Business context and reporting period
BofI Holding, Inc. (now identified in the request as Axos Financial, Inc.) filed this Form 10-K for the fiscal year ended June 30, 2017—not 2016 Q4. The company operated BofI Federal Bank, a nationwide branchless bank focused on consumer and business deposits, residential mortgages, multifamily lending, commercial and industrial (C&I) loans, and specialty finance. The filing also provides unaudited fourth-quarter FY2017 results.
Financial performance and position
- Profitability: FY2017 net income was $134.7 million, up 13.0% from $119.3 million; diluted EPS was $2.07, versus $1.85. Return on average assets was 1.68% (1.75% in FY2016), and return on average common equity was 17.78% (19.43%).
- Revenue and margins: Net interest income rose 20.0% to $313.2 million. Net interest margin increased to 3.95% from 3.91%; interest rate spread was 3.74% versus 3.70%. Non-interest income was $68.1 million, up from $66.3 million. Non-interest expense rose 22.0% to $137.6 million, and the efficiency ratio worsened to 36.08% from 34.44%.
- Credit costs and quality: Provision for loan and lease losses was $11.1 million, compared with $9.7 million. Gross loans and leases were $7.449 billion; net loans and leases were $7.374 billion. The allowance was $40.8 million, or 0.55% of gross loans. Non-performing loans were $28.4 million (0.38% of loans), down from $31.9 million (0.50%); non-performing assets were $29.8 million, or 0.35% of assets.
- Assets, deposits, and capital: Total assets rose 11.9% to $8.502 billion. Deposits increased 14.2% to $6.900 billion; 88.3% were demand and savings accounts. Stockholders’ equity was $834.2 million. The Bank’s regulatory ratios were 9.60% Tier 1 leverage, 14.25% common equity Tier 1, and 14.97% total capital; it reported being well-capitalized.
- Liquidity, debt, and cash flow: Cash and cash equivalents were $643.5 million. Borrowings included $640 million of FHLB advances, $20 million of repurchase agreements, and $54.5 million of subordinated notes and debentures. The Bank reported $1.249 billion of immediately available FHLB capacity plus $157.6 million with additional collateral, and $35 million of unused federal funds lines. FY2017 operating cash flow was $223.9 million, investing cash flow was negative $820.6 million, financing cash flow was $753.6 million, and cash increased $156.8 million.
Material changes versus the prior comparable period
- Loan growth was the main earnings driver: average loans and leases increased, while their average yield rose to 5.26% from 5.12%. Interest income increased 21.9%, faster than interest expense, which rose 30.6%.
- Non-interest income growth was modest because higher H&R Block-related fees, mortgage banking income, securities gains, and prepayment fees were partly offset by an $11.1 million decline in gains on other loan sales, primarily structured settlements.
- Expenses increased with staffing, lending capacity, technology, marketing, and compliance investment. Full-time equivalent staff rose to 681 from 647.
- C&I loans grew to $992.2 million from $514.3 million, increasing from 8.0% to 13.3% of the loan portfolio. Multifamily loans reached $1.619 billion, up from $1.373 billion.
- During the first quarter, the company reclassified all $194.2 million of held-to-maturity securities to available-for-sale, citing uncertainties about future policy, accounting and regulatory guidance, and interest rates. Securities totaled $272.8 million at year-end, down from $472.2 million.
Outlook, commentary, risks, and unusual items
- Management’s stated long-term 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 36% or lower. These are objectives, not specific FY2018 guidance. Management identified interest rates, deposit and loan competition, credit performance, regulatory actions, strategic transactions, and operating efficiency as factors affecting future results.
- The Bank’s asset mix remains concentrated in real estate; approximately 69.6% of real estate loans were secured by California properties. Management warned that falling property values or a downturn could raise defaults and losses. It also noted the relatively limited loss history for newer lending, particularly C&I, and the uncertainty in estimating the allowance.
- Interest-rate exposure includes a negative one-year repricing gap under the company’s assumptions. Its modeled first-12-month net interest income rose 9.0% under an immediate 200-basis-point increase and fell 12.5% under a 200-basis-point decrease; management cautioned that these are estimates dependent on assumptions.
- H&R Block products contribute fees and deposits but add consumer-credit, operational, partner-dependence, and seasonal risks. Management said related fee income and expenses typically peak in the March quarter. In July 2017, the Bank agreed to be the exclusive provider of H&R Block interest-free Refund Advance loans for the 2018 tax season.
- The company and certain executives faced putative securities class actions and shareholder derivative actions involving allegations tied to a former employee’s wrongful-termination complaint and a media article. The company disputed the allegations and said it was vigorously defending the cases; the filing did not provide a clear estimate of potential exposure.
- Management and the auditor reported effective disclosure controls and internal control over financial reporting as of June 30, 2017; the auditor issued unqualified opinions on the financial statements and internal controls. Securities impairment and fair-value estimates nevertheless rely in part on significant unobservable inputs.
- No cash dividends on common stock were anticipated in the foreseeable future; preferred-stock dividends were paid. The board’s $100 million repurchase authorization remained unused during FY2017.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing covers FY2017, and its fourth-quarter results are for the quarter ended June 30, 2017.
- Track credit performance and allowance adequacy as C&I and other newer lending categories expand, including subsequent non-performing loan trends and charge-offs.
- Assess California real-estate concentration and sensitivity to interest rates, deposit repricing, and loan prepayments.
- Review the outcome and financial consequences, if any, of the securities and derivative litigation, as well as the company’s securities impairment assumptions and Level 3 valuations.
- Monitor deposit mix and funding costs, including the $1.104 billion of brokered deposits, FHLB borrowing capacity, and whether the stated growth and efficiency objectives are being met.