BofI Holding Reports a Great Quarter

Internet-based bank BofI Holding (AX 0.23%) reported fantastic growth and profitability for the most recent quarter. If the bank continues to grow at this rate, it won't be a small bank for long.

In this clip, Industry Focus: Financials host Michael Douglass and Motley Fool contributor Matt Frankel discuss the bank's latest results and the catalysts investors should keep an eye on.

A full transcript follows the video.

This video was recorded on Feb. 2, 2018.

Michael Douglass: Let's turn to our second smaller bank story. This is Bank of Internet, or BofI. Of course, listeners will know we've talked a lot about BofI. We did a deep dive on them late last year. If you haven't heard that, it's a great chance to understand how we think through banks of this size. When you look at BofI, just, pretty across the board a stellar quarter. Loan portfolio up 19%. Earnings per share actually declined a little bit, but that's because of tax reform. Again, for most banks, they had to take a write down on their earnings from tax reform, one time. But if you net out tax reform, earnings per share were up 22% year over year. 12% deposit growth, 9% asset growth. It's hard to overstate how quickly that bank is growing.

Matt Frankel: Their profitability was incredible this quarter, too. To give you an idea, last year, BofI ran a 17.5% return on equity, which is ...

Douglass: Stellar.

Frankel: Yeah. And they beat that this quarter, 18.5% excluding the tax reform. So, their profitability has been fantastic. They started a share buyback, which shows that they're getting on really good financial footing. It's also worth mentioning that BofI is, in every sense, a smaller bank. They're only at about $9 billion worth of assets. So, this growth could conceivably continue for a long time.

Douglass: That ROE number, I want to circle that one more time. Consider that, for banks, a solid ROE is 10% and a great ROE is 12%. We're talking 18.5%. Return on assets of just under 2%. That's just incredible. Of course, the key question we always ask when we're seeing a bank growing really quickly is, but what's the risk? Basically, are they really aggressively giving out loans? And is that going to really hurt them when the tide goes out? Their non-performing loan rate is 0.42%, compared to the peer average which is almost exactly double that at 0.82%. And historically speaking, at least -- of course, we can't speak to the credit culture today as compared to during the Great Recession, but they dramatically outperformed just about everybody else in non-performing loans during the Great Recession. So, I think in general, it's a pretty good look for the bank.

Frankel: And they also gave some pretty optimistic figures for projections going forward. In addition to that ROE number that you highlighted again, which was definitely worth doing ...

Douglass: It was big, right?

Frankel: It is. They say now, because of tax reform, they're expecting to run at an 18% ROE going forward, and a 40% efficiency ratio, which I already mentioned is stellar. They're a big beneficiary of tax reform. They're one of the highest effective tax rates in the banking industry, pretty much because they're based in California, where there's lots of state taxes. So, they're expecting their effective tax rate going forward to drop from the 41% to 42% range to 28% to 30%, which will make a big difference for profitability.

Douglass: And particularly because -- when you look at BofI, they're running about a 40% efficiency ratio these days. Remember, we were talking about New York Community Bancorp just a minute ago running a 36% efficiency ratio --

Frankel: Yeah, before Dodd-Frank.

Douglass: Right, so, back in 2010. But BofI's efficiency ratio has been creeping up a little bit in the past couple of years as they've begun really investing in growth. So, that lower tax rate then basically gives them some extra cushion to continue doing that. For me, one of the things that really makes BofI currently the only true bank that I hold in my portfolio is that its efficiency ratio is so low. Of course, when I see it creeping up, that makes me a little bit concerned, unless you buy, as I do, that this is really management investing in technology and investing in people, to basically make sure that they can continue building that growth in a variety of different areas. If that's the case, then this bank has a long way to go.

Frankel: Yeah. Like I said, even though it's grown exponentially over the past five or six years, it's still a very small bank. There's a lot of room to grow, especially as interest rates rise. These online banks tend to pass on the savings more to their customers than branch-based banks. BofI is already offering some amazing savings rates when compared to a Wells Fargo or a Bank of America. So, I could see their deposit base growing significantly as interest rates continue to rise.

Douglass: Yeah. And for fairly traditional banks like New York Community Bancorp and BofI, interest rates are going to be the name of the game in terms of expanding those margins in the coming years.