Axos Financial, Inc. annual report, FY2014

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Filing summary

Period and identity: The supplied metadata says Axos Financial, Inc. and “2013 Q4,” but the source filing is a BofI Holding, Inc. Form 10-K for the fiscal year ended June 30, 2014. It includes unaudited results for the quarter ended June 30, 2014. The figures below summarize the filing as provided.

Business context

BofI Holding’s principal subsidiary, BofI Federal Bank, operated a nationwide branchless banking and lending business. It gathered consumer and business deposits and made residential mortgage, multifamily, commercial, and specialty finance loans, with additional fee income from mortgage sales and prepaid-card services. Management emphasized growth through technology and low-cost distribution channels.

Financial results and condition

  • Growth: Total assets rose 42.5% to $4.403 billion; gross loans increased to $3.593 billion from $2.301 billion; deposits rose to $3.042 billion from $2.092 billion.
  • Earnings: Net income was $56.0 million, up from $40.3 million; net income attributable to common shareholders was $55.6 million, or $3.85 diluted EPS, versus $39.5 million, or $2.89. Return on average assets was 1.59% and return on average common equity was 17.89%.
  • Interest income and margins: Net interest income increased 34.9% to $137.1 million. Net interest margin improved to 3.95% from 3.79%; interest rate spread was 3.81%. Interest expense rose to $35.8 million, while the average rate paid on interest-bearing liabilities declined to 1.17% from 1.39%.
  • Non-interest income and expense: Non-interest income fell to $22.5 million from $27.7 million, chiefly because mortgage banking income declined to $10.2 million from $23.0 million as refinancing and loans originated for sale slowed. Non-interest expense rose to $59.9 million from $53.6 million, primarily with staffing and operating growth. The efficiency ratio improved to 37.56% from 41.43%.
  • Credit quality: Provision for loan losses decreased to $5.4 million from $7.6 million. The allowance increased to $18.4 million, but fell to 0.51% of gross loans from 0.62%. Non-performing loans were $20.4 million, or 0.57% of loans, versus $18.3 million, or 0.80%; non-performing assets were 0.46% of assets versus 0.66%. Net charge-offs were 0.04% of average loans.
  • Funding, debt, and liquidity: Deposits were the main funding source. At year-end, borrowings included $910.0 million of FHLB advances, $45.0 million under repurchase agreements, and $5.2 million of subordinated debentures. The Bank reported $751.5 million of immediately available FHLB capacity, $20.0 million of unused federal funds lines, and $16.6 million of unused Federal Reserve borrowing capacity based on pledged collateral.
  • Capital: Stockholders’ equity was $370.8 million, or 8.42% of assets. The Bank was classified as well-capitalized, with an 8.66% Tier 1 leverage ratio, 14.42% Tier 1 risk-based ratio, and 15.11% total risk-based ratio.
  • Cash flow: Operating activities provided $21.3 million; investing activities used $1.318 billion, largely reflecting loan originations; financing activities provided $1.251 billion, principally from deposit growth and FHLB advances. Cash and cash equivalents declined $46.1 million to $155.6 million.

Material changes and unusual items

  • Loan originations held for investment increased to $2.298 billion from $1.055 billion. Single-family mortgage loans grew substantially, while multifamily loans remained a major portfolio component.
  • Mortgage originations for sale declined to $741.5 million from $1.086 billion, reflecting weaker agency refinancing activity; mortgage banking income consequently decreased.
  • The Bank completed its acquisition of approximately $173 million of Principal Bank deposits in September 2013.
  • A purchase and assumption agreement with H&R Block Bank was pending at filing. It contemplated assuming approximately $450–$550 million of customer deposits and prepaid-card balances, subject to regulatory approvals and other closing conditions, alongside a planned program management arrangement.
  • The Company completed $50.0 million of gross common-stock sales under its at-the-market offering by June 30, 2014. Common-stock issuance contributed approximately $41.6 million to equity during the fiscal year.
  • Non-interest income included $6.7 million of gains on other sales, including structured-settlement receivables, and $2.8 million of net securities impairment losses recognized in earnings. Held-to-maturity securities had $15.5 million of gross unrecognized losses.

Outlook, risks, and contingencies

  • Management’s stated business-plan objectives were annualized return on average common equity of at least 15%, annual growth in average interest-earning assets of at least 15%, and an efficiency ratio of 35% or lower. These are objectives, not quantified earnings guidance.
  • Management attributed earnings growth mainly to loan-portfolio expansion and improved net interest margin. It also cited increased staffing and investment in systems to support growth and described cost-management efforts.
  • Interest-rate risk is significant: liabilities reprice sooner than many assets in the one-year gap analysis. Management’s pro forma model showed net interest income increasing 3.3% under an immediate 200-basis-point rise in the first 12 months, but decreasing 3.4% in the next 12 months. Pro forma market value of equity fell 18.1% under a 200-basis-point rise and 28.6% under a 300-basis-point rise.
  • Credit and concentration risks include a real-estate-heavy portfolio, approximately 61.7% of real-estate loans secured by California properties, and recent growth in less-seasoned C&I and specialty finance lending. Management warned that non-performing loans could increase.
  • Valuation of non-agency mortgage securities and other Level 3 assets depends on management assumptions, including defaults, prepayments, loss severity, and discount rates. Changes in these estimates could affect reported values and earnings.
  • The filing cites competition, economic and housing conditions, deposit-funding costs, regulatory changes, execution and integration risks, and technology, cybersecurity, privacy, and third-party service-provider risks. The H&R Block transaction’s approvals and expected benefits were uncertain.
  • The Company reported no material legal proceedings and no unresolved SEC staff comments. Management and the auditor concluded that internal control over financial reporting was effective as of June 30, 2014.

Most important facts for investors to verify

  • Confirm the issuer and reporting period: the source is BofI Holding’s FY2014 10-K, not a 2013 Q4 filing identified as Axos Financial.
  • Check whether the H&R Block transaction received approvals, closed, and delivered the expected deposit and program economics.
  • Track loan growth, non-performing loans, allowance coverage, and credit performance in newer C&I and specialty finance portfolios.
  • Assess deposit mix and pricing, reliance on FHLB advances, and sensitivity of earnings and economic value to changing interest rates.
  • Review non-agency securities valuations, impairment assumptions, and the $15.5 million of held-to-maturity gross unrealized losses.
  • Compare subsequent operating results with management’s stated growth, return, and efficiency objectives, accounting for the $50.0 million ATM equity issuance.