Shares of BofI Holding, Inc. ( AX -3.24% ) closed down 12.9% on Oct. 28 following the release of the internet bank's first-quarter financial results after market close on October 27:
Overall, BofI Holding delivered a pretty solid quarter:
- Net interest income increased 18%.
- Non-interest income increased 51%.
- Loan originations were up 6% and the loan portfolio grew 25%.
- Tangible book value increased 24%, to $11.25 per share.
- Net income increased 13.3%, and EPS was up 12.5%.
If there's a negative to BofI's results, it was in the sharp increase it reported in operating expense, which came in $10 million higher, at $32.9 million. Nearly half of this is related to new staffing added over the past year, with the balance coming from investments in marketing, data processing and internet-related expense, professional services, and occupancy and equipment related to expansions and acquisitions.
The inverse view of BofI's higher expenses is that they are a short-term pain to build a stronger business. Over the past year, BofI has made several acquisitions that have expanded the bank into new lines, including equipment leasing and its partnership with H&R Block. It has also expanded its auto lending and other lending businesses. In other words, there's a chance that some of the market's response today in sending shares down so much is a short-sighted reaction to expenses increasing much faster than profits.
There's also the ongoing legal challenges BofI faces, including lawsuits with a former employee and a class-action case in Texas. Until there's resolution in those cases, there will be uncertainty that affects BofI's share price.
Lastly, BofI remains highly shorted, with nearly 36% of shares sold short at last report. The number of shares held short has fallen by several million since August, and it's not unreasonable to expect that we'll see the number of shares held short go up today following an earnings report that was mostly good, but left room for interpretation on the expense line.
Bottom line: BofI remains heavily shorted and has some risk related to its ongoing litigation. But even in the midst of these concerns, the business itself continues to deliver solid profit and book-value growth. This quarter continued BofI's track record of excellent performance in those areas.