Business context and reporting period
This is BofI Holding, Inc.’s Form 10-K for the fiscal year ended June 30, 2013, filed September 4, 2013. The request metadata says “2012 Q4,” but the filing covers FY2013; it also reports FY2013 fourth-quarter results. BofI, now identified in the request as Axos Financial, operated BofI Federal Bank, a nationwide branchless bank providing consumer and business deposits, residential and multifamily mortgages, commercial lending, and specialty finance.
Financial performance and condition
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | FY2013 / June 30, 2013 | FY2012 / June 30, 2012 |
|---|---|---|
| Interest and dividend income | $135.7 | $115.7 |
| Net interest income | $101.6 | $79.2 |
| Provision for loan losses | $7.6 | $8.1 |
| Non-interest income | $27.7 | $16.4 |
| Non-interest expense | $53.6 | $38.0 |
| Net income | $40.3 | $29.5 |
| Net income attributable to common stock | $39.5 | $28.2 |
| Diluted earnings per share | $2.89 | $2.33 |
| Total assets | $3,090.8 | $2,386.8 |
| Net loans held for investment | $2,256.9 | $1,720.6 |
| Deposits | $2,092.0 | $1,615.1 |
| Total borrowings | $705.6 | $547.2 |
| Stockholders’ equity | $268.3 | $206.6 |
- Net interest margin rose to 3.79% from 3.70%; interest rate spread was 3.66% versus 3.55%. Return on average assets was 1.46% versus 1.35%, and return on average common equity was 17.57% versus 16.95%.
- The efficiency ratio increased to 41.43% from 39.72%. The allowance for loan losses was $14.2 million, or 0.62% of loans held for investment, versus $9.6 million, or 0.55%.
- Non-performing loans were $18.3 million (0.80% of loans) versus $17.1 million (0.98%); non-performing assets were $20.3 million (0.66% of assets) versus $18.3 million (0.77%).
- Cash and cash equivalents were $201.7 million, up from $35.4 million. FY2013 cash flows were $15.8 million provided by operating activities, $511.6 million used in investing activities, and $662.1 million provided by financing activities; cash increased $166.3 million.
- Bank regulatory capital ratios were 8.63% Tier 1 leverage, 14.52% Tier 1 risk-based, and 15.28% total risk-based; the Bank met the “well-capitalized” thresholds.
Material changes versus the prior comparable period
- Assets grew 29.5%, deposits 29.5%, and net loans held for investment about 31.2%, primarily reflecting growth in single-family and multifamily mortgage lending.
- Net income rose 36.7%, principally due to higher loan balances and net interest income. Mortgage banking income increased to $23.0 million from $16.7 million as originations for sale grew to $1,085.9 million from $664.6 million.
- Interest expense declined to $34.0 million from $36.5 million despite higher average funding balances, as the average rate on interest-bearing liabilities fell to 1.39% from 1.85%.
- Non-interest expense increased 41.2%, including higher staffing costs. Headcount rose to 312 from 230. Provision for loan losses declined modestly, while the ending allowance increased 47.2%.
- Deposits increased $476.9 million and FHLB advances increased $168.4 million. Stockholders’ equity increased $61.6 million; the year included an $18.5 million Series C preferred issuance and $6.8 million in common-stock proceeds. Series B and Series C preferred shares were mandatorily converted into common stock during the year.
- FY2013 fourth-quarter net income was $11.1 million and diluted EPS was $0.78; FY2012 fourth-quarter net income was $8.6 million and diluted EPS was $0.64.
Outlook, commentary, risks and unusual items
- Management’s stated 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. FY2013 equity returns exceeded the objective; the efficiency ratio remained above target. These are business objectives, not specific earnings guidance.
- Management identified continued growth, deposit and loan competition, credit performance, interest rates, regulation, and operating efficiency as important factors affecting results. It anticipated possible increases in non-performing loans as business lending expands and newer lending programs season.
- Interest-rate exposure is material: management reported a negative one-year repricing gap of $1,018.9 million. Its modeled market value of equity declined 10.2% under a 100-basis-point increase and 39.6% under a 300-basis-point increase; these are scenario estimates, not forecasts.
- Credit and concentration risks include substantial California real-estate exposure (about 58.2% of mortgage loans), newer C&I and specialty-finance portfolios, and $367.1 million of interest-only loans and $7.1 million of option-ARM loans as reported in the business discussion. The filing’s notes give somewhat different balances for these loan types; verify the underlying disclosures.
- The securities portfolio totaled $468.4 million and included non-agency mortgage-backed securities. Held-to-maturity securities had $16.0 million of gross unrecognized losses; FY2013 recognized $3.5 million of net impairment losses in earnings. Valuations for certain securities rely on management assumptions and unobservable inputs.
- Liquidity sources included $625.7 million immediately available from the FHLB, $28.2 million of Federal Reserve borrowing capacity, and $20.0 million in unused federal-funds lines. Repurchase agreements totaling $110.0 million could be called on scheduled dates; the weighted-average time until they could be called was 0.13 years. Time deposits of about $590.5 million were due within one year.
- The Company began an at-the-market common-stock offering of up to $50 million and had sold 200,000 shares for net proceeds of $6.8 million by year-end. A planned transfer of approximately $200 million of deposits from Principal Bank was subject to OCC approval and targeted for September 2013. New Basel III capital rules were scheduled to take effect beginning in 2015.
- The filing reports no material pending legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Confirm the applicable reporting period: this filing is FY2013, not a 2012 Q4 filing; reconcile the differing interest-only and option-ARM loan balances in the filing.
- Assess whether rapid loan and deposit growth can continue without further deterioration in credit quality, especially in newer C&I, warehouse, and specialty-finance lending.
- Review the allowance adequacy, non-performing loans and troubled debt restructurings, including exposures tied to California property values and purchased loans.
- Examine non-agency securities’ impairment assumptions, unrecognized held-to-maturity losses, and potential effects of further market or housing deterioration.
- Evaluate the negative one-year interest-rate gap, callable funding, near-term deposit maturities, capital needs, and dilution from equity issuance or conversion.
- Track progress toward the 35% efficiency-ratio objective and the effect of continued hiring, operating costs, and mortgage-banking volume on profitability.