Axos Financial, Inc. (filed as BofI Holding, Inc.) — Form 10-Q
Period: Three months ended September 30, 2015, the company’s fiscal 2016 first quarter. The filing identifies the registrant as BofI Holding, Inc.; the request metadata names Axos Financial, Inc. Financial figures below are in U.S. dollars.
Business context and key financial results
BofI operated a nationwide, branchless banking business through BofI Federal Bank, with approximately $6.3 billion in assets. Its lending was concentrated in single-family and multifamily real estate, alongside business and specialty-finance lending.
- Profitability: Net income was $25.5 million, up from $17.8 million year over year; diluted EPS was $1.60 versus $1.20. Net income attributable to common shareholders was $25.4 million. Non-GAAP adjusted earnings were $25.5 million versus $18.5 million.
- Interest income and margins: Net interest income rose 31.8% to $59.1 million. Net interest margin was 4.02%, up 4 basis points; interest-rate spread was 3.89%. Return on average assets was 1.70%, and return on average common equity was 18.34%.
- Other income and expenses: Non-interest income increased to $9.8 million from $5.2 million, including higher gains on other sales and banking fees. Non-interest expense rose to $22.9 million from $17.4 million, principally reflecting increased staffing and growth-related costs. The efficiency ratio improved to 33.25% from 34.81%.
- Balance sheet and liquidity: Total assets were $6.26 billion, up 7.5% from June 30, 2015. Cash and cash equivalents were $367.8 million. Deposits totaled $4.76 billion, up $303.4 million during the quarter; net loans held for investment were $5.23 billion. Operating cash flow was $41.5 million, investing cash outflow was $286.3 million, and financing cash inflow was $389.8 million.
- Debt and capital: Borrowings totaled $861.2 million, including $821.0 million in Federal Home Loan Bank advances. Stockholders’ equity was $578.2 million. Company and bank capital ratios exceeded regulatory minimums; the bank’s total risk-based capital ratio was 15.77%.
- Credit quality: The allowance for loan losses was $31.1 million, or 0.59% of gross loans. Non-performing loans were $30.4 million, or 0.57% of loans, and non-performing assets were $31.3 million, or 0.50% of assets. Net annualized charge-offs were negative 0.03%, reflecting net recoveries.
Material changes versus comparable period
- Average earning assets increased 30.4% year over year, driving higher net interest income; management attributed much of the growth to loan and deposit expansion.
- Loan originations for investment were $825.1 million, compared with $813.1 million a year earlier; originations for sale increased to $272.3 million from $191.6 million.
- The August 31 acquisition of approximately $419 million of H&R Block Bank deposits contributed to deposit and account growth, as well as higher banking service income. The transaction also included related program-management, receivables-participation and guaranty agreements.
- Staff increased to 503 from 393 year over year. Salaries and related costs rose $4.6 million to $14.3 million.
- Non-performing loans declined from 0.62% of loans at June 30, 2015 to 0.57% at September 30; the allowance-to-loans ratio increased from 0.51% to 0.59%.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management said liquidity sources were adequate for anticipated needs and contingencies, and believed it could increase deposits and borrowings if needed.
- Liquidity resources included $1.26 billion of immediately available FHLB capacity, $35 million of unused federal funds lines and $7.6 million available through the Federal Reserve discount window. Brokered deposits were $826.2 million. Time deposits of $368.4 million were due within one year; management noted that replacement funding could cost more if deposits did not remain.
- Interest-rate sensitivity modeling showed net interest income increasing 3.5% in the first 12 months under an immediate 200-basis-point rate increase, but declining 3.0% in the following 12 months. The modeled market value of equity fell 20.6% under a 300-basis-point increase. Management cautioned that these estimates rely on assumptions and are not forecasts of actual results.
- The allowance reflects management estimates and may need to increase if credit conditions, collateral values or loan performance deteriorate. Real estate represented most of the loan portfolio; management reported a 56% weighted-average loan-to-value ratio for its real estate loans.
- A putative securities class action was filed October 15, 2015 against the company, its CEO and CFO, alleging federal securities-law violations related to allegations in a former employee’s wrongful-termination lawsuit. The company disputes the allegations and said it was vigorously defending the matter; an adverse outcome could materially affect results, cash flows or financial condition.
- After quarter-end, the board approved a four-for-one forward stock split, with trading expected on a split-adjusted basis beginning November 18, 2015.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is BofI Holding, Inc.’s quarter ended September 30, 2015, not a filing under the Axos Financial name.
- Review the H&R Block deposit acquisition’s ongoing economics, related agreements, and contribution to fees and deposit stability.
- Track the securities litigation, potential insurance coverage, legal costs and any subsequent developments.
- Monitor loan growth, concentrations, delinquencies, non-performing loans and adequacy of the allowance as the portfolio expands.
- Assess reliance on brokered deposits and FHLB funding, near-term deposit maturities, and sensitivity to changing interest rates.
- Distinguish GAAP net income from management’s non-GAAP adjusted earnings and review the drivers of gains on other sales.