Online-only bank BofI Holding Inc. (NASDAQ:AX) -- the "BofI" stands for "Bank of Internet" -- has grown tremendously in recent years. In fact, the bank's assets have increased by 180% since 2013, and net income has grown by 240% in the same period. Here's a closer look at what BofI does, and how it makes its money.
BofI Holding: The quick version
BofI Holding operates Bank of Internet, an online-only bank, as well as a few other online financial brands. There are no physical branches, and just one office building where the bank conducts its operations. As of its most recent quarterly report, the bank has about $8.7 billion in total assets.
The basic idea -- and competitive advantage -- of BofI's business model is that since it operates entirely online, it doesn't have nearly as much overhead as traditional brick-and-mortar banks. It can therefore run a higher profit margin, while offering higher interest rates on deposits than its competitors can give.
How BofI Holding makes its money
It shouldn't come as much of a surprise that most of BofI Holding's revenue comes from interest on its loans. Here's a quick rundown of BofI's most recent income statement to provide some more color on how the bank makes its money.
Through the first three quarters of the 2017 fiscal year (BofI's fiscal year ends on June 30), the bank generated $265.8 million in interest income from its loan portfolio, and another $22.9 million from investments, for a total of $288.7 million in interest and dividend income. BofI generated an additional $54.6 million from non-interest sources, such as service fees and mortgage banking income.
The bank had $54 million in interest expenses, such as interest paid on deposits, and also had a $10.9 million provision for losses. Non-interest expenses came to $101.6 million, of which $60.6 million was for salaries. The rest covered other costs of doing business, such as data processing, promotional and advertising expenses, FDIC and regulatory fees, and other administrative costs.
In total, the bank's income was $176.8 million through the first three quarters of its current fiscal year, of which $74.6 million went to income taxes, for an after-tax net income of $102.2 million.
Impressive profitability and growth
BofI's income tells only a small part of the story. Because of BofI's internet-only business model, the bank is far more efficient and profitable than most of its peers are, both big and small. Furthermore, BofI is growing -- fast.
As far as profitability goes, consider that BofI's return on assets is 1.72% for the past three quarters, and return on equity is 18.48%, both well above the industry benchmarks of 1% and 10%, respectively. Plus, BofI's efficiency ratio of 35.1% is among the best in the business -- for comparison, Bank of America's efficiency recently dropped into the low 60s (lower is better), and shareholders were happy about that.
In addition, the bank's growth has been simply remarkable. Since the end of the 2013 fiscal year, BofI's total assets have grown from $3.1 billion to $8.7 billion. Deposits have grown from $2.1 billion to $6.8 billion -- a 37% annualized growth rate. As a result, net income has grown by about 240% -- impressive growth in under four years -- and earnings per share have climbed dramatically.
What's next for BofI?
BofI's growth has been very impressive, but there's reason to believe it still has lots of potential. The bank's market share in mortgage lending -- most of its current loan portfolio -- is rather small, and in 2017 BofI has started to expand its operations into new kinds of lending, such as auto loans and personal lending. There's also the relatively new partnership with H&R Block, for which BofI provides refund anticipation loans.
The bottom line is that with less than $9 billion in assets, BofI is still a pretty small bank, and there are a lot of untapped revenue-generating opportunities that it could potentially capitalize on in the coming years.