Business context and reporting period
This is BofI Holding, Inc.’s Form 10-K for the fiscal year ended June 30, 2016, not a 2015 Q4 filing. The request identifies Axos Financial, Inc.; the filing itself names BofI Holding, Inc. (the company later became known as Axos Financial). Results below are for BofI Holding and its subsidiary, BofI Federal Bank.
The company operates a nationwide, branchless bank offering consumer and business deposits, residential and commercial lending, and fee-generating financial products. Its strategy emphasizes scalable digital distribution and growth in loans and deposits.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total assets at year-end | $7.60 billion | $5.82 billion |
| Loans and leases held for investment, net | $6.35 billion | $4.93 billion |
| Total deposits | $6.04 billion | $4.45 billion |
| Net interest income | $261.0 million | $198.9 million |
| Provision for loan and lease losses | $9.7 million | $11.2 million |
| Non-interest income | $66.3 million | $30.6 million |
| Non-interest expense | $112.8 million | $77.5 million |
| Net income | $119.3 million | $82.7 million |
| Diluted earnings per share | $1.85 | $1.34 |
- Net interest margin was 3.91%, compared with 3.92%; interest rate spread was 3.70%, compared with 3.79%.
- Return on average assets was 1.75% (1.61%); return on average common equity was 19.43% (18.34%). The efficiency ratio was 34.44% (33.75%).
- Operating cash flow was $210.6 million; investing cash use was $1.59 billion; financing cash flow was $1.64 billion. Cash and cash equivalents increased $263.9 million to $486.7 million.
- Year-end borrowings included $727.0 million of FHLB advances, $35.0 million under repurchase agreements, and $58.1 million of subordinated notes and other debt. Total stockholders’ equity was $683.6 million.
- The Bank and holding company were classified as well-capitalized. The Bank’s Tier 1 leverage ratio was 8.78%, common equity Tier 1 ratio 14.00%, and total capital ratio 14.75%.
Material changes versus FY2015
- Assets grew 30.5%, primarily from single-family mortgage and C&I loan growth, funded mainly by deposit growth. Net loans and leases increased about $1.43 billion, and deposits increased $1.59 billion.
- Net income rose about 44%. Management attributed earnings growth primarily to expansion of interest-earning assets and higher net interest income.
- Non-interest income more than doubled, led by $29.3 million of additional banking service fees, primarily from H&R Block-branded products, and a $9.7 million increase in gains on sales of other assets, mainly structured settlements. Mortgage banking income fell $4.2 million.
- Non-interest expense increased about 45%, including higher staffing, technology, regulatory-compliance, deposit-insurance, and H&R Block-related costs. Full-time equivalent staffing rose from 467 to 647.
- The allowance for loan and lease losses rose to $35.8 million from $28.3 million, while its ratio to held-for-investment loans declined slightly to 0.56% from 0.57%. Non-performing loans fell as a share of loans to 0.50% from 0.62%; non-performing assets were $32.1 million in both years.
Outlook, risks, contingencies, and unusual items
- Management’s stated business objectives are to maintain annualized return on average common equity of at least 15%, increase average interest-earning assets by at least 15% annually, and keep the annualized efficiency ratio at or below 35%. These are objectives, not formal earnings guidance.
- Management identified interest rates, deposit and loan competition, asset credit performance, regulatory actions, strategic transactions, and operating efficiency as factors affecting future results. The filing provides no specific earnings or revenue forecast.
- Credit risks include rapid growth in less-seasoned C&I and other business lending and substantial real-estate exposure. About 68% of mortgage loans were secured by California properties. The company also disclosed $838.2 million of interest-only loans and $3.0 million of option-ARM loans.
- Liquidity relies primarily on deposits and FHLB advances. At year-end the Bank reported about $1.31 billion of immediately available FHLB borrowing capacity, $42.2 million of Federal Reserve borrowing capacity, and $35.0 million of unused federal-funds lines. Brokered deposits were $800.7 million.
- The H&R Block relationship added approximately $419 million of deposits and materially increased fee income. It also introduces seasonal revenue and expense patterns, with activity typically peaking in the fiscal quarter ended March 31. The agreement has no minimum transaction levels.
- The company issued $51 million of 6.25% subordinated notes due 2026. It authorized up to $100 million in common-stock repurchases, but made no repurchases under the plan during FY2016. No common-stock cash dividend was declared; preferred-stock dividends were $0.3 million.
- Putative securities class actions and five shareholder derivative actions alleged disclosure, internal-control, fiduciary-duty, and related misconduct. The company disputed the allegations and said it was vigorously defending the cases. The filing does not provide a clear estimated loss or range.
- Held-to-maturity securities had $10.0 million of gross unrecognized losses. The portfolio included non-agency mortgage-backed securities with fair values dependent on management’s assumptions; future impairments could reduce earnings.
- Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2016; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer and period: this is BofI Holding’s FY2016 10-K, not a 2015 Q4 filing, despite the Axos Financial metadata.
- Track whether H&R Block product volumes, fee contribution, deposit balances, and seasonal costs meet management’s expectations.
- Review loan growth and performance by category, especially C&I, multifamily, California real estate, and newer lending portfolios; assess allowance adequacy against that growth.
- Monitor funding mix, brokered deposits, deposit pricing, FHLB borrowing capacity, and sensitivity of net interest income to changing rates.
- Follow the securities and derivative valuations that rely on Level 3 inputs, associated impairment disclosures, and any developments in the class and derivative litigation.
- Assess whether growth can be sustained while controlling staffing and operating costs and maintaining capital ratios and the stated return and efficiency objectives.