BofI Holding, Inc. (AX 0.45%) reported its fiscal year 2018 first-quarter results on October 25, showing double-digit growth in almost every key category, including deposits, loans, book value, and maybe most importantly, earnings per share (EPS). Even better, BofI delivered growth across several of its business lines, as investments into new areas of lending in recent years began to bear fruit.
Although the news was good, there are a few things investors should continue to pay close attention to, including operating expenses rising faster than earnings. Keep reading to get a closer look at what investors need to know about BofI's results and its prospects going forward.
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A breakdown of BofI's most important metrics
Here are some key first-quarter results:
| Metric | Q1 2018 | Q1 2017 | Change (YoY) |
|---|---|---|---|
| Net income attributable to shareholders | $32.3 | $28.8 | 12.1% |
| Net interest income | $80.6 | $69.8 | 15.4% |
| Net non-interest income | $13.34 | $14.73 | (9.4)% |
| Earnings per share | $0.50 | $0.45 | 11.1% |
| Tangible book value per share | $13.41 | $11.25 | 19.2% |
| Non-interest expenses | $38.0 | $32.9 | 15.6% |
| Efficiency ratio | 40.5% | 38.9% | (16)BPS |
All dollar amounts except tangible book value and earnings per share are in millions. Source: BofI Holding.
As the table shows, with the exception of net non-interest income -- which declined because of a change in the mix of lending-related fees partly offset by an increase in banking service fees -- BofI delivered double-digit growth in the most important categories, including net interest income, earnings per share, and tangible book value per share.
A closer look at BofI's increasing expenses
BofI's non-interest expense, essentially a bank's operating expense line, and its efficiency ratio, which measures the percentage of the bank's revenues, must cover those operating expenses, but both trended in the "wrong" direction last quarter. Expenses outpaced earnings growth, driving the efficiency ratio higher.
Why is BofI's operating expense growth outpacing earnings, and should investors be concerned? After all, this is a continuation of a trend that started last year.
In fiscal 2017, BofI increased its non-interest expenses by 22% -- even more than the 16% jump in the first quarter. But this is part of an intentional plan with three major focuses:
- preparing BofI for the regulatory effects of reaching $10 billion in assets (which will likely occur within two years)
- investments to support BofI's "Universal Digital Banking" initiative
- investments in people in BofI's expanded lending platforms such as auto, commercial and industrial (C&I), and business-equipment leasing
CEO Greg Garrabrants said the following on the earnings call:
Additionally, we continue to make significant strategic investments in infrastructure, personnel, and growth initiatives, as well as in preparation across the $10 billion in assets threshold. We believe these long-term investments will enhance our lending and deposit franchise, and generate attractive returns for our shareholders.
He followed up that comment by pointing to the increase in commercial and industrial (C&I) lending in the quarter -- which carries higher loan yields than residential lending -- as one of the reasons why BofI's loan yield increased from 4.98% to 5.21% versus the year-ago quarter.
In addition to potentially generating higher loan yields -- which should also drive net interest margin higher over time -- BofI should also benefit from the investments to expand these lending lines since it will help diversify its business and reduce its reliance on real estate lending.
Some key points on the quality of BofI's loan portfolio
BofI's business model makes it cheaper to operate than most commercial banks because it doesn't have to pay for and staff expensive brick-and-mortar locations. But that alone doesn't make BofI a safer or more risky investment. One metric that can help determine the relative safety of a bank is the loan-to-value ratio -- or LTV -- of its loan book. In short, LTV is the percentage of the property's value that's currently owed on the loan.
At the end of the quarter, BofI broke down the LTV averages for its residential real estate lending portfolio as follows:
| Category | ≤60% LTV | 60%-70% | 70%-75% LTV | 75%-80% | ≥80% |
|---|---|---|---|---|---|
| Single-family real estate | 59% | 34% | 5% | 1% | 1% |
| Multi-family real estate | 66% | 30% | 4% | <1% | <1% |
Source: BofI Holding 10-Q filing.
Combined, these two categories make up $5.5 billion in assets, over 73% of BofI's loan portfolio, and more than 90% of the loans issued are less than 70% of the appraised value of the real estate at the time the loan was issued. Garrabrants made a point on the earnings call to point out that in 17 years of writing multi-family loans, BofI's credit losses are less than 1 basis point -- that's less than one-tenth of 1% -- in total.
There's less historical data on BofI's newer C&I and auto-lending groups, but the company said it has had no C&I losses since inception, and its average FICO score for auto loans is above 770, indicating high-quality (and generally lower-risk) credit customers.
Looking ahead: BofI will keep spending more to enhance growth and improve profitability
During the first quarter and subsequent to it, BofI expanded its executive and management team, hiring a Chief Operating Officer, Chief Digital Officer, a Head of C&I Lending, a Senior C&I Portfolio Manager, and a Senior Sales Business Banking Leader, as well as numerous support staff for these positions.
This is a necessary step to support BofI as it continues to grow the new lines of lending it has added in the past couple of years. It also keeps the momentum and focus on delivering profit growth, while still managing risk as well as the company has on an historical basis. As Garrabrants put it, BofI isn't "changing the strategic plan for a small variation in efficiency ratio."
With history as our guide, BofI's strategy of accelerating its investments in added capabilities and new technology has paid off resoundingly well for investors. It would appear that management intends to stick to a strategy that's worked quite well.
