Internet bank holding company BofI Holding, Inc. (NASDAQ:BOFI) reported financial and operating results on April 25 after market close, with net income of $41 million -- the most ever in a single quarter in its history. BofI delivered strong growth in net interest income, book value, loan originations, and a number of other key metrics.
However, two analysts who follow BofI released notes following the company's quarterly earnings, lowering their full-year earnings estimates and cutting their targets for its stock price. And in typical market fashion, Mr. Market responded to the analysts with shares down almost 9% following the estimate cuts.
Let's take a closer look at what really matters: BofI's operating and financial results. While BofI's profit growth has tapered off over the past several quarters after regularly delivering far above 20% (and even 30%) growth, it continues to increase earnings at solid double-digit rates. At the same time, management continues to invest in growing its various business lines beyond mortgage lending.
A closer look at the financial results
|Metric||Q3 2017||Q3 2016||Year-Over-Year Change|
|Net income attributable to shareholders||$40.9||$35.8||14.2%|
|Net interest income||$88.6||$69.6||27.3%|
|Net non-interest income||$23.2||$23.3||(0.6%)|
|Earnings per share||$0.63||$0.56||12.5%|
|Tangible book value per share||$12.44||$10.23||21.6%|
While BofI may not have given shareholders the big earnings growth many have come to expect, it continued to deliver what have proven to be very solid and incredibly efficient results. In addition to the top- and bottom-line results above, investors should note how the bank performed in the following key metrics:
- Net interest margin -- the spread between what it charges in interest and what it must pay in interest, so higher is better -- was 4.24%, up 39 BPS from 3.85%.
- Excluding the seasonal benefit of H&R Block loan products, net interest margin was still a very strong 3.97%.
- Efficiency ratio -- the percentage of revenue that must cover operating expenses, so lower is better -- was 31.73%, roughly flat from 31.66% year over year, but down from 35.78% sequentially.
- Loan portfolio up $986 million year over year, a 16.3% increase.
- Deposits up $752 million, a 12.4% increase.
- Non-performing assets at 0.39% of total assets (this is very low).
- Return on equity of 21.1%.
Investments in growing a more diverse book of business paying off
BofI's bread and butter has been residential mortgages, which generate the lion's share of income, not atypical for a commercial bank. But management is taking steps to increase the bank's exposure to other business lines, both in an effort to continue earnings growth as well as to diversify the business. Those efforts are working out.
Commercial and industrial -- or C&I -- lending is growing quickly. C&I loan balances increased $154 million sequentially and $469 million year over year. Combined, this group was 19% of total loans outstanding, up from 15% at the start of the quarter. As a matter of fact, demand in this segment has been so strong, BofI has actually had to turn away business that it doesn't yet have the bandwidth to process. But management says it will continue to develop and build its business in a controlled manner, since high-quality loans are more important than growth that increases risk. Here are comments from CEO Greg Garrabrants, from the earnings call (emphasis mine):
I think if you're looking 6 quarters out, look for that C&I side to get a lot bigger and look for continued growth in multi- and single-family. As you start to look out beyond that, you'll start to see that, like all the things that we do, all the new initiatives, those loans creep up and start to make up a portion of the loan book. It's very early for me to tell because, as you know, we've been very good at when we enter a new loan category, making sure that we do a very good job of having controlled losses and good credit quality. We want to really put that first. So look, there's a ton of opportunity there, but I want to make sure that we're ready for it.
BofI has also made investments in its "One Universal Digital Bank" initiative. The strategy is build around using a combination of technology with an improved customer interface, a broadened portfolio of lending and deposit products, and better capabilities to partner with third parties for customer acquisition, and payment services.
These investments are increasing the bank's operating expenses. In the quarter, salaries and related expenses were $21.3 million, up 25% year over year. Year to date, this line item is up 27%. BofI has also seen its operating costs increase YTD in data processing and internet, advertising and promotional, and other general and administrative expenses.
It may take time for these increased operating expenses to drive incremental growth, but as the C&I results showed this quarter, there appears to be opportunity. Maybe the most important point is that management is playing a long game, prioritizing a deliberate approach to a high-quality book of business over high-speed but potentially higher-risk asset growth.
At this writing, the first market day following the earnings release, Mr. Market has decided to put more weight behind a couple of Wall Street analysts' downward revisions than the financial results delivered by BofI. With a tangible book value per share of about 1.9, BofI shares are cheaper today than they've been since late 2016. On an earnings basis, BofI shares sell for less than 11 times 2017 earnings estimates.
At the same time, more than 32% of BofI shares were still held short at last count, as ongoing litigation and the cloud of (almost entirely debunked) allegations of impropriety continue to weigh on the stock. This is likely to continue at least until there is closure on the outstanding legal cases.
For the time being, long-term investors should keep in mind that it's about the business, not the market, in the long run. BofI's high-quality assets and industry-leading efficiency have proven to make for an incredibly profitable bank, while management is taking a steady and deliberate approach to growing and expanding what BofI can do.