BofI Holding, Inc. (NYSE:AX) reported its second-quarter financial and operating results after market close on Jan. 30, and the market responded favorably when trading resumed on the 31st, with shares climbing over 13% at one point before cooling off later in the day.
On the surface, the online bank's results may not look that great, with earnings down 2%. But like the vast majority of banks, BofI's GAAP results were negatively affected in the quarter following the recently passed federal tax overhaul. Adjusted for that one-time charge, BofI's earnings grew at a higher rate than we've seen in several quarters. Furthermore, the net benefit of the new tax law is set to boost earnings from here out.
But management isn't just resting on its laurels; it already has plans to accelerate investments in driving even more growth by taking some of that tax savings and reinvesting in expanding the bank's operations. Let's examine what that plan is, and what it means for the company.
BofI was even more profitable than usual
Here's a closer look at BofI's financial performance in the quarter, both on a GAAP basis, and adjusted for the one-time impact of the tax legislation on deferred tax assets:
|GAAP||Adjusted for Deferred Tax Asset Revaluation|
|Metric||Q2 2018||Q2 2017||Change (YoY)||Q2 2018||Q2 2017||Change (YoY)|
|Net income attributable to shareholders||$31,580||$32,222||(2%)||$39,612||$32,222||22.9%|
|Net interest income||$84,213||$76,361||10.3%||$84,213||$76,361||10.3%|
|Net non-interest income||$17,099||$16,700||2.4%||$17,099||$16,700||2.4%|
|Earnings per share||$0.49||$0.50||(2%)||$0.61||$0.50||22%|
|Tangible book value per share||$13.70||$11.72||16.9%||n/a||n/a||n/a|
|Return on assets||1.49%||1.66%||(10.2%)||1.87%||1.66%||12.7%|
|Return on equity||14.37%||17.49%||(17.8%)||18.65%||17.49%||6.7%|
The new federal tax law will significantly benefit BofI over the long term, but the bank had to write down the value of deferred tax assets on its balance sheet in the quarter by $8.03 million, resulting in the difference between GAAP and adjusted results.
BofI's profit surged in the quarter, while return on assets and return on equity both improved at double-digit rates. Furthermore, CEO Greg Garrabrants said the long-term goal for ROE is now 18% or higher, up from 15%, with the primary driver the lower corporate tax rate.
BofI's earnings boost was largely a result of increased lending activity. The loan and lease portfolio grew by $1.1 billion, up 15.6% year over year on $2.1 billion in originations. Total assets were up 9.2% to $8.9 billion. Deposits were up 11.8%, a $783 million increase.
It's putting those profits to work for more growth
BofI expects its total tax rate to fall from 42% last year to 29%-30%. This lower rate will boost to the company's bottom line even more, and Garrabrants says the plan is to "opportunistically reinvest a portion of these savings to accelerate some strategic initiatives."
This will boost operating expenses -- shown as "non-interest expenses" on the income statement -- and hence the efficiency ratio, to around 40% "for the next several years," according to Garrabrants. On the earnings call, he said this included accelerated expansion of the business banking and commercial and industrial lending teams, information technology and other infrastructure investments, and increased marketing and rebranding initiatives. Garrabrants also said the bank will make "opportunistic additions of senior-level talent."
Increasing its operating expenses isn't something new for BofI. The bank has substantially grown its operations for years:
However, the lower tax rate will allow further acceleration of spending to grow its operations while still generating some of the best profitability metrics in the banking industry.
Based on last quarter's earnings and taxes paid, BofI is on track to cut its tax bill -- and boost its earnings -- by more than $33 million per year. That's a substantial amount of money for the small bank to be able to put to work, roughly equal to 20% of its operating expenses. In other words, redirecting only half of its tax savings alone would fund a 10% increase in operations while still leaving over $16 million to spend in other ways, such as repurchasing shares, funding loans, or a litany of other opportunities.
But the big focus, it appears, continues to be on internal growth. BofI continues to rely on real estate loans for a substantial portion of its business and earnings, but its efforts to expand commercial and business lending, equipment leasing, and auto loans is steadily paying off. With the new tax law set to boost the bottom line in a big way, management is going to accelerate that growth. Will it pay off with continued high-speed growth at some of the best profitability measures in banking?
Only time will tell, but Garrabrants' formula and the bank's execution has been incredible for years. Now that it has even more money to invest in growth, I wouldn't want to bet against them.