Filing identity and reporting period
The supplied filing is BofI Holding, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017 (fiscal third quarter 2017), filed April 25, 2017. It is not an Axos Financial, Inc. filing, and it does not cover 2016 Q3 as stated in the request metadata. The figures below therefore summarize the supplied BofI filing and should not be attributed to Axos.
BofI Holding was the parent of BofI Federal Bank, a branchless financial services company with consumer and business banking, lending, and affinity-partner products. Amounts are in U.S. dollars; financial statement figures are generally in thousands unless stated otherwise.
Financial performance and condition
| Metric | Quarter ended March 31, 2017 | Comparable 2016 period |
|---|---|---|
| Interest and dividend income | $107.0 million | $84.3 million |
| Net interest income | $88.6 million | $69.6 million |
| Provision for loan and lease losses | $4.9 million | $2.0 million |
| Non-interest income | $23.2 million | $23.3 million |
| Non-interest expense | $35.4 million | $29.4 million |
| Net income | $41.0 million | $35.9 million |
| Diluted earnings per share | $0.63 | $0.56 |
| Net interest margin | 4.24% | 3.85% |
| Efficiency ratio | 31.73% | 31.66% |
| Return on average assets | 1.94% | 1.95% |
| Return on average common equity | 21.10% | 22.59% |
For the nine months ended March 31, 2017, net interest income was $234.7 million, net income was $102.2 million, and diluted EPS was $1.57, versus $191.9 million, $89.6 million, and $1.39, respectively, in the prior-year period. Nine-month net interest margin was 4.02% versus 3.97%; efficiency ratio was 35.13% versus 33.08%.
- Balance sheet: Total assets were $8.70 billion at March 31, 2017, up 14.5% from June 30, 2016. Net loans and leases were $7.02 billion, up 10.5%; deposits were $6.80 billion, up 12.5%; and stockholders’ equity was $800.3 million.
- Funding and debt: Borrowings totaled $1.05 billion, including $961.0 million of FHLB advances, $35.0 million of repurchase agreements, and $54.5 million of subordinated notes, debentures and other. Cash and cash equivalents were $1.08 billion.
- Cash flows: For the nine-month period, operating activities provided $168.9 million, investing activities used $566.3 million, and financing activities provided $989.5 million. Cash and cash equivalents increased $592.0 million to $1.08 billion.
- Credit quality: Non-performing loans and leases were $33.3 million, or 0.47% of gross loans, versus 0.50% at June 30, 2016. The allowance for loan and lease losses was $46.0 million in the balance sheet and detailed allowance note; non-performing asset coverage was reported at 138.09%.
- Capital and liquidity: The company and bank reported capital ratios above regulatory “well capitalized” thresholds. The bank reported $1.1 billion of FHLB capacity available immediately, another $115.0 million with additional collateral, and $1.28 billion available through the Federal Reserve discount window. It also had $35.0 million in unused federal funds lines.
Material changes versus comparable periods
- Quarterly net income rose about 14% and diluted EPS increased from $0.56 to $0.63; management attributed the earnings growth mainly to higher net interest income from loan growth.
- Net interest income increased 27.3% for the quarter and 22.3% for the nine months. Average earning assets grew, loan yields rose, and the quarter’s margin benefited from a 45-basis-point increase in the yield on interest-earning assets.
- Loan growth was concentrated in commercial and industrial lending, up to $868.3 million from $514.3 million at June 30, 2016; auto and RV, factoring, and multifamily balances also increased. Single-family mortgage loans remained the largest portfolio category.
- Non-interest expense increased 20.5% for the quarter and 27.4% for the nine months, reflecting higher staffing, technology and customer-account costs, marketing, and seasonal H&R Block program expenses. Nine-month return on average assets and return on average equity declined from the prior year.
- Non-interest income was nearly flat for the quarter, as higher seasonal banking fees and prepayment penalties were offset by lower mortgage banking income and gains on other asset sales. Nine-month non-interest income rose, primarily from banking service fees and mortgage banking, partly offset by lower gains on other sales.
- The company reclassified all held-to-maturity securities to available-for-sale in September 2016, moving approximately $194.2 million at carrying value. It cited uncertainties around policy, accounting and interest rates; it said the reclassification prevented use of the held-to-maturity classification for at least one year.
Outlook, commentary, risks and unusual items
- The filing gives no quantified earnings, revenue, margin or growth guidance. Management said results for the nine months are not necessarily indicative of the full year and that liquidity was adequate for anticipated needs.
- Management said future loan-loss provisions depend on ongoing portfolio risk evaluation and acknowledged that economic uncertainty could lead to higher charge-offs or additional allowance needs. The provision rose to $4.9 million for the quarter, partly reflecting Refund Advance loans, portfolio growth and changes in loan mix.
- H&R Block-branded products introduce seasonality: related banking service fee income and expenses typically peak in the fiscal quarter ending March 31. Refund Advance loans are purchased at a discount; discount accretion is recorded as interest income, and H&R Block provides a limited guarantee.
- Interest-rate risk is material. The company’s model estimated first-12-month net interest income would change +10.4% under an immediate 200-basis-point rise and −13.6% under a 200-basis-point decline. These are modeled scenarios, not forecasts, and rely on assumptions about rates, prepayments and deposit behavior.
- Fair values for certain trading securities, non-agency mortgage-backed securities, mortgage servicing rights and derivatives use significant Level 3 assumptions. Management disclosed sensitivity of trading-security fair value to discount-rate changes and noted valuation estimates may differ from realizable values.
- The company and certain officers faced securities class actions, including a new putative action filed April 3, 2017, and multiple shareholder derivative actions. The company disputed the allegations and said it was vigorously defending the cases; the filing did not quantify a potential loss.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It also cautioned that controls provide reasonable, not absolute, assurance.
- The company stated that adoption of the expected-credit-loss standard (ASU 2016-13) was expected to have a material financial-statement impact; adoption was scheduled for periods beginning July 1, 2020, with early adoption permitted from July 1, 2019.
Investor verification priorities
- Confirm the issuer and period: the supplied document is BofI Holding’s March 31, 2017 10-Q, not an Axos Financial filing or a 2016 Q3 report.
- Reconcile the allowance for loan and lease losses: the balance sheet and detailed allowance note report $45.987 million, while the selected financial data table appears to show $42.525 million.
- Assess whether loan growth—particularly commercial and industrial lending—and the higher loss provision are consistent with underwriting and credit-quality trends.
- Review deposit composition and funding concentration, including $903.6 million in brokered deposits, large time-deposit maturities, and the increased reliance on FHLB advances.
- Evaluate the assumptions and potential earnings effects behind Level 3 valuations, securities impairment charges, the securities portfolio reclassification, and interest-rate sensitivity scenarios.
- Track the securities and derivative litigation, including subsequent developments and any later disclosure of reasonably estimable exposure.