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BOFI > SEC Filings for BOFI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BOFI HOLDING, INC.

Form 10-Q for BOFI HOLDING, INC.


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, off balance sheet items, contractual obligations and capital resources of BofI Holding, Inc. and subsidiary. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our financial information in our Annual Report on Form 10-K for the year ended June 30, 2012, and the interim unaudited condensed consolidated financial statements and notes thereto contained in this report.
Some matters discussed in this report may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. These forward-looking statements can be identified by the use of terminology such as "estimate," "project," "anticipate," "expect," "intend," "believe," "will," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other risk factors discussed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Our Performance" in our Annual Report on Form 10-K for the year ended June 30, 2012, which has been filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements made in connection with this report, which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing information.
General

Our company, BofI Holding, Inc., is the holding company for BofI Federal Bank, a diversified financial services company with $2.6 billion in assets that provides innovative banking and lending products and services to approximately 40,000 customers through our scalable low cost distribution channels. BofI Holding, Inc.'s common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 3000 Index.

BofI Federal Bank is a federal savings bank wholly-owned by our company and regulated by the Office of the Comptroller of the Currency (OCC). The parent company, BofI Holding, Inc., is a unitary savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.
We originate small- to medium-size multifamily and single-family mortgage loans. We also purchase loans and mortgage-backed securities. We source our deposit products, including time deposits and interest bearing demand and savings accounts from low-cost channels including; direct retail over the internet, affinity and affiliate programs and wholesale programs. We manage our cash and cash equivalents based upon our need for liquidity, and we seek to minimize the assets we hold as cash and cash equivalents by investing our excess liquidity in higher yielding assets such as mortgage loans or mortgage-backed securities.

Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances. However, actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

Our significant accounting policies and practices are described in greater detail in Note 1 to our June 30, 2012 audited consolidated financial statements and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year end June 30, 2012.


Table of Contents

Use of Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this report includes non-GAAP financial measures such as core earnings. Core earnings exclude realized and unrealized gains and losses associated with our securities portfolios. Excluding these gains and losses provides investors with an understanding of our Bank's core lending and mortgage banking business. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious as their use of such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of its business and performance, these non-GAAP measures should not be consider in isolation, or as a substitute for GAAP basis financial measures.


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SELECTED FINANCIAL DATA
The following tables set forth certain selected financial data concerning the
periods indicated:
                       BofI HOLDING, INC. AND SUBSIDIARY
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION


                                                      September 30,       June 30,        September 30,
(Dollars in thousands)                                    2012              2012              2011
Selected Balance Sheet Data:
Total assets                                        $     2,617,319     $ 2,386,845     $     2,097,042
Loans-net of allowance for loan losses                    1,912,999       1,720,563           1,443,860
Loans held for sale, at fair value                           52,433          38,469              40,478
Loans held for sale, lower of cost or market                 69,567          40,712               8,721
Allowance for loan losses                                    10,171           9,636               8,008
Securities-trading                                            6,439           5,838               5,248
Securities-available-for-sale                               160,378         164,159             156,130
Securities-held-to-maturity                                 300,039         313,032             350,066
Total deposits                                            1,852,971       1,615,088           1,494,158
Securities sold under agreements to repurchase              120,000         120,000             130,000
Advances from the FHLB                                      404,000         422,000             287,000
Subordinated debentures and other borrowings                  5,155           5,155               5,155
Total stockholders' equity                                  214,706         206,620             166,493


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                       BofI HOLDING, INC. AND SUBSIDIARY
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION

                                                                     At or for the Three Months Ended
                                                                            September 30,
(Dollars in thousands, except per share data)                        2012                   2011
Selected Income Statement Data:
Interest and dividend income                                  $         30,989       $         27,765
Interest expense                                                         8,504                  9,588
Net interest income                                                     22,485                 18,177
Provision for loan losses                                                2,550                  2,363
Net interest income after provision for loan losses                     19,935                 15,814
Non-interest income                                                      6,761                  4,570
Non-interest expense                                                    11,532                  9,552
Income before income tax expense                                        15,164                 10,832
Income tax expense                                                       6,175                  4,299
Net income                                                    $          8,989       $          6,533
Net income attributable to common stock                       $          8,912       $          6,407
Per Share Data:
Net income:
Basic                                                         $           0.73       $           0.59
Diluted                                                       $           0.67       $           0.58
Book value per common share                                   $          16.36       $          14.29
Tangible book value per common share                          $          16.36       $          14.29
Weighted average number of shares outstanding:
Basic                                                               12,191,062         10,923,701,000
Diluted                                                             13,253,283         11,180,070,000
Common shares outstanding at end of period                          12,813,171         10,485,953,000
Common shares issued at end of period                               13,647,741         11,223,365,000
Performance Ratios and Other Data:
Loan originations for investment                              $        279,697       $        252,626
Loan originations for sale                                             254,796                 90,369
Loan purchases                                                           1,541                      -
Return on average assets                                                  1.44 %                 1.28 %
Return on average common stockholders' equity                            18.46 %                17.28 %
Interest rate spread1                                                     3.58 %                 3.51 %
Net interest margin2                                                      3.70 %                 3.65 %
Efficiency ratio                                                         39.43 %                41.99 %
Capital Ratios:
Equity to assets at end of period                                         8.20 %                 7.94 %
Tier 1 leverage (core) capital to adjusted tangible assets3               8.20 %                 8.08 %
Tier 1 risk-based capital ratio3                                         12.83 %                12.89 %
Total risk-based capital ratio3                                          13.44 %                13.50 %
Tangible capital to tangible assets3                                      8.20 %                 8.08 %
Asset Quality Ratios:
Net annualized charge-offs to average loans outstanding                   0.42 %                 0.43 %
Non-performing loans to total loans                                       1.07 %                 0.79 %
Non-performing assets to total assets                                     0.82 %                 0.80 %
Allowance for loan losses to total loans at end of period                 0.53 %                 0.55 %
Allowance for loan losses to non-performing loans                        48.96 %                69.98 %


_________________________


1. Interest rate spread represents the difference between the annualized weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.
2. Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
3. Reflects regulatory capital ratios of BofI Federal Bank.


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RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2012 and September 30, 2011 For the three months ended September 30, 2012, we had net income of $9.0 million compared to net income of $6.5 million for the three months ended September 30, 2011. Net income attributable to common stockholders was $8.9 million or $0.67 per diluted share compared to net income attributable to common shareholders of $6.4 million or $0.58 per diluted share for the three months ended September 30, 2012 and 2011, respectively.

Other key comparisons between our operating results for the three months ended September 30, 2012 and 2011 are:

Net interest income increased $4.3 million in the quarter ended September 30, 2012 due to a 22.0% increase in average earning assets primarily from loan originations. Our net interest margin increased 5 basis points in the quarter ended September 30, 2012 compared to September 30, 2011, with a decrease in the rates paid on deposits and borrowings of 54 basis points, partially offset by decreases in the rates earned on loans of 49 basis points and rates on securities of 60 basis points.

Non-interest income increased $2.2 million for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011. The increase in non-interest income was primarily the result of a $1.7 million increase in gain on sale of loans held for sale and fair value gains from trading securities of $602,000, offset by impairment on investment securities of $874,000.

Non-interest expense increased $2.0 million for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 primarily due to a $1.7 increase in compensation attributed to increased staffing and office expansion.

We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings ("core earnings") which we believe provides useful information about the Bank's operating performance. Core earnings for the quarters ended September 30, 2012 and 2011, were $9.2 million and $6.8 million, respectively.

Below is a reconciliation of net income to core earnings:

                                  Three Months Ended
                                    September 30,
(Dollars in Thousands)             2012         2011
Net Income                     $   8,989      $ 6,533
Realized securities gains              -            -
Unrealized securities losses         272          402
Tax provision                       (111 )       (164 )
Core Earnings                  $   9,150      $ 6,771

Net Interest Income
Net interest income for the quarter ended September 30, 2012 totaled $22.5 million, an increase of 23.7% compared to net interest income of $18.2 million for the quarter ended September 30, 2011.
Total interest and dividend income during the quarter ended September 30, 2012 increased 11.6% to $31.0 million, compared to $27.8 million during the quarter ended September 30, 2011. The increase in interest and dividend income for the 2012 quarter was attributable primarily to growth in average earning assets from origination of loans. The average balance of loans increased 32.8% when compared to the three-month period ended September 30, 2011. The increase in interest income was partially offset by lower rates earned on loans and mortgage-backed securities. The loan portfolio yield for the quarter ended September 30, 2012 decreased 49 basis points and the investment security portfolio yield decreased 60 basis points from the 2011 period. The net growth in average earning assets for the three-month period was funded largely by increased deposits and to a lesser extent borrowings.
Total interest expense was $8.5 million for the quarter ended September 30, 2012, a decrease of $1.1 million or 11.3% as compared with the same period in 2011. The average funding rate decreased by 54 basis points while average interest-bearing liabilities grew 20.5%. Contributing to the decrease in the average funding rate were decreases in the average rates for time deposits of 46 basis points and FHLB advances of 55 basis and demand and savings accounts of 11 basis points. Net interest margin, defined as net interest income divided by average earning assets, increased by 5 basis points to 3.70% for the quarter ended September 30, 2012, compared with 3.65% for the quarter ended September 30, 2011.


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Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table presents information regarding (i) average balances;
(ii) the total amount of interest income from interest-earning assets and the weighted average yields on such assets; (iii) the total amount of interest expense on interest-bearing liabilities and the weighted average rates paid on such liabilities; (iv) net interest income; (v) interest rate spread; and
(vi) net interest margin for the three months ended September 30, 2012 and 2011:

                                                            For the three month period ended
                                                                      September 30,
                                                 2012                                               2011
                                             Interest       Average Yields                      Interest       Average Yields
                              Average         Income/        Earned/Rates        Average         Income/        Earned/Rates
(Dollars in thousands)       Balance2         Expense           Paid1           Balance2         Expense           Paid1
Assets:
Loans3, 4                  $ 1,926,883     $    25,208             5.23 %     $ 1,450,927     $    20,751             5.72 %
Federal funds sold               6,724               3             0.18 %          10,986               1             0.04 %
Interest-earning deposits
in other financial
institutions                       307               -                - %             230               -                - %
Mortgage-backed and other
investment securities5         477,612           5,756             4.82 %         516,431           7,003             5.42 %
Stock of the FHLB, at cost      20,657              22             0.43 %          15,488              10             0.26 %
Total interest-earning
assets                       2,432,183          30,989             5.10 %       1,994,062          27,765             5.57 %
Non-interest-earning
assets                          65,707                                             45,964
Total assets               $ 2,497,890                                        $ 2,040,026
Liabilities and
Stockholders' Equity:
Interest-bearing demand
and savings                $   739,572     $     1,488             0.80 %     $   360,299     $       816             0.91 %
Time deposits                  960,332           4,049             1.69 %       1,061,215           5,711             2.15 %
Securities sold under
agreements to repurchase       120,000           1,339             4.46 %         130,000           1,445             4.45 %
Advances from the FHLB         418,685           1,587             1.52 %         305,935           1,580             2.07 %
Other borrowings                 5,155              41             3.18 %           5,155              36             2.79 %
Total interest-bearing
liabilities                  2,243,744           8,504             1.52 %       1,862,604           9,588             2.06 %
Non-interest-bearing
demand deposits                 21,817                                              7,532
Other non-interest-bearing
liabilities                     18,902                                             13,525
Stockholders' equity           213,427                                            156,365
Total liabilities and
stockholders' equity       $ 2,497,890                                        $ 2,040,026
Net interest income                        $    22,485                                        $    18,177
Interest rate spread6                                              3.58 %                                             3.51 %
Net interest margin7                                               3.70 %                                             3.65 %


 __________________________
1.  Annualized.

2. Average balances are obtained from daily data.

3. Loans include loans held for sale, loan premiums and unearned fees.

4. Interest income includes reductions for amortization of loan and investment securities premiums and earnings from accretion of discounts and loan fees. Loan fee income is not significant. Also, includes $33.3 million of Community Reinvestment Act loans which are taxed at a reduced rate.

5. Includes $5.5 million of municipal securities which are taxed at a reduced rate.

6. Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities.

7. Net interest margin represents net interest income as a percentage of average interest-earning assets.


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Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income and interest expense attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income and interest expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume) for the three months ended September 30, 2012 and 2011:

                                                                     For the three months ended September 30,
                                                                                   2012 vs 2011
                                                                            Increase (Decrease) Due to
                                                                                                               Total
                                                                                                             Increase
(Dollars in thousands)                                       Volume            Rate         Rate/Volume     (Decrease)
Increase/(decrease) in interest income:
Loans                                                     $    6,806       $    (1,777 )   $      (572 )   $     4,457
Federal funds sold                                                 -                 4              (2 )             2
Interest-earning deposits in other financial institutions          -                 -               -               -
Mortgage-backed and other investment securities                 (526 )            (775 )            54          (1,247 )
Stock of the FHLB, at cost                                         3                 7               2              12
                                                          $    6,283       $    (2,541 )   $      (518 )   $     3,224
Increase/(decrease) in interest expense:
Interest-bearing demand and savings                       $      863       $       (99 )   $       (92 )   $       672
Time deposits                                                   (542 )          (1,220 )           100          (1,662 )
Securities sold under agreements to repurchase                  (111 )               3               2            (106 )
Advances from the FHLB                                           583              (421 )          (155 )             7
Other borrowings                                                   -                 5               -               5
                                                          $      793       $    (1,732 )   $      (145 )   $    (1,084 )

Provision for Loan Losses
The loan loss provision was $2.6 million and $2.4 million for the three months ended September 30, 2012 and September 30, 2011. The increases in the provision for the three months ended September 30, 2012 was a result of higher charge offs of multifamily and commercial loans and overall increase in the loan portfolio. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management based on the factors discussed under "Financial Condition-Asset Quality and Allowance for Loan Losses."


Table of Contents

Non-Interest Income
The following table sets forth information regarding our non-interest income for
the periods shown:

                                                  For the Three Months Ended
                                                         September 30,
(Dollars in Thousands)                          2012         2011       Inc (Dec)
Realized gain on securities:
Sale of mortgage-backed securities          $       -      $     -     $        -
Total realized gain on securities                   -            -              -
Other than temporary loss on securities:
Total impairment losses                        (2,872 )       (765 )       (2,107 )
Loss recognized in other comprehensive loss     1,998          168          1,830
Net impairment loss recognized in earnings       (874 )       (597 )         (277 )
Fair value gain on trading securities             602          195            407
Total unrealized loss on securities              (272 )       (402 )          130
Prepayment penalty fee income                     202           61            141
Mortgage banking income                         6,456        4,785          1,671
Banking service fees and other income             375          126            249
Total non-interest income                   $   6,761      $ 4,570     $    2,191

Non-interest income increased $2.2 million to $6.8 million from $4.6 million for the three months ended September 30, 2012 and 2011. The increase was primarily the result of higher mortgage banking income of $1.7 million, fair value gain on trading securities of $602,000, partially offset by impairment of securities of $0.9 million. The increase in mortgage banking income includes gains on sale of loans of $6.5 million and $4.8 million for the three months ended September 30, 2012 and 2011, respectively, due to an increase in origination volume of loans held for sale to $254.8 million from $90.4 million. Non-Interest Expense . . .

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