BofI Holding Inc: Continually the Best in Class - With Good Reason

Source: Company

Bofl Holding  (NASDAQ: BOFI  ) is an accolade-winning, highly profitable public thrift, that is worthy of investors' attention. The company has been repeatedly ranked as one of the largest, most profitable thrifts in the United States and posts strong business growth in its core segments.

BofI Holding's operational and financial performance metrics have led to a surge in investor interest in the financial institution over the last couple of years. Correspondingly, BofI Holding's share price has delighted investors with a gain of 279% over the last two years.

Business background
Public thrifts, also referred to as savings and loans institutions, usually focus on a strong deposit business via savings and checking accounts and stringent mortgage lending in order to drive earnings.

Bofl Holding is the holding company of BofI Federal bank, which "provides financing for single and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables".

Outside recognition
SNL Financial, a business intelligence service and financial data provider, regularly ranks community banks and the largest thrifts in the United States in terms of profitability and a diverse set of other performance metrics. Making it on SNL's highly coveted lists of top-performing banks in either sector can clearly be seen as a badge of honor.

Fortunately for BofI Holding investors, the thrift repeatedly made in onto the list. In fact, the thrift didn't just make it onto the list, the company actually took the top spot. -- two times in a row.

That's right. BofI Holdings was ranked the best-performing of the biggest thrifts in the sector in 2013 and in 2012. More importantly, BofI Holdings was also ranked no. 2 in both 2011 and 2010.

Source: SNL Financial Data Dispatch

BofI Holdings being featured on the SNL list of most-profitable banks is a strong indicator, that the company is doing something right, and that a thrift business can be hugely rewarding.

The thrift not only took the top spot in SNL's overall thrift ranking consisting of 100 companies, but also achieved respectable placements in a variety of other performance metrics, most notably:

  • Rank 2 in terms of tangible book value/share median 3-year growth rate with 15.36%
  • Rank 3 in terms of return on average tangible common equity (ROATCE) with a whopping 17.79%
  • Rank 3 in terms of efficiency ratio with 40.70%
  • Rank 5 in terms of return on average assets (ROAA) with 1.54%
  • Rank 8 in terms of non-performing loans/loans with 0.63%.

These metrics highlight, that BofI Holdings runs one of the most attractive banking operations in the country with industry-leading profitability measures. Not surprisingly, BofI Holdings' equity valuation reflects this outperformance: The thrift trades at roughly 3.5 times book value.

Deposit growth

Source: BofI Holdings Investor Presentation

As already indicated in the introduction, thrifts are focusing on a diversified deposit base in order to grow their loan and mortgage business. As a result, thrifts appear to be more stable than financial institutions with investment banking exposure due to higher-quality, less cyclical earnings streams.

BofI Holdings, for instance, has grown its banking business deposits from just $124 million in the second quarter of 2013 to more than $1.1 billion in the third quarter of fiscal 2014.

Investors can be sure, that BofI Holding's consistently high ranking as one of the best thrifts in the United States contributed to fueling deposit growth.

With further deposit growth in the next couple of quarters, BofI Holding should be able to continue to deliver at least satisfactory performance results, although investors should expect decreasing relative profitability measures as the bank grows in size.

Loan growth

Source: BofI Holdings Investor Presentation

As the financial crisis has taught investors, a thorough focus should be applied not only to loan growth, but also robust underwriting standards.

During the housing boom from 2004-2007 it was not uncommon for investors to get a loan with minimal documentation and practically no skin in the game.

Oftentimes, homebuyers were not even required to make a downpayment, entered into interest-only loans and lenders were willing to push the loan-to-value ratio.

BofI Holding has significantly increased its loan origination over the last five quarters, but didn't sacrifice underwriting standards in the process. Its loan production increased from just $2.2 billion in Q3 2013 to more than $3.1 billion in Q3 of fiscal 2014: A plus of 41% in a relatively short period of time.

However, its average loan-to-value ratio for multi-family loans stayed stable at a 55% and its loan-to-value ratio for single-family loans rose only slightly from 54% to 56% over the same time period.

Low loan-to-value ratios indicate prudent lending activity and the application of stringent underwriting standards. All of which is in the interest of long-term shareholders.

The Foolish Bottom Line
Thrifts are somewhat off the beaten path. In the case of BofI Holding, however, investors may pass up on a good investment opportunity by only focusing on established, high-profile banks.

BofI Holding has won outside recognition, multiple years in a row, for its industry-leading profitability in terms of return on assets and on tangible equity and chances are that the thrift will continue to capitalize on its strong thrift business model.

Though BofI Holding trades at a significant premium to book value, quality is well worth paying the price.

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