Business context and reporting period
This is BofI Holding, Inc.’s unaudited Form 10-Q for the quarter and six months ended December 31, 2014 (its fiscal Q2 and first half of fiscal 2015). The filing identifies the company as BofI Holding, Inc., not Axos Financial, Inc.; investors should confirm the entity and period match their intended filing. BofI Federal Bank operated a nationwide, branchless banking model, with lending concentrated in single-family and multifamily real estate.
Key financial results
Amounts are in millions unless noted. Quarterly comparisons are with the three months ended December 31, 2013; six-month comparisons are with the six months ended December 31, 2013.
| Metric | Quarter | Six months |
|---|---|---|
| Interest and dividend income | $59.1 vs. $41.2 | $113.9 vs. $77.6 |
| Net interest income | $48.1 vs. $32.8 | $93.0 vs. $60.9 |
| Provision for loan losses | $2.9 vs. $1.0 | $5.4 vs. $1.5 |
| Non-interest income | $6.7 vs. $5.5 | $11.9 vs. $12.5 |
| Non-interest expense | $18.9 vs. $15.3 | $36.4 vs. $29.8 |
| Net income | $19.4 vs. $13.2 | $37.2 vs. $25.3 |
| Diluted EPS | $1.26 vs. $0.91 | $2.46 vs. $1.77 |
| Net interest margin | 3.85% vs. 4.01% | 3.91% vs. 3.94% |
| Return on average assets | 1.53% vs. 1.58% | 1.55% vs. 1.60% |
For the quarter, net income rose about 47% and net interest income about 47%. Management attributed NII growth primarily to larger average earning assets, especially loans, and lower average funding costs; lower asset yields partly offset these benefits. The efficiency ratio improved to 34.55% from 39.89%. Management’s non-GAAP core earnings were $19.4 million for the quarter and $37.9 million for six months; these exclude after-tax securities gains and losses.
Financial position, cash flow and liquidity
- At December 31, assets were $5.195 billion, up 18.0% from June 30, 2014. Net loans were $4.304 billion, up 21.8%; gross loans were $4.373 billion.
- Deposits were $4.005 billion, up 31.7% since June. Non-interest-bearing deposits were $267 million. Brokered deposits totaled $654 million, up from $405 million at June 30.
- Total borrowings were $710 million, down $250 million from June 30 and equal to 13.7% of assets. This included $670 million of FHLB advances and $35 million of repurchase agreements. Stockholders’ equity was $450 million; equity to assets was 8.67%.
- For the six months, operating cash flow was $62.3 million, investing cash outflow $761.2 million, and financing cash inflow $753.5 million. Cash and cash equivalents ended at $210.1 million.
- Management reported $1.431 billion of immediately available FHLB borrowing capacity, $35 million of unused unsecured federal-funds lines, and $11.4 million available at the Federal Reserve discount window. It considered liquidity adequate for anticipated needs.
- The Bank was “well capitalized” at quarter-end: tier 1 leverage 8.84%, tier 1 risk-based capital 14.95%, and total risk-based capital 15.71%. Management said these ratios would also exceed the revised “well capitalized” standards effective January 1, 2015.
Material changes, risks and outlook
- Loan growth drove higher interest income but also a larger loss provision: the allowance increased to $23.2 million from $18.4 million at June 30. Non-performing loans rose to $34.9 million, or 0.80% of gross loans, from $20.4 million, or 0.57%; non-performing assets rose to $35.7 million. Management attributed much of the increase to two single-family loans and cited delays in foreclosure tied to a seller-servicer’s practices. The allowance was 66.45% of non-performing loans, versus 93.35% at June 30.
- Management considered the allowance adequate, but noted that future provisions depend on credit conditions, portfolio growth and other estimates. The real estate portfolio’s weighted-average LTV was 54%. Credit quality, collateral values, loan growth and non-performing loan resolution remain key risks.
- Non-interest expense increased as the Bank expanded staffing, lending, business banking and compliance operations. Staff increased 33.1% year over year to 430. Six-month non-interest income declined mainly because gains on sales of structured settlements were lower; securities valuation and impairment losses also affected results.
- The company reported material exposure to Level 3 valuations, including non-agency mortgage securities and collateralized debt obligations, for which values rely on management assumptions. At December 31, held-to-maturity securities had $20.3 million of gross unrealized losses; non-agency RMBS impairment and fair-value assumptions are notable sensitivities.
- Interest-rate modeling showed first-12-month net interest income rising 1.54% under an immediate 200-basis-point increase, but falling 9.04% in the following 12 months under that scenario. Estimated market value of equity fell 31.9% under a 200-basis-point increase. Management cautioned that these models rely on assumptions and are not forecasts.
- There was no specific earnings or revenue guidance. Management stated it believed deposits and borrowing capacity could support foreseeable liquidity needs. A pending deposit assumption transaction would add approximately $125 million of FDIC-insured deposits, subject to regulatory approval and closing conditions, targeted for fiscal Q3 2015.
- The company raised $38.9 million of net proceeds from common-stock issuance during the six months, primarily through an at-the-market offering. Gross sales under the $50 million program were $40.1 million through December 31, leaving $9.9 million available. Further issuance could dilute existing shareholders.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material legal proceedings.
Important facts for investors to verify
- Confirm the filing is for the intended issuer: the supplied filing is BofI Holding, Inc., while the request metadata names Axos Financial, Inc.
- Track whether loan growth, provision expense and non-performing loans evolve together; review the two large residential exposures and foreclosure servicing delays.
- Assess deposit funding quality, including the $654 million in brokered deposits, deposit maturities, and the execution of the proposed $125 million deposit transaction.
- Review net interest margin and actual sensitivity to changing rates against the filing’s modeled scenarios.
- Evaluate Level 3 securities assumptions, impairment charges and the potential impact of changes in defaults, loss severities, prepayments and discount rates.
- Monitor capital ratios under the revised regulatory standards and the effect of continued ATM share issuance on per-share results.