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BOFI > SEC Filings for BOFI > Form 10-K on 28-Aug-2014All Recent SEC Filings

Show all filings for BOFI HOLDING, INC.

Form 10-K for BOFI HOLDING, INC.


28-Aug-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements that are based upon current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those expressed or implied in our forward-looking statements due to various important factors, including those set forth under "Risk Factors" in Item 1A. and elsewhere in this Form 10-K. The following discussion and analysis should be read together with the "Selected Financial Data" and consolidated financial statements, including the related notes included elsewhere in this Form 10-K.

OVERVIEW
BofI Holding, Inc., is the holding company for BofI Federal Bank, a diversified financial services company with over $4.4 billion in assets that provides innovative banking and lending products and services to customers nationwide through 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 2000® Index and the S&P SmallCap 600® Index.

Net income for the fiscal year ended June 30, 2014 was $56.0 million compared to $40.3 million and $29.5 million for the fiscal years ended June 30, 2013 and 2012, respectively. Net income attributable to common stockholders for the fiscal year ended June 30, 2014 was $55.6 million, or $3.85 per diluted share compared to $39.5 million, or $2.89 per diluted share and $28.2 million, or $2.33 per diluted share for the years ended June 30, 2013 and 2012, respectively. Growth in our interest earning assets, particularly the loan portfolio, was the primary driver of the increase in our net income from fiscal 2012 to fiscal 2014. Net interest income increased $35.5 million for the year ended June 30, 2014 compared to the year ended June 30, 2013.

We define net income without the after-tax impact of realized and unrealized securities gains and losses as adjusted earnings ("core earnings"), a non-GAAP financial measure, which we believe provides useful information about the Bank's operating performance. Core earnings for the fiscal years ended 2014, 2013, and 2012 were $56.9 million, $41.5 million, and $30.7 million, respectively.


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Below is a reconciliation of net income to core earnings (non-GAAP):

                                        For the Fiscal Years Ended June 30,
(Dollars in Thousands)                  2014               2013           2012
Net Income                         $     55,956       $     40,291     $ 29,476
Realized securities losses (gains)         (208 )             (212 )          -
Unrealized securities losses              1,848              2,227        2,018
Tax provision                              (666 )             (825 )       (817 )
Core Earnings                      $     56,930       $     41,481     $ 30,677

Net interest income for the year ended June 30, 2014 was $137.1 million compared to $101.6 million and $79.2 million for the years ended June 30, 2013 and 2012, respectively. The increase was due to growth in our loan portfolio and the increase in our net interest margin from fiscal years 2012 through 2014.

Provision for loan losses for the year ended June 30, 2014 was $5.4 million, compared to $7.6 million and $8.1 million for the years ended June 30, 2013 and 2012, respectively. The decrease of $2.2 million for fiscal year 2014 is the result of lower charge-offs partially offset by additional provisions needed for growth in the loan portfolio.

Mortgage banking income was $10.2 million compared to $23.0 million and $16.7 million for the years ended June 30, 2014, 2013, and 2012. The decrease was a result of lower loan Agency refinance and originations for sale of $741.5 million compared to $1,085.9 million for the years ended June 30, 2014 and 2013, respectively.

Non-interest expense for the fiscal year ended June 30, 2014 was $59.9 million compared to $53.6 million and $38.0 million for the years ended June 30, 2013 and 2012 respectively. The increase was primarily due to increased staffing levels in order to support growth in lending and deposit operations. Our staffing rose to 366 full-time equivalents compared to 312 and 230 at June 30, 2014, 2013, and 2012, respectively.

Total assets were $4,403.0 million at June 30, 2014 compared to $3,090.8 million at June 30, 2013. Assets grew $1,312.2 million or 42.5% during the last fiscal year, primarily due to an increase in the origination of single family and multifamily mortgage loans. These loans were funded primarily with growth in deposits and to a lesser extent capital transactions.

Our future performance will depend on many factors: changes in interest rates, competition for deposits and quality loans, the credit performance of our assets, regulatory actions, strategic transactions, and our ability to improve operating efficiencies. See "Item 1A. Risk Factors."

MERGERS AND ACQUISITIONS

From time to time we undertake acquisitions or similar transactions consistent with the Bank's operating and growth strategies. During the fiscal year ended June 30, 2014, there were two transactions, which are discussed below.

Principal Bank
In September 2013, the Bank announced the completion of the acquisition of approximately $173 million in deposits from Principal Bank, which included $142 million in checking, savings and money market accounts and $31 million in time deposit accounts.
H&R Block Bank
In April, 2014, the Bank entered into a Purchase and Assumption Agreement (the "Agreement") with H&R Block Bank, a federal savings bank ("HRBB"), and its parent company Block Financial LLC. Block Financial LLC is a wholly-owned subsidiary of H&R Block, Inc.
Pursuant to the Agreement, the Bank agreed to purchase certain assets and assume certain liabilities of HRBB. The assumed liabilities at closing are projected to include approximately $450 to $550 million in customer deposits of HRBB and balances on prepaid cards, including HRBB's Emerald Cards, gift cards and incentive cards. The amount is subject to change


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based on such factors as the timing of the closing. Substantially all of the assets transferred to the Bank will consist of cash equal to the face amount of deposits and other liabilities transferred to the Bank at closing. The Bank will also acquire a de-minimis amount of non-cash assets at zero cost. The consummation of the transaction contemplated by the Agreement is subject to regulatory approvals and waivers and other customary closing conditions.

Upon regulatory approval of the Agreement and concurrent with closing of the transactions contemplated by the Agreement, the Bank also intends to enter into a Program Management Agreement with Emerald Financial Services, LLC, a subsidiary of H&R Block, Inc., under which the Bank will provide H&R Block-branded financial services products through H&R Block's retail and online channels. These products will include Emerald Prepaid MasterCard®, Refund Transfers, and Emerald Advance® lines of credit.

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.
Securities. Currently, we classify securities as either trading, available-for-sale or held-to-maturity. Trading securities are those securities for which we have elected fair value accounting. Trading securities are recorded at fair value with changes in fair value recorded in earnings each period. Securities available-for-sale are reported at estimated fair value, with unrealized gains and losses, net of the related tax effects, excluded from operations and reported as a separate component of accumulated other comprehensive income or loss. The fair values of securities traded in active markets are obtained from market quotes. If quoted prices in active markets are not available, we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities from the underlying mortgage assets. To determine the performance of the underlying mortgage loan pools, we consider where appropriate borrower prepayments, defaults, and loss severities based on a number of macroeconomic factors, including housing price changes, unemployment rates, interest rates and borrower attributes such as credit score and loan documentation at the time of origination. We input for each security our projections of monthly default rates, loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The projections of default rates are derived by the Company from the historic default rate observed in the pool of loans collateralizing the security, increased by (or decreased by) the forecasted increase or decrease in the national unemployment rate. The projections of loss severity rates are derived by the Company from the historic loss severity rate observed in the pool of loans, increased by (or decreased by) the forecasted decrease or increase in the national home price appreciation (HPA) index. To determine the discount rates used to compute the present value of the expected cash flows for these non-agency RMBS securities, we separate the securities by the borrower characteristics in the underlying pool. For example, non-agency RMBS "Prime" securities generally have borrowers with higher FICO scores and better documentation of income. "Alt-A" securities generally have borrowers with lower FICO and less documentation of income. "Pay-option ARMs" are Alt-A securities with borrowers that tend to pay the least amount of principal (or increase their loan balance through negative amortization). Separate discount rates are calculated for Prime, Alt-A and Pay-option ARM non-agency RMBS securities using market-participant assumptions for risk, capital and return on equity. Securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Amortization of purchase premiums and accretion of discounts on securities are recorded as yield adjustments on such securities using the effective interest method. The specific identification method is used for purposes of determining cost in computing realized gains and losses on investment securities sold. At each reporting date, we monitor our available-for-sale and held-to-maturity securities for other-than-temporary impairment. The Company measures its debt securities in an unrealized loss position at the end of the reporting period for other-than-temporary impairment by comparing the present value of the cash flows currently expected to be collected from the security with its amortized cost basis. If the calculated present value is lower than the amortized cost, the difference is the credit component of an other-than-temporary impairment of its debt securities. The excess of the present value over the fair value of the security (if any) is the noncredit component of the impairment, only if the Company does not intend to sell the security and will not be required to sell the security before recovery of its amortized cost basis. The credit component of the other-than-temporary-impairment is recorded as a loss in earnings and the noncredit component is recorded as a charge to other comprehensive income, net of the related income tax benefit.


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For non-agency RMBS we determine the cash flow expected to be collected and calculate the present value for purposes of testing for other-than-temporary impairment, by utilizing the same industry-standard tool and the same cash flows as those calculated for fair values (discussed above). We compute cash flows based upon the underlying mortgage loan pools and our estimates of prepayments, defaults, and loss severities. We input our projections for the underlying mortgages for the remaining life of the security to determine the expected cash flows. The discount rates used to compute the present value of the expected cash flows for purposes of testing for the credit component of the other-than-temporary impairment are different from those used to calculate fair value and are either the implicit rate calculated in each of our securities at acquisition or the last accounting yield (ASC Topic 325-40-35). We calculate the implicit rate at acquisition based on the contractual terms of the security, considering scheduled payments (and minimum payments in the case of pay-option ARMs) without prepayment assumptions. We use this discount rate in the industry-standard model to calculate the present value of the cash flows for purposes of measuring the credit component of an other-than-temporary impairment of our debt securities.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level estimated to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual loans and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. This evaluation is inherently subjective and requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by the provision for loan losses, which is reduced by charge-offs and recoveries of loans previously charged-off. Allocations of the allowance may be made for specific loans but the entire allowance is available for any loan that, in management's judgment, may be uncollectible or impaired.
The allowance for loan loss includes specific and general reserves. Specific reserves are provided for impaired loans. All other impaired loans are written down through charge-offs to their realizable value and no specific or general reserve is provided. A loan is measured for impairment generally two different ways. If the loan is primarily dependent upon the borrowers ability to make payments, then impairment is calculated by comparing the present value of the expected future payments discounted at the effective loan rate to the carrying value of the loan. If the loan is collateral dependent, the net proceeds from the sale of the collateral is compared to the carrying value of the loan. If the calculated amount is less than the carrying value of the loan, the loan has impairment.
A general reserve is included in the allowance for loan loss and is determined by adding the results of a quantitative and a qualitative analysis to all other loans not measured for impairment at the reporting date. The quantitative analysis determines the Bank's actual annual historic charge-off rates and applies the average historic rates to the outstanding loan balances in each loan class. The qualitative analysis considers one or more of the following factors:
changes in lending policies and procedures, changes in economic conditions, changes in the content of the portfolio, changes in lending management, changes in the volume of delinquency rates, changes to the scope of the loan review system, changes in the underlying collateral of the loans, changes in credit concentrations and any changes in the requirements to the credit loss calculations. A loss rate is estimated and applied to those loans affected by the qualitative factors. The following portfolio segments have been identified:
single family secured mortgage, home equity secured mortgage, single family warehouse and other, multifamily secured mortgage, commercial real estate mortgage, recreational vehicles and auto secured, factoring, C&I and other.

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, net of tax. Excluding these gains and losses provides investors with an understanding of our Bank's core lending and mortgage banking business performance. 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 to their use of such measures. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of our 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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AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID

The following tables set forth, for the periods indicated, 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 Fiscal Years Ended June 30,
                                          2014                                          2013                                           2012
                                                        Average                                       Average                                        Average
                                        Interest        Yields                        Interest        Yields                         Interest        Yields
                          Average       Income /       Earned /         Average       Income /       Earned /         Average        Income /       Earned /
(Dollars in thousands)   Balance1        Expense      Rates  Paid      Balance1        Expense      Rates  Paid      Balance1        Expense       Rates  Paid
Assets:
Loans2,3               $ 2,850,600     $ 147,664          5.18 %     $ 2,157,974     $ 113,503          5.26 %     $ 1,607,523     $   89,308          5.56 %
Federal funds sold               -             -             - %          17,017            30          0.18 %          12,297             10          0.08 %
Interest-earning
deposits in other
financial institutions     107,534           275          0.26 %          23,632            47          0.20 %             295              -             - %
Mortgage-backed and
other investment
securities4                480,940        22,566          4.69 %         462,946        21,588          4.66 %         506,223         26,353          5.21 %
Stock of the FHLB, at
cost                        32,115         2,373          7.39 %          22,594           486          2.15 %          16,683             62          0.37 %
Total interest-earning
assets                   3,471,189       172,878          4.98 %       2,684,163       135,654          5.05 %       2,143,021        115,733          5.40 %
Non-interest-earning
assets                      58,953                                        70,896                                        46,464
Total assets           $ 3,530,142                                   $ 2,755,059                                   $ 2,189,485
Liabilities and
Stockholders' Equity:
Interest-bearing
demand and savings     $ 1,522,884     $  10,723          0.70 %     $   826,797     $   6,399          0.77 %     $   504,835     $    4,388          0.87 %
Time deposits              876,621        14,094          1.61 %       1,065,669        16,469          1.55 %       1,003,728         20,501          2.04 %
Securities sold under
agreements to
repurchase                  85,726         3,840          4.48 %         114,247         5,068          4.44 %         125,820          5,552          4.41 %
Advances from the FHLB     576,307         6,981          1.21 %         436,383         5,939          1.36 %         333,866          5,955          1.78 %
Other borrowings             5,155           143          2.77 %           5,155           151          2.93 %           5,155            149          2.89 %
Total interest-bearing
liabilities              3,066,693        35,781          1.17 %       2,448,251        34,026          1.39 %       1,973,404         36,545          1.85 %
Non-interest-bearing
demand deposits            123,859                                        45,299                                        13,796
Other
non-interest-bearing
liabilities                 23,549                                        18,681                                        16,152
Stockholders' equity       316,041                                       242,828                                       186,133
Total liabilities and
stockholders' equity   $ 3,530,142                                   $ 2,755,059                                   $ 2,189,485
Net interest income                    $ 137,097                                     $ 101,628                                     $   79,188
Interest rate spread5                                     3.81 %                                        3.66 %                                         3.55 %
Net interest margin6                                      3.95 %                                        3.79 %                                         3.70 %

1 Average balances are obtained from daily data.
2 Loans include loans held for sale, loan premiums and unearned fees. 3 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 $32.1 million as of June 30, 2014, $32.8 million as of June 30, 2013 and $33.4 million as of June 30, 2012 of Community Reinvestment Act loans which are taxed at a reduced rate. 4 Includes $5.5 million of municipal securities which are taxed at a reduced rate.
5 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.
6 Net interest margin represents net interest income as a percentage of average interest-earning assets.


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RESULTS OF OPERATIONS
Our results of operations depend on our net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Our net interest income has increased as a result of the growth in our assets and increases in our net interest margin. Our net interest income is reduced by our estimate of loss provisions for our impaired loans. We also earn non-interest income primarily from mortgage banking activities, prepaid card fee income, prepayment fee income from multifamily borrowers who repay their loans before maturity and from gains on sales of other loans and investment securities. Losses on investment securities reduce non-interest income. The largest component of non-interest expense is salary and benefits, which is a function of the number of personnel, which increased from 312 full time employees at June 30, 2013 to 366 full time equivalent employees at June 30, 2014. We are subject to federal and state income taxes, and our effective tax rates were 40.64%, 40.92% and 40.50% for the fiscal years ended June 30, 2014, 2013, and 2012, respectively. Other factors that affect our results of operations include expenses relating to professional services, occupancy, data processing, advertising and other miscellaneous expenses.

COMPARISON OF THE FISCAL YEAR ENDED JUNE 30, 2014 AND JUNE 30, 2013

Net Interest Income. Net interest income totaled $137.1 million for the fiscal year ended June 30, 2014 compared to $101.6 million for the fiscal year ended June 30, 2013. 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):

                                                     Fiscal Year Ended June 30, 2014 vs 2013
                                                            Increase (Decrease) Due to
                                                                                             Total
                                                                              Rate/        Increase
(Dollars in thousands)                          Volume           Rate         Volume      (Decrease)
Increase (decrease) in interest income:
Loans                                       $    36,432       $  (1,726 )   $   (545 )   $    34,161
Federal funds sold                                  (31 )           (31 )         31             (31 )
Interest-earning deposits in other
financial institutions                              168              14           46             228
Mortgage-backed and other investment
securities                                          839             139            -             978
Stock of the FHLB, at cost                          205           1,184          499           1,888
Total increase (decrease) in interest
income                                      $    37,613       $    (420 )   $     31     $    37,224
Increase (decrease) in interest expense:
Interest-bearing demand and savings         $     5,360       $    (579 )   $   (457 )   $     4,324
Time deposits                                    (2,930 )           639          (84 )        (2,375 )
Securities sold under agreements to
repurchase                                       (1,266 )            46           (8 )        (1,228 )
Advances from the FHLB                            1,903            (655 )       (206 )         1,042
Other borrowings                                      -              (8 )          -              (8 )
Total increase (decrease) in interest
expense                                     $     3,067       $    (557 )   $   (755 )   $     1,755

Interest Income. Interest income for the fiscal year ended June 30, 2014 totaled $172.9 million, an increase of $37.2 million, or 27.4%, compared to $135.7 million in interest income for the fiscal year ended June 30, 2013 primarily due to growth of interest-earning assets. Average interest-earning assets for the fiscal year ended June 30, 2014 increased by $787.0 million compared to the fiscal year ended June 30, 2013 due to the origination of loans for investment, which increased $1,243.4 million during the year ended June 30, 2014 compared to . . .

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