Over the past several months, investors in BofI Holding, Inc. (NYSE:AX) have struggled with a dilemma, watching the share price fall more than 30% from the peak at one point, before a recent surge. Considering that the company's stock has been under a years-long short attack -- despite a debunking of essentially all the allegations -- it's likely that many long-term shareholders have been pushed to the brink of selling.
But when BofI announced another strong quarter and the expansion of a major partnership that will further boost earnings, investors were rewarded with a nearly 10% jump following earnings release on July 28. In the trading days since earnings, BofI shares are up more than 13%. And while it's certainly great to have double-digit gains after a rough recent patch, it's staying plugged into the long term that can really pay off.
Keep reading to learn more about BofI's quarter and full-year results, as well as what management says to expect down the road.
Financial and operating results
|Metric||Q4 2017||Q4 2016||Change (YoY)|
|Net income attributable to shareholders||$32.5||$29.7||9.5%|
|Net interest income||$78.5||$69.2||13.5%|
|Net non-interest income||$13.53||$17.02||(20.5%)|
|Earnings per share||$0.50||$0.46||8.7%|
|Tangible book value per share||$12.94||$10.67||21.35%|
|Metric||Fiscal 2017||Fiscal 2016||Change (YoY)|
|Net income attributable to shareholders||$134.4||$119.0||13.0%|
|Net interest income||$313.2||$261.0||20.0%|
|Net non-interest income||$68.13||$66.34||2.7%|
|Earnings per share||$2.07||$1.85||11.9%|
|Tangible book value per share||$12.94||$10.67||21.3%|
As the tables show, BofI delivered solid growth in profits, and tangible book value per share -- an important metric for valuing a bank's asset -- was up 21% year over year.
BofI's operations continue to deliver solid returns with minimal losses
BofI also continues to deliver solid returns and operates one of the most profitable banks out there. Its efficiency ratio -- or the percentage of its revenue that must cover operating costs -- was 39.08% last quarter and 36.08% for the full year. This ratio, where lower is better, is roughly half that of many traditional banks, which spend far more to support their retail operations than BofI's internet-only business.
This contributed to BofI's solid 15.89% return on equity and 1.55% return on assets in the fourth quarter, and 17.78% and 1.68%, respectively, for the full year. While these metrics were lower year over year both in the fourth quarter and full year, they are still far better than those of most traditional banks.
And despite assertions from BofI's detractors that its loan book is risky, BofI's portfolio continues to generate tiny losses. Non-performing loans and leases was a very small 38 basis points -- that's 0.38% -- in the third quarter and for the full year, down from 50 basis points last year. That compares with an allowance of 55 basis points, meaning BofI's allowance for losses exceeded those losses by 144% -- a solid margin of safety.
Even while operating with very low losses, BofI grew its loan book across multiple lines, while also adding to its deposit base. According to the release, the loan and lease portfolio increased 16% year over year, while deposits were up 14.2%. BofI originated $1.14 billion in loans and leased in the fourth quarter, 9.3% higher than the sequential quarter.
The bank ended the year with $8.5 billion in total assets, up $902.4 million year over year.
Looking ahead: Next stop, $10 billion?
At BofI's recent rate of growth, $10 billion in assets could be less than two years away, bringing along heightened regulatory requirements. Management has already started preparing for this, investing in resources well ahead of reaching this level to make sure the bank is prepared.
But it's not just bigger regulatory requirements that BofI is investing in. The main reason both return on assets and expense ratio performance declined in the quarter and year was due to increased spending. For the full year, non-interest (essentially operating) expense increased 22% to $137.6 million. This was a product of increased spending on technology, but also people, as BofI expanded its commercial and industrial lending, expanded its business equipment leasing business, and grew its auto lending business. BofI is also in the midst of its "Universal Digital Banking" initiative, which will help it get closer to its customers, enhance the online and app experience for its customers, and help further drive down costs and increase information about its customers. CEO Greg Garrabrants put it thusly on the earnings call:
We incurred incremental costs related to these investments in fiscal 2017; however, we firmly believe these investments will generate significant long-term returns to lower customer acquisition costs, better our ability to cross-sell our customers an ever-increasing array of products and services, lower third-party technology costs, and give the ability to be faster and more agile on new product and service deployment.
In short, BofI is spending today to accelerate growth and drive down costs tomorrow.
At recent prices near $28 per share, BofI trades for 13.5 times earnings, about half the average stock in the S&P 500 , and 2.2 times tangible book value, less than half the company's pre-short attack peak. If management can continue delivering on the levels of highly profitable growth and maintain a low-loss loan book, shareholders could do very well to hang on for the long term.