Business context and reporting period
This Form 10-Q is filed under the name BofI Holding, Inc. (the company later known as Axos Financial, Inc.) and covers the quarter and six months ended December 31, 2013, the company’s fiscal second quarter. BofI Federal Bank operated as a nationwide, branchless bank offering consumer and business deposits, residential and commercial lending, and specialty finance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Quarter: Net interest income was $32.8 million, up 31.6% year over year; provision for loan losses was $1.0 million; net income was $13.2 million and diluted EPS was $0.91. Net interest margin was 4.01% and efficiency ratio 39.89%.
- Six months: Net interest income was $60.9 million, up 28.5%; provision was $1.5 million; net income was $25.3 million and diluted EPS was $1.77. Net interest margin was 3.94% and efficiency ratio 40.59%.
- Revenue mix and expenses: Quarterly non-interest income was $5.5 million, down $0.7 million year over year, mainly because mortgage banking income fell $2.4 million. Six-month non-interest income was $12.5 million, down $0.5 million. Non-interest expense rose to $15.3 million for the quarter and $29.8 million for six months, reflecting staffing, professional services, and data-processing costs.
- Balance sheet: At December 31, total assets were $3.57 billion, up 15.5% from June 30, 2013. Net loans were $2.78 billion, up 23.1%; deposits were $2.40 billion, up 14.9%; and stockholders’ equity was $311.7 million.
- Funding and liquidity: Borrowings totaled $829.2 million, including $729.0 million of FHLB advances and $95.0 million of repurchase agreements. Cash and cash equivalents were $131.9 million, versus $201.7 million at June 30. For the six months, operating cash flow was $36.8 million, investing cash flow was negative $560.5 million, and financing cash flow was positive $453.9 million. The bank reported $664.0 million of immediately available FHLB capacity, two unused $10 million federal funds lines, and $21.7 million available at the Federal Reserve discount window.
- Capital and credit: The bank was reported well capitalized; its Tier 1 leverage ratio was 9.01% and total risk-based capital ratio 15.73%. Non-performing loans were $16.3 million, or 0.58% of gross loans, down from $18.3 million, or 0.80%, at June 30. The allowance for loan losses was $15.2 million, equal to 0.54% of gross loans.
Material changes and management commentary
- Management attributed higher net interest income primarily to loan growth and lower average funding costs. Average earning assets increased, while the average rate paid on interest-bearing liabilities declined 28 basis points for the quarter and 27 basis points for the six-month period year over year.
- Loan originations for investment were $1.07 billion for the six months, compared with $611.7 million a year earlier. Management cited lower charge-offs and improvements in non-performing loans and delinquencies as reasons for the lower loan-loss provision.
- Deposit growth included approximately $173 million of deposits acquired from Principal Bank. The company also reported $444.3 million in brokered deposits and $396.7 million of time deposits due within one year; it cautioned that replacement funding could cost more if maturing deposits do not remain.
- During the six months, the company issued $16.7 million of common stock. Its ATM program authorized up to $50 million in aggregate offerings; cumulative gross sales through December 31 were $24.3 million, with $25.7 million remaining.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it believed liquidity sources were stable and adequate for anticipated needs, and that it could raise deposits or borrowings as needed. It also noted that additional capital could be required to support growth and maintain well-capitalized status.
- Key risks include credit deterioration, interest-rate changes, competition, and the availability and cost of deposits and borrowings. The company’s modeled market value of equity fell 34.8% under an immediate 300-basis-point rate increase; management cautioned that these modeled sensitivities depend on assumptions and are not forecasts.
- Non-agency mortgage-backed securities involve significant unobservable valuation assumptions. The company recognized $1.4 million of net impairment losses in earnings for the six months, and reported $19.6 million of gross unrealized losses on held-to-maturity securities at December 31.
- Off-balance-sheet commitments included $125.3 million to originate loans and $38.8 million to sell loans. The company reported no material legal proceedings. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that the period and issuer identity are understood correctly: this 2013 filing names BofI Holding, Inc., not Axos Financial, Inc.
- Review whether loan growth, credit quality, and allowance coverage remain sustainable, particularly in single-family and multifamily real estate lending.
- Track deposit mix, brokered-deposit reliance, near-term deposit maturities, and borrowing capacity and costs.
- Assess the sensitivity of earnings and securities valuations to interest-rate changes and the assumptions used for Level 3 securities.
- Separate recurring operating performance from mortgage banking fluctuations, securities impairments, structured-settlement gains, and equity issuance when evaluating results.