Business context and reporting period
This is BofI Holding, Inc.’s Form 10-Q for the quarter and six months ended December 31, 2017 (fiscal Q2 2018), filed January 30, 2018. The filing identifies the registrant as BofI Holding, Inc., not Axos Financial, Inc. The company was the holding company for BofI Federal Bank, a branchless financial services business with consumer and commercial lending, deposits, and fee-generating products.
Financial performance and condition
Unless otherwise stated, amounts are in millions of dollars. Quarterly and six-month comparisons are year over year; balance-sheet comparisons are to June 30, 2017.
| Metric | Quarter ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Net interest income | $84.2; +10.3% | $164.8; +12.7% |
| Provision for loan and lease losses | $4.0, versus $4.1 | $5.0, versus $6.0 |
| Non-interest income | $17.1; +$0.4 | $30.4; down $1.0 |
| Non-interest expense | $40.8; +$7.5 | $78.8; +$12.7 |
| Net income | $31.7; versus $32.3 | $64.0; versus $61.2 |
| Diluted EPS | $0.49; versus $0.50 | $0.98; versus $0.94 |
| Net interest margin | 4.00%; unchanged | 3.94%; up 5 basis points |
| Efficiency ratio | 40.28%; versus 35.78% | 40.38%; versus 37.27% |
- Balance sheet: Assets were $8,916, up 4.9% from June. Net loans and leases rose 6.8% to $7,874; deposits increased 7.2% to $7,393. Cash and cash equivalents were $618, down from $644.
- Funding and debt: Total borrowings were $598, down $117 from June, and equaled 6.7% of assets. This included $543 of Federal Home Loan Bank advances and $54.5 of subordinated notes and other borrowings; repurchase-agreement balances were zero at quarter-end. Brokered deposits were $1,359.
- Cash flow: For the six months, operating activities provided $67.2, investing activities used $437.1, and financing activities provided $344.5. Cash declined $25.5 to $618.1. Investing outflows chiefly reflected loan and lease originations.
- Credit: The allowance was $45.6, or 0.57% of gross loans and leases. Non-performing loans and leases were $30.0 (0.38% of loans); non-performing assets were $38.8 (0.44% of assets), up from $29.8 at June. Net annualized charge-offs were 0.01% for the six-month period.
- Capital and liquidity: Stockholders’ equity was $873.7; equity-to-assets was 9.80%. The company and bank reported well-capitalized status. The bank reported $1.7 billion of immediately available FHLB capacity, $770.7 of Federal Reserve discount-window capacity, and $35.0 of unused unsecured federal-funds lines.
Material changes, outlook, and risks
- Loan growth lifted interest income and net interest income, while interest expense rose faster in percentage terms as deposit costs increased. Average funding cost rose 29 basis points for the quarter and 25 basis points for the six months. Quarterly NIM remained at 4.00%.
- Reported quarterly net income included an $8.0 charge to revalue deferred tax assets following enactment of the Tax Cuts and Jobs Act. Management presented non-GAAP quarterly net income of $39.7 and diluted EPS of $0.61 excluding this adjustment; these measures are not substitutes for GAAP results. The tax-rate change also reduced six-month tax expense by $6.2, partially offsetting the deferred-tax revaluation charge, for a net $1.9 increase in six-month tax expense.
- Expense growth reflected higher staffing, advertising, data-processing and technology costs. Staff increased 12.7% year over year to 711. Management attributed staffing growth to lending, technology infrastructure and compliance needs.
- The company expanded its H&R Block relationship to be the exclusive provider of interest-free Refund Advance loans for the 2018 tax season. H&R Block products create seasonality, with peak fee income and expense generally in the fiscal quarter ending March 31. No numerical earnings or full-year guidance was provided.
- Management said liquidity was adequate for anticipated needs, but noted that deposits and borrowings could cost more if market conditions change. $354 of time deposits were due within one year, and the filing cautioned that some maturing deposits might not remain.
- Risks include interest-rate movements, credit quality and loan growth, competition, reliance on deposits including brokered funding, and valuation uncertainty in Level 3 securities and servicing rights. The company disclosed pending securities class actions and shareholder derivative actions; outcomes and potential financial effects were not quantified. It disputed the allegations and said it was defending the cases.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that the expected-credit-loss accounting standard (ASU 2016-13), effective for the company’s fiscal year beginning July 1, 2020, is expected to have a material impact.
Important facts for investors to verify
- Confirm the entity and period: the supplied filing is for BofI Holding, Inc., quarter ended December 31, 2017—not a filing labeled Axos Financial, Inc.
- Assess underlying earnings apart from the tax-related deferred-asset revaluation, while distinguishing management’s non-GAAP presentation from GAAP results.
- Track deposit pricing, brokered-deposit levels, near-term deposit maturities, liquidity capacity, and the effect of rising rates on funding costs and NIM.
- Review the growth and mix of commercial and industrial, residential, and multifamily loans, plus non-performing assets, allowance coverage, and charge-offs.
- Monitor the pending litigation and H&R Block seasonal program; the filing does not quantify potential litigation exposure or provide numerical forward guidance.