Business context and reporting period
This is BofI Holding, Inc.’s unaudited Form 10-Q for the fiscal quarter ended December 31, 2012, and the six months then ended. The filing identifies the registrant as BofI Holding, Inc., not Axos Financial, Inc.; investors should verify the requested company and filing match. BofI’s wholly owned BofI Federal Bank originated and purchased mortgage loans and funded lending through internet, affinity and wholesale deposit channels.
Unless stated otherwise, financial amounts below are in U.S. dollars. “Quarter” compares the three months ended December 31, 2012 with the same 2011 period; “six months” compares the respective six-month periods.
Financial performance and condition
| Metric | Quarter | Six months / period-end |
|---|---|---|
| Net interest income | $24.9 million, up 30.7% | $47.4 million, up 27.3% |
| Net interest margin | 3.81%, versus 3.60% | 3.76%, versus 3.62% |
| Non-interest income | $6.2 million, versus $3.0 million | $13.0 million, versus $7.6 million |
| Non-interest expense | $12.8 million, up $3.6 million | $24.3 million, up $5.6 million |
| Net income | $9.8 million, versus $6.7 million | $18.8 million, versus $13.2 million |
| Diluted EPS | $0.70, versus $0.54 | $1.37, versus $1.14 |
| Total assets | $2.874 billion at December 31, up 20.4% from June 30 | |
| Net loans held for investment | $2.155 billion, up 25.3% from June 30 | |
| Deposits | $1.968 billion, up 21.9% from June 30 | |
| Borrowings | $647.2 million at December 31, including $527.0 million of FHLB advances and $115.0 million in repurchase agreements | |
| Cash and cash equivalents | $89.5 million at December 31 | |
| Stockholders’ equity | $242.6 million, versus $206.6 million at June 30 |
Mortgage banking income rose to $5.6 million for the quarter and $12.0 million for the six months, primarily reflecting higher loan-sale activity. The efficiency ratio was 41.0% for the quarter and 40.2% for the six months, improving from 41.7% and 41.9%, respectively. Core earnings, a company-defined non-GAAP measure excluding after-tax securities gains and losses, were $10.1 million for the quarter and $19.2 million for the six months; GAAP net income was $9.8 million and $18.8 million, respectively.
Six-month cash flows were $34.5 million used in operating activities, $383.4 million used in investing activities and $472.0 million provided by financing activities, resulting in a $54.1 million increase in cash. Operating cash outflow reflected held-for-sale loan originations exceeding sale proceeds; financing inflows primarily reflected deposit growth and increased FHLB advances. At December 31, the bank reported $251.0 million available immediately and a further $268.3 million available from the FHLB with additional collateral, plus $20.0 million in unused unsecured federal funds lines and $37.8 million of Federal Reserve discount-window availability.
At December 31, the bank’s regulatory capital ratios were 8.52% Tier 1 leverage, 13.95% Tier 1 risk-based and 14.60% total risk-based; the filing said it met requirements and was “well capitalized.” The allowance for loan losses was $11.4 million, or 0.52% of gross loans. Non-performing loans were $20.8 million (0.95% of loans), and non-performing assets were $22.7 million (0.79% of assets).
Material changes versus comparable periods
- Net income increased 46.7% for the quarter and 42.2% for the six months. Management attributed higher net interest income primarily to growth in average earning assets and lower deposit funding costs. Average loan balances rose 34.2% in the quarter and 33.5% for the six months, while net interest margin expanded.
- Loan growth was funded mainly by deposits, which increased $353.2 million from June 30, and by a $105.0 million increase in FHLB advances. The loan portfolio mix shifted toward single-family loans; single-family balances rose to $1.216 billion from $863.6 million at June 30.
- Non-interest expense grew alongside staffing, loan production, advertising and operating activity. Salaries and benefits increased $2.0 million for the quarter and $3.6 million for the six months; advertising rose $0.5 million and $0.8 million, respectively.
- Non-performing loans increased $3.7 million from June 30, although the ratio declined from 0.98% to 0.95% as the portfolio expanded. Non-performing assets increased $4.4 million, including increases in commercial non-performing loans and foreclosed real estate.
- The company converted its Series B preferred stock into 1,246,571 common shares and issued Series C preferred stock for approximately $18.6 million net proceeds. These transactions affected capital and common-share dilution.
Outlook, risks and unusual items
The filing gives no specific earnings or growth guidance. Management said liquidity sources were stable and adequate for anticipated needs and believed it could raise deposits or borrowings as needed. It also noted that future capital could be required to support growth and maintain the bank’s well-capitalized status.
- Management identified economic conditions, competition, interest-rate changes and credit quality as risks. It cautioned that actual results may differ from forward-looking statements and undertook no obligation to update them.
- Interest-rate sensitivity analysis estimated that an immediate 100, 200 or 300 basis-point rise would reduce modeled net present value by 10.9%, 20.7% or 30.8%, respectively. The filing cautions that these estimates depend on assumptions and are not predictions of actual results.
- The securities portfolio included substantial non-agency mortgage-backed securities valued using Level 3 assumptions. The company recognized $0.8 million of net impairment loss in earnings for the quarter and $1.7 million for the six months; management’s valuation models rely on projected defaults, loss severities, prepayments and discount rates.
- Time deposits totaling $608.9 million were due within one year, creating potential refinancing and repricing exposure if customers do not renew. Brokered deposits were $407.8 million at December 31.
- The company disclosed $211.4 million of commitments to originate loans and $180.3 million of commitments to sell loans. It reported no material legal proceedings and stated that disclosure controls were effective; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm that this BofI Holding, Inc. filing for the quarter ended December 31, 2012 is the intended filing for Axos Financial, Inc.
- Review loan growth, non-performing loan and asset trends, charge-offs, and whether the $11.4 million allowance remains adequate as the portfolio expands.
- Assess the assumptions and sensitivity behind Level 3 non-agency mortgage-backed securities valuations and the reported impairment charges.
- Monitor deposit retention and pricing, the $608.9 million of time deposits due within a year, brokered-deposit reliance, and borrowing availability and terms.
- Consider the cost growth, mortgage banking activity, and dilution and preferential rights associated with Series C preferred stock and prior Series B conversion.