Filing summary
Period and entity: The supplied filing is BofI Holding, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014, not a 2013 Q3 filing. The company later became Axos Financial; the filing itself identifies the registrant as BofI Holding, Inc. Dollar figures below are in millions unless stated otherwise.
Business context
BofI Holding was the parent of BofI Federal Bank, a nationwide, branchless bank offering consumer and business deposits and lending. Its loan portfolio was concentrated in single-family and multifamily real estate. The filing compares the three and nine months ended March 31, 2014 with the same periods in 2013; balance-sheet comparisons are primarily to June 30, 2013.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net interest income | $35.7 (2014); $26.2 (2013) | $96.6 (2014); $73.6 (2013) |
| Provision for loan losses | $1.6; $1.6 | $3.1; $6.1 |
| Non-interest income | $5.2; $6.8 | $17.7; $19.8 |
| Non-interest expense | $14.3; $13.9 | $44.2; $38.2 |
| Net income | $14.6; $10.4 | $39.9; $29.2 |
| Diluted EPS | $1.00; $0.74 | $2.76; $2.12 |
| Net interest margin | 3.89%; 3.74% | 3.92%; 3.75% |
For the nine-month period, return on average assets was 1.59% versus 1.45%, and the efficiency ratio was 38.63% versus 40.91%. Management’s non-GAAP “core earnings,” excluding after-tax securities gains and losses, were $40.8 million for the nine months, compared with $29.4 million.
Financial position, liquidity and capital
- Total assets were $3,850.8, up 24.6% from June 30, 2013. Net loans held for investment were $3,101.4, up 37.4%; gross loans were $3,154.0.
- Deposits rose 35.4% to $2,833.0. Interest-bearing demand and savings balances grew, while the company also reported $417.6 of brokered deposits.
- Cash and cash equivalents were $128.4, down from $201.7 at June 30, 2013. Nine-month cash flows were $73.8 provided by operations, $869.9 used in investing, and $722.7 provided by financing.
- Total borrowings were $657.2, including $592.0 of FHLB advances and $60.0 of repurchase agreements. Stockholders’ equity was $338.8; the reported equity-to-assets ratio was 8.80%.
- The bank reported regulatory capital ratios of 9.07% Tier 1 leverage, 15.10% Tier 1 risk-based capital, and 15.78% total risk-based capital, and was classified as “well capitalized.” Management reported $972.1 of immediately available FHLB borrowing capacity, two $20.0 unsecured federal funds lines, and $19.4 available from the Federal Reserve discount window.
Material changes and management commentary
- Net interest income increased as loan growth expanded average earning assets and the average funding rate declined. Net interest margin rose 15 basis points for the quarter and 17 basis points for the nine-month period year over year.
- Mortgage banking income fell to $2.4 for the quarter and $7.5 for the nine months, from $5.4 and $17.4, respectively, as higher rates reduced refinancing activity. The decline in total non-interest income was partly offset by gains on sales of structured settlement receivables and higher banking service fees.
- Nine-month non-interest expense increased $5.9, with higher staffing, professional services and data-processing costs. Management cited growth and system updates, and said expenses were expected to increase in future periods as it pursued growth initiatives, despite cost-control measures.
- Non-performing loans were $19.0, or 0.60% of gross loans, versus $18.3, or 0.80%, at June 30, 2013. The allowance for loan losses was $16.0, or 0.51% of gross loans. Management considered the allowance adequate but noted future provisions could rise as credit risks and portfolio conditions are reassessed.
- The portfolio included $493.2 of interest-only mortgage loans and $6.5 of option adjustable-rate mortgage loans. Management reported a 55% weighted-average LTV for the real estate portfolio and noted that economic conditions could still lead to higher charge-offs or provisions.
- For the nine months, the company recognized $2.2 of net impairment losses on securities in earnings. Non-agency mortgage-backed securities and trading securities included Level 3 valuations dependent on management estimates of defaults, prepayments, loss severities and discount rates.
Outlook, transactions and risks
- On April 10, 2014, after quarter-end, the bank agreed to acquire certain assets and assume H&R Block Bank liabilities, projected to include approximately $450–$550 million of customer deposits and prepaid-card balances. Completion required regulatory approvals and other customary conditions. A related program-management arrangement contemplated H&R Block-branded financial products; the filing cautioned that transaction volumes and anticipated benefits were uncertain.
- Interest-rate modeling showed net interest income increasing 1.80% in the first 12 months under an immediate 200-basis-point rise, but decreasing 5.93% in the following 12 months. Modeled market value of equity declined 14.1% under a 200-basis-point rise and 23.8% under a 300-basis-point rise. Management cautioned that these estimates depend on assumptions and are not forecasts of actual results.
- Time deposits due within one year totaled approximately $413.0. The company said deposit retention, replacement funding costs, interest rates, credit quality, competition, and execution of growth initiatives could affect results and liquidity.
- The filing reported no material legal proceedings, no defaults upon senior securities, and effective disclosure controls as of quarter-end. It stated that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the source is for the quarter ended March 31, 2014, although the request metadata says 2013 Q3.
- Track loan growth and credit performance, especially multifamily and purchased mortgages, non-performing loans, charge-offs, and allowance adequacy.
- Assess the durability of earnings as mortgage refinancing income declines and operating expenses rise; distinguish GAAP results from management’s non-GAAP core earnings.
- Review deposit mix, brokered-deposit reliance, near-term deposit maturities, borrowing capacity, and the terms and call features of borrowings.
- Verify regulatory approval, closing, integration, deposit assumptions, and realized activity and economics under the H&R Block arrangements.
- Evaluate the uncertainty of Level 3 securities valuations and the assumptions underlying the interest-rate sensitivity analyses.