When BofI Holding, Inc. (AX 0.05%) reported its first-quarter financial results on October 27, it seemed like another solid performance. Net interest and non-interest income were up 18% and 50.5%, respectively. Earnings per share increased 12.5%. BofI's loan portfolio and total assets increased more than 25%, while the quality of those assets remained very high, with only 0.55% of total assets non-performing.
Combined, the growth in high-quality assets lifted BofI's tangible book value per share to $11.25, up $2.17 per share from one year ago. That's a 24% growth in this key measure of BofI's value over the past year.
However, the market's reaction to its earnings and the call with management seemed to fly in the face of the bank's financial results, sending shares down more than 13%. Needless to say, one of the most difficult and frustrating parts of investing is trying to understand why a stock falls so much when the business results seem to be good. So, what's an investor to do? Knowledge is power, so let's take a deeper look at BofI's results. The more you know about the businesses you own, the easier it can be to ride out the market's short-term volatility.
Key financial results
|Metric||Q1 2017||Q1 2016||Change (YOY)|
|Net interest income||$69.8||$59.1||18.1%|
|Net non-interest income||$14.7||$9.8||50%|
|Earnings per share||$0.45||$0.40||12.5%|
|Tangible book value per share||$11.25||$9.08||23.9%|
A closer look at BofI's performance
BofI delivered solid growth in both income and asset growth:
- Loan portfolio grew by $1.32 billion, up 25%; loan originations and purchases were up 5.7% to $1.16 billion.
- Deposits increased $1.57 billion, up 33%.
- Loan quality remains very high; 1 basis point of net annualized charge-offs to average loans and leases, and total non-performing assets of 0.55% of total assets. Total loan and lease provisions was $1.9 million.
BofI did report that several key operating expenses were growing faster than earnings:
- Salaries and related costs increased 36% to $19.4 million.
- Professional services increased more than triple to $1.35 million.
- Occupancy and equipment increased 40% to $1.28 million.
- Data processing and internet increased 69% to $3.2 million.
- Advertising and promotional increased 56% to $2.5 million.
Combined, non-interest (operating) expenses were up $10 million, a 43% increase year over year. This big jump is almost all tied to BofI's growth initiatives, including investments in new personnel related to the equipment leasing business it recently acquired, continued investment in growing its partnership with H&R Block, and other key initiatives to continue diversifying its revenue streams. In other words, these are the seeds management is counting on to deliver future growth.
BofI's loan portfolio continues to have a broad margin of safety
Here's a closer look at what BofI's home loan portfolio is comprised of, and some key metrics that give some measure of the relative risk:
- $3.69 billion in single-family mortgages. Loan-to-value (LTV) below or equal to 60%: $1.95 billion; 61%-70%: $1.37 billion; 71%-80%: $368.9 million; greater than 80%: $0.2 million.
- $1.4 billion of multifamily mortgages. LTV below or equal to 55%: $648.9 million; 56%-65%: $451.6 million; 66%-75%: $283.7 million; 76%-80%: $12.5 million and greater than 80%: $0.0 million.
- $136.3 million of commercial real estate loan balances. LTV less than or equal to 50%: $61.6 million; 51%-60%: $30.2 million; 61%-70%: $38.7 million; and 71%-80%: $5.8 million.
- Weighted average LTV of entire real estate loan portfolio of 57%.
What does this tell us? The average BofI loan is on a property with a significant value above the loan. Only 10% of single-family mortgages are for more than 70% of the appraised property value. This should help insulate BofI from loan losses even in the case of foreclosure.
What management had to say about growth initiatives and BofI's performance
CEO Greg Garrabrants, on the company's recent entry into the business equipment leasing business, said:
Based on the first two quarters of operation, we feel more confident that we will be able to execute upon our leasing business plan. The group has a nationwide focus with a commitment to grow the business over the next few years, as a result of both the bank's expertise and recent investments in lead generation resources, alternative marketing strategies, a transition to a more robust customer relationship management system, expanding product offerings, and inter-bank cross-sell initiatives, all of which we believe will accelerate production over time.
We continue to expect the leasing group to originate between $80 and $100 million of new leases in the first year. While we are focusing on implementing our management framework, a process improvement and workflow integration in the first two quarters, to build the business for future success, the equipment leasing team has successfully increased the pipeline in the equipment leasing business during the quarter.
Here's Garrabrants on the progress BofI has started making in other key growth initiatives:
I'm pleased with the progress we're making across the dozens of strategic and operational initiatives we are currently undertaking. In auto lending, we've methodically grown originations from approximately $10 million in the first quarter of 2016 to over $25 million in the first quarter of 2017 ...
... We continue to make good progress in our next generation digital banking infrastructure initiative, the universal digital bank. With the consumer online banking platform prototype and consumer online opening software completed, we are focusing our efforts on building the production ready consumer online banking platform and expanding our API toolkit in micro services architecture to allow us to seamlessly integrate with third parties and offer new financial services developed by us or third parties to our clients through our core consumer banking platform. ... Once the universal digital bank is fully developed, we will be able to provide more personalized and targeted products and services delivered in a more seamless way across the channels by which we interact with our clients.
We are making significant progress in implementation of our next generation retail mortgage origination platform that will automate and streamline the mortgage origination process for the retail client. We believe that software will allow us to automate time consuming paper based interactions with customers by integrating with third party providers of tax returns, pay stubs, and bank statements thereby improving the customer experience and further reducing our closing times.
BofI continues to deliver solid, profitable growth from a very high-quality loan portfolio. At the same time, management is investing resources to expand BofI's banking business across multiple lending lines, while also developing better tools to offer a more fully integrated banking experience. In the near term, this will likely mean operating expenses will continue to grow faster than earnings. But if these investments work out how management expects, they should help BofI continue delivering market-beating results for the long run.
Will those positive results ever lift BofI's stock? Benjamin Graham once said the stock market is a voting machine in the short term and a weighing machine in the long term. If BofI continues delivering strong growth, the market will catch on. Just don't ask me when.