Business context and reporting period
The supplied filing is BofI Holding, Inc.’s Form 10-K for the fiscal year ended June 30, 2012, not a 2011 Q4 filing. BofI Federal Bank operated nationwide through online and other branchless channels, with approximately 40,000 customers and a primary focus on single-family and multifamily mortgage lending. The company name in the filing is BofI Holding, Inc.; the filing does not identify the registrant as Axos Financial, Inc.
Financial performance and condition
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total assets | $2.387 billion | $1.940 billion |
| Net interest income | $79.2 million | $58.5 million |
| Provision for loan losses | $8.1 million | $5.8 million |
| Non-interest income | $16.4 million | $8.0 million |
| Non-interest expense | $38.0 million | $26.5 million |
| Net income | $29.5 million | $20.6 million |
| Diluted earnings per share | $2.33 | $1.87 |
| Net interest margin | 3.70% | 3.67% |
| Efficiency ratio | 39.72% | 39.90% |
| Return on average assets | 1.35% | 1.26% |
| Return on average common equity | 16.95% | 15.17% |
- Net loans held for investment were $1.721 billion; loans held for sale totaled $79.2 million. Securities totaled $483.0 million, including $313.0 million held to maturity.
- Deposits increased to $1.615 billion from $1.340 billion. Borrowings included $422.0 million of FHLB advances, $120.0 million under repurchase agreements and $5.2 million of junior subordinated debentures.
- Cash and cash equivalents were $35.4 million, up from $9.1 million. Operating cash flow was negative $56.3 million, investing cash flow negative $329.9 million and financing cash flow positive $412.6 million. The large operating outflow chiefly reflected mortgage-loan originations for sale.
- The Bank reported regulatory capital ratios of 8.62% Tier 1 leverage, 13.69% Tier 1 risk-based and 14.32% total risk-based, and was categorized as well-capitalized.
Material changes versus the prior comparable period
- Net income rose 43% year over year, primarily as loan growth lifted net interest income and higher mortgage-sale volume increased mortgage banking income.
- Mortgage banking income increased to $16.7 million from $4.7 million; originations of loans for sale rose to $664.6 million from $216.9 million.
- Assets grew 23.0%. Loans held for investment increased by $395.5 million, while deposits rose $274.8 million and FHLB borrowings rose $117.0 million.
- Non-interest expense increased 43%, driven in part by staffing growth to 230 from 173 employees and increased advertising, data processing and loan-related activity.
- Non-performing loans increased to $17.1 million, or 0.98% of loans, from $9.6 million, or 0.72%. Non-performing assets declined to $18.3 million, or 0.77% of assets, from $19.2 million, or 0.99%, mainly as foreclosed assets were reduced.
- Net charge-offs improved to 0.35% of average loans from 0.45%, while the allowance for loan losses increased to $9.6 million from $7.4 million.
Outlook, commentary, risks and unusual items
- Management’s stated business objectives were to maintain annualized return on average common equity of at least 15%, grow average interest-earning assets at least 15% annually and reduce the annualized efficiency ratio to 35% or lower. These are objectives, not specific earnings guidance.
- Management expected deposits and FHLB advances to remain primary funding sources and said additional capital would be needed to support further growth and maintain well-capitalized status. The Bank had $451.6 million of immediately available FHLB capacity, a further $38.1 million available with additional collateral, $74.2 million of FRB capacity and $20.0 million in unused federal-funds lines.
- Interest-rate exposure includes a negative one-year repricing gap. The filing’s model estimated market value of equity would fall 4.2% under an immediate 100-basis-point rate increase and 24.6% under a 300-basis-point increase. These estimates depend on assumptions and are not forecasts of actual results.
- Credit and concentration risks include real-estate collateral exposure, approximately 55.4% of mortgage loans secured by California property, and a securities portfolio with significant non-agency mortgage-backed holdings. Management used model-based, Level 3 estimates for some securities; defaults, severities, prepayments and discount rates are key assumptions.
- The company recorded $2.8 million of net securities impairment losses in earnings in FY 2012 and reported $5.4 million of net accumulated other comprehensive loss. Management cautioned that further housing weakness, unemployment, interest-rate changes, competition, regulatory costs and operational or cybersecurity events could adversely affect results.
- Subsequent event: the company announced mandatory conversion of its outstanding Series B preferred stock effective September 11, 2012, expected to issue approximately 1.247 million common shares. The filing also reported no material legal proceedings and effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer and period: the supplied document is BofI Holding’s FY 2012 10-K, not an Axos Financial filing or a 2011 Q4 report.
- Review the trajectory and composition of non-performing loans, troubled debt restructurings, charge-offs and allowance coverage as the loan portfolio expands.
- Assess the assumptions and sensitivity underlying Level 3 non-agency securities valuations and impairment estimates.
- Monitor deposit retention and repricing, callable repurchase agreements, FHLB funding availability and the substantial amount of time deposits maturing within one year.
- Account for preferred-stock conversion and resulting share-count changes when evaluating ownership dilution and earnings per share.