Axos Financial, Inc. (then BofI Holding, Inc.) — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the company’s fiscal first quarter of fiscal 2014—not calendar-year 2013 Q1. The filing was submitted under the name BofI Holding, Inc.; the name in the request metadata differs.
Business context and financial performance
BofI Holding was the parent of BofI Federal Bank, a nationwide, branchless bank offering consumer and business deposits and loans. Unless otherwise stated, figures below are in U.S. dollars; financial statement amounts are in millions.
- Profit: Net income was $12.2 million, up from $9.0 million a year earlier. Net income attributable to common shareholders was $12.1 million; diluted EPS was $0.85 versus $0.67.
- Interest income and margin: Interest and dividend income was $36.3 million versus $31.0 million. Net interest income rose 25% to $28.1 million; net interest margin increased to 3.86% from 3.70%, and the interest rate spread was 3.73% versus 3.58%.
- Credit costs: Provision for loan losses fell to $0.5 million from $2.6 million. Non-interest income was $7.0 million versus $6.8 million, and non-interest expense increased to $14.5 million from $11.5 million.
- Cash flow: Operating activities provided $60.0 million, investing activities used $233.2 million, and financing activities provided $168.5 million. Cash and cash equivalents ended at $197.0 million, down $4.7 million during the quarter.
- Balance sheet and funding: Total assets were $3.284 billion, up 6.3% from June 30, 2013. Net loans were $2.433 billion; deposits were $2.193 billion; total borrowings were $771.2 million; and stockholders’ equity was $282.6 million. The bank reported an 8.50% Tier 1 leverage ratio and 15.41% total risk-based capital ratio and was classified as well capitalized.
- Asset quality: Non-performing loans were $15.6 million, or 0.63% of gross loans, down from $18.3 million and 0.80% at June 30. The allowance was $14.5 million, or 0.59% of gross loans.
Material changes versus comparable periods
- Year-over-year net interest income growth reflected 19.9% growth in average earning assets, primarily loans, and a lower average funding rate. Average loan balances increased 21.7%.
- Net income improved despite lower mortgage banking income, which fell $4.5 million to $2.0 million. A $3.1 million gain on other sales, primarily structured settlements, and higher service fees and prepayment penalties partly offset the decline.
- Expenses rose $3.0 million year over year. Salaries increased $1.4 million, professional services $0.8 million, and data processing and internet costs $0.6 million; staffing increased 22.6% to 320 employees.
- Against June 30, 2013, net loans grew 7.8%, deposits rose $101.0 million, and FHLB advances increased $65.6 million. Deposit growth included approximately $173 million of deposits acquired from Principal Bank.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or growth guidance. Management said liquidity sources were stable and adequate for anticipated needs and contingencies, and believed it could increase deposits and borrowings as needed.
- Liquidity sources included $542.1 million available immediately from the FHLB and another $37.4 million available with additional collateral, two unused $10 million unsecured federal funds lines, and $24.9 million available at the Federal Reserve discount window. Brokered deposits totaled $446.5 million.
- Management cited economic conditions, interest rates, competition, and credit quality as risks. It noted uncertainty in future charge-offs and allowance needs. A large share of non-performing loans consisted of single-family mortgages, with foreclosure delays attributed to poor servicing practices of one seller-servicer.
- Interest-rate exposure is significant: modeled market value of equity fell 38.6% under an immediate 300-basis-point rate increase. The filing cautions that this sensitivity analysis relies on assumptions and is not a forecast of actual results.
- Unusual or judgment-sensitive items included the $3.1 million structured-settlement-related gain, a $0.6 million impairment charge on a non-agency mortgage-backed security, and Level 3 valuations for securities and other instruments. Management’s trading-security valuation was sensitive to discount-rate assumptions.
- Contractual obligations totaled $1.710 billion, including $801.6 million of long-term debt obligations and $894.2 million of time deposits. Time deposits due within one year were approximately $445 million; the company warned replacement funding could cost more if deposits did not renew. Certain repurchase agreements and FHLB advances were callable or putable.
- Credit commitments to originate loans totaled $115.9 million; commitments to sell loans totaled $44.6 million. The company reported no material legal proceedings, no defaults upon senior securities, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing covers the quarter ended September 30, 2013, while the request labels it 2013 Q1; also confirm the BofI-to-Axos company-name relationship relevant to the requested entity.
- Assess the sustainability of earnings growth given the mortgage banking decline, higher operating costs, and the structured-settlement-related gain; compare GAAP results with the company’s non-GAAP “core earnings” measure of $12.0 million.
- Review loan growth, portfolio mix, delinquencies, non-performing assets, allowance coverage, and foreclosure-servicing delays, including the concentration in residential and multifamily real estate lending.
- Evaluate funding concentration and liquidity, including brokered deposits, near-term time-deposit maturities, rising FHLB advances, and callable or putable borrowing terms.
- Examine Level 3 securities assumptions and the disclosed interest-rate sensitivity; the filing’s valuation estimates and modeled scenarios depend on management assumptions.