Business context and reporting period
BofI Holding, Inc. (now Axos Financial, Inc.) filed this Form 10-Q for its fiscal first quarter, the three months ended September 30, 2016. The filing identifies the registrant as BofI Holding, Inc.; the period is not a calendar-year first quarter. The company operates BofI Federal Bank, a branchless banking business with $7.9 billion in assets, serving nationwide consumer and business customers.
Financial results and position
Amounts are in millions of dollars unless stated otherwise.
| Metric | Quarter ended Sept. 30, 2016 | Prior-year quarter or comparison |
|---|---|---|
| Interest and dividend income | $87.5 | $71.2 |
| Net interest income | $69.8 | $59.1 |
| Provision for loan and lease losses | $1.9 | $2.4 |
| Non-interest income | $14.7 | $9.8 |
| Non-interest expense | $32.9 | $22.9 |
| Net income | $28.9 | $25.5 |
| Net income attributable to common stock; diluted EPS | $28.8; $0.45 | $25.4; $0.40 |
| Net interest margin; efficiency ratio | 3.78%; 38.90% | 4.02%; 33.25% |
| Return on average assets; return on average common equity | 1.53%; 16.59% | 1.70%; 18.34% |
- Total assets were $7,855.0 million, up 3.3% from June 30, 2016. Net loans and leases were $6,549.7 million, up 3.1%; deposits were $6,323.8 million, up 4.6%.
- Cash and cash equivalents were $599.1 million at quarter-end. Cash flow from operations was $65.5 million, investing activities used $160.7 million, and financing activities provided $207.6 million. Cash and cash equivalents increased $112.3 million during the quarter.
- Total borrowings were $746.5 million, including $655.0 million of FHLB advances, $35.0 million in repurchase agreements and $56.5 million in subordinated notes and other. Equity was $721.9 million; equity to assets was 9.19%.
- The company and bank reported regulatory capital ratios above minimums and met the filing’s “well capitalized” thresholds. Bank total risk-based capital was 14.77%; company total risk-based capital was 16.32%.
- Non-performing loans and leases were $42.0 million, or 0.64% of loans, versus $31.9 million, or 0.50%, at June 30. The allowance was $37.6 million, 0.57% of loans and 89.45% of non-performing loans.
Material changes versus the prior comparable period
- Net income rose 13.3% year over year, while net interest income increased 18.0%, primarily on loan growth. Average earning assets rose 25.6%.
- Net interest margin declined 24 basis points to 3.78%: asset yields fell 11 basis points while the average rate paid on interest-bearing liabilities rose 17 basis points. Interest expense increased 46.3%.
- Non-interest income increased $4.9 million, principally from mortgage banking income and H&R Block-related banking fees. Non-interest expense rose $10.0 million, led by salaries, professional services, data processing and advertising.
- Non-performing assets increased to $43.4 million from $32.1 million at June 30, 2016, mainly due to higher non-performing single-family and multifamily loans and foreclosed real estate.
- In September 2016, the company reclassified all $194.2 million of held-to-maturity securities to available-for-sale, citing uncertainty about future policy, accounting and regulatory developments, and interest rates. The reclassification produced a $3.6 million unrealized gain in other comprehensive income and prevents use of held-to-maturity classification for at least one year.
Outlook, risks and unusual items
- No numeric earnings or growth guidance is provided. Management stated it believed liquidity sources were stable and adequate for anticipated needs and contingencies, and that it could increase deposits or borrowings if needed.
- Management said the allowance was adequate at quarter-end but future provisions could increase as credit risks are reassessed. Interest-rate changes, economic conditions, credit quality, and deposit retention are identified as risks. The filing’s interest-rate sensitivity estimates are model-based and not predictions of actual results.
- Liquidity sources included $999.2 million of immediately available FHLB borrowing capacity, another $57.0 million available with additional collateral, $35.0 million of unused federal funds lines, and $57.8 million available at the Federal Reserve discount window. Brokered deposits totaled $704.8 million.
- The company had $502.1 million of commitments to originate loans and leases and $85.9 million of commitments to sell loans. Time deposits of $472.5 million were due within one year; management noted that replacement funding could cost more if deposits do not renew.
- A securities class action and several shareholder derivative actions remained pending. The company disputed the allegations and said it was vigorously defending them. On September 27, 2016, the court dismissed the class action as to four individual defendants with leave to amend, but denied dismissal motions as to the company and its CEO.
- The company expects the new credit-loss accounting standard, effective for it beginning July 1, 2020, to have a material impact; it was still evaluating the effect. The filing also describes an October 2016 agreement to offer H&R Block interest-free Refund Advance loans, with an expected average life of ten days.
- H&R Block-related products contribute seasonality, with related fee income and expenses typically peaking in the fiscal quarter ending March 31. Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant and reporting period: this filing is for BofI Holding, Inc., fiscal Q1 ended September 30, 2016, despite the request metadata naming Axos Financial.
- Track margin pressure and expense growth against loan growth, including the higher cost of deposits and the deterioration in efficiency ratio.
- Monitor the increase in non-performing loans and assets, especially single-family and multifamily exposures, alongside reserve coverage and charge-offs.
- Review the rationale, valuation effects and duration implications of the full held-to-maturity-to-available-for-sale reclassification, including Level 3 securities estimates.
- Assess funding concentration and renewal risk, particularly brokered deposits, near-term time-deposit maturities and FHLB/repurchase borrowing terms.
- Follow developments and potential costs from the securities and derivative litigation, and assess the economics and risk of the new H&R Block Refund Advance program.