reports $357.9 million, a difference to verify.
- The company and certain current and former officers and directors faced a putative securities class action and shareholder derivative actions relating to alleged disclosure failures, internal controls and fiduciary duties. The company disputed the allegations and said it was vigorously defending the matters. The court denied dismissal as to the company and CEO in the class action; a second amended complaint was filed and a motion to dismiss was filed on December 23, 2016. The filing does not provide a clear estimate of potential loss.
- Other notable items include $1.47 million of six-month net securities impairment loss recognized in earnings and the adoption of a new expected-credit-loss accounting standard that management expected to have a material impact when effective for the company’s fiscal year beginning July 1, 2020.
- Management reported disclosure controls and procedures were effective at quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant and period: the source is a BofI Holding, Inc. 10-Q for the quarter ended December 31, 2016, notwithstanding the Axos Financial metadata.
- Review the composition, performance and funding cost of loan and deposit growth, particularly rising C&I balances, brokered deposits and time-deposit maturities.
- Assess the quality and valuation uncertainty of non-agency mortgage-backed and other Level 3 securities, the impairment charges, and the consequences of the HTM-to-AFS reclassification.
- Track credit trends, allowance adequacy and the increase in multifamily non-performing loans and foreclosed real estate.
- Follow the securities and derivative litigation, potential costs and outcomes, and the discrepancy in reported time deposits due within one year.
- Evaluate whether operating expense growth and margin compression persist, and distinguish GAAP results from management’s non-GAAP adjusted earnings measure.